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EX-31.1 - AIM ImmunoTech Inc. | v211077_ex31-1.htm |
EX-32.2 - AIM ImmunoTech Inc. | v211077_ex32-2.htm |
EX-32.1 - AIM ImmunoTech Inc. | v211077_ex32-1.htm |
EX-23.1 - AIM ImmunoTech Inc. | v211077_ex23-1.htm |
EX-31.2 - AIM ImmunoTech Inc. | v211077_ex31-2.htm |
EX-10.26 - AIM ImmunoTech Inc. | v211077_ex10-26.htm |
FORM
10-K/A-2
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, 2009
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 whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ No x
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
filerx 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, 2009,
the last business day of the registrant’s most recently completed second fiscal
quarter was $299,465,873.
The
number of shares of the registrant’s Common Stock outstanding as of April 27,
2010 was 132,876,924.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
EXPLANATORY
NOTE
On March
12, 2010, Hemispherx Biopharma, Inc. (“Hemispherx”, the “Company”, “we”, “our”
or “us”) filed its Annual Report on Form 10-K for the year ended
December 31, 2009 (the “Original Filing”) with the Securities and Exchange
Commission (the “SEC”). On April 30, 2010, we filed an amendment to
the Original Filing to disclose the information required by Part III, Item 11 (Executive
Compensation) of Form 10-K, which disclosure we had intended to
incorporated by reference to our definitive proxy statement (to be subsequently
filed)(this amendment with the Original Filing, the “Original Form
10-K”). We are filing this amendment no. 2 (the “Amendment”) to the
Original Filing to reflect the changes made in response to a comment letter
received by us from the Staff of the SEC in connection with the Staff’s review
of the Original Form 10-K, including a restatement of our Financial Statements
due to a change in our Liabilities due to the valuation of certain Warrants that
result in a non-cash related adjustment. In this regard, the
Amendment amends and restates the items identified below with respect to the
Original Form 10-K:
|
Part
I, Item 1 (Business), subsections “Our Products”, “Research And
Development (“R&D”)”, “Manufacturing” and
Marketing/Distribution”;
|
|
Part
II, Item 6 (Selected Financial
Data);
|
|
Part
II, Item 7 (Management's Discussion and Analysis of Financial Condition
and Results of Operations);
|
|
Part
II, Item 8 (Financial Statements and Supplementary
Data);
|
|
Part
II, Item 9A (Controls and
Procedures);
|
|
Part
III, Item 10 (Directors and Executive Officers and Corporate
Governance);
|
|
Part
III, Item 11 (Executive Compensation);
and
|
Part IV,
Item 15 (Exhibits, Financial Statement Schedules).
The
Company is filing amended Quarterly Reports on Form 10-Q/A for the quarters
ended March 31, 2010, June 30, 2010 and September 30, 2010, to restate the
effected financial statements and related disclosure. Please refer to
those amended reports for further discussion of the restatement of those
respective periods.
Except as
discussed above, all other items as presented in the Original Form 10-K, are
unchanged. Except for the foregoing amended and restated information, this
Amendment does not amend, modify, update or change any other information
presented in the Original Filing as previously amended. Solely for
convenience and ease of reference, we are filing this Annual Report in its
entirety with the applicable changes noted above.
In
addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934,
this Amendment contains new certifications by our Chief Executive Officer and
our Chief Financial and Accounting Officer, filed as exhibits
hereto.
ii
TABLE OF
CONTENTS
Page
|
|||
PART I
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|||
Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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19
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Item
1B.
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Unresolved
Staff Comments
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29
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|
Item
2.
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Properties
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30
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|
Item
3.
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Legal
Proceedings
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30
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PART II
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|||
Item
5.
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Market
for the Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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30
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|
Item
6.
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Selected
Financial Data
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33
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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34
|
|
Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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52
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|
Item
8.
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Financial
Statements and Supplementary Data
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52
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|
Item
9.
|
Changes
In and Disagreements with Accountants on Accounting and Financial
Disclosure
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52
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Item
9A.
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Controls
and Procedures
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52
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Item
9B.
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Other
Information
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55
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PART III
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|||
Item
10.
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Directors
and Executive Officers and Corporate Governance
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56
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|
Item
11.
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Executive
Compensation
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62
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|
Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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85
|
|
Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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89
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|
Item
14.
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Principal
Accountant Fees and Services
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90
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PART IV
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|||
Item
15.
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Exhibits
and Financial Statement Schedules
|
91
|
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 6.
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 (the
“Exchange Act”), 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”,
“Company”, “we or “us”) to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements and other factors referenced in this Form 10-K. We do not
undertake and specifically 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
specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged
in the clinical development of new drug therapies based on natural immune system
enhancing technologies for the treatment of viral and immune based chronic
disorders. We were 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 natural interferon and 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. Our foreign subsidiary is Hemispherx Biopharma Europe
N.V./S.A. established in Belgium in 1998, which has 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® and Alferon N
Injection®. The commercial focus for Ampligen® includes application
as a treatment for Chronic Fatigue Syndrome (“CFS”) and as an influenza vaccine
enhancer (adjuvant) for both therapeutic and preventative vaccine
development. Alferon N Injection® is a Food and Drug Administration
(“FDA”) approved product with an indication for refractory or recurring genital
warts. Alferon® LDO (Low Dose Oral) is a formulation currently under
development targeting influenza.
1
We own
and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ that was
primarily designed to produce Alferon®. On September 16, 2009, our
Board of Directors approved up to $4.4 million for full engineering studies,
capital improvements, system upgrades and introduction of building management
systems to enhance production of three products: Alferon N Injection®, Alferon®
LDO and Ampligen®. (Please see “Manufacturing” in Item 1. Business
for more information.)
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.
OUR
PRODUCTS
Our primary pharmaceutical product
platform consists of our experimental compound, Ampligen®, our FDA approved
natural interferon product, Alferon N Injection® and Alferon® LDO (low dose
oral), our experimental liquid natural interferon for oral
administration.
Ampligen®
Ampligen®
is an experimental drug currently undergoing clinical development for the
treatment of Myalgic Encephalomyelitis / Chronic Fatigue Syndrome
(“ME/CFS”). Over its developmental history, Ampligen® has received
various designations, including Orphan Drug Product Designation (FDA), Treatment
IND (e.g., treatment investigational new drugs, or “Emergency” or
“Compassionate” use authorization) with Cost Recovery Authorization (FDA) and
“promising” clinical outcome recognition based on the evaluation of certain
summary clinical reports (“AHRQ” or Agency for Healthcare Research and
Quality). Ampligen® represents the first drug in the class of large
(macromolecular) RNA (nucleic acid) molecules to apply for New Drug Application
(“NDA”) review. Based on the results of published, peer reviewed
pre-clinical studies and clinical trials, we believe that Ampligen® may have
broad-spectrum anti-viral and anti-cancer properties. Over 1,000
patients have participated in the Ampligen® clinical trials representing the
administration of more than 90,000 doses of this drug.
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, in turn, 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®, an experimental,
unapproved drug, that would be administered intravenously.
2
Clinical
trials of Ampligen® already conducted by us include studies of the potential
treatment of ME/CFS, Hepatitis B, HIV and cancer patients with renal cell
carcinoma and malignant melanoma. All of these potential uses will
require additional clinical trials to generate the safety and effectiveness data
necessary to support regulatory approval.
On July
7, 2008, the FDA accepted for review our NDA for Ampligen® 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®, 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 11, 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. On May 22, 2009, we were notified by the FDA that it may
require additional time to take action beyond the scheduled PDUFA action date of
May 25, 2009. Between March 9, 2009 and September 15, 2009, we issued
six new reports to the FDA spanning various subjects including clinical safety
assessments, specialized pre-clinical toxicology reports and abbreviated
chemistry and manufacturing control reports.
On
November 25, 2009, we received a Complete Response Letter (“CRL”) from the FDA
which described specific additional recommendations related to the Ampligen®
NDA. In accordance with its 2008 Complete Response procedure, the FDA
reviewers determined that they could not approve the application in its present
form and provided specific recommendations to address the outstanding
issues.
We are
carefully reviewing the CRL and will seek a meeting with the FDA to discuss its
recommendations upon the compilation of necessary data to be used in our
response. We intend to take the appropriate steps to seek approval
and commercialization of Ampligen®. Most notably, the FDA stated that
the two primary clinical studies submitted with the NDA did not provide credible
evidence of efficacy of Ampligen® and recommended at least one additional
clinical study which shows convincing effect and confirms safety in the target
population. The FDA indicated that the additional study should be of
sufficient size and sufficient duration (six months) and include appropriate
monitoring to rule out the generation of autoimmune disease. In
addition, patients in the study should be on more than one dose regimen,
including at least 300 patients on dose regimens intended for
marketing. We continue to plan a confirmatory clinical study of 600
patients each, in which we intend
to utilize the same primary endpoints as our earlier studies but with an
enlarged number of subjects to potentially achieve a more representative
statistical model. Lastly, additional data including a
well-controlled QT interval study (i.e., a measurement of time between the start
of the Q wave and the end of the T wave in the heart’s electrical cycle) and
pharmacokinetic evaluations of dual dosage regiments were
requested. Other items required by the FDA include certain aspects of
Non-Clinical safety assessment and Product Quality. In the
Non-Clinical area, the FDA recommended among other things that we complete
rodent carcinogenicity studies in two species. As part of the NDA
submission, we had requested that these studies be waived, but the waiver had
not been granted.
In
September 2008, we engaged Lovelace Respiratory Research Institute (“Lovelace”)
in Albuquerque, New Mexico, to perform certain animal toxicity studies in
support of our Ampligen® NDA.
3
On
January 14, 2010, we submitted reports of new preclinical data regarding
Ampligen® to the FDA that we believe should be sufficient to address certain
preclinical issues in the FDA’s CRL. The preclinical studies
discussed in these reports were the combined work-product of the staffs at
Hemispherx and Lovelace regarding pharmacokinetic analyses in two lower animal
species (primate and rodent). The new preclinical data showed no
evidence of antibodies against Ampligen® in primates nor evidence of an increase
in certain undesirable cytokines (specific modulators of the immune system) at
clinically used doses of Ampligen® for CFS. Although most other
experimental immunomodulators have been associated with one or more features of
aberrant immune activity, including toll-like receptor activators (of which
Ampligen® is one), this was specifically not seen with Ampligen® in
primates.
Under the
Product Quality section of the CRL, the FDA recommended that we submit
additional data and complete various analytical procedures. The
collection of these data and the completion of these procedures is already part
of our ongoing Quality Control, Quality Assurance program for Ampligen®
manufacturing under cGMP (“current Good Manufacturing Practice”) guidelines and
our manufacturing enhancement program.
The FDA
also commented on Ampligen® manufacturing noting the need to resolve outstanding
inspection issues at the facilities producing Ampligen®. These
include our facility located in New Brunswick, NJ and one of our third-party
subcontractor manufacturing facilities, Hollister-Stier Laboratories of Spokane,
Washington (“Hollister-Stier”). On December 11, 2009 via
Hollister-Stier, we submitted comprehensive new data, from the combined
work-product of both staffs, to the District Office (“DO”) of the FDA in
Seattle, WA which we believed demonstrated that certain manufacturing issues
noted in the pre-approval inspections at the facility had been fully
addressed. On February 2, 2010, Hollister-Stier received a favorable
response from the FDA’s Seattle DO in which they noted that certain
manufacturing issues noted in the pre-approval inspection at this facility had
been fully addressed and made a recommendation to the FDA’s Center for Drug
Evaluation and Research (“CDER”) for approval of our subcontractor as a
manufacturing site under the Ampligen® NDA. The DO recommendations
are not binding on the FDA and pertain only to the specific manufacturing issues
cited in the Ampligen® manufacturing
response and to the subcontractor site. See “Manufacturing”
below.
We are
also engaged in ongoing, experimental studies assessing the efficacy of
Ampligen® against influenza viruses. The status of our initiative for
Ampligen® 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 (“NIID”). A three year program targeting regulatory approval
for pandemic influenza and seasonal influenza in Japan has been funded by the
Japanese Ministry of Health with the NIID and Biken (operational arm of the
non-profit Foundation for Microbial Disease of Osaka University) in which
Ampligen® is used as a mucosal adjuvant with vaccine. Our arrangement
with Biken is part of a process to develop an effective nasal administered
vaccine for Japan utilizing the resources of the NIID, varied vaccines and
Hemispherx supplied Ampligen®. See “Research and Development
(R&D); Other Viral Diseases” below.
A Phase
II Trial for intramuscular administration of Ampligen® for seasonal influenza
was conducted in Australia through St. Vincent’s Hospital. We have
attempted in good faith to obtain the clinical data and retrieve the study
samples from St. Vincent’s recently restructured Clinical Trials
Centre. As a prerequisite of payment, we requested the confirmation
that samples were properly maintained utilizing current Good Clinical Practice
(“cGCP”) and Good Laboratory Practice (“cGLP”) for the controlled environment as
per our agreement. On February 5, 2010, our Counsel advised them in
correspondence that, due to the failure to meet the condition precedent to
payment, we had no choice but to declare them in breach of the agreement and our
intention to terminate the relationship between parties. Due to the
termination of this agreement, we are not able to test the samples taken for
this study for efficacy (i.e., the capacity for beneficial change or therapeutic
effect from a given treatment).
4
A study
was published in the December 20, 2009 issue of “Virology” by a consortium of
researchers at Utah State University and the University of North Carolina,
regarding a newly developed animal model of Severe Acute Respiratory Disease
Syndrome (“SARS”) which, according to the authors, “…largely mimicked human
disease”. SARS emerged in 2002 in the Guangdong province of Southern
China as a new infectious respiratory disease characterized by influenza-like
symptoms with a very high mortality rate. The researchers
characterized and adapted a new strain of the SARS virus (SARS-CoV) to mice that
was 100% lethal and was associated with the overproduction of cytokines and
severe lung pathology (Day CW, et al. Virology, 395:210-222,
2009). Multiple agents with purported antiviral activity were
evaluated for activity in this unique mouse model of the human disease,
including Ampligen®. The researchers found that, unique among the
agents tested, Ampligen®, “…protected against death and gross damage to the
lungs in the presence of lethal SARS-CoV” and was associated with a reduction in
IL-6 concentration in which high levels of the cytokine correlated with the
mortality of SARS-CoV infection. Mortality was high, under the
conditions tested, for all the other antiviral agents examined that have
previously been used extensively in humans with SARS without definitive evidence
of efficacy (Stockman LJ, et al. PLoS Med 3 (9),e 343). To date,
there are no approved agents for treating SARS. Animal experiments do
not necessarily predict safety or efficacy in man. Encouraged by
these results, we are now in preliminary discussions with Chinese clinical
research organizations in an attempt to initiate clinical antiviral programs in
China.
We
estimate that it could take approximately 18 months to three years to complete
an Ampligen® clinical study for resubmission to the FDA under the industry norm
of three to six months to initiate the study, one to two years to accrue and
test patients, three to six months to close-out the study and file the necessary
documents with the FDA. The actual duration to complete the clinical
study may be different based on the final design of an accepted FDA clinical
Phase III study, availability of participants, clinical sites and any other
factors that could impact the implementation of the study, analysis of results,
or requirements of the FDA and other governmental organizations.
Additionally,
we estimate that the approximate cost to undertake the Ampligen® Phase III
clinical study could range from $12,000 to $18,500 per each of the 600
participating patients, for an estimated range of total costs of $7,200,000 to
$11,100,000. Our estimate is based on the belief that our experience
from the prior Phase III study and established teams (e.g., Medical, Data
Processing, Clinical Monitors, Statisticians, Medical Reporting) along with
existing inventory and investigational protocol, could produce financial
efficiencies. We believe that these efficiencies could permit our
costs of undertaking a Phase III CFS study to be discounted as compared to a
potential $28,500 per patient cost approximated as an industry average for
running a Phase III study from scratch, as estimated and adjusted for inflation,
utilizing data from the business intelligence firm Cutting Edge
Information. The actual costs of a Phase III investigation study for
CFS may differ based on final design of an accepted FDA Phase III clinical
study, prevailing costs to undertake clinical studies, qualification and access
to CFS patients, insurance and government requirements along with other
potential costs or reimbursements unknown at this time.
As
discussed below in “Research And Development (“R&D”); Myalgic
Encephalomyelitis/ Chronic Fatigue Syndrome” in the October 8, 2009 issue of
Science Express, a consortium of researchers from the Whittemore Peterson
Institute (“WPI”), the National Cancer Institute and the Cleveland Clinic
reported a new retrovirus - XMRV (xenotropic murine leukemia related virus) - in
the blood cells of 67% of Chronic Fatigue Syndrome (“CFS”) patients and 3.7% in
healthy control subjects. We believe that our collaboration with WPI
could determine if there is a correlation between patient samples from our
previously completed Phase III trial of Ampligen® for CFS and
XMRV. If a positive correlation can be determined, it may provide a
new perspective on the design of the additional Phase III study as required by
the FDA. However, until it can be determined if XMRV can be
recognized and used as a potential validation marker to better identify
potential CFS patients, we have delayed finalizing the design of the Phase III
clinical study’s protocol. Therefore, the timing to begin and
projection to complete the Phase III study are unknown at this
time.
5
Aside from the foregoing,
we cannot estimate what additional studies and/or additional testing or
information that the FDA may require. Accordingly, as of this time, we
are unable to estimate the nature, timing, costs and necessary efforts to obtain
FDA clearance, the anticipated completion dates or whether we will obtain FDA
clearance.
Alferon
N Injection®
Alferon N
Injection® is the registered trademark for our injectable formulation of natural
alpha interferon, which is approved by the FDA for the treatment of certain
categories of genital warts. Alferon® is the only natural-source,
multi-species alpha interferon currently approved for sale in the
U.S.
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. Alferon N Injection® 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
products each contain only a single species. Researchers have
reported that the various species of interferons may have differing antiviral
activity depending upon the type of virus. Natural alpha interferon
presents a broad complement of species, which we believe may account for its
higher activity in laboratory studies. Natural alpha interferon is
also glycosylated (partially covered with sugar molecules). Such glycosylation
is not present on the currently U.S. marketed recombinant alpha
interferons. We believe that the absence of glycosylation may be, in
part, responsible for the production of interferon-neutralizing antibodies seen
in patients treated with recombinant alpha interferon. Although cell
culture-derived interferon is also composed of multiple glycosylated alpha
interferon species, the types and relative quantity of these species are
different from our natural alpha interferon.
Alferon N
Injection® [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.
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®.
The FDA
approved Alferon N Injection® 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”). The Centers for Disease Control and Prevention
(“CDC”) estimates that approximately twenty million Americans are currently
infected with HPV with another six million becoming newly infected each
year.
6
Commercial
sales of Alferon N Injection® were halted in March 2008 as the current
expiration date of our finished goods inventory expired. We are
undertaking a major capital improvement program to upgrade our manufacturing
capability for Alferon N Injection® at our New Brunswick facility that will
continue throughout 2010. As a result, Alferon N Injection® could be
available for commercial sales in mid to late 2011. (Please see
“Alferon® Low Dose Oral (LDO)” and “Manufacturing” below in Item 1. Business for
more information.)
It is our
belief that the use of Alferon® N in combination with Ampligen® has the
potential to increase the positive therapeutic responses in chronic life
threatening viral diseases. While Alferon N Injection® remains in
clinical development for treating West Nile Virus, the ability to continue this
study has been hampered by the significant reduction in confirmed
cases. We also are planning trials of Alferon N Injection® for
seriously ill, hospitalized influenza patients in Argentina and potentially
other countries. (Please see “Alferon® Low Dose Oral (LDO)” below for
more information.)
Alferon® Low Dose Oral
(LDO)
Alferon®
LDO [Low Dose Oral Interferon Alfa-n3 (Human Leukocyte Derived)] is an
experimental low-dose, oral liquid formulation of Natural Alpha Interferon and
like Alferon N Injection® 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
induced by cells through absorption in the oral mucosa, enabling it to bolster
systemic antiviral responses. Oral interferon could be economically
feasible for patients and logistically manageable in development programs in
third-world countries primarily affected by avian or swine influenza and other
emerging viruses. Oral administration of Alferon® LDO, with its
anticipated affordability, low toxicity, no production of antibodies, and broad
range of potential bioactivity, may provide a low cost treatment or prevention
for a broad spectrum of viral diseases.
We have
conducted early stage clinical trials as part of an evaluation of the
experimental bio-therapeutic Alferon® LDO as a potential new experimental
therapy against influenza viruses and other lethal viral diseases, which have
high acute death rates. Clinical trials in human volunteers were
designed to determine whether Alferon®, delivered in this new, experimental oral
drug delivery format, can resuscitate the broad-spectrum antiviral and
immunostimulatory genes. While adequate samples were retrieved from
the clinical trials sites, the next phase of the study was delayed due to
funding considerations and has recently been reinitiated. Potential
facilities to undertake the gene expression analysis phase of the study are
currently being identified with the intention to complete the clinical
trial.
Alferon®
LDO is undergoing pre-clinical testing for possible prophylaxis against
influenza. Subject to FDA authorization and/or authorization of
regulatory authorities in other countries, the finished goods inventory of
Alferon N Injection® 5ml vials could be used to produce approximately 11,000,000
sachets of Alferon® Low Dose Oral (“LDO”) for clinical
trials. However, no assurance can be given that this inventory will
be permitted to be used in future clinical trials or for any other clinical
use. While the studies to date have been encouraging, preliminary
testing in the laboratory and animals 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 Alferon® as a possible treatment of any influenza or
other viral infection requires prior regulatory approval and there can be no
assurance that such approval can be obtained either for clinical trial use or
commercial sale.
7
In
October 2009, we submitted a protocol to the FDA proposing to conduct a Phase II
Trial, well-controlled, clinical study using Alferon® LDO for the prophylaxis
and treatment of seasonal and pandemic influenza of more than 200
subjects. Following a teleconference with the FDA in November 2009,
the FDA placed the proposed study on “Clinical Hold” because the protocol was
deemed by the FDA to deficient in design, and because of the need for additional
information to be submitted in the area of chemistry, manufacturing and controls
(“CMC”). Thereafter in December 2009, we submitted additional
information by Amendment with respect to both the clinical protocol design
issues and the CMC items. In January 2010, the FDA acknowledged that
our responses to the clinical study design issues were acceptable; however,
removal of the Clinical Hold was not warranted because the FDA believed that
certain CMC issues had not been satisfactorily resolved. In this
regard, the FDA communicated concern regarding the extended storage of Alferon®
LDO drug product clinical lots which had been manufactured from an active
pharmaceutical ingredient (“API”) of Alferon N Injection® manufactured in year
2001. While the biological (antiviral) potency of the product had
remained intact, we learned through newly conducted physico-chemical tests (the
“new tests” of temperature, pH, oxidation and light on the chemical stability of
the active API), that certain changes in the drug over approximately nine
storage years (combined storage of Alferon N Injection® plus storage of certain
LDO sachets) had introduced changes in the drug which might adversely influence
the human safety profile. These “new tests” are part of recent FDA
requirements for biological products, such as interferon, which did not exist at
the time of the original FDA approval of Alferon N Injection® for
commercialization and at the time of FDA approval of the “Establishment License”
for Hemispherx’ manufacturing facility. Based on the recent FDA
request, we have now established and implemented the “new test”
procedures. As a result, we have found that certain Alferon N
Injection® lots with extended storage (i.e., approximately eight to nine years)
do appear to demonstrate some altered physico-chemical
properties. However we have also observed that more recent lots,
including those manufactured beginning in the year 2006, are superior with
respect to the enhanced scrutiny of these tests and, in our view, could be
considered appropriate for clinical trials in the Alferon® LDO sachet
format. Due to the capital improvements and enhancements to the
manufacturing process at our New Brunswick facility, we intend to submit new
data to the FDA in late 2010 utilizing more current Raw Materials and/or Work In
Progress inventory. We believe that the full Clinical Hold could be
thereafter lifted if the FDA concurs that these data address the outstanding CMC
issues cited in the January 2010 FDA recommendations.
Oragens®
In 1999,
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. For a $30,000 annual
minimum royalty payment and costs to maintain the patents, we were granted an
exclusive worldwide license from Temple for the Oragens®
products. These compounds had been evaluated in various academic
laboratories for application to chronic viral and immunological
disorders.
In the
2009 review of our patent rights to determine whether they have continuing
value, we undertook an analysis of the Oragen® patents prior to renewing the
licensing agreement with Temple University. This review included a
cost/benefit analysis of the patents’ ultimate revenue and profitability
potential in consideration of their remaining life. In addition,
management studied the rights as to whether each patent continues to fit into
our strategic business plans for Ampligen®, Alferon N Injection® and Alferon®
LDO. As a result of this process, we proposed a patent renewal
agreement that significantly discounted the prior agreement’s annual minimum
royalty payment. In February 2010, it was formally communicated by
Temple University that they had elected not to pursue our proposal to renew the series of
patents on Oragens®. Accordingly as of December 2009, we wrote-off
the remaining value of these patents from Patent and Trademark Rights resulting
in a net expense for Patents Abandoned of $114,000.
8
The
following table sets forth the costs related to our major products for each of
the prior three years. Our aggregate expenses from the time that we
first started developing nucleic acid pharmaceutical technology in the mid 1980s
through March 2003 were substantially related to the development of Ampligen®,
and from that date through the current period were substantially related to
Ampligen® and Alferon
(dollars
in thousands)
|
||||||||||||||||||||
Costs
and Expenses
|
Year
Ended December 31, 2009
|
|||||||||||||||||||
Ampligen®
NDA
|
Alferon
N
Injection®
|
Alferon
®
LDO
|
Other
|
Total
|
||||||||||||||||
Production/cost
of goods sold
|
$ | - | $ | 584 | $ | - | $ | - | $ | 584 | ||||||||||
Research
and development
|
5,026 | - | 1,784 | 185 | 6,995 | |||||||||||||||
General
and administrative
|
3,844 | 447 | 1,364 | 141 | 5,796 | |||||||||||||||
Total
|
$ | 8,870 | $ | 1,031 | $ | 3,148 | $ | 326 | $ | 13,375 |
(dollars
in thousands)
|
||||||||||||||||||||
Costs
and Expenses
|
Year
Ended December 31, 2008
|
|||||||||||||||||||
Ampligen®
NDA
|
Alferon
N
Injection®
|
Alferon
®
LDO
|
Other
|
Total
|
||||||||||||||||
Production/cost
of goods sold
|
$ | - | $ | 798 | $ | - | $ | - | $ | 798 | ||||||||||
Research
and development
|
5,491 | - | - | 309 | 5,800 | |||||||||||||||
General
and administrative
|
5,392 | 783 | - | 303 | 6,478 | |||||||||||||||
Total
|
$ | 10,883 | $ | 1,581 | $ | - | $ | 612 | $ | 13,076 |
(dollars
in thousands)
|
||||||||||||||||||||
Costs
and Expenses
|
Year
Ended December 31, 2007
|
|||||||||||||||||||
Ampligen®
NDA
|
Alferon
N
Injection®
|
Alferon®
LDO
|
Other
|
Total
|
||||||||||||||||
Production/cost
of goods sold
|
$ | - | $ | 930 | $ | - | $ | - | $ | 930 | ||||||||||
Research
and development
|
10,283 | - | - | 161 | 10,444 | |||||||||||||||
General
and administrative
|
8,113 | 784 | - | 127 | 8,974 | |||||||||||||||
Total
|
$ | 18,396 | $ | 1,664 | $ | - | $ | 288 | $ | 20,348 |
PATENTS AND NON-PATENT
EXCLUSIVITY RIGHTS
We have
38 patents worldwide with 46 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 4: Patents,
Trademark Rights and Other Intangibles” under Notes To Consolidated Financial
Statements for more information on these patents.
9
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®, Alferon N Injection® and Alferon® LDO.
With
respect to Ampligen®, 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. Our U.S.
Ampligen® Trademark (#73/617,687) has been renewed through December 6,
2018.
In
addition to our patent rights relating to Ampligen®, the FDA has granted “orphan
drug status” to the drug for ME/CFS, HIV/AIDS, and renal cell carcinoma and
malignant melanoma. Orphan drug status grants us protection against
the potential approval of other sponsors’ versions of the drug for these uses
for a period of seven years following FDA approval of Ampligen® for each of
these designated uses. The first NDA approval for Ampligen® as a new
chemical entity will also qualify for four or five years of non-patent
exclusivity during which abbreviated new drug applications seeking approval to
market generic versions of the drug cannot be submitted to the
FDA. See “Government Regulation” below.
The U.S.
patents relating to our Alferon® products expire April 2, 2013 (5,503,828)
October 14, 2014 (5,676,942) and December 22, 2017 (5,989,441).
RESEARCH AND DEVELOPMENT
(“R&D”)
Our
general 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. Our current R&D projects are only targeting treatment
therapies for ME/CFS and other viral diseases such as prevention and treatment
of seasonal and pandemic H1N1 or Avian influenza.
Our
primary focus during the past three fiscal years has been on our Ampligen® New Drug
Application for the treatment of CFS. In 2009, we also began to develop
Alferon® Low
Dose Oral for treatment of viral diseases.
The
following table summarizes our research and development costs for the years
2007, 2008 and 2009 by project.
(in
thousands)
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Ampligen® New Drug
Application for the treatment of Chronic Fatigue Syndrome
|
$ | 10,283 | $ | 5,491 | $ | 5,026 | ||||||
Alferon®
LDO
|
- | - | 1,784 | |||||||||
Other
projects
|
161 | 309 | 185 | |||||||||
Total
research and development
|
$ | 10,444 | $ | 5,800 | $ | 6,995 |
In November 2009,
we received a CRL from the FDA which indicated, among other things, that an
additional study would be needed to confirm safety and our Alferon®
LDO is in the initial stages of development. See “Our Products” above. Aside
from our discussion above in “Our Products; Ampligen®”, we cannot estimate what
additional studies and/or additional testing or information that may be required
by the FDA. Accordingly, as of this time, we are unable to estimate the
nature, timing, costs and necessary efforts to complete these projects nor the
anticipated completion dates. In addition, we have no basis to estimate when
material net cash inflows are expected to commence. We have yet to
generate any revenues from the sale of these products. As of December
31, 2009, we had approximately $58.1 million in Cash and Cash Equivalents and,
based upon our current anticipated financial needs, absent unexpected
circumstances or new opportunities, we anticipate, but cannot assure, that we
will be able to fund operations for at least the next five
years. However, if we are unable to timely commercialize and sell
Ampligen® for
the treatment of CFS or Alferon® LDO and/or
recommence material sales of Alferon N Injection®, our
operations, financial position and liquidity will be adversely effected
(see Item 1A. Risk Factors; “We may require additional financing which may not
be available” below).
10
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. ME/CFS is recognized by both the
government and private sector as a major health problem, including the National
Institutes of Health, FDA and the U.S. Centers for Disease Control and
Prevention (“CDC”). The CDC listed ME/CFS as a priority disease,
causing severe health and financial problems for 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.
Dr. Julie
Gerberding, former director of the CDC and current president of Merck &
Company’s vaccine division, 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 information regarding the diagnosis and
treatment of CFS, and is designed to raise awareness of the disease among
patients and clinicians. A CDC sponsored website 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.
11
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).
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.
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 FDA approved 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. New
diagnostic approaches to possibly accelerate the identification of ME/CFS are
being developed (see below in this section regarding the Whittemore Peterson
Institute).
The
leading model of ME/CFS pathogenesis is thought to be rooted in abnormalities in
the immune system and brain (central nervous system), each of which affects and
alters the function of the other. Because some cases of CFS 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. The etiology is likely to be related to 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.
In the October 8, 2009
issue of Science Express, a consortium of researchers from the Whittemore
Peterson Institute (“WPI”), the National Cancer Institute and the Cleveland
Clinic report a new retrovirus in the blood cells of 67% of CFS patients
and 3.7% in healthy control subjects. The infectious virus was also
greater than 99% identical to that previously detected in prostate
cancer. Patients with CFS are known to display various abnormalities
in immune system functions and experience both higher cancer rates and
neurological pathology, which have been associated with the human retroviruses
HIV and HTLV-1. While an updated agreement is being finalized, we
continue to collaborate with WPI under the terms of an Evaluation Agreement that
expired on July 23, 2010 to evaluate Hemispherx patient samples for XMRV using
WPI’s proprietary flow cytometry assay. Immunosuppression is often
seen in CFS patients and may be a feature of many retroviruses in animal and
man. We are presently also collaborating with the Institute with
respect to the potential roles of the novel retrovirus more generally found in
CFS. These studies are taking the form of both retrospective analysis
from stored samples of CFS patients, with and without Ampligen® treatment, along
with prospective clinical studies.
12
Other
Viral Diseases
We are
engaged in ongoing, experimental studies assessing the efficacy of Ampligen®,
Alferon N Injection® and Alferon® LDO against influenza
viruses. Ampligen® as a mucosal adjuvant with vaccine has been
studied at Japan’s National Institute of Infectious Disease (“NIID”) and at
Biken (the for profit operational arm of the Foundation for Microbial Diseases
of Osaka University). We have been focusing our resources on the
studies being undertaken in Japan and the United States along with the design of
new Alferon® LDO studies for both prevention and treatment of seasonal or
pandemic influenza.
We had a
material evaluation agreement with Biken which expired on September 1,
2010. We are in active discussions with Biken to extend the
agreement. Pursuant to the agreement, we supplied Biken with proprietary
information related to Ampligen® and Biken purchased Ampligen® from us for use
solely in connection with evaluating Ampligen® as a candidate for adjuvant
incorporated into potential influenza virus vaccines in the form of intranasal
mucosal administration, including conducting further animal studies of
intranasal prototype vaccines containing antigens from various influenza
sub-types, including H5N1, H1N1, H3N2 and B. This collaboration may
progress to human studies and has received the support of the Japanese Health
Ministry.
Investigators
from Japan’s NIID have conducted studies in animals that suggest that Ampligen®
can stimulate a sufficiently broad immune response to provide cross-protection
against a range of virus genetic types, including H5N1 and derivative
clades. Japan’s Council for Science & Technology Policy (“CSTP”),
a cabinet level position, has awarded funds from Japan’s CSTP to advance
research with influenza vaccines utilizing Ampligen. The Principal
Investigator, Dr. Hideki Hasegawa, M.D., Ph.D., Chief of
Laboratory of Mucosal Vaccine Development Virus Research Center,
undertook studies in 2009 and plans to continue these studies throughout 2010
that focus on mucosal immunity and the inherent advantages of a vigorous immune
response to respiratory pathogens. Dr. Hasegawa has published data
that the formulation of pandemic vaccine mixed with Ampligen® increases
immuno-genicity and may demonstrate cross protection against mutated
strains. Initial data from findings in mice exposed to the most
virulent forms of pandemic influenza (H5N1) suggest that standard human seasonal
influenza vaccines given alone, and having no benefit on H5N1 influenza virus
pathology and clinical status, were nonetheless effective against pandemic virus
when combined with Ampligen® when applied intranasally in very small doses in a
prophylactic treatment setting. Clinical trials emanating from
successful primate (monkey) studies are anticipated to begin in
2010.
Dr.
Hasegawa expanded the data on Ampligen® in an October 23, 2009, issue of
“Vaccine” (Vol. 27, issue 45, pp 6276-6279) to include the conveyance of
cross-protective immunity against various variants of the pandemic influenza
virus. In this article, jointly published by researchers at NIID and
Yale University, it was communicated that Ampligen® may convey two additional
biological properties, in addition to the above referenced cross-protection,
when co-administered intranasally with pandemic influenza vaccines: 1) the
enhancement of immunity with higher IgA and IgG levels, which may convey a
survival/therapeutic advantage in animal model systems, and 2) the potential to
widen the therapeutic (preventative) profile (“heterosubtypic immunity”) by
protecting against a phenomenon known as “antigenic drift” in which the pandemic
virus may escape the preventative effect of the vaccine; this phenomenon is
well-established with avian H5N1 virus and mitigated the potential effectiveness
of various influenza vaccines manufactured several years ago in the
U.S.A. Animal model experiments
do not necessarily predict biological behavior in man.
13
We
received notice of an Annual Report (April 2008-March 2009) prepared by a
Director of the NIID to the governing organization of the Japanese Ministry of
Health (“MHLW”) reporting a series of successful preclinical studies in new
pandemic vaccines which rely on Ampligen® (Poly I: Poly C12U). Efficacy
in these studies was shown both within the airways themselves as well as
systemically. As a result, the program is expected to be accelerated
from animal studies into human volunteers promptly under supervision of NIID
staff. The project is officially titled “Clinical Application of the
Influenza Virus Vaccine in the Intranasal Dosage Form for Mucosal
Administration”. To date, only very few pharmaceutical companies
world-wide have achieved regulatory authorizations to sell intranasally
administered influenza vaccines versus many companies receiving approval for
intramuscular vaccine delivery routes.
Concurrently,
Biken successfully completed in co-operation with NIID a series of
animal/preclinical tests on new pandemic vaccines with Ampligen® as a mucosal
adjuvant. Biken is expected to undertake studies for regulatory
requirements such as safety, stability and formulation to be shared with
NIID. Successful studies in animal models, including the monkey
studies conducted to date under auspices of the NIID, do not necessarily predict
human safety and efficacy of any investigational product including
Ampligen®. To support preclinical studies, Ampligen® especially
formulated for intranasal use had been manufactured and on August 17, 2009 we
shipped Ampligen® to Biken for use in the preclinical studies they are
conducting prior to initiating human clinical trials.
The
emergence of a new H1N1 Swine Flu strain provides additional significance to the
Japanese studies. The original studies by Dr. Hasegawa and his
colleagues provided the basis for the expanded preclinical trials that
demonstrated cross-clade protection against H5N1 isolates following vaccination
with a seasonal influenza vaccine (J Infect Dis.196:1313-1320,
2007). With this in mind, Biken is concentrating its efforts to
proceed on a regulatory path for the registration of H5N1 intranasal vaccine
combined with Ampligen® in Japan.
On July
15, 2010, we entered into an amended adviser's agreement (the "Sage Agreement")
with The Sage Group, Inc. ("Sage") that amends and supersedes all other
agreements and arrangements between the parties. Sage was
instrumental in securing our relationship with Biken. Pursuant to the
Sage Agreement, we have retained Sage to assist us in finding and consummating
licensing, partnering, distribution, alliance or other similar transactions
pertaining to and promoting the sale of our products and technologies
("Transactions"). Transactions do not include agreements that are
non-revenue producing such as research arrangements or feasibility
studies. The Sage Agreement runs for 18 months and automatically
renews for an additional 18 months unless terminated on 180 days notice prior to
the expiration of the term. For its services, Sage is entitled to a
monthly fee of $15,000. Should we enter into a Transaction during the
term of the Sage Agreement or within 18 months thereafter, Sage is entitled to a
success fee equal to five percent of all Consideration (as defined in the Sage
Agreement) received by us and our affiliates as a result of the
Transaction. The Success Fee is capped at $5,000,000 per
year. At the sole discretion of our Board, Sage may receive an
additional bonus for extraordinary performance or special projects up to
$250,000 per year. Upon execution of the Sage Agreement, we issued an
aggregate of 545,000 10 year options to Sage personnel.
In
January 2010, we engaged an Argentinean regulatory and business design entity to
explore the possibility of initiating clinical trials of Alferon N Infection®,
Ampligen® and Alferon® LDO during the influenza season in
Argentina.
A
clinical trial for intramuscular administration of Ampligen® for seasonal
influenza conducted in Australia through St. Vincent’s Hospital utilized
Ampligen® administered intramuscularly (“IM”) in combination with seasonal
influenza vaccine. This
open-label study (Phase IIa Trial) utilized Ampligen® (Poly I: Poly C12U) as a
potential immune-enhancer in Australia with thirty-eight subjects age 60 or
greater with the standard trivalent seasonal influenza vaccines. We
have attempted in good faith to obtain the clinical data and retrieve the
study’s samples from St. Vincent’s recently restructured Clinical Trials
Centre. As a prerequisite of payment, we requested the confirmation
that samples were properly maintained utilizing current Good Clinical Practice
(“cGCP”) and Good Laboratory Practice (“cGLP”) for the controlled environment as
required by our agreement. In February 2010, our General Counsel
advised them in correspondence that due to the failure to meet the condition
precedent for payment, we had no choice but to declare them in breach of the
agreement and our intention to terminate the relationship between
parties. Due to the termination of this agreement, we are not able to
test the samples collected in this study for efficacy (i.e., the capacity for
beneficial change or therapeutic effect from a given
treatment).
14
A
peer-reviewed article providing study data on Ampligen® was published in a
recent issue of the “American Journal of Obstetrics and Gynecology” (January 15,
2010, vol. 202). The report, whose lead author is Dr. Jonathan S.
Berek, Professor and Chair, Obstetrics and Gynecology, Stanford University
School of Medicine, discussed the value of stimulating a periodic “danger
signal” with a TLR3 agonist such as poly(I)•poly(C12U) as part
of immunotherapeutic cancer treatment regimens, and suggested such regimens may
have broad potential application to boost the effects of many immunotherapies of
cancer. The authors concluded that poly(I)•poly(C12U) “shows
promise as a potential agent for selective enhancement of effect with currently
available and future cancer immunotherapies”. According to the
authors, “immunotherapy of cancer holds the promise of disease-specific
intervention without the toxicity that is associated with traditional
therapeutic modalities”. This reported study was supported by an
Ovarian Cancer Research Fund COGI Grant, Advanced Immune Therapeutics,
Hemispherx Biopharma, and grants from the National Institute of Health (Grants
CA 33399, CA 34233), the Ruth Kirschstein Award (Grant 5 T32 AI07290, and the
Ruth L. Kirschstein Award (Grant F32 DKO78416).
Collaboration
studies in non-human primates conducted by ViroClinics in the Netherlands
suggest a potential role for Alferon® LDO as another novel therapeutic approach
to viral pandemics. In these studies, Alferon® LDO treatment appeared
to be more effective than published results for a neuraminidase inhibitor
(Relenza®), which is a current standard for care of seasonal influenza along
with a similar drug (Tamiflu®). The opportunity for Alferon® LDO is
reinforced by new reports of severe side effects secondary to Tamiflu®, by both
the FDA and Japanese health authorities. Also, Tamiflu® resistant
strains of influenza virus are now raising serious concerns on a world-wide
basis. We are planning to expand this Alferon® LDO effort into H1N1
Swine Flu preclinical models in the United States and preclinical laboratory
studies are initially underway.
MANUFACTURING
We own
and operate a 43,000 sq. ft. FDA approved facility in New Brunswick, NJ that was
primarily designed to produce Alferon®. On September 16, 2009, our
Board of Directors approved up to $4.4 million for engineering studies, capital
improvements, system upgrades and building management systems. In
2008, production of Alferon N Injection® from our Work-In-Progress Inventory had
been put on hold due to the resources needed to prepare our New Brunswick
facility for the FDA preapproval inspection with respect to our Ampligen®
NDA.
We are
currently undertaking a major capital improvement program to enhance our
manufacturing capability for Alferon N Injection®, Alferon® LDO and
Ampligen®. The planned capital improvements include upgrade to the
ventilation and electrical distribution systems; upgrade of the high pressure
boiler to support process equipment and battery management system; building a
utility mezzanine to support the installation of a new water and waste treatment
process. In addition, we have increased our manufacturing staff with
the addition of Directors for Quality Assurance and Quality
Control. As a result, Alferon N Injection® could be available for
commercial sales in mid to late 2011.
15
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 in connection with
review of the Ampligen® NDA. 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. The validations have been completed and the reports
were forward to the FDA in April 2009 for review. As a result, the
New Jersey office of the FDA has indicated that there are no more preapproval
review issues at that time. In addition to having addressed all known
FDA Form 483 issues, we reported to the regional office of the FDA that the New
Brunswick facility is in progress of validating certain manufacturing steps and
compiling data that will be sent to the FDA after NDA approval or as
required.
The FDA,
in its November 25, 2009 CRL, noted that its field investigators had conveyed
deficiencies to us at our New Jersey facility that needed to be resolved before
the NDA could be approved. We believe these issues to be the same as those on
the Form FDA 483 discussed above. At our expected meeting with the
FDA to review the CRL, we intend to communicate that it is our
understanding that these manufacturing issues had been previously
addressed.
The FDA described specific
recommendations related to the Ampligen® NDA in the “Product Quality”
section of the CRL which identified additional analytic procedures to be
submitted to the FDA. We believe that these procedures are already
part of our ongoing Quality Control, Quality Assurance program for Ampligen®
manufacturing under current Good Manufacturing Practice (“cGMP”)
requirements. We are currently undertaking the majority of the tests
needed for the validation phase to address the issues identified in the CRL as
part of our originally scheduled post-approval testing prior to any commercial
sales of Ampligen®.
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. We have a Supply Agreement with Hollister-Stier Laboratories
LLC (“Hollister-Stier”) of Spokane, Washington, related to the manufacture of
Ampligen®. Pursuant to the agreement, we are required to supply the
key raw materials and Hollister-Stier formulates and bottles
Ampligen®. At least 90 days prior to our first order, we are required
to provide a written 12 month rolling forecast of our initial requirements for
the product and, every 90 days thereafter, provide an extended 12 month forecast
of the number of batches we anticipate will be needed and the requested delivery
dates. Our baseline cost was set in the agreement and increases
annually based on any percentage increase in the Producer Price Index -
Pharmaceutical Preparations. Payment is due 30 days after our acceptance of the
Product. Hollister-Stier has a right of first refusal to manufacture
certain Ampligen® related products. The Supply Agreement was entered
into in December 2005 and had a five year term unless terminated
earlier. The agreement is terminable by either party upon a material
breach by the other party of the agreement that is not cured within 60 days or
upon the other party’s insolvency or certain filings under the U.S. Bankruptcy
Code. In February 2010, the agreement was extended through the
earlier of the date upon which the parties execute a revised supply agreement or
March 1, 2011.
The FDA,
in its CRL, also noted the need to resolve outstanding inspection issues at the
Hollister-Stier facility. On December 11, 2009 via Hollister-Stier,
we submitted comprehensive new data to the District Office (“DO”) of the FDA in
Seattle, WA, which we believed demonstrated that certain manufacturing issues
noted in the pre-approval inspections at the facility had been fully
addressed. On February 2, 2010, Hollister-Stier received a favorable
response from the FDA’s Seattle DO in which they noted that certain
manufacturing issues noted in the pre-approval inspection at this facility had
been fully addressed and that they had forwarded a recommendation to the FDA’s
CDER for approval of Hollister-Stier as a manufacturing site under the Ampligen®
NDA. The DO recommendations are not binding on the FDA and pertain
only to the specific manufacturing issues cited in the Ampligen® manufacturing
response and to the subcontractor site.
16
We have manufactured
purified drug concentrate utilized in the formulation of Alferon N
Injection® in our New Brunswick, New Jersey facility. With
manufacturing of Alferon® expected to take place in 2011, we are seeking new
vendors that can provide the needed cGMP formulation, packaging and labeling
services for this product.
MARKETING/DISTRIBUTION
Our
marketing strategy for Ampligen® reflects the differing health care systems
around the world along with the different marketing and distribution systems
that are used to supply pharmaceutical products to those systems. In
the U.S., we expect that, subject to receipt of regulatory approval, Ampligen®
may be utilized in four medical arenas: physicians’ offices, clinics, hospitals
and the home treatment setting. We remain 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 continue to develop 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®-CFS may include
licensing/co-marketing agreements utilizing the resources and capacities of a
strategic partner(s). We are seeking world-wide 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.
COMPETITION
RNA based
products and toll-like receptors (TLRs) have demonstrated great promise in
preclinical 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 (in the US), Agency for the
Evaluation of Medicinal Products (“EMEA”) (in Europe) and Health Protection
Branch ("HPB") (in Canada), 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.
17
The major
pharmaceutical competitors with biotech capabilities/vaccine franchises include
Pfizer, GSK, Wyeth (now part of Pfizer), Merck, Novartis, Gilead Pharmaceutical,
and Schering-Plough Corp (now part of Merck). Biotech competitors
include Baxter, Fletcher/CSI, AVANT Immunotherapeutics, AVI Biopharma and
GENTA. When we recommence sales of Alferon N Injection®, it will
again compete with products produced by Schering-Plough Corp. and others 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® 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®. Our wholesale price on a per unit basis of
Alferon N Injection® 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® N products and
our ongoing research and product development activities. Ampligen®
and other 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 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, help to accelerate the process of drug development and
commercialization. Alferon N Injection® 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® 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. Our laboratory and production facility in New Brunswick, New
Jersey is approved for the manufacture of Alferon N Injection® and we believe it
is in substantial compliance with all material regulations. However,
there can be no assurance that this facility, or facilities owned and operated
by third parties that are utilized in the manufacture of our products, will be
considered by the FDA to be in substantial compliance at the present time or in
the future.
HUMAN
RESOURCES
As of
March 1, 2010, we had 44 personnel consisting of 32 full-time employees or
consultants and 12 regulatory/research medical personnel on a part-time
basis. Part-time personnel are paid on a per diem or monthly
basis. 25 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.
18
SCIENTIFIC ADVISORY BOARD
AND DATA SAFETY MONITORING 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,
Director of the Infectious Disease Section of New York Hospital Queens, is one
of the nation's foremost experts on the West Nile Virus. Professor
Luc Montagnier of the Institut Pasteur in Paris has devoted his career to the
study of viruses and is perhaps best known for the 2008 receipt of the Nobel
Prize in Medicine related to his discovery of the Human Immunodeficiency Virus
(HIV). It is the role of this Board to advise us about current and
long-term scientific planning including research and development. The
Scientific Advisory Board conducts periodic meetings as needed. No
Scientific Advisory Board meetings were held in 2008 or 2009 primarily due to
fewer active scientific projects. However, individual Scientific
Advisory Board Members sometime consult with and meet informally with our
employees or Board Members. Members of the Scientific Advisory Board
are employed by others and may have commitments to and/or consulting agreements
with other entities, including our potential competitors.
In May
2010, we formed a Data Safety Monitoring Board (“DSMB”) that consists of two
independent regulatory and medical experts along with a Biostatistics
expert. The function of the DSMB is to perform independent safety and
efficacy analyses on our clinical trials, including those with Alferon®
LDO. However with Alferon® LDO study on FDA Clinical Hold, the DSMD
has yet to take action.
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®
and related products. The development of Ampligen® and
our other related products is subject to a number of significant
risks. Ampligen® 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 investigational 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® 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®. Although Alferon N Injection® 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.
19
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®, are
investigational and must receive prior regulatory approval by appropriate
regulatory authorities for commercial distribution and sale and are currently
legally available only through clinical trials with specified
disorders. At present, Alferon N Injection® 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® for
other indications will require regulatory approval.
Our
products, including Ampligen®, are subject to extensive regulation by numerous
governmental authorities in the United States (“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 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® or any other proposed
product and receive product revenues or royalties. We cannot assure
you that Ampligen® will ultimately be demonstrated to be safe or
efficacious. While Ampligen® is authorized for use in clinical trials
in the U.S. 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. In addition, although Ampligen® has been authorized by the
FDA for treatment use under certain conditions, including provision for cost
recovery, there can be no assurance that such authorization will continue in
effect.
On July
7, 2008, the FDA accepted for review our New Drug Application (“NDA”) for
Ampligen® to treat CFS, originally submitted in October
2007.
On
November 25, 2009, we received a Complete Response Letter (“CRL”) from the FDA
which described specific additional recommendations related to the Ampligen®
NDA. In accordance with its 2008 Complete Response procedure, the FDA
reviewers determined that they could not approve the application in its present
form and provided specific recommendations to address the outstanding
issues. We are carefully reviewing the CRL and will seek a meeting
with the FDA to discuss its recommendations. We intend to take the
appropriate steps to seek approval and commercialization of
Ampligen®. Most notably, the FDA stated that the two primary clinical
studies submitted with the NDA did not provide credible evidence of efficacy of
Ampligen® and recommended at least one additional clinical study which shows
convincing effect and confirms safety in the target population. The
FDA indicated that the additional study should be of sufficient size and
sufficient duration (6 months) and include appropriate monitoring to rule out
the generation of autoimmune disease. In addition, patients in the
study should be on more than one dose regimen, including at least 300 patients
on dose regimens intended for marketing. Finally, additional data
including a well-controlled QT interval study of the heart’s electrical cycle
and pharmacokinetic evaluations of dual dosage regiments was
requested. Other items required by the FDA include certain aspects of
Non-Clinical safety assessment and product Quality. In the
Non-Clinical area, the FDA recommended among other things that we complete
rodent carcinogenicity studies in two species. As part of the NDA
submission, we had requested that these studies be waived, but the waiver has
not been granted.
If we are
unable to generate the additional data required by the FDA or if, for that or
any other reason, Ampligen® 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.
20
Alferon® LDO is undergoing
pre-clinical testing for possible prophylaxis against
influenza. While the studies to date have been encouraging,
preliminary testing in the laboratory and in animal models 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 Alferon® as a possible treatment
of any influenza requires prior regulatory approval. In October 2009, we
submitted a protocol to the FDA proposing to conduct a Phase II Trial,
well-controlled, clinical study for the prophylaxis and treatment of seasonal
and pandemic influenza of more than 200 subjects. Following a
teleconference with the FDA in November 2009, the FDA placed the proposed study
on “Clinical Hold” because the protocol was deemed by the FDA to be deficient in
design and because additional information was required to be submitted in the
area of chemistry, manufacturing and controls (“CMC”). Thereafter in
December 2009, we submitted additional information by Amendment with respect to
both the clinical protocol design issues and the CMC items. In
January 2010, the FDA acknowledged that our responses to the clinical issues
were acceptable; however, the Clinical Hold was maintained in effect because the
FDA believed that certain CMC issues had not yet been satisfactorily
resolved. In this regard, the FDA communicated continuing questions
regarding the extended storage of Alferon® LDO drug product clinical lots which
had been manufactured from an active pharmaceutical ingredient (“API”) of
Alferon N Injection® manufactured in year 2001. Only the FDA can determine
whether a drug is safe, effective or appropriate for clinical testing or
treating a specific application. Therefore, no assurance can be given
that the use of our existing inventory will be permitted for use in future
clinical trials.
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®,
approved. As of December 31, 2009, our restated accumulated deficit
was approximately $(204,589,000). 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, 2009, we had approximately $58,072,000 in
Cash and Cash Equivalents. Given the harsh economic conditions, we
continue to review every aspect of our operations for cost and spending
reductions to assure our long-term financial stability while maintaining the
resources necessary to achieve our primary objectives of obtaining NDA approval
of Ampligen® and securing a strategic partner.
If we are
unable to commercialize and sell Ampligen® or Alferon® LDO and/or recommence and
increase sales of Alferon N Injection® or our other products, we eventually may
need to secure other sources of funding through additional equity or debt
financing or other sources in order to satisfy our working capital needs and/or
complete the necessary clinical trials and the regulatory approval processes on
which the commercialization of our products depends.
Our
ability to raise additional funds from the sale of equity securities is
limited. In this regard, we only have approximately 32,200,000 shares
authorized but unissued and unreserved. At our annual stockholders’
meeting held on June 24, 2009, we sought approval of an amendment to our
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 200,000,000 to 350,000,000. At this meeting, there
was an insufficient number of votes in favor of the proposal and voting on this
proposal had been left open until September 3, 2009. We announced on
September 2, 2009 that insufficient votes were obtained for passage of Proposal
No. 3 contained in the proxy for the 2009 Annual Meeting of
Stockholders. With voting on this proposal as the sole purpose of the
adjourned Stockholders' Meeting scheduled for September, 4, 2009, this meeting
was cancelled. Since the approval was not obtained to increase the
number of authorized shares of Common Stock, the amount of proceeds we may
receive from the sale of our Common Stock is limited.
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® Commercial
Sales were halted due to lack of finished goods inventory.
Commercial
sales of Alferon N Injection® were halted in March 2008 as the current
expiration date of our finished goods inventory expired in March 2008. As a
result, we have no product to sell at this time. We are undertaking a
major capital improvement program, that will continue throughout 2010, to
enhance our manufacturing capability to produce the purified drug concentrate
used in the formulation of Alferon N Injection® at our New Brunswick
facility. As a result, Alferon N Injection® could be available for
commercial sales in mid to late 2011. However our agreement with a
third party to formulate, package and label Alferon N Injection® has expired and
we are seeking new vendors to supply this service. Also, each
production lot of Alferon N Injection® is subject to FDA review and approval
prior to releasing the lots to be sold. In light of these
contingencies, there can be no assurances that the approved Alferon N Injection®
product will be returned to production on a timely basis, if at all, or that if
and when it is again made commercially available, it will return to prior sales
levels.
21
Although preliminary in vitro
testing indicates that Ampligen® 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®
is currently being tested as a vaccine adjuvant for H5N1, a pathogenic avian
influenza virus (“HPAIV”) in Japan, where the preclinical data has shown
activity in preventing lethal challenge with the original virus used for
vaccination as well as the other related, but not identical, isolates of H5N1
virus (i.e., cross-reactivity). The clinical testing phase of
Ampligen® in Japan is expected to begin in 2010 (see “Item 2: Management's
Discussion and Analysis of Financial Condition and Results of Operations;
Overview; General” in Part I above). No assurance can be given that
similar results will be observed in clinical trials. Use of Ampligen®
in the treatment of influenza requires prior regulatory
approval. Only the FDA or other corresponding regulatory agencies
world-wide can determine whether a drug is safe, effective and appropriate for
treating a specific application. As discussed above, obtaining
regulatory approvals is a rigorous and lengthy process (see “Our drugs 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” above).
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® for a
particular disease in order to obtain exclusive rights for the commercial sale
of Ampligen® for such disease. We obtained all rights to Alferon N
Injection®, 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®. We also have been issued patents on the use of Ampligen®
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® in patients with Chronic Fatigue Syndrome. We have
not yet been issued any patents in the United States for the use of
AmpligenÒ as a sole
treatment for any of the cancers which we have sought to target. With
regard to Alferon N Injection®, 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® 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 so. 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 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.
22
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® for ME/CFS may include
licensing/co-marketing agreements utilizing the resources and capacities of a
strategic partner(s). We continue to seek world-wide marketing
partner(s), with the goal of having a relationship in place before approval is
obtained. In parallel to partnering discussions, appropriate
premarketing 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 and
services. If we are unable to obtain the required raw materials
and/or services, we may not be able to manufacture Alferon N Injection® and/or
Ampligen®.
A number
of essential materials are used in the production of Alferon N Injection®,
including human white blood cells. We do not have, but are working
towards having long-term agreements for the supply 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.
23
There are
a limited number of manufacturers in the United States available to provide the
polymers for use in manufacturing Ampligen®. 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®
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 raw materials, we may be unable to
manufacture Alferon
N Injection® and/or Ampligen®. The costs and availability of products
and materials we need for the production of Ampligen® and the commercial
production of Alferon N Injection® 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.
Changes
in methods of manufacturing, including commercial scale-up, may affect the
chemical structure of Ampligen® and other RNA drugs, as well as their safety and
efficacy. 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, or capable of being manufactured
under applicable quality standards, economically, and in commercial quantities,
or successfully marketed.
We
have limited manufacturing experience.
Ampligen®
has been produced to date in limited quantities for use in our clinical trials,
and we are dependent upon a qualified third party supplier for the manufacturing
and packaging 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 may not be adequate for the
production of our proposed products for large-scale
commercialization. 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 Practice (“cGMP”)
requirements. 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.
We
may not be profitable unless we can produce Ampligen® or other products in
commercial quantities at costs acceptable to us.
We have
never produced Ampligen® 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® 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® 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.
24
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®. Competitors
may be developing technologies that are, or in the future may be, the basis for
competitive products. Some of these potential products may have an
entirely different approach or means of accomplishing similar therapeutic
effects to products being developed by us. These competing products
may be more effective and less costly than our products. In addition,
conventional drug therapy, surgery and other more familiar treatments may offer
competition to our products. Furthermore, many of our competitors
have significantly greater experience than us in preclinical 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 Sciences, Pfizer, Bristol-Myers Squibb, Abbott Laboratories,
GlaxoSmithKline and Merck. 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® on the immune system, we cannot assure that we
will be able to compete.
ALFERON N
Injection®. 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® currently competes with Schering’s injectable recombinant alpha
interferon product (INTRON® A) for the treatment of genital warts. 3M
Pharmaceuticals also offer competition from its immune-response modifier,
Aldara®, a self-administered topical cream, for the treatment of external
genital and perianal warts. In addition, Medigene AG has FDA approval
for a self-administered ointment, Veregen®, which is indicated for the topical
treatment of external genital and perianal warts. Alferon N
Injection® 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®. 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® 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®. Currently, our wholesale price on a per unit basis of
Alferon N Injection® is higher than that of the competitive recombinant alpha
and beta interferon products.
25
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® or Alferon N Injection® could adversely
affect potential revenues and physician/patient acceptability of our
product.
Ampligen®. We
believe that Ampligen® 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® in certain clinical situations and therefore, could adversely
affect potential revenues and physician/patient acceptability of our
product.
Alferon N
Injection®. At present, Alferon N Injection® 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®, 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® which could threaten or
limit such product’s usefulness.
We
may be subject to product liability claims from the use of Ampligen®, Alferon N
Injection®, or other of our products which could negatively affect our future
operations. We have discontinued product liability
insurance.
We face
an inherent business risk of exposure to product liability claims in the event
that the use of Ampligen® 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, we suspended product liability insurance for Alferon N
Injection® and Ampligen®. We now require third parties to indemnify
us in conjunction with all overseas emergency sales of Ampligen® and Alferon®
LDO. We concluded that years of successfully addressing the limited
number of product liability claims filed against Ampligen® and Alferon® LDO,
combined with the informed consent and other patient waivers completed as an
element of clinical trials, and the lack of any commercial sales since April
2008, that temporarily discontinuing the liability insurance was an acceptable
risk until we receive regulatory clearance for Ampligen® or Alferon® LDO or
until Alferon N Injection® again becomes available.
26
Currently,
without product liability coverage for Ampligen®, Alferon N Injection® and
Alferon® LDO, a claim against the products could have a materially adverse
effect on our business and financial condition.
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®, and his knowledge of our overall
activities, including patents and clinical trials. The loss of the
services of Dr. Carter or other personnel key to our operations, 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 on the life of Dr. Carter. 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 key 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.
A
Number of Purported Class Action Lawsuits Have Been Filed Against Us and We May
Be Subject to Civil Liabilities.
A number
of purported class action lawsuits have been filed against us alleging
securities fraud. The complaints seek monetary damages, costs, attorneys’ fees,
and other equitable and injunctive relief. Securities class action suits and
derivative suits are often brought against companies following periods of
volatility in the market price of their securities. Defending against these
suits, even if meritless, can result in substantial costs to us and could divert
the attention of our management.
The
existence of these proceedings could have a material adverse effect on our
ability to access the capital markets to raise additional funds. While
management believes that the lawsuits are without merit, we cannot predict or
determine the timing or final outcomes of the lawsuits and are unable to
estimate the amount or range of loss that could result from unfavorable
outcomes. Adverse results in some or all of these legal proceedings
could be material to our results of operations, financial condition or cash
flows.
27
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:
|
·
|
announcements
of the results of clinical trials by us or our
competitors;
|
|
·
|
announcement
of legal actions against us and/or settlements or verdicts adverse to
us;
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|
·
|
adverse
reactions to products;
|
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·
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governmental
approvals, delays in expected governmental approvals or withdrawals
of any prior governmental approvals or public or regulatory
agency comments regarding the safety or effectiveness of our products, or
the adequacy of the procedures, facilities or controls employed in the
manufacture of our products;
|
|
·
|
changes
in U.S. or foreign regulatory policy during the period of product
development;
|
|
·
|
developments
in patent or other proprietary rights, including any third party
challenges of our intellectual property
rights;
|
|
·
|
announcements
of technological innovations by us or our
competitors;
|
|
·
|
announcements
of new products or new contracts by us or our
competitors;
|
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·
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actual
or anticipated variations in our operating results due to the level of
development expenses and other
factors;
|
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·
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changes
in financial estimates by securities analysts and whether our earnings
meet or exceed the
estimates;
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·
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conditions
and trends in the pharmaceutical and other
industries;
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·
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new
accounting standards;
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|
·
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overall
investment market fluctuation;
|
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·
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restatement
of financial results; and
|
|
·
|
occurrence
of any of the risks described in these "Risk
Factors".
|
Our
common stock is listed for quotation on the NYSE Amex. For the 12
month period ended December 31, 2009, the closing price of our common stock has
ranged from $0.32 to $3.75 per share. We expect the price of our
common stock to remain volatile. The average daily trading volume of
our common stock varies significantly.
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. In this regard,
please see “A Number of
Purported Class Action Lawsuits Have Been Filed Against Us and We May Be Subject
to Civil Liabilities” above.
Our
stock price may be adversely affected if a significant amount of shares are sold
in the public market.
In May
2009 we issued an aggregate of 25,543,339 shares and warrants to purchase an
additional 14,708,687 shares under a universal shelf registration
statement. 4,895,000 of these warrants have been exercised as of
December 31, 2009. Depending upon market conditions, we anticipate
selling 9,813,687 shares pursuant to the conversion of remaining
warrants.
In
addition to the foregoing, we registered with the SEC on September 29, 2009,
1,038,527 shares issuable upon exercise of certain other warrants. To
the extent the exercise price of our outstanding 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 exercise price of certain of these warrants are adjusted pursuant to
anti-dilution protection, the warrants 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 have registered
$150,000,000 of securities for public sale pursuant to a universal shelf
registration, 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.
28
Sales of
substantial amounts of our common stock in the public market, including our sale
of securities pursuant to the universal shelf registration statement or upon
exercise of outstanding Warrants could cause the market price for our common
stock to decrease. Furthermore, a decline in the price of our common
stock would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
Provisions
of our Certificate of Incorporation and Delaware law could defer a change of our
management which could discourage or delay offers to acquire
us.
Provisions
of our Certificate of Incorporation and Delaware law may make it more difficult
for someone to acquire control of us or for our stockholders to remove existing
management, and might discourage a third party from offering to acquire us, even
if a change in control or in Management would be beneficial to our
stockholders. For example, our Certificate of Incorporation allows us
to issue shares of preferred stock without any vote or further action by our
stockholders. Our Board of Directors has the authority to fix and
determine the relative rights and preferences of preferred stock. Our
Board of Directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our Board of Directors
could authorize the issuance of a series of preferred stock that would grant to
holders the preferred right to our assets upon liquidation, the right to receive
dividend payments before dividends are distributed to the holders of common
stock and the right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In this regard, in
November 2002, we adopted a Stockholder Rights Plan (“Rights Plan”) and, under
the Rights 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-hundredth 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 5.4% of our
common stock, the Rights Plan’s threshold will be 20%, instead of
15%. The Rights Plan 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® 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 revenue.
ITEM
1B. Unresolved Staff Comments.
None.
29
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 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 14 – Contingencies” under Notes to Consolidated Financial
Statements.
ITEM 4. Removed and
Reserved
PART
II
ITEM
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
In 2009,
we issued shares of common stock consisting of 1) 1,514,272 shares in payment to
vendors and consultants for services rendered; 2) 11,862,866 shares issued
pursuant to the 2008 Purchase Agreement with Fusion; and 3) 426,136 shares to
our Directors pursuant to our Directors’ Compensation Program. In
addition, in February 2009, we issued an aggregate of 980,392 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 Amex under
the symbol HEB. The following table sets forth the high and low list
prices for our Common Stock for the last two fiscal years as reported by the
NYSE Amex. Such prices reflect inter-dealer prices, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions.
COMMON
STOCK
|
High
|
Low
|
||||||
Time Period:
|
||||||||
January
1, 2009 through March 31, 2009
|
0.84 | 0.26 | ||||||
April
1, 2009 through June 30, 2009
|
4.54 | 0.44 | ||||||
July
1, 2009 through September 30, 2009
|
3.58 | 1.86 | ||||||
October
1, 2009 through December 31, 2009
|
2.16 | 0.54 | ||||||
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 |
30
As of
March 1, 2010, there were approximately 220 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
1, 2010, the last sale price for our common stock on the NYSE Amex was $0.69 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, 2009:
Plan Category
|
Number of
Securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
|
Weighted-average
Exercise price of
Outstanding
options, warrants
and rights
|
Number of
securities
Remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a)
|
|||||||||
(a)
|
(b)
|
(c)
|
||||||||||
Equity
compensation plans approved by security holders:
|
8,797,912 | $ | 2.60 | 13,755,325 | ||||||||
Equity
compensation plans not approved by security holders:
|
11,008,246 | $ | 1.44 | - | ||||||||
Total
|
19,806,158 | $ | 1.96 | 13,755,325 |
31
Performance
Graph
Total
Return To Shareholders
(Includes
reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
|
||||||||||||||||||||
Years Ending
|
||||||||||||||||||||
Company Name / Index
|
Dec 05
|
Dec 06
|
Dec 07
|
Dec 08
|
Dec 09
|
|||||||||||||||
Hemispherx
Biopharma, Inc.
|
14.21 | 1.38 | -65.45 | -52.63 | 55.56 | |||||||||||||||
S&P
SmallCap 600 Index
|
7.68 | 15.12 | -0.30 | -31.07 | 25.57 | |||||||||||||||
Peer
Group
|
-7.61 | 12.86 | -28.20 | -67.93 | 78.77 |
INDEXED
RETURNS
|
|||||||||||||||||||||||
Base
|
Years
Ending
|
||||||||||||||||||||||
Period
|
|||||||||||||||||||||||
Company
Name / Index
|
Dec
04
|
Dec
05
|
Dec
06
|
Dec
07
|
Dec
08
|
Dec
09
|
|||||||||||||||||
Hemispherx
Biopharma, Inc.
|
100
|
114.21 | 115.79 | 40.00 | 18.95 | 29.47 | |||||||||||||||||
S&P
SmallCap 600 Index
|
100
|
107.68 | 123.96 | 123.59 | 85.19 | 106.97 | |||||||||||||||||
Peer
Group
|
100
|
92.39 | 104.27 | 74.87 | 24.01 | 42.92 | |||||||||||||||||
Peer
Group Companies
|
|||||||||||||||||||||||
AVI
BIOPHARMA INC.
|
|||||||||||||||||||||||
CARDIUM
THERAPEUTICS INC.
|
|||||||||||||||||||||||
CYTRX
CORP.
|
|||||||||||||||||||||||
GENVEC
INC.
|
|||||||||||||||||||||||
OXIGENE
INC.
|
|||||||||||||||||||||||
REGENERX
BIOPHARMACEUTICALS INC.
|
32
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, 2009 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
|
2005
|
2006
|
2007
|
2008
|
2009
|
|||||||||||||||
(restated)
|
||||||||||||||||||||
Statement
of Operations Data:
|
||||||||||||||||||||
Revenues
and License fee Income
|
$ | 1,083 | $ | 933 | $ | 1,059 | $ | 265 | $ | 111 | ||||||||||
Total
Costs and Expenses(1)
|
10,998 | 19,627 | 20,348 | 13,076 | 13,375 | |||||||||||||||
Interest
Expense and Financing Costs(2)
|
3,121 | 1,259 | 396 | - | 241 | |||||||||||||||
Redeemable
warrants valuation adjustment(3)
|
- | - | - | - | (6,258 | ) | ||||||||||||||
Net
loss
|
(12,446 | ) | (19,399 | ) | (18,139 | ) | (12,219 | ) | (7,180 | ) | ||||||||||
Deemed
Dividend
|
- | - | - | - | - | |||||||||||||||
Net
loss applicable to common stockholders
|
(12,446 | ) | (19,399 | ) | (18,139 | ) | (12,219 | ) | (7,180 | ) | ||||||||||
Basic
and diluted net loss per share
|
$ | (0.24 | ) | $ | (0.31 | ) | $ | (0.25 | ) | $ | (0.16 | ) | $ | (0.07 | ) | |||||
Shares
used in computing basic and diluted net loss per share
|
51,475,192 | 61,815,358 | 71,839,782 | 75,142,075 | 109,514,401 | |||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Working
Capital
|
$ | 16,353 | $ | 16,559 | $ | 14,412 | $ | 5,646 | $ | 55,789 | ||||||||||
Total
Assets
|
24,654 | 31,431 | 23,142 | 13,211 | 64,994 | |||||||||||||||
Debt,
net of discount
|
4,171 | 3,871 | - | - | - | |||||||||||||||
Stockholders’
Equity
|
18,627 | 24,751 | 20,955 | 11,544 | 58,695 | |||||||||||||||
Cash
Flow Data:
|
||||||||||||||||||||
Cash
used in operating activities
|
(7,231 | ) | (13,747 | ) | (15,112 | ) | (9,358 | ) | (9,297 | ) | ||||||||||
Capital
expenditures
|
$ | (1,002 | ) | $ | (1,351 | ) | $ | (212 | ) | $ | (73 | ) | $ | (332 | ) |
33
(1)
|
General
and Administrative expenses include stock compensation expense of $391,
$2,483, $2,291, $573 and $826 for the years ended December 31, 2005, 2006,
2007, 2008 and 2009,
respectively.
|
(2)
|
For
information concerning our financing see Note 6 to our consolidated
financial statements for the year ended December 31, 2009 contained
herein.
|
(3)
|
Please
see “Note 18 – Restatement” under Notes to Consolidated Financial
Statements and “ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations –
Restatement”.
|
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,
2009. This information should be read in conjunction with Item 5 –
“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
specialty pharmaceutical company based in Philadelphia, Pennsylvania and engaged
in the clinical development of new drug therapies based on natural immune system
enhancing technologies for the treatment of viral and immune based chronic
disorders. Our flagship products include Alferon N Injection® and the
experimental therapeutics Ampligen®. Alferon N Injection® is approved
for a category of STD infection, and Ampligen® represents an experimental RNA
nucleic acids being developed for globally important viral diseases and
disorders of the immune system. Hemispherx' platform technology
includes large and small agent components for potential treatment of various
severely debilitating and life threatening diseases. We have 38
patents comprising our core intellectual property estate, a product (Alferon N
Injection®) and cGMP 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.
34
Restatement
In connection with equity
financings on May 11 and 19, 2009, we issued warrants (the “Warrants”) that are
single compound derivatives containing both an embedded right to obtain stock
upon exercise (a “Call”) and a series of embedded rights to settle the
Warrants for cash upon the occurrence of certain events (each, a
“Put”). Generally, the Put
provisions allow the Warrant Holders liquidity protection; the right to receive
cash in certain situations where the Holders would not have a means of readily
selling the shares issuable upon exercise of the Warrants (e.g., where there
would no longer be a significant public market for our common
stock). However because the contractual formula used to determine the
cash settlement value of the embedded Put requires use of certain assumptions,
the cash settlement value of the embedded Put can differ from the fair value of
the unexercised embedded Call option at the time the embedded Put option is
exercised. Specifically, the Put rights would be triggered upon the
happening of a “Fundamental Transaction” (as defined below) that also is (1) an
all cash transaction; (2) a “Rule 13e-3 transaction” under the Exchange Act
(where the Company would be taken private); or (3) a transaction involving a
person or entity not traded on a national securities
exchange. “Fundamental Transactions” include (i) a merger or
consolidation of the Company with or into another person or entity; (ii) a sale,
lease, license, transfer or other disposition of all or substantially all of the
Company’s assets; (iii) any purchase offer, tender offer or exchange offer in
which holders of Company Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property, which offer has been
accepted by the holders of 50% or more of the Company’s outstanding Common
Stock; (iv) a reclassification, reorganization or recapitalization of the Common
Stock pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property; or (v) a stock purchase or
other business combination with another person or entity is effected pursuant to
which such other person or entity acquires more than 50% of the outstanding
shares of Common Stock. Pursuant to the Warrants, the Put rights
enable the Warrant Holders to receive cash in the amount of the Black-Scholes
value is obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”)
determined as of the day of consummation of the applicable Fundamental
Transaction for pricing purposes and reflecting (A) a risk-free interest rate
corresponding to the U.S. Treasury rate for a period equal to the time between
the date of the public announcement of the applicable Fundamental Transaction
and the Warrant expiration date, (B) an expected volatility equal to the greater
of 100% and the 100 day volatility obtained from the HVT function on Bloomberg
as of the Trading Day immediately following the public announcement of the
applicable Fundamental Transaction, (C) the underlying price per share used in
such calculation shall be the sum of the price per share being offered in cash,
if any, plus the value of any non-cash consideration, if any, being offered in
such Fundamental Transaction and (D) a remaining option time equal to the time
between the date of the public announcement of the applicable Fundamental
Transaction and the Warrant expiration date.
Initially, we determined
that these Warrants created a related Liability in accordance with ASC
480-10-55-29 & 30 due to the fact that the Warrants could be settled for
cash as discussed above. In our estimation of the value of
this Liability, we interpreted and applied the concept of “Fair Value” from ASC
820 (formally SFAS 157). After reviewing current accounting
literature and the findings and opinion of an independent appraiser in
determining proper accounting treatment, we took into account the extreme
unlikelihood of the occurrence of a Fundamental Transaction triggering a right
to cash settlement as a probability factor in applying a Black-Scholes-Merton
valuation of the Warrants. As a result, we deemed the fair value of
the Warrants to be immaterial and, therefore, we stated the Warrants’ related
Liability from May 31, 2009 through December 31, 2009 at
zero.
35
On
September 15, 2010, we received a comment letter from the Securities and
Exchange Commission (“SEC”) concerning its review of our annual report on Form
10-K, as amended, for the year ended December 31, 2009. During the
process of resolving the SEC’s comments, the SEC Staff alerted us that they did
not agree with our method of computing the fair value of the Warrants as
discussed above.
As a result, on December
22, 2010, after discussion with McGladrey & Pullen, LLP, our independent
registered public accounting firm, our Audit Committee determined that
the previously issued financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2009 and in our Forms 10-Q for the
periods ended March 31, 2010, June 30, 2010 and September 30, 2010 and in our
Forms 10-Q for the periods ended June 30, 2009 and September 30, 2009, should
not be relied upon. We have restated the
financial statements for the year ended December 31, 2009 contained
herein and will restate the financial statements contained in our Forms 10-Q for
the periods ended March 31, 2010, June 30, 2010 and September 30, 2010
(including the comparable periods ended June 30, 2009 and September 30, 2009) to
reflect the revised value of this Liability.
The
restatements reflect the recalculation of the fair value of the Warrants using a
Monte Carlo Simulation approach, applying critical assumptions provided by
Management reflecting conditions at the valuation date. The Monte
Carlo Simulation approach incorporates the incremental value of the Put rights
available to the Warrant Holders. The fair value of Warrants ranged
from $0.37 to $2.14 during 2009 and ranged from $0.37 to $0.38 at December 31,
2009.
The
Company recomputes the fair value of the Warrants at the end of each quarterly
reporting period. Such value computation includes subjective input
assumptions that are consistently applied each period. If the Company
were to alter its assumptions or the numbers input based on such assumptions,
the resulting fair value could be materially different.
Fair
value at measurement dates during the period from Warrants’ issuances at May 10,
2009, May 18, 2009 and May 21, 2009 to December 31, 2009, were estimated using
the following assumptions:
Underlying
price per share
|
$0.56
- $2.54
|
|
Exercise
price per share
|
$1.10
– $1.65
|
|
Risk-free
interest rate
|
0.19%
- 2.67%
|
|
Expected
holding period
|
0.122
- 5.50 years
|
|
Expected
volatility
|
94.99%
– 226.46%
|
|
Expected
dividend yield
|
None
|
The
significant assumptions using the Monte Carlo Simulation approach for valuation
of the Warrants are:
(i) Risk-Free Interest
Rate. The risk-free interest rates for the Warrants are based
on U.S Treasury constant maturities for periods commensurate with the remaining
expected holding periods of the warrants.
(ii) Expected Holding Period. The
expected holding period represents the period of time that the Warrants are
expected to be outstanding until they are exercised. The Company
utilizes the remaining contractual term of the Warrants at each valuation date
as the expected holding period.
36
(iii) Expected
Volatility. Expected stock volatility is based on daily
observations of the Company’s historical stock values for a period commensurate
with the remaining expected holding period on the last day of the period for
which the computation is made.
(iv) Expected Dividend
Yield. Expected dividend yield is based on the Company’s
anticipated dividend payments over the remaining expected holding
period. As the Company has never issued dividends, the expected
dividend yield is $-0- and this assumption will be continued in future
calculations unless the Company changes its dividend policy.
(v) Expected Probability of a
Fundamental Transaction. The possibility of the occurrence of
a Fundamental Transaction triggering a Put right is extremely
remote. As discussed above, a Put right would only arise if a
Fundamental Transaction 1) is an all cash transaction; (2) results in the
Company going private; or (3) is a transaction involving a person or entity not
traded on a national securities exchange. The Company believes such
an occurrence is highly unlikely because:
|
a.
|
The
Company only has one product that is FDA
approved;
|
|
b.
|
The
Company will have to perform additional clinical trials for FDA approval
of its flagship product;
|
|
c.
|
Industry
and market conditions continue to include a global market recession,
adding risk to any transaction;
|
|
d.
|
Available
capital for a potential buyer in a cash transaction continues to be
limited;
|
|
e.
|
The
nature of a life sciences company is heavily dependent on future funding
and high fixed costs, including Research &
Development;
|
|
f.
|
According
to Forbes.com, of approximately 17,000 public companies, fewer than 30
went private in 2008 and less than 100 were completed in 2007,
representing 0.18% and 0.6%, respectively. This would be
further reduced based on the nature of a life sciences company and the
potential lack of revenues, cash flows and the Company’s funding needs;
and
|
|
g.
|
The
Company's Rights Agreement makes it less attractive to a potential
buyer.
|
With the
above factors utilized in analysis of the likelihood of the Put's potential
Liability, the Company estimated the range of probabilities related to a Put
right being triggered as:
Range of Probability
|
Probability
|
|||
Low
|
0.5 | % | ||
Medium
|
1.0 | % | ||
High
|
5.0 | % |
The Monte
Carlo Simulation incorporated a 5.0% probability of a Fundamental
Transaction.
(vi) Expected Timing of Announcement of a
Fundamental Transaction. As the Company has no specific
expectation of a Fundamental Transaction, for reasons elucidated above, the
Company utilized a discrete uniform probability distribution over the Expected
Holding Period to model in the potential announcement of a Fundamental
Transaction occurring during the Expected Holding Period.
(vii)
Expected 100 Day
Volatility at Announcement of a Fundamental Transaction. An
estimate of future volatility is necessary as there is no mechanism for directly
measuring future stock price movements. Daily observations of the
Company’s historical stock values for the 100 days immediately prior to the
Warrants’ grant dates, with a floor of 100%, were utilized as a proxy for the
future volatility.
37
(viii)
Expected Risk-Free
Interest Rate at Announcement of a Fundamental
Transaction. The Company utilized a risk-free interest rate
corresponding to the forward U.S. Treasury rate for the period equal to the time
between the date forecast for the public announcement of a Fundamental
Transaction and the Warrant expiration date for each simulation.
(ix)
Expected Time Between Announcement and Consummation of a Fundamental
Transaction. The expected time between the announcement and
the consummation of a Fundamental Transaction is based on the Company’s
experience with the due diligence process performed by acquirers, and is
estimated to be six months. The Monte Carlo Simulation approach
incorporates this additional period to reflect the delay Warrant Holders would
experience in receiving the proceeds of the Put.
As a
result of the corrections in the valuation of the Liabilities as of December 31,
2009 described above, we have restated our consolidated financial statements in
this amended report as follows:
38
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Balance Sheet
December
31, 2009
(in
thousands)
December
31, 2009
As
Previously
Reported
|
Adjustments
|
December 31,
2009
As
Restated
|
||||||||||
ASSETS
|
||||||||||||
Current
Assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 58,072 | $ | 58,072 | ||||||||
Prepaid
expenses and other current assets
|
332 | 332 | ||||||||||
Total
current assets
|
58,404 | 58,404 | ||||||||||
Property
and equipment, net
|
4,704 | 4,704 | ||||||||||
Patent
and trademark rights, net
|
830 | 830 | ||||||||||
Investment
|
35 | 35 | ||||||||||
Construction
in progress
|
135 | 135 | ||||||||||
Other
assets
|
886 | 886 | ||||||||||
Total
assets
|
$ | 64,994 | $ | 64,994 | ||||||||
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
||||||||||||
Current
liabilities:
|
||||||||||||
Accounts
Payable
|
$ | 1,294 | $ | 1,294 | ||||||||
Accrued
expenses
|
1,321 | 1,321 | ||||||||||
Total
current liabilities
|
2,615 | 2,615 | ||||||||||
Redeemable
warrants
|
- | 17,359(a) |
|
3,684 | ||||||||
(7,417)(b) | ||||||||||||
(6,258)(b)(c) | ||||||||||||
Total
liabilities
|
2,615 | 3,684 | 6,299 | |||||||||
Commitment
and contingencies
|
||||||||||||
Stockholders’
equity
|
||||||||||||
Preferred
stock
|
- | - | ||||||||||
Common
stock
|
133 | 133 | ||||||||||
Additional
paid-in capital
|
273,093 | (17,359)(a) | 263,151 | |||||||||
7,417(b) | ||||||||||||
Accumulated
deficit
|
(210,847 | ) | 6,258(b)(c) | (204,589 | ) | |||||||
Total
stockholders' equity
|
62,379 | (3,684) | 58,695 | |||||||||
Total
liabilities and stockholders’ equity
|
$ | 64,994 | $ | 64,994 | ||||||||
39
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statement of Operations
Year
ended December 31, 2009
(in
thousands, except per share data)
December
31, 2009
As
Previously
Reported
|
Adjustments
|
December 31,
2009
As
Restated
|
||||||||||
Revenues:
|
||||||||||||
Sales
of product, net
|
$ | $ | $ | |||||||||
Clinical
treatment programs
|
111 | 111 | ||||||||||
Total
revenues
|
111 | 111 | ||||||||||
Costs
and expenses:
|
||||||||||||
Production/cost
of goods sold
|
584 | 584 | ||||||||||
Research
and development
|
6,995 | 6,995 | ||||||||||
General
and administrative
|
5,796 | 5,796 | ||||||||||
Total
costs and expenses
|
13,375 | 13,375 | ||||||||||
Operating
loss
|
(13,264 | ) | (13,264 | ) | ||||||||
Interest
and other income
|
67 | 67 | ||||||||||
Financing
costs
|
(241 | ) | (241 | ) | ||||||||
Redeemable
warrants valuation adjustment
|
- | 6,258 | (b)(c) | 6,258 | ||||||||
Net
loss
|
$ | (13,438 | ) | $ | 6,258 | $ | (7,180 | ) | ||||
Basic
and diluted loss per share
|
$ | (0.12 | ) | $ | .05 | $ | (0.07 | ) | ||||
Weighted
average shares outstanding Basic and Diluted
|
109,514,401 | 109,514,401 |
NOTES:
|
(a)
|
The
total initial estimated fair value of the Liability related to the
Warrants was $17,359,000 at the date of their issuance in May
2009. In order to record this Liability, an adjustment will be
made to decrease Additional Paid-In Capital and increase Liabilities by
$17,359,000.
|
|
(b)
|
In
May 2009 and June 2009, some of these Warrants were exercised resulting in
total non-cash losses of $3,675,000. Prior to each exercise,
the individual Warrant’s fair value was revalued. The
revaluation adjustments were made to increase the above mentioned
Warrants’ Liability of $17,359,000 by the related $3,675,000 loss and
then, upon exercise, reduce the Warrants’ Liability value by $7,417,000
for the exercised
Warrants.
|
40
|
(c)
|
The
estimated fair value of the Liability related to the Warrants was revalued
at the end of each fiscal quarter from June 2009 through December 31,
2009. Due to the decreasing trading value of our stock during
this period, at December 31, 2009, the value of the Liability related to
the remaining outstanding Warrants will be $3,684,000. The June
to December 2009 year to date adjustments to record the change in fair
value for the remaining Warrants’ Liability will be $9,933,000, resulting
in a related non-cash gain of
$9,933,000.
|
None of
the above issues from this non-cash adjustment will actually affect our
revenues, operating expenses, liquidity or cash flows from past or future
operations, except in the highly unlikely event that a Put right is triggered
under the Warrants.
RESULTS
OF OPERATIONS
Year
ended December 31, 2009 versus December 31, 2008
Net Loss
(restated)
Our net
loss of approximately $7,180,000 for the year ended December 31, 2009 was 41.2%
lower when compared to the same period in 2008. This $5,039,000
decrease in loss was primarily due to:
1)
|
Increased
Research and Development costs in 2009 of approximately $1,195,000 or 21%
as compared to the same period in
2008.
|
2)
|
Sales
of Alferon N Injection® for 2008 of approximately $173,000 compared to no
sales recorded in 2009.
|
3)
|
Decreased
interest and other income in 2009 of approximately $525,000 or 89% as
compared to the same period in
2008.
|
4)
|
Increased
non-cash financing costs of $241,000 in 2009 in the form of Common Stock
Commitment Warrants incurred as a result of the February 2009
implementation of the Standby Financing Agreement. No agreement
of this type was in effect during
2008.
|
5)
|
Decreased
Production/Cost of Goods Sold in 2009 of approximately $214,000 or 27% and
decreased General and Administrative expenses of approximately $682,000 or
11% as compared to the same period in
2008.
|
6)
|
An
adjustment at December 31, 2009 to record the change in fair value for a
Liability related to the Warrants issued in May 2009. This
Liability of $17,359,000 as originally recorded in May 2009, was adjusted
due to a change in the method of computing the fair value of the Warrants’
Liability including taking into account the exercise of some of these
Warrants and revalued to $3,684,000 at December 31, 2009 in our
restatement, thereby resulting in a related gain of
$6,258,000.
|
Restated
net loss per share for the year ended 2009 was $(0.07versus $(0.16) for the same
period in 2008.
Revenues
There
were no revenues related to the sale of Alferon N Injection® for the twelve
month period ended 2009 while there were approximately $173,000 of sales for the
same period of 2008. Revenues from our Ampligen® cost recovery
treatment program for the year ended December 31, 2009 were approximately
$111,000 compared to revenues of $92,000 for the same period in 2008, an
increase of $19,000 or 21% for approximately the same number of patients
participating in the program. Commercial sales of Alferon N
Injection® were halted in March 2008 as the expiration date of our Finished
Goods Inventory expired in March 2008. As a result, we have no
Alferon N Injection® product to commercially sell in 2009 and all revenue in
2009 has been generated from Ampligen® cost recovery clinical treatment
programs.
41
In 2008
and 2009 production of Alferon N Injection® had been put on hold due to the
resources needed to prepare our New Brunswick facility for the FDA preapproval
inspection with respect to our Ampligen® NDA. We now have the
financial resources to commence manufacturing upgrades that will be undertaken
throughout 2010. As a result, Alferon N Injection® could be available
for commercial sales in mid to late 2011.
Production/Cost of Goods
Sold
Production/Cost
of Goods Sold was approximately $584,000 and $798,000, respectively, for the
twelve months ended December 31, 2009 and 2008. This represents a
decrease of $214,000 or 27% as compared to the same period in
2008. These expenses primarily represent the costs to maintain
Alferon N Injection® and Ampligen® inventories including storage, stability
testing, transport and reporting costs including Ampligen® NDA work undertaken
in 2008. Additionally, there was a reduction in Cost of Goods Sold
for 2009 due to the lack of Alferon N Injection® sales.
Research and Development
Costs
Overall
Research and Development costs for the year ended December 31, 2009 were
approximately $6,995,000 as compared to $5,800,000 for the same period a year
ago reflecting an increase of $1,195,000 or 21%. 2009’s Research and
Development costs include the write-off of approximately $214,000 for patents
that Management either has not renewed the rights to or deemed no longer of
value and/or material to future operations. Additionally, Research
and Development costs increased approximately $254,000 due to Research and
Clinical employees participating in the Employee Wage Or Hour Reduction Program
(see “Liquidity and Capital Resources” below for details), approximately
$386,000 to evaluate and begin to ready the New Brunswick Plant for production
and a net increase of $341,000 in comparing 2009 to 2008 expenses related to the
efforts of employees in responding to the FDA and 2009 issued bonus
awards.
During
2008 and 2009, we spent considerable time and effort preparing for the
preapproval inspection by the FDA of manufacturing of Ampligen® 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 (“cGMP”) 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. In its November 25, 2009 CRL, the FDA described specific
additional recommendations related to the Ampligen® NDA. The FDA
reviewers determined that they could not approve the application in its present
form and provided specific recommendations to address the outstanding
issues.
In September 2008, we
engaged Lovelace Respiratory Research Institute in Albuquerque, New Mexico, to
perform certain animal toxicity studies in support of our Ampligen®
NDA. These studies were requested by the FDA and have been done in
collaboration with the resources of the New Brunswick
facility. On January 14, 2010, we submitted reports of new
preclinical data regarding Ampligen® for potential treatment of CFS to the FDA
which we believe to be sufficient to address certain preclinical issues
referenced in the CRL. The new preclinical data showed no evidence of
antibodies against Ampligen® in primates and no evidence of an increase in
certain undesirable cytokines (specific modulators of the immune system) at
clinically used doses of Ampligen® for CFS. Although most other
experimental immunomodulators have been associated with one or more features of
aberrant immune activity, including toll-like receptor activators (of which
Ampligen® is one), this was specifically not seen with Ampligen® in
primates.
42
We are
engaged in ongoing, experimental studies assessing the efficacy of Ampligen®,
Alferon N Injection® and Alferon® LDO against influenza viruses. As a
result, we have been focusing our resources on the studies being undertaken in
Japan and United States as well as the design of new Alferon® LDO studies for
both prevention and treatment of seasonal or pandemic influenza.
General and Administrative
Expenses
General and Administrative (“G&A”)
expenses for the year ended December 31, 2009 and 2008 were approximately
$5,796,000 and $6,478,000, respectively, reflecting a decrease of $682,000 or
11%. This decrease relates primarily to the effect of the cash
conservation and cost reduction program implemented in January 2009.
Accordingly, areas of expenses were reduced including legal fees of
approximately $440,000, stock compensation of approximately $220,000, accounting
and related fees of approximately $214,000, a reduction in personnel costs of
approximately $259,000 along with reduced expenses of approximately $433,000
related to discontinuation of sales of Alferon®. These cost savings were
somewhat offset by an increase of approximately $130,000 of incremental non-cash
labor expenses resulting from G&A employees participating in the Employee
Wage Or Hour Reduction Program along with an increase of approximately $328,000
in financial consulting, security filings and transfer fees, approximately
$44,000 in costs related to the second round of stockholder voting and
approximately $387,000 in professional advisor fees.
Interest and Other
Income
Interest and other income decreased
approximately $525,000 or 89% during the twelve months ended December 30, 2009
as compared to the same period in 2008 due to reduction of Cash available to
invest during the first five months of 2009 at lower interest rates. While
we received an infusion of cash from the two Rodman deals in May 2009, along
with the receipt of additional cash from Fusion Capital in the third quarter of
2009, historically low interest rates existed for conservative investments
throughout 2009.
Interest Expense and
Financing Costs
We had no
interest expense for 2009 or 2008. In February 2009, we entered into a
Standby Financing Agreement that produced finance costs of $241,000 in Common
Stock Commitment Warrants for the twelve months ended December 31, 2009 for
which no agreement of this type existed during the prior period in 2008.
For detailed information on this agreement, please see “Standby Financing
Agreement” below.
Restatement
As a
result of the correction to the valuation of a Liability related to Warrants
issued in May 2009, a net gain of 6,258,000 was recorded in 2009. The
Monte Carlo Simulation approach was used to determine the fair value of this
Liability with regard to these Warrants of $17,359,000 at their inception in May
2009, increased by the losses from the exercised Warrants in May and June 2009
of $3,675,000 and reduced by $7,417,000 for the exercised Warrants. At
December 31, 2009 the fair value of this Liability related to the unexercised
Warrants had decreased to $3,684,000. The net effect to reflect the change
in the fair value of this Liability during 2009 resulted in a gain of
$9,933,000. The approximate combined losses of $3,675,000 from the
exercised Warrants and the gain of $9,933,000 from the fair value adjustment
resulted in a net total gain of $6,258,000.
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:
43
1)
|
Decreased
research and development expenses in 2008 of approximately $4,644,000 as
compared to the same period in
2007.
|
2)
|
Alferon
N Injection® had no sales of Alferon N Injection® for the last nine months
of 2008. Sales of Alferon N Injection® 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)
|
Decreased
general and administrative expenses of approximately $2,496,000 during the
twelve months ended December 31, 2008 versus the same period a
year.
|
4)
|
Decreased
interest and other income of $608,000 or 51% for the twelve months ended
December 31, 2008 as compared to the same period in
2007.
|
5)
|
Decreased
Production/Cost of Goods Sold in 2008 of $132,000 being applied to
Inventory due to the halting of Alferon® 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.
|
Net loss per share was $(0.16) for the
12 month period 2008 versus $(0.25) for the same period in 2007.
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® sold under the cost recovery
clinical program was down $42,000 and Alferon N Injection® sales were down
$752,000 or 81% as compared to the prior period.
Ampligen®
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®; and 2) collection of
clinical data relating to the patients’ treatment and results. Revenues
from our Ampligen® 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® NDA and related documents preparatory to filing for a full
commercial license.
The
primary reason for the 81% drop in the sales Alferon® for the twelve months
ended December 31, 2008 is that commercial sales of Alferon N Injection® were
halted in March 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®
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® Finished Goods. The primary reason for the decrease in cost of
goods sold can be attributed to the lack of Alferon N Injection® sales since
April 1, 2008 and its impact on costs of goods sold.
44
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®.
In 2008,
we spent considerable time and effort preparing for the preapproval inspection
by the FDA for manufacturing of Ampligen® 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 (“cGMP”) 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.
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®
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, an increase of $346,000 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
prior. 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.
45
Liquidity
and Capital Resources
Cash used
in operating activities for the year ended December 31, 2009 was $9,297,000
compared to $9,358,000 for the same period in 2008, a reduction of
$61,000. The cash used in operating activities was essentially flat and
did not change significantly. We had proceeds from financing activities of
approximately $61,824,000 compared to $270,000 during the twelve months ended
December 31, 2009 and 2008, respectively. As of December 31, 2009, we had
approximately $58,072,000 in Cash and Cash Equivalents or an increase of
approximately $51,953,000 from December 31, 2008.
In an
effort to conserve our cash, the Employee Wage Or Hours Reduction Program (the
“Program”) was ratified by our Board effective January 1, 2009. In a
mandatory program that was 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 decrease in wages, of
which none elected this alternative.
On a
semi-monthly basis, Participants received rights to Stock (“Incentive Rights”)
that could not be traded. Six months after the date the Incentive Rights
were awarded, we established a process to have Incentive Rights converted into
Stock and issued to each Participant on a monthly basis. We established
and maintain a record for the number of Incentive Rights awarded to each
Participant. At the end of each semi-monthly period, we determined 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
Amex based on the average daily closing price for the period.
The Plan
was administered for full-time employees as follows:
|
o
|
Employees
earning $90,000 or less per year elected a wage reduction of 10% per annum
and received an incentive of two times the value in
Stock;
|
|
o
|
Employees
earning $90,001 to $200,000 per year elected a wage reduction of 25% per
annum received an incentive of two times the value in
Stock;
|
|
o
|
Employees
earning over $200,000 per year elected a wage reduction of 50% per annum
and received an incentive of three times the value in
Stock;
|
|
o
|
Any
employee could have elected a 50% per annum wage reduction which would
allow them to be eligible for an incentive award of three times the value
of Stock.
|
We worked
with Wachovia Securities, LLC (now Wells Fargo Advisors) to establish a trading
account for each Participant. Incentive Rights constitute income to the
Participants and be subject to payroll taxes upon Stock issuance. We will
bear all expenses related to selling the Stock at Wells Fargo Advisors (i.e.;
broker fees, transaction costs, commissions, etc.) for payroll withholding tax
purposes. Thereafter, for each Participant that remains an active employee
during the period, we will continue to bear such costs from their Wells Fargo
Advisors’ accounts for the maintenance of these 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 our stock except for the initial costs
associated to the selling of stock for payroll withholding tax
purposes.
The
Program was suspended as of May 31, 2009 with employees returning back to their
rate of pay from January 1, 2009. At the passage of six months for each of
their months of participation, non-affiliate employees have been issued shares
for the months ended July 31, August 31, September 30, October 30 and November
30, 2009. Individuals defined by Rule 144 in the Securities Act of 1933 as
an “affiliate” have yet to receive their distribution of stock from the
Program.
46
In
addition, certain vendors and service providers have agreed to accept shares of
our Common Stock as partial payment of their bills. We issued 1,514,272
and 3,017,276 shares of common stock for services rendered in 2009 and 2008,
respectively.
We have
been using the proceeds from our financings with the assistance of Rodman & Renshaw, LLC
(“Rodman”) as placement agent and from Fusion Capital Fund II,
LLC (“Fusion Capital”) equity financing to fund operating expense and
infrastructure growth including preparation for manufacturing, regulatory
compliance and market development costs related to the FDA approval process for
Ampligen®. We were able to raise in the aggregate of approximately
$33,712,000 in equity financing pursuant to the two Rodman financings in May
2009 and an aggregate of approximately $28,111,700 in equity financing pursuant
to the Fusion Capital Agreement. For more details on the Rodman and Fusion
Capital financings, please see “Equity Financing” below.
Because
of our long-term capital requirements, we may seek to access the public equity
market whenever conditions are favorable, even if we do not have an immediate
need for additional capital at that time. 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® products.
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® 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.
Standby
Financing Agreement
In
February 2009, we entered into a Standby Financing Agreement pursuant to which
certain individuals (“Individuals”), consisting of Dr. William 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 would 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 would send written notice to each of the Individuals informing
them of the total amount of additional funds required and the specific amount
that would be required from each Individual. Such funding as prescribed by
the agreement was obtained in May 2009.
47
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.
Equity
Financing
On May 8,
2009, we entered into a letter agreement (the “Engagement Letter”) with Rodman
& Renshaw, LLC (“Rodman”) as placement agent, relating to a proposed
offering of our securities. The proceeds from the May 10 and 18, 2009
equity transactions are net of all related offering costs, including the fair
value of warrants issued.
On May 10, 2009, we entered into
Securities Purchase Agreements with two institutional investors.
Pursuant to the Securities Purchase Agreements, we issued to these
investors in the aggregate: (a) 13,636,363 shares of our common stock; (b)
Series I warrants to purchase an additional 6,136,363 shares of common stock at
an exercise price of $1.65 per share (“Series I Warrants”); and (c) Series II
warrants to purchase up to 3,000,000 shares of common stock at an exercise price
of $1.10 per share (“Series II Warrants”, and together with the Series I
Warrants, the “Warrants”). The Series I Warrants could be exercised at any
time on or after the six month anniversary of the May 18, 2009 closing date of
the offering and for a five year period thereafter. The Series II Warrants
could be exercised at any time on or after the May 18, 2009 date of delivery of
the Series II Warrants and for a period of 45 days thereafter. As of
December 31, 2009, all Series II Warrants were exercised and none of the Series
I Warrants have been exercised.
Rodman, as placement agent for the May
10, 2009 Securities Purchase Agreements, acted on a best efforts basis for the
offering and received a placement fee equal to $825,000 as well as Series I
Warrants to purchase 750,000 shares of our common stock equal at an exercise
price of $1.38 per share. The Series I Warrants can be exercised at any
time on or after the six month anniversary of the May 18, 2009 closing date of
the offering and for a five year period thereafter. Rodman also was
entitled to a fee equal to 5.5% of the Series II Warrants that were
exercised. As of December 31, 2009, Rodman received $165,000 in fees with
regard to the exercise of the Series II Warrants.
On May 18, 2009, we entered into
Securities Purchase Agreements with two institutional investors. Pursuant
to the Securities Purchase Agreements, we issued to these investors in the
aggregate: (a) 11,906,976 shares of common stock; and (b) warrants to purchase
an additional 4,167,440 shares of common stock at an exercise price $1.31 per
share (“Warrants”). The Warrants could be exercised at any time on or
after their May 21, 2009 date of issuance and for a five year period
thereafter. As of December 31, 2009, 1,895,000 of these Warrants had been
exercised.
Rodman, as placement agent for the May
18, 2009 Securities Purchase Agreements, acted on a best efforts basis for the
offering and received a placement fee equal to $797,500 as well as Warrants to
purchase 654,884 shares of common stock at an exercise price of $1.34375 per
share. The Warrants could be exercised at any time on or after the six
month anniversary of the May 21, 2009 closing date of the offering and for a
five year period thereafter.
48
Refer to
Note 17 -“Fair Value” and Note 18 – “Restatement” under Notes to Consolidated
Financial Statements for further explanation of the warrants in these
agreements. The warrants include a cash settlement feature if certain
conditions are met.
On July 2, 2008, we entered into a $30
million Common Stock Purchase Agreement (the "Purchase Agreement") with Fusion
Capital Fund II, LLC (“Fusion Capital”), an Illinois limited liability
company. Concurrently with entering into the Purchase Agreement, we
entered into a registration rights agreement with Fusion Capital. Under
the registration rights agreement, we filed a registration statement related to
the transaction with the U.S. Securities & Exchange Commission (“SEC”)
covering the shares that have been issued or may be issued to Fusion Capital
under the common stock purchase agreement. That registration statement was
declared effective by the SEC on August 12, 2008. As reported in the
registration statement related to the transaction, we had the right over a 25
month period from August 2008 to sell our shares of common stock to Fusion
Capital 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 was 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 had control of the timing and amount of any sales of shares to
Fusion Capital. However, Fusion Capital could not purchase any shares of
our common stock pursuant to the Purchase Agreement if the price of our common
stock had three trading days with an average value below $0.40 over the prior
twelve trading days. There were no negative covenants, restrictions on
future funding, penalties or liquidated damages in the agreement. In
consideration for entering into the Purchase Agreement, we issued to Fusion
Capital 650,000 shares as a commitment fee. Also, we were to issue to
Fusion Capital 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. As of September
1, 2009, Fusion Capital had purchased the maximum number of shares that were
registered under the Registration Statement, an aggregate of 20,000,000 shares
for $28,111,695 and received 1,259,086 commitment shares, thereby in effect
exhausting the Purchasing Agreement.
Under the rules of the NYSE Amex, we
could 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 had executed transactions pursuant the
Fusion Capital Stock Purchase Agreement valued at $270,000 and 1,211,122 shares,
which included 650,000 shares as the initial fee for the financing.
In April 2006 we entered into a prior
common stock purchase agreement with Fusion Capital, pursuant to which we sold
an aggregate of 10,682,032 shares for total gross proceeds of approximately
$19,739,000 through November, 2007. No purchases were made by Fusion
Capital in 2008 or 2009 under this agreement, which expired on July 31,
2008.
The proceeds from our financing has
been used to fund infrastructure growth including manufacturing, regulatory
compliance and market development.
Because
of our long-term capital requirements, we may seek to access the public equity
market whenever conditions are favorable, even if we do not have an immediate
need for additional capital at that time. In this regard we also have
previously registered $150,000,000 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® products.
49
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
|
2010
|
2011
|
2012
|
|||||||||||||
Operating
Leases
|
$ | 58 | $ | 58 | $ | -0- | $ | -0- | ||||||||
Total
|
$ | 58 | $ | 58 | $ | -0- | $ | -0- |
New
Accounting Pronouncements
Refer to
“Note 2(i) – 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® under cost recovery clinical treatment protocols
approved by the FDA is recognized when the treatment is provided to the
patient.
Revenues
from the sale of product are recognized when the product is shipped, as title is
transferred to the customer. We have no other obligation associated with our
products once shipment has occurred.
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.
50
Stock Based
Compensation
Under
FASB ASC 718-Compensation-Stock Compensation (“ASC 718”) 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 ASC-718, 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.
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.
Redeemable
Warrants
We
utilize the guidance contained ASC 480 (formally SFAS 150) in the determination
of whether to record warrants and options as Equity and/or Liability. If
the guidance of ASC 480 is deemed inconclusive, we continue our analysis
utilizing ASC 815 (formally EITF 00-19).
Our
method of recording the related value attempts to be consistent with the
standards as defined by the Financial Accounting Standards Board utilizing the
concept of “Fair Value” from ASC 820-10-55-1 that states that any fair value
measurement requires that the reporting entity to determine the valuation
technique(s) appropriate for the measurement, considering the availability of
data with which to develop inputs that represent the assumptions that market
participants would use in pricing the asset or liability and the level in the
fair value hierarchy within which the inputs fall.
We
recomputed the value of the redeemable warrants at the end of each quarterly
period. We use the Monte Carlo Simulation approach which includes
subjective input assumptions that are consistently applied each quarter.
If we were to alter our assumptions or the numbers input based on such
assumptions, the resulting fair value could be materially different. As
discussed in greater detail in “Restatement” at the beginning of this Item 7,
the significant assumptions using this model are: (i) Risk-Free Interest Rate;
(ii) Expected Holding Period; (iii) Expected Volatility; (iv) Expected Dividend
Yield; (v) Expected Probability of a Fundamental Transaction; (vi) Expected
Timing of Announcement of a Fundamental Transaction; (vii) Expected 100 Day
Volatility at Announcement of a Fundamental Transaction; (viii) Expected
Risk-Free Interest Rate at Announcement of a Fundamental Transaction; and (ix)
Expected Time Between Announcement and Consummation of a Fundamental
Transaction.
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, 2009, 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 historically consisted principally of amounts due from wholesale
drug companies. At December 31, 2009 there were no receivables and those
at December 31, 2008 were fully reserved as doubtful accounts.
51
Sales to
three large wholesalers represented approximately 77% of our total sales for the
year ended December 31, 2008. There were no sales for year ended December
31, 2009.
Item
7A. Quantitative And Qualitative Disclosures About Market
Risk.
We had
approximately $58,072,000 in cash and cash equivalents at December 31,
2009. To the extent that our cash and cash equivalents exceed our near
term funding needs, we intend to invest the excess cash in money market accounts
or three to eighteen month financial instruments. We employ established
conservative policies and procedures to manage any risks with respect to
investment exposure.
ITEM
8. Financial Statements and Supplementary Data.
The
consolidated balance sheets as of December 31, 2008 and 2009, 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, 2009, 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, 2009, 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, 2009 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.
As discussed in Part II;
Item 6. Management’s Discussion and Analysis of Financial Condition and Result
of Operations, we have restated our financial statements herein. The
restatement relates to how we valued certain Warrants that are single compound
derivatives containing both the right to obtain stock upon exercise (a “Call”)
and a right to settle the Warrants for cash upon the happening of certain
remote events (each, a “Put”). Financial
recording of warrants with such provisions is subject to a number of
intricate accounting pronouncements and interpretations. Generally,
the Put provision allows the Warrant Holders liquidity protection; the
right to receive cash under the Call in certain situations where the Holders
would not have a means of readily selling the shares issuable upon exercise of
the Warrants (e.g., where there would no longer be a significant public market
for our common stock). However, because the contractual formula used to
determine the cash settlement value of the embedded Put requires use of certain
assumptions, the cash settlement value of the embedded Put can differ from the
fair value of the unexercised embedded Call at the time the embedded Put is
exercised.
52
Initially,
we determined that these Warrants created a related Liability in accordance with
ASC 480-10-55-29 & 30 due to the fact that the Warrants could be settled for
cash as discussed above. In our estimation of the value of this Liability, we
interpreted and applied the concept of “Fair Value” from ASC 820 (formally SFAS
157). Utilizing the results from an independent appraisal firm that we
engaged with regard to valuation of the Warrants, we took into account the
extreme unlikelihood of the occurrence of a Fundamental Transaction triggering a
right to cash settlement as a factor in applying the Black-Scholes-Merton
valuation of the Warrants. As a result, we deemed the fair value of the
Warrants to be immaterial and, therefore, we stated the Warrant’s related
Liability from May 31, 2009 through December 31, 2009 at zero. In
September 2010, we received a comment letter from the SEC concerning its review
of our annual report on Form 10-K, as amended, for the year ended December 31,
2009. During the process of resolving the SEC’s comments, the SEC Staff
alerted us that they did not agree with our method of computing
the fair value of the Warrants. As a result, we determined that our
financial statements for the year ended December 31, 2009 (and relevant interim
unaudited financial statements) should be restated to reflect the revised value
of this Liability.
We have
carefully reviewed the process we relied upon in valuing the Warrants and,
although we have determined to restate the financial statements, we do not
believe that our actions in originally valuing the Warrants utilizing a
remoteness factor constituted a material weakness. In utilizing the above
discussed valuation method we retained an independent appraisal firm that
conduct its engagement as defined in the Statement on Standards for Valuation
Services of the American Institute of Certified Public Accountants and we took
into account its findings.
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 our assets; (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.
53
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, 2009. 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, 2009. 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, 2009, 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, 2009 has been
audited by McGladrey and Pullen, LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
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, 2009, 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 included in the accompanying Management’s Report on 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.
54
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, 2009
based on criteria established in Internal Control—Integrated
Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the December 31, 2009 consolidated financial
statements of Hemispherx Biopharma, Inc. and our report dated March 12, 2010,
except for Notes 17 and 18, as to which the date is February 11, 2011,
expressed an unqualified opinion.
/s/ McGladrey & Pullen,
LLP
|
Blue
Bell, Pennsylvania
March 12,
2010, except for Notes 17 and 18, as to which the date is February 11,
2011
ITEM
9B. Other Information.
None.
55
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.
|
72
|
Chairman,
Chief Executive Officer
|
||
Charles
T. Bernhardt, CPA
|
48
|
Chief
Financial Officer
|
||
David
R. Strayer, M.D.
|
64
|
Medical
Director, Regulatory Affairs
|
||
Robert
Dickey IV
|
54
|
Senior
Vice President
|
||
Carol
A. Smith, Ph.D.
|
58
|
Vice
President of Manufacturing Quality and Process
Development
|
||
Richard
C. Piani
|
81
|
Director
|
||
Thomas
K. Equels
|
57
|
Director,
Secretary and General Counsel
|
||
Katalin
Ferencz-Biro, Ph.D.
|
63
|
Senior
Vice President of Regulatory Affairs
|
||
William
M. Mitchell, M.D.
|
75
|
Director
|
||
Iraj
Eqhbal Kiani, N.D.
|
64
|
Director
|
||
Wayne
Springate
|
39
|
Vice
President of Operations
|
||
Russel
Lander, Ph.D.
|
|
59
|
|
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.
We
believe our Board Members represent a desirable diversity of backgrounds,
skills, education and experiences, and they all share the personal attributes of
dedication to be effective directors. In recommending Board
candidates, Corporate Governance and Nomination Committee considers a
candidate’s: (1) general understanding of elements relevant to the success of a
publicly traded company in the current business environment; (2) understanding
of our business; and (3) diversity in educational and professional
background. The Committee also gives consideration to a candidate’s
judgment, competence, dedication and anticipated participation in Board
activities along with experience, geographic location and special talents or
personal attributes. The following are qualifications, experience and
skills for Board members which are important to Hemispherx’s business and its
future:
Leadership
Experience: We seek directors who have demonstrated strong leadership
qualities. Such leaders bring diverse perspectives and broad business
insight to our Company. The relevant leadership experience that we seek
includes a past or current leadership role in a large or entrepreneurial
company, a senior faculty position at a prominent educational institution or a
past elected or appointed senior government position.
Industry or Academic
Experience: We seek directors who have relevant industry experience, both
with respect to the disease areas where we are developing new therapies as well
as with the economic and competitive dynamics of pharmaceutical markets,
including those in which our drugs will be prescribed.
56
Scientific, Legal or
Regulatory Experience: Given the highly technical and specialized nature
of biotechnology, we desire that certain of our directors have advanced degrees,
as well as drug development experience. Since we are subject to
substantial regulatory oversight, both here and abroad by the FDA and other
agencies, we also desire directors who have legal or regulatory
experience.
Finance Experience:
We believe that our directors should possess an understanding of finance and
related reporting processes, particularly given the complex budgets and long
timelines associated with drug development programs.
WILLIAM
A. CARTER, M.D., the co-inventor of
Ampligen®, 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 Professor and Director of
Clinical Research for Hahnemann Medical University's Institute for Cancer and
Blood Diseases, and as a member of the faculty 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.
WILLIAM A. CARTER, M.D. -
Director
Qualifications:
|
·
|
Leadership
Experience – Chairman and CEO of
Hemispherx;
|
|
·
|
Industry
Experience - Knowledge of new and existing technologies, particularly as
they relate to anti-viral and immune therapies;
and
|
|
·
|
Scientific,
Legal or Regulatory Experience - M.D., co-inventor of Ampligen®, leading
innovator in the development of interferon-based drugs and expertise in
patent development.
|
|
·
|
Finance
Experience – Extensive knowledge of financial markets and successfully
completed numerous financing efforts on behalf of
Hemispherx.
|
CHARLES T. BERNHARDT is a
Certified Public Accountant who has served as our Chief Financial Officer and
Chief Accounting Officer since January 1, 2009. He attained an
undergraduate in Accountancy from Villanova University and received a Masters’
Degree in Business Administration from West Chester University of
Pennsylvania. Mr. Bernhardt was formally the Director of Accounting for
Healthcare Division of Thomson Reuters, where he was responsible for their
accounting operations including the Physicians’ Desk Reference business and
shared financial services for the Healthcare and Scientific Divisions from 2006
to 2008. He was also the 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/Zeneca (currently AstraZeneca
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.
57
DAVID R. STRAYER, M.D. has
acted as our Medical Director since 1986. He has served as Professor of
Medicine at the Medical College of Pennsylvania and Hahnemann University.
Dr. Strayer is Board Certified in Medical Oncology and Internal Medicine with
research interests in the fields of cancer and immune system disorders. He
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.
ROBERT DICKEY IV has served
as Senior Vice
President since June 2009. He has approximately
15 years of previous experience in biotech management as a CFO, COO and CEO
following a career as an investment banker. His experience spans startups
to revenue stage companies involved in cancer and CNS drug development,
transplantation and computational drug design. Mr. Dickey has specific
expertise in fund raising, business development, project management,
restructuring and international operations. Previously he spent 18 years
as an investment banker, 14 of those at Lehman Brothers, with his background
evenly split between M&A and capital markets transactions across a variety
of industries. He has an undergraduate degree from Princeton University
and an MBA from The Wharton School, University of Pennsylvania.
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®. 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.
RICHARD C. PIANI - Director
Qualifications:
|
·
|
Leadership
Experience – Chairman of Industrielle du Batiment-Morin, Chairman and CEO
of Societe "La Cellophane";
|
|
·
|
Industry
Experience - Rhone-Poulenc (now Sanofi
Aventis);
|
|
·
|
Scientific,
Legal or Regulatory Experience – Law degree, delegate for Industry to the
City of Science and Industry; and
|
|
·
|
Finance
Experience – over 40 years of diverse international business
experience.
|
THOMAS K. EQUELS has been a
director since 2008 and presently serves as our secretary, general counsel and
litigation counsel. Mr. Equels is the President and Managing Director of
the Equels Law Firm based in Miami Florida that focuses on litigation. For
over a quarter century, Mr. Equels has represented national and state
governments as well as companies in the banking, insurance, aviation,
pharmaceutical and construction industries. Mr. Equels received his Juris
Doctor degree with high honors from Florida State University. He is a
summa cum laude graduate of Troy University and also obtained his Masters Degree
from Troy. He is a member of the Florida Bar Association and the American
Bar Association.
58
THOMAS K. EQUELS - Director
Qualifications:
|
·
|
Leadership
Experience – President, Managing Director of Equels Law
Firm;
|
|
·
|
Industry
Experience –legal counsel to Hemispherx and numerous
prior pharmaceutical clients;
and
|
|
·
|
Scientific,
Legal or Regulatory Experience - Law degree with over 25 years as a
practicing attorney specializing in
litigation.
|
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 and is a board certified
physician. 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.
WILLIAM M. MITCHELL, M.D., Ph.D. -
Director Qualifications:
|
·
|
Leadership
Experience – Professor at Vanderbilt University School of Medicine and is
Chairman of the Medical Advisory Board for Chronix Biomedical.
Additionally, he has served on multiple governmental review committees of
the
National Institutes
of Health, Centers for Disease Control and Prevention and European Union,
including key roles as
Chairman.
|
|
·
|
Academic
and Industry Experience – Well published medical researcher with a
specific focus on virus and immunology issues relevant to the scientific
business of Hemispherx along with being a Director of an entrepreneurial
diagnostic company (Chronix Biomedical) that is involved in next
generation DNA sequencing for medical diagnostics;
and
|
|
·
|
Scientific,
Legal or Regulatory Experience - M.D., Ph.D. and professor at a top ranked
school of medicine, and inventor of record on numerous U.S. and
international patents who is experienced in regulatory affairs through
filings with the FDA.
|
59
IRAJ EQHBAL KIANI, N.D.,
Ph.D., was appointed to the Board of Directors on May 1, 2002. Dr.
Kiani is a citizen of the United States and England and resides in Newport
Beach, California. Dr. Kiani served in various local government positions
including the Mayor and Governor of Yasoi, Capital of Boyerahmand, Iran.
In early 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.
IRAJ EQHBAL KIANI, N.D., Ph.D.
- Director
Qualifications:
|
·
|
Leadership
Experience – former Mayor and Governor of Yasoi in
Iran;
|
|
·
|
Industry
Experience – Broad international network and contacts within the field of
immunology;
|
|
·
|
Scientific,
Legal or Regulatory Experience – N.D. and Ph.D. with trading company
management experience;
|
|
·
|
Finance
Experience – over 30 years of international business
experience.
|
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® 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 was also
responsible for preparing and having a successful Preapproval Inspection by the
FDA for our New Brunswick manufacturing plant in connection with the filing of
our Ampligen® NDA. Currently he is managing a $4.4 million capital
improvement budget to enhance our Alferon® facility in accordance with current
Good Manufacturing Practice (“cGMP”). Previously, Mr.
Springate served as President for World Fashion Concepts in New York and oversaw
operations at several locations throughout 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 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 various positions including Senior
Director of Regulatory Affairs, Quality Control and Quality Assurance
Departments, and official FDA contact for our FDA approved product, Alferon N
Injection®. Dr. Ferencz-Biro received her Ph.D. in Chemistry/ Biochemistry
in 1972 from the University of Eötvös Lóránd, Budapest, Hungary, and her M.S.,
in Chemistry and Biology in 1971 from University of Eötvös Lóránd, 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®.
He subsequently served at the New Brunswick site as Director of Quality Control
and provided guidance to the efforts to improve and validate the manufacturing
process for the synthesis of Ampligen® polynucleotide raw materials, Poly I and
Poly C12U.
He is currently directing research and development activities in New
Brunswick. 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.
60
Ransom W.
Etheridge, who has been associated with us for nearly 20 years, left our
employment when his agreement expired on December 31, 2009. Mr. Etheridge
first contributed to the Company in 1980 when he provided consulting services
and participated in negotiations with respect to our initial private
placement. Over time, his roles included service as our Secretary and
General Counsel as well as being on our Board of Directors from October 1997
through November 2008.
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
2009. Specifically, Dr. Carter, Dr. Strayer and Mr. Bernhardt each filed
four form 4 late concerning their receipt of five sets of Incentive Rights
through the “Employee Wage Or Hours Reduction Program” and Mr. Springate filed a
form 4 late related to his receipt of five sets of Incentive Rights through the
“Employee Wage Or Hours Reduction Program”; Mr. Bernhardt, Mr. Dickey and Mr.
Springate each filed late an initial Form 3; Mr. Equels filed three form 4 late
concerning five transactions; Dr. Kiani, Dr. Mitchell and Mr. Piani each have
two form 4 filed late regarding two transactions.
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, N.D., Ph.D. 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 Amex 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 because we believe that Richard Piani, an existing
director, has sufficient experience. 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 institutions. We
believe Mr. Piani, Dr. Mitchell, and Dr. 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 Amex 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 revision to the Code of Ethics and business conduct for
officers, directors, employees, agents and consultants on October 15,
2009. The principal amendments included broadening the Code's application
to our agents and consultants, adoption of a regulatory compliance policy and
adoption of a policy for protection and use of Company computer technology for
business purposes only. This Code has been presented, reviewed and signed
by each officer, director and employee and strategic consultants with none of
the amendments constituting a waiver of provision of the Code of Ethics on
behalf of the our Chief Executive Officer, Chief Financial Officer, Controller,
or persons performing similar functions.
61
You may
obtain a copy of this code by visiting our web site at www.hemispherx.net
(Investor Relations / Corporate Governance) or by written request to our office
at 1617 JFK Boulevard, Suite 660, Philadelphia, PA 19103.
Item
11. Executive Compensation.
COMPENSATION
DISCUSSION AND ANALYSIS
This
discussion and analysis describes our executive compensation philosophy,
process, plans and practices as they relate to our “Named Executive Officers”
(“NEO”) listed below and gives the context for understanding and evaluating the
more specific compensation information contained in the narratives, tables and
related disclosures that follow:
|
·
|
Dr.
William A. Carter, Chairman & Chief Executive Officer
(“CEO”);
|
|
·
|
Charles
T. Bernhardt, Chief Financial Officer (“CFO”) & Chief Accounting
Officer (“CAO”);
|
|
·
|
Dr.
David Strayer, Medical Director;
|
|
·
|
Robert
Dickey, IV, Senior Vice President; and
|
|
·
|
Wayne
Springate, Vice President (“V.P.”) of
Operations.
|
Overview
of Our Business Environment
Hemispherx
is a specialty pharmaceutical company based in Philadelphia, Pennsylvania and
engaged in the clinical development of new drug therapies based on natural
immune system enhancing technologies for the treatment of viral and immune based
chronic disorders. We were 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 natural interferon and 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.
Our
current strategic focus is derived from four applications of our two core
pharmaceutical technology platforms Ampligen® and Alferon N Injection®.
The commercial focus for Ampligen® includes application as a treatment for
Chronic Fatigue Syndrome (“CFS”) and as an influenza vaccine enhancer (adjuvant)
for both therapeutic and preventative vaccine development. Alferon N
Injection® is a FDA approved product for refractory or recurring genital
warts. Alferon® LDO (Low Dose Oral) is a formulation currently under
development targeting influenza.
Governance
The
Compensation Committee consists of the following three directors, each of whom
is “independent” under applicable NYSE Amex rules, a “Non-Employee Director” as
defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended, and
an “Outside Director” as defined under the treasury regulations promulgated
under Section 162(m) of the Internal Revenue Code of 1986, as amended (the
“Internal Revenue Code”): Dr. William Mitchell, M.D., Richard C. Piani, and Dr.
Iraj E. Kiani, N.D. The Compensation Committee makes recommendations
concerning salaries and compensation for senior management and other highly paid
professionals or consultants to Hemispherx. The full text of the
Compensation Committee Charter, as approved by the Board, is available on our
website: www.hemispherx.net in
the “Investor Relations” tab under “Corporate Governance”. This Committee
met three times in 2009 and all committee members were in attendance. Our
Chief Financial Officer and the Director of Human Resources support the
Compensation Committee in its work.
62
Process
Our
Compensation Committee is responsible for determining the compensation of our
NEO included in the “Summary Compensation Table” below. For purposes of
determining compensation for our NEO, our Compensation Committee takes into
account the recommendation of our Chief Executive Officer. The
Compensation Committee is also responsible for overseeing our incentive
compensation plans and equity-based plans, under which stock option grants have
been made to employees, including the NEO, as well as non-employee Directors and
strategic consultants.
The
following table summarizes the roles of each of the key participants in the
executive compensation decision-making process:
Compensation
Committee
|
•
Fulfills the Board of Directors' responsibilities relating to compensation
of Hemispherx’ NEO, other non-officer Executives and
non-Executives.
|
|
• Oversees
implementation and administration of Hemispherx’ compensation and employee
benefits programs, including incentive compensation and equity
compensation plans.
|
||
•
Reviews and approves Hemispherx’ goals and objectives and, in light of
these, evaluates each NEO's performance and sets his annual base salary,
annual incentive opportunity, long-term incentive opportunity and any
special/supplemental benefits or payments.
|
||
•
Reviews and approves compensation for all other non-officer Executives of
Hemispherx including annual base salary, annual incentive opportunity,
long-term incentive opportunity and any special/supplemental benefits or
payments.
|
||
•
In consultation with the CEO and CFO, reviews the talent development
process within Hemispherx to ensure it is effectively managed and
sufficient to undertake successful succession planning.
|
||
•
Reviews and approves employment agreements, severance arrangements,
issuances of equity compensation and change in control
agreements.
|
||
Chairman
and CEO
|
•
Presents to the Compensation Committee the overall performance evaluation
of, and compensation recommendations for, each of the NEO and other
non-officer Executives.
|
|
CFO
and Director of Human Resources
|
•
Reports directly or indirectly to the Chief Executive
Officer.
|
|
• Assists
the Compensation Committee with the data for competitive pay and
benchmarking
purposes.
|
63
•
Reviews relevant market data and advises the Compensation Committee on
interpretation of information, including cost of living statistics, within
the framework of Hemispherx.
|
||
•
Informs the Compensation Committee of regulatory developments and how
these may affect Hemispherx’ compensation
program.
|
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 products 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.
Use
of Compensation Data
Our
compensation plans are developed by utilizing publicly available compensation
data for national and regional companies in the biopharmaceutical industry as
well as web sites that specialize in compensation and/or employment data.
We believe that the practices of this group of companies and/or data obtained
from employment industry organizations, provide us with appropriate compensation
benchmarks necessary to review the compensation recommendations by the CEO, CFO
and/or Human Resources Department. While not utilized in 2009 or 2008 due
to our maintaining Base Salary at existing levels with the exception of cost of
living adjustments, in past years we had engaged independent outside consultants
to help us analyze compensation data and compare our programs with the practices
of the similar national and/or regional companies represented in the
biopharmaceutical industry.
Elements
of Executive Compensation
The
Compensation Committee has adopted a mix among the compensation elements in
order to further our compensation goals. The elements
include:
|
·
|
Base
salary (impacted in 2009 by the Employee Wage Or Hours Reduction Program
and cost of living adjustments);
|
|
·
|
Variable
compensation consisting of a cash bonus based upon individual and
corporate performance;
|
|
·
|
Long-term
bonus incentive programs consisting of the Goal Achievement Program and
Employee Bonus Pool Program;
|
|
·
|
Stock
option grants with exercise prices set at the fair market value at the
time of grant.
|
64
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. For those
NEO with employment agreements, base salary is determined and set forth in the
agreement and the Compensation Committee reviews the base salary prior to
renewal of such agreement. Base salaries for the other NEO are normally
reviewed annually, and adjusted from time to time to realign salaries with
market levels after taking into account individual responsibilities, performance
and experience. While this review process normally occurs in the fourth
quarter of each year, it was not undertaken regarding 2008, 2009 or 2010 base
salaries. However after analysis of overall Company compensation, the
Committee authorized a non-discriminatory and universally applied cost of living
increase to the base salaries of all full-time employees of record effective
July 1, 2009 and January 1, 2010. Therefore, with the exception of these
cost of living adjustments, no other modifications were made to the base salary
rate of our NEO during 2008 or 2009. However, additional changes to our
NEO’s base salaries could be undertaken in a future determination by the
Compensation Committee at its discretion. In this regard, in June 2010, we
entered into amended and restated agreements with Dr. Carter, and an employment
agreement with Mr. Equels, pursuant to which, Mr. Equels acts as our General
Counsel, Secretary and Executive Vice Chairman of the Board
of Directors. These employment agreements were further amended
in July 2010.
Employee
Wage Or Hours Reduction Program (January 1 to May 31, 2009)
In an
effort to conserve our cash, the Employee Wage Or Hours Reduction Program (the
“Program”) was ratified by the Board effective January 1, 2009. In a
mandatory program that was 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 base salary for which
they would be eligible to receive shares of our common stock (“Stock”) six
months after the shares were earned. All employees were also offered the
alternative option to reduce their work hours with a proportional decease in
wages. No employee elected this alternative.
On a
semi-monthly basis, Participants received rights to Stock (“Incentive Rights”)
that could not be traded. Six months after the date the Incentive Rights
were awarded, we established a process to have Incentive Rights converted into
Stock and issued to each Participant on a monthly basis. We have
established and maintained a record for the number of Incentive Rights awarded
to each Participant. At the end of each semi-monthly period, we determined
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 Amex based on the average daily closing price for the period.
The
Program was administered for full-time employees as follows:
|
·
|
Employees
earning $90,000 or less per year elected a wage reduction of 10% per annum
and received an incentive of two times the value in
Stock;
|
|
·
|
Employees
earning $90,001 to $200,000 per year elected a wage reduction of 25% per
annum received an incentive of two times the value in
Stock;
|
|
·
|
Employees
earning over $200,000 per year elected a wage reduction of 50% per annum
and received an incentive of three times the value in
Stock;
|
|
·
|
Any
employee could have elected a 50% per annum wage reduction which would
allow them to be eligible for an incentive award of three times the value
of Stock.
|
65
We have
worked with Wells Fargo Advisors (formally Wachovia Securities) to establish a
trading account for each Participant. Incentive Rights constitute income
to the Participants and be subject to payroll taxes upon Stock issuance.
We bear all expenses related to selling the Stock at Wells Fargo Advisors (i.e.;
broker fees, transaction costs, commissions, etc.) for payroll withholding tax
purposes. Thereafter, for each Participant that remains an active employee
during the period, we continue to bear such costs from their Wells Fargo
Advisors’ accounts for the maintenance of these account and all expenses related
to selling our Stock. Participants leaving us or voluntarily separating
from the Plan received the Stock earned upon the six month conversion of their
Incentive Rights. The Plan benefits for individuals that are no longer
Participants are fixed and we do not continue to bear such costs from the
designated brokerage firm for the maintenance of an account nor any
expenses related to selling Hemispherx stock except for the initial costs
associated to the selling of stock for payroll withholding tax
purposes.
During
2009, Dr. Carter and Mr. Springate agreed to temporally modify their respective
employment agreements with us pursuant to the Employee Wage Or Hours Reduction
Program. As with all other Company employees, Mr. Bernhardt and Dr.
Strayer elected to participate in the Program. As was the case regarding
all four individuals, they received half of their monthly salary or fee in
Company stock on a 3 to 1 conversion of dollars forsaken to the average stock
closing price for the respective period. On a semi-monthly basis, they
receive Incentive Rights that could not be traded. The Company determined
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 Amex based on the average daily closing price for the period.
The Program was suspended
as of May 31, 2009 with employees returning back to their rate of Base
Salary of January 1, 2009. At the passage of six months for each of their
months of participation, non-affiliate employees converted their Incentive
Rights and were issued shares on July 31, August 31, September 30, October 30
and November 30, 2009. Individuals defined by Rule 144 in the Securities
Act of 1933 as an “affiliate” converted their Incentive Rights and received
their distribution of our common stock from the Program in June or August 2010
as follows:
|
·
|
Dr.
William Carter, Chairman & CEO (818,682
shares);
|
|
·
|
Charles
Bernhardt, CFO & CAO (198,135
shares);
|
|
·
|
Dr.
David Strayer, Medical Director (230,586 shares);
and
|
|
·
|
Wayne
Springate, V.P. of Operations (185,748
shares).
|
Annual
Bonus
Our compensation program includes
eligibility for an annual performance-based cash bonus in the case of all NEO
and certain senior, non-officer Executives. 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 their respective employment agreement,
during the year ended December 31, 2009, the following Executives were eligible
for an annual performance bonus based 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:
|
·
|
Dr.
William Carter, Chairman & CEO (bonus opportunity up to
25%);
|
|
·
|
Robert
Dickey, Sr. Vice President (bonus opportunity up to 25%);
and
|
|
·
|
Wayne
Springate, V.P. of Operations (bonus opportunity up to
20%).
|
As of
June 2010, as provided in their respective employment agreement, the following
NEO were eligible for an annual performance bonus based 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:
66
|
·
|
Dr.
William Carter, Chairman & CEO (bonus opportunity up to
25%);
|
|
·
|
Thomas
Equels, General Counsel, Secretary and Executive Vice Chairman of the
Board (bonus opportunity up to 25%);
and
|
|
·
|
Wayne
Springate, V.P. of Operations (bonus opportunity up to
20%).
|
The
Compensation Committee utilizes annual incentive bonuses to compensate NEO and
certain senior, non-officer executives (the “Executive Team”) for attainment or
success towards overall corporate financial and/or operational goals along with
achieving individual annual performance objectives. These objectives will
vary depending on the individual Executive, but generally relate to strategic
factors such as establishment and/or maintenance of key strategic relationships,
development of our products, identification, research and/or development of
additional products, enhancing financial factors such as raising capital, cost
containment and/or improving the results of operations.
In June
2008, the Compensation Committee unanimously recommended to the Board that upon
acceptance of the Ampligen® NDA by the FDA, and at a time the Company had the
financial resources to pay such a bonus, that a performance bonus should be
awarded for $300,000 to Dr. William Carter, CEO and Chairman of the Board, and
$150,000 to Dr. David Strayer, Chief Medical Officer.
On May
15, 2009, the Compensation Committee completed its review of internal and
external reports, including correspondence to and from the FDA, and undertook
informal interviews with the medical management team responsible for the NDA
filing. This analysis did not include quantitative measures or threshold,
target or maximum levels of achievements. In consideration of the
successfully submitted Ampligen® NDA Application, the Compensation Committee
concluded that substantial progress had been accomplished regarding the
Ampligen® NDA application process to warrant the award of the full dollar bonus
to Dr. Carter and Dr. Strayer. Additionally with our receipt of
substantial proceeds from the private sale of our securities in May 2009, the
Chief Executive Officer deemed sufficient cash reserves existed to make such
bonus payment without creating financial hardships to the Company.
As a
result, in May 2009, in concurrence with the unanimous recommendation of the
Compensation Committee, our Board of Directors awarded the above mentioned
bonuses of $300,000 to Dr. William Carter, CEO and Chairman of the Board, and
$150,000 to Dr. David Strayer, Chief Medical Officer, in recognition for their
effort and substantial progress related to their 2008 goal regarding the
Ampligen® NDA application process.
The Compensation
Committee also undertook the initial steps to establish goals and objectives for
the Executive Team regarding possible bonuses for the year ending December 31,
2009. On an overall basis, all bonus eligible member of the Executive Team
would share the following Company-wide goals:
|
A.
|
FDA
approval of Ampligen® for Chronic Fatigue
Syndrome;
|
|
B.
|
A
country by country European strategic plan for Ampligen® to be submitted
to and approved by the Board;
|
|
C.
|
Strategic
plans for the marketing and partnering for Ampligen® to be submitted to
and approved by the Board;
|
|
D.
|
Continued
development of microbiological enhancement of vaccines requiring
Ampligen®;
|
|
E.
|
Success
in the protection of Company Intellectual
Property;
|
|
F.
|
Continued
development in the launch of Alferon®
LDO;
|
|
G.
|
Maintaining
the overall financial strength of the Company and operations consistent
with the Board approved budget.
|
67
On a
specific employee basis, each bonus eligible member of the Executive Team would
be judged on his/her success as to meeting or exceeding elements of his/her
specific job duties. This would be accomplished
by:
H.
|
At
year-end, and at the sole discretion of the Compensation Committee, with
input from the Chief Executive Officer or the Executive’s direct
supervisor, the Committee would evaluate the individual performance of
each member of the Executive Team as to his/her achievement and/or
contribution towards meeting the overall Company-wide goals along with
his/her accomplishments specific to his/her job description. The
outcome of the Committee’s analysis would be utilized to determine if a
bonus was warranted, and if so, the dollar amount or percentage of the
Executive Team member’s year-end base pay rate to be
awarded.
|
During
the first fiscal quarter of the subsequent year, the Compensation Committee
would complete their analysis utilizing any internal and external documentation
desired, including but not limited to reports from independent analysts and/or
corporate benchmarking organizations. Upon analysis completion, the
Compensation Committee made formal recommendations to the Board based on their
findings with regard to bonuses for the year ended 2009. Due to the
subjective nature of the Company-wide goals regarding the success and analysis
of an Executive in meeting or exceeding elements of his/her specific job duties,
the goals were not designed to be weighted in value or quantitative in
nature. The bonuses were designed to be awarded based on a subjective
cumulate nature of the goals deemed attainable, employee performance and
progress towards achievement. The bonus threshold was designed to range
from zero percent to twenty-five percent, with a target bonus of approximately
twenty percent, calculated from the individuals year-end base pay
rate.
In
February 2010, the Compensation Committee reviewed the Executive Team’s
Company-wide goals as detailed in the Committee’s Meeting Minutes of May 2009
and specific goals documented in each individual’s job description. The
Committee believed that the Executive Team had excelled in meeting their goals
and responsibilities as documented in each individual’s job description as well
as made significant progress in meeting corporate goals with outstanding success
in the following areas:
1.
|
Continued
development of microbiological enhancement of vaccines requiring
Ampligen®;
|
2.
|
Success
in the protection of our intellectual
property;
|
3.
|
Continued
development towards a potential clinical launch of Alferon® LDO;
and
|
4.
|
Maintaining
the overall financial strength of Hemispherx and operations consistent
with the Board approved budget; and
|
5.
|
Attainment
of a favorable FDA response to utilize a subcontractor for manufacture of
Ampligen®.
|
Specifically,
with regards to the NEO, the Compensation Committee determined that these
Executives had demonstrated sufficient progress or exceeded expectations related
to the following established goals described above and designated by the letters
“A” through “H”:
(i)
|
Dr. William Carter, Chairman & CEO: Goals “D”, “E”, “F” and
“G”;
|
(ii)
|
Charles Bernhardt, CFO & CAO: Goals “E”, “G” and
“H”;
|
(iii)
|
Dr. David Strayer, Medical Director: Goals “D”, “E”, and “F”;
and
|
(iv)
|
Wayne Springate, V.P. of Operations: Goals “F”, “G” and
“H”.
|
For this
achievement, the Compensation Committee awarded each of these four identified
NEO with a performance bonus of twenty percent of their respective base salary
rate at year-end 2009. For what the Compensation Committee designated as
unusual meritorious service during the year, they awarded the following NEO with
an extra five percent performance bonus of their respective base salary rate at
year-end 2009:
68
1.
|
Dr.
William Carter, Chairman & CEO, related to his service in obtaining
new composition of matter Ampligen® patent applications and spearheading
the successful raising of new capital;
and
|
2.
|
Charles
Bernhardt, CFO & CAO, related to his outstanding service as Chief
Financial Officer in completing SEC filings, controlling the Company’s
cash burn and enforcing budgetary
requirements.
|
On
February 8, 2010, Hemispherx’ Board of Directors approved the recommendations of
the Compensation Committee to award bonuses to NEO and certain senior,
non-officer Executives for their performance in relation to their
attainment of 2009 Company-wide goals as well as their achievements in
individual goals and responsibilities. The Compensation Committee had
recommended, and the Board ratified, the award of the following bonuses: Dr.
William Carter, Chairman & CEO ($182,772 or 25% of base salary), Charles
Bernhardt, CFO & CAO ($44,000 or 25% of base salary), Dr. David Strayer,
Medical Director ($44,306 or 20% of base salary) and Wayne Springate, V.P. of
Operations ($33,000 or 20% of base salary) and certain senior,
non-officer Executives.
Long-Term Bonus Incentive
Programs
The
Compensation Committee believes that team oriented performance by our NEO,
non-officer Executive officers and all employees, consistent with our short and
long-term goals, can be achieved through the use of goal or result oriented
bonus programs. Accordingly, two programs have been established to provide
our employees, including our NEO and certain senior, non-officer Executives,
with incentives to help align their financial interests with that of Hemispherx
and its stockholders. One program terminated in March 2010 and the other
is ongoing.
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® 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® following the full commercial approval of the sale of
Ampligen® 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 Hemispherx. This program presently includes Dr.
William Carter, CEO, Dr. Chaunce Bogard, strategic consultant, The Sage Group
(strategic advisor firm), Anthony Bonelli, our former President and Chief
Operating Officer, Dr. David R. Strayer, Medical Director and all of our active
full-time employees as of January 1, 2009.
69
From the
inception through its March 31, 2010 expiration, Hemispherx paid no compensation
related to the Goal Achievement Incentive Program.
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®. 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 salary 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.
For the
year ending 2009, Hemispherx paid no compensation related to the Employee Bonus
Pool Program.
Stock
Options
The
Compensation Committee believes that long-term performance is achieved through
an ownership culture that encourages such performance by our NEO, non-officer
Executives and all employees through the use of stock and stock-based
awards. Our stock plans have been established to provide our employees,
including our NEO and senior non-officer Executives, with incentives to help
align their interests with the interests of stockholders. Accordingly, the
Compensation Committee believes that the use of stock and stock-based awards
offers the best approach to achieving long-term performance goals
because:
|
·
|
Stock
options align the interests of Executives and employees with those of the
stockholders, support a pay-for-performance culture, foster employee stock
ownership, and focus the management team on increasing value for the
stockholders;
|
|
·
|
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;
and
|
|
·
|
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.
|
We have
historically elected to use stock options as the primary long-term equity
incentive vehicle and expect to continue to use stock options as a long-term
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. The Compensation Committee believes 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.
In
determining the number of stock options to be granted to NEO, non-officer
Executives and employees, we take into account the individual's position, scope
of responsibility, ability to affect profits and stockholder value and the
individual's historic and recent performance and the value of stock options in
relation to other elements of the individual's total compensation.
Our stock
plans authorize us to grant options to purchase shares of common stock to our
NEO, 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 NEO 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 NEO and employees and, in appropriate
circumstances, the Compensation Committee considers the recommendations of the
CEO.
70
In 2008,
the Compensation Committee and the Board authorized the renewal of expiring
options for certain named Executives. 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 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.
In 2009,
Robert Dickey IV was the only employee granted stock options as an element of
his acceptance of the Senior Vice President position on June 11, 2009. He
was granted the option to purchase 150,000 shares of our common stock at an
exercise price of $2.81 per share, or 110% of the
$2.55 closing price of the stock on the NYSE Amex. These options are
designed to vest proportionately over each month for four years beginning July
1, 2009.
On June
11, 2010, we granted options to purchase shares of our common stock at an
exercise price of $0.66 per share, or 110% of the $0.60 closing price of the
stock on the NYSE Amex as of June 10, 2010, to the following NEO consistent with
their respective employment agreements:
|
·
|
William
A. Carter, Chairman of the Board & CEO for 500,000 shares with
immediate vesting; and
|
|
·
|
Thomas
K. Equels, Executive Vice Chairman of the Board, Secretary and General
Counsel for 300,000 shares with immediate
vesting.
|
On
December 6, 2010, we granted options to purchase shares of our common stock at
an exercise price of $0.55 per share, or 110% of the $0.50 closing price of the
stock on the NYSE Amex as of December 3, 2010, to Charles T. Bernhardt, Chief
Financial Officer and Chief Accounting Officer consistent with his employment
agreement.
Other
Compensation
We
provide the following benefits to our NEO generally on the same bases as
benefits provided to all full-time employees:
|
·
|
Health,
vision and dental insurance;
|
|
·
|
Life
insurance;
|
|
·
|
Short
and long-term disability insurance;
|
|
·
|
401(k)
with company match of up to 6% of employee’s
contribution.
|
The
Compensation Committee believes that these benefits are consistent with those
offered by other companies, specifically those provided by our
peers.
Occasionally,
certain Executives separately negotiate other benefits in addition to the
benefits described above. The following additional benefits were provided
in 2009 to Dr. William Carter, Chairman & CEO, as an element of his
employment:
|
·
|
Automobile
allowance;
|
|
·
|
Reimbursement
of home office and phone expenses;
|
|
·
|
Supplementary
life insurance policies;
|
|
·
|
Incentive
bonus of 0.5% of the gross proceeds received by us from any joint venture
or corporate partnering arrangement. During 2009, there were no
bonus payments related to this
incentive.
|
71
Commencing
as of June 2010, as provided in their respective employment agreement, the
following Executives were eligible for incentive bonuses related to: (i) product
sales, joint ventures or corporate partnering arrangements (“Sales or
Arrangements”), and (ii) any sale of our Company or substantially all of our
assets not in the ordinary course of our business (“Asset Sale”): Dr. William
Carter, Chairman & CEO (2.5% of Sales or Arrangements and 5% of any Asset
Sale); and Thomas Equels, General Counsel, Secretary and Executive Vice Chairman
of the Board (5% of Sales or Arrangements and 5% of any Asset Sale). These
incentive bonuses, if earned, are not to exceed in the aggregate an annual
maximum of $5,000,000 per Executive.
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 participant
immediately vests in his or her deferred salary contributions, while our
contributions will vest over one year.
Effective
March 15, 2008 and continuing through December 31, 2009, we halted our matching
of 401(k) contributions provided to the account for each eligible
participant. Effective January 1, 2010, our Compensation Committee
reestablished Hemispherx’ 100% matching of up to 6% of the 401(k) contributions
provided to the account for each eligible participant, including without
exception each eligible Named Executive Officer.
Key
Employee Retention
On
December 31, 2008, we entered into a severance/consulting agreement with the
former Chief Financial Officer, Robert E. Peterson. This agreement
provides 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 Amex on the last trading day of the calendar quarter for which
the Options are
being issued. Additionally, the severance/consulting agreement allows for
the possibility of a one percent fee to be paid to Mr. Peterson in the event of
financial transactions to raise capital for a maximum potential pay-out value of
$518,328 (two times the amount of compensation paid to Mr. Peterson by us for
calendar year 2008). Mr.
Peterson may terminate the Advisory Services at any time upon giving us sixty
(60) days notice in writing of the intention to terminate his Advisory
Services.
Severance
In determining whether to approve and
setting the terms of severance arrangements, the Compensation Committee
recognizes that Executives, especially highly ranked Executives, often face
challenges securing new employment following termination. Upon termination of
employment, the following NEO currently are entitled to receive severance
payments under their employment and/or engagement
agreements:
|
·
|
William
A. Carter, Chairman of the Board & Chief Executive
Officer;
|
|
·
|
Thomas
K. Equels, Executive Vice Chairman of the Board, Secretary and General
(effective June 1, 2010); and
|
|
·
|
Wayne
Springate, Vice President of
Operations.
|
72
The Compensation Committee believes
that severance
agreements provided these individuals are generally in line with severance
packages offered to executive officers of the companies of similar size.
Mr. Bernhardt, Mr. Dickey and Dr. Strayer are currently not covered under
a severance agreement and any severance benefits payable to them under similar
circumstances would be determined by the Compensation Committee in its
discretion. See “Estimated Payments Following Severance — Named Executive
Officers.
Conclusion
Our
compensation policies are designed to retain and motivate our Executive
Officers, other non-officer Executives and non-Executives and to ultimately
reward them for outstanding individual and corporate performance.
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee of our Board of Directors oversees our compensation
program on behalf of the Board. In fulfilling its oversight
responsibilities, the Committee reviewed and discussed with Management the
Executive Compensation Discussion and Analysis set forth in this amendment to
Form 10-K for the fiscal year ended December 31, 2009.
In
reliance on the review and discussions referred to above, the Committee
recommended to the Board that the Compensation Discussion and Analysis be
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009 and Hemispherx’ Proxy Statement to be filed in connection with
Hemispherx’ 2010 Annual Meeting of Stockholders.
COMPENSATION COMