FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 1-13441
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822 _
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Philadelphia, Pennsylvania 19103 _
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section
12(b) of the Act:
Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ( ) No (X)
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes ( ) No (X)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one): ( ) Large
accelerated filer(X) Accelerated filer ( ) Non-accelerated filer ( ) Smaller
Reporting Company ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The aggregate market value of Common Stock held by non-affiliates at June 30,
2008, the last business day of the registrant's most recently completed second
fiscal quarter was $59,326,916.
The number of shares of the registrant's Common Stock outstanding as of March 3,
2009 was 80,881,135.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 14
Item 1B. Unresolved Staff Comments 26
Item 2. Properties 26
Item 3. Legal Proceedings 26
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 27
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 32
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 46
Item 8. Financial Statements and Supplementary Data 46
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure 46
Item 9A. Controls and Procedures 46
Item 9B. Other Information 47
PART III
Item 10. Directors and Executive Officers and Corporate Governance 50
Item 11. Executive Compensation 54
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 74
Item 13. Certain Relationships and Related Transactions,
and Director Independence 77
Item 14. Principal Accountant Fees and Services 78
PART IV
Item 15. Exhibits and Financial Statement Schedules 79
1
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (the "Form
10-K"), including statements under "Item 1. Business," "Item 1A. Risk Factors,"
"Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Result of Operations," constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended, and the Private Securities Litigation Reform Act of 1995
(collectively, the "Reform Act"). Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
All statements other than statements of historical fact included in this Form
10-K regarding our financial position, business strategy and plans or objectives
for future operations are forward-looking statements. Without limiting the
broader description of forward-looking statements above, we specifically note
that statements regarding potential drugs, their potential therapeutic effect,
the possibility of obtaining regulatory approval, our ability to manufacture and
sell any products, market acceptance or our ability to earn a profit from sales
or licenses of any drugs or our ability to discover new drugs in the future are
all forward-looking in nature.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of Hemispherx Biopharma, Inc. and its subsidiaries
(collectively, "Hemispherx", "we or "us") to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements and other factors referenced in this Form 10-K. We do
not undertake and specifically decline any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
PART I
ITEM 1. Business.
GENERAL
We are a biopharmaceutical company engaged in the clinical development,
manufacture, marketing and distribution of new drug therapies based on natural
immune system enhancing technologies for the treatment of viral and immune based
chronic disorders. The Company was founded in the early 1970s doing contract
research for the National Institutes of Health. Since that time, we have
established a strong foundation of laboratory, pre-clinical, and clinical data
with respect to the development of nucleic acids to enhance the natural
antiviral defense system of the human body and to aid the development of
therapeutic products for the treatment of certain chronic diseases. We have
three domestic subsidiaries BioPro Corp., BioAegean Corp., and Core BioTech
Corp., all of which are incorporated in Delaware and are dormant. The Company's
foreign subsidiary is Hemispherx Biopharma Europe N.V./S.A. established in
Belgium in 1998, which has limited or no activity. All significant intercompany
balances and transactions have been eliminated in consolidation.
Our current strategic focus is derived from four applications of our
two core pharmaceutical technology platforms Ampligen(R) and Alferon N
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Injection(R). The commercial focus for Ampligen(R) includes application as a
treatment for Chronic Fatigue Syndrome (CFS) and as a vaccine enhancer
(adjuvant) for both therapeutic and preventative vaccine development. Alferon N
Injection(R) is an FDA approved product with an indication for refractory or
recurring genital warts. Alferon(R) LDO (Low Dose Oral) is an application
currently under early stage development targeting influenza and viral diseases
both as an adjuvant as well as a single entity anti-viral.
Ampligen(R) is an experimental drug currently undergoing clinical
development for the treatment of CFS. In August 2004, we completed a Phase III
clinical trial ("AMP 516") treating over 230 CFS patients with Ampligen(R) and
are presently in the registration process for a new drug application ("NDA")
with the Food and Drug Administration ("FDA"). Over its developmental history,
Ampligen(R) has received various designations, including Orphan Drug Product
Designation (FDA), Emergency (compassionate) Cost Recovery Sales Authorization
(FDA) and "promising" clinical outcome recognition based on the evaluation of
certain summary clinical reports (AHRQ, Agency Health Research Quality).
Ampligen represents the first drug in the class of RNA (nucleic acid) molecules
to apply for NDA review.
On July 7, 2008, the FDA accepted for review our NDA for Ampligen(R) to
treat CFS, originally submitted in October 2007. We are seeking marketing
approval for the first-ever treatment for CFS. At present, only supportive,
symptom-based care is available for CFS patients. The NDA for Ampligen(R), whose
chemical designation is poly I : poly C12U, is also the first ever accepted for
review by the FDA for systemic use of a toll-like receptor therapy to treat any
condition. On February 18, 2009, we were notified by the FDA that the originally
scheduled Prescription Drug User Fee Act ("PDUFA") date of February 25, 2009 has
been extended to May 25, 2009. For more information on our NDA, please see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations; Results of Operations; Year ended December 31, 2007 versus December
31, 2008; Research and Development Costs" and "Note 19: Subsequent Events" under
Notes to Consolidated Financial Statements.
The Status of our initiative for Ampligen(R) as an adjuvant for
preventative vaccine development includes the pre-clinical studies in seasonal
and pandemic influenza for intranasal administration being conducted by Japan's
National Institute for Infectious Diseases. A three year program targeting
regulatory approval for pandemic flu and seasonal flu in Japan has been funded
by the Japanese Ministry of Health. Parties to the research grant include
Hemispherx, the NIID and BIKEN (operational arm of the non-profit Foundation for
Microbial Disease of Osaka University). Our agreement with BIKEN is part of a
three party agreement to develop an effective influenza vaccine for Japan and
utilizes the resources of the National Institute of Infectious Disease of Japan.
We intend to conduct human studies in the US and Australia to seek approval for
seasonal and pandemic indications in the US and Europe for intranasal
administration. A phase II study for intramuscular administration for seasonal
flu was conducted in Australia through St. Vincent's Hospital Clinical Trials
Centre. The clinical data from this trial is currently being analyzed and the
results are expected by mid-2009.
Based on the results of published, peer reviewed pre-clinical studies
and clinical trials, we believe that Ampligen(R) may have broad-spectrum
anti-viral and anti-cancer properties. Over 1,000 patients have participated in
the Ampligen(R) clinical trials representing the administration of more than
90,000 doses of this drug.
Alferon N Injection(R) is the registered trademark for our injectable
formulation of natural alpha interferon, which is approved by the FDA for the
3
treatment of genital warts. Alferon N Injection(R) is also in clinical
development for treating West Nile Virus.
Commercial sales of Alferon N Injection(R) were halted in April 2008 as
the current expiration date of our finished goods inventory expired in March
2008. The FDA has declined to respond to our requests for an extension of the
expiration date, therefore we consider the request to be denied. Since our
testing of the product indicates that it is not impaired and could be safely
utilized, the finished goods inventory of 2,745 Alferon N Injection(R) 5ml vials
may be used to produce approximately 11,000,000 sachets of Low Dose Oral Alferon
(LDO) for future clinical trials.
Production of Alferon N injection(R) from our work-in-progress
inventory, which has an approximate expiration date of 2012, has been put on
hold at this time due to the resources needed to prepare our New Brunswick
facility for the FDA preapproval inspection with respect to our Ampligen(R) NDA.
Work on the Alferon N Injection(R) is expected to resume in mid-2009 under the
condition that adequate funding is obtained, which means that we may not have
any Alferon N Injection(R) product commercially available until 2010.
We own and operate a 43,000 sq. ft. FDA approved facility in New
Brunswick, NJ primarily designed to produce Alferon N Injection(R). In 2006, we
completed the installation of a polymer production line to produce Ampligen(R)
raw materials on a more reliable and consistent basis.
We outsource certain components of our research and development,
manufacturing, marketing and distribution while maintaining control over the
entire process through our quality assurance group and our clinical monitoring
group.
Our principal executive offices are located at One Penn Center, 1617
JFK Boulevard, Philadelphia, Pennsylvania 19103, and our telephone number is
215-988-0080.
AVAILABLE INFORMATION
We file our annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 electronically with the Securities and Exchange
Commission, or SEC. The public may read or copy any materials we file with the
SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address
of that site is http://www.sec.gov.
You may obtain a free copy of our annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K and amendments to
those reports on the day of filing with the SEC on our website on the World Wide
Web at http://www.hemispherx.net or by contacting the Investor Relations
Department by calling (518) 398-6222 or sending an e-mail message to
dwill@willstar.net.
4
OUR PRODUCTS
Our primary products consist of our experimental compound, Ampligen(R),
our FDA approved natural interferon product, Alferon N Injection(R) and
Alferon(R) LDO (low dose oral) our experimental liquid natural interferon for
oral administration.
Ampligen(R)
Nucleic acid compounds represent a potential new class of
pharmaceutical products that are designed to act at the molecular level for
treatment of human diseases. There are two forms of nucleic acids, DNA and RNA.
DNA is a group of naturally occurring molecules found in chromosomes, the cell's
genetic machinery. RNA is a group of naturally occurring informational molecules
which orchestrate a cell's behavior which regulates the action of groups of
cells, including the cells which compromise the body's immune system. RNA
directs the production of proteins and regulates certain cell activities
including the activation of an otherwise dormant cellular defense against
viruses and tumors. Our drug technology utilizes specifically-configured RNA.
Our double-stranded RNA drug product, trademarked Ampligen(R), an experimental,
unapproved drug, which is administered intravenously, is in human clinical
development for various therapeutically oriented studies, including treatment
for Myalgic Encephalomyelitis / Chronic Fatigue Syndrome ("ME/CFS"), HIV, renal
cell carcinoma and malignant melanoma.
Clinical trials already conducted by us include Ampligen(R) treatments
of ME/CFS, Hepatitis B, HIV and cancer patients with renal cell carcinoma and
malignant melanoma. Certain of these will require additional clinical trials to
support regulatory approval.
The FDA has approved the use of Ampligen(R) in treating ME/CFS on an
emergency basis (i.e. those with immediate life threatening illnesses). This is
known as a treatment IND, or Treatment Investigational New Drug. Furthermore,
the FDA has granted Hemispherx Orphan Drug Status in the United States. Orphan
drugs get seven years of market exclusivity upon FDA approval.
Alferon N Injection(R)
Interferons are a group of proteins produced and secreted by cells to
combat diseases. Researchers have identified four major classes of human
interferon: alpha, beta, gamma and omega. The Alferon N Injection(R) product
contains a multi-species form of alpha interferon. The worldwide market for
injectable alpha interferon-based products has experienced rapid growth and
various alpha interferon injectable products are approved for many major medical
uses worldwide. Alpha interferons are manufactured commercially in three ways:
by genetic engineering, by cell culture, and from human white blood cells. All
three of these types of alpha interferon are or were approved for commercial
sale in the U.S. Our natural alpha interferon is produced from human white blood
cells.
The potential advantages of natural alpha interferon over recombinant
(synthetic) interferon produced and marketed by other pharmaceutical firms may
be based upon their respective molecular compositions. Natural alpha interferon
is composed of a family of proteins containing many molecular species of
interferon. In contrast, commercial recombinant alpha interferon each contain
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only a single species. Researchers have reported that the various species of
interferons may have differing antiviral activity depending upon the type of
virus. Natural alpha interferon presents a broad complement of species, which we
believe may account for its higher activity in laboratory studies. Natural alpha
interferon is also glycosylated (partially covered with sugar molecules). Such
glycosylation is not present on the currently U.S. marketed recombinant alpha
interferons. We believe that the absence of glycosylation may be, in part,
responsible for the production of interferon-neutralizing antibodies seen in
patients treated with recombinant alpha interferon. Although cell
culture-derived interferon is also composed of multiple glycosylated alpha
interferon species, the types and relative quantity of these species are
different from our natural alpha interferon.
The FDA approved Alferon N Injection(R) in 1989 for the intralesional
(within lesions) treatment of refractory (resistant to other treatment) or
recurring external genital warts in patients 18 years of age or older. Certain
types of human papillomaviruses ("HPV") cause genital warts, a sexually
transmitted disease ("STD"). A published report estimates that approximately
eight million new and recurrent causes of genital warts occur annually in the
United States alone.
Alferon N Injection(R) [Interferon alfa-n3] (human leukocyte derived)]
is a highly purified, natural-source, glycosylated, multi-species alpha
interferon product. There are essentially no antibodies observed against natural
interferon to date and the product has a relatively low side-effect profile.
Alferon(R) is the only natural-source, multi-species alpha interferon currently
sold in the U.S.
The recombinant DNA derived alpha interferon are now reported to have
decreased effectiveness after one year, probably due to antibody formation and
other severe toxicities. These detrimental effects have not been reported with
the use of Alferon N Injection(R) which could allow this product to assume a
much larger market share.
It is our belief that the use of Alferon(R) N in combination with Ampligen(R)
has the potential to increase the positive therapeutic responses in chronic life
threatening viral diseases. We have suspended certain preclinical trials for
various viral disorders at this time due to funding considerations and increased
resource requirements of other projects.
Alferon(R) Low Dose Oral (LDO)
Alferon(R) LDO is an experimental low-dose, oral liquid formulation of
Natural Alpha Interferon and like Alferon N Injection(R) should not cause
antibody formation, which is a problem with recombinant interferon. It is an
experimental immunotherapeutic believed to work by stimulating an immune cascade
response in the cells of the mouth and throat, enabling it to bolster systemic
immune response through the entire body by absorption through the oral mucosa.
Oral interferon would be much more economically feasible for patients and
logistically manageable in development programs in third-world countries
primarily affected by HIV and other emerging viruses (SARS, Ebola, bird flu,
etc.). Oral administration of Alferon(R) N, with its affordability, low
toxicity, no production of antibodies, and broad range of potential bio
activity, could be a breakthrough treatment for viral diseases.
We have conducted clinical trials as part of an evaluation of the
experimental bio-therapeutic Alferon(R) LDO (Low Dose Oral Interferon Alfa-n3
(Human Leukocyte Derived)) as a potential new experimental therapy for Avian Flu
and other lethal viral diseases, which have high acute death rates. Clinical
trials in human volunteers (conducted in both the US at Drexel University,
6
Philadelphia and in Hong Kong at the Princess Margaret Hospital) were designed
to determine whether Alferon(R) N, delivered in a new, experimental oral drug
delivery format, can resuscitate the broad-spectrum antiviral and
immunostimulatory genes. These human genes are shut down by acute lethal viral
infections such as HIV, avian flu and smallpox. The results of this study are
being evaluated.
Oragens
We acquired a series of patents on Oragens, potentially a set of oral
broad spectrum antivirals and immunological enhancers, through a licensing
agreement with Temple University in Philadelphia, PA. We were granted an
exclusive worldwide license from Temple for the Oragens products. These
compounds have been evaluated in various academic laboratories for application
to chronic viral and immunological disorders.
The 2', 5' oligoadenylate synthetase/RNase L system is an important and
widely distributed pathway for the inhibition of viral replication and tumor
growth. The 2', 5' oligoadenylate synthetase, up activation by double-stranded
RNA, synthesizes 2', 5' oligoadenylates (2-5A) from ATP. These bioactive 2-5As
directly activate RNase L, which degrades viral and cellular RNAs resulting in
the inhibition of protein synthesis.
The bioactive 2-5A molecules can be degraded by various hydrolytic
enzymes, resulting in a short half life. Analogues of these bioactive 2-5As,
termed Oragen RNA compounds, have been produced to increase stability and
maintain or increase biological activity without demonstrable toxicity.
Additional pre-clinical tests will need to be conducted prior to pursuing
clinical trials.
PATENTS
We have over 50 patents worldwide with approximately 30 additional
pending patent applications pending comprising our intellectual property. In
2006, we obtained the global patent rights for a compound that enhances DNA
vaccination by the efficient intracellular delivery of immunogenic DNA (i.e.-
DNA that can produce antigenic proteins that simulate an acute viral infection
with a resultant humoral and cell-mediated immune response). Please see "Note 5:
Patents, Trademark Rights and Other Intangibles" under Notes To Consolidated
Financial Statements for more information on these patents.
We continually review our patents rights to determine whether they have
continuing value. Such review includes an analysis of the patent's ultimate
revenue and profitability potential. In addition, management's review addresses
whether each patent continues to fit into our strategic business plans for
Ampligen(R), Alferon(R) N and other intellectual property.
Our experimental compounds, which have yet to be determined "safe and
effective" by regulatory authorities, are accordingly only available legally in
certain authorized trials and tests; in vitro (outside the body) tests are also
not necessarily indicative of any evidence of clinical benefits or advantages.
But the current focus of Hemispherx is on Ampligen(R) as a treatment for ME/CFS.
The main U.S. ME/CFS treatment patent (#6130206) expires October 10,
2017. Our main patents covering HIV treatment (#4820696, #5063209, and #5091374)
expired on April 11, 2006, November 5, 2008, and February 25, 2009,
respectively; Hepatitis treatment coverage is conveyed by U.S. patent #5593973
which expires on January 14, 2014. The U.S. Ampligen(R) Trademark (#1,515,099)
7
expired on December 6, 2008 and we are in the renewal process for an additional
10 years of patent protection. The FDA has granted us "orphan drug status" for
our nucleic acid-derived therapeutics for ME/CFS, HIV/AIDS, and renal cell
carcinoma and malignant melanoma. Orphan drug status grants us protection
against competition for a period of seven years following FDA approval, as well
as certain federal tax incentives, and other regulatory benefits. The HIV/AIDS
indication will be covered under the marketing protection provided by the orphan
drug designation for using Ampligen(R) to treat HIV/AIDS.
The U.S. Alferon(R) Patents expire February 10, 2012 (5,503,828 and
5,676,942) and December 22, 2017 (5,989,441).
RESEARCH AND DEVELOPMENT ("R&D")
Our focus is on developing drugs for use in treating viral and immune
based chronic disorders and diseases such as ME/CFS, HIV, HPV, SARS and West
Nile Virus. Due to limited capital resources, our current R&D projects are only
targeting treatment therapies for ME/CFS and other viral diseases, i.e.;
Avian/Seasonal Influenza.
Myalgic Encephalomyelitis/Chronic Fatigue Syndrome ("ME/CFS")
Chronic Fatigue Syndrome ("CFS"), also known as Chronic Immune
Dysfunction Syndrome ("CFIDS") and, myalgic encephalomyelitis ("ME") is a
serious and debilitating chronic illness and a major public health problem. Long
misunderstood, under-recognized, and under-diagnosed, ME/CFS is now recognized
by both the government and private sector as a major health problem, including
the National Institutes of Health, U.S. Centers for Disease Control and
Prevention ("CDC"), FDA and Social Security Administration, recognizes ME/CFS as
one of the most common chronic illnesses of our time. The CDC listed ME/CFS as a
priority disease, causing severe health and financial problems for the patients,
their family, and the community. ME/CFS is endemic in the population, but
occasionally seen in clusters suggesting an infectious basis. A variety of
immunological, endocrine, autonomic nervous system, and metabolic abnormalities
have been documented.
CDC Director Dr. Julie Gerberding has stated that "The CDC considers
Chronic Fatigue Syndrome to be a significant public health concern and we are
committed to research that will lead to earlier diagnosis and better treatment
of the illness." A variety of studies by the CDC and others have shown that
between 1 and 4 million Americans suffer from CFS. While those with the disease
are seriously impaired and at least a quarter are unemployed or on disability
because of CFS, only about half have consulted a physician for their illness.
Equally important, about 40% of people in the general population who report
symptoms of ME/CFS have a serious, treatable, previously unrecognized medical or
psychiatric condition (such as diabetes, thyroid disease, substance abuse).
ME/CFS is a serious illness and poses a dilemma for patients, their families and
health care providers.
The CDC has launched a national public education and awareness campaign
on CFS. The campaign, called "Get Informed. Get Diagnosed. Get Help." is
designed to increase awareness among clinicians and the public because 80
percent of Americans afflicted with CFS illness may not know they have it. The
campaign provides the latest information regarding the diagnosis and treatment
of CFS along with national print and broadcast advertising designed to raise
awareness of the disease among patients and clinicians. A CDC sponsored website
8
at www.cdc.gov/cfs provides easy to understand, downloadable educational tools
for patients, their families and health care professionals.
While ME/CFS strikes people of all age, racial, ethnic, and
socioeconomic groups, it is most prevalent amongst women. Research has shown
that ME/CFS is about three times as common in women as men, a rate similar to
that of many autoimmune diseases, such as multiple sclerosis and lupus. To put
this into perspective, ME/CFS is over four times more common than HIV infection
in women, and the rate of ME/CFS in women is considerably higher than a woman's
lifetime risk of getting lung cancer as published by the CFIDS Association of
America.
Many severe ME/CFS patients become completely disabled or totally
bedridden and are afflicted with severe pain and mental confusion even at rest.
ME/CFS is characterized by incapacitating fatigue with profound exhaustion and
extremely poor stamina, sleep difficulties and problems with concentration and
short-term memory. It is also accompanied by flu-like symptoms, pain in the
joints and muscles, tender lymph nodes, sore throat and new headaches. A
distinctive characteristic of the illness is a worsening of symptoms following
physical or mental exertion which do not subside with rest.
Because no cause for ME/CFS has been identified, current treatment
programs are directed at relieving symptoms, with the goal of the patient
regaining some level of function and well-being. Diagnosis of ME/CFS is a
time-consuming and challenging process for which there is no diagnostic test or
biomarker to clearly identify the disorder. Diagnosis is primarily arrived at by
taking a patient's medical history, completing a physical exam and lab tests to
rule out other conditions excluding other illnesses with similar symptoms and
comparing a patient's symptoms with the case definition. Overlapping symptoms
can occur with several diseases, such as fibromyalgia, Gulf War Illnesses and
multiple chemical sensitivities. Many diseases have similar symptoms including
Lupus and Lyme disease which may closely mimic ME/CFS that they need to be
considered when making a diagnosis to rule them out. If there are no abnormal
test results or other physical ailments identified, clinicians can use
standardized tests to quantify the level of fatigue and evaluate symptoms.
Diagnosis can be complicated by the fact that the symptoms and severity of CFS
vary considerably from patient to patient.
The case definition for ME/CFS criteria calls for certain symptoms to
be present along with fatigue that interferes with physical, mental, social, and
educational activities. Both the fatigue and symptoms must have occurred for (at
least) a six month period. People with ME/CFS may experience many more than the
symptoms named in the case definition, so knowledgeable physicians will take
this fact into consideration when making a diagnosis (after other possible
reasons for symptoms have been ruled out).
The leading model of ME/CFS pathogenesis is thought to be rooted in
abnormalities in the immune system and brain (central nervous system), both of
which affects and alters the function of the other. Because some cases of
chronic fatigue begin with a flu-like infection, several viruses have been
studied as possible causes because all are relatively common in the general
population, including Human Herpesvirus ("HHV") 6 and 7, Retroviruses,
Epstein-Barr Virus, Enteroviruses, as well as, Mycoplasmas, etc. Whilst, the
etiology is likely to be caused by a collection of factors, including viral,
hormonal, stress, and other triggers for the illness in genetically,
environmentally or otherwise susceptible individuals and continues to be a
subject of discussion.
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Most ME/CFS patients are treated symptomatically with traditional
treatments geared toward treating symptoms of the disease, such as improving
quality of sleep, reducing pain and treatment of depression. Clinically, a
number of different therapeutic approaches have been pursued, but with no
significant clinical success.
Other Viral Diseases
We are actively engaged in broad-based experimental studies assessing
the efficacy of our products, Ampligen(R), Alferon N Injection(R) and Alferon(R)
LDO against influenza viruses as an adjuvant and/or single agent antiviral with
the National Institute of Infectious Disease in Tokyo, St. Vincent's Hospital
Clinical Trial Centre in Australia and various research affiliates of the
National Institutes of Health in the United States.
In September 2007, Japan's National Institute of Infectious Disease
("JNIID") initiated research on the co-administration of JNIID's HIV-1 vaccine
with our experimental TLR3 agonist, Ampligen(R). Activation of TLR3 by
Ampligen(R) triggers a host defense innate immune response in the cell. This
research is the result of earlier studies suggesting a potential role for
Ampligen(R) in boosting responses to certain vaccines designed to combat avian
influenza (Bird Flu) as well as seasonal influenza viruses. The objective of
this research is to determine if Ampligen(R) can overcome the historical problem
which has handicapped HIV/AIDS vaccine development, namely marginal immune
response which undermines the potential of long-lasting protection. Ampligen(R)
will be combined with HIV/AIDS recombinant protein and administered via an
intranasal route.
In 2007 JNIID published in two peer reviewed journals, the results of
their studies to evaluate the ability of current seasonal influenza vaccine to
confer cross-protection against highly pathogenic H5N1 influenza (Bird Flu)
virus in mice. These studies indicate that, as a vaccine enhancer
co-administered with their seasonal trivalent influenza vaccine, Ampligen(R)
helps induce a protective effect against H5N1 influenza viruses. As such,
Ampligen(R) as a toll-like receptor 3 agonist may aid in overcoming the problems
protecting against mutated strains of the H5N1 virus and of limited supplies of
H5N1 virus vaccines. Additional studies to support this conclusion are being
planned.
In April 2007, Japan's Ministry of Health, Labor and Welfare (MHLW)
issued authorization to its National Institute of Infectious Diseases approving
their budget to advance studies indicating that an H5N1 influenza vaccine
co-administered intranasally with Hemispherx's experimental therapeutic,
Ampligen(R), protected against mutated strains of the virus and, further that,
the seasonal trivalent influenza vaccine co-administered intranasally with
Ampligen(R) maintained efficacy even when challenged with the H5N1 influenza
virus.
In June 2007, we initiated a clinical trial in Australia using
Ampligen(R) in combination with seasonal flu vaccine. This open-label study
(Phase IIa) utilizing Ampligen(R) (Poly I: Poly C12U) as a potential
immune-enhancer was conducted in Australia with thirty-eight subjects age 60 or
greater with the standard trivalent seasonal influenza vaccines. Ampligen(R) was
administered subcutaneously. Elderly subjects typically have reduced immune
responses relative to younger populations. The combinational treatment was
generally well-tolerated. Serologic studies to evaluate the magnitude and
spectrum of immune response are pending and are expected by mid-2009; however,
only certain labs are qualified to conduct these tests and during the course of
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the clinical testing, one of these testing labs changed ownership. We are in the
process of determining that the methodology remained validated and consistent
with the pilot results obtained about a year earlier with a smaller group
consisting of the first 8 enrolled subjects.
The CDC reports that in 2007 the number of mosquito-borne West Nile
Virus ("WNV") infections in the United States were "up sharply" over the same
period in 2006. This increased infection rate has accelerated the enrollment of
patients in the Phase IIb clinical trial using Alferon(R) N to treat WNV
patients. In lab studies, Alferon(R) N, a natural cocktail of eight
alpha-interferons, shows synergistic effects (up to 100 fold over recombinant
interferons) against pathogens such as WNV. The Phase IIb clinical trial is a
double-blinded, randomized, multi-center program under the direction of Cornell
University and Weill Cornell Medical College/New York Hospital.
Our direct Research and Development cost was $5,800,000 in 2008,
$10,444,000 in 2007 and $10,127,000 in 2006. Most of these expenditures relate
to the development of our experimental drug, Ampligen(R). The costs in 2006 and
2007 reflect the costs of producing Ampligen(R) raw materials (polymers) and
Ampligen(R) doses for use in stability and validation testing, including the
costs of preparing the NDA for filing with the FDA.
MANUFACTURING
We have a Supply Agreement with Hollister-Stier Laboratories LLC
("Hollister-Stier") of Spokane, Washington related to the manufacture of
Ampligen(R) for a five year term ending in 2010. Pursuant to the agreement, we
supply the key raw materials and Hollister-Stier formulates and bottles
Ampligen(R). Hollister-Stier has completed five (5) pilot manufacturing runs of
Ampligen(R) for stability testing with one additional manufacturing run which
was completed mid-March 2007. The first three pilot runs were completed in
January 2006 utilizing polymer/raw material from Ribotech (our previous supplier
of raw material). A six month accelerated stability data on these three lots
support a two year expiration period to 2011. Having successfully completed
these manufacturing runs, the scale up of Ampligen(R) manufacturing to
commercial batch size and the validation of the manufacturing at Hollister-Stier
was initiated. We are currently using these three process validation lots in
stability studies to monitor and confirm the product quality and stability.
Alferon N Injection(R), the purified drug concentrate utilized in the
formulation of Alferon N Injection(R), was manufactured in our New Brunswick,
New Jersey facility and was formulated and packaged at a production facility
formerly owned and operated by Abbott Laboratories located in Kansas. Abbott
Laboratories sold the facility to Hospira. Hospira ceased the labeling and
packaging of Alferon N Injection(R) as they sought larger production runs for
cost efficiency purposes. On February 8, 2006, we executed a Manufacturing and
Safety Agreement with Hyaluron, Inc. ("Hyaluron") of Burlington, Massachusetts,
for the formulation, packaging and labeling of Alferon N Injection(R). Pursuant
to the Agreement, we will supply raw materials in sufficient quantity and
provide any pertinent information to the project. Hyaluron is in the process of
preparing their facility to produce Alferon N Injection(R). At this time we are
in the process of scheduling additional production runs in 2010.
MARKETING/DISTRIBUTION
Our marketing strategy for Ampligen(R) reflects the differing health
care systems around the world, and the different marketing and distribution
systems that are used to supply pharmaceutical products to those systems. In the
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U.S., we expect that, subject to receipt of regulatory approval, Ampligen(R) may
be utilized in four medical arenas: physicians' offices, clinics, hospitals and
the home treatment setting. We are in the process of developing pre-launch and
launch driven marketing plans focusing on those audience development, medical
support and payor reimbursement initiatives which will facilitate product
acceptance and utilization at the time of regulatory approval. Similarly, we are
developing distribution scenarios for the Specialty Pharmacy/Infusion channel
which will insure market access, offer 3PL (third party logistics) capabilities
and provide the requisite risk management control mechanisms. It is our intent
to utilize third party service providers to execute elements of both the
marketing/sales and distribution plans. We currently plan to utilize a small
group of Managed Market account managers to introduce the product to payor,
employer and government account audiences. We believe that this approach will
establish a market presence and facilitate the generation of revenue without
incurring the substantial costs associated with a traditional sales force.
Furthermore, management believes that the approach will enable us to retain many
options for future marketing strategies.
For example, our commercialization strategy for Ampligen(R)-CFS may
include licensing/co-marketing agreements utilizing the resources and capacities
of a strategic partner(s). We are currently seeking worldwide marketing
partner(s), with the goal of having a relationship in place before approval is
obtained. In parallel to partnering discussions, appropriate pre-marketing
activities will be undertaken. We intend to control manufacturing of Ampligen on
a world-wide basis.
In 1998, we entered into a strategic alliance with Accredo to develop
certain marketing and distribution capacities for Ampligen(R) in the United
States. Accredo, a division of MEDCO, is one of the nation's largest Specialty
Pharmacy providers. Pursuant to the agreement, Accredo assumed certain
responsibilities for distribution of Ampligen(R) for which they received a fee.
Through this arrangement, we may mitigate the necessity of incurring certain
up-front costs. Accredo has also worked with us in connection with the Amp 511
ME/CFS cost recovery treatment program, Amp 516 ME/CFS Phase III clinical trial
and the Amp 719 (combining Ampligen(R) with other antiviral drugs in HIV-salvage
therapy and Amp 720 HIV Phase IIb clinical trials now under way). There can be
no assurances that this alliance will develop a significant commercial position
in any of its targeted chronic disease markets. The agreement had an initial one
year term from February 9, 1998 with successive additional one year terms unless
either party notifies the other not less than 180 days prior to the anniversary
date of its intent to terminate the agreement. Also, the agreement may be
terminated for uncured defaults, or bankruptcy, or insolvency of either party
and will automatically terminate upon our receiving an NDA for Ampligen(R) from
the FDA, at which time, a new agreement will need to be negotiated with Accredo
or another major drug distributor. This agreement offers the potential to
provide some marketing and distribution capacity in the United States. There has
been no communication or activity under this agreement for the past few years.
In 2007, we had executed a marketing strategy for Alferon N
Injection(R) by relaunching the product via a collaborative marketing initiative
between Hemispherx and Armada Healthcare, a Specialty Pharmacy network
encompassing specialty pharmacists, pharmacies, distributors and targeted
physician specialists. This effort was intended to direct our efforts in the
most appropriate and productive market fully exposing our product in the
indicated market. This initiative had a positive impact on Alferon(R) revenues
in 2007 by focusing on direct, non-personal selling efforts to targeted
physician audiences. It was our intent to promote Alferon to those
dermatologists, OB GYNs and Family practice/IMs who are involved in the
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treatment of patients with refractory or recurring external genital warts and
who currently utilize both
injectable interferons as well as topical therapeutic agents. This marketing
initiative has been put on hold due to lack of commercially marketable product.
We expect to reactivate Alferon(R) N production and the marketing program in
2010.
COMPETITION
RNA based products and toll-like receptors (TLRs) have demonstrated
great promise in pre-clinical and limited clinical applications resulting in
active research and development by large pharmaceutical companies and emerging
Biotech firms. As such, our potential competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources, product
development, and manufacturing and marketing capabilities than we have.
These companies and their competing products may be more effective and
less costly than our products. In addition, conventional drug therapy, surgery
and other more familiar treatments will offer competition to our products.
Furthermore, our competitors have significantly greater experience than we do in
pre-clinical testing and human clinical trials of pharmaceutical products and in
obtaining FDA, EMEA Health Protection Branch ("HPB") and other regulatory
approvals of products. Accordingly, our competitors may succeed in obtaining
FDA, EMEA and HPB product approvals more rapidly than us. If any of our products
receive regulatory approvals and we commence commercial sales of our products,
we will also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which we have no experience. Our competitors may possess
or obtain patent protection or other intellectual property rights that prevent,
limit or otherwise adversely affect our ability to develop or exploit our
products.
The major pharmaceutical competitors with biotech capabilities/vaccine
franchises include Pfizer, GSK, Wyeth, Merck, Novartis, Gilead Pharmaceutical,
and Schering-Plough Corp. Biotech competitors include AVANT Immunotherapeutics,
AVI Biopharma and GENTA. When we recommence sales of Alferon N Injection(R), it
will again compete with a product produced by Schering for treating genital
warts. 3M Pharmaceutical also markets its immune response modifier product,
Aldera, for the treatment of genital and perianal warts. We believe the approval
and marketing of this product is the main reason that past sales of Alferon N
Injection(R) have not met our expectations since acquisition. In November 2006,
the botanical drug, Veregen (marketed by Bradley Pharmaceuticals) was also
approved for the topical treatment of genital and perianal warts. In addition,
because certain competitive products are not dependent on a source of human
blood cells, such products may be able to be produced in greater volume and at a
lower cost than Alferon N Injection(R). Our wholesale price on a per unit basis
of Alferon N Injection(R) is higher than that of the competitive recombinant
alpha and beta interferon products.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign
countries is and will be a significant factor in the manufacture and marketing
of Alferon(R) N products and our ongoing research and product development
activities. Ampligen(R) and the products developed from the ongoing research and
product development activities will require regulatory clearances prior to
commercialization. In particular, new drug products for humans are subject to
13
rigorous preclinical and clinical testing as a condition for clearance by the
FDA and by similar authorities in foreign countries. The lengthy process of
seeking these approvals, and the ongoing process of compliance with applicable
statutes and regulations, has, and will continue to require the expenditure of
substantial resources. Any failure by us or our collaborators or licensees to
obtain, or any delay in obtaining, regulatory approvals could materially
adversely affect the marketing of any products developed by us and our ability
to receive product or royalty revenue. We have received orphan drug designation
for certain therapeutic indications, which might, under certain conditions,
accelerate the process of drug commercialization. Alferon N Injection(R) is only
approved for use in intra-lesional treatment of refractory or recurring external
genital warts in patients 18 years of age or older. Use of Alferon N
Injection(R) for other applications requires regulatory approval.
We are subject to various federal, state and local laws, regulations
and recommendations relating to such matters as safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use of and disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in connection with our
research work. The laboratory and production facility in New Brunswick, New
Jersey is approved for the manufacture of Alferon N Injection(R) and we believe
it is in substantial compliance with all material regulations. However, we
cannot give assurances that facilities owned and operated by third parties that
are utilized in the manufacture of our products, are in substantial compliance,
or if presently in substantial compliance, will remain so.
RESEARCH, CONSULTING, LICENSING AND SUPPLY AGREEMENTS
Please see "Note 10: Research, Consulting and Supply Agreements"
under Notes to Consolidated Financial Statements.
HUMAN RESOURCES
As of March 3, 2009, we had 46 personnel consisting of 32 full time
employees and 14 regulatory/research medical personnel on a part-time basis.
Part time personnel are paid on a per diem or monthly basis. 27 personnel are
engaged in our research, development, clinical, and manufacturing effort. 19 of
our personnel perform regulatory, general administration, data processing,
including bio-statistics, financial and investor relations functions. We have no
union employees and we believe our relationship with our employees is good.
While we have been successful in attracting skilled and experienced
scientific personnel, there can be no assurance that we will be able to attract
or retain the necessary qualified employees and/or consultants in the future.
SCIENTIFIC ADVISORY BOARD
Our Scientific Advisory Board presently consists of two individuals who
we believe have particular scientific and medical expertise in Virology, Cancer,
Immunology, Biochemistry and related fields. Dr. James Rahal of New York
Hospital Queens and Prof. Luc Montagnier from the Pasteur/World AIDS Research &
Prevention advise us about current and long term scientific planning including
research and development. This Board was originally made up of four medical
scientists of which one resigned due to conflict of interest and one resigned
for personal reasons. The Scientific Advisory Board conducts periodic meetings
as needed by the clinical studies in progress by us. No Scientific Advisory
Board meetings were held in 2008 primarily due to fewer active scientific
14
projects. However, individual Scientific Advisory Board Members sometimes
consult with and meet informally with our employees. Members of the Scientific
Advisory are employed by others and may have commitments to and/or consulting
agreements with other entities, including our potential competitors.
ITEM 1A. Risk Factors.
The following cautionary statements identify important factors that
could cause our actual results to differ materially from those projected in the
forward-looking statements made in this Form 10-K. Among the key factors that
have a direct bearing on our results of operations are:
Risks Associated With Our Business
No assurance of successful product development.
Ampligen(R) and related products. The development of Ampligen(R) and
our other related products is subject to a number of significant risks.
Ampligen(R) may be found to be ineffective or to have adverse side effects, fail
to receive necessary regulatory clearances, be difficult to manufacture on a
commercial scale, be uneconomical to market or be precluded from
commercialization by proprietary right of third parties. Our products are in
various stages of clinical and pre-clinical development and, require further
clinical studies and appropriate regulatory approval processes before any such
products can be marketed. We do not know when, if ever, Ampligen(R) or our other
products will be generally available for commercial sale for any indication.
Generally, only a small percentage of potential therapeutic products are
eventually approved by the FDA for commercial sale. Please see the next risk
factor.
Alferon N Injection(R). Although Alferon N Injection(R) is approved for
marketing in the United States for the intra-lesional treatment of refractory or
recurring external genital warts in patients 18 years of age or older, to date
it has not been approved for other indications. We face many of the risks
discussed above, with regard to developing this product for use to treat other
ailments.
Our drug and related technologies are investigational and subject to regulatory
approval. If we are unable to obtain regulatory approval, our operations will be
significantly adversely affected.
All of our drugs and associated technologies, other than Alferon N
Injection(R), are investigational and must receive prior regulatory approval by
appropriate regulatory authorities for general use and are currently legally
available only through clinical trials with specified disorders. At present,
Alferon N Injection(R) is only approved for the intra-lesional treatment of
refractory or recurring external genital warts in patients 18 years of age or
older. Use of Alferon N Injection(R) for other indications will require
regulatory approval.
Our products, including Ampligen(R), are subject to extensive
regulation by numerous governmental authorities in the U.S. and other countries,
including, but not limited to, the FDA in the U.S., the Health Protection Branch
("HPB") of Canada, and the Agency for the Evaluation of Medicinal Products
("EMEA") in Europe. Obtaining regulatory approvals is a rigorous and lengthy
process and requires the expenditure of substantial resources. In order to
obtain final regulatory approval of a new drug, we must demonstrate to the
15
satisfaction of the regulatory agency that the product is safe and effective for
its intended uses and that we are capable of manufacturing the product to the
applicable regulatory standards. We require regulatory approval in order to
market Ampligen(R) or any other proposed product and receive product revenues or
royalties. We cannot assure you that Ampligen(R) will ultimately be demonstrated
to be safe or efficacious. In addition, while Ampligen(R) is authorized for use
in clinical trials including a cost recovery program in the United States and
Europe, we cannot assure you that additional clinical trial approvals will be
authorized in the United States or in other countries, in a timely fashion or at
all, or that we will complete these clinical trials.
We filed an NDA with the FDA for treatment of CFS on October 10, 2007.
On December 5, 2007 we received an RTF letter from the FDA as our NDA filing was
deemed "not substantially complete". We responded to the FDA's concerns by
filing amendments to our NDA on April 25, 2008. These amendments should allow
the FDA reviewers to better evaluate independently the statistical
efficacy/safety conclusions of our NDA for the use of Ampligen(R) in treating
CFS. On July 7, 2008 the FDA accepted our NDA filing for review. However, there
are no assurances that upon review of the NDA that it will be approved by the
FDA. On February 18, 2009, we were notified by the FDA that the originally
scheduled Prescription Drug User Fee Act ("PDUFA") date of February 25, 2009 has
been extended to May 25, 2009. For more information on our NDA, please see "Note
19: Subsequent Events" under Notes to Consolidated Financial Statements.
If Ampligen(R) or one of our other products does not receive regulatory
approval in the U.S. or elsewhere, our operations most likely will be materially
adversely affected.
We may continue to incur substantial losses and our future profitability is
uncertain.
We began operations in 1966 and last reported net profit from 1985
through 1987. Since 1987, we have incurred substantial operating losses, as we
pursued our clinical trial effort to get our experimental drug, Ampligen(R),
approved. As of December 31, 2008, our accumulated deficit was approximately
$197,409,000. We have not yet generated significant revenues from our products
and may incur substantial and increased losses in the future. We cannot assure
that we will ever achieve significant revenues from product sales or become
profitable. We require, and will continue to require, the commitment of
substantial resources to develop our products. We cannot assure that our product
development efforts will be successfully completed or that required regulatory
approvals will be obtained or that any products will be manufactured and
marketed successfully, or be profitable.
We may require additional financing which may not be available.
The development of our products will require the commitment of
substantial resources to conduct the time-consuming research, preclinical
development, and clinical trials that are necessary to bring pharmaceutical
products to market. As of December 31, 2008, we had approximately $6,119,000 in
cash and cash equivalents and short-term investments. Given the harsh economic
conditions, we have reviewed every aspect of our operations for cost and
spending reductions to assure the long term survival of our Company while
maintaining the resources necessary to achieve our primary objectives of
obtaining NDA approval of Ampligen(R) and securing a strategic partner (see
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations; Liquidity and Capital Resources"). Based on these actions, we
16
anticipate, but cannot assure, that these funds will be sufficient to meet our
operating cash requirements for the next 16 months.
We have in place two potential sources of financing: 1) a Common Stock
Purchase Agreement (the "Purchase Agreement") with Fusion Capital Fund II, LLC
("Fusion") pursuant to which we have the right to sell shares of our Common
Stock to Fusion (see Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations; Liquidity and Capital Resources; Equity
Financing); and 2) a Standby Financing Agreement with certain of our executives,
directors and strategic consultants (see Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations; Liquidity and Capital
Resources; Standby Financing Agreement"). However, Fusion cannot purchase any
shares of our common stock pursuant to the Purchase Agreement if the price of
our common stock has three trading days with an average value below $0.40 over
the prior twelve trading days. For the past few months, with limited exceptions,
the price of our common stock has been below $0.40, thereby adversely affecting
our ability to exercise the Fusion financing.
Assuming no material financing from the sale of securities to Fusion,
financing under the Standby Financing Agreement is not sufficient and if we are
unable to commercialize and sell Ampligen(R) and/or increase sales of Alferon N
Injection(R) or our other products, we will need to secure other sources of
funding through additional equity or debt financing or from other sources in
order to satisfy our working capital needs and to complete the necessary
clinical trials and the regulatory approval processes including the
commercializing of Ampligen(R) products. In this regard we previously registered
$50,000,000 worth of our securities in a universal shelf registration statement,
none of which has been designated or issued. We are unable to estimate the
amount, timing or nature of future sales of outstanding common stock or
instruments convertible into or exercisable for our common stock. There can be
no assurances that we will raise adequate funds which may have a material
adverse effect on our ability to develop our products or continue our
operations.
Our Alferon N Injection(R) Commercial Sales have halted due to lack of finished
goods inventory.
Our finished goods inventory of Alferon N Injection(R) reached it's
expiration date in March 2008. As a result, we have no product to sell at this
time. The FDA has declined to respond to our requests for an extension of the
expiration date, therefore we consider the request to be denied. Since our
testing of the product indicates that it is not impaired and could be safely
utilized, the finished goods inventory of 2,745 Alferon N Injection(R) 5ml vials
may be used to produce approximately 11,000,000 sachets of Low Dose Oral Alferon
(LDO) for future clinical trials.
Production of Alferon N Injection(R) from our work-in-progress
inventory, which has an approximate expiration date of 2012, has been put on
hold at this time due to the resources needed to prepare our New Brunswick
facility for the FDA preapproval inspection with respect to our Ampligen(R) NDA.
Work on the Alferon N Injection(R) is expected to resume in mid-2009 under the
condition that adequate funding is obtained, which means that we may not have
any Alferon N Injection(R) product commercially available until 2010.
In 2007, we averaged Alferon N Injection(R) sales of approximately
$77,000 per month. However with no FDA approval to extend the expiration date of
our finished good inventory, we will no longer receive these monthly revenues.
17
In addition, if there is a significant absence of the product from the market
place, no assurance can be given that sales will return to prior levels.
Although preliminary in vitro testing indicates that Ampligen(R) enhances the
effectiveness of different drug combinations on avian influenza, preliminary
testing in the laboratory is not necessarily predictive of successful results in
clinical testing or human treatment.
Ampligen(R) continues to undergo pre-clinical testing for possible
treatment of avian flu. Although preliminary in vitro testing indicates that
Ampligen(R) enhances the effectiveness of different drug combinations on avian
flu, preliminary testing in the laboratory is not necessarily predictive of
successful results in clinical testing or human treatment. No assurance can be
given that similar results will be observed in clinical trials. Use of
Ampligen(R) in the treatment of avian flu requires prior regulatory approval.
Only the FDA can determine whether a drug is safe, effective or promising for
treating a specific application. As discussed in the prior risk factor,
obtaining regulatory approvals is a rigorous and lengthy process.
In addition, Ampligen(R) is currently being tested on strains of avian
influenza virus. There are a number of strains and strains mutate. No assurance
can be given that Ampligen(R) will be effective on any strains that might infect
humans.
We may not be profitable unless we can protect our patents and/or receive
approval for additional pending patents.
We need to preserve and acquire enforceable patents covering the use of
Ampligen(R) for a particular disease in order to obtain exclusive rights for the
commercial sale of Ampligen(R) for such disease. We obtained all rights to
Alferon N Injection(R), and we plan to preserve and acquire enforceable patents
covering its use for existing and potentially new diseases. Our success depends,
in large part, on our ability to preserve and obtain patent protection for our
products and to obtain and preserve our trade secrets and expertise. Certain of
our know-how and technology is not patentable, particularly the procedures for
the manufacture of our experimental drug, Ampligen(R), which is carried out
according to standard operating procedure manuals. We also have been issued
patents on the use of Ampligen(R) in combination with certain other drugs for
the treatment of chronic Hepatitis B virus, chronic Hepatitis C virus, and a
patent which affords protection on the use of Ampligen(R) in patients with
Chronic Fatigue Syndrome. We have not yet been issued any patents in the United
States for the use of Ampligen(R) as a sole treatment for any of the cancers,
which we have sought to target. With regard to Alferon N Injection(R), we have
acquired from ISI its patents for natural alpha interferon produced from human
peripheral blood leukocytes and its production process and we have filed a
patent application for the use of Alferon(R) LDO in treating viral diseases
including avian influenza. We cannot assure that our competitors will not seek
and obtain patents regarding the use of similar products in combination with
various other agents, for a particular target indication prior to our doing
such. If we cannot protect our patents covering the use of our products for a
particular disease, or obtain additional patents, we may not be able to
successfully market our products.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain and involves complex legal and factual questions.
To date, no consistent policy has emerged regarding the breadth of
protection afforded by pharmaceutical and biotechnology patents. There can be no
18
assurance that new patent applications relating to our products or technology
will result in patents being issued or that, if issued, such patents will afford
meaningful protection against competitors with similar technology. It is
generally anticipated that there may be significant litigation in the industry
regarding patent and intellectual property rights. Such litigation could require
substantial resources from us and we may not have the financial resources
necessary to enforce the patent rights that we hold. No assurance can be made
that our patents will provide competitive advantages for our products or will
not be successfully challenged by competitors. No assurance can be given that
patents do not exist or could not be filed which would have a materially adverse
effect on our ability to develop or market our products or to obtain or maintain
any competitive position that we may achieve with respect to our products. Our
patents also may not prevent others from developing competitive products using
related technology.
There can be no assurance that we will be able to obtain necessary licenses if
we cannot enforce patent rights we may hold. In addition, the failure of third
parties from whom we currently license certain proprietary information or from
whom we may be required to obtain such licenses in the future, to adequately
enforce their rights to such proprietary information, could adversely affect the
value of such licenses to us.
If we cannot enforce the patent rights we currently hold we may be
required to obtain licenses from others to develop, manufacture or market our
products. There can be no assurance that we would be able to obtain any such
licenses on commercially reasonable terms, if at all. We currently license
certain proprietary information from third parties, some of which may have been
developed with government grants under circumstances where the government
maintained certain rights with respect to the proprietary information developed.
No assurances can be given that such third parties will adequately enforce any
rights they may have or that the rights, if any, retained by the government will
not adversely affect the value of our license.
There is no guarantee that our trade secrets will not be disclosed or
known by our competitors.
To protect our rights, we require certain employees and consultants to
enter into confidentiality agreements with us. There can be no assurance that
these agreements will not be breached, that we would have adequate and
enforceable remedies for any breach, or that any trade secrets of ours will not
otherwise become known or be independently developed by competitors.
We have limited marketing and sales capability. If we are unable to obtain
additional distributors and our current and future distributors do not market
our products successfully, we may not generate significant revenues or become
profitable.
We have limited marketing and sales capability. We are dependent upon
existing and, possibly future, marketing agreements and third party distribution
agreements for our products in order to generate significant revenues and become
profitable. As a result, any revenues received by us will be dependent in large
part on the efforts of third parties, and there is no assurance that these
efforts will be successful.
Our commercialization strategy for Ampligen(R)-CFS may include
licensing/co-marketing agreements utilizing the resources and capacities of a
strategic partner(s). We are currently seeking worldwide marketing partner(s),
19
with the goal of having a relationship in place before approval is obtained. In
parallel to partnering discussions, appropriate pre-marketing activities will be
undertaken. We intend to control manufacturing of Ampligen on a world-wide
basis.
We cannot assure that our U.S. or foreign marketing strategy will be
successful or that we will be able to establish future marketing or third party
distribution agreements on terms acceptable to us, or that the cost of
establishing these arrangements will not exceed any product revenues. Our
inability to establish viable marketing and sales capabilities would most likely
have a materially adverse effect on us.
There are no long-term agreements with suppliers of required materials. If we
are unable to obtain the required raw materials, we may be required to scale
back our operations or stop manufacturing Alferon N Injection(R) and/or
Ampligen(R).
A number of essential materials are used in the production of Alferon N
Injection(R), including human white blood cells. We do not have long-term
agreements for the supply of any of such materials. There can be no assurance we
can enter into long-term supply agreements covering essential materials on
commercially reasonable terms, if at all.
There are a limited number of manufacturers in the United States
available to provide the polymers for use in manufacturing Ampligen(R). At
present, we do not have any agreements with third parties for the supply of any
of these polymers. We have established relevant manufacturing operations within
our New Brunswick, New Jersey facility for the production of Ampligen(R)
polymers from raw materials in order to obtain polymers on a more consistent
manufacturing basis.
If we are unable to obtain or manufacture the required polymers, we may
be required to scale back our operations or stop manufacturing. The costs and
availability of products and materials we need for the production of Ampligen(R)
and the commercial production of Alferon N Injection(R) and other products which
we may commercially produce are subject to fluctuation depending on a variety of
factors beyond our control, including competitive factors, changes in
technology, and FDA and other governmental regulations and there can be no
assurance that we will be able to obtain such products and materials on terms
acceptable to us or at all.
There is no assurance that successful manufacture of a drug on a limited scale
basis for investigational use will lead to a successful transition to
commercial, large-scale production.
Small changes in methods of manufacturing, including commercial
scale-up, may affect the chemical structure of Ampligen(R) and other RNA drugs,
as well as their safety and efficacy, and can, among other things, require new
clinical studies and affect orphan drug status, particularly, market exclusivity
rights, if any, under the Orphan Drug Act. The transition from limited
production of pre-clinical and clinical research quantities to production of
commercial quantities of our products will involve distinct management and
technical challenges and will require additional management and technical
personnel and capital to the extent such manufacturing is not handled by third
parties. There can be no assurance that our manufacturing will be successful or
that any given product will be determined to be safe and effective, capable of
being manufactured economically in commercial quantities or successfully
marketed.
20
We have limited manufacturing experience and capacity.
Ampligen(R) has been only produced in limited quantities for use in our
clinical trials and we are dependent upon a third party supplier for
substantially all of the production process. The failure to continue these
arrangements or to achieve other such arrangements on satisfactory terms could
have a material adverse affect on us. Also to be successful, our products must
be manufactured in commercial quantities in compliance with regulatory
requirements and at acceptable costs. To the extent we are involved in the
production process, our current facilities are not adequate for the production
of our proposed products for large-scale commercialization, and we currently do
not have adequate personnel to conduct commercial-scale manufacturing. We intend
to utilize third-party facilities if and when the need arises or, if we are
unable to do so, to build or acquire commercial-scale manufacturing facilities.
We will need to comply with regulatory requirements for such facilities,
including those of the FDA pertaining to current Good Manufacturing Practices
("cGMP") regulations. There can be no assurance that such facilities can be
used, built, or acquired on commercially acceptable terms, or that such
facilities, if used, built, or acquired, will be adequate for our long-term
needs. Please refer to the Risk Factor "Our Alferon N Injection(R) commercial
sales have halted due to lack of finished goods inventory."
We may not be profitable unless we can produce Ampligen(R) or other products in
commercial quantities at costs acceptable to us.
We have never produced Ampligen(R) or any other products in large
commercial quantities. We must manufacture our products in compliance with
regulatory requirements in large commercial quantities and at acceptable costs
in order for us to be profitable. We intend to utilize third-party manufacturers
and/or facilities if and when the need arises or, if we are unable to do so, to
build or acquire commercial-scale manufacturing facilities. If we cannot
manufacture commercial quantities of Ampligen(R) or enter into third party
agreements for its manufacture at costs acceptable to us, our operations will be
significantly affected. Also, each production lot of Alferon N Injection(R) is
subject to FDA review and approval prior to releasing the lots to be sold. This
review and approval process could take considerable time, which would delay our
having product in inventory to sell.
Rapid technological change may render our products obsolete or non-competitive.
The pharmaceutical and biotechnology industries are subject to rapid
and substantial technological change. Technological competition from
pharmaceutical and biotechnology companies, universities, governmental entities
and others diversifying into the field is intense and is expected to increase.
Most of these entities have significantly greater research and development
capabilities than us, as well as substantial marketing, financial and managerial
resources, and represent significant competition for us. There can be no
assurance that developments by others will not render our products or
technologies obsolete or noncompetitive or that we will be able to keep pace
with technological developments.
Our products may be subject to substantial competition.
Ampligen(R). Competitors may be developing technologies that are, or in
the future may be, the basis for competitive products. Some of these potential
products may have an entirely different approach or means of accomplishing
similar therapeutic effects to products being developed by us. These competing
21
products may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments may offer
competition to our products. Furthermore, many of our competitors have
significantly greater experience than us in pre-clinical testing and human
clinical trials of pharmaceutical products and in obtaining FDA, HPB and other
regulatory approvals of products. Accordingly, our competitors may succeed in
obtaining FDA, HPB or other regulatory product approvals more rapidly than us.
There are no drugs approved for commercial sale with respect to treating ME/CFS
in the United States. The dominant competitors with drugs to treat disease
indications in which we plan to address include Gilead Pharmaceutical, Pfizer,
Bristol-Myers, Abbott Labs, GlaxoSmithKline, Merck and Schering-Plough Corp.
These potential competitors are among the largest pharmaceutical companies in
the world, are well known to the public and the medical community, and have
substantially greater financial resources, product development, and
manufacturing and marketing capabilities than we have. Although we believe our
principal advantage is the unique mechanism of action of Ampligen(R) on the
immune system, we cannot assure that we will be able to compete.
ALFERON N Injection(R). Our competitors are among the largest
pharmaceutical companies in the world, are well known to the public and the
medical community, and have substantially greater financial resources, product
development, and manufacturing and marketing capabilities than we have. Alferon
N Injection(R) currently competes with Schering's injectable recombinant alpha
interferon product (INTRON(R) A) for the treatment of genital warts. 3M
Pharmaceuticals also offer competition from its immune-response modifier,
Aldara(R), a self-administered topical cream, for the treatment of external
genital and perianal warts. In addition, Medigene has FDA approval for a
self-administered ointment, VeregenTM, which is indicated for the topical
treatment of external genital and perianal warts. Alferon N Injection(R) also
competes with surgical, chemical, and other methods of treating genital warts.
We cannot assess the impact products developed by our competitors, or advances
in other methods of the treatment of genital warts, will have on the commercial
viability of Alferon N Injection(R). If and when we obtain additional approvals
of uses of this product, we expect to compete primarily on the basis of product
performance. Our competitors have developed or may develop products (containing
either alpha or beta interferon or other therapeutic compounds) or other
treatment modalities for those uses. There can be no assurance that, if we are
able to obtain regulatory approval of Alferon N Injection(R) for the treatment
of new indications, we will be able to achieve any significant penetration into
those markets. In addition, because certain competitive products are not
dependent on a source of human blood cells, such products may be able to be
produced in greater volume and at a lower cost than Alferon N Injection(R).
Currently, our wholesale price on a per unit basis of Alferon N Injection(R) is
higher than that of the competitive recombinant alpha and beta interferon
products.
General. Other companies may succeed in developing products earlier
than we do, obtaining approvals for such products from the FDA more rapidly than
we do, or developing products that are more effective than those we may develop.
While we will attempt to expand our technological capabilities in order to
remain competitive, there can be no assurance that research and development by
others or other medical advances will not render our technology or products
obsolete or non-competitive or result in treatments or cures superior to any
therapy we develop.
Possible side effects from the use of Ampligen(R) or Alferon N Injection(R)
could adversely affect potential revenues and physician/patient acceptability of
our product.
22
Ampligen(R). We believe that Ampligen(R) has been generally well
tolerated with a low incidence of clinical toxicity, particularly given the
severely debilitating or life threatening diseases that have been treated. A
mild flushing reaction has been observed in approximately 15-20% of patients
treated in our various studies. This reaction is occasionally accompanied by a
rapid heart beat, a tightness of the chest, urticaria (swelling of the skin),
anxiety, shortness of breath, subjective reports of "feeling hot", sweating and
nausea. The reaction is usually infusion-rate related and can generally be
controlled by reducing the rate of infusion. Other adverse side effects include
liver enzyme level elevations, diarrhea, itching, asthma, low blood pressure,
photophobia, rash, transient visual disturbances, slow or irregular heart rate,
decreases in platelets and white blood cell counts, anemia, dizziness,
confusion, elevation of kidney function tests, occasional temporary hair loss
and various flu-like symptoms, including fever, chills, fatigue, muscular aches,
joint pains, headaches, nausea and vomiting. These flu-like side effects
typically subside within several months. One or more of the potential side
effects might deter usage of Ampligen(R) in certain clinical situations and
therefore, could adversely affect potential revenues and physician/patient
acceptability of our product.
Alferon N Injection(R). At present, Alferon N Injection(R) is only
approved for the intra-lesional (within the lesion) treatment of refractory or
recurring external genital warts in adults. In clinical trials conducted for the
treatment of genital warts with Alferon N Injection(R), patients did not
experience serious side effects; however, there can be no assurance that
unexpected or unacceptable side effects will not be found in the future for this
use or other potential uses of Alferon N Injection(R) which could threaten or
limit such product's usefulness.
We may be subject to product liability claims from the use of Ampligen(R),
Alferon N Injection(R), or other of our products which could negatively affect
our future operations. We have temporarily discontinued product liability
insurance.
We face an inherent business risk of exposure to product liability
claims in the event that the use of Ampligen(R) or other of our products results
in adverse effects. This liability might result from claims made directly by
patients, hospitals, clinics or other consumers, or by pharmaceutical companies
or others manufacturing these products on our behalf. Our future operations may
be negatively affected from the litigation costs, settlement expenses and lost
product sales inherent to these claims. While we will continue to attempt to
take appropriate precautions, we cannot assure that we will avoid significant
product liability exposure.
On November 28, 2008, as we disclosed in an 8-K, we suspended product
liability insurance for Alferon(R) N and Ampligen(R) until we receive regulatory
clearance for Ampligen(R). We now require third parties to indemnify us in
conjunction with all overseas emergency sales of Ampligen(R) and Alferon(R) LDO.
We concluded that years of successfully addressing the limited number of product
liability claims filed against Ampligen(R) and Alferon(R) LDO, combined with the
mandatory patient waivers completed as an element of clinical trials and lack of
any commercial sales since April 2008, that temporarily discontinuing the
liability insurance was an acceptable risk given our financial condition and
need to conserve cash.
Currently, without product liability coverage for Ampligen(R) and
Alferon(R) LDO, a claim against the products could have a materially adverse
effect on our business and financial condition.
23
The loss of services of key personnel including Dr. William A. Carter could hurt
our chances for success.
Our success is dependent on the continued efforts of our staff,
especially certain doctors and researchers along with the continued efforts of
Dr. William A. Carter because of his position as a pioneer in the field of
nucleic acid drugs, his being the co-inventor of Ampligen(R), and his knowledge
of our overall activities, including patents and clinical trials. As a result of
our implementation of the Employee Wage Or Hours Reduction Program, our staff
has agreed to take a portion of their compensation in shares of our Common
Stock. While we believe that our employees are dedicated to us and while we have
incentivised them to remain with us through the establishment of a Bonus Pool
that would award them money in the event that the FDA approves our NDA for
Ampligen(R), we cannot assure that they will remain with us. For information on
the Employee Wage Or Hours Reduction Program and the Bonus Pool, please see
"Item 11. Executive Compensation; Compensation Discussion and Analysis; Elements
of Executive Compensation; Other Compensation." The loss of the services of
personnel key to our operations or Dr. Carter could have a material adverse
effect on our operations and chances for success. As a cash conservation
measure, we have elected to discontinue the key man life insurance in the amount
of $2,000,000 on the life of Dr. Carter until we receive regulatory clearance
for Ampligen(R). An employment agreement continues to exist with Dr. Carter
that, as amended, runs until December 31, 2010. However, Dr. Carter has the
right to terminate his employment upon not less than 30 days prior written
notice. The loss of Dr. Carter or other personnel or the failure to recruit
additional personnel as needed could have a materially adverse effect on our
ability to achieve our objectives.
Uncertainty of health care reimbursement for our products.
Our ability to successfully commercialize our products will depend, in
part, on the extent to which reimbursement for the cost of such products and
related treatment will be available from government health administration
authorities, private health coverage insurers and other organizations.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and from time to time legislation is proposed, which, if
adopted, could further restrict the prices charged by and/or amounts
reimbursable to manufacturers of pharmaceutical products. We cannot predict
what, if any, legislation will ultimately be adopted or the impact of such
legislation on us. There can be no assurance that third party insurance
companies will allow us to charge and receive payments for products sufficient
to realize an appropriate return on our investment in product development.
There are risks of liabilities associated with handling and disposing of
hazardous materials.
Our business involves the controlled use of hazardous materials,
carcinogenic chemicals, flammable solvents and various radioactive compounds.
Although we believe that our safety procedures for handling and disposing of
such materials comply in all material respects with the standards prescribed by
applicable regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident or the failure to comply with applicable regulations, we could be held
liable for any damages that result, and any such liability could be significant.
We do not maintain insurance coverage against such liabilities.
24
Risks Associated With an Investment in Our Common Stock
The market price of our stock may be adversely affected by market
volatility.
The market price of our common stock has been and is likely to be
volatile. This is especially true given the current significant instability in
the financial markets. In addition to general economic, political and market
conditions, the price and trading volume of our stock could fluctuate widely in
response to many factors, including:
o announcements of the results of clinical trials by us or our competitors;
o adverse reactions to products;
o governmental approvals, delays in expected governmental approvals or
withdrawals of any prior governmental approvals or public or regulatory agency
concerns regarding the safety or effectiveness of our products;
o changes in U.S. or foreign regulatory policy during the period of product
development;
o developments in patent or other proprietary rights, including any third
party challenges of our intellectual property rights;
o announcements of technological innovations by us or our competitors;
o announcements of new products or new contracts by us or our
competitors;
o actual or anticipated variations in our operating results due to the
level of development expenses and other factors;
o changes in financial estimates by securities analysts and whether
our earnings meet or exceed the estimates;
o conditions and trends in the pharmaceutical and other industries;
o new accounting standards;
o overall investment market fluctuation; and
o occurrence of any of the risks described in these "Risk Factors."
Our common stock is listed for quotation on the NYSE Alternext US
(formerly, the American Stock Exchange). For the 12-month period ended December
31, 2008, the price of our common stock has ranged from $0.25 to $1.20 per
share. We expect the price of our common stock to remain volatile. The average
daily trading volume of our common stock varies significantly. Our relatively
low average volume and low average number of transactions per day may affect the
ability of our stockholders to sell their shares in the public market at
prevailing prices and a more active market may never develop.
In the past, following periods of volatility in the market price of the
securities of companies in our industry, securities class action litigation has
often been instituted against companies in our industry. If we face securities
litigation in the future, even if without merit or unsuccessful, it would result
in substantial costs and a diversion of management attention and resources,
which would negatively impact our business.
Our stock price may be adversely affected if a significant amount of shares are
sold in the public market.
In connection with entering into the Purchase Agreement with Fusion
Capital Fund II, LLC ("Fusion")in August 2008, we registered 21,300,000 shares
in the aggregate, consisting of 20,000,000 shares which we may sell to Fusion
and 1,300,000 shares we have issued or may issue to Fusion as Commitment Shares.
The number of shares ultimately offered for sale by Fusion is dependent upon the
number of shares purchased by Fusion under the agreement. The purchase price for
the common stock to be sold to Fusion pursuant to the Purchase Agreement will
25
fluctuate based on the price of our common stock. Under the rules of the NYSE
Alternext US, we may not issue more than 14,823,651 shares (19.99% of our
outstanding shares as of July 2, 2008, the date of the purchase agreement)
without first obtaining the approval of stockholders. In November 2008, we
received stockholder approval to issue the additional 6,476,349 shares. It is
anticipated that shares registered could be sold over a period of up to 25
months after the registration statement is declared effective. Depending upon
market liquidity at the time, a sale of shares by Fusion at any given time could
cause the trading price of our common stock to decline. Fusion may ultimately
purchase all, some or none of the 20,000,000 shares of common stock to be
registered but not yet issued. After it has acquired such shares, it may sell
all, some or none of such shares. Therefore, sales to Fusion by us under the
Purchase Agreement may result in substantial dilution to the interests of other
holders of our common stock. The sale of a substantial number of shares of our
common stock by Fusion, or anticipation of such sales, could make it more
difficult for us to sell equity or equity-related securities in the future at a
time and at a price that we might otherwise wish to effect sales. However, we
have the right to control the timing and amount of any sales of our shares to
Fusion and the agreement may be terminated by us at any time at our discretion
without any cost to us.
In addition to the 21,300,000 shares registered for Fusion, we have
previously registered 135% of 3,615,514 shares issuable upon exercise of
Warrants related to our former convertible debentures and 14,442,294 shares
issuable upon exercise of certain other warrants. To the extent the exercise
price of the warrants is less than the market price of the common stock, the
holders of the warrants are likely to exercise them and sell the underlying
shares of common stock and to the extent that the conversion price and exercise
price of these securities are adjusted pursuant to anti-dilution protection, the
securities could be exercisable or convertible for even more shares of common
stock. We also may issue shares to be used to meet our capital requirements or
use shares to compensate employees, consultants and/or directors. In this regard
we previously registered $50,000,000 worth of our securities in a universal
shelf registration statement, none of which has been designated or issued. We
are unable to estimate the amount, timing or nature of future sales of
outstanding common stock or instruments convertible into or exercisable for our
common stock.
Sales of substantial amounts of our common stock in the public market
could cause the market price for our common stock to decrease. Furthermore, a
decline in the price of our common stock would likely impede our ability to
raise capital through the issuance of additional shares of common stock or other
equity securities.
Provisions of our Certificate of Incorporation and Delaware law could defer a
change of our management which could discourage or delay offers to acquire us.
Provisions of our Certificate of Incorporation and Delaware law may
make it more difficult for someone to acquire control of us or for our
stockholders to remove existing management, and might discourage a third party
from offering to acquire us, even if a change in control or in management would
be beneficial to our stockholders. For example, our Certificate of Incorporation
allows us to issue shares of preferred stock without any vote or further action
by our stockholders. Our Board of Directors has the authority to fix and
determine the relative rights and preferences of preferred stock. Our Board of
Directors also has the authority to issue preferred stock without further
stockholder approval. As a result, our Board of Directors could authorize the
issuance of a series of preferred stock that would grant to holders the
26
preferred right to our assets upon liquidation, the right to receive dividend
payments before dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium, prior to the
redemption of our common stock. In this regard, in November 2002, we adopted a
stockholder rights plan and, under the Plan, our Board of Directors declared a
dividend distribution of one Right for each outstanding share of Common Stock to
stockholders of record at the close of business on November 29, 2002. Each Right
initially entitles holders to buy one unit of preferred stock for $30.00. The
Rights generally are not transferable apart from the common stock and will not
be exercisable unless and until a person or group acquires or commences a tender
or exchange offer to acquire, beneficial ownership of 15% or more of our common
stock. However, for Dr. Carter, our Chief Executive Officer, who already
beneficially owns 7.7% of our common stock, the Plan's threshold will be 20%,
instead of 15%. The Rights will expire on November 19, 2012, and may be redeemed
prior thereto at $.01 per Right under certain circumstances.
Special Note Regarding Forward Looking Statements
Because the risk factors referred to above could cause actual results
or outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements. Our research in clinical efforts
may continue for the next several years and we may continue to incur losses due
to clinical costs incurred in the development of Ampligen(R) for commercial
application. Possible losses may fluctuate from quarter to quarter as a result
of differences in the timing of significant expenses incurred and receipt of
licensing fees and/or cost recovery treatment revenues in Europe, Canada and the
United States.
ITEM 1B. Unresolved Staff Comments.
None.
ITEM 2. Properties.
We currently lease our headquarters located in Philadelphia,
Pennsylvania consisting of a suite of offices of approximately 9,000 square
feet. We also currently own, occupy and use our New Brunswick, New Jersey
laboratory and production facility that we acquired from ISI. These facilities
consist of two buildings located on 2.8 acres. One building is a two story
facility consisting of a total of 31,300 square feet. This facility contains
offices, laboratories, production space and shipping and receiving areas. It is
also contains space designated for research and development, our pharmacy,
packaging, quality assurance and quality control laboratories. Building Two has
11,670 square feet consisting of offices, laboratories and warehouse space. The
property has parking space for approximately 100 vehicles.
ITEM 3. Legal Proceedings.
Please see "Note 15 - Contingencies" under Notes to Consolidated
Financial Statements.
27
ITEM 4. Submission of Matters to a Vote of Security Holders.
Our Annual Meeting of Stockholders initially held on September 17, 2008, was
adjourned to October 17, 2008 and then November 11, 2008. The adjournments were
due to an inability to obtain a quorum. Our Board of Directors amended our
By-Laws to reduce the quorum solely for this meeting from a majority to 44% in
voting power of the outstanding shares of stock entitled to vote at the meeting.
At the meeting, stockholders approved the following:
Election of Directors:
Nominees For Withheld
William A. Carter 31,762,316 4,959,791
Richard C. Piani 31,912,275 4,809,832
William M. Mitchell 31,918,799 4,803,308
Iraj-Eqhbal Kiani, Ph.D. 31,730,192 4,991,915
Thomas K. Equels 32,524,699 4,197,408
Ratification of the appointment of McGladrey & Pullen, LLP as our independent
accountants:
For: 35,911,303 Against: 845,300 Abstain: 117,733.
Approval of the issuance of our Common Stock to comply with AMEX Company Guide
Section 713 (Shares voted for excluding 650,000 shares owned by Fusion Capital
Fund II, LLC):
For: 12,089,859 Against: 1,355,887 Abstain: 103,215
Broker non-votes: 22,675,375.
Total shares voted: 36,874,336 out of 74,805,334 eligible to vote.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
In 2008, we issued shares of common stock consisting of 1) 2,677,640
shares in payment to vendors and consultants for services rendered; 2) 1,211,122
shares issued pursuant to the 2008 Purchase Agreement with Fusion; and 3)
339,636 shares to our Directors pursuant to our Directors' Compensation Program.
In addition, in February 2009, we issued an aggregate of 982,392 warrants with
an expiration period of ten years and exercise price of $0.51 per share to Dr.
Carter and Mr. Equels, pursuant to the terms of the Standby Financing Agreement.
The foregoing issuances of securities were private transactions and
exempt from registration under section 4(2) of the Securities Act and/or
regulation D rule 506 promulgated under the Securities Act.
Since October 1997 our common stock has been listed and traded on the
NYSE Alternext US (formerly, the American Stock Exchange) under the symbol HEB.
The following table sets forth the high and low list prices for our Common Stock
for the last two fiscal years as reported by the NYSE Alternext US. Such prices
reflect inter-dealer prices, without retail markup, markdowns or commissions and
may not necessarily represent actual transactions.
28
COMMON STOCK High Low
---- ---
Time Period:
------------
January 1, 2008 through March 31, 2008 0.89 0.59
April 1, 2008 through June 30, 2008 1.00 0.62
July 1, 2008 through September 30, 2008 1.20 0.25
October 1, 2008 through December 31, 2008 0.70 0.25
29
January 1, 2007 through March 31, 2007 2.49 1.60
April 1, 2007 through June 30, 2007 1.82 1.24
July 1, 2007 through September 30, 2007 1.79 1.06
October 1, 2007 through December 31, 2007 2.08 0.53
As of March 3, 2009, there were approximately 233 holders of record of
our Common Stock. This number was determined from records maintained by our
transfer agent and does not include beneficial owners of our securities whose
securities are held in the names of various dealers and/or clearing agencies.
On March 3, 2009, the last sale price for our common stock on the NYSE
Alternext US (formerly, the American Stock Exchange) was $0.41 per share.
We have not paid any cash dividends on our Common Stock in recent
years. It is management's intention not to declare or pay dividends on our
Common Stock, but to retain earnings, if any, for the operation and expansion of
our business.
The following table gives information about our Common Stock that may
be issued upon the exercise of options, warrants and rights under all of our
equity compensation plans as of December 31, 2008.
Number of securities
Remaining available for
Weighted-average future issuance under
Number of Securities to Exercise price of equity compensation
be issued upon exercise Outstanding plans(excluding
of outstanding options, options, warrants securities reflected in
Plan Category warrants and rights and rights column (a))
------------- ------------------ ---------- -----------
(a) (b) (c)
Equity compensation plans approved by
security holders: 9,021,818 $2.54 3,932,894
Equity compensation plans not
approved by security holders: 5,266,187 $3.12
---------- -----
Total 14,288,005 $2.75 3,932,894
========== ===== =========
30
Performance Graph
Total Return To Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
Company Name / Index Dec 04 Dec 05 Dec 06 Dec 07 Dec 08
---------------------------------------------- ---------- ----------- ----------- ----------- ----------- ----------
Hemispherx Biopharma, Inc. -15.93 14.21 1.38 -65.45 -52.63
S&P SmallCap 600 Index 22.65 7.68 15.12 -0.30 -31.07
Peer Group -40.46 0.20 24.05 -25.81 -74.85
INDEXED RETURNS
Base Years Ending
Period
Company Name / Index Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08
---------------------------------------------- ---------- ----------- ----------- ----------- ----------- ----------
Hemispherx Biopharma, Inc. 100 84.07 96.02 97.35 33.63 15.93
S&P SmallCap 600 Index 100 122.65 132.07 152.04 151.59 104.48
Peer Group 100 59.54 59.66 74.00 54.91 13.81
Peer Group Companies
---------------------------------------------- ---------- ----------- ----------- ----------- ----------- ----------
AVI BIOPHARMA INC
CYTRX CORP.
GENVEC INC.
OXIGENE INC.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
31
ITEM 6. Selected Financial Data (in thousands except for share and per share
data).
The selected consolidated financial data set forth below should be read
in conjunction with our consolidated financial statements, and the related notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations", included in this Annual Report. The statement of
operations and balance sheet data presented below for, and as of the end of,
each of the years in the five year period ended December 31, 2008 are derived
from our audited consolidated financial statements. Historical results are not
necessarily indicative of the results to be expected in the future.
Year Ended
December 31 2004 2005 2006 2007 2008
----------- ---- ---- ---- ---- ----
Statement of Operations
Data:
Revenues and License fee Income $1,229 $1,083 $933 $1,059 $265
Total Costs and Expenses(1) 12,118 10,998 19,627 20,348 13,076
Interest Expense and Financing
Costs(2) 5,674 3,121 1,259 396 -
Net loss (16,887) (12,446) (19,399) (18,139) (12,219)
Deemed Dividend (4,031) - - - -
Net loss
applicable to common stockholders (20,918) (12,446) (19,399) (18,139) (12,219)
Basic and diluted net loss per
share (0.46) (0.24) (0.31) (0.25) (0.16)
Shares used in computing basic
and diluted net loss per share 45,177,862 51,475,192 61,815,358 71,839,782 75,142,075
Balance Sheet Data:
Working Capital $ 13,934 $ 16,353 $16,559 $14,412 $5,646
Total Assets 25,293 24,654 31,431 23,142 13,211
Debt, net of discount(3) 4,312 4,171 3,871 - -
Stockholders' Equity 19,443 18,627 24,751 20,955 11,544
Cash Flow Data:
Cash used in operatin
activities $ (7,240) $ (7,231) $(13,747) $(15,112) $(9,358)
Capital expenditures (150) (1,002) (1,351) (212) (73)
32
(1) General and Administrative expenses include stock compensation expense of
$2,000, $391, $2,483, $2,291 and $573 for the years ended December 31,
2004, 2005, 2006, 2007 and 2008, respectively.
(2) For information concerning our financing see Note 7 to our consolidated
financial statements for the year ended December 31, 2008 contained
herein.
(3) In accounting for the January 26, 2004 and July 13, 2004 issuances of 6%
Senior Convertible Debentures in the principal amounts of $4,000, and
$2,000, respectively, and related embedded conversion features and
warrant issuances, we recorded debt discounts which, in effect, reduced
the carrying value of the debt.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis is related to our financial
condition and results of operations for the three years ended December 31, 2008.
This information should be read in conjunction with Item 6 - "Selected Financial
Data" and our consolidated financial statements and related notes thereto
beginning on F-1 of this Form 10-K.
Statement of Forward-Looking Information
Certain statements in the section are "forward-looking statements." You
should read the information before Item 1B above, "Special Note" Regarding
Forward-Looking Statements" for more information about our presentation of
information.
Background
We are a biopharmaceutical company engaged in the manufacture and
clinical development of new drug entities for treatment of seriously
debilitating disorders. Our flagship products include Alferon N Injection(R) and
the experimental therapeutics Ampligen(R) and Oragens. Alferon N Injection(R) is
approved for a category of STD infection, and Ampligen(R) and Oragens represent
experimental RNA nucleic acids being developed for globally important viral
diseases and disorders of the immune system. Hemispherx's platform technology
includes large and small agent components for potential treatment of various
severely debilitating and life threatening diseases. We have in excess of 50
patents comprising our core intellectual property estate, a product (Alferon N
Injection(R)) and GMP certified manufacturing facilities for our novel
pharmaceutical products.
We have reported net income only from 1985 through 1987. Since 1987, we
have incurred, as expected, substantial operating losses due to our conducting
research and development programs.
RESULTS OF OPERATIONS
Year ended December 31, 2007 versus December 31, 2008
Net loss
Our net loss of approximately $12,219,000 for the year ended December
31, 2008 was 33% lower when compared to the same period in 2007. This $5,920,000
reduction in loss was primarily due to:
33
1) Research and Development costs in 2007 included significant
expenses related to the preparation of the Ampligen(R) NDA as well
as expenses related to the production of Ampligen(R) for use in
stability studies and preparation of pre commercial lots for
regulatory review purposes. Research and development expenses in
2008 were down approximately $4,644,000 as compared to the same
period in 2007.
2) Alferon N Injection(R) had seen increased competition from the use
of topical solutions for genital warts. Additionally, there were
no sales of Alferon N Injection(R) for the last nine months of
2008 as finished goods inventory has reached its current product
expiration date of March 31, 2008. Sales of Alferon N Injection(R)
for the twelve months ended December 31, 2008 and 2007 amounted to
approximately $173,000 and $925,000, respectively for a reduction
of $752,000 or 81%.
3) General and administrative expenses decreased approximately
$2,496,000 during the twelve months ended December 31, 2008 versus
the same period a year ago primarily due to reductions in the cost
of non-cash Stock Compensation of $1,718,000, Director Fees for
$137,000, Impairment Charges for $562,000 and Accounting Fees of
$34,000 that were offset with an increase of Legal Fees for
$635,000 resulting from litigation expenses.
Impairment charges of $526,000 incurred during the year ended
December 31, 2007 primarily due to the write-down of Royalty
Interest of patents acquired from ISI on Alferon N Infection(R)
and charges taken against a water purification system that was
determined not needed for use at the New Brunswick, NJ facility
due to a change in manufacturing plans.
4) Interest and other income decreased $608,000 or 51% for the twelve
months ended December 31, 2008 as compared to the same period in
2007 due to a reduction of funds available to invest as compared
to the prior period and compounded by lower the interest rates.
5) Production/Cost of Goods Sold were lower in 2008 by $132,000. This
decrease reflects a lower cost of sales in 2008 offset by fixed
costs in manufacturing which could not be applied Inventory due to
the halting of Alferon(R) N production.
6) In September 2007, an increase of $346,000 in other income
occurred due to the reversal of accrued liquidated damages in 2006
with respect to our debentures. These damages related to certain
debenture covenants were settled without charge in the maturation
and pay down of the debenture holder's outstanding loan balances
in 2007.
Net loss per share was $(0.16) for the current period versus $(0.25)
for the same period in 2008.
Revenues
Revenues for the year ended December 31, 2008 were $265,000 as compared
to revenues of $1,059,000 for the same period in 2007. Ampligen(R) sold under
the cost recovery clinical program was down $42,000 and Alferon N Injection(R)
sales were down $752,000 or 81% as compared to the prior period.
34
Ampligen(R) sold under the cost recovery clinical program is a product
of physicians and ME/CFS patients applying to us to enroll in the program. This
program has been in effect for several years and is offered as a treatment
option to patients severely affected by CFS. As the name "cost recovery"
implies, we have no gain or profit on these sales. The benefits to us include 1)
physicians and patients becoming familiar with Ampligen(R); and 2) collection of
clinical data relating to the patients' treatment and results. Revenues from our
Ampligen(R) cost recovery program were down 32% as fewer patients are
participating in the program. Our clinical staff has not encouraged cost
recovery clinical enrollments in order that our internal resources could address
the Ampligen(R) New Drug Application ("NDA") and related documents preparatory
to filing for a full commercial license.
The primary reason for the 81% drop in the sales Alferon(R) for the
twelve months ended December 31, 2008 is that commercial sales of Alferon N
Injection(R) were halted in April 2008 as the expiration date of our finished
good inventory expired in March 2008. As a result, we had no product to sell for
the last nine months of 2008.
Production costs/cost of goods sold
Production/cost of goods sold was approximately $930,000 and $798,000,
respectively, for the twelve months ended December 31, 2007 and 2008. This
represented a decrease of approximately $132,000 or 14% as compared to the same
period in 2007. These costs primarily represent: 1) costs of goods sold of
approximately $381,000 and $-0-, respectively, for the twelve months ended
December 31, 2007 and 2008; and 2) Costs to maintain Alferon N Injection(R)
Inventory including storage, stability testing and reporting costs incurred in
our attempt to have the FDA extend the commercial sales life of our Alferon N
Injection(R) Finished Goods. The primary reason for the decrease in cost of
goods sold can be attributed to the lack of Alferon N Injection(R) sales since
April 1, 2008 and its impact on costs of goods sold.
Research and Development Costs
Overall research and development costs for the twelve months ended
December 31, 2008 were $5,800,000 as compared to $10,444,000 for the same period
a year ago reflecting a decrease of $4,644,000 or 44%. This decrease was
primarily due to reduced outside consulting fees and other costs related to the
preparation and filing of our NDA for Ampligen(R).
On July 7, 2008 we were notified that the FDA had accepted for review
our amended NDA filing for using Ampligen(R) to treat CFS. FDA approval of this
application would provide the first-ever treatment for CFS. At present, only
supportive symptom-based care is available for CFS patients. While we are
optimistic, there are no assurances that the NDA will be approved. Over the
summer of 2008, our clinical monitors visited our sites associated with our
AMP-511 cost recovery treatment program for the collection and audit of
additional data to be submitted to the FDA in support of our NDA for CFS
currently under review. FDA inspections of several clinical sites did not result
in the issuance of any "483" reports indicating lack of compliance with various
regulations governing clinical trials. On February 18, 2009, we were notified by
the FDA that the originally scheduled Prescription Drug User Fee Act ("PDUFA")
date of February 25, 2009 has been extended to May 25, 2009. For more
information on our NDA, please see "Note 19:
Subsequent Events" under Notes to Consolidated Financial Statements.
35
In 2008, we spent considerable time and effort preparing for the
preapproval inspection by the U.S. FDA for manufacturing of Ampligen(R) product
and its raw materials, polynucleotides Poly I and Poly C12U. A satisfactory
recommendation from the FDA Office of Compliance based upon an acceptable
preapproval inspection is required prior to approval of the product. The
preapproval inspection determines compliance with current Good Manufacturing
Practices (cGMPs) as well as a product specific evaluation concerning the
manufacturing process of product. The inspection includes many aspects of the
cGMP requirements, such as manufacturing process validation, equipment
qualification, analytical method validation, facility cleaning, quality systems,
documentation system and part 11 compliance.
The New Jersey District Office of the FDA conducted an inspection of
the New Brunswick, New Jersey facility in late January and early February 2009
(nine days total). A one-page Form FDA 483 was issued citing a need to
re-perform four method validations to generate data in the New Brunswick
Laboratories. These validations had been performed at another site also owned
and operated by us prior to transferring the equipment to New Brunswick. We
anticipate that the validations will be re-performed and completed at the New
Brunswick site within three months.
The FDA conducted a field inspection at Hollister-Stier Laboratories in
Spokane, Washington in mid-2008 (June 19 to July 2, 2008). The Ampligen(R) final
fill operations are performed under contract with Hollister-Stier. The
inspection resulted in a Form FDA 483 with two observations dealing with reviews
and validations of process variability. We are working with Hollister-Stier to
finalize specific actions.
On September 19, 2008, we executed an agreement with Lovelace
Respiratory Research Institute in Albuquerque, New Mexico to perform certain
animal toxic studies in support of our Ampligen(R) NDA. These studies were
requested by the FDA and will be done in collaboration with the resources of the
New Brunswick facility. We expect these studies to be complete in April 2009.
We are also engaged in ongoing, experimental studies assessing the
efficacy of Ampligen(R), Alferon N Injection(R), and Alferon(R) LDO against
influenza viruses as a single adjuvant agent antiviral with Japan's National
Institute of Infectious disease, Biken (the non-profit operational arm of the
Foundation for Microbial Diseases of Osaka University) and St. Vincent's
Hospital in Darlinghurst, Australia. As a result of focusing our limited
resources on the Australian and Japanese studies, no further experiments have
been undertaken by the Defence R&D Canada with respect to their independent
study assessing the efficacy of Ampligen(R) against Influenza viruses as a
single agent antiviral.
The Biken arrangement was concluded in December 2007 and basically
consists of Biken purchasing Ampligen(R) for use in conducting further animal
studies of intranasal prototype vaccines containing antigens from influenza
sub-types H1N1, H3N2 and B progressing to human studies with all programs
supported by the Japanese Health Ministry. Under the terms of the non--exclusive
licensing arrangement, we will receive royalties as well as income for all
Ampligen(R) used in the ongoing experimental work and any subsequent marketing
of Ampligen(R) as an immuno-enhancer for flu vaccines delivered intranasally in
Japan. To date, only two or three pharma companies worldwide have achieved
regulatory authorizations to sell intranasally (IN) administered influenza
vaccines versus many companies receiving approval for intramuscular vaccine
delivery routes. Safety has been paramount in developing effective treatments.
However, animal studies to date indicate Ampligen(R), an experimental drug, may
be safely administered intranasally. Clinical studies (in other disorders) have
36
built a database of more than 90,000 injections of Ampligen(R) when given
parenterally (intravenous, or "IV"). In June 2008, Biken notified us they were
accelerating their program and were shipped additional Ampligen(R) supplies for
various preclinical vaccine studies and research projects that remain in
progress. A secondary goal of the trial is to evaluate whether antibodies
stimulated by the vaccine/Ampligen(R) combination also provide protection
against H5N1, the avian influenza virus. Since 2003, the World Health
Organization has confirmed 407 cases and attributed 254 human deaths worldwide
to H5N1. Investigators from Japan's Institute of Infectious Disease have
conducted studies in animals that suggest that Ampligen(R) can stimulate a
sufficiently broad immune response to provide cross-protection against a range
of virus strains, including H5N1.
The clinical trial in Australia is using Ampligen(R) in combination
with seasonal flu vaccine. This open-label study (Phase IIa) utilizing
Ampligen(R) (Poly I: Poly C12U) as a potential immune-enhancer was conducted in
Australia with thirty-eight subjects age 60 or greater with the standard
trivalent seasonal influenza vaccines. Ampligen(R) was administered
subcutaneously. Elderly subjects typically have reduced immune responses
relative to younger populations. The combinational treatment was generally
well-tolerated. Serologic studies to evaluate the magnitude and spectrum of
immune response are pending and are expected by mid-2009; however, only certain
labs are qualified to conduct these tests and during the course of the clinical
testing, one of these testing labs changed ownership. We are in the process of
determining that the methodology remained validated and consistent with the
pilot results obtained about a year earlier with a smaller group consisting of
the first 8 enrolled subjects.
As reported in the Journal of American Medical Association in 2003 by
Thompson, Shay, Weintraub, Brammer, Cox, Anderson, et al. seasonal influenza
kills approximately 36,000 Americans annually, most over the age of 70. In 2004
in JAMA, the same authors attributed 200,000 U.S. hospital admissions annually
to seasonal flu.
Collaboration studies in non-human primates conducted by ViroClinics in
the Netherlands suggest a potential role for Alferon(R) LDO as another novel
therapeutic approach to viral pandemics. Meetings with prospective partners are
underway with respect to conducting clinical trials using Alferon LDO to treat
and/or prevent seasonal influenza in the Pacific Rim countries. Alferon LDO is
now poised for clinical trials against seasonal influenza epidemics; meetings
with prospective partners are ongoing to conduct clinical trials in the Pacific
Rim countries and elsewhere. The opportunity for Alferon(R) LDO is reinforced by
new reports of severe side effects secondary to Tamiflu, the present standard of
care, by both the FDA and Japanese health authorities. Also, Tamiflu resistant
strains of flu virus are now raising serious concerns on a world-wide basis.
37
General and Administrative Expenses
General and Administrative ("G&A") expenses for the twelve months ended
December 31, 2007 and 2008 were approximately $8,974,000 and $6,478,000,
respectively, reflecting a decrease of $2,496,000 or 28% primarily due to
reductions in the cost of non-cash Stock Compensation of $1,718,000, Director
Fees for $137,000, Impairment Charges of $526,000, Accounting Fees of $34,000
and various other general administrative expenses that were partially offset by
an increase of Legal Fees for $635,000 resulting from litigation to settle
existing suits.
In 2007, we incurred impairment charges amounting to $526,000 as
compared to no such charges in the current year. The primary reason for these
charges stemmed from the $228,000 write-down of a water purification system that
was determined to be unnecessary at our New Jersey facility due to a change in
manufacturing plans. Additionally in 2007, we wrote down the value of our
intangible asset associated with the repurchase of a 6% Royalty on Alferon N
Injection(R) sales by $298,000. We determined in 2007 that we did not have
sufficient inventory on hand to realize the full economic benefit of this asset;
therefore, it was written down to its net realizable value.
Reversal of Previously Accrued Interest Expense
In September 2007, and increase of $346,00 in other income occurred due
to the reversal of accrued liquidated damages in 2006 with respect to our
debentures holders. These damages related to certain debenture covenants were
settled without charge in the maturation and pay down of the debenture holder's
outstanding loan balance in 2007.
Interest and Other Income
Interest and other income for the year ended December 31, 2007 and 2008
was $1,200,000 and $592,000, respectively, representing a decrease of $608,000
or 51%. The decrease in interest and other income during the current period was
mainly due to a reduction in funds available for Short Term Investments
compounded by the lower interest rates.
Interest Expense and Financing Costs
We had no interest expense or non-cash financing costs for the twelve
months ended December 31, 2008 as compared to $396,000 for the same period a
year ago. The expenses reflected for the year ended 2007 reflect financing costs
and interest charges related to our convertible debentures which matured in June
2007 when all outstanding loan balances were paid.
Year ended December 31, 2006 versus December 31, 2007
Net loss
Our net loss of approximately $18,139,000 for the year ended December
31, 2007 was 6.5% lower when compared to the same period in 2006. This
$1,260,000 reduction in loss was primarily due to:
1) Higher Interest and Other Income of approximately $646,000 mainly
due to higher interest earned upon the maturity of our marketable
securities as compared to the same period a year ago;
38
2) Lower interest expense and financing costs of $863,000 in 2007
relating to the amortization of debt discounts on our convertible
debentures and the incurring of liquidated damages in 2006 payable
to our debenture holders resulting from us failing to timely file
our 2005 Annual Report on Form 10-K; and
3) An increase of $346,000 in other income due to a reversal of
accrued liquidated damages in 2006 with respect to our debentures
holders as a result of our failure to timely file our 2005 Annual
Report on Form 10-K. These damages related to certain debenture
covenants settled without charge in the maturation and pay down of
the debenture holder's outstanding loan balances in 2007.
Net loss per share was $(0.25) for the current period versus $(0.31)
for the same period in 2006.
Revenues
Revenues for the year ended December 31, 2007 were $1,059,000 as
compared to revenues of $933,000 for the same period in 2006. Ampligen(R) sold
under the cost recovery clinical program was down $49,000 or 27% and Alferon N
Injection(R) sales were up $175,000 or 23% as compared to the prior period.
Ampligen(R) sold under the cost recovery clinical program is a product of
physicians and ME/CFS patients applying to us to enroll in the program. This
program has been in effect for several years and is offered as a treatment
option to patients severely affected by CFS. As the name "cost recovery"
implies, we have no gain or profit on these sales. The benefits to us include 1)
physicians and patients becoming familiar with Ampligen(R) and 2) collection of
clinical data relating to the patients' treatment and results.
We altered our marketing strategy for Alferon N Injection(R) by
relaunching the product via a collaborative marketing initiative between
Hemispherx and a national Specialty Pharmacy network encompassing specialty
pharmacists, pharmacies and targeted physician specialists. This effort was
intended to focus our efforts in the most appropriate and productive market
segment for the product. While Alferon N dollar sales are up from 2006, unit
sales are down which reflects the effect of the price increase put into place in
February 2007.
Production costs/cost of goods sold
Production/cost of goods sold was approximately $930,000 during the
current period representing a decrease of approximately $345,000 or 27% as
compared to the same period in 2006. This decrease was primarily due to lower
production costs of $199,000 relating to excess production capacity during the
prior period as more effort was directed toward Ampligen(R) research and
development and the NDA; and a decrease in costs of goods sold of $146,000.
Costs of goods sold for the year ended December 31, 2006 and 2007 was $527,000
and $381,000, respectively.
The primary reason for the decrease can be attributed to a decrease in
unit sales in the current year versus the prior year. We outsourced certain
components of our overall research and development, manufacturing, marketing and
distribution while maintaining control over the entire process through our
quality assurance group and our clinical monitoring group.
Research and Development costs
Overall research and development costs for the year ended December 31,
2007 were $10,444,000 as compared to $10,127,000 for the same period a year ago
39
representing an increase of $317,000 or 3%. These costs are primarily related to
the collection and processing of clinical data, including the costs of
establishing our in-house polymer production facility and the costs of preparing
and completing our NDA for the use of Ampligen(R) in treating CFS. The year to
year increase can be basically attributed to an increase in the use of
consultants related to the preparation of our Ampligen(R) NDA.
Our primary focus in 2007 was on the preparation of the NDA for using
Ampligen(R) to treat patients affected with CFS. In addition, we documented our
polymer production process in anticipation of an FDA inspection. Three lots of
liquid Ampligen(R) were produced for use in testing and stability studies. We
finalized the filing of our Ampligen(R) NDA on October 7, 2007.
Much of our R&D cost is related to production of raw materials at our
new production line installed at our New Brunswick facility. This facility
produces Poly I and Poly C12U for use by Hollister-Stier (our contract
manufacturer) in the manufacture of Ampligen(R). The first pilot production runs
are being used for stability testing. Later commercial sized runs are being used
for process validation and clinical use.
In addition, we are engaged in broad based, ongoing, experimental
studies assessing the efficacy of Ampligen(R), Alferon N Injection(R), and
Alferon LDO against influenza viruses as an adjuvant single agent antiviral with
Defence R&D Canada, Japan's National Institute of Infectious disease, Biken (the
non-profit operational arm of the Foundation for Microbial Diseases of Osaka
University) and St. Vincent's Hospital in Darlinghurst, Australia.
The Biken arrangement was concluded in December 2007 and basically
consists of Biken purchasing Ampligen(R) from us for use in conducting further
animal studies of intranasal prototype vaccines containing antigens from
influenza sub-types H1N1, H3N2 and B progressing to human studies with all
programs supported by the Japanese Health Ministry. Under the terms of the
non--exclusive licensing arrangement, we will receive royalties as well as
income for all Ampligen(R) used in the ongoing experimental work and any
subsequent marketing of Ampligen(R) as an immuno-enhancer for flu vaccines
delivered intranasally in Japan. To date, only 2 or 3 pharma companies worldwide
have achieved regulatory authorizations to sell intranasally (IN) administered
influenza vaccines versus many companies receiving approval for intramuscular
vaccine delivery routes. Safety has been paramount in developing effective
treatments. However, animal studies to date indicate Ampligen(R), an
experimental drug, may be safely administered intranasally. Clinical studies (in
other disorders) have built a database of more than 90,000 injections of
Ampligen(R) when given parenterally (intravenous, or "IV").
In September 2007, Japan's National Institute of Infectious Disease
("JNIID") initiated research on the co-administration of JNIID's HIV-1 vaccine
with our experimental TLR3 agonist a substance that binds to a specific receptor
and triggers a host defense response in the cell) and immune enhancer,
Ampligen(R). This research is the result of earlier research suggesting a
potential role for Ampligen(R) in boosting responses to certain vaccines
designed to combat avian influenza (Bird Flu) as well as seasonal influenza
viruses. The objective of this research is to determine if Ampligen(R) can
overcome the historical problem which has handicapped AIDS vaccine development,
namely marginal immune response which undermines the potential of long-lasting
protection. Ampligen(R) will be combined with HIV recombinant protein and
administered via an intranasal route.
In June 2007, we initiated a clinical trial in Australia using
Ampligen(R) in combination with seasonal flu vaccine. This trial, expected to
40
continue for several months, is being conducted in Australia's winter season and
focuses on populations at risk for virulent cases of influenza, especially those
over the age of 60 years who historically may have weakened immune systems. The
Australian clinical trial was prompted by the results from the pre-clinical work
conducted by the JNIID (see above). Thirty patients were enrolled in this study,
which utilized a two dose Ampligen(R) regimen of 2 mg per dose. This study was
monitored by Clinical Network Services Pty. Ltd. located in Brisbane, Australia.
The clinical trials center of St. Vincent's Hospital based in Darlinghurst,
Australia conducted the trial. The clinical data from this trial is currently
being analyzed with the results expected by mid-2009.
The CDC reports that the number of mosquito-borne West Nile Virus
("WNV") infections in the United States is "up sharply" over the same period in
2006. This increased infection rate has accelerated the enrollment of patients
in our Phase IIb clinical trial using Alferon N(TM) to treat WNV patients. In
lab studies, Alferon(R) N, a natural cocktail of eight alpha-interferons, shows
synergistic effects (up to 100 fold over recombinant interferons) against
pathogens such as WNV. The Phase IIb clinical trial is a double-blinded,
randomized, multi-center program under the direction of Cornell University and
Weill Cornell Medical College/New York Hospital.
General and Administrative Expenses
General and Administrative ("G&A") expenses for the year ended December
31, 2006 and 2007 were approximately $8,225,000 and $8,974,000, respectively,
reflecting an increase of $749,000 or 9%. This increase related primarily to an
increase in legal and professional fees of $325,000 primarily due to on-going
litigation involving Bioclones, increase in travel related expenses of $87,000
and increases in salaries and wages of $398,000 mainly resulting from the hire
of our chief operating officer during the 4th quarter 2006. These increases in
general and administrative costs were offset by lower accounting fees of
$545,000 in 2007. The decrease in accounting fees was primarily due to charges
incurred by us in 2006 related to the restatements to our financial statements
in 2005. Lastly, we incurred impairment losses in 2007 amounting to $526,000 as
compared to no such charges in the prior year. The primary reason for these
charges stemmed from the $228,000 write-down of a water purification system that
was determined to be unnecessary at our New Jersey facility due to a change in
manufacturing plans. In addition, we wrote down the value of our intangible
asset associated with the repurchase of a 6% Royalty on Alferon N Injection
sales by $298,000. We determined that we did not have sufficient inventory on
hand to realize the full economic benefit of this asset; therefore, it was
written down to its net realizable value.
Reversal of Previously Accrued Interest Expense
Reversal of previously accrued interest expense was $346,000 for the
year ended December 31, 2007. This item, classified as other income, resulted
from the reversal of accrued liquidated damages in 2006 related to a certain
covenant in our debenture agreements. These charges were incurred as a result of
our failure to timely file our 2005 Annual Report on Form 10-K and our report on
Form 10-Q for the quarterly period ended March 31, 2006 with the SEC pursuant to
the 1934 Act. These liquidated damages were not included as part of the
maturation and pay down of the debenture holder's outstanding loan balances.
Interest and Other Income
Interest and other income for the year ended December 31, 2006 and 2007
increased approximately $646,000 as compared to the same period a year earlier.
The increase in interest and other income during the current period was mainly
due to higher interest earned upon the maturity of our marketable securities as
compared to the same period a year ago.
41
Interest Expense and Financing Costs
Interest expense and non-cash financing costs were approximately
$396,000 for the year ended December 31, 2007 versus $1,259,000 for the same
period a year ago. The main reason for the decrease in interest expense and
financing costs of $863,000 or 69% can be attributed to decreased amortization
charges on debt discounts and the incurring of liquidated damages in 2006
payable to our debenture holders resulting from our failure to timely file our
2005 Annual Report on Form 10-K as we were in violation of provisions within our
debenture agreements. These debentures matured in June 2007 and all outstanding
loan balances were paid off.
Liquidity and Capital Resources
Cash used in operating activities for the year ended December 31, 2008
was $9,358,000 reflecting mainly expenditures for the preparation and filing of
the Ampligen(R) NDA. Cash provided by investing activities for the year ending
December 31, 2008, amounted to $3,736,000, primarily from the maturity of
short-term investments. Cash provided by financing activities for the year ended
December 31, 2008 amounted to $270,000, basically from the sale of common stock.
As of February 28, 2009 we had approximately $5,734,000 in cash and cash
equivalents and short-term investments, or a decrease of approximately 6.3% from
December 31, 2008.
Given the harsh economic conditions, we have reviewed every aspect of
our operations for cost and spending reductions to assure the long-term survival
of our Company while maintaining the resources necessary to achieve our primary
objectives of obtaining NDA approval of Ampligen(R) and securing a strategic
partner. We believe, but cannot assure, that our current funds should be
sufficient to meet our operating cash requirements for the next 16 months as we
have taken the steps discussed below to curtail discretionary spending to
conserve cash and reduce our monthly burn rate. Please see Item 1A. Risk
Factors, "We may require additional financing which may not be available."
In an effort to conserve Company cash, the Employee Wage Or Hours
Reduction Program (the "Program") was ratified by the Board effective January 1,
2009. In a mandatory program that is estimated to be in effect for up to six
months, compensation of all active full-time employees as of January 1, 2009
("Participants") were reduced through a reduction in their wages for which they
would be eligible to receive shares of our common stock ("Stock") six months
after the shares were earned. While all employees were also offered the option
to reduce their work hours with a proportional decease in wages, none elected
this alternative. For more information, please see "Item 11. Executive
Compensation; Compensation Discussion and Analysis; Elements of Executive
Compensation; Other Compensation."
In addition, certain vendors and service providers have agreed to
accept shares of our Common Stock as partial payment of their bills. In 2008, we
issued 3,017,276 shares of common stock for services rendered.
42
Notwithstanding our cost and spending reduction activities, we may need
to raise additional funds through additional equity or debt financing or from
other sources in order to complete the necessary clinical trials and the
regulatory approval processes including the commercializing of Ampligen(R)
products. There can be no assurances that we will raise adequate funds from
these or other sources, especially considering current adverse market
conditions, which may have a material adverse effect on our ability to develop
our products. Any additional funding may result in significant dilution and
could involve the issuance of securities with rights, which are senior to those
of existing stockholders. We may also need additional funding earlier than
anticipated, and our cash requirements, in general, may vary materially from
those now planned, for reasons including, but not limited to, changes in our
research and development programs, clinical trials, competitive and
technological advances, the regulatory process, and higher than anticipated
expenses and lower than anticipated revenues from certain of our clinical trials
for which cost recovery from participants has been approved.
We have been using the proceeds from financing to fund infrastructure
growth including manufacturing, regulatory compliance and market development.
Due to current market conditions, we have been unable to consistently raise
funds pursuant to the terms of the Fusion Purchase Agreement (see "Equity
Financing" below).
Standby Financing Agreement
In February 2009, we entered into a Standby Financing Agreement
pursuant to which certain individuals ("Individuals"), consisting of Dr. Carter
and Thomas Equels, agreed to loan us up to an aggregate of $1,000,000 in funds
should we be unable to obtain additional financing, if needed. Under the Standby
Financing Agreement, we will use our best efforts in 2009 to obtain one or more
additional financing agreements on such terms as our Board deems to be
reasonable and appropriate in order to maintain our operations. If at any time
after December 1, 2009 and prior to June 30, 2010 a majority of our independent
Directors deems that in the event a financing of at least $2.5 Million has not
been obtained and additional funds are needed to maintain our operations, we
will send a written notice to each of the Individuals informing them of the
total amount of additional funds required and the specific amount that will be
required from each Individual. Within fifteen calendar days after receipt of the
notice, the Individuals will be required to pay us their respective amount. We
will then issue to them one year 15% senior secured notes for their respective
amounts (the "Notes"). Interest will be paid monthly in our Common Stock.
Repayment of the principal and interest under the Notes will be secured by all
of our assets. We will not, without the consent of the Individuals, (i) incur
any new debt senior or pari passu to the Notes or (ii) encumber or grant a
security interest in any assets. Upon 20 business days written notice, we may
prepay the Notes in cash at any time at 105% of the then outstanding principal
amount of the Notes, plus any accrued but unpaid interest.
For agreeing to be obligated to loan us money, each Individual received
10 year warrants (the "Commitment Warrants") to purchase our common stock at the
rate of $50,000 worth in warrants per $100,000 committed. The exercise price of
these warrants is $0.51 (125% of the market closing price of our Common Stock on
the date that Agreement was executed. These warrants vested immediately. If and
when we notify the Individuals that we are consummating the Standby Financing,
upon each Individual's payment of his committed amount, he will receive
additional 10 year warrants to purchase our Common Stock at the rate of $50,000
worth in warrants per $100,000 paid. The exercise price of the warrants will be
43
the closing market price of our Common Stock on the day we receive the funds
from the Individuals. These warrants will vest immediately. While any portion of
the Notes are outstanding, Individuals will have weighted average anti-dilution
rights with regard to the exercise price of all warrants issued pursuant hereto
except that these rights will not apply if the securities are issued to
employees, Board members, corporate and scientific advisors, select vendors,
pursuant to our current agreement with Fusion Capital Fund II, LLC or part of a
corporate or strategic alliance.
Equity Financing
In July 2008, we entered into a $30 million Common Stock Purchase
Agreement (the "Purchase Agreement") with Fusion Capital Fund II, LLC
("Fusion"), an Illinois limited liability company. Concurrently with entering
into the Purchase Agreement, we entered into a registration rights agreement
with Fusion. Pursuant to the registration rights agreement, we filed a
registration statement related to the transaction with the U.S. Securities and
Exchange Commission ("SEC") covering 21,300,000 shares that have been issued or
may be issued to Fusion under the Purchase Agreement. The SEC declared effective
the registration statement on August 12, 2008. We have the right over a 25 month
period to sell our shares of common stock to Fusion from time to time in amounts
between $120,000 and $1 million depending on certain conditions as set forth in
the agreement, up to a maximum of $30 million. The purchase price of the shares
related to the $30.0 million of future funding will be based on the prevailing
market prices of our shares at the time of sales as computed under the Purchase
Agreement without any fixed discount, and we will control the timing and amount
of any sales of shares to Fusion. Fusion shall not have the right or the
obligation to purchase any shares of our common stock on any business day that
the price of our common stock is below $0.40. Recently, the price of our common
stock has consistently fallen been below $0.40 and, accordingly, no additional
sales can be made to Fusion unless and until the price rises to $0.40 per share
or better for 12 consecutive business days. The Purchase Agreement may be
terminated by us at any time at our discretion without any cost to us. There are
no negative covenants, restrictions on future funding, penalties or liquidated
damages in the agreement. In consideration for entering into the Purchase
Agreement, upon execution of the Purchase Agreement we issued to Fusion 650,000
shares as a commitment fee. Also, we will issue to Fusion up to an additional
650,000 shares as a commitment fee pro rata as we receive up to the $30.0
million of future funding.
Under the rules of the NYSE Alternext US, we may issue no more than
14,823,651 shares (19.99% of our outstanding shares as of July 2, 2008, the date
of the purchase agreement) without first obtaining the approval of stockholders.
That approval was obtained on November 11, 2008. As of December 31, 2008, we
have executed transactions pursuant the Fusion Stock Purchase Agreement valued
at $270,000 and 1,211,122 shares, which includes 650,000 shares as the initial
fee for the financing.
The proceeds from this financing have been used to fund infrastructure
growth including manufacturing, regulatory compliance and market development.
In April 2006 we entered into a prior common stock purchase agreement
with Fusion, pursuant to which we sold an aggregate of 10,682,032 shares for
total gross proceeds of approximately $19,739,000 through November, 2007. This
agreement expired on July 31, 2008.
Because of our long-term capital requirements, we may seek to access
the public equity market whenever conditions are favorable, even if we do not
44
have an immediate need for additional capital at that time. In this regard we
also have previously registered $50,000,000 worth of our securities in a
universal shelf registration statement, none of which has been designated or
issued. We are unable to estimate the amount, timing or nature of future sales
of outstanding common stock or instruments convertible into or exercisable for
our common stock. Any additional funding may result in significant dilution and
could involve the issuance of securities with rights, which are senior to those
of existing stockholders. We may also need additional funding earlier than
anticipated, and our cash requirements, in general, may vary materially from
those now planned, for reasons including, but not limited to, changes in our
research and development programs, clinical trials, competitive and
technological advances, the regulatory processes, including the commercializing
of Ampligen(R) products.
There can be no assurances that we will raise adequate funds from these
or other sources, which may have a material adverse effect on our ability to
develop our products. Also, we have the ability to curtail discretionary
spending, including some research and development activities, if required to
conserve cash.
(dollars in thousands)
Obligations Expiring by Period
Contractual Cash Obligations
Total 2009 2010 2011
Operating Leases $229 $171 $58 $-0-
---- ---- --- ----
Total $229 $171 $58 $-0-
==== ==== === ====
New Accounting Pronouncements
Refer to "Note 2(l) - Recent Accounting Standards and Pronouncements"
under Notes to Consolidated Financial Statements.
Disclosure About Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Our significant accounting policies are described in the
Notes to Consolidated Financial Statements. The significant accounting policies
that we believe are most critical to aid in fully understanding our reported
financial results are the following:
Revenue
Revenue from the sale of Ampligen(R) under cost recovery clinical
treatment protocols approved by the FDA is recognized when the treatment is
provided to the patient.
45
Revenues from the sale of product are recognized when the product is
shipped, as title is transferred to the customer. We have no other obligation
associated with our products once shipment has occurred.
Inventories
We use the lower of first-in, first-out ("FIFO") cost or market method
of accounting for inventory.
Patents and Trademarks
Patents and trademarks are stated at cost (primarily legal fees) and
are amortized using the straight-line method over the estimated useful life of
17 years. We review our patents and trademark rights periodically to determine
whether they have continuing value. Such review includes an analysis of the
patent and trademark's ultimate revenue and profitability potential. In
addition, management's review addresses whether each patent continues to fit
into our strategic business plans.
Stock Based Compensation
Under FAS 123R, share-based compensation cost is measured at the grant
date, based on the estimated fair value of the award, and is recognized as
expense over the requisite service period. We adopted the provisions of FAS
123R, effective January 1, 2006, using a modified prospective application. Under
this method, compensation cost is recognized for all share-based payments
granted, modified or settled after the date of adoption, as well as for any
unvested awards that were granted prior to the date of adoption. Prior periods
are not revised for comparative purposes. Because we previously adopted only the
pro forma disclosure provisions of FAS 123, we recognize compensation cost
relating to the unvested portion of awards granted prior to the date of
adoption, using the same estimate of the grant-date fair value and the same
attribution method used to determine the pro forma disclosures under FAS 123,
except that forfeiture rates are estimated for all options, as required by FAS
123R. The cumulative effect of applying the forfeiture rates is not material.
The fair value of each option award is estimated on the date of grant
using a Black-Scholes option valuation model. Expected volatility is based on
the historical volatility of the price of our common stock. The risk-free
interest rate is based on U.S. Treasury issues with a term equal to the expected
life of the option. We use uses historical data to estimate expected dividend
yield, expected life and forfeiture rates.
Concentration of Credit Risk
Our policy is to limit the amount of credit exposure to any one
financial institution and place investments with financial institutions
evaluated as being credit worthy, or in short-term money markets, which are
exposed to minimal interest rate and credit risks. At and since December 31,
2008, we have had bank deposits and overnight repurchase agreements that exceed
federally insured limits.
Concentration of credit risk, with respect to receivables, is limited
through our credit evaluation process. We do not require collateral on our
receivables. Our receivables consist principally of amounts due from wholesale
drug companies as of December 31, 2007 and 2008.
46
Sales to three large wholesalers represented approximately 68% and 77%
of our total sales for the years ended December 31, 2007 and 2008, respectively.
Item 7A. Quantitative And Qualitative Disclosures About Market Risk.
We had approximately $6,119,000 in cash and cash equivalents at
December 31, 2008. To the extent that our cash and cash equivalents exceed our
near term funding needs, we invest the excess cash in three to twelve month
interest bearing financial instruments. We employ established conservative
policies and procedures to manage any risks with respect to investment exposure.
We have not entered into, and do not expect to enter into, financial
instruments for trading or hedging purposes.
ITEM 8. Financial Statements and Supplementary Data.
The consolidated balance sheets as of December 31, 2007 and 2008, and
our consolidated statements of operations, changes in stockholders' equity and
comprehensive loss and cash flows for each of the years in the three year period
ended December 31, 2008, together with the report of McGladrey & Pullen, LLP,
independent registered public accountants, is included at the end of this
report. Reference is made to the "Index to Financial Statements and Financial
Statement Schedule" on page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
ITEM 9A. Controls and Procedures.
Effectiveness of Control Procedures
As of December 31, 2008, the end of the period covered by this report,
we carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) promulgated
under the Securities Act of 1934, as amended, as of December 31, 2008. Our
disclosure controls and procedures are intended to ensure that the information
we are required to disclose in the reports that we file or submit under the
Securities Exchange Act of 1934 is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities Exchange
Commission's rules and forms and (ii) accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
as the principal executive and financial officers, respectively, to allow final
decisions regarding required disclosures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that the controls and
procedures were effective as of December 31, 2008 to ensure that material
information was accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Our management has concluded
that the financial statements included in this Form 10-K present fairly, in all
material respects our financial position, results of operations and cash flows
for the periods presented in conformity with accounting principles generally
accepted in the United States of America.
47
Changes in Internal Control over Financial Reporting
We made no changes in our internal control over financial reporting
during the last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as such term is defined in Rules
13a-15(f) or 15d-15(f), under the Exchange Act. Internal control over financial
reporting is a process designed by, or under the supervision of, our principal
executive and principal financial officers and affected by our Board of
Directors, management and other personnel, and to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (ii)provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over
financial reporting as of December 31, 2008. In making this assessment,
management used the criteria set forth in the framework established by the
Committee of Sponsoring Organizations of the Treadway Commission Internal
Control--Integrated Framework, (COSO). Based on this assessment, management has
not identified any material weaknesses as of December 31, 2008. A material
weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.
Management has concluded that we did maintain effective internal
control over financial reporting as of December 31, 2008, based on the criteria
set forth in "Internal Control--Integrated Framework" issued by the COSO.
Our internal control over financial reporting as of December 31, 2008
has been audited by McGladrey and Pullen, LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
ITEM 9B. Other Information.
None.
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Hemispherx Biopharma, Inc.
We have audited Hemispherx Biopharma, Inc.'s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Hemispherx Biopharma, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (a) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (b)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (c) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Hemispherx Biopharma, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008
based on criteria established in Internal Control--Integrated Framework [issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)].
49
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the December 31, 2008 consolidated
financial statements of Hemispherx Biopharma, Inc. and our report dated March
13, 2009 expressed an unqualified opinion.
Blue Bell, Pennsylvania
March 13, 2009
/s/ McGladrey & Pullen, LLP
50
PART III
Item 10. Directors and Executive Officers and Corporate Governance.
The following sets forth biographical information about each of our
directors and executive officers as of the date of this report:
Name Age Position
William A. Carter, M.D. 71 Chairman, Chief Executive Officer
Charles T. Bernhardt, CPA 47 Chief Financial Officer
David R. Strayer, M.D. 63 Medical Director, Regulatory Affairs
Carol A. Smith, Ph.D. 57 VP of Manufacturing Quality and Process
Development
Richard C. Piani 80 Director
Thomas K. Equels 58 Director
Katalin Ferencz-Biro 62 Senior Vice President of Regulatory
Affairs
William M. Mitchell, M.D. 74 Director
Ransom W. Etheridge 69 Secretary and General Counsel
Iraj Eqhbal Kiani, Ph.D. 61 Director
Wayne Springate 38 Vice President of Operations
Russel Lander 58 Vice President of Quality Assurance
Each director has been elected to serve until the next annual meeting
of stockholders, or until his earlier resignation, removal from office, death or
incapacity. Each executive officer serves at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment.
WILLIAM A. CARTER, M.D., the co-inventor of Ampligen(R), joined us in 1978, and
has served as: (a) our Chief Scientific Officer since May 1989; (b) the Chairman
of our Board of Directors since January 1992; (c) our Chief Executive Officer
since July 1993; (d) our President since April, 1995; and (e) a director since
1987. From 1987 to 1988, Dr. Carter served as our Chairman. Dr. Carter was a
leading innovator in the development of human interferon for a variety of
treatment indications including various viral diseases and cancer. Dr. Carter
received the first FDA approval to initiate clinical trials on a beta interferon
product manufactured in the U.S. under his supervision. From 1985 to October
1988, Dr. Carter served as our Chief Executive Officer and Chief Scientist. He
received his M.D. degree from Duke University and underwent his post-doctoral
training at the National Institutes of Health and Johns Hopkins University. Dr.
Carter also served as Professor of Neoplastic Diseases at Hahnemann Medical
University, a position he held from 1980 to 1998. Dr. Carter served as Director
of Clinical Research for Hahnemann Medical University's Institute for Cancer and
Blood Diseases, and as a professor at Johns Hopkins School of Medicine and the
State University of New York at Buffalo. Dr. Carter is a Board certified
physician and author of more than 200 scientific articles, including the editing
of various textbooks on anti-viral and immune therapy.
51
CHARLES T. BERNHARDT is a Certified Public Accountant who also has attained a
Masters' Degree in Business Administration. He is a graduate of Villanova
University and West Chester University of Pennsylvania who has served as our
Chief Financial Officer since January 1, 2009. Most recently he was the Director
of Accounting for Healthcare Division of Thomson Reuters, an overall company
with $12 billion annual revenues and 50,000 total world-wide employees, where he
was responsible for their Healthcare Division's accounting operations, including
the Physicians' Desk Reference business, as well as the shared financial
services for the Healthcare and Scientific Divisions from 2006 to 2008. He was a
Regional Controller for Comcast Cable during 1999 to 2002, Director of Finance
for TelAmerica Media for 2003 to 2006 and earlier in his career a member of the
Internal Audit management teams American Stores Corporation and ICI
Americas/Zenica (currently AstraZenica Pharmaceuticals). In 1986, he became a
C.P.A. licensed in Pennsylvania and New Jersey while with public accounting's
"Big Four" firm of KPMG.
DAVID R. STRAYER, M.D. who served as Professor of Medicine at the Medical
College of Pennsylvania and Hahnemann University, has acted as our Medical
Director since 1986. He is Board Certified in Medical Oncology and Internal
Medicine with research interests in the fields of cancer and immune system
disorders. Dr. Strayer has served as principal investigator in studies funded by
the Leukemia Society of America, the American Cancer Society, and the National
Institutes of Health. Dr. Strayer attended the School of Medicine at the
University of California at Los Angeles where he received his M.D. in 1972.
CAROL A. SMITH, Ph.D. is Vice President of Manufacturing Quality and Process
Development who has served as our Director of Manufacturing and Process
Development from 1995 to 2003, as Director of Operations from 1993 to 1995 and
as the Manager of Quality Control from 1991 to 1993, with responsibility for the
manufacture, quality control, process development, technology transfer to
contract manufacturers and the chemistry of Ampligen(R). Dr. Smith was
Scientist/Quality Assurance Officer for Virotech International, Inc. from 1989
to 1991 and Director of the Reverse Transcriptase and Interferon Laboratories
and a Clinical Monitor for Life Sciences, Inc. from 1983 to 1989. She received
her Ph.D. in Medical Sciences with a concentration on Virology from the
University of South Florida, College of Medicine in 1980 and was an NIH
post-doctoral fellow in the Department of Microbiology and Virology at the
Pennsylvania State University College of Medicine from 1980 to 1983.
RICHARD C. PIANI has been a director since 1995. Mr. Piani has been employed as
a principal delegate for Industry to the City of Science and Industry, Paris,
France, a billion dollar scientific and educational complex. Mr. Piani provided
consulting to us in 1993, with respect to general business strategies for our
European operations and markets. Mr. Piani served as Chairman of Industrielle du
Batiment-Morin, a building materials corporation, from 1986 to 1993. Previously
Mr. Piani was a Professor of International Strategy at Paris Dauphine University
from 1984 to 1993. From 1979 to 1985, Mr. Piani served as Group Director in
Charge of International and Commercial Affairs for Rhone-Poulenc and from 1973
to 1979 he was Chairman and Chief Executive Officer of Societe "La Cellophane",
the French company which invented cellophane and several other worldwide
products. Mr. Piani has a Law degree from Faculte de Droit, Paris Sorbonne and a
Business Administration degree from Ecole des Hautes Etudes Commerciales, Paris.
THOMAS K. EQUELS is the President and Managing Director of Equels Law Firm based
in Miami Florida. Mr. Equels legal practice is focused on litigation, with
particular emphasis on civil racketeering for about 25 years Mr. Equels has
represented national and state government and companies in the banking,
insurance, aviation, pharmaceutical and construction industries. Mr. Equels
52
received his law degree from Florida State University and he is a graduate of
Troy State University. He is a member of the Florida Bar, the American Bar
Association and the Academy of Florida Trial Lawyers. Along with serving as a
Board member, he continues to serve as the Company's litigation lawyer.
WILLIAM M. MITCHELL, M.D., Ph.D. has been a director since July 1998. Dr.
Mitchell is a Professor of Pathology at Vanderbilt University School of
Medicine. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from Johns
Hopkins University, where he served as an Intern in Internal Medicine, followed
by a Fellowship at its School of Medicine. Dr. Mitchell has published over 200
papers, reviews and abstracts dealing with viruses, anti-viral drugs and immune
responses to HIV infection. Dr. Mitchell has worked for and with many
professional societies, including the International Society for Antiviral
Research, the American Society of Biochemistry and Molecular Biology, the
American Society of Microbiology and government review committees, among them
the National Institutes of Health, AIDS and Related Research Review Group. Dr.
Mitchell previously served as one of our directors from 1987 to 1989.
RANSOM W. ETHERIDGE presently serves as our secretary and general counsel. He
served as a member of our Board of Directors from October 1997 through November
2008. Mr. Etheridge first became associated with us in 1980 when he provided
consulting services to us and participated in negotiations with respect to our
initial private placement through Oppenheimer & Co., Inc. Mr. Etheridge has been
practicing law since 1967, specializing in transactional law. Mr. Etheridge is a
member of the Virginia State Bar, a Judicial Remedies Award Scholar, and has
served as President of the Tidewater Arthritis Foundation. He is a graduate of
Duke University, and received his Law degree from the University of Richmond
School of Law.
IRAJ EQHBAL KIANI, M.B.A., Ph.D., was appointed to the Board of Directors on May
1, 2002. Dr. Kiani is a citizen of the United States and England that resides in
Newport, California. Dr. Kiani served in various local government positions
including the Mayor and Governor of Yasoi, Capital of Boyerahmand, Iran. In
1980, Dr. Kiani moved to England, where he established and managed several
trading companies over a period of some 20 years. Dr. Kiani is a planning and
logistic specialist who is now applying his knowledge and experience to build a
worldwide immunology network, which will use our proprietary technology. Dr.
Kiani received his Ph.D. degree from the University of Ferdosi in Iran, ND from
American University.
WAYNE S. SPRINGATE is Vice President of Operations and joined Hemispherx in 2002
as Vice President of Business Development. Mr. Springate came on board when
Hemispherx acquired Alferon N Injection(R) and its New Brunswick, NJ
manufacturing facilities. He led the consolidation of our Rockville facility to
our New Brunswick location as well as coordinated the relocation of
manufacturing polymers from South Africa to our production facility in New
Brunswick. He is responsible for preparing our Manufacturing plant for a Pre
Approval Inspection by the FDA in connection with the filing of our Ampligen(R)
NDA. Previously, Mr. Springate acted as President for World Fashion Concepts. He
oversaw operations at several locations in the United States and overseas. Mr.
Springate assisted the CEO in details of operations on a daily basis and was
involved in all aspects of manufacturing, warehouse management, distribution and
logistics.
KATALIN FERENCZ-BIRO, Ph.D. has served as the Company's Senior Vice President of
Regulatory Affairs and Quality Assurance Departments since January 2007. She
served as the Director of Regulatory Affairs and Quality Assurance from 2006 to
2007. Previously from 1987 to 2003, she served Interferon Sciences Inc, in
53
various positions including Senior Director of Regulatory Affairs, Quality
Control and Quality Assurance Departments, and FDA official for our FDA approved
product, Alferon N Injection(R). Dr. Ferencz-Biro received her Ph.D. in
Chemistry/ Biochemistry in 1972 from the University of Eotvos Lorand, Budapest,
Hungary, and her M.S., in Chemistry and Biology in 1971 from University of
Eotvos Lorand, Budapest, Hungary. She was a postdoctoral fellow from 1981-1984
in Rutgers University, Center for Alcohol Studies, Piscataway, New Jersey. She
is an author and co-author of several scientific publications, patents and
presentations on the field of biochemistry. Currently she is a member of
Regulatory Affairs Professionals Society.
RUSSEL J. LANDER, Ph.D. is Vice President Quality Assurance. Dr. Lander joined
Hemispherx in 2005, assuming responsibility for CMC writing for the NDA filing
of Ampligen(R). He has subsequently served at the New Brunswick site as Director
of Quality Control and has provided guidance to the efforts to improve and
validate the manufacturing process for the synthesis of Ampligen(R)
polynucleotide raw materials, Poly I and Poly C12U. Dr. Lander was formerly
employed at Merck and Co., Inc. in the process development groups for drug
development (1977-1991) and vaccines (1991-2005). Dr. Lander received his Ph.D.
in Chemical/Biochemical Engineering from the University of Pennsylvania. He has
authored numerous scientific publications and invention disclosures.
On November 27, 2008, Anthony Bonelli, left our employment when his employment
agreement ended. Mr. Bonelli was President and Chief Operating Officer of the
Company for two years.
Robert E. Peterson, our Chief Financial Officer for nearly 20 years, retired as
of December 31, 2008. Mr. Peterson retains a position of part-time consultant
and financial advisor to us.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of equity
securities, to file reports with the Securities and Exchange Commission
reflecting their initial position of ownership on Form 3 and changes in
ownership on Form 4 or Form 5. Based solely on a review of the copies of such
Forms received by us, we found that, during the fiscal year ended December 31,
2008, certain of our officers and directors had not complied with all applicable
Section 16(a) filing requirements on a timely basis with regard to transactions
occurring in 2008. Specifically, Dr. Carter filed one form 4 late concerning one
transaction; Mr. Etheridge filed three forms 4 late concerning three
transactions; Mr. Kiani filed three forms 4 late concerning three transactions;
Mr. Piani filed three forms 4 late concerning three transactions; Dr. Mitchell
filed four forms 4 late concerning four transactions; and Dr. Strayer filed one
form 4 late concerning one transaction.
Audit Committee and Audit Committee Expert
The Audit Committee of our Board of Directors consists of Richard Piani,
Committee Chairman, William Mitchell, M.D. and Iraj Eqbal Kiani. Mr. Piani, Dr.
Mitchell, and Mr. Kiani are all determined by the Board of Directors to be
independent directors as required under Section 121B(2)(a) of the NYSE Alternext
US Company Guide. We do not have a financial expert as defined in the SEC rules
on the committee in the true sense of the description. However, Mr. Piani has 40
years experience in business and has served in senior level and leadership
positions for international businesses. His working experience includes
reviewing and analyzing financial statements and dealing with financial
54
institutions. We believe Mr. Piani, Dr. Mitchell, and Mr. Kiani to be
independent of management and free of any relationship that would interfere with
their exercise of independent judgment as members of this committee. The
principal functions of the Audit Committee are to (i) assist the Board in
fulfilling its oversight responsibility relating to the annual independent audit
of our consolidated financial statements and internal control over financial
reporting, the engagement of the independent registered public accounting firm
and the evaluation of the independent registered public accounting firm's
qualifications, independence and performance, (ii) prepare the reports or
statements as may be required by NYSE Alternext US or the securities laws, (iii)
assist the Board in fulfilling its oversight responsibility relating to the
integrity of our financial statements and financial reporting process and our
system of internal accounting and financial controls, (iv) discuss the financial
statements and reports with management, including any significant adjustments,
management judgments and estimates, new accounting policies and disagreements
with management, and (v) review disclosures by our independent registered public
accounting firm concerning relationships with us and the performance of our
independent accountants.
Code of Ethics
Our Board of Directors adopted a code of ethics and business conduct
for officers, directors and employees that went into effect on May 19, 2003.
This code has been presented, reviewed and signed by each officer, director and
employee. You may obtain a copy of this code by visiting our web site at
www.hemispherx.net (Corporate Info) or by written request to our office at 1617
JFK Boulevard, Suite 660, Philadelphia, PA 19103.
Item 11. Executive Compensation.
Compensation Discussion and Analysis
Objectives and Philosophy of Executive Compensation
The primary objectives of the compensation committee of our board of
directors with respect to executive compensation are to attract and retain the
most talented and dedicated executives possible, to tie annual and long-term
cash and stock incentives to achievement of measurable performance objectives,
and to align executives' incentives with stockholder value creation. To achieve
these objectives, the compensation committee expects to implement and maintain
compensation plans that tie a substantial portion of executives' overall
compensation to key strategic financial and operational goals such as the
establishment and maintenance of key strategic relationships, the development of
our products, the identification and advancement of additional product and the
performance of our common stock price. The compensation committee evaluates
individual executive performance with the goal of setting compensation at levels
the committee believes are comparable with executives in other companies of
similar size and stage of development operating in the biotechnology industry
while taking into account our relative performance and our own strategic goals.
Our compensation plans are developed by utilizing publicly available
compensation data and subscription compensation survey data for national and
regional companies in the biopharmaceutical industry. We believe that the
practices of this group of companies provide us with appropriate compensation
benchmarks, because these companies have similar organizational structures and
tend to compete with us for executives and other employees. For benchmarking
executive compensation, we typically review the compensation data we have
55
collected from the complete group of companies, as well as a subset of the data
from those companies that have a similar number of employees as our company. In
past years, we had engaged independent outside consultants to help us analyze
this data and to compare our compensation programs with the practices of the
companies represented in the compensation data we review. However given the
current harsh economic conditions and our efforts to conserve cash, we did not
undertake an analysis of any compensation nor offer any incremental or
performance salary increases for the year-end 2008. Additionally, the Board did
not approve the award of any bonus for 2008.
Elements of Executive Compensation
Executive compensation consists of the following elements:
Base Salary
Base salaries for our executives are established based on the scope of
their responsibilities, taking into account competitive market compensation paid
by other companies for similar positions. Generally, we believe that executive
base salaries should be targeted near the median of the range of salaries for
executives in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Base salaries are reviewed
annually, and adjusted from time to time to realign salaries with market levels
after taking into account individual responsibilities, performance and
experience. This review normally occurs in the fourth quarter of each year.
Annual Bonus
Our compensation program includes eligibility for an annual
performance-based cash bonus in the case of all executives and certain senior,
non-executive employees. The amount of the cash bonus depends on the level of
achievement of the stated corporate, department, and individual performance
goals, with a target bonus generally set as a percentage of base salary. As
provided in his employment agreement, our Chief Executive Officer is eligible
for an annual performance-based bonus up to 25% of their salaries, the amount of
which, if any, is determined by the board of directors in its sole discretion
based on the recommendation of the compensation committee.
The compensation committee utilizes annual incentive bonuses to
compensate officers for achieving financial and operational goals and for
achieving individual annual performance objectives. These objectives will vary
depending on the individual executive, but will relate generally to strategic
factors such as establishment and maintenance of key strategic relationships,
development of our product, identification and research and development of
additional products, and to financial factors such as raising capital and
improving our results of operations.
The Compensation Committee and the Board of Directors declined to
awarded bonuses for 2008 to any of our executives, senior or non-executive
employees.
Long-Term Incentive Program
We believe that long-term performance is achieved through an ownership
culture that encourages such performance by our executive officers through the
use of stock and stock-based awards. Our stock plans have been established to
provide our employees, including our executive officers, with incentives to help
align those employees' interests with the interests of stockholders. The
56
compensation committee believes that the use of stock and stock-based awards
offers the best approach to achieving our compensation goals. We have
historically elected to use stock options as the primary long-term equity
incentive vehicle. We have adopted stock ownership guidelines and our stock
compensation plans have provided the principal method, other than through direct
investment for our executive officers to acquire equity in our Company. We
believe that the annual aggregate value of these awards should be set near
competitive median levels for comparable companies. However, in the early stage
of our business, we provided a greater portion of total compensation to our
executives through our stock compensation plans than through cash-based
compensation.
Stock Options
Our stock plans authorize us to grant options to purchase shares of
common stock to our employees, directors and consultants. Our compensation
committee oversees the administration of our stock option plan. The compensation
committee reviews and recommends approval by our Board of Directors of stock
option awards to executive officers based upon a review of competitive
compensation data, its assessment of individual performance, a review of each
executive's existing long-term incentives, and retention considerations.
Periodic stock option grants are made at the discretion of the Board of
Directors upon recommendation of the compensation committee to eligible
employees and, in appropriate circumstances, the compensation committee
considers the recommendations of members of management. In 2008, the
Compensation Committee and the Board authorized the renewal of expiring options
for certain named executives in the amounts indicated in the section entitled
"Stock Option Grants to Executive Officers." Grants were made to certain of our
employees based on past performance, particularly, those who worked hard and
diligently on the preparation of our NDA. Stock options granted by us have an
exercise price equal to the fair market value of our common stock on the day of
grant and typically vest over a period of years based upon continued employment,
and generally expire ten years after the date of grant. Incentive stock options
also include certain other terms necessary to assure compliance with the
Internal Revenue Code of 1986, as amended, or Internal Revenue Code.
We expect to continue to use stock options as a long-term incentive
vehicle because: (1) Stock options align the interests of executives with those
of the shareholders, support a pay-for-performance culture, foster employee
stock ownership, and focus the management team on increasing value for the
shareholders, (2) Stock options are performance based. All the value received by
the recipient of a stock option is based on the growth of the stock price, (3)
Stock options help to provide a balance to the overall executive compensation
program as base salary and our discretionary annual bonus program focus on
short-term compensation, while the vesting of stock options increases
shareholder value over the longer term, and (4) the vesting period of stock
options encourages executive retention and the preservation of shareholder
value.
In determining the number of stock options to be granted to executives,
we take into account the individual's position, scope of responsibility, ability
to affect profits and shareholder value and the individual's historic and recent
performance and the value of stock options in relation to other elements of the
individual executive's total compensation.
Options granted under the 2004 plan include 1,345,742 in 2006,
3,232,870 in 2007 (including 2,970,000 issued for expiring options) and 687,000
in 2008 (302,000 issued for unexercised and expired options). Unless sooner
terminated, the Equity Incentive Plan will continue in effect for a period of 10
years from its effective date.
57
Our 2004 Equity Compensation Plan authorizes us to grant restricted
stock and restricted stock units. In 2008, we issued 755,829 shares to
consultants and vendors for services rendered in lieu of cash.
As of December 31, 2008 we had 18,081 shares for future use under the
2004 plan.
On June 30, 2007 the stockholders adopted the 2007 Equity Incentive
Plan which authorizes the issuance of up to 8,000,000 stock options to acquire
common stock pursuant to the terms of the plan. This Plan also authorizes us to
grant restricted stock and restricted stock units. 1,450,000 options (all were
issued for expiring and unexercised options) were granted pursuant to the 2007
plan. In addition, we issued 201,010 shares of unrestricted stock and 2,434,177
shares in restricted stock to consultants and other vendors for services
performed in lieu of cash.
Other Compensation
Our Chief Executive Officer, Chief Financial Officer and General
Counsel have employment, and/or engagement contracts that will remain in effect
until they are terminated, expire, or are renegotiated. Each contract is
different with respect to specific benefits or other compensation. We maintain a
broad-based benefits program that is provided to all employees including
vacation, sick leave and health insurance. Details of these agreements is
discussed below. Notwithstanding the disclosure below, the executive officers
are participating in the Employee Wage Or Hours Reduction Program (please see
"Item 11. Executive Compensation; Compensation Discussion and Analysis; Elements
of Executive Compensation; Other Compensation").
Dr. Carter's employment as our Chief Executive Officer and Chief
Scientific Officer expires December 31, 2010 unless sooner terminated for cause
or disability. The agreement automatically renews for successive one year
periods after the initial termination date unless we or Dr. Carter give written
notice otherwise at least ninety days prior to the termination date or any
renewal period. Dr. Carter has the right to terminate the agreement on 30 days'
prior written notice. The base salary is subject to adjustments and the average
increase or decrease in the Consumer Price Index for the prior year. In
addition, Dr. Carter could receive an annual performance bonus of up to 25% of
his base salary, at the sole discretion of the Compensation Committee of the
board of directors, based on his performance or our operating results. Dr.
Carter will not participate in any discussions concerning the determination of
his annual bonus. Dr. Carter is also entitled to an incentive bonus of 0.5% of
the gross proceeds received by us from any joint venture or corporate partnering
arrangement. Dr. Carter's agreement also provides that he be paid a base salary
and benefits through the last day of the then term of the agreement if he is
terminated without "cause", as that term is defined in agreement. In addition,
should Dr. Carter terminate the agreement or the agreement be terminated due to
his death or disability, the agreement provides that Dr. Carter be paid a base
salary and benefits through the last day of the month in which the termination
occurred and for an additional twelve month period. On January 1, 2009, Dr.
Carter's compensation as an employee was changed pursuant to our "Employee Wage
Or Hours Reduction Program" consistent with an employee earning over $200,000
per annum to receive 50% of his wages in Incentive Rights on a three-to-one
conversion basis.
Our engagement of Dr. Carter as a consultant related to patent
development, as one of our directors and as chairman of the Executive Committee
58
of our Board of Directors expires December 31, 2010 unless sooner terminated for
cause or disability. The agreement automatically renews for successive one year
periods after the initial termination date or any renewal period. Dr. Carter has
the right to terminate the agreement on 30 days' prior written notice. The base
fee is subject to annual adjustments equal to the percentage increase or
decrease of annual dollar value of directors' fees provided to our directors
during the prior year. The annual fee is further subject to adjustment based on
the average increase or decrease in the Consumer Price Index for the prior year.
In addition, Dr. Carter could receive an annual performance bonus of up to 25%
of his base fee, at the sole direction of the Compensation Committee of the
board of directors, based on his performance. Dr. Carter will not participate in
any discussions concerning the determination of this annual bonus. Dr. Carter's
agreement also provides that he be paid his base fee through the last day of the
then term of the agreement if he is terminated without "cause", as that term is
defined in the agreement. In addition, should Dr. Carter terminate the agreement
or the agreement be terminated due to his death or disability, the agreement
provides that Dr. Carter be paid fees due him through the last day of the month
in which the termination occurred and for an additional twelve month period. On
January 1, 2009, Dr. Carter's compensation as a consultant was changed pursuant
to our "Employee Wage Or Hours Reduction Program" consistent with an employee
earning over $200,000 per annum to receive 50% of his fee in Incentive Rights on
a three-to-one conversion basis.
An Engagement Agreement with Charles T. Bernhardt, CPA as Chief
Financial Officer (interim) was finalized on December 1, 2008 and effective
January 1, 2009. The agreement calls for an initial salary of $160,000 per annum
and eligibility for the Goal Achievement Incentive Program. Additionally, the
agreement is based on an employment "at will" basis in which either party may
cancel upon two weeks written notice. Consistent with the Company's "Employee
Wage Or Hours Reduction Program", Mr. Bernhardt has elected to receive 50% of
his wages in Incentive Rights on a three-to-one conversion basis.
Our agreement with Ransom W. Etheridge provides for Mr. Etheridge's
engagement as our General Counsel until December 31, 2009 unless sooner
terminated for cause or disability. The agreement automatically renews for
successive one year periods after the initial termination date unless we or Mr.
Etheridge give written notice otherwise at least ninety days prior to the
termination date or any renewal period. Mr. Etheridge has the right to terminate
the agreement on 30 days' prior written notice. The initial annual fee for
services is $105,408 and is annually subject to adjustment based on the average
increase or decrease in the Consumer Price Index for the prior year. Mr.
Etheridge's agreement also provides that he be paid all fees through the last
day of then current term of the agreement if he is terminated without "cause" as
that term is defined in the agreement. In addition, should Mr. Etheridge
terminate the agreement or the agreement be terminated due to his death or
disability, the agreement provides that Mr. Etheridge be paid the fees due him
through the last day of the month in which the termination occurred and for an
additional twelve month period. Mr. Etheridge will devote approximately 85% of
his business time to our business. Effective January 1, 2009, one-half of the
monthly fee compensation to be paid to Ransom W. Etheridge pursuant to the terms
of his Engagement Agreement with us as our General Counsel will be paid in
shares of the Company's common stock ("Etheridge Share Compensation"). The
number of shares issued as Etheridge Share Compensation shall be calculated
based on a value equal to three times one-half of the monthly fee compensation
to be paid to Mr. Etheridge pursuant to the terms of his Engagement Agreement
with us, with the value of the shares being determined by the closing share
price of our common stock on the NYSE Alternext US on the last trading day of
each month.
59
Goal Achievement Incentive Program
On November 17, 2008 the Board of Directors authorized the Goal
Achievement Incentive Program. This program is designed to intensify the efforts
of the parties involved in securing strategic partnering agreements with third
parties. We will pay the parties participating in the Program an incentive bonus
for each timely agreement (as defined below) entered into by us with any and all
third parties in which we receive cash (as defined below) from such third
parties as a result of the execution of such agreements ("Strategic Partnering
Agreements"), provided, however, Strategic Partnering Agreements shall not
include agreements whereby we receive cash as a result of (i) only the sale of
Ampligen(R) or other Hemispherx products, (ii) our only being reimbursed for
expenses, not including expenses for prior research conducted by us, incurred by
us, (iii) an agreement in which the only economic benefit to us is one or more
loans, and (iv) an agreement, other than an agreement which results in a change
of control of Hemispherx, in which the only economic benefit to us is the sale
of our equity or other securities. The incentive bonus shall be in an amount
equal to one percent (1%) of the amount of all cash received by us pursuant to
each such Strategic Partnering Agreement between the dates of the execution of
each such Strategic Partnering Agreement and the first commercial sale of
Ampligen(R) following the full commercial approval of the sale of Ampligen(R) in
each jurisdiction. All incentive bonus payments shall be payable in readily
available funds within ten (10) days following receipt by us of readily
available funds as a result of our receipt of such first cash. For purposes
hereof "timely agreements" means all agreements entered into by us with any and
all third parties (a) on or before June 30, 2009 and (b) on or before March 31,
2010 with third parties with which we had been in active negotiations on or
before June 30, 2009. For purposes hereof "cash" means any asset which is either
(a) readily available funds or (b) capable of being converted into readily
available funds in value equal to the value ascribed to such asset in the
Strategic Partnering Agreement within six months of the receipt of such asset by
the Company. This program presently includes Dr. William Carter, CEO, Dr.
Chaunce Bogard, consultant and acting Senior Vice President, The Sage Group (one
of our strategic advisors) and Anthony Bonelli, our former President and COO,
Dr. David R. Strayer, Medical Director and all of our active employees as of
January 1, 2009.
Employee Wage Or Hours Reduction Program
In an effort to conserve Company cash, the Employee Wage Or Hours
Reduction Program (the "Program") was ratified by the Board effective January 1,
2009. In a mandatory program that is estimated to be in effect for up to six
months, compensation of all active full-time employees as of January 1, 2009
("Participants") were reduced through a reduction in their wages for which they
would be eligible to receive shares of our common stock ("Stock") six months
after the shares were earned. While all employees were also offered the option
to reduce their work hours with a proportional decease in wages, none elected
this alternative.
On a semi-monthly basis, Participants receive rights to Stock
("Incentive Rights") that cannot be traded. Six months after the date the
Incentive Rights are awarded, we will undertake a process to have Incentive
Rights converted into Stock and issued to each Participant on a monthly basis.
We will establish and maintain a record for the number of Incentive Rights
awarded to each Participant. At the end of each semi-monthly period, we will
determine the number of Incentive Rights by converting the proportionate
60
incentive award to the value of the Stock by utilizing the closing price of the
Stock on the NYSE Alternext US (formerly the American Stock Exchange or AMEX)
based on the average daily closing price for the period.
The Plan is being administered for full-time employees as follows:
o Twenty-three employees earning $90,000 or less per year elected a wage
reduction of 10% per annum and are receiving an incentive of two times the
value in Stock;
o Four employees earning $90,001 to $200,000 per year elected a wage
reduction of 25% per annum are receiving an incentive of two times the
value in Stock;
o Two employees earning over $200,000 per year elected a wage reduction of
50% per annum and are receiving an incentive of three times the value in
Stock;
o Any employee could elect a 50% per annum wage reduction for which would
allow them to be eligible for an incentive award of three times the value
of Stock. This option was elected by three employees.
Prior to the Stock being issued, we will establish a trading account
with an independent brokerage firm for each Participant. Incentive Rights will
constitute income to the Participants and be subject to payroll taxes upon Stock
issuance. At a brokerage firm selected by us, we will bear all expenses related
to selling the Stock (i.e.; broker fees, transaction costs, commissions, etc.)
for payroll withholding taxes purposes. Thereafter, for each Participant during
the period that they remain an active employee, we will continue to bear such
costs from this designated brokerage firm for the maintenance of this account
and all expenses related to selling our Stock. Participants leaving us or
voluntarily separating from the Plan will receive the Stock earned upon the six
month conversion of their Incentive Rights. The Plan benefits for individuals
that are no longer Participants will become fixed and we will not continue to
bear such costs from the designated brokerage firm for the maintenance of an
account nor any expenses related to selling the Stock except for the initial
costs associated to the selling of Stock for payroll withholding taxes purposes.
Employee Bonus Pool Program
An element of the Employee Wage Or Hours Reduction Program was the
establishment of a Bonus Pool (the "Pool") in the case of FDA Approval
("Approval") of Ampligen(R). This bonus is to award to each employee of record
at January 1, 2009 a pretax sum of 30% in wages, calculated on their base per
annum compensation at the time of the Approval, and awarded within three months
of Approval. Participants who terminate their employment prior to the Approval
will not qualify for this bonus.
Key Employee Retention
The Board of Directors, deeming it essential to the best interests of
our shareholders to foster the continuous engagement of key management personnel
and recognizing that, as is the case with many publicly held corporations, a
change of control might occur and that such possibility, and the uncertainty and
questions which it might raise among management, might result in the departure
or distraction of management personnel to the detriment of us and our
shareholders, determined to reinforce and encourage the continued attention and
dedication of members of our management to their engagement without distraction
in the face of potentially disturbing circumstances arising from the possibility
of a change in control of our Company and entered into identical agreements
61
regarding change in control with William A. Carter, our Chief Executive Officer
and Chief Scientific Officer and Ransom W. Etheridge, our General Counsel. Each
of the agreements regarding change in control became effective March 11, 2005
and continue through December 31, 2008 and shall extend automatically to the
third anniversary thereof unless we give notice to the other party prior to the
date of such extension that the agreement term will not be extended.
Notwithstanding the foregoing, if a change in control occurs during the term of
the agreements, the term of the agreements will continue through the second
anniversary of the date on which the change in control occurred. Each of the
agreements entitles William A. Carter and Ransom W. Etheridge, respectively, to
change of control benefits, as defined in the agreements and summarized below,
upon their respective termination of employment/engagement with us during a
potential change in control, as defined in the agreements or after a change in
control, as defined in the agreements, when their respective terminations are
caused (1) by us for any reason other than permanent disability or cause, as
defined in the agreement (2) by William A. Carter and/or Ransom W. Etheridge,
respectively, for good reason as defined in the agreement or, (3) by William A.
Carter and/or Ransom W. Etheridge, respectively for any reason during the 30 day
period commencing on the first date which is six months after the date of the
change in control.
The benefits for each of the foregoing executives would be as follows:
o A lump sum cash payment of three times his base salary and annual bonus
amounts; and o Outplacement benefits.
Each agreement also provides that the executive is entitled to a "gross-up"
payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him.
Dr. Carter's agreement also provides for the following benefits:
o Continued insurance coverage through the third anniversary of his termination;
and o Retirement benefits computed as if he had continued to work for the above
period.
On December 31, 2008, we entered into a severance/consulting agreement with
retiring Chief Financial Officer, Robert E. Peterson. This agreement provide a
monthly fee of $4,000 plus travel expenses and Options to purchase 20,000 shares
of the our common stock at the end of each calendar quarter through year-end
2011 in return for consulting services. The exercise price of the Options is to
be equal to 120% of the closing price of the our stock on the NYSE Alternext on
the last trading day of the calendar quarter for which the Options are being
issued. Peterson may terminate the Advisory Services at any time upon giving us
Sixty (60) days notice in writing of the intention to terminate the Advisory
Services. Please see "Note (12) Royalties, License, and Employment Agreements"
of Notes To Consolidated Financial Statements.
401(K) Plan
In December 1995, we established a defined contribution plan, effective
January 1, 1995, entitled the Hemispherx Biopharma employees 401(K) Plan and
Trust Agreement. All of our full time employees are eligible to participate in
the 401(K) plan following one year of employment. Subject to certain limitations
imposed by federal tax laws, participants are eligible to contribute up to 15%
of their salary (including bonuses and/or commissions) per annum. Through March
14, 2008, Participants' contributions to the 401(K) plan were matched by
Hemispherx at a rate determined annually by the board of directors. Each
62
participant immediately vests in his or her deferred salary contributions, while
our contributions will vest over one year. Please see Note 11 to the
consolidated financial statements contained herein.
Effective March 15, 2008, we ended our 100% matching of up to 6% of the
401(k) contributions provided to the account for each eligible participant. Our
401(k) Plan contribution cost for the twelve months ended December 31, 2008 is
$20,421 and it is required for payment prior to the final filing of our 2008
Federal Corporate Tax filing. There has not been any additional Company matching
costs since March 15, 2008 and none is projected for calendar year 2009.
Severance
Upon termination of employment, most executive officers are entitled to
receive severance payments under their employment and/or engagement agreements.
In determining whether to approve and setting the terms of such severance
arrangements, the compensation committee recognizes that executives, especially
highly ranked executives, often face challenges securing new employment
following termination. The employment agreement with our CEO, which expires on
December 31, 2010, provides that we pay him an annual salary through the term of
the agreement if terminated without cause.
We believe that our Executive Officers' severance package is generally
in line with severance packages offered to chief executive officers of the
companies of similar size to us represented in the compensation data we
reviewed.
Compensation of Directors
Non-employee Board member compensation consists of an annual retainer
("Directors' fees") of $150,000, which in 2008 was paid two thirds in cash and
one third in our common stock. On September 9, 2003, the Directors approved a 10
year plan which authorizes up to 1,000,000 shares for use in supporting this
compensation plan. The number of shares paid shall have a value of $12,500 with
the value of the shares being determined by the closing price of our common
stock on the NYSE Alternext US Exchange on the last day of the calendar quarter.
Director's fees are paid quarterly at the end of each calendar quarter.
On November 28, 2009, Thomas K. Equels joined our Board of Directors as
a non-employee Board member in which his compensation of $150,000 for all
director fees were agreed to be paid in the form of our common stock.
All Directors have been granted options to purchase common stock under
our Stock Option Plans and/or Warrants to purchase common stock. We believe such
compensation and payments are necessary in order for us to attract and retain
qualified outside directors.
Commencing as of January 1, 2009, the ratio of stock to cash being paid
as Director's fees ("Annual Compensation") was changed. The Annual Compensation
for each of the directors then serving, other than Thomas Equels, consists of
$25,000 and shares of common stock having a value of $125,000 ("Share
Compensation"). The Annual Compensation for Thomas Equels consists of shares of
common stock having a value of $150,000 ("Share Compensation").
63
To the extent that Share Compensation would exceed 1,000,000 shares in
the aggregate for the ten year period commencing January 1, 2003 as previously
approved by Resolution of the Board of September 9, 2003, shares for Share
Compensation shall be issued under the our 2007 Equity Incentive Plan.
64
Summary Compensation Table - 2006
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
Name and Principal Salary/Fees Bonus Stock Option Award Non-Equity Change in Pension All Other Total
Position Award (1) Incentive Plan Value and Compensation
Compensation Nonqualified
Deferred
Compensation
Earnings
W. A. Carter,
CEO $655,686 $166,624 - $1,236,367 - - $118,087(2) $2,186,764
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
A. Bonelli,
COO 35,000(4) 50,000 - 122,601 - - 3,000 (2) 210,601
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. E. Peterson,
CFO 259,164 64,791 - 373,043 - - - 696,998
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
D. Strayer,
Medical Director 225,144 - - 19,200 - - - 244,344
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
M. J. Liao,
Director - QC 158,381 - - 9,600 - - 18,246(3) 186,406
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
C. Smith,
VP of MFG 143,136 - - 9,600 - - 17,227(3) 169,963
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. Hansen,
VP of
Manufacturing 140,311 - - 9,600 - - 17,006(3) 166,917
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. D. Hulse 105,000 - - - - - - 105,000
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
Notes:
(1) Based on Black Scholes Pricing Model of valuing options. Total Fair Value
of Option Awards granted to officers in 2006 was $1,780,011.
(2) Consists of Healthcare premiums, life insurance premiums, 401-K matching
funds, qualifying insurance premium, company car and parking cost.
(3) Consists of healthcare premiums and 401-K matching funds.
(4) Mr. Bonelli joined us on November 27, 2006. His annual salary is $350,000.
65
Summary Compensation Table - 2007
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
Name and Principal Salary/Fees Bonus Stock Option Award Non-Equity Change in Pension All Other Total
Position Award (1) Incentive Plan Value and Compensation
Compensation Nonqualified
Deferred
Compensation
Earnings
W. A. Carter,
CEO $637,496 $166,156 - $1,688,079 - - $123,063(2) $2,664,794
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
A. Bonelli,
COO 350,000(4) 87,500 - 59,684 - - 33,375(3) 530,504
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. E. Peterson,
CFO 259,164 64,791 - 153,055 - - - 477,010
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
D. Strayer,
Medical
Director 240,348 50,347 - 79,810 - - - 370,505
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
C. Smith,
VP of MFG. 147,695 - - 34,235 - - 30,088(4) 212,018
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
K. Ferencz-
Biro, VP of
Reg. Affairs 145,000 - - 11,744 - - 13,999(5) 170,743
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
W. Springate,
VP of
Operations 150,000 37,500 - 36,253 - - 13,429(5) 237,182
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. Lander,
VP of Quality
Assurance 178,000 - - 11,744 - - 9,649(6) 199,393
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
Notes:
(1) Based on Black Scholes pricing model of valuing options. Total fair of
options granted to Officers in 2007 was $2,241,028.
(2) Consists of a) Life Insurance premiums totaling $63,627; b) 401-K matching
funds of $18,833; c) Healthcare premiums of $28,586; and d) Company car
expenses of $12,017.
(3) Healthcare premiums of $9,649, car allowance expense of $9,276, and life
insurance premiums totaling $14,400.
(4) Consists of Healthcare premiums of $21,266, and 401-K matching funds of
$8,862.
(5) Healthcare premiums and 401-K matching funds.
(6) Healthcare premiums.
66
Summary Compensation Table - 2008
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
Name and Principal Salary/Fees Bonus Stock Option Award Non-Equity Change in Pension All Other Total
Position Award (1) Incentive Plan Value and Compensation
Compensation Nonqualified
Deferred
Compensation
Earnings
W. A. Carter, CEO $664,624 $- - $316,571(4) - - $106,094(2) $1,087,289
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. E. Peterson, CFO 259,164 - - - - - - 259,164
(3)
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
D. Strayer, Medical 201,389 - - 16,168(4) - - - 217,309
Director
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
C. Smith, 147,695 - - 600(4) - - 23,072(5) 171,367
VP of MFG.
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
K. Ferencz-Biro, VP 145,000 - - - - - 11,461(6) 156,461
of Reg. Affairs
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
W. Springate, VP of 150,000 - - - - - 7,354(6) 157,354
Operations
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
R. Lander, 178,000 - - - - - 9,649(7) 187,649
VP of Quality
Assurance
------------------- ----------- ------ ------- ------------ --------------- ----------------- ------------- -----------
Notes:
(1) Based on Black Scholes pricing model of valuing options. Total fair of
options granted to Officers in 2007 was $364,648.
(2) Consists of a) Life Insurance premiums totaling $66,411; b) Healthcare
premiums of $28,586; and d) Company car expenses of $11,097.
(3) Mr. Peterson retired from the Company Effective December 31, 2008.
(4) Issue of options for options previously granted that expired unexercised.
(5) Consists of Healthcare premiums of $21,226, and 401-K matching funds of
$1,846.
(6) Healthcare premiums and 401-K matching funds.
(7) Healthcare premiums.
67
2007 Stock Option Grants to Executive Officers
The following table provides additional information about option awards granted
to our Named Executive Officers during the year ended December 31, 2007. The
compensation plan under which the grants in the following tables were made are
described in the Compensation Discussion and Analysis section headed "Long-Term
Equity Incentive Awards".
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
Name Grant Date No. of Options Exercise Price per Expiration Date Closing Price on Grant Date Fair Value
Share Grant of Option (2)
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
W.A. Carter, CEO 9/10/07 1,000,000(1) $2.00 9/9/17 1.24 674,063
10/1/07 1,400,000(1) 3.50 9/30/17 1.60 1,014,016
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
A. Bonelli, COO 2/22/07 50,000 2.07 2/27/17 1.88 59,684
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
R.E. Peterson, CFO 1/23/07 13,750(1) 2.37 1/23/17 2.10 18,242
9/10/07 200,000(1) 2.00 9/9/17 1.24 134,813
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
D. Strayer, 1/23/07 20,000(1) 2.37 1/23/17 2.10 26,534
Medical Director
9/10/07 50,000(1) 2.00 9/9/17 1.24 33,703
12/6/07 25,000 1.30 12/6/17 1.30 19,573
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
C. Smith, 1/23/07 6,791(1) 2.37 1/23/17 2.10 9,010
VP of MFG.
9/10/07 20,000(1) 2.00 9/9/17 1.24 13,481
12/6/07 15,000 1.30 12/6/17 1.30 11,744
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
W. Springate, 5/1/07 20,000 1.78 4/30/17 1.63 20,595
VP of Operations 12/6/07 20,000 1.30 12/6/17 1.30 15,658
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
K. Ferencz-Biro, 12/6/07 15,000 1.30 12/6/17 1.30 11,744
VP of Reg. Affairs
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
R. Lander, 12/6/07 15,000 1.30 12/6/17 1.30 11,744
VP of Quality
Assurance
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
1) Renewal of previously issued options that expired unexercised.
2) These amounts shown represent the approximate amount we recognize for
financial statement reporting purposes in fiscal year 2007 for the fair
value of equity awards granted to the named executive officers. As a
result, these amounts do not reflect the amount of compensation actually
received by the named executive officer during the fiscal year. For a
description of the assumptions used in calculating the fair value of equity
awards under SFAS No. 123(R), see Note 2(m) of our financial statements.
68
2008 Stock Option Grants to Executive Officers
The following table provides additional information about option awards granted
to our Named Executive Officers during the year ended December 31, 2008. The
compensation plan under which the grants in the following tables were made are
described in the Compensation Discussion and Analysis section headed "Long-Term
Equity Incentive Awards".
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
Name Grant Date No. of Options Exercise Price per Expiration Date Closing Price on Grant Date Fair Value
Share Grant of Option (2)
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
W.A. Carter, CEO 2/18/08 190,000(1) $4.00 2/18/18 0.89 61,437
9/17/08 1,450,000(1) 2.20 9/17/18 0.52 255,134
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
D. Strayer, 2/18/08 50,000(1) 4.00 2/18/18 0.89 16,168
Medical Director
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
C. Smith, VP MFG. 2/18/08 5,000(1) 4.00 2/18/18 0.89 600
----------------- -------------- ------------------ ------------------- ---------------- ----------------- -----------------------
1) Renewal of previously issued options that expired unexercised.
2) These amounts shown represent the approximate amount we recognize for
financial statement reporting purposes in fiscal year 2008 for the fair
value of equity awards granted to the named executive officers. As a
result, these amounts do not reflect the amount of compensation actually
received by the named executive officer during the fiscal year. For a
description of the assumptions used in calculating the fair value of equity
awards under SFAS No. 123(R), see Note 2(m) of our financial statements.
69
Outstanding Equity Awards at Year End - 2007
----------------- ----------------------------------------------------------------------------------------- -----------------------
Option/Warrants Awards Stock Awards
----------------- -------------------------------------------------------------------- --------------------------------------------
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
Name Number of Number of Equity Option Option Number of Market Equity Equity
Securities Securities Incentive Plan Exercise Expiration Shares or Value of Incentive Plan Incentive
Underlying Underlying Awards Number Price Date Units of Shares or Awards: Number Plan Awards:
Unexercised Unexercised of Securities Stock That Unit That of Unearned Market or
Options (#) Options (#) Underlying Have Not Have Not Shares,Units Payout Value
Exercisable Unexercisable Unexercised Vested (#) Vested or Other of Unearned
Unearned Rights That Shares,Units
Options (#) Have Not or Other
Vested (#) Rights That
Have Not
Vested
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
W.A. Carter, CEO 1,450,000 0 0 $2.20 9/8/08 - - - -
1,000,000 0 0 2.00 9/9/17 - - - -
190,000 0 0 4.00 1/1/08 - - - -
3,728 0 0 2.71 12/31/10 - - - -
10,000 0 0 4.03 1/3/11 - - - -
167,000 0 0 2.60 9/7/14 - - - -
153,000 0 0 2.60 12/7/14 - - - -
100,000 0 0 1.75 4/26/15 - - - -
465,000 0 0 1.86 6/30/15 - - - -
70,000 0 0 2.87 12/9/15 - - - -
300,000 0 0 2.38 1/1/16 - - - -
10,000 0 0 2.61 12/9/15 - - - -
376,650 0 0 3.78 2/22/16 - - - -
1,400,000 0 0 3.50 9/30/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
A. Bonelli, COO 100,000 0 0 2.11 11/26/16 - - - -
50,000 0 0 2.07 2/27/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
R. Peterson, CFO 200,000 0 0 2.00 9/9/17 - - - -
50,000 0 0 3.44 6/22/14 - - - -
13,824 0 0 2.60 9/7/14 - - - -
55,000 0 0 1.75 4/26/15 - - - -
10,000 0 0 2.61 12/8/15 - - - -
50,000 0 0 3.85 2/28/16 - - - -
100,000 0 0 3.48 4/14/16 - - - -
30,000 0 0 3.55 4/30/16 - - - -
13,750 0 0 2.37 1/22/17 - - - -
10,000 0 0 4.03 1/3/11 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
D. Strayer, 50,000 0 0 2.00 9/9/17 - - - -
Medical Director 50,000 0 0 4.00 2/28/08 - - - -
10,000 0 0 4.03 1/3/11 - - - -
20,000 0 0 3.50 2/23/07 - - - -
10,000 0 0 1.90 12/14/14 - - - -
10,000 0 0 2.61 12/8/15 - - - -
10,000 5,000 0 2.20 11/20/16 - - - -
25,000 0 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
C. Smith, VP of 20,000 0 0 2.00 9/9/17 - - - -
MFG 5,000 0 0 4.00 9/17/18 - - - -
10,000 0 0 4.03 1/3/11 - - - -
10,000 0 0 2.61 12/8/15 - - - -
6,791 0 0 2.37 1/23/17 - - - -
10,000 0 0 1.90 12/7/14 - - - -
5,000 2,500 0 2.20 11/20/16 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
W. Springate, VP 1,812 0 0 1.90 12/7/14 - - - -
of Operations 2,088 0 0 2.61 12/8/05 - - - -
5,000 0 0 2.20 11/20/16 - - - -
20,200 0 0 1.78 4/30/17 - - - -
6,067 13,333 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
R. Lander, VP of
Quality Assurance 5,000 10,000 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
K. Ferencz-Biro,
VP of Reg. Affairs 5,000 10,000 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
71
Outstanding Equity Awards at Year End - 2008
----------------- ----------------------------------------------------------------------------------------- -----------------------
Option/Warrants Awards Stock Awards
----------------- -------------------------------------------------------------------- --------------------------------------------
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
Name Number of Number of Equity Option Option Number of Market Equity Equity
Securities Securities Incentive Plan Exercise Expiration Shares or Value of Incentive Plan Incentive
Underlying Underlying Awards Number Price Date Units of Shares or Awards: Number Plan Awards:
Unexercised Unexercised of Securities Stock That Unit That of Unearned Market or
Options (#) Options (#) Underlying Have Not Have Not Shares,Units Payout Value
Exercisable Unexercisable Unexercised Vested (#) Vested or Other of Unearned
Unearned Rights That Shares,Units
Options (#) Have Not or Other
Vested (#) Rights That
Have Not
Vested
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
W.A. Carter, CEO 1,450,000 0 0 $2.20 9/17/18 - - - -
1,000,000 0 0 2.00 9/9/17 - - - -
190,000 0 0 4.00 2/18/18 - - - -
73,728 0 0 2.71 12/31/10 - - - -
10,000 0 0 4.03 1/3/11 - - - -
167,000 0 0 2.60 9/7/14 - - - -
153,000 0 0 2.60 12/7/14 - - - -
100,000 0 0 1.75 4/26/15 - - - -
465,000 0 0 1.86 6/30/15 - - - -
70,000 0 0 2.87 12/9/15 - - - -
300,000 0 0 2.38 1/1/16 - - - -
10,000 0 0 2.61 12/9/15 - - - -
376,650 0 0 3.78 2/22/16 - - - -
1,400,000 0 0 3.50 9/30/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
C. Bogard, S VP 100,000 0 0 0.68 6/5/13 - - - -
50,000 0 0 2.07 2/27/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
R. Peterson, CFO 200,000 0 0 2.00 9/9/17 - - - -
50,000 0 0 3.44 6/22/14 - - - -
13,824 0 0 2.60 9/7/14 - - - -
55,000 0 0 1.75 4/26/15 - - - -
10,000 0 0 2.61 12/8/15 - - - -
50,000 0 0 3.85 2/28/16 - - - -
100,000 0 0 3.48 4/14/16 - - - -
30,000 0 0 3.55 4/30/16 - - - -
13,750 0 0 2.37 1/22/17 - - - -
10,000 0 0 4.03 1/3/11 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
D. Strayer, 50,000 0 0 2.00 9/9/17 - - - -
Medical Director 50,000 0 0 4.00 2/28/18 - - - -
10,000 0 0 4.03 1/3/11 - - - -
5,000 15,000 0 3.50 2/23/07 - - - -
10,000 0 0 1.90 12/14/14 - - - -
10,000 0 0 2.61 12/8/15 - - - -
15,000 0 0 2.20 11/20/16 - - - -
16,667 8,333 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
C. Smith, VP of 20,000 0 0 2.00 9/9/17 - - - -
MFG 5,000 0 0 4.00 9/17/18 - - - -
10,000 0 0 4.03 1/3/11 - - - -
10,000 0 0 2.61 12/8/15 - - - -
6,791 0 0 2.37 1/23/17 - - - -
10,000 0 0 1.90 12/7/14 - - - -
7,500 0 0 2.20 11/20/16 - - - -
10,000 5,000 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
W. Springate, VP 1,812 0 0 1.90 12/7/14 - - - -
of Operations 2,088 0 0 2.61 12/8/15 - - - -
5,000 0 0 2.20 11/20/16 - - - -
20,000 0 0 1.78 4/30/17 - - - -
13,333 6,667 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
R. Lander, VP of
Quality Assurance 10,000 5,000 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
K. Ferencz-Biro,
VP of Reg. Affairs 10,000 5,000 0 1.30 12/6/17 - - - -
---------------- --------------- -------------- ------------ ---------- ----------- --------- -------- ------------ -----------
73
Options Exercised / Stock Vested - 2008
--------------------------- ------------------------------------------- ----------------------------------------------
Option Awards Stock Awards
--------------------------- ------------------------------------------- ----------------------------------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
Name Number of Shares Value Realized on Number of Shares Value of Realized on
Acquired on Exercise Exercise ($) Acquired on Vesting Vesting ($)
(#) (#)
(b) (c) (d) (e)
(a)
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
W.A. Carter, CEO
none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
W.C. Bogard,
S VP none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
R. Peterson, CFO
none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
D. Strayer, Medical
Director
none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
C. Smith,
VP MFG. none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
W. Springate, VP of
Operations none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
R. Lander,
VP of Quality Assurance none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
K. Ferencz-Biro,
VP of Reg. Affairs
none
--------------------------- ---------------------- -------------------- ---------------------- -----------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our Compensation Committee of the Board of Directors, consisting of Richard
Piani, the Committee Chairman, William Mitchell, M.D. and Dr. Iraj E. Kiani, are
all independent directors. There are no interlocking relationships.
COMPENSATION COMMITTEE REPORT
Our Committee has reviewed and discussed the Compensation Discussion and
Analysis contained in this Annual Report with management. Based on our
Committee's review of and the discussions with management with respect to the
Compensation Discussion and Analysis, our Committee recommended to the board of
directors that the Compensation Discussion and Analysis be included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008
for filing with the SEC.
COMPENSATION COMMITTEE
Richard Piani, Committee Chairman
William Mitchell, M.D.
Dr. Iraj E. Kiani
The foregoing Compensation Committee report shall not be deemed
incorporated by reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, and shall not otherwise be deemed filed
under these acts, except to the extent we incorporate by reference into such
filings.
74
Director Compensation - 2008
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
Name Fees Stock Option Non-Equity Change in Pension All Other Total ($)
Earned or Awards ($) Awards ($) Incentive Value and Compensat-ion
Paid in (2) Plan Nonqualified ($)
Cash ($) Compensation Deferred
($) Compensation
Earnings
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
T. Equels, Director -0- 37,500 0 0 0 395,369 (1) 433,869
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
W. Mitchell, 100,000 50,000 0 0 0 0 150,000
Director
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
R. Piani, 100,000 50,000 0 0 0 0 150,000
Director
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
I. Kiani, 100,000 50,000 0 0 0 0 150,000
Director
------------------ ------------ ----------- ----------- --------------- ------------------- ----------------- -----------
(1) General Counsel fees as per Engagement Agreement.
(2) No options were awarded in 2008.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth as of March 1, 2009, the number and
percentage of outstanding shares of common stock beneficially owned by:
o Each person, individually or as a group, known to us to be deemed the
beneficial owners of five percent or more of our issued and outstanding
common stock;
o each of our directors and the Named Executives; and
o all of our officers and directors as a group.
As of March 3, 2009, there were no other persons, individually or as a
group, known to us to be deemed the beneficial owners of five percent or more of
our issued and outstanding common stock.
--------------------------------------------- ------------------------------------ -------------------------------
Name and Address of Shares Beneficially Owned % Of Shares
Beneficial Owner Beneficially Owned
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
William A. Carter, M.D. 6,241,868 (1) 7.7%
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Ransom W. Etheridge 722,633 (2) *
2610 Potters Rd.
Virginia Beach, VA 23452
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Richard C. Piani 600,685 (3) *
97 Rue Jeans-Jaures
Levaillois-Perret
France 92300
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Warren C. Bogard, Ph.D. 100,000 (4) *
332 Long Ridge Lane
Exton, PA 19341
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
William M. Mitchell, M.D. 527,957 (5) *
Vanderbilt University
Department of Pathology
Medical Center North
21st and Garland
Nashville, TN 37232
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Thomas K. Equels *
Director 320,842
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
David R. Strayer, M.D. 229,246 (6) *
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Carol A. Smith, Ph.D. 64,291 (7) *
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Iraj-Eqhbal Kiani, Ph.D. 235,203 (8) *
Orange County Immune Institute
18800 Delaware Street
Huntingdon Beach, CA 92648
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
W. Springate 48,900 (9) *
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
R. Lander, Ph.D. 15,000 (10) *
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
K. Ferencz-Biro, Ph.D. 15,000 (10) *
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
Charles T. Bernhardt CPA 65,079 *
--------------------------------------------- ------------------------------------ -------------------------------
--------------------------------------------- ------------------------------------ -------------------------------
All directors and executive officers as a
group 9,491,357 11.7%
(11 persons)
--------------------------------------------- ------------------------------------ -------------------------------
* Less than 1%
(1) Includes shares issuable upon the exercise of (i) replacement options
issued in 2006 to purchase 376,650 shares of common stock exercisable at
$3.78 per share expiring on February 22, 2016; (ii) stock options issued in
2001 to purchase 10,000 shares of common stock at $4.03 per share expiring
January 3, 2011; (iii) options issued in 2007 to purchase 1,000,000 shares
of common stock exercisable at $2.00 per share expiring on September 9,
2017, these options replaced previously issued options that expired
unexercised on August 13, 2007; (iv) warrants issued in 2003 to purchase
1,450,000 shares of common stock exercisable at $2.20 per share expiring on
September 17, 2018, these options replaced previously issued options that
expired unexcercised on September 8, 2008; (v) stock options issued in 2004
to purchase 320,000 shares of common stock at $2.60 per share expiring on
September 7, 2014; (vi) Stock Options issued in 2005 to purchase 100,000
shares of common stock at $1.75 per share expiring on April 26, 2015; (vii)
Stock options issued in 2005 to purchase 465,000 shares of common stock at
$1.86 per share expiring June 30, 2015; and (viii) stock options issued in
2005 to purchase 70,000 shares of Common Stock at $2.87 per share expiring
December 9, 2015; (ix) stock options issued in 2005 to purchase 10,000
shares of Common Stock at $2.61 per share expiring December 8, 2015; (x)
300,000 options issued in 2006 to purchase common stock at $2.38 per share
and expiring on January 1, 2016; and (xi) 476,490 shares of Common Stock.
Also includes 1,663,728 warrants and options originally issued to William
A. Carter and subsequently transferred to Carter Investments of which Dr.
Carter is the beneficial owner. These securities consist of (a) warrants
issued in 2008 to purchase 190,000 shares of common stock at $4.00 per
share expiring on February 17, 2018, these options replace previously
issued warrants that expired unexercised on February 18, 2007, (b) stock
options granted in 1991 and extended to purchase 73,728 shares of common
stock exercisable at $2.71 per share expiring on December 31, 2019 and
(c)options issued in 2007 to purchase 1,400,000 shares of common stock at
$3.50 per share expiring on September 30, 2017, these options replaced
previously issued options that expired unexercised on September 30, 2007.
(2) Includes shares issuable upon exercise of (i) 20,000 options issued in to
purchase common stock at $4.00 per share expiring on February 17, 2018,
76
these options replace previously issued warrants that expired unexercised
on February 18, 2007; (ii) 100,000 warrants issued in 2002 exercisable
$2.00 per share expiring on August 17, 2017, these options replaced
previously issued options that expired unexercised on August 13, 2007;
(iii) stock options issued in 2005 to purchase 100,000 shares of common
stock exercisable at $1.75 per share expiring on April 26, 2015; and(iv)
stock options issued in 2004 to purchase 50,000 shares of common stock
exercisable at $2.60 per share expiring on September 7, 2014; (and (vi)
252,633 shares of common stock of which 40,900 are subject to security
interest. Also includes 200,000 stock options originally granted to Ransom
Etheridge in 2003 and 50,000 stock options originally granted to Ransom
Etheridge in 2006, all of which were subsequently transferred to relatives
and family trusts. 200,000 of these stock options are exercisable at $2.75
per share and expire on November 3, 2013. 37,500 of these options were
transferred to Julianne Inglima; 37,500 of these options were transferred
to Thomas Inglima; 37,500 of these options were transferred to R.
Etheridge-BMI Trust; 37,500 options were transferred to R. Etheridge-TCI
Trust and 50,000 of these options were transferred to the Etheridge Family
Trust. 50,000 of these stock options are exercisable at $3.86 per share and
expire on February 24, 2016. 12,500 of these shares were transferred to
Julianne Inglima; 12,500 of these options were transferred to Thomas
Inglima; 12,500 of these options were transferred to R. Etheridge - BMI
Trust; and 12,500 of these options were transferred to R. Etheridge-TCI
Trust. Julianne and Thomas are Mr. Etheridge's daughter and son-in-law.
(3) Includes shares issuable upon exercise of (i) 20,000 warrants issued in
1998 to purchase common stock at $4.00 per share expiring on February 17,
2018, these options replace previously issued warrants that expired
unexercised on February 18, 2007; (ii) 100,000 warrants issued in 2007
exercisable at $2.00 per share expiring on September 17, 2017, these
options replaced previously issued options that expired unexercised on
August 13, 2007; (iii)options granted in 2004 to purchase 54,608 shares of
common stock exercisable at $2.60 per share expiring on September 17, 2014;
(iv) options granted in 2005 to purchase 100,000 shares of common stock
exercisable at $1.75 per share expiring on April 26, 2015; (v) stock
options issued in 2006 to purchase 50,000 shares of common stock
exercisable at $3.86 per share expiring February 24, 2016; (vi) 230,177
shares of common stock owned by Mr. Piani; vii) 40,900 shares of common
stock owned jointly by Mr. and Mrs. Piani; and (viii) and 5,000 shares of
common stock owned by Mrs. Piani.
(4) Consists of (i) 100,000 options exercisable at $0.68 per share expiring
June 5, 2013.
(5) Includes shares issuable upon exercise of (i) options issued in to purchase
12,000 shares of common stock at $6.00 per share; (ii) 100,000 warrants
issued in 2007 exercisable at $2.00 per share expiring on September 9,
2017; (iii) 50,000 stock options issued in 2004 exercisable at $2.60 per
share expiring on September 7, 2014; (iv) 100,000 stock options issued in
2005 exercisable at $1.75 per share expiring on April 26, 2015; (v) stock
options issued in 2006 to purchase 50,000 shares of common stock
exercisable at $3.86 per share expiring February 24, 2016; and (vi) 215,957
shares of common stock.
(6) (i) stock options issued in 2007 to purchase 20,000 shares of common stock
at $2.37 per share expiring on February 22, 2017; (ii) warrants issued in
1998 to purchase 50,000 shares of common stock exercisable at $4.00 per
share expiring on February 17, 2018. These options replace previously
77
issued warrants that expired unexercised on February 18, 2007; (iii) stock
options granted in 2001 to purchase 10,000 shares of common stock
exercisable at $4.03 per share expiring on January 3, 2011; (iv) warrants
issued in 2007 to purchase 50,000 shares of common stock exercisable at
$2.00 per share expiring on September 17, 2017, these options replaced
previously issued options that expired unexercised on August 13, 2007; (v)
stock options issued in 2004 to purchase 10,000 shares of common stock
exercisable at $1.90 per share expiring on December 7, 2014; (vi) stock
options issued in 2005 to purchase 10,000 shares of Common Stock at $2.61
per share expiring December 8, 2015; (vii) stock options to purchase 15,000
shares of common stock at $2.20 per share expiring November 20, 2016;
(viii)stock options issued in 2007 to purchase 25,000 shares of common
stock at $1.30 per share expiring December 6, 2017 and (ix) 39,246 shares
of common stock.
(7) Consists of shares issuable upon exercise of(i) 20,000 options issued in
2007 exercisable at $2.00 per share expiring in September 17, 2017, these
options replaced previously issued options that expired unexercised on
August 13, 2007; (ii) 6,791 stock options issued in 1997 exercisable at
$2.37 expiring January 22, 2017; (iii) 10,000 stock options issued in 2001
exercisable at $4.03 per share expiring January 3, 2011; (iv) 10,000 stock
options issued in 2004 exercisable at $1.90 expiring on December 7, 2014;
(v) 10,000 stock options issued in 2005 to purchase Common Stock at $2.61
per share expiring December 8, 2015 and (vi) 7,500 stock options issued in
1996 to purchase common stock at $2.20 per share expiring November 20,
2016.
(8) Consists of shares issuable upon exercise of (i) 12,000 options issued in
2005 exercisable at $1.63 per share expiring on June 2, 2015; (ii) 15,000
options issued in 2005 exercisable at $1.75 per share expiring on April 26,
2015; (iii) stock options issued in 2006 to purchase 50,000 shares of
common stock exercisable at $3.86 per share expiring February 24, 2016 and
(iv) 158,203 shares of common stock.
(9) Consists of (i) stock options to acquire 1,812 shares of common stock at
$1.90 per share expiring December 7, 2014; (ii) stock options to acquire
2,088 shares of common stock at $2.61 per share expiring December 8, 2015;
(iii) 5,000 stock options at $2.20 per share expiring November 20, 2016;
(iv) stock options to acquire 20,000 shares of common stock at $1.78 per
share expiring April 30, 2017 and (v) stock options to acquire 20,000
shares at $1.30 per share expiring December 6, 2017.
(10) Consists of stock options to purchase 15,000 shares of common stock at
$1.30 per share expiring on December 6, 2017.
Item 13. Certain Relationships and Related Transactions, and Director
Independence.
We have employment agreements with certain of our executive officers and
have granted such officers and directors options and warrants to purchase our
common stock, as discussed under the headings, "Item 11. Executive
Compensation," and "Item 12. Security Ownership of Certain Beneficial Owners and
Management," as noted above.
Ransom W. Etheridge, our Secretary, General Counsel and a former director,
is an attorney in private practice, who renders corporate legal services to us
78
from time to time, for which he has received fees totaling approximately
$117,000 and $105,400 in 2007 and 2008, respectively. In addition, Mr. Etheridge
served on the Board of Directors until November 2008 for which he received
Director's Fees of cash and stock. He was paid $150,000 in cash and stock for
the time served in 2008. In 2007 he was paid $150,000 in cash and stock for his
services as a Director.
We used the property acquired in late 2004 by Retreat House, LLC an entity
in which the children of William A. Carter have a beneficial interest. We paid
Retreat House, LLC $153,000 and $41,200 in 2007 and 2008, respectively, for the
use of the property at various times.
Tom Equels was elected to the Board of Directors at the Annual Stockholders
Meeting on November 17, 2008. Mr. Equels has provided legal serves to us for
several years. In 2008 and 2007, we paid Mr. Equel's law firm $395,000 and
$215,000, respectfully, for services rendered. Mr. Equel's received $37,500 in
our stock for his Board fees in 2008.
We have continued to utilize The Sage Group, Inc., a health care,
technology oriented, strategy and transaction advisory firm, to assist us in
obtaining a strategic alliance in Japan for the use of Ampligen(R) in treating
Chronic Fatigue Syndrome (CFS) and Avian Flu. We paid The Sage Group
approximately $24,000, $25,000 and $167,000 in fees for the years ended December
31, 2006, 2007 and 2008, respectively.
Kati Kovari, M.D. was paid $13,000 in 2007 and 2008 for her part-time
services to us as Assistant Medical Director. Dr. Kovari is the spouse of W. A.
Carter, our CEO.
ITEM 14. Principal Accountant Fees and Services.
All audit and professional services are approved in advance by the
Audit Committee to assure such services do not impair the auditor's independence
from us. The total fees by McGladrey & Pullen, LLP ("McGladrey") for 2007 and
2008 were $280,000 and $308,000, respectively. The following table shows the
aggregate fees for professional services rendered during the year ended December
31, 2008.
-------------------------- ----------------------------------------------
Amount ($)
-------------------------- ----------------------- ----------------------
Description of Fees 2007 2008
-------------------------- ----------------------- ----------------------
Audit Fees $280,000 $315,000
Audit-Related Fees -0- -0-
Tax Fees -0- -0-
All Other Fees -0- -0-
--- ---
Total $280,000 $315,000
======== ========
-------------------------- ----------------------- ----------------------
Audit Fees
Represents fees for professional services provided for the audit of our
annual financial statements, audit of the effectiveness of internal control over
financial reporting, services that are performed to comply with generally
accepted auditing standards, and review of our financial statements included in
our quarterly reports and services in connection with statutory and regulatory
filings.
79
Audit-Related Fees
Represents the fees for assurance and related services that were
reasonably related to the performance of the audit or review of our financial
statements.
The Audit Committee has determined that McGladrey's rendering of these
audit-related services was compatible with maintaining auditor's independence.
The Board of Directors considered McGladrey to be well qualified to serve as our
independent public accountants. The committee also pre-approved the charges for
services performed in 2007 and 2008.
The Audit Committee pre-approves all auditing services and the terms
thereof (which may include providing comfort letters in connection with
securities underwriting) and non-audit services (other than non-audit services
prohibited under Section 10A(g) of the Exchange Act or the applicable rules of
the SEC or the Public Company Accounting Oversight Board) to be provided to us
by the independent auditor; provided, however, the pre-approval requirement is
waived with respect to the provisions of non-audit services for us if the "de
minimus" provisions of Section 10A (i)(1)(B) of the Exchange Act are satisfied.
This authority to pre-approve non-audit services may be delegated to one or more
members of the Audit Committee, who shall present all decisions to pre-approve
an activity to the full Audit Committee at its first meeting following such
decision.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules.
(a) Financial Statements and Schedules - See index to financial statements on
page F-1 of this Annual Report.
All other schedules called for under regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is included in the financial statements or notes thereto.
(b) Exhibits - See exhibit index below.
Except as disclosed in the footnotes, the following exhibits were filed
with the Securities and Exchange Commission as exhibits to our Form S-1
Registration Statement (No. 33-93314) or amendments thereto and are hereby
incorporated by reference:
Exhibit
No. Description
2.1 First Asset Purchase Agreement dated March 11, 2003, by and between the
Company and ISI.(1)
2.2 Second Asset Purchase Agreement dated March 11, 2003, by and between the
Company and ISI.(1)
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended, along with Certificates of Designations.
3.1.1 Series E Preferred Stock.
3.2 Amended and Restated By-laws of Registrant. (17)
4.1 Specimen certificate representing our Common Stock.
80
4.2 Rights Agreement, dated as of November 19, 2002, between the Company and
Continental Stock Transfer & Trust Company. The Right Agreement includes
the Form of Certificate of Designation, Preferences and Rights of the
Series A Junior Participating Preferred Stock, the Form of Rights
Certificate and the Summary of the Right to Purchase Preferred Stock.(2)
4.3 Form of 6% Convertible Debenture of the Company issued in March 2003.(1)
4.4 Form of Warrant for Common Stock of the Company issued in March 2003.(1)
4.5 Form of Warrant for Common Stock of the Company issued in June 2003.(3)
4.6 Form of 6% Convertible Debenture of the Company issued in July 2003.(4)
4.7 Form of Warrant for Common Stock of the Company issued in July 2003.(4)
4.8 Form of 6% Convertible Debenture of the Company issued in October 2003.(5)
4.9 Form of Warrant for Common Stock of the Company issued in October 2003.(5)
4.10 Form of 6% Convertible Debenture of the Company issued in January 2004.(6)
4.11 Form of Warrant for Common Stock of the Company issued in January 2004.(6)
4.12 Form of Warrant for Common Stock of the Company. (9)
4.13 Amendment Agreement, effective October 6, 2005, by and among the Company
and debenture holders.(11) 4.14 Form of Series A amended 7% Convertible
Debenture of the Company (amending Debenture due October 31, 2005).(11)
4.15 Form of Series B amended 7% Convertible Debenture of the Company
(amending Debenture issued on January 26, 2004 and due January 31,
2006).(11)
4.16 Form of Series C amended 7% Convertible Debenture of the Company (amending
Debenture issued on July 13, 2004 and due January 31, 2006).(11)
4.17 Form of Warrant issued effective October 6, 2005 for Common Stock of the
Company.(11)
4.18 Form of Commitment Warrant issued in February 2009 under the Standby
Financing Agreement.*
4.19 Form of Indenture filed with Universal shelf registration statement.(18)
10.1 1990 Stock Option Plan.
10.2 1992 Stock Option Plan.
10.3 1993 Employee Stock Purchase Plan.
10.4 Form of Confidentiality, Invention and Non-Compete Agreement.
10.5 Form of Clinical Research Agreement.
10.6 Form of Collaboration Agreement.
10.7 Amended and Restated Employment Agreement by and between the Company and
Dr. William A. Carter, dated as of July 1, 1993.(7)
10.8 Employment Agreement by and between the Registrant and Robert E. Peterson,
dated April 1, 2001.
10.9 License Agreement by and between the Company and The Johns Hopkins
University, dated December 31, 1980.
10.10Technology Transfer, Patent License and Supply Agreement by and between
the Company, Pharmacia LKB Biotechnology Inc., Pharmacia P-L Biochemicals
Inc. and E.I. du Pont de Nemours and Company, dated November 24, 1987.
10.11Pharmaceutical Use Agreement, by and between the Company and Temple
University, dated August 3, 1988.
10.12Assignment and Research Support Agreement by and between the Company,
Hahnemann University and Dr. David Strayer, Dr. lsadore Brodsky and Dr.
David Gillespie, dated June 30, 1989.
10.13Lease Agreement between the Company and Red Gate Limited Partnership,
dated November 1, 1989, relating to the Company's Rockville, Maryland
facility.
81
10.14 Agreement between the Company and Bioclones (Proprietary) Limited.
10.15Amendment, dated August 3, 1995, to Agreement between the Company and
Bioclones (Proprietary) Limited (contained in Exhibit 10.14).
10.16 Licensing Agreement with Core BioTech Corp.
10.17 Licensing Agreement with BioPro Corp.
10.18 Licensing Agreement with BioAegean Corp.
10.19 Agreement with Esteve.
10.20 Agreement with Accredo (formerly Gentiva) Health Services.
10.21 Agreement with Biovail Corporation International.
10.22Forbearance Agreement dated March 11, 2003, by and between ISI,the
American National Red Cross and the Company.(1)
10.23Forbearance Agreement dated March 11, 2003, by and between ISI, GP
Strategies Corporation and the Company.(1)
10.24Securities Purchase Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(1)
10.25Registration Rights Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(1)
10.26Securities Purchase Agreement, dated July 10, 2003, by and among the
Company and the Buyers named therein.(4)
10.27Registration Rights Agreement, dated July 10, 2003, by and among the
Company and the Buyers named therein.(4)
10.28Securities Purchase Agreement, dated October 29, 2003, by and among the
Company and the Buyers named therein.(5)
10.29Registration Rights Agreement, dated October 29, 2003, by and among the
Company and the Buyers named therein.(5)
10.30Securities Purchase Agreement, dated January 26, 2004, by and among the
Company and the Buyers named therein.(6)
10.31Registration Rights Agreement, dated January 26, 2004, by and among the
Company and the Buyers named therein.(6)
10.32 Memorandum of Understanding with Fujisawa. (8)
10.33Securities Purchase Agreement, dated July 30, 2004, by and among the
Company and the Purchasers named therein.(9)
10.34Registration Rights Agreement, dated July 30, 2004, by and among the
Company and the Purchasers named therein. (9)
10.35 Agreement for services of R. Douglas Hulse, (12)
10.36 Amended and Restated Employment Agreement of Dr. William A. Carter. (10)
10.37 Engagement Agreement with Dr. William A. Carter. (10)
10.38 Amended and restated employment agreement of Dr. William A. Carter (12)
10.39 Amended and restated engagement agreement with Dr. William A. Carter (12)
10.40 Amended and restated engagement agreement with Robert E. Peterson (12)
10.41 Engagement Agreement with Ransom W. Etheridge (12)
10.42 Change in control agreement with Dr. William A. Carter (12)
10.43 Change in control agreement with Dr. William A. Carter (12)
10.44 Change in control agreement with Robert E. Peterson (12)
10.45 Change in control agreement with Ransom Etheridge (12)
10.46 Supply Agreement with Hollister-Stier Laboratories LLC
10.47 Manufacturing and Safety Agreement with Hyaluron, Inc.
10.48Common Stock Purchase Agreement, dated July 8, 2005, by and among the
Company and Fusion Capital Fund II, LLC.(13)
10.49Registration Rights Agreement, dated July 8, 2005, by and among the
Company and Fusion Capital Fund II, LLC.(13)
10.48Common Stock Purchase Agreement, dated April 12, 2006, by and among the
Company and Fusion Capital Fund II, LLC.(14)
10.49Registration Rights Agreement, dated April 12, 2006, by and among the
Company and Fusion Capital Fund II, LLC.(14)
10.50 Supply Agreement with Hollister-Stier Laboratories LLC.(15)
10.51 Manufacturing and Safety Agreement with Hyaluron, Inc. (15)
82
10.52April 19, 2006 Amendment to Common Stock Purchase Agreement by and among
the Company and Fusion Capital Fund II, LLC.(15)
10.53July 21, 2006 Letter Amendment to Common Stock Purchase Agreement by and
among the Company and Fusion Capital Fund II, LLC.(15)
10.54 Royalty Purchase Agreement with Stem Cell Innovations, Inc. (15)
10.55 Biken Activating Agreement. (16)
10.56 Biken Material Evaluation Agreement. (16)
10.57Common Stock Purchase Agreement, dated July 2, 2008, by and among the
Company and Fusion Capital.(19)
10.58Registration Rights Agreement, dated July 2, 2008, by and among the
Company and Fusion Capital.(19)
10.59Amendment to Common Stock Purchase Agreement, dated July 23, 2008, by and
among the Company and Fusion Capital.(20)
10.60 Employee Wage Or Hours Reduction Program.*
10.61 Standby Financing Agreement.*
10.62 Engagement Agreement with Charles T. Bernhardt, CPA.*
10.63 Goal Achievement Incentive Award Program. (21)
21 Subsidiaries of the Registrant.
23.1 McGladrey & Pullen, LLP consent.*
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.*
------------------------------------------------------------
* Filed herewith
(1) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated March 12, 2003 and
is hereby incorporated by reference.
(2) Filed with the Securities and Exchange Commission on November 20, 2002 as
an exhibit to the Company's Registration Statement on Form 8-A (No.
0-27072) and is hereby incorporated by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated June 27, 2003 and
is hereby incorporated by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated July 14, 2003 and
is hereby incorporated by reference.
(5) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated October 30, 2003
and is hereby incorporated by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated January 27, 2004
and is hereby incorporated by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit to the
Company's quarterly report on Form 10-Q (No. 1-13441) for the period ended
September 30, 2001 and is hereby incorporated by reference.
83
(8) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form S-1 Registration Statement (No. 333-113796) and is hereby
incorporated by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated August 6, 2004 and
is hereby incorporated by reference.
(10) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated September 15, 2004
and is hereby incorporated by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K/A-1 (No. 1-13441) filed on October 28,
2005 and is hereby incorporated by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit to the
Company's annual report on Form 10-K (No. 1-13441) for the year ended
December 31, 2004 and is hereby incorporated by reference.
(13) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated September 15, 2005
and is hereby incorporated by reference.
(14) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated April 12, 2006 and
is hereby incorporated by reference.
(15) Filed with the Securities and Exchange Commission on July 31, 2006 as an
exhibit to the Company's Form S-1 Registration Statement (No. 333-136187)
and is hereby incorporated by reference.
(16) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated December 13, 2007
and is hereby incorporated by reference.
(17) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) filed October 22, 2008
and is hereby incorporated by reference.
(18) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form S-3 Registration Statement (No. 333-151696) and is hereby
incorporated by reference.
(19) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) filed July 8, 2008 and
is hereby incorporated by reference.
(20) Filed with the Securities and Exchange Commission as an exhibit to the
Company's quarterly report on Form 10-Q (No. 1-13441) for the period ended
June 30, 2008 and is hereby incorporated by reference.
(21) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) filed November 28, 2008
and is hereby incorporated by reference.
84
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEMISPHERx BIOPHARMA, INC.
By: /s/ William A. Carter
---------------------------------------------
William A. Carter, M.D.
Chief Executive Officer
March 13, 2009
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
of 1934, as amended, this report has been signed below by the following persons
on behalf of this Registrant and in the capacities and on the dates indicated.
/s/ William A. Carter Chairman of the Board, March 13, 2009
---------------------- Chief Executive
William A. Carter, M.D. Officer and Director
/s/ Richard Piani Director March 13, 2009
---------------------
Richard Piani
/s/ Charles T. Bernhardt Chief Financial Officer (Interim) March 13, 2009
------------------------
Charles T. Bernhardt CPA
/s/ Thomas Equels Director March 13, 2009
-------------------
Thomas Equels
/s/ William Mitchell Director March 13, 2009
---------------------
William Mitchell, M.D., Ph.D.
/s/ Iraj E. Kiani Director March 13, 2009
-----------------
Iraj E. Kiani, Ph.D.
F1
F-1
HEMISPHERx BIOPHARMA, INC AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Report of Independent Registered
Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December
31, 2007 and 2008. . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations
for each of the years in the three-year period
ended December 31, 2008. . . .. . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders'
Equity and Comprehensive
Loss for each of the years in the three-year period ended
December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for
each of the years in the three-year period ended
December 31, 2008. . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . F-8
Schedule II - Valuation and qualifying Accounts
for each of the years in the three year period
ended December 31, 2008. . . . . . . . . . . . . . . . . . . . F-41
F2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Hemispherx Biopharma, Inc.
We have audited the consolidated balance sheets of Hemispherx Biopharma, Inc.
and Subsidiaries as of December 31, 2007 and 2008 and the related consolidated
statements of operations, stockholders' equity and comprehensive loss and cash
flows for each of the three years in the period ended December 31, 2008. Our
audits also included the financial statement schedule of Hemispherx Biopharma,
Inc. listed in Item 15(a). These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether 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, 2007 and 2008, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule for each of the three years in the period
ended December 31, 2008, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Hemispherx Biopharma, Inc. and
Subsidiaries' internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control--Integrated Framework [issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)]
and our report dated March 13, 2009, expressed an unqualified opinion on the
effectiveness of Hemispherx Biopharma, Inc.'s internal control over financial
reporting.
/s/ McGladrey & Pullen, LLP
Blue Bell, Pennsylvania
March 13, 2009
F3
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2007 and 2008
(in thousands, except for share and per share amounts)
2007 2008
---- ----
ASSETS
Current assets:
Cash and cash equivalents (Notes 2 & 17) $11,471 $6,119
Short term investments (Notes 2 & 4) 3,944 -
Inventories (Note 3) 511 864
Accounts and other receivables (Note 2) 77 -
Prepaid expenses and other current assets 146 330
Assets held for sale (Note 2) 450 -
---------------- --------------
Total current assets 16,599 7,313
---------------- --------------
Property and equipment, net (Note 2) 4,821 4,877
Patent and trademark rights, net (Notes 2 & 5) 958 969
Investment 35 35
Royalty interest, net (Note 5) 243 -
Construction in progress (Note 2) 469 -
Other assets 17 17
---------------- --------------
Total assets $ 23,142 $13,211
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,118 $791
Accrued expenses (Notes 2 & 6) 1,069 876
---------------- --------------
Total current liabilities 2,187 1,667
---------------- --------------
Commitments and contingencies
(Notes 10, 12, 13, 15)
Stockholders' equity (Note 8):
Preferred stock, par value $0.01 per share, authorized 5,000,000; issued
and outstanding; none - -
Common stock, par value $0.001 per share, authorized 200,000,000 shares;
issued and outstanding 73,760,446 and 78,750,995, respectively
74 79
Additional paid-in capital 206,078 208,874
Accumulated other comprehensive loss (7) -
Accumulated deficit (185,190) (197,409)
---------------- --------------
Total stockholders' equity 20,955 11,544
---------------- --------------
Total liabilities and stockholders' equity $23,142 $13,211
======= =======
See accompanying notes to consolidated financial statements.
F4
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except share and per share data)
Years ended December 31,
-----------------------------
2006 2007 2008
---- ---- ----
Revenues:
Sales of product, net $ 750 $ 925 $173
Clinical treatment programs 183 134 92
--- --- ---
Total Revenues 933 1,059 265
--- ----- ---
Costs and Expenses:
Production/cost of goods sold 1,275 930 798
Research and development 10,127 10,444 5,800
General and administrative 8,225 8,974 6,478
----- ----- -----
Total Costs and Expenses: 19,627 20,348 13,076
------ ------ ------
Operating loss (18,694) (19,289) (12,811)
Reversal of previously accrued interest expense - 346 -
Interest and other income 554 1,200 592
Interest expense (646) (116) -
Financing costs (Note 7) (613) (280) -
----- ----- -------
Net loss $ (19,399) $(18,139) $ (12,219)
========== ========= ==========
Basic and diluted loss per share $ (.31) $ (.25) $(.16)
======= ======= ======
Weighted average shares outstanding Basic and Diluted
61,815,358 71,839,782 75,142,075
========== =========== ==========
See accompanying notes to consolidated financial statements.
F5
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Loss
(in thousands except share data)
Common Accumulated
Stock .001 Additional other Total
Common Stock Par Value paid-in Comprehensive Accumulated stockholders
Shares capital Income (loss) deficit equity
------ -------- ------- ------------- ------- ------
Balance December 31, 2005 56,264,155 $ 56 $166,394 $ (171) $ (147,652) $18,627
Shares issued for:
Payment of accounts payable 111,085 - 272 - - 272
Conversion of debt 400,642 1 832 - - 833
Warrants exercised 255,416 1 671 - - 672
Interest on convertible debt 80,724 - 177 - - 177
Private placement, net of issuance costs 9,393,014 9 20,090 - - 20,099
Purchase patents 61,728 - 150 - - 150
Purchase royalty interest 250,000 - 620 - - 620
Stock-based compensation - - 2,483 - - 2,483
Net comprehensive loss - - - 217 (19,399) (19,182)
--------- ---------- ----------- ------------- ---- -------- - --------
Balance December 31, 2006 66,816,764 67 191,689 46 (167,051) 24,751
Shares issued for:
Interest on convertible debt 116,745 - 193 - - 193
Private placement, net of issuance costs 6,651,502 7 11,613 - - 11,620
Stock issued for set tlement of
accounts payable 175,435 - 292 - - 292
Stock based compensation - - 2,291 - - 2,291
Net comprehensive loss - - - (53) (18,139) (18,192)
---------- ---------- ----------- ------------- ---- -------- -- --------
Balance December 31, 2007 73,760,446 74 206,078 (7) (185,190) 20,955
Shares issued for:
Private placement, net of issuance costs 1,211,122 1 269 - - 270
Settlement of accounts payable 3,779,427 4 1,954 - - 1,958
Stock based compensation - - 573 - - 573
Net comprehensive loss - - - 7 (12,219) (12,212)
---------- ---------- ----------- ------------- ----------- --------
Balance December 31, 2008 78,750,995 $ 79 $ 208,874 $ - $ (197,409) $11,544
========== ========== =========== ============= =========== =======
See accompanying notes to consolidated financial
statements
F6
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31,
------------------------
2006 2007 2008
---- ---- ----
Cash flows from operating activities:
Net loss $(19,399) $(18,139) $(12,219)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and
equipment 192 266 342
Amortization of patent, trademark rights, and royalty
interest 180 170 374
Amortization of deferred
financing costs 608 281 -
Stock option and warrant
compensation and service
expense 2,483 2,291 573
Impairment losses - 526 -
Inventory reserve 141 109 (65)
Interest on convertible debt 177 181 -
Changes in assets and liabilities:
Inventory 669 337 (288)
Accounts and other receivables 3 (148) 77
Assets held for sale - (678) 450
Prepaid expenses and other
current assets (26) 22 (184)
Accounts payable 829 (138) 1,702
Accrued expenses 396 (192) (120)
----------------- ---------------- -----------------
Net cash used in operating
activities (13,747) (15,112) (9,358)
----------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and
Equipment and construction in progress, net
(1,351) (212) (73)
Additions to patent and trademark
rights (73) (211) (142)
Maturities of short term
investments 12,548 21,132 3,951
Purchase of short term
investments (18,329) (6,754) -
----------------- ---------------- -----------------
Net cash (used in) provided by
investing activities $(7,205) $13,955 $3,736
======== ======= ======
F7
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Years ended December 31,
------------------------
2006 2007 2008
---- ---- ----
Cash flows from financing activities:
Proceeds from issuance of common
stock, net $20,099 $11,620 $ 270
Payment of long-term debt - (4,102) -
Collection of advance receivable - 1,464 -
Proceeds from exercise of stock
warrants 672 - -
------------------ ------------------ ---------------
Net cash provided by financing
activities 20,771 8,892 270
------------------ ------------------ ---------------
Net (decrease) increase in cash
and cash equivalents (181) 7,825 (5,352)
Cash and cash equivalents at beginning of year
3,827 3,646 11,471
------------------ ------------------ ---------------
Cash and cash equivalents at end of year $ 3,646 $11,471 $6,119
======= ======= ======
Supplemental disclosures of cash flow information:
Issuance of common stock for
accounts payable and accrued
expenses $ 272 $ 292 1,958
===== ===== ========
Issuance of common stock for
debt conversion, interest payments and debt payments
$ 1,010 $ 181 -
======= ===== ========
Common stock issued for
purchase of patents and royalty interest
$ 770 $ - -
===== ===== =======
Unrealized gains/(losses) on investments
$ 217 $ (53) $ 7
======= ====== ====
See accompanying notes to consolidated financial statements.
F8
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
The Company is a biopharmaceutical company engaged in the clinical
development, manufacture, marketing and distribution of new drug therapies based
on natural immune system enhancing technologies for the treatment of viral and
immune based chronic disorders. The Company was founded in the early 1970s doing
contract research for the National Institutes of Health. Since that time, the
Company has established a strong foundation of laboratory, pre-clinical, and
clinical data with respect to the development of nucleic acids to enhance the
natural antiviral defense system of the human body and to aid the development of
therapeutic products for the treatment of certain chronic diseases.
The consolidated financial statements include the financial statements of
Hemispherx Biopharma, Inc. and its wholly-owned subsidiaries. The Company has
three domestic subsidiaries BioPro Corp., BioAegean Corp. and Core BioTech
Corp., all of which are incorporated in Delaware and are dormant. The Company's
foreign subsidiary of Hemispherx Biopharma Europe N.V./S.A. was established in
Belgium in 1998, which has limited or no activity. All significant intercompany
balances and transactions have been eliminated in consolidation.
On October 10, 2007, the Company filed a New Drug Application ("NDA") with
the US Food and Drug Administration ("FDA") for using Ampligen to treat Chronic
Fatigue Syndrome. The Company received notice on December 5, 2007 from the FDA
that its submission was determined to be insufficiently complete to permit
substantive review. On January 8, 2008, the Company formally submitted to the
FDA its response to all 14 questions posed by the FDA. The Company met with the
FDA on February 8, 2008 to discuss the outstanding issues.
On July 7, 2008, the U.S. Food and Drug Administration (FDA) accepted for
review the Company's New Drug Application (NDA) for Ampligen(R), an experimental
therapeutic to treat Chronic Fatigue Syndrome (CFS), originally submitted in
October 2007. The Company is seeking marketing approval for the first-ever
treatment for CFS.
On February 18, 2009, the Company was notified by the FDA that the
originally scheduled Prescription Drug User Fee Act ("PDUFA") date of February
25, 2009 has been extended to May 25, 2009. For more information on the NDA,
please see "Note 19: Subsequent Events" under Notes to Consolidated Financial
Statements.
(2) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash and Cash Equivalents consist of cash and money market with fair value
of $11,471,000 and $6,119,000 at December 31, 2007 and 2008, respectively.
F9
(b) Short-term Investments
Investments with original maturities of more than three months and less
than 12 months and marketable equity securities are considered available for
sale. The investments classified as available for sale include debt securities
and equity securities carried at estimated fair value of $3,944,000 at December
31, 2007. The unrealized gains and losses are recorded as a component of
stockholders' equity. At December 31, 2008 the Company has no short term
investments.
(c) Assets held for sale
Assets held for sale consisted of equipment purchases related to the
purified water system that was to be installed at the Company's manufacturing
facility in New Brunswick, NJ. The Company reevaluated their manufacturing needs
to determine the cost/benefit for installing the purified water system as
compared to selling this asset. As a result of this process, in 2007 the Company
reclassed the Equipment of $678,000 to Assets Held for Sale and then recorded an
impairment charge of $228,000 to bring the cost down to its net realizable value
of $450,000 as per SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". In December 2008, the asset was sold for $450,000 without
the need to recognize gain or loss on sale.
(d) Property and Equipment (in thousands)
December 31,
------------
2007 2008
------ ------
Land, buildings and improvements $4,094 $4,094
Furniture, fixtures, and equipment 2,097 2,495
Leasehold improvements 85 85
------- -------
Total property and equipment 6,276 6,674
Less accumulated depreciation and amortization 1,455 1,797
------ ------
Property and equipment, net $4,821 $4,877
====== ======
Property and equipment is recorded at cost. Depreciation and amortization
is computed using the straight-line method over the estimated useful lives of
the respective assets, ranging from five to thirty-nine years.
Construction in progress consists of funds used for the construction and
installation of property and equipment within the Company's New Jersey facility.
As of December 31, 2007, construction in progress was $469,000. $130,000 of
equipment was returned to the manufacturer and the balance of $339,000 was
reclassified to equipment along with $59,000 of new equipment purchased in
November 2008
(e) Patent and Trademark Rights
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the established useful life of 17
years. The Company reviews its patents and trademark rights periodically to
determine whether they have continuing value. Such review includes an analysis
of the patent and trademark's ultimate revenue and profitability potential.
Management's review addresses whether each patent continues to fit into the
Company's strategic business plans.
F10
(f) Revenue
Revenue from the sale of Ampligen(R) under cost recovery clinical treatment
protocols approved by the FDA is recognized when the treatment is provided to
the patient.
Revenues from the sale of Alferon N Injection(R) are recognized when the
product is shipped, as title is transferred to the customer. The Company has no
other obligation associated with its products once shipment has occurred.
Commercial sales of Alferon N Injection(R) were halted in April 2008 as the
current expiration date of their finished goods inventory expired in March 2008.
The FDA has declined to respond to the Company's requests for an extension of
the expiration date, therefore they consider the request to be denied. Since
their testing of the product indicates that it is not impaired and could be
safely utilized, the finished goods inventory of 2,745 Alferon N Injection(R)
5ml vials will be used to produce approximately 11,000,000 sachets of Low Dose
Oral Alferon (LDO) for future clinical trials.
(g) Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the period. Equivalent
common shares, consisting of stock options and warrants including the Company's
convertible debentures, amounted to 26,016,660, 16,686,281 and 29,335,536
shares, are excluded from the calculation of diluted net loss per share for the
years ended December 31, 2006, 2007 and 2008, respectively, since their effect
is antidilutive.
(h) Accounting for Income taxes
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes on January 1, 2008. As a result of
the implementation of Interpretation 48, there has been no material change to
the Company's tax position as they have not paid any corporate income taxes due
to operating losses. All tax benefits will likely not be recognized due to the
substantial net operating loss carryforwards which will most likely not be
realized prior to expiration. With no tax due for the foreseeable future, the
Company has determined that a policy to determine the accounting for interest or
penalties related to the payment of tax is not necessary at this time.
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws in effect
when the differences are expected to reverse. The measurement of deferred income
tax assets is reduced, if necessary, by a valuation allowance for any tax
benefits, which are not expected to be realized. The effect on deferred income
tax assets and liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
(i) Comprehensive loss
Comprehensive loss consists of net loss and net unrealized gains (losses)
on securities and is presented in the consolidated statements of changes in
stockholders' equity and comprehensive loss.
F11
(j) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses for the reporting period. Actual results could differ from those
estimates.
(k) Recent Accounting Standards and Pronouncements:
The Emerging Issues Task Force (EITF) issued in 2007 the following
guidance:
o Issue No. 07-1, "Accounting for Collaborative Arrangements" was
established to define collaborative arrangements and to establish
reporting requirements for transactions between participants in a
collaborative arrangement and between participants in the arrangement
and third parties. The Company has no collaborative arrangements and
this issue has no impact on the financial statements.
o Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for
Goods or Services Received for Use in Future Research and Development
Activities" provides guidance that nonrefundable advance payments for
goods or services, that will be used or rendered for future research
and development activities, should be deferred and capitalized. Such
amounts should be recognized as an expense as the related goods are
delivered or the related services are performed. Entities should
continue to evaluate whether they expect the goods to be delivered or
services to be rendered. If an entity does not expect the goods to be
delivered or services to be rendered, the capitalized advance payment
should be charged to expense. The Company is in compliance with this
issue in reference to the Lovelace Laboratories advance payment for
research and development.
o Issue No. 07-5, "Determining Whether an Instrument (or an Embedded
Feature) is Indexed to an Entity's Own Stock" provides guidance for
determining whether an equity-linked financial instrument (or embedded
feature) is indexed to an entity's own stock. This is required to be
applied in the 1st Quarter of 2009 and the Company is in the process of
determining the effect, but the Company does not expect it to have a
material effect on the financial statements.
On February 15, 2007, the FASB issued FASB Statement No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities - Including an
Amendment of FASB Statement No. 115. This standard permits an entity to choose
to measure many financial instruments and certain other items at fair value.
This option is available to all entities, including not-for-profit
organizations. Most of the provisions in Statement 159 are elective; however,
the amendment to FASB Statement No. 115, Accounting for Certain Investments in
Debt and Equity Securities, applies to all entities with available-for-sale and
trading securities. Some requirements apply differently to entities that do not
report net income. The FASB's stated objective in issuing this standard is as
follows: "to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions".
F12
The fair value option established by Statement 159 permits all entities to
choose to measure eligible items at fair value at specified election dates. A
business entity will report unrealized gains and losses on items for which the
fair value option has been elected in earnings (or another performance indicator
if the business entity does not report earnings) at each subsequent reporting
date. A not-for-profit organization will report unrealized gains and losses in
its statement of activities or similar statement. The fair value option: (a) may
be applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; (b) is irrevocable (unless a new
election date occurs); and (c) is applied only to entire instruments and not to
portions of instruments.
Statement 159 was effective as of the beginning of an entity's first fiscal
year that begins after November 15, 2007. The Company elected not to adopt the
fair value option for any eligible instruments.
On December 4, 2007, the FASB issued FASB Statement No. 160,
"Noncontrolling Interests in Consolidated Financial Statements - An Amendment of
ARB No. 51." Statement 160 that established new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Specifically, this statement required the
recognition of a noncontrolling interest (minority interest) as equity in the
consolidated financial statements and separate from the parent's equity. The
amount of net income attributable to the noncontrolling interest would be
included in consolidated net income on the face of the income statement.
Statement 160 clarified that changes in a parent's ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
required that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss would be measured using the fair value of
the noncontrolling equity investment on the deconsolidation date. Statement 160
also included expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interest.
Statement 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The Company believes adoption of this standard in 2009 will not have
an impact on the financial condition or the results of the Company's operations.
On April 21, 2008, the FASB posted a revised FASB Statement No. 133
Implementation guidance for Issues I1, Interaction of the Disclosure
Requirements of Statement 133 and Statement 47, and K4, Miscellaneous: Income
Statement Classification of Hedge Ineffectiveness and the Component of a
Derivative's Gain or Loss Excluded from the Assessment of Hedge Effectiveness.
The revisions relate to the issuance of FASB Statement No. 161, Disclosures
about Derivative Instruments and Hedging Activities. The Company believes
adoption of this standard has no impact on the financial condition or the
results of the Company's operations.
The FASB has issued FASB Statement No. 162, The Hierarchy of Generally
Accepted Accounting Principles. Statement 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. generally accepted accounting principles for
nongovernmental entities. The hierarchy under Statement 162 is as follows:
F13
* FASB Statements of Financial Accounting Standards and Interpretations,
FASB Statement 133 Implementation Issues, FASB Staff Positions, AICPA Accounting
Research Bulletins and Accounting Principles Board Opinions that are not
superseded by actions of the FASB, and Rules and interpretive releases of the
SEC for SEC registrants.
* FASB Technical Bulletins and, if cleared by the FASB, AICPA Industry
Audit and Accounting Guides and Statements of Position.
* AICPA Accounting Standards Executive Committee Practice Bulletins that
have been cleared by the FASB, consensus positions of the EITF, and Appendix D
EITF topics.
Statement 162 is effective 60 days following the SEC's approval of the
PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles. Since Statement 162 is only
effective for nongovernmental entities, the GAAP hierarchy will remain in AICPA
Statement on Auditing Standards (SAS) No. 69, The Meaning of "Present Fairly in
Conformity with Generally Accepted Accounting Principles" in the Independent
Auditor's Report, for state and local governmental entities and federal
governmental entities. The Company believes the adoption of this standard will
not have an impact on the financial condition or the results of the Company's
operations.
The FASB issued FASB Statement No. 163, Accounting for Financial Guarantee
Insurance Contracts. This new standard clarifies how FASB Statement No. 60,
Accounting and Reporting by Insurance Enterprises, applies to financial
guarantee insurance contracts issued by insurance enterprises, including the
recognition and measurement of premium revenue and claim liabilities. It also
requires expanded disclosures about financial guarantee insurance contracts.
Statement 163 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and all interim periods within those fiscal
years, except for disclosures about the insurance enterprise's risk-management
activities, which are effective the first period (including interim periods)
beginning after May 23, 2008. Except for the required disclosures, earlier
application is not permitted. The Company believes the adoption of this standard
in 2009 will not have an impact on the financial condition or the results of the
Company's operations.
(l) Equity Based Compensation
The Equity Plan effective May 1, 2004, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 8,000,000 shares of common stock is
reserved for potential issuance pursuant to awards under the Equity Plan of
2004. Unless sooner terminated, the Equity Plan of 2004 will continue in effect
for a period of 10 years from its effective date.
The Equity Incentive Plan of 2007, effective June 20, 2007, authorizes the
grant of non-qualified and incentive stock options, stock appreciation rights,
restricted stock and other stock awards. A maximum of 8,000,000 shares of common
stock is reserved for potential issuance pursuant to awards under the Equity
Incentive Plan of 2007. Unless sooner terminated, the Equity Incentive Plan of
2007 will continue in effect for a period of 10 years from its effective date.
F14
The Equity Plan of 2004 and the Equity Incentive Plan of 2007 are
administered by the Board of Directors. The Plans provide for awards to be made
to such officers, other key employees, non-employee directors, consultants and
advisors of the Company and its subsidiaries as the Board may select.
Stock options awarded under the Plans may be exercisable at such times (not
later than 10 years after the date of grant) and at such exercise prices (not
less than fair market value at the date of grant) as the Board may determine.
The Board may provide for options to become immediately exercisable upon a
"change in control," which is defined in the Plans to occur upon any of the
following events: (a) the acquisition by any person or group, as beneficial
owner, of 20% or more of the outstanding shares or the voting power of the
outstanding securities of the Company; (b) either a majority of the directors of
the Company at the annual stockholders meeting has been nominated other than by
or at the direction of the incumbent directors of the Board, or the incumbent
directors cease to constitute a majority of the Company's Board; (c) the
Company's stockholders approve a merger or other business combination pursuant
to which the outstanding common stock of the Company no longer represents more
than 50% of the combined entity after the transaction; (d) the Company's
stockholders approve a plan of complete liquidation or an agreement for the sale
or disposition of all or substantially all of the Company's assets; or (e) any
other event or circumstance determined by the Company's Board to affect control
of the Company and designated by resolution of the Board as a change of control.
Effective January 1, 2006, the Company adopted FAS 123R. Under FAS 123R,
share-based compensation cost is measured at the grant date, based on the
estimated fair value of the award, and is recognized as expense over the
requisite service period. The Company adopted the provisions of FAS 123R using a
modified prospective application. Under this method, compensation cost is
recognized for all share-based payments granted, modified or settled after the
date of adoption, as well as for any unvested awards that were granted prior to
the date of adoption. Prior periods are not revised for comparative purposes.
Because the Company previously adopted only the pro forma disclosure provisions
of FAS 123, it will recognize compensation cost relating to the unvested portion
of awards granted prior to the date of adoption, using the same estimate of the
grant-date fair value and the same attribution method used to determine the pro
forma disclosures under FAS 123, except that forfeiture rates will be estimated
for all options, as required by FAS 123R. The cumulative effect of applying the
forfeiture rates is not material.
The fair value of each option award is estimated on the date of grant using
a Black-Scholes option valuation model. Expected volatility is based on the
historical volatility of the price of the Company's stock. The risk-free
interest rate is based on U.S. Treasury issues with a term equal to the expected
life of the option. The Company uses historical data to estimate expected
dividend yield, expected life and forfeiture rates. The fair values of the
options granted, were estimated based on the following weighted average
assumptions:
December 31,
2006 2007 2008
---- ---- ----
Risk-free interest rate 4.3 - 5.0% 3.39 - 4.77% 2.52 - 3.74%
Expected dividend yield - - -
Expected lives 2.5 - 5 yrs 5 yrs 2.5-5 yrs
Expected volatility 72.62 - 79.31% 70.01 - 77.52% 73.84 - 79.2%
F15
Weighted average fair
value of options and
warrants issued in the
years 2006, 2007 and
2008 respectively $2,503,000 $2,216,091 $473,954
For stock warrants or options granted to non-employees, the Company
measures fair value of the equity instruments utilizing the Black-Scholes method
if that value is more reliably measurable than the fair value of the
consideration or service received. The Company amortizes such cost over the
related period of service.
The exercise price of all stock warrants granted was equal to or greater
than the fair market value of the underlying common stock as defined by APB 25
on the date of the grant.
Stock option activity during the years ended December 31, 2007 and 2008 is
as follows:
Stock option activity for employees:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contracted Intrinsic
Options Price Term (Years) Value
--------- ------- --------- --------
Outstanding January 1, 2006 1,133,948 $2.19 7.07 -
Options granted 870,742 2.94 9.22 -
Options forfeited (2,721) (1.47) - -
---------- ------- ------- --------
Outstanding December 31, 2006 2,001,969 2.51 8.01 -
Options granted 2,624,120 2.77 9.05 -
Options forfeited - - - -
---------- -------- ------- --------
Outstanding December 31, 2007 4,626,089 $2.66 8.25 -
Options Granted 1,655,000 2.42 9.69 -
Options Forfeited (22,481) 2.13 - -
---------- -------- -------- --------
Outstanding December 31, 2008 6,258,608 $2.60 7.92 -
========= ======== ======== ========
Exercisable December 31, 2008 6,181,664 $2.61 7.95 -
========= ======== ======== ========
The weighted-average grant-date fair value of employee options granted during
the year 2008 was $0.19.
F16
Unvested stock option activity for employees:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contracted Intrinsic
Options Price Term (Years) Value
--------- ------- --------- --------
Outstanding January 1, 2006 54,314 $2.28 7.50 -
Options granted 62,393 2.20 10.00 -
Options forfeited (2,721) (1.47) - -
--------- ------- --------- --------
Outstanding December 31, 2006 113,986 2.26 9.05 -
Options granted 130,000 1.34 10.00 -
Options vested (77,223) (6.86) 8.29 -
-------- -------- --------- --------
Outstanding December 31, 2007 166,673 $1.59 7.18 -
Options Granted -0- -0- -0- -
Options Vested (73,420) 1.68 8.58 -
Options Forfeited (16,399) 2.00 6.18
-------- -------- --------- --------
Outstanding December 31, 2008 76,944 $1.41 3.89 -
====== ======== ========= ========
Stock option activity for non-employees during the year:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contracted Intrinsic
Options Price Term (Years) Value
--------- ------- --------- --------
Outstanding January 1, 2006 851,732 $2.09 7.67 -
Options granted 475,000 3.60 9.09 -
Options forfeited -0- -0- -0- -
----------- ------- --------- ---------
Outstanding December 31, 2006 1,326,732 $2.63 8.18 -
Options granted 608,750 1.99 9.94 -
Options forfeited -0- -0- -0- -
----------- ------- --------- ---------
Outstanding December 31, 2007 1,935,482 2.43 8.05 -
Options Granted 482,000 2.02 6.72 -
Options Forfeited -0- -0- -0- -
----------- ------- --------- ---------
Outstanding December 31, 2008 2,417,482 $2.35 6.98 -
=========== ======= ========= =========
Exercisable December 31, 2008 2,390,815 $2.36 7.13 -
=========== ======= ========= =========
The weighted-average grant-date fair value of non-employee options granted
during the year 2008 was $0.31.
F17
Unvested stock option activity for non-employees:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contracted Intrinsic
Options Price Term (Years) Value
--------- ------- --------- --------
Outstanding January 1, 2006 7,100 $2.61 9.00 -
Options granted 30,000 2.20 10.00 -
Options forfeited -0- -0- -0- -
--------- ------- --------- ---------
Outstanding December 31, 2006 37,100 $2.28 9.81 -
Options granted 25,000 1.30 10.00 -
Options vested (22,100) (2.30) 8.23 -
--------- ------- --------- ---------
Outstanding December 31, 2007 40,000 $1.50 9.30 -
Options granted -0- -0- -0- -
Options vested (13,333) (1.64) 6.91 -
--------- ------- --------- ---------
Outstanding December 31, 2008 26,667 $1.43 9.00 -
========= ======= ========= ========
The impact on the Company's results of operations of recording
stock-based compensation for the year ended December 31, 2008 was to increase
general and administrative expenses by approximately $573,000 and reduce
earnings per share by $.01 per basic and diluted share.
As of December 31, 2008, there was $46,000 of unrecognized
stock-based compensation cost related to options granted under the Equity
Incentive Plan.
(m) Accounts Receivable
Concentration of credit risk, with respect to accounts receivable, is
limited due to the Company's credit evaluation process. The Company does not
require collateral on its receivables. The Company's receivables primarily
consist of amounts due from wholesale drug companies as of December 31, 2007 and
2008. The Company has agreements requiring its wholesaler drug companies to
assess credit worthiness of the customers. The Company assesses collectability
monthly by review of the accounts receivable aging report.
F18
(3) Inventories
The Company uses the lower of first-in, first-out ("FIFO") cost or
market method of accounting for inventory.
Inventories consist of the following: (in thousands)
December 31,
2007 2008
------ ------
Raw materials and work in process $ 505 $ 864
Finished goods, net of reserves of $350,000 and $286,000
at December 31, 2007 and 2008 6 -
------ ------
$511 $864
====== ======
Production of Alferon N injection(R) from our work-in-progress
inventory, which has an approximate expiration date of 2012, has been put on
hold at this time due to the resources needed to prepare our New Brunswick
facility for the FDA preapproval inspection with respect to our Ampligen(R) NDA.
Work on the Alferon N Injection(R) is expected to resume in mid-2009 under the
condition that adequate funding is obtained, which means that we may not have
any Alferon N Injection(R) product commercially available until 2010.
(4) Short-term investments:
December 31, 2007
-----------------
Unrealized Maturity
Name of security Cost Market value loss date
---------------- ---- ------------ ------ ----
Marshall & Isley $1,979,000 $1,976,000 $(3,000) March 2008
Intesa Funding 1,972,000 1,968,000 (4,000) April 2008
---------- ---------- -------
$3,951,000 $3,944,000 $(7,000)
=========== =========== ========
No investment securities were pledged to secure public funds at December 31,
2007. The table below indicates the length of time individual securities have
been in a continuous unrealized loss position at December 31, 2007.
Less than 12 months 12 months or longer Total
------------------- ------------------- -----
Name of Number of Fair value Unrealized Fair value Unrealized Fair value Unrealized
---------- ---------- ----------- ---------- ----------- ---------- ----------
security Securities loss loss loss
-------- ---------- ---- ---- ----
Marshall &
Isley 1 $1,976,000 $(3,000) $- $- $1,976,000 $(3,000)
Intesa Funding 1 1,968,000 (4,000) - - 1,968,000 (4,000)
---------- ------- ---------- ---------- ---------- -------
Total
temporary
impairment
securities 2 $3,944,000 $(7,000) $- $- $3,944,000 $(7,000)
=========== ======== ========== ========== =========== ========
F19
In management's opinion, the unrealized losses reflected changes in
interest rates subsequent to the acquisition of specific securities. There were
two securities in the less than 12 months category and none in the more than a
twelve month category. The Company held these securities until maturity;
therefore, the unrealized losses represented temporary impairment of the
securities. In 2008, the Company did not hold any short-term investments.
(5) Patents, Trademark Rights and Other Intangibles
Intangibles are stated at cost and amortized over the established
useful life of 17 years for patents or over the period which the asset is
expected to directly or indirectly contribute to the Company's cash flow.
On July 3, 2006, and July 20, 2006, the Company entered into an
agreement with Paul Griffin and The Asclepius Trust ("Asclepius") whereby the
Company acquired the right, title and interest in certain awarded patents and
pending patent applications ("patents"). Consideration given by the Company for
the acquisition of these patents amounted to $150,000 paid with shares of the
Company's common stock to Paul Griffin valued at the closing price on the date
of the agreement or July 3, 2006. The value of the Company's common stock was
$2.43 on this date and equated to consideration of 61,728 shares of the
Company's common stock. The Company registered these shares on behalf of Mr.
Griffin for public resale. Asclepius received in consideration a 2% royalty of
the gross sums received from all sales utilizing or relying upon the patents.
The Company recorded the acquisition of these patents as an intangible asset to
be amortized over the remaining life of the patent under guidance set forth in
SFAS No. 2 Accounting for Research and Development Costs ("FAS 2") which refers
to SFAS No. 142 - Goodwill and Other Intangible Assets ("FAS 142"). The net book
value of these patents, net of accumulated amortization, as of December 31, 2007
and 2008, was $136,000 and $128,000, respectively.
On July 26, 2006, the Company executed an agreement with Stem Cell
Innovations, Inc. (formerly Interferon Sciences, Inc.) whereby it acquired the
royalty interest previously granted Interferon Sciences with respect to the
Company's sale of products containing alpha interferon in exchange for 250,000
shares of common stock. The Company registered these shares on behalf of Stem
Cell Innovations for public resale. The Company recorded this transaction on its
balance sheet as an intangible asset under guidance provided by FAS 142. The
total consideration paid to Stem Cell under the agreement amounted to $620,000
and was derived by multiplying the number of shares issued by the fair market
value of the Company's common stock on the date of the agreement or $2.48 per
share. The intangible asset is amortized over the period which the asset is
expected to contribute directly or indirectly to the Company's cash flow. In
2007, the Company recorded an impairment charge of $298,000 as the Company
determined that sufficient inventory is not on hand to realize the full economic
benefit; therefore, the asset was written down to its estimated net realizable
value. The balance of this intangible asset, as of December 31, 2007 and 2008,
was $243,000 and $0, respectively. The balance was written-off in 2008 as we had
no more Alferon(R) to sell.
During the years ended December 31, 2006, 2007 and 2008, the Company
decided not to pursue certain patents in various countries for strategic reasons
and recorded abandonment charges of $67,000, $7,000 and $4,000 respectively,
which are included in research and development. Amortization expense was
$94,000, $103,000 and $122,000 in 2006, 2007 and 2008, respectively. The total
cost of the patents was $2,627,000 and $2,760,000 as of December 31, 2007 and
2008, respectively. The accumulated amortization as of December 31, 2007 and
2008 is $1,669,000 and $1,791,000, respectively.
F20
As of December 31, 2008, the weighted average remaining life of the
patents and trademarks was 8 years. Amortization of patents and trademarks for
each of the next five years is as follows: 2009 - $122,000, 2010 - $122,000,
2011 - $122,000, 2012 - $122,000 and 2013 - $122,000.
(6) Accrued Expenses
Accrued expenses at December 31, 2007 and 2008 consists of the following:
(in thousands)
December 31,
------------------
2007 2008
------ ------
Compensation $360 $192
Professional fees 187 497
Other expenses 230 54
Other liability 292 133
------ ------
$1,069 $876
====== ======
The Company executed a Memorandum of Understanding (MOU) in January
2004 with Astellas Pharma ("Astellas"), formally Fujisawa Deutschland GmbH, a
major pharmaceutical corporation, granting them an exclusive option for a
limited number of months to enter a Sales and Distribution Agreement with
exclusive rights to market Ampligen(R) for ME/CFS in Germany, Austria and
Switzerland. The Company received an initial fee of 400,000 Euros
(approximately $497,000 US) in 2004. On November 9, 2004, Astellas exercised
their right to terminate the MOU. Pursuant to the agreement of the parties
the Company refunded 200,000 Euros ($248,000 USD) to Astellas during the
fourth quarter 2004. The Company recorded the remaining 200,000 Euros
($264,000 USD and $292,000 USD) as an accrued liability as of December 31,
2007. In 2008 the balance was recorded as other income.
(7) Debenture Financing
In June 2007, the Company retired all remaining debt related to its
convertible debentures issued in October 2003, January 2004 and July 2004. Of
the outstanding debt of approximately $4,102,000, only $2,638,000 was required
to be paid in new funds to retire the debentures, with the balance being covered
by the Company's advance receivable held as collateral by one of the debenture
holders.
October 2003 Debentures
The discount on the October 2003 Debentures was fully amortized;
therefore, the Company did not record any financing costs for the years ended
December 31, 2006, 2007 and 2008, respectively. Interest expense for the years
ended December 31, 2006, 2007 and 2008, with regard to the October 2003
Debentures was approximately $145,000, $72,000 and $0, respectively.
January 2004 Debentures
Financing costs for the years ended December 31, 2006, 2007 and 2008,
was approximately $49,000, $0 and $0, respectively. Interest expense for the
years ended December 31, 2006, 2007 and 2008, with regard to the January 2004
Debentures was approximately $77,000, $9,000 and $0, respectively.
F21
July 2004 Debentures
The Company recorded financing costs for the years ended December 31,
2006, 2007 and 2008, with regard to the July 2004 Debentures of $484,000,
$231,000 and $0, respectively. Interest expense for the year ended December 31,
2006, 2007 and 2008, with regard to the July 2004 Debentures was approximately
$78,000, $35,000 and $0, respectively.
(8) Stockholders' Equity
(a) Preferred Stock
The Company is authorized to issue 5,000,000 shares of $.01 par value
preferred stock with such designations, rights and preferences as may be
determined by the board of directors. There were no preferred shares issued and
outstanding at December 31, 2007 and 2008.
(b) Common Stock
The Company's stockholders approved an amendment to the Company's
corporate charter at the Annual Shareholder meeting held in Philadelphia, PA on
September 20, 2006. This amendment increased the Company's authorized shares
from 100,000,000 to 200,000,000.
As of December 31, 2007 and 2008, 73,760,446 and 78,750,995 shares,
were outstanding, respectively.
(c) Equity Financings
On July 8, 2005, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion"), pursuant to which Fusion
has agreed, under certain conditions, to purchase on each trading day $40,000 of
the Company's common stock up to an aggregate of $20.0 million over
approximately a 25 month period, subject to earlier termination at the Company's
discretion. In the Company's discretion, it may elect to sell less common stock
to Fusion than the daily amount and may increase the daily amount as the market
price of the Company's stock increases. The purchase price of the shares of
common stock will be equal to a price based upon the future market price of the
common stock without any fixed discount to the market price. Fusion did not have
the right or the obligation to purchase shares of the Company's common stock in
the event that the price of the common stock was less than $1.00.
Pursuant to the Company's agreement with Fusion, the Company has
registered for public sale to Fusion up to 10,795,597 shares of common stock.
However, in the event that the Company decides to issue more than 10,113,278,
i.e. greater than 19.99% of the outstanding shares of common stock as of the
date of the agreement, the Company would first seek stockholder approval in
order to be in compliance with American Stock Exchange rules. As of April 3,
2006, Fusion purchased 8,791,838 (4,678,382 in 2006) shares amounting to
approximately $20,000,000 in gross proceeds to the Company, which completed the
terms of the July 8, 2005, Fusion agreement. Pursuant to the agreement, the
Company also issued 785,597 (235,287 in 2006) commitment fee shares and 10,000
shares as reimbursement for expenses.
In connection with entering into the above agreement with Fusion, the
Company, in July 2005, issued to Fusion 402,798 shares of its common stock.
392,798 of these shares represented 50% of the commitment fee due Fusion with
the remaining 10,000 shares issued as reimbursement for expenses. An additional
392,799 shares, representing the remaining balance of the commitment, were
issued in conjunction with daily purchases of common stock by Fusion. These
F22
additional commitment shares were issued in an amount equal to the product of
(x) 392,799 and (y) the Purchase Amount Fraction. The "Purchase Amount Fraction"
means a fraction, the numerator of which is the purchase price at which the
shares were being purchased by Fusion and the denominator of which is
$20,000,000.
On April 12, 2006, the Company entered into a Common Stock Purchase
Agreement ("Purchase Agreement") with Fusion. Pursuant to the terms of the
Purchase Agreement, Fusion has agreed to purchase from the Company up to
$50,000,000 of common stock over a period of approximately twenty-five (25)
months. Pursuant to the terms of the Registration Rights Agreement, dated as of
April 12, 2006, the Company registered 12,386,723 shares issuable to or issued
to Fusion under the Purchase Agreement. Once the Registration Statement was
declared effective, each trading day during the term of the Purchase Agreement
the Company has the right to sell to Fusion up to $100,000 of the Company's
common stock on such date or the arithmetic average of the three lowest closing
trade prices of the common stock during the immediately proceeding 12 trading
day period. At the Company's option under certain conditions, Fusion can be
required to purchase greater amounts of common stock during a given period. In
connection with entering into the Purchase Agreement, the Company issued to
Fusion as commitment shares 321,751 shares of common stock and the Company is
obligated to issue an additional 321,751 commitment shares. These additional
commitment shares will be issued in an amount equal to the product of (x)
321,751 and (y) the Purchase Amount Fraction. The "Purchase Amount Fraction"
means a fraction, the numerator of which is the purchase price at which the
shares are being purchased by Fusion and the denominator of which is
$50,000,000.
The purchase price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction.
Fusion Capital may not purchase shares of the Company's common stock under the
common stock purchase agreement if it, together with its affiliates, would
beneficially own more than 9.9% of the common stock outstanding at the time of
the purchase by Fusion. Fusion has the right at any time to sell any shares
purchased under the 2006 Purchase Agreement which would allow it to avoid the
9.9% limitation. Due to AMEX guidelines, without prior stockholder approval, we
do not have the right or the obligation under the Agreement to sell shares to
Fusion in excess of 12,386,723 shares (i.e. 19.99% of the 61,964,598 outstanding
shares of our common stock on April 12, 2006, the date of the 2006 Purchase
Agreement) inclusive of commitment shares issued to Fusion under the Agreement.
In addition, Fusion cannot purchase more than 27,386,723 shares, inclusive of
the commitment shares under the Agreement. On September 20, 2006 stockholders
voted to allow the sale of up to 27,386,723 shares pursuant to the terms of the
Fusion agreement.
As of December 31, 2007, Fusion had purchased from the Company
10,682,032 shares for aggregate gross proceeds of approximately $19,739,000. In
addition, the Company issued to Fusion 127,065 shares towards the remaining
commitment fee. No purchases were made by Fusion in 2008 under this agreement,
which expired July 31, 2008.
On July 2, 2008, the Company entered into a $30 million Common Stock
Purchase Agreement (the "Purchase Agreement") with Fusion Capital Fund II, LLC
("Fusion") an Illinois limited liability company. Concurrently with entering
into the Purchase Agreement, they entered into a registration rights agreement
with Fusion. Pursuant to the registration rights agreement, the Company filed a
registration statement related to the transaction with the U.S. Securities and
Exchange Commission ("SEC") covering 21,300,000 shares that have been issued or
may be issued to Fusion under the Purchase Agreement. The SEC declared effective
F23
the registration statement on August 12, 2008. The Company has the right over a
25 month period to sell their shares of common stock to Fusion from time to time
in amounts between $120,000 and $1 million depending on certain conditions as
set forth in the agreement, up to a maximum of $30 million. The purchase price
of the shares related to the $30.0 million of future funding will be based on
the prevailing market prices of their shares at the time of sales as computed
under the Purchase Agreement without any fixed discount, and the Company will
control the timing and amount of any sales of shares to Fusion. Fusion shall not
have the right or the obligation to purchase any shares of our common stock on
any business day that the price of our common stock is below $0.40. Recently,
the price of the Company's common stock had consistently fallen below $0.40 and,
accordingly, no additional sales could be made to Fusion unless and until the
daily closing price rises to $0.40 per share or better for twelve consecutive
business days. The Purchase Agreement may be terminated by us at any time at our
discretion without any cost to the Company. There are no negative covenants,
restrictions on future funding, penalties or liquidated damages in the
agreement. In consideration for entering into the Purchase Agreement, upon
execution of the Purchase Agreement, the Company issued to Fusion 650,000 shares
as a commitment fee. Also, the Company will issue to Fusion up to an additional
650,000 shares as a commitment fee pro rata as they receive up to the $30.0
million of future funding.
Under the rules of the NYSE Alternext US (formerly, the American Stock
Exchange), the Company may issue no more than 14,823,651 shares (19.99% of our
outstanding shares as of July 2, 2008, the date of the purchase agreement)
without first obtaining the approval of stockholders. That approval was obtained
on November 11, 2008. As of December 31, 2008, the Company had executed
transactions pursuant the Fusion Stock Purchase Agreement valued at $270,000 and
561,121 shares.
The proceeds from this financing have been used to fund infrastructure
growth including manufacturing, regulatory compliance and market development.
(d) Common Stock Options and Warrants
(i) Stock Options
The 1990 Stock Option Plan provides for the grant of options to
purchase up to 460,798 shares of the Company's Common Stock to employees,
directors, and officers of the Company and to consultants, advisors, and other
persons whose contributions are important to the success of the Company. The
recipients of options granted under the 1990 Stock Option Plan, the number of
shares to be converted by each option, and the exercise price, vesting terms, if
any, duration and other terms of each option shall be determined by the
Company's Board of Directors or, if delegated by the Board, its 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. This plan is no
longer in effect and no further options will be issued from this plan.
F24
Information regarding the options approved by the Board of Directors
under the 1990 Stock Option Plan is summarized below:
___________2006___________ ________2007________ ___________2008___________
-------------------------- -------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
------- ------- -------
Shares Price Price Shares Price Price Shares Price Price
------ ----- ----- ------ ----- ----- ------ ----- -----
Outstanding,
beginning of
year 414,702 $2.71-4.03 $3.11 400,702 $2.71-4.03 $3.08 345,728 $2.71-4.03 $3.01
Granted - - - - - - - - -
Canceled (14,000) $4.03 $4.03 (54,974) $3.50-4.03 $3.53 - -
Exercised - - - - - - - - -
Outstanding, end
of year 400,702 $2.71-4.03 $3.08 345,728 $2.71-4.03 $3.01 345,728 $2.71-4.03 $3.01
======= ======= =======
Exercisable 400,702 $2.71-4.03 $3.08 345,728 $2.71-4.03 $3.01 345,728 $2.71-4.03 $3.01
======= ======= =======
Weighted average
remaining
contractual life
(years) 6.3 yrs. - - 5.86 yrs. - - 4.86 yrs. - -
======== = = ======== = = =======
Exercised in
current and prior
years (27,215) - - (27,215) - - (27,215) - -
======== = = ======= = = ======== = =
Available for
future grants 60,096 - - - - - - - -
====== = = = = = = = =
In December 1992, the Board of Directors approved the 1992 Stock Option
Plan (the 1992 Stock Option Plan) which provides for the grant of options to
purchase up to 92,160 shares of the Company's Common Stock to employees,
Directors, and Officers of the Company and to consultants, advisors, and other
persons whose contributions are important to the success of the Company. The
recipients of the options granted under the 1992 Stock Option Plan, the number
of shares to be covered by each option, and the exercise price, vesting terms,
if any, duration and other terms of each option shall be determined by the
Company's Board of Directors. No option is exercisable more than 10 years and
one month from the 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
F25
shares on the date of grant or 85% of the 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.
The Equity Plan effective May 1, 2004, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 8,000,000 shares of common stock is
reserved for potential issuance pursuant to awards under the Equity Incentive
Plan. Unless sooner terminated, the Equity Incentive Plan will continue in
effect for a period of 10 years from its effective date.
The Equity Plan is administered by the Board of Directors. The Equity
Incentive Plan provides for awards to be made to such Officers, other key
employees, non-employee directors, consultants and advisors of the Company and
its subsidiaries as the Board may select.
Stock options awarded under the Equity Plan may be exercisable at such
times (not later than 10 years after the date of grant) and at such exercise
prices (not less than fair market value at the date of grant) as the Board may
determine. The Board may provide for options to become immediately exercisable
upon a "change in control," which is defined in the Equity Incentive Plan to
occur upon any of the following events: (a) the acquisition by any person or
group, as beneficial owner, of 20% or more of the outstanding shares or the
voting power of the outstanding securities of the Company; (b) either a majority
of the directors of the Company at the annual stockholders meeting has been
nominated other than by or at the direction of the incumbent directors of the
Board, or the incumbent directors cease to constitute a majority of the
Company's Board; (c) the Company's stockholders approve a merger or other
business combination pursuant to which the outstanding common stock of the
Company no longer represents more than 50% of the combined entity after the
transaction; (d) the Company's shareholders approve a plan of complete
liquidation or an agreement for the sale or disposition of all or substantially
all of the Company's assets; or (e) any other event or circumstance determined
by the Company's Board to affect control of the Company and designated by
resolution of the Board as a change of control.
Information regarding the options approved by the Board of Directors
under the Equity Plan is summarized below:
2006 2007 2008
---------------------------------- ---------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------ ----- ----- ------ ----- ----- ------ ----- -----
Outstanding
beginning at
year 1,985,680 $1.63-2.87 $2.15 3,328,701 $1.63-3.86 $2.56 6,556,476 $1.30-3.86 $2.59
Granted 1,345,742 $2.11-3.86 $3.17 3,232,870 $1.30-3.86 $2.62 687,000 $0.68-6.00 $2.61
$1.90- $1.30-
Canceled (2,721) $1.90-2.61 $1.47 (5,095) 2.61 $2.40 (17,386) 2.61 $2.00
Exercised - - - - - - - - -
--------- --------- ---------
Outstanding end
of year 3,328,701 $1.63-3.86 $2.56 6,556,476 $1.30-3.86 $2.59 7,226,090 $0.68-6.00 $2.59
========= ========= =========
Exercisable 3,177,615 $1.63-3.86 $2.57 6,354,808 $1.75-3.86 $2.63 7,122,479 $0.68-6.00 $2.61
========= ========= =========
Weighted
average
remaining
contractual
life (years) 8-9 yrs. - - 8-9 yrs. - - 7-8 yrs. - -
======== = = ======== = = ======== = =
Availablefor
future grants 4,671,299 - - 1,443,524 - - 18,081 - -
========= = = ========= = = ====== = =
F26
On June 20, 2007, our Stockholders approved the 2007 Equity Incentive
Plan at our Annual Shareholder Meeting. This plan, effective June 1, 2007
authorizes the grant of non-qualified and incentive stock options, stock
appreciation rights, restricted stock and other awards. A maximum of 8,000,000
shares of common stock is reserved for potential issuance pursuant to awards
under this plan. Unless sooner terminated, this plan will continue in effect for
a period of 10 years from its effective date. As of December 31, 2008 option
awards under this plan were:
Weighted Average
Shares Option Price Exercise Price
Granted, outstanding, and
exercisable at end of year 1,450,000 $2.20 $2.20
=========
Remaining contractual life 9 yrs.
======
Available for future grants 3,914,813
=========
(ii) Stock Warrants
Information regarding warrants outstanding and exercisable into shares of common
stock is summarized below:
2006 2007 2008
---------------------------------- ---------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------ ----- ----- ------ ----- ----- ------ ----- -----
Outstanding
beginning of
year 11,529,837 $1.55-16.00 $3.32 10,262,771 $1.55-6.00 $2.89 7,262,771 $1.32-6.00 $2.96
Granted 20,000 $1.87-3.60 $2.55 20,000 $1.32-2.20 $1.71 20,000 $.35-.80 $0.68
Canceled (1,031,650) $3.50-16.00 $8.35 (3,020,000) $2.00-4.00 $2.64 (2,016,584) $2.20-6.00 $2.53
Exercised (255,416) $1.50-2.86 $2.63 - - - - - -
--------- ----------- -----------
Outstanding end
of year 10,262,771 $1.55-6.00 $2.89 7,262,771 $1.32-6.00 $2.96 5,266,187 $.35-4.25 $3.13
========== ========== ============
Exercisable 10,262,771 $1.55-6.00 $2.89 7,262,771 $1.32-6.00 $2.96 5,266,187 $.35-4.25 $3.13
========== ========== ============
Weighted
average
remaining
contractual
life (years) 1.97 yrs. - - 1.99 yrs. - - 1 yr. - -
========= = = ========= = = ============= = =
Years
exercisable 2007-2016 - - 2008-2017 - - 2009-2018 - -
========= = = ========= = = ============= = =
F27
Certain of the stock warrants outstanding are subject to adjustments
for stock splits and dividends.
Proceeds received from the exercise of stock warrants were $672,000 for
2006. No warrants were exercised during 2007 and 2008.
(e) Rights Offering
On November 19, 2002, the Board of Directors of the Company declared a
dividend distribution of one Right for each outstanding share of Common Stock to
stockholders of record at the close of business on November 29, 2002 (the
"Record Date"). Each Right entitles the registered holder to purchase from the
Company a unit consisting of one one-hundredth of a share (a "Unit") of Series A
Junior Participating Preferred Stock, par value $.01 per share (the "Series A
Preferred Stock") at a Purchase Price of $30.00 per Unit, subject to adjustment.
The description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and Continental Stock Transfer & Trust
Company, as Rights Agent.
Initially, the Rights are attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. Subject to certain exceptions specified in the Rights Agreement,
the Rights will separate from the Common Stock and a Distribution Date will
occur upon the earlier of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more (or 20% or more for William A.
Carter, M.D.) of the outstanding shares of Common Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders or (ii) 10
business days (or such later date as the Board shall determine) following the
commencement of a tender offer or exchange offer that would result in a person
or group becoming an Acquiring Person. Until the Distribution Date, (i) the
Rights will be evidenced by the Common Stock certificates and will be
transferred with and only with such Common Stock certificates, (ii) new Common
Stock certificates issued after the Record Date will contain a notation
incorporating the Rights Agreement by reference and (iii) the surrender for
transfer of any certificates for Common Stock outstanding will also constitute
the transfer of the Rights associated with the Common Stock represented by such
certificate. Pursuant to the Rights Agreement, the Company reserves the right to
require prior to the occurrence of a triggering event that, upon any exercise of
Rights, a number of Rights be exercised so that only whole shares of Preferred
Stock will be issued.
(9) Segment and Related Information
The Company operates in one segment, which performs research and
development activities related to Ampligen(R) and other drugs under development,
and sales and marketing of Alferon(R). The Company's revenues for the three year
period ended December 31, 2008, were earned in the United States.
F28
The Company employs an insignificant amount of net property and equipment
in its foreign operations.
(10) Research, Consulting and Supply Agreements
In 1994, the Company entered into a licensing agreement with Bioclones
(Proprietary) Limited ("Bioclones") for manufacturing and international market
development in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen(R) and Oragen(TM). On
December 27, 2004 the Company initiated a lawsuit in Federal Court identifying a
conspiratorial group seeking to illegally manipulate the Company's stock for
purposes of bringing about a hostile takeover of Hemispherx. This conspiratorial
group includes Bioclones. On December 29, 2008, the US Court of Appeals
overturned a lower court's dismissal of the Company's fraud claim against a
group of South African defendants related to misrepresentations made in an
alleged hostile takeover attempt. The Company had recently reached a settlement
with two of the South African defendants, Bioclones and its former CEO, Cyril
Donninger. The reinstatement of the common law fraud claim allows them to
continue to pursue damages in the case against the remaining South African
defendants, including JCI and the estate of R.B. Kebble. This licensing
agreement was terminated.
In 1998, the Company entered into a strategic alliance with Accredo to
develop certain marketing and distribution capacities for Ampligen(R) in the
United States. Accredo is one of the nation's largest home health care companies
with over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Accredo assumed certain responsibilities for distribution of
Ampligen(R) for which they received a fee. Through this arrangement, the Company
may mitigate the necessity of incurring certain up-front costs. Accredo has also
worked with the Company in connection with the Amp 511 ME/CFS cost recovery
treatment program, Amp 516 ME/CFS Phase III clinical trial and the Amp 719
(combining Ampligen(R) with other antiviral drugs in HIV-salvage therapy and Amp
720 HIV Phase IIb clinical trials now under way). There can be no assurances
that this alliance will develop a significant commercial position in any of its
targeted chronic disease markets. The agreement had an initial one year term
from February 9, 1998 with successive additional one year terms unless either
party notifies the other not less than 180 days prior to the anniversary date of
its intent to terminate the agreement. Also, the agreement may be terminated for
uncured defaults, or bankruptcy, or insolvency of either party and will
automatically terminate upon the Company's receiving an NDA for Ampligen(R) from
the FDA, at which time, a new agreement will need to be negotiated with Accredo
or another major drug distributor. There were no initial fees. There has been no
communication or activity under this agreement for the past few years.
In March 2002, the Company's European subsidiary Hemispherx S.A.
entered into a Sales and Distribution agreement with Laboratorios del Dr. Esteve
("Esteve"). In December 2006 Hemispherx S.A. assigned all of its rights and
obligations under the Sales and Distribution agreement to the Company. Pursuant
to the terms of the Agreement, Esteve was granted the exclusive right to market
Ampligen(R) in Spain, Portugal and Andorra for the treatment of ME/CFS. Due to
non-performance of certain contractually required clinical trials, the Company
notified Esteve of its intention to terminate the Sales and Distribution
Agreement in 2007. As is its right under the Sales and Distribution Agreement,
Esteve has applied for arbitration, seeking damages. In June 2008, the Company
settled the arbitration with Esteve. The case was dismissed by mutual agreement
of the parties in which they regained all licensing right to Ampligen(R) in
Spain, Portugal and Andorra.
F29
In October 2005, the Company signed a research agreement with the
National Institute of Infectious Diseases, in Tokyo, Japan. The collaboration,
by Hideki Hasegawa, M.D., Ph.D., Chief of the Laboratory of Infectious Disease
Pathology, will assess the Company's experimental therapeutic Ampligen(R) as a
co-administered immunotherapeutic to the Institution's nasal flu vaccine.
In October 2005, the Company also engaged the Sage Group, Inc., a
health care, technology oriented, strategy and transaction advisory firm, to
assist the Company in obtaining a strategic alliance in Japan for the use of
Ampligen(R) in treating Chronic Fatigue Syndrome or CFS. In May 2008, the
Company agreed to a proposed engagement extension with Sage to assist the
Company in obtaining strategic alliance in Japan for the use of Ampligen(R) in
treating Avian Flu. In October 2008, the Company agreed in principle to engage
The Sage Group as an advisor regarding the commercialization of Ampligen(R) to
treat CFS. Comprehensive contracts between the parties for the May and October
2008 preliminary agreements are in final negotiation with expected execution by
mid-2009. The Company incurred approximately $24,000, $25,000 and $167,000 in
fees to The Sage Group for the years ended December 31, 2006, 2007 and 2008
respectively, pursuant to this agreement.
On December 9, 2005, the Company executed a Supply Agreement with
Hollister-Stier Laboratories LLC of Spokane, Washington ("Hollister-Stier"), for
the manufacturing of Ampligen(R) for a five year term ending in 2010. Pursuant
to the agreement the Company supplies the key raw materials and Hollister-Stier
formulates and bottles the Ampligen(R). The Company incurred approximately
$1,450,000, $475,000 and $-0- in fees for the years ended December 31, 2006,
2007 and 2008, respectively, pursuant to this agreement.
In December 2007, the Company concluded an agreement with BIKEN (the
non-profit operational arm of the Foundation for Microbial Diseases of Osaka
University) for the use of the Company's experimental drug, Ampligen(R), as an
immune enhancer to influenza vaccines. The Company's agreement with Biken is
part of a three party agreement to develop an effective influenza vaccine for
Japan and utilizes vast resources of the National Institute of Infectious
Diseases of Japan.
On June 6, 2008, the Company engaged the services of Warren C. Bogard,
Jr, Ph.D. as a consultant for Business and Product. Dr. Bogard has agreed to
spend at least 70% of his time working on product and business development
matters. His compensation includes $5,000 per work week and 100,000 stock
options with a five year term exercisable at $.68 per share. Dr. Bogard is also
a participant in the Goal Achievement Incentive Award Program and this agreement
expires May 31, 2009 unless extended by mutual consent.
On November 18, 2008, the Company announced it has entered into a
contract with Lovelace Respiratory Research Institute ("LRRI"), Albuquerque,
N.M. LRRI is the nation's largest independent, not-for-profit organization
conducting basic and applied research on the causes and treatment of respiratory
illness and disease. LRRI has agreed to undertake preclinical studies of new
pharmaceuticals that include Ampligen(R) for a total fee of $1,001,516 which was
paid in full with 1,824,256 shares of Company Restricted Stock on October 3,
2008 at the value of $0.55 per share. In the event that after April 3, 2009 and
before October 3, 2011 LRRI sells the shares, the Company will make-up any
short-fall below $0.55 per share between the ultimate selling price and issuance
price. The projected preclinical studies are designed to enhance the cellular
understanding of Ampligen(R)'s molecular actions across various animal species,
F30
including man, and should facilitate the filing of additional NDA's (New Drug
Applications) for potential treatment of Chronic Fatigue Syndrome (CFS) in
various countries outside North America. The new studies anticipate close
operational collaborations between the Company's New Brunswick, N.J. research
staff and the LRRI staff.
The Company has entered into agreements for consulting services, which
are performed at medical research institutions and by medical and clinical
research individuals. The Company's obligation to fund these agreements can be
terminated after the initial funding period, which generally ranges from one to
three years or on an as-needed monthly basis. During the years ending December
31, 2006, 2007 and 2008, the Company incurred approximately $477,000, $842,000
and $704,000 respectively, of consulting service fees under these agreements.
These costs are charged to research and development expense as incurred.
(11) 401(K) Plan
The Company has a defined contribution plan, entitled the Hemispherx
Biopharma Employees 401(K) Plan and Trust Agreement (the 401(K) Plan). Full time
employees of the Company are eligible to participate in the 401(K) Plan
following one year of employment. Subject to certain limitations imposed by
federal tax laws, participants are eligible to contribute up to 15% of their
salary (including bonuses and/or commissions) per annum. Participants'
contributions to the 401(K) Plan may be matched by the Company at a rate
determined annually by the Board of Directors.
Each participant immediately vests in his or her deferred salary
contributions, while Company contributions will vest over one year. In 2006,
2007 and 2008 the Company provided matching contributions to each employee for
up to 6% of annual pay aggregating $105,000, $130,000 and $21,000, respectively.
The 6% Company matching contribution was terminated as of March 15, 2008.
(12) Royalties, License, and Employment Agreements
The Company acquired a series of patents on Oragens, potentially a set
of oral broad spectrum antivirals and immunological enhancers, through a
licensing agreement with Temple University in Philadelphia, PA. The Company was
granted an exclusive worldwide license from Temple for the Oragens products.
These compounds have been evaluated in various academic laboratories for
application to chronic viral and immunological disorders. The 2', 5'
oligoadenylate synthetase/RNase L system is an important and widely distributed
pathway for the inhibition of viral replication and tumor growth. Pursuant to
the terms of the Company's agreement with Temple, the Company is obligated to
pay royalties of 2% to 4% of sales depending on the amount of technical
assistance required. The Company currently pays a royalty of $30,000 per year to
Temple. This agreement is to remain in effect until the date that the last
licensed patent expires unless terminated sooner by mutual consent or default
due to royalties not being paid. The last Oragen(TM) patent expires on June 1,
2018. The Company records the payment of the royalty as research and development
cost for the period incurred.
In October 1994, the Company entered into a licensing agreement with
Bioclones (Propriety) Limited (SAB/Bioclones) with respect to co-development of
various RNA drugs, including Ampligen(R), for a period ending three years from
the expiration of the last licensed patents. The licensing agreement provided
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). This marketing arrangement with Bioclones was deemed void by the
Company due to the numerous and long standing failures of performance by
Bioclones. This agreement was subsequently terminated.
F31
The Company had contractual agreements with three officers in 2006,
2007 and 2008. The aggregate annual base compensation under these contractual
agreements for 2006, 2007 and 2008 (as adjusted, see below) was $938,000,
$1,276,000 and $1,290,000 respectively. In addition, certain of these officers
are entitled to receive performance bonuses of up to 25% of the annual base
salary (in addition to the bonuses described below). In 2006, 2007 and 2008,
bonuses of $253,000, $319,000 and $0 respectively were granted and a signing
bonus of $50,000 was paid to the third officer in 2006. The Chief Executive
Officer's employment agreement (see below) provides for bonuses based on gross
proceeds received by the Company from any joint venture or corporate partnering
agreement. In 2006, the Chief Executive Officer was granted 677,000 options to
purchase common stock at $2.38 to $3.78 per share, the Chief Financial Officer
was granted 180,000 options to purchase common stock at $3.48 to $3.85 per share
and the Chief Operating Officer was granted 100,000 options at $3.55 per share.
In 2007, the Chief Executive Officer was granted 2,400,000 options to purchase
common stock at $1.24-$1.60 per share, the Chief Financial Officer was granted
213,050 options to purchase common stock at $1.30-$2.00 per share and the Chief
Operating Officer was granted 50,000 options to purchase common stock at $1.88
per share. In 2008, the Chief Executive Officer was granted 1,640,000 to
purchase common stock at $2.20 to $4.00 per share. The Company recorded stock
compensation expense of $1,732,000, $1,883,000 and $317,000, respectively,
during the years ended December 31, 2006, 2007 and 2008 with regard to these
issuances.
Dr. Carter's employment as the Company's Chief Executive Officer and
Chief Scientific Officer expires December 31, 2010 unless sooner terminated for
cause or disability. The agreement automatically renews for successive one year
periods after the initial termination date unless the Company or Dr. Carter give
written notice otherwise at least ninety days prior to the termination date or
any renewal period. Dr. Carter has the right to terminate the agreement on 30
days' prior written notice. The base salary is subject to adjustments and the
average increase or decrease in the Consumer Price Index for the prior year. In
addition, Dr. Carter could receive an annual performance bonus of up to 25% of
his base salary, at the sole discretion of the Compensation Committee of the
board of directors, based on his performance or the Company's operating results.
Dr. Carter will not participate in any discussions concerning the determination
of his annual bonus. Dr. Carter is also entitled to an incentive bonus of 0.5%
of the gross proceeds received from any joint venture or corporate partnering
arrangement. Dr. Carter's agreement also provides that he be paid a base salary
and benefits through the last day of the then term of the agreement if he is
terminated without "cause", as that term is defined in agreement. In addition,
should Dr. Carter terminate the agreement or the agreement be terminated due to
his death or disability, the agreement provides that Dr Carter be paid a base
salary and benefits through the last day of the month in which the termination
occurred and for an additional twelve month period.
The Company's engagement of Dr. Carter as a consultant related to
patent development, as one of the Company's directors and as chairman of the
Executive Committee of the Company's board expires December 31, 2010 unless
sooner terminated for cause or disability. The agreement automatically renews
for successive one year periods after the initial termination date or any
renewal period. Dr. Carter has the right to terminate the agreement on 30 days'
prior written notice. The base fee is subject to annual adjustments equal to the
percentage increase or decrease of annual dollar value of directors' fees
provided to the Company's directors during the prior year. The annual fee is
further subject to adjustment based on the average increase or decrease in the
F32
Consumer Price Index for the prior year. In addition, Dr. Carter could receive
an annual performance bonus of up to 25% of his base fee, at the sole direction
of the Compensation Committee of the board of directors, based on his
performance. Dr. Carter will not participate in any discussions concerning the
determination of this annual bonus. Dr. Carter's agreement also provides that he
be paid his base fee through the last day of the then term of the agreement if
he is terminated without "cause", as that term is defined in the agreement. In
addition, should Dr. Carter terminate the agreement or the agreement be
terminated due to his death or disability, the agreement provides that Dr.
Carter be paid fees due him through the last day of the month in which the
termination occurred and for an additional twelve month period.
The Company's agreement with Ransom W. Etheridge provides for Mr.
Etheridge's engagement as our General Counsel until December 31, 2009 unless
sooner terminated for cause or disability. The agreement automatically renews
for successive one year periods after the initial termination date unless we or
Mr. Etheridge give written notice otherwise at least ninety days prior to the
termination date or any renewal period. Mr. Etheridge has the right to terminate
the agreement on 30 days' prior written notice. The initial annual fee for
services is $105,408 and is annually subject to adjustment based on the average
increase or decrease in the Consumer Price Index for the prior year. Mr.
Etheridge's agreement also provides that he be paid all fees through the last
day of then current term of the agreement if he is terminated without "cause" as
that term is defined in the agreement. In addition, should Mr. Etheridge
terminate the agreement or the agreement be terminated due to his death or
disability, the agreement provides that Mr. Etheridge be paid the fees due him
through the last day of the month in which the termination occurred and for an
additional twelve month period. Mr. Etheridge will devote approximately 85% of
his business time to the business. Effective January 1, 2009, one half of the
monthly fee compensation to be paid to Ransom W. Etheridge pursuant to the terms
of his Engagement Agreement with us as our General Counsel will be paid in
shares of the Company's common stock ("Etheridge Share Compensation"). The
number of shares issued as Etheridge Share Compensation shall be calculated
based on a value equal to three times one half of the monthly fee compensation
to be paid to Mr. Etheridge pursuant to the terms of his Engagement Agreement
with the Company, with the value of the shares being determines by the closing
share price of our common stock on the NYSE Alternext US on the last trading day
of each month.
An agreement was made and entered into as of the 31st day of December,
2008 with Robert E. Peterson. Mr. Peterson was previously engaged by the Company
as it's Chief Financial Officer pursuant to an Amended And Restated Engagement
Agreement ("Engagement Agreement") made as of March 11, 2005. Mr. Peterson, at
his election, terminated the Engagement Agreement as of December 31, 2008 in
accord with the provisions of this agreement. This Engagement Agreement provided
pursuant to subsection 6(c) or due to Peterson's death or disability, the
Company shall pay to Peterson, at the time of such termination his annual
compensation for an additional twelve month period. Whereas the Company wished
to modify its obligation to pay to Mr. Peterson at the termination of the
Engagement Agreement the fees due to him for the additional twelve month period
and Mr. Peterson was willing to agree to modification of the Company's
obligation to pay to him at the termination of the Engagement Agreement the fees
due to him, the Company and Mr. Peterson agreed to the follows:
o Peterson waived his right to receive payment for the additional twelve
month period as provided for in the Engagement Agreement;
o On the occurrence of a "Change In Control, the Company shall pay to
Peterson three times the amount of compensation paid to Peterson by the
Company for calendar year 2008. A "Change In Control" shall be deemed
F33
to have occurred as set forth the Engagement Agreement Regarding Change
In Control made as of March 11, 2005 between the Company and Peterson,
with the definition of "Change In Control" as therein set forth;
o Upon executing a "Financial Transaction", the Company shall pay to
Peterson one (1) percent (the "Peterson One Per Cent Fee") of the cash
to be received by the Company from each Financial Transaction.
Provided, however, the Peterson One Per Cent Fee shall in no event
exceed in the aggregate two times the amount of compensation paid to
Peterson by the Company for calendar year 2008. A "Financial
Transaction" shall be any agreements entered into by the Company in
which the Company is to receive cash from such third parties. A
Financial Transaction does not include agreements whereby the Company
receives cash as a result of (i) the Company only being reimbursed for
expenses, not including expenses for prior research conducted by the
Company, incurred by the Company, (ii) an agreement in which the only
economic benefit to the Company is a loan or loans to the Company,
(iii) any transactions with Fusion pursuant to the July 2, 2008, Common
Stock Purchase Agreement between the Company and Fusion;
o For a period of thirty six (36) months following the Effective Date of
December 31, 2008, subject to earlier termination by Peterson in his
sole discretion, the Company shall engage Peterson as a part time
advisor to the Company's Chief Executive Officer and shall pay to
Peterson for such services ("Advisory Services") the sum of four
thousand dollars ($4,000) per month, payable monthly with the first
monthly payment being due and payable one month after the Effective
Date;
o Peterson is to receive Options to purchase 20,000 shares of the
Company's common stock at the end of each calendar quarter following
the Effective Date. Peterson may terminate the Advisory Services at any
time;
o This Agreement shall terminate upon Peterson having received full
payment for a change in control or upon receiving the maximum one
percent fee. The Agreement provides for a "gross-up" payment to make
Peterson whole for any Federal taxes imposed as a result of change of
control or one percent payments to him.
On December 1, 2008, an Engagement Agreement with Charles T. Bernhardt,
CPA as Chief Financial Officer (interim) was finalized and effective January 1,
2009. The agreement calls for an initial salary of $160,000 per annum and
eligibility for the Goal Achievement Incentive Program.
On November 27, 2006, the Company engaged the services of a full-time
President and Chief Operating Officer. Pursuant to this agreement, the President
and Chief Operating Officer is employed for an initial term of two years. The
employment agreement automatically renews thereafter for successive one year
periods unless either party gives written notice not to renew within 90 days of
the termination date. The Company and President and Chief Operating Officer
failed to negotiate a renewal and the agreement terminated on November 27, 2008.
The Board of Directors, deeming it essential to the best interests of
the Company's shareholders to foster the continuous engagement of key management
personnel and recognizing that, as is the case with many publicly held
corporations, a change of control might occur and that such possibility, and the
uncertainty and questions which it might raise among management, might result in
the departure or distraction of management personnel to the detriment of the
Company and the Company's shareholders, determined to reinforce and encourage
the continued attention and dedication of members of the Company's management to
F34
their engagement without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of the Company
and entered into identical agreements regarding change in control with William
A. Carter, the Company's Chief Executive Officer and Chief Scientific Officer,
and Ransom W. Etheridge, the Company's General Counsel. Each of the agreements
regarding change in control became effective March 11, 2005 and continue through
December 31, 2008 and shall extend automatically to the third anniversary
thereof unless the Company gave notice to the other party prior to the date of
such extension that the agreement term will not be extended. Notwithstanding the
foregoing, if a change in control occurs during the term of the agreements, the
term of the agreements will continue through the second anniversary of the date
on which the change in control occurred. Each of the agreements entitles William
A. Carter and Ransom W. Etheridge, respectively, to change of control benefits,
as defined in the agreements and summarized below, upon their respective
termination of employment/engagement with the Company during a potential change
in control, as defined in the agreements or after a change in control, as
defined in the agreements, when their respective terminations are caused (1) by
the Company for any reason other than permanent disability or cause, as defined
in the agreement (2) by William A. Carter and/or Ransom W. Etheridge,
respectively, for good reason as defined in the agreement or, (3) by William A.
Carter, and Ransom W. Etheridge, respectively for any reason during the 30 day
period commencing on the first date which is six months after the date of the
change in control.
The benefits for each of the foregoing executives would be as follows:
o A lump sum cash payment of three times his base salary and annual bonus
amounts; and
o Outplacement benefits.
Each agreement also provides that the executive is entitled to a "gross-up"
payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him.
Dr. Carter's agreement also provides for the following benefits:
o Continued insurance coverage through the third anniversary of his
termination; and
o Retirement benefits computed as if he had continued to work for the
above period.
In order to facilitate the Company's need to obtain financing and prior
to the Company's shareholders approving an amendment to the Company's corporate
charter to merge the number of authorized shares, Dr. Carter, the Company's
Chief Executive Officer, agreed to waive his right to exercise certain warrants
and options unless and until the Company's shareholder approved an increase in
the Company's authorized shares of Common Stock.
The Company has engaged the Sage Group, Inc., a health care, technology
oriented, strategy and transaction advisory firm, to assist the Company in
obtaining a strategic alliance in Japan for the use of Ampligen(R) in treating
Chronic Fatigue Syndrome or CFS. R. Douglas Hulse, the Company's former
President and Chief Operating Officer, is a member and an executive director of
The Sage Group, Inc.
(13) Leases
The Company has a non-cancelable operating lease for the space in which
its principal office is located.
F35
Future minimum lease payments under the noncancellable operating lease
are as follows:
Year Ending December 31, (in thousands)
2009 $171
2010 58
-----
Total minimum lease payments $229
=====
Rent expense charged to operations for the years ended December 31,
2006, 2007 and 2008 amounted to approximately $229,000, $231,000 and $239,000
respectively. The term of the lease for the Philadelphia, Pennsylvania offices
is through April 30, 2010.
(14) Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes on January 1, 2008. As a result of
the implementation of Interpretation 48, there has been no material change to
the Company's tax position as they have not paid any corporate income taxes due
to operating losses. All tax benefits will likely not be recognized due to the
substantial net operating loss carryforwards which will most likely not be
realized prior to expiration.
As of December 31, 2008, the Company has approximately $87,000,000 of
federal net operating loss carryforwards (expiring in the years 2009 through
2028) available to offset future federal taxable income. The Company also has
approximately $34,000,000 of Pennsylvania state net operating loss carryforwards
(expiring in the years 2009 through 2028) and approximately $41,000,000 of New
Jersey state net operating loss carry forwards (expiring in the years 2010
through 2015) available to offset future state taxable income. The utilization
of certain state net operating loss carryforwards may be subject to annual
limitations. With no tax due for the foreseeable future, the Company has
determined that a policy to determine the accounting for interest or penalties
related to the payment of tax is not necessary at this time.
Under the Tax Reform Act of 1986, the utilization of a corporation's
net operating loss carryforward is limited following a greater than 50% change
in ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation generally determined by multiplying the value of the Company on the
date of the ownership change by the federal long-term tax exempt rate. Any
unused annual limitation may be carried forward to future years for the balance
of the net operating loss carryforward period.
Deferred income taxes reflect the net tax effects of temporary
differences between carrying amounts of assets and liabilities for financial
reporting purposes and the carrying amounts used for income tax purposes. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty of the Company's ability to realize the benefit of the deferred
tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2007 and 2008.
F36
The components of the net deferred tax asset of December 31, 2007 and
2008 consists of the following:
(000's omitted)
Deferred tax assets: 2007 2008
---- ----
Net operating losses $28,097 $29,655
Stock Based Compensation 765 191
Accrued Expenses and Other (119) 22
Research and development costs 3,551 1,945
----- -------
Total 32,294 31,813
Less: Valuation Allowance (32,294) (31,813)
-------- --------
Balance $ -0- $ -0-
======== ========
(15) Contingencies
In December 2004, the Company filed a multi-count complaint in federal
court (Southern District of Florida) against a conspiratorial group seeking to
illegally manipulate the Company's stock for purposes of bringing about a
hostile takeover of Hemispherx. The lawsuit alleges that the conspiratorial
group commenced with a plan to seize control of its cash and proprietary assets
by an illegal campaign to drive down the Company's stock price and publish
disparaging reports on its management and current fiduciaries. The lawsuit seeks
monetary damages from each member of the conspiratorial group as well as
injunctions preventing further recurrences of their misconduct. The
conspiratorial group includes Bioclones, a privately held South African
Biopharmaceutical company that collaborated with the Company, and Johannesburg
Consolidated Investments, a South African corporation, Cyril Donninger, R. B.
Kebble, H. C. Buitendag, Bart Goemaere, and John Doe(s). Bioclones, Johannesburg
Consolidated Investments, Cyril Donninger, R. B. Kebble and H.C. Buitendag filed
a motion to dismiss the complaint, which was granted by the court. The Company
appealed this decision to the 11th federal circuit court of appeals. In July
2008, we settled our disputes with both Bioclones and Cyril Donninger and
dismissed them from the lawsuit. In December 2008, the 11th Federal Circuit
Court of Appeals overturned the lower court's decision dismissing our claim of
common law fraud against the remaining defendants which now may be pursued in
the Florida Southern District Federal Court.
In October 2006, litigation was initiated against the Company in the
Court of Common Pleas, Philadelphia County, Pennsylvania between the Company and
Hospira Worldwide, Inc. with regard to a dispute with respect to fees for
services charged by Hospira Worldwide, Inc. to the Company. The dispute was
promptly settled and the litigation dismissed.
F37
In January 2007, arbitration proceedings were initiated by Bioclones
(Proprietary), Ltd., ("Bioclones") in South Africa to determine damages arising
out of the termination of a marketing agreement the Company had with Bioclones.
The Company had deemed the marketing agreement void due to numerous and long
standing failures of performance by Bioclones and presented claims for damages
against Bioclones in the arbitration. In July 2008, the arbitration proceedings
were terminated by mutual agreement with Bioclones with the agreement that the
marketing agreement was terminated.
In January 2007, the Company filed an application in South Africa for
the dissolution of Ribotech (PTY) Ltd. ("Ribotech") on the grounds that the
purpose for the existence of Ribotech, the marketing agreement between the
Company and Bioclones, had been terminated. In July 2008 in conjunction with our
settlement of the arbitration proceedings with Biotech, we dismissed our
application for the dissolution of Ribotech.
Due to non-performance by Laboratorios del Dr. Esteve ("Esteve") of
certain contractually required clinical trials, the Company notified Esteve of
its intention to terminate the Sales and Distribution Agreement entered into as
of March 20, 2002 (the "Sales Agreement and Distribution Agreement"), and in
December 2007, as was its right under the Sales and Distribution Agreement,
Esteve applied for arbitration, seeking damages. The Company believed the Esteve
claim was without merit and filed a counterclaim. In June 2008, the arbitration
proceedings were mutually terminated with Esteve with the understanding that the
Sales and Distribution Agreement was terminated.
In March 2007, Cedric Philipp ("Philipp") initiated an arbitration
proceeding in Philadelphia, Pennsylvania with the American Arbitration
Association alleging that, under a 1994 agreement between the Company and
Philipp ("1994 Agreement"), the Company owed him commissions on product, or
services he alleged the Company purchased from Hollister-Stier. The Company
defended this claim and in July 2008, all of Philipp's claims were denied by the
arbitrators and the arbitration was dismissed.
In December 2008, Lovells LP filed a complaint against the Company in the
Federal District Court for the Eastern District of Pennsylvania seeking 151,330
pounds sterling for legal fees allegedly due to Lovells LP by the Company. The
Company has filed an answer to this complaint and is defending against this
claim.
The Company has not recorded any loss contingencies as a result of the
above matters for the years ended December 31, 2007 and 2008.
(16) Certain Relationships and Related Transactions
The Company has employment agreements with certain of our executive
officers and have granted such officers and directors options and warrants to
purchase our common stock, as discussed under the headings, "Item 11. Executive
Compensation," and "Item 12. Security Ownership of Certain Beneficial Owners and
Management".
The Company used at various times the property owned by Retreat House,
LLC, an entity in which the children of William A. Carter have a beneficial
interest. The Company paid Retreat House, LLC $102,000, $153,000 and $41,200 for
the use of the property at various times in 2006, 2007 and 2008, respectively.
F38
Ransom W. Etheridge, the Company's Secretary, General Counsel and a
former director, is an attorney in private practice, who renders corporate legal
services to them from time to time, for which he has received fees totaling
approximately $117,000 and $105,400 in 2007 and 2008, respectively. In addition,
Mr. Etheridge served on the Board of Directors until November 2008 for which he
received Director's Fees of cash and stock. He was paid $150,000 in cash and
stock for the time served in 2008. In 2007 he was paid $150,000 in cash and
stock for his services as a Director.
Tom Equels was elected to the Board of Directors at the Annual
Stockholders Meeting on November 17, 2008. Mr. Equels has provided legal serves
to the Company for several years. In 2008 and 2007, the Company paid Mr. Equel's
law firm $395,000 and $215,000, respectfully, for services rendered. Mr. Equel's
received $37,500 in their stock for his Board fees in 2008.
The Company continues to utilize The Sage Group, Inc., a health care,
technology oriented, strategy and transaction advisory firm, to assist them in
obtaining a strategic alliance in Japan for the use of Ampligen(R) in treating
Chronic Fatigue Syndrome (CFS) and Avian Flu. The Company paid The Sage Group
approximately $24,000, $25,000 and $167,000 in fees for the years ended December
31, 2006, 2007 and 2008, respectively.
Kati Kovari, M.D. was paid $13,000 in 2007 and 2008 for her part-time
services to the Company as Assistant Medical Director. Dr. Kovari is the spouse
of W. A. Carter, CEO.
(17) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents,
investments and accounts receivable. The Company places its cash with
high-quality financial institutions. At times, such amount may be in excess of
Federal Deposit Insurance Corporation insurance limits of $100,000.
Sales to three large wholesalers represented approximately 68% and 77%
of the Company's total sales for the years ended December 31, 2007 and 2008,
respectively.
(18) Quarterly Results of Operation (unaudited)
The following is a summary of the unaudited quarterly results of operations:
2008
(in thousands except per share data)
March 31, 2008 June 30, 2008 September 30, 2008 December 31, 2008 Total
-------------- ------------ ----------------- ----------------- -------
Revenues $208 $15 $17 $25 $265
Costs and expenses 3,453 3,145 3,468 3,010 13,076
----- ----- ----- ----- ------
Net loss $(3,165) $(2,802) $(3,415) $(2,837) $(12,219)
======== ======== ======== ======== =========
Basic and diluted
loss per share $(.04) $(.04) $(.05) $(.03) $(.16)
====== ====== ====== ====== ======
F39
2007
(in thousands except per share data)
March 31, 2007 June 30, 2007 September 30, 2007 December 31, 2007 Total
-------------- ------------- ------------------ ---------------- -------
Revenues $255 $234 $285 $285 $1,059
Costs and expenses 5,195 4,392 6,464 3,771 19,822
----- ----- ----- ----- ------
Net loss $(5,100) $(3,925) $(5,718) $(3,396) $(18,139)
======== ======== ======== ======== =========
Basic and diluted
loss per share $(.07) $(.05) $(.08) $(.05) $(.25)
====== =====- ====== ====== ======
(19) Subsequent Events
Employee Wage Or Hours Reduction Program
In an effort to conserve Company cash, the Employee Wage Or Hours
Reduction Program (the "Program") was ratified by the Board effective January 1,
2009. In a mandatory program that is estimated to be in effect for up to six
months, compensation of all active full-time employees of January 1, 2009
("Participants") were reduced through a reduction in their wages for which they
would be eligible to receive shares of Company common stock ("Stock") six months
after the shares were earned. While all employees were also offered the option
to reduce their work hours with a proportional decease in wages, none elected
this alternative.
On a semi-monthly basis, Participants receive rights to Stock
("Incentive Rights") that cannot be traded. Six months after the date the
Incentive Rights are awarded, the Company will undertake a process to have
Incentive Rights converted into Stock and issued to each Participant on a
monthly basis. The Company will establish and maintain a record for the number
of Incentive Rights awarded to each Participant. At the end of each semi-monthly
period, the Company will determine the number of Incentive Rights by converting
the proportionate incentive award to the value of the Stock by utilizing the
closing price of the Stock on the NYSE Alternext US (formerly the American Stock
Exchange or AMEX) based on the average daily closing price for the period.
The Plan is being administered for full-time employees as follows:
o Twenty-three employees earning $90,000 or less per year elected a wage
reduction of 10% per annum and are receiving an incentive of two times
the value in Stock;
o Four employees earning $90,001 to $200,000 per year elected a wage
reduction of 25% per annum are receiving an incentive of two times the
value in Stock;
o Two employees earning over $200,000 per year elected a wage reduction
of 50% per annum and are receiving an incentive of three times the
value in Stock;
o Any employee could elect a 50% per annum wage reduction for which would
allow them to be eligible for an incentive award of three times the
value of Stock. This option was elected by three employees.
Prior to the Stock being issued, the Company will establish a trading
account with an independent brokerage firm for each Participant. Incentive
Rights will constitute income to the Participants and be subject to payroll
taxes upon Stock issuance. At the Company selected brokerage firm, we will bear
all expenses related to selling the Stock (i.e.; broker fees, transaction costs,
commissions, etc.) for payroll withholding taxes purposes. Thereafter for each
Participant during the period that they remain an active employee, the Company
F40
will continue to bear such costs from this designated brokerage firm for the
maintenance of this account and all expenses related to selling the Company's
Stock. Participants leaving the Company or voluntarily separating from the Plan
will receive the Stock earned upon the six month conversion of their Incentive
Rights. The Plan benefits for individuals that are no longer Participants will
become fixed and the Company will not continue to bear such costs from the
designated brokerage firm for the maintenance of an account nor any expenses
related to selling the Company's Stock except for the initial costs associated
to the selling of Stock for payroll withholding taxes purposes.
Employee Bonus Pool Program
An element of the Employee Wage Or Hours Reduction Program was the
establishment of a Bonus Pool (the "Pool") in the case of FDA Approval
("Approval") of Ampligen(R). This bonus is to award to each employee of record
at January 1, 2009 a pretax sum of 30% in wages, calculated on their base per
annum compensation at the time of the Approval, and awarded within three months
of Approval. Participants who terminate their employment prior to the Approval
will not qualify for this bonus.
Standby Financing Agreement
In February 2009, the Company entered into a Standby Financing
Agreement pursuant to which certain individuals ("Individuals"), consisting of
Dr. Carter and Thomas Equels, agreed to loan us up to an aggregate of $1,000,000
in funds should they be unable to obtain additional financing, if needed. Under
the Standby Financing Agreement, the Company will use its best efforts in 2009
to obtain one or more additional financing agreements on such terms as our Board
deems to be reasonable and appropriate in order to maintain our operations. If
at any time after December 1, 2009 and prior to June 30, 2010 a majority of the
Company's independent Directors deems that in the event a financing of at least
$2.5 Million has not been obtained and additional funds are needed to maintain
our operations, they will send a written notice to each of the Individuals
informing them of the total amount of additional funds required and the specific
amount that will be required from each Individual. Within fifteen calendar days
after receipt of the notice, the Individuals will be required to pay the Company
their respective amount. We will then issue to them one year 15% senior secured
notes for their respective amounts (the "Notes"). Interest will be paid monthly
in our Common Stock. Repayment of the principal and interest under the Notes
will be secured by all of our assets. The Company will not, without the consent
of the Individuals, (i) incur any new debt senior or pari passu to the Notes or
(ii) encumber or grant a security interest in any assets. Upon 20 business days
written notice, we may prepay the Notes in cash at any time at 105% of the then
outstanding principal amount of the Notes, plus any accrued but unpaid interest.
For agreeing to be obligated to loan the Company money, each Individual
received 10 year warrants (the "Commitment Warrants") to purchase their common
stock at the rate of $50,000 worth in warrants per $100,000 committed. The
exercise price of these warrants is $0.51 (125% of the market closing price of
their Common Stock on the date that Agreement was executed). These warrants
vested immediately. If and when the Company notifies the Individuals that they
are consummating the Standby Financing, upon each Individual's payment of his
committed amount, he will receive additional 10 year warrants to purchase our
Common Stock at the rate of $50,000 worth in warrants per $100,000 paid. The
F41
exercise price of the warrants will be the closing market price of our Common
Stock on the day we receive the funds from the Individuals. These warrants will
vest immediately. While any portion of the Notes are outstanding, Individuals
will have weighted average anti-dilution rights with regard to the exercise
price of all warrants issued pursuant hereto except that these rights will not
apply if the securities are issued to employees, board members, corporate and
scientific advisors, select vendors, pursuant to our current agreement with
Fusion Capital Fund II, LLC or part of a corporate or strategic alliance.
FDA Extends NDA Review Date For Ampligen(R)
In February 2009, the Company received a letter from the Federal Drug
Administration ("FDA") indicating that their originally scheduled Prescription
Drug User Fee Act ("PDUFA") date on the Ampligen(R) (Poly I:Poly C12U) New Drug
Application ("NDA") would be extended by three months "in order to provide time
for a full review of the submission." A decision from the FDA was originally
expected by February 25, 2009. The extended PDUFA date for Ampligen(R) is now
scheduled for May 25, 2009. Due to constraints at the FDA, specifically and
including the increased workload related to the recently enacted and implemented
FDA Amendments Act and Safety First/Safe Use initiatives, work priorities may
change resulting in the agency going past the customary PDUFA goal date set for
reviews of an NDA.
Extensions of NDA reviews are a separate category of FDA response,
distinct from a complete response letter or approval by the PDUFA date, and have
always existed. Prior to the recent new FDA initiatives (cited above) and
resultant increased workload, "on time" action by the agency has generally
ranged between 68 and 100 percent for the standard NDA reviews between fiscal
years 1999 and 2006 (source: Annual FDA PDUFA Performance Reports (www.FDA.gov).
Hemispherx Biopharma, Inc.
Schedule II -Valuation and Qualifying Accounts
(dollars in thousands)
Column A Column B Column C Column D Column E
Balance at Balance at
beginning of Charge to Write-offs end of period
Description period expense
----------- ------ ------- ---------- -------------
Year Ended December 31, 2006
Reserve for inventory
$100 $241 $(100) $241
Year Ended December 31, 2007
Reserve for inventory
$241 $109 - $350
Year Ended December 31, 2008
Reserve for inventory
$350 - $(64) $286
Exhibit 4.18
Form of Commmitment Warrants issued in February 2009 under the Standby Financing
Agreement
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE. THESE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
COVERING SUCH SECURITIES UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
UNLESS THE HOLDER SHALL HAVE OBTAINED AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE COMMON STOCK
OF
HEMISPHERx BIOPHARMA, INC.
Date: February 1, 2009 No. 09-02-01
Hemispherx Biopharma, Inc., a Delaware corporation (the "Company"),
hereby certifies that, for value received, [insert name] (the "Warrant Holder"),
is entitled to subscribe for and purchase up to XXX,XXX shares of the Company's
Common Stock at a price equal to the Exercise Price (as defined below), subject
to the provisions and upon the terms and conditions hereinafter set forth. This
Warrant and related terms were approved by the Board of Directors.
This Warrant is subject to all of the terms and conditions specified
below.
1 COMMON STOCK. The Common Stock of Hemispherx Biopharma, Inc. which at
the date hereof consists of 200 million shares authorized, each share
having a par value of $.001 per share, as designated in the Company's
Certificate of Incorporation as amended from time to time.
2. STOCK PURCHASABLE. The number of shares of Common Stock purchasable
upon the total exercise of this Warrant is [insert number of warrants].
3. EXERCISE PRICe. The price at which this Warrant is exercisable, unless
such price is adjusted as described in Section 7, is $0.51 per share,
in lawful funds of the United States of America ("Exercise Price").
4. EXPIRATION OF WARRANT. This Warrant shall expire and be no longer
exercisable after 5:00 p.m. Eastern Time on January 31, 2019
(Expiration Date").
5. EXERCISE OF WARRANTS. These Warrants may be exercised as of February 1,
2009 and thereafter during the remaining term of this agreement. The
purchase rights represented by this Warrant may be exercised, as
allowed by the terms and conditions of this agreement, in whole or in
part (but not less than 1,000 share increments), by the Warrantholder
or its duly authorized attorney or representative at any time and from
time to time while this Warrant is exercisable, upon presentation of
this Warrant at the principal office of the Company, with the purchase
form (Exhibit A) attached hereto duly completed and signed, and upon
payment to the Company in cash or by certified check or bank draft of
an amount equal to the number of shares being so purchased multiplied
by the Exercise Price.
6. PROCEDURES. The Company agrees that the Warrantholder shall be deemed
the record owner of the Stock as of the close of business on the date
on which the Warrant shall have been presented and payment shall have
been made for the Stock as aforesaid. Certificates for the shares of
Stock so purchased shall be delivered to the Warrantholder within a
reasonable time, not exceeding 15 days, after the exercise in full of
the rights represented by this Warrant.
If the Warrant is exercised in part only, the Company, upon surrender
of this Warrant for cancellation, shall deliver a new Warrant
evidencing the rights of the Warrantholder to purchase the balance of
the shares of Stock which the Warrantholder is entitled to purchase
hereunder.
7. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The number
and kind of securities purchasable upon the exercise of this Warrant
and the Exercise Price shall be subject to adjustment from time to time
upon the occurrence of certain events and in the manner described
below.
(a) Reorganization, Consolidation, Merger, etc. In case of any capital
reclassification or reorganization or of any consolidation or merger of
the Company with or into any other person, or any other corporate
reorganization (other than a merger or consolidation in which the
Company shall be the continuing or surviving entity and which does not
result in any change in the Common Stock) or any sale of all or
substantially all of the assets of the Company (any such transaction
being hereinafter referred to as a "Reorganization"), then, in each
case, the Holder, on exercise hereof at any time after the consummation
or effective date of such Reorganization (the "Effective Date"), shall
receive, in lieu of the Warrant Shares issuable on such exercise prior
to the Effective Date, the stock and other securities and property
(including cash) to which such Holder would have been entitled upon the
Effective Date as if the Holder had exercised this Warrant immediately
prior thereto.
(b) Split, Subdivision or Combination of Common Stock. If the Company
at any time while this Warrant remains outstanding shall split,
subdivide or combine the Common Stock or shall issue a dividend on the
Common Stock payable in shares of Common Stock, the Exercise Price
shall be proportionately decreased in the case of a split, subdivision
or stock dividend, and increased in the case of a combination. Upon
each such adjustment in the Exercise Price, the number of Warrant
Shares purchasable hereunder shall be adjusted, to the nearest whole
share, to the product obtained by multiplying the number of Warrant
Shares purchasable immediately prior to such adjustment in the Exercise
Price by a fraction (i) the numerator of which shall be the Exercise
Price immediately prior to such adjustment, and (ii) the denominator of
which shall be the Exercise Price immediately after such adjustment.
(c) Other Dividends and Distributions. If the Company shall make or
issue, or shall fix a record date for the determination of eligible
holders entitled to receive, a dividend or other distribution with
respect to the Common Stock payable in (i) securities or evidences of
indebtedness of the Company or of other persons (other than shares of
Common Stock in which case the provisions of paragraph (b) above shall
apply) or (ii) assets or cash (excluding cash dividends paid or payable
solely out of retained earnings), then in each case, the Holder on
exercise hereof at any time after the consummation, effective date or
record date of such event, shall receive, in addition to the Warrant
Shares (or such other stock or securities) issuable on such exercise
prior to such dates the securities or such other assets of the Company
to which Holder would have been entitled upon such date as if the
Holder had exercised this Warrant immediately prior thereto.
(d)ssuance of stock or convertible securities at a price less than 125%
of the Exercise Price. If and whenever prior to the Expiration Date,
the Company issues or sells any shares of Common Stock (excluding
shares of Common Stock (i) issued to employees, board members,
corporate or scientific advisors or select vendors; (ii) issued to
Fusion Capital Fund II, LLC pursuant to the Company's current agreement
with Fusion Capital; (iii) issued as part of a corporate or strategic
alliance; and (iv) issued upon exercise of options, warrants or other
convertible equity or debt securities or rights to acquire Common Stock
(collectively, "Outstanding Convertible Securities") which are
outstanding on the date immediately preceding the date of this Warrant,
provided that such issuance of shares of Common Stock upon exercise of
such Outstanding Convertible Securities is made pursuant to the terms
of such Outstanding Convertible Securities in effect on the date
immediately preceding the date of this Warrant such Outstanding
Convertible Securities are not amended after the date immediately
preceding the date of this Warrant) for a consideration per share when
multiplied by 125% that is less than the Exercise Price in effect
immediately prior to such issuance or sale (each such sale or issuance,
a "Dilutive Issuance"), then concurrent with such issue or sale, the
Exercise Price then in effect shall be reduced to a price (rounded to
the nearest cent) equal to the product of (x) the Exercise Price in
effect immediately prior to such issuance or sale and (y) the quotient
determined by dividing (1) the sum of (I) the product derived by
multiplying the Exercise Price in effect immediately prior to such
Dilutive Issuance by the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale, plus (II) the
consideration, if any, received by the Company upon such Dilutive
Issuance, by (2) the product derived by multiplying the (I) the
Exercise Price in effect immediately prior to such Dilutive Issuance by
(II) the number of shares of Common Stock Deemed Outstanding
immediately after such Dilutive Issuance.
(e) Statements of Adjustments. Whenever the Exercise Price shall be
adjusted as provided in this Section 7, the Company shall prepare a
statement showing the facts requiring such adjustment and the Exercise
Price that shall be in effect after such adjustment. The Company shall
cause a copy of such statement to be by first class mail, postage
prepaid, to the Holder at his/her address appearing on the Company's
records. Where appropriate, such copy may be given in advance and may
be included as part of the notice required to be mailed under the
provisions of subsection (g) of this Section 7.
(f) Effectiveness of Adjustment. Adjustment made pursuant to subsection
(b) (c) and (d) of this Section 7 shall be made on the date such split,
subdivision, dividend, combination, distribution or Dilutive Event, as
the case may be, is made. Adjustments pursuant to subsection (b) or (c)
shall become effective at the opening of business on the business day
next following the record date for the determination of stockholders
entitled to such split, subdivision, dividend, combination or
distribution. Adjustments pursuant to subsection (d) shall become
effective at the opening of business on the business day next following
the date of the adjustment.
(g) Notices. In the event the Company shall propose to take any action
of the types described in subsection (a) (b) or (c) of this Section 7
or the Company has effected a Dilutive Event, the Company shall give
notice to the Holder, in the manner set forth in subsection (e) of this
Section 7, which notice shall specify the record date, if any, with
respect to any such action under subsection (a) or (b) and the date on
which such action is to take place or, in the event of a Dilutive Event
under subsection (d), the date of the adjustment. Such notice shall
also set forth such facts with respect thereto as shall be reasonably
necessary to indicate the number, kind or class of shares or other
securities or property which shall be deliverable to the Holder upon
exercise hereof following the occurrence of such action. In the case of
any action which would require the fixing of a record date, such notice
shall, to the extent practicable be given at least 10 days prior to the
date so fixed, and in case of all other action, such notice shall be
given at least 10 days prior to the taking of such proposed action.
Failure to give such notice, or any defect therein, shall not affect
the legality or validity of any such action.
8. COVENANTS. The Company covenants and agrees that:
(a) Reservation of Stock. During the period within which the rights
represented by the Warrant may be exercised, the Company shall, at all
times, reserve and keep available, free from preemptive rights out of
the aggregate of its authorized but unissued Stock, for the purpose of
enabling it to satisfy any obligation to issue shares of Stock upon the
exercise of this Warrant, the number of shares of Stock deliverable
upon the exercise of this Warrant. If at any time the number of shares
of authorized Stock shall not be sufficient to effect the exercise of
this Warrant, the Company shall take such corporate action as may be
necessary to increase its authorized but unissued Stock to such number
of shares as shall be sufficient for such purpose. The Company shall
have analogous obligations with respect to any other securities or
properties issuable upon exercise of this Warrant.
(b) No Liens, etc. All Stock that may be issued upon exercise of the
rights represented by this Warrant shall, upon issuance, be validly
issued, fully paid, nonassessable and free from all taxes, liens and
charges with respect to the issue thereof;
(c) Taxes. All original issue taxes payable with respect to the
issuance of shares upon the exercise of the rights represented by this
Warrant shall be borne by the Company, but in no event shall the
Company be responsible or liable for income taxes or transfer taxes
upon the transfer of any Warrant;
(d) No Diminution of Value.
-----------------------
The Company shall not take any action to terminate this Warrant or to
diminish it in value; and
(e) Notice of Events. The Company shall give prior written notice to
the Warrantholder of (i) any tender offer that is being made for any of
the Company's stock; (ii) any offers to holders of Stock for
subscription or purchase by them of any shares of stock of any class;
(iii) any capital reorganization of the Company, reclassification of
the capital stock of the Company, consolidation or merger of the
Company with or into another corporation, the sale, lease or transfer
of all or substantially all of the property or assets of the Company to
another corporation or the voluntary or involuntary dissolution,
liquidation or winding up of the Company and (iv) any event of the type
described in Section 7 hereof (all such events in clauses (i)-(iv)
above are referred to as "Events"). Upon becoming aware of any pending
or proposed Event, the Company shall deliver notice at least five
business days before the day of the occurrence of any Event and shall
describe the Event, the date it is to take place and when the holders
of the Company's stock will be entitled to exchange their shares for
securities or other properties deliverable upon such Event.
9. VOTING RIGHTS. Until exercised, this Warrant shall not entitle the
Warrantholder to any voting rights or other rights as a stockholder of
the Company.
10. TRANSFER RESTRICTIONS. Neither this Warrant nor the Stock issuable upon
the exercise hereof may be sold, transferred, pledged or hypothecated
unless the Company shall have been supplied with evidence reasonably
satisfactory to it that such transfer is not violation of the
Securities Act of 1933, as amended (the "Act"), and any applicable
state laws. The Company may place a legend to that effect on this
Warrant or any replacement Warrant and on each certificate representing
shares issuable upon exercise of this Warrant. Subject to the
satisfaction of the aforesaid condition, this Warrant shall be
transferable by the Warrantholder.
If this Warrant is transferred, in whole or in part, upon surrender of
this Warrant to the Company, the Company shall deliver to each
transferee an Warrant evidencing the rights of such transferee to
purchase the number of shares of Stock that such transferee is entitled
to purchase pursuant to such transfer.
11. STOCKHOLDER COMMUNICATIONS. Until the exercise or expiration of this
Warrant, the Company shall provide each Warrantholder with each and
every report or other communication mailed to the stockholders of the
Company.
12. LOST, STOLEN WARRANTS. If this Warrant is lost, stolen mutilated or
destroyed, the Company shall, on such terms as the Company may
reasonably impose, including a requirement that the Warrantholder
obtain a bond, issue a new Warrant of like denomination, tenor and
date. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen,
mutilated or destroyed Warrant shall be at any time enforceable by
anyone.
13. PROVISIONS OF NEW WARRANTS. Any Warrant issued pursuant to the
provisions of Section 14, or upon transfer, exchange, division or
partial exercise of this Warrant or combination thereof with another
Warrant or Warrants, shall set forth each provision set forth in
Sections 1 through 26, inclusive, of this Warrant as each such
provision is set forth herein, and shall be duly executed on behalf of
the Company by an executive officer.
14. CANCELLATION OF WARRANT. Upon surrender of this Warrant for transfer or
exchange or upon the exercise hereof, this Warrant shall be canceled by
the Company, shall not be reissued by the Company, and, except as
provided in Section 6 in case of a transfer, no Warrant shall be issued
in lieu hereof. Any new Warrant certificate shall be issued promptly
but no later than 14 days after receipt of the old Warrant certificate,
provided, however, that the obligation of the Company to transfer the
Warrant or issue the shares of Stock upon the exercise of this Warrant
shall be subject to compliance with Section 10.
15. COMPLETE AGREEMENT: Modifications. This Warrant and any documents
referred to herein or executed contemporaneously herewith constitute
the parties' entire agreement with respect to the subject matter hereof
and supersede all agreements, representations, warranties, statements,
promises and understandings, whether oral or written, with respect to
the subject matter hereof. This Warrant may not be amended, altered or
modified except by a writing signed by the parties.
16. COOPERATION. Each party hereto agrees to execute any and all further
documents and writings and perform such other reasonable actions which
may be or become necessary or expedient to effectuate and carry out
this Warrant.
17. NOTICES. All notices under this Warrant shall be in writing and shall
be delivered by personal service or telegram, telecopy or certified
mail, postage prepaid, to such address as may be designated from time
to time by the relevant party, and which will initially be as set forth
below. Any notice sent by certified mail will be deemed to have been
given three (3) days after the date on which it is mailed. All other
notices will be deemed given when received. No objection may be made to
the manner of delivery of any notice actually received in writing by an
authorized agent of a party. Notices will be addressed as set forth on
the last page hereof or to such other addresses as the party to whom
the same is directed will have specified.
18. SUCCESSOR AND ASSIGNS. Except as provided herein to the contrary, this
Warrant shall be binding upon and inure to the benefit of the parties,
their respective successors and permitted assigns.
19. GOVERNING LAW: JURISDICTION. This Warrant shall be governed by and
construed in accordance with the internal laws of the State of Delaware
and without giving effect to choice of law provisions. No amendment or
waiver of any provision of this Warrant, nor a consent to any departure
by the Company therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Company and the Holder, and
then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given. The captions of
this Warrant have been inserted for convenience only and shall have no
substantive effect.
20. CONSTRUCTION. No term or provision of the Warrant shall be construed so
as to require the commission of any act contrary to law, and wherever
there is any conflict between any provision of this Warrant and any
present or future statute, law, ordinance, or regulation contrary to
which the parties have no legal right to contract, the latter shall
prevail, but in such event the provision of this Warrant so affected
shall be curtailed and limited only to the extent necessary to bring it
within the requirements of the law.
21. WAIVERS STRICTLY CONSTRUED. With regard to any power, remedy or right
provided herein or otherwise available to any party hereunder (i) no
waiver or extension of time shall be effective unless expressly
contained in writing signed by the waiving party; and (ii) no
alteration, modification or impairment shall be implied by reason of
any previous waiver, extension of time, delay or omission in exercise,
or other indulgence.
22. SEVERABILITY. If one or more of the provisions of this Warrant shall be
held to be invalid, illegal or unenforceable in any respect, the
validity, legality or enforceability of the remainder of this Warrant
shall not be affected.
23. HEADINGS. The headings in this Warrant are inserted only as a matter of
convenience, and in no way define, limit, or extend or interpret the
scope of this Warrant or of any particular provision.
24. COUNTERPARTS. This Warrant may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one or the same instrument.
25. ATTORNEY'S FEES. Should any litigation be commenced (including any
proceedings in a bankruptcy court) between the parties hereto or their
representatives concerning any provision of this Warrant or the rights
and duties of any person or entity hereunder, the party or parties
prevailing in such proceedings shall be entitled, in addition to such
other relief as may be granted, to the attorney's fees and court costs
incurred by reason of such litigation.
26. NO BROKERS ETC. FEES. Each party hereto represents that it is not and
will not be obligated for any finder's or broker's fees or commissions
in connection with this Warrant or any agreement referred to herein or
contemplated hereby. The Company agrees to indemnify and hold harmless
the Warrantholder from any liability for any commission or compensation
in the nature of a finder's or broker's fee (and the costs and expenses
of defending against such liability or asserted liability) for which
the Company or any of its officers, employees or representatives is
alleged to be responsible.
27. OTHER. These Warrants were granted to the Warrantholder for services
performed on behalf of the Company.
WITNESS the signature of a duly authorized officer.
Dated: February 1, 2009
Hemispherx Biopharma, Inc.
By:___________________________________________________________
Charles T. Bernhardt, Chief Financial Officer
ADDRESS OF COMPANY:
Hemispherx Biopharma, Inc.
One Penn Center
1617 JFK Boulevard
Philadelphia, PA 19103
Telephone (215) 988-0080
Fax (215) 988-1739
ADDRESS OF WARRANTHOLDER:
EXHIBIT "A"
HEMISPHERX BIOPHARMA, INC.
PURCHASE FORM
09-02-01
To Be Executed Upon Exercise of Warrant
The undersigned Warrant holder hereby exercises the right to purchase shares of
Stock, evidenced by the within Warrant, according to the terms and conditions
thereof, and herewith makes payment of the purchase price in full for
________________ shares at the exercise price of $_______ per share for a total
of $________________. The undersigned requests that the certificate(s) for such
shares shall be issued in the name and delivered to the address set forth below:
-----------------------------------
If said number of shares shall not be all the shares purchasable under the
within Warrant the Warrantholder hereby requests that a new Warrant for the
unexercised portion (______________ shares) shall be registered in the name and
delivered to the address set forth below.
Dated: __________________________
NAME OF WARRANTHOLDER
By:_____________________________
Address:
Employee Identification Number,
Social Security Number or other identifying
number:
-------------------------------------
Exhibit 10.60
Employee Wage Or Hours Reduction Program
Hemispherx Biopharma, Inc
Employee Wage Or Hours Reduction Program
As Of January 1, 2009
General
The Board of Directors have approved the Employee Wage Or Hours Reduction
Program (the "Program") to conserve cash in 2009 which includes a mandatory
program in which all employees agree to reduce their compensation through either
the election of accepting a reduction in their wages or proportionately reducing
their work hours per week. In the case of employees electing to reduce their
wages rather than work hours, Hemispherx Biopharma, Inc. (the "Company") has
created an incentive plan (the "Incentive Plan") for which active employees as
of January 1, 2009 would be eligible to receive shares of Company unrestricted
freely tradable common stock ("Stock"). Employees who decline to reduce either
their wages or work hours will be terminated regarding their employment with the
Company as of December 31, 2008.
Term
This Program will go into effect on January 1, 2009 and is estimated to be in
effect for up to six months. However, this term could be reduced or increased in
duration by the Company's management depending on the financial condition of the
Company.
Wage Reduction Incentive Plan
A Wage Reduction Incentive Plan (the "Plan") is available to employees
("Participants") who elect to reduce their wages without decreasing their
minimum forty hour work week. On a semi-monthly basis, Participants will receive
rights to Stock ("Incentive Rights") that cannot be traded. Six months after the
date the Incentive Rights are awarded, the Company will undertake a process to
have Incentive Rights converted into Stock and issued to each Participant on a
monthly basis.
The Company will establish and maintain a record ("Participant's Statement") for
the number of Incentive Rights awarded to each Participant. At the end of each
semi-monthly period, the Company will determine the number of Incentive Rights
by converting the proportionate incentive award to the value of the Stock by
utilizing the closing price of the Stock on the NYSE Alternext US (formerly the
American Stock Exchange or AMEX) based on the average daily closing price for
the period. On a monthly basis, a Participant Statement will be issued to each
Participant reflecting the number of Incentive Rights earned in the current
period as well as cumulative Incentive Rights earned.
Wage Reduction Incentive Plan Terms The Plan will be administered as follows:
o Participants earning $90,000 or less per year that elect a wage reduction
of 10% per annum will receive an incentive of two times the value in Stock
(i.e.; $3,000 per month wages at 10% wage reduction = $300 x 2 or $600
value in Incentive Rights and $2,700 in wages);
o Participants earning $90,001 to $200,000 per year that elect a wage
reduction of 25% per annum will receive an incentive of two times the
value in Stock (i.e.; $10,000 per month wages at 25% wage reduction =
$2,500 x 2 or $5,000 value in Incentive Rights and $7,500 in wages);
o Participants earning over $200,000 per year that elect a wage reduction of
50% per annum will receive an incentive of three times the value in Stock
(i.e.; $17,000 per month pay x 50% wage reduction = $8,500 x 3 or $25,500
value in Incentive Rights and $8,500 in wages);
o Any employee can elect a 50% per annum wage reduction. This will allow
them to be eligible for an incentive award of three times the value of
Stock (i.e.; $3,000 per month pay x 50% wage reduction = $1,500 x 3 or
$4,500 value in Incentive Rights and $1,500 in wages).
Wage Reduction Incentive Plan Administration
1. Prior to the Stock being issued (becoming available to sell), the Company
will establish a trading account with a Brokerage Firm for each
Participant.
2. As with most awards offered to eligible employees, the Incentive Rights
will constitute income to the Participants and be subject to payroll taxes
upon Stock issuance. At the Company established Brokerage Firm, the Company
will bear all expenses related to selling the Stock (i.e.; broker fees,
transaction costs, commissions, etc.) for payroll withholding taxes
purposes.
3. Thereafter for each Participant during the period that they remain an
active employee or becomes deceased during their preexisting participation
in the Plan, the Company will continue to bear such costs from this
designated Brokerage Firm for the maintenance of this account and all
expenses related to selling the Company's Stock.
4. Participants leaving the Company or voluntarily separating from the Plan
will receive the Stock earned upon the six month conversion of their
Incentive Rights. The Plan benefits for individuals that are no longer
Participants will become fixed and the Company will not continue to bear
such costs from the designated Brokerage Firm for the maintenance of an
account nor any expenses related to selling the Company's Stock except for
the initial costs associated to the selling of Stock for payroll
withholding taxes purposes.
5. In the case of dividends, splits or any other related activity initiated by
the Company to the Stock prior to the six month conversation period, the
financial impact will be calculated into the value of the Incentive Rights
for the eventual conversion to Stock.
6. The Company makes no representations as to the ultimate value of the Stock
nor Incentive Rights issued to the employee under the Plan.
7. The Company makes no representations as to whether the Plan will ultimately
be the same as, greater than, or less than, the employee's compensation
prior to the employee's participation in the Wage Reduction Incentive Plan.
8. Subject to the provisions of the Plan, the Board of Directors shall be
authorized to interpret the Plan and the grants made under the Plan, to
establish, amend and rescind any rules, regulations or policies related to
the Plan, to determine the terms and provisions of the agreements related
to the Plan, and to make all other determinations necessary or advisable
for the administration of the Plan. The Board of Directors may correct any
defect, supply any omission and reconcile any inconsistency in the Plan or
any grant in the manner and to the extent it shall be deemed desirable to
carry into effect. The determination of the Board of Directors in the
administration of the Plan, as described herein, shall be final and
conclusive. The Board of Directors may adopt such rules, regulations and
policies as it deems necessary for governing its affairs.
Withholding Taxes For Incentive Award
On the date Stock is to be issued, the number of shares needed for sale to cover
the related payroll withholding taxes will be determined by the Company and
communicated to the Participant. The Participant may elect to pay the
withholding taxes dollar amount directly to the Company or formally agree to
sell the necessary shares of Stock and immediately forward the proceeds directly
to the Company for payroll tax withholding. The Stock proceeds will then be used
to fund the employee's portion of payroll withholding taxes.
Hours Reduction Program
As an alternative to the Wage Reduction Incentive Plan, an employee may elect to
reduce their working hours and proportionate pay determined on base salary
criteria: o Participants earning $90,000 or less per year would reduce their
work hours and proportionate compensation by 10%; o Participants earning $90,001
to $200,000 per year would reduce their work hours and proportionate
compensation by 25%; or o Participants earning over $200,000 per year would
reduce their work hours and proportionate compensation by 50%. o Any employee
could elect to reduce their work hours and proportionate compensation by 50%.
Mandatory Employee Election
As of December 31, 2008, all employees will be required to acknowledge their
participation in the Program by executing an agreement to be supplied by the
Company titled "Employee Election Form As Of December 31, 2008". This agreement
will reference to the terms of the Program Document. Otherwise, employees will
be required to separate from the Company. Those employees electing to
participate in the Program through timely election of the Wage Reduction
Incentive Plan Or Hours Reduction Program, understand and acknowledge that they
will remain employees "at will".
Bonus Pool
A Bonus Pool (the "Pool") will be established in the case of FDA Approval
("Approval") of Ampligen to award each employee of record at January 1, 2009 a
pretax sum of 30% in wages, calculated on their base per annum compensation at
the time of the Approval and to be awarded within three months of Approval.
Participants who terminate their employment prior to the Approval will not
qualify for this bonus.
Subject to the provisions of the Program, the Board of Directors shall be
authorized to interpret the Pool and the grants made under the Pool, to
establish, amend and rescind any rules, regulations or policies related to the
Pool, to determine the terms and provisions of the agreements related to the
Pool, and to make all other determinations necessary or advisable for the
administration of the Pool. The Board of Directors may correct any defect,
supply any omission and reconcile any inconsistency in the Pool or any grant in
the manner and to the extent it shall be deemed desirable to carry into effect.
The determination of the Board of Directors in the administration of the Pool,
as described herein, shall be final and conclusive. The Board of Directors may
adopt such rules, regulations and policies as it deems necessary for governing
its affairs.
Goal Achievement Incentive Program
The Company will pay eligible employees an aggregate incentive bonus based upon
the Goal Achievement Incentive Program described in the 8-K of November 28, 2008
titled "Hemispherx Biopharma, Inc. Introduces Expense Reduction Program" filed
with the SEC. The aggregate incentive bonus will be in the amount of 1% of cash
received from each Strategic Partnering Agreement as defined in November 28,
2008's 8-K. Eligible employees are defined as employees of record of the Company
as of January 1, 2009 and continue to be active employees of the Company at the
time of execution of each respective Strategic Partnering Agreement. Each
eligible employee will be paid a proportion of the aggregate incentive bonus
equal to the proportion of such eligible employee's base compensation at the
time of the execution of each respective Strategic Partnering Agreement to the
total base compensation of all eligible employees at the time of the execution
of each such Strategic Partnering Agreement.
Exhibit 10.61
Standby Financing Agreement
THIS AGREEMENT made and entered into this 1st day of February, 2009 by
and between HEMISPHERX BIOPHARAM, INC., a Delaware corporation (the "Company"),
and the undersigned Individuals (each an "Individual" and collectively, the
"Individuals").
WHEREAS, the Company may have additional financial requirements between
December 1, 2009 and June 30, 2010 if the Company is unable to consummate
strategic partnering transactions or other financing arrangements (the
"Additional Financing"); and
WHEREAS, each of the Individuals is ready, willing and able to loan the
Company funds up to the amounts set forth next to their names on the signature
page of this Agreement through the purchase of securities as described in
greater detail below (the "Notes Funding"),
NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. The Company shall use its best efforts to obtain one or more Additional
Financings on such terms and subject to such conditions as the Board of
Directors of the Company shall deem to be reasonable and appropriate in order to
maintain the Company's operations.
2. If at any time after December 1, 2009 and prior to June 30, 2010 a majority
of the independent Directors of the Company deem that in the event a financing
of at least $2.5 Million has not been achieved and additional funds are needed
to maintain the Company's operations, the Company shall send a written notice
(the "Notice") to each of the Individuals informing them of the total amount of
additional funds required, that the Company is effecting the Notes Funding and
the specific amount that will be required from each Individual (each amount, an
"Individual's Amount"). The Company will deliver with the Notice the following
documents: (i) a securities purchase agreement ("SPA"), (ii) a form of Note.
(iii) a security agreement ("Security Agreement"), and (iv) a form of common
stock purchase warrant ("Note Warrant") (all of the foregoing documents,
collectively, the "Transaction Documents").
3. Within fifteen (15) calendar days after receipt of the Notice and the
Transaction Documents from the Company, the Individuals shall deliver to the
Company an executed SPA and their respective Individual's Amount, and the
Company shall deliver to each Individual executed copies of the Transaction
Documents.
4. No Individual shall be required to pay more than his or her Individual's
Amount as adjusted pursuant to paragraph 4 above.
5. The specific terms of the Note Funding are set forth on Exhibit A, attached
hereto and, by this reference, incorporated herein.
6. The Company will issue to each Individual who executes this Agreement
Commitment Warrants as defined and described in Exhibit A in consideration of
his or her agreeing to participate in the Note Funding and being obligated to
provide funding thereunder.
7. Each of the Individuals hereby represents and warrants as follows:
(a) The Individual (i) is over the age of 21 (if an individual); (ii) has
adequate means of providing for the Individual's current needs and possible
contingencies, and the Individual has no need for liquidity of the Individual's
investment in the Company; (iii) can bear the economic risk of losing the
Individual's entire investment therein; (iv) has such knowledge and experience
in business and financial matters, alone or with a purchaser representative,
that the Individual is capable of evaluating the relative risks and merits of
this investment; (v) understands the speculative nature and uncertainty of the
Company's business; and (vi) not only can the Individual bear the economic risk,
but understands that the Individual can lose his entire investment.
(b) The Individual acknowledges that the Notes, the Commitment Warrants and the
Note Warrants, as well as any shares issuable as interest under the Notes or
exercise of the Warrants (collectively, the "Securities") have not been and are
not being registered under the Securities Act of 1933 (the "Act") and that the
certificates received by the Individual will bear a legend indicating that
transfer of these Securities is restricted by reason of the fact that the said
Securities have not been so registered.
(c) The Individual represents that these Securities are being acquired for his
or her own account, for investment purposes only and not with a view to resale
or other distribution thereof, nor with the intention of selling, transferring
or otherwise disposing of all or any part of such Securities for any particular
event or circumstances, except for selling, transferring or disposing of said
Securities in full compliance with all applicable provisions of the Act and the
Securities Exchange Act of 1934, and the Rules and Regulations promulgated by
the Securities and Exchange Commission thereunder. The Individual further
understands and agrees that such Securities may be sold only if they are
subsequently registered under the Act or an exemption from such registration is
available, and that any routine sales of Securities made in reliance upon Rule
144 can be made only after the holding period specified in that Rule, and only
in the amounts set forth in and pursuant to the other terms and conditions of
that Rule. The Individual understands that a stop order will be placed on the
book and records of the transfer agent regarding any shares issued pursuant to
the Securities.
(d) The address set forth below is the Individual's true and correct residence,
and the Individual has no present intention of becoming a resident of any other
state or jurisdiction prior to the date on which payment in full for the
Securities is made.
(e) The Individual's execution and delivery of this Agreement has been duly
authorized by all necessary legal action.
(f) The Individual has reviewed this Agreement and the Attachment attached
thereto.
(g) The Individual has read the definitions of "ACCREDITED INVESTOR" as that
term is defined on the last two pages of this Agreement and the Individual is an
"ACCREDITED INVESTOR."
(h) The Individual has been afforded the opportunity to ask questions of and
receive answers from the Company concerning the terms and conditions of the Note
Funding and the business of the Company and to obtain any additional information
which the Company possesses or could acquire without unreasonable effort or
expense that is necessary to verify the accuracy of information contained
herein; the Individual desires no more information;
(i) There are substantial restrictions on the transferability of the Securities.
Each of the certificates representing Securities acquired by the Individual
pursuant hereto will bear in substance the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended. They may not be sold or transferred in the absence of an
effective Registration Statement under that Act without an opinion of counsel
satisfactory to the Company that such Registration is not required."
The foregoing representations and warranties are true and accurate as of the
date hereof. If, in any respect, such representations and warranties shall not
be true and accurate prior to the date that the Company effects the Note
Funding, the Individual shall give written notice of such fact to the Company,
specifying which representations and warranties are not true and accurate and
the reasons therefor, if any.
8. Transferability.
---------------
The Individual will not transfer or assign this Agreement, or any interest of
the Individual herein without the prior written consent of the Company, and the
assignment and transferability of the Securities acquired pursuant hereto shall
be made only in accordance with the provisions of this Agreement, the Act and
Regulations thereunder and applicable state securities laws.
9. Miscellaneous
----------------
(a) All notices or other communications given or made hereunder shall be in
writing and shall be deemed to have been duly given (i) on the date of service
if served personally on the party to whom notice is to be given, (ii) on the day
of transmission if sent by facsimile transmission to the number given below, and
telephonic confirmation of receipt is obtained promptly after completion of
transmission, (iii) on the day after delivery to Federal Express or similar
overnight courier, or (iv) on the fifth day after mailing, if mailed to the
party to whom notice is to be given, by first class mail, registered or
certified, postage prepaid, and properly addressed, return receipt requested, to
the party as follows: To the Company: Hemispherx Biopharma, Inc., 1617 JFK
Boulevard, Philadelphia, Pennsylvania 1910, facsimile number: (215) 988-1739. To
the Individuals: at the address set forth on the signature page hereto.
(b) This Agreement shall be governed by and construed in accordance with the
substantive law of the State of Delaware without giving effect to the principles
of conflicts of laws thereof.
(c) This Agreement constitutes the entire agreement between the parties hereto
with respect to the subject matter hereof and may be amended only by a writing
executed by all parties.
(d) This Agreement may be executed in two (2) or more counterparts, and with
counterpart signature pages, each of which shall be deemed an original, and all
of such counterparts together constitute but one (1) and the same agreement. One
(1) or more counterparts may be delivered by facsimile with the same force and
effect as an original.
(e) If any term, provision, covenant or restriction of this Agreement is held by
a court of competent jurisdiction to be invalid, illegal, void or unenforceable,
the remainder of the terms, provisions, covenants and restrictions set forth
herein shall remain in full force and effect and shall in no way be affected,
impaired or invalidated, and the parties hereto shall use their commercially
reasonable efforts to find and employ an alternative means to achieve the same
or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a sealed
instrument as of the date first above written.
HEMISPHERX BIOPHARMA, INC.
By: _________________________
Chief Financial Officer
Accredited
Investor
Individual/Address Confirmation* $Amount Committed
___________________________ #4 $500,000
-------------- --------
William A. Carter, M.D.
Fax No.:
----------------------------------
___________________________ #4 $500,000
--------------- --------
Thomas Equels, Esq.
Fax No.:
----------------------------------
* Each Individual is required to insert one of the subsections of the definition
of "Accredited Investor" set forth on the last two pages of the Agreement that
applies to him.
FEDERAL DEFINITION OF ACCREDITED INVESTOR
SEC RULE 501(a)
Sec. 230.501 Definitions and terms used in Regulation D.
As used in Regulation D, the following terms shall have the
meaning indicated:
(a) Accredited Investor. "Accredited Investor" shall mean any person who comes
within any of the following categories, or who the issuer reasonably believes
comes within any of the following categories, at the time of the sale of the
securities to that person:
(1) Any bank as defined in Section 3(a(2) of the Act, or any
savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934; insurance company as defined in
Section 2(13) of the Act; investment company registered under the
Investment Company Act of 1940 or a business development company as
defined in Section 2(a)(48) of that Act; Small Business Investment
Company licensed by the U.S. Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958; any
plan established and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees, if investment decisions
are made by a plan fiduciary which is a bank, savings and loan
association, insurance company, or registered investment adviser and
the plan establishes fiduciary principles the same or similar to those
contained in sections 404-407 of Title I of the Employee Retirement
Income Security Act of 1974, employee benefit plan within the meaning
of the Employee Retirement Income Security Act of 1974 if the
investment decision is made by a plan fiduciary, as defined in Section
3(21) of such Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser, or if
the employee benefit plan has total assets in excess of $5,000,000 or,
if a self-directed plan, with investment decisions made solely by
persons that are accredited investors;
(2) Any private business development company as defined
in Section 202(a)(22) of the Investment Advisors Act of 1940;
(3) Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring
the securities offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the
issuer of the securities being offered or sold, or any director,
executive officer, or general partner of a general partner of that
issue;
(5) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his purchase,
exceeds $1,000,000;
(6) Any natural person who had an individual income in excess
of $200,000 in each of the two most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years and
has a reasonable expectation of reaching the same income level in the
current year;
(7) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person as described in
'230.506(b)(2)(ii); and
(8) Any entity in which all of the equity owners are
accredited investors.
Exhibit 10.62
Engagement Letter with Charles T. Bernhardt, CPA
HEMISOHERX BIOPHARMA, INC.
Date: December 1, 2008
To: Charles T. Bernhardt
CC: Robert Peterson, Wayne Springate
From: William A. Carter
Re: Chief Financial Officer Position
--------------------------------------------------------------------------------
Based on your outstanding commitment to date, we are prepared to offer you
this position, effective January 1, 2009, subject to the following terms
and conditions: The position is interim CFO on an "at will" basis i.e.,
either party may cancel the agreement upon two (2) weeks written notice.
Moreover, based on your continued growth in the area of 404 and SOX
compliance, plus other matters customarily executed by CFOs of public
companies, we may well enter into a longer term contract, solely at our
discretion. Your initial salary will be $160,000 per annum, paid 50% in
restricted stock (like all other employees whose gross pay exceeds $90,000
per year) and you will be eligible for the Achievement Strategic Alliance
(cash) pool described in our recent news releases. Following any
significant external investment, you may receive the full salary in cash if
you desire (you will receive a stock certificate for your work prior to
January 1, 2009, regardless of your decision regarding the CFO (interim)
position pursuant to your previous understanding with Wayne Springate). Mr.
Peterson has agreed to assist you as Financial Advisor with special focus
on timely preparation of the 10-K.
I have certainly enjoyed working with you, especially your diligence,
enthusiasm and willingness to work 7 days per week. Companies which survive
and grow in such turbulent times benefit from such focused energy as yours.
Best regards,
William A. Carter, M.D., CEO
Agreed to
---------------------- ----------
Charles T. Bernhardt Date
Exhibit 21
Subsidiaries
Status
-------
US Subsidiaries:
BioPro Corp. Dormant
BioAegean Corp. Dormant
Core BioTech Corp. Dormant
Foreign Subsidiaries:
Hemispherx Biopharma Europe N.V./S.A. (Belgium) Inactive
Hemispherx Biopharma Europe S.A. (Luxembourg) Dissolved
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
Hemispherx Biopharma, Inc.
Philadelphia, Pennsylvania
We consent to the incorporation by reference in the Registration Statements
(No. 333-129811 and No. 333-155528) on Form S-8 and the Registration of the
Universal Shelf (No. 333-151696) on Form S-3 of Hemispherx Biopharma, Inc. and
Subsidiaries of our reports dated March 13, 2009 relating to our audit of the
consolidated financial statements and the financial statement schedule, and
internal control over financial reporting, which appear in this Annual Report on
Form 10-K of Hemispherx Biopharma, Inc. for the year ended December 31, 2008.
/s/ McGladrey & Pullen LLP
McGladrey & Pullen LLP
Blue Bell, Pennsylvania
March 13, 2009
Exhibit 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, William A. Carter certify that:
1. I have reviewed this annual report on Form 10-K of Hemispherx
Biopharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e))and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15 (f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: March 13, 2009
/s/ William A. Carter
---------------------------
William A. Carter, M.D.
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Charles T. Bernhardt certify that:
1. I have reviewed this annual report on Form 10-K of Hemispherx
Biopharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c. Evaluated the effectiveness of the Registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the Registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Registrant's internal
control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the Registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
control over financial reporting.
Date: March 13, 2009
/s/ Charles T. Bernhardt
------------------------
Charles T. Bernhardt CPA
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2008 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, William A. Carter, Chief Executive Officer of the Company, certify, pursuant
to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ William A. Carter
--------------------------
William A. Carter, M.D.
Chief Executive Officer
March 13, 2009
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hemispherx Biopharma, Inc. (the
"Company") on Form 10-K for the fiscal year ended December 31, 2007 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Charles T. Bernhardt, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Charles T. Bernhardt
-------------------------
Charles T. Bernhardt CPA
Chief Financial Officer
March 13, 2009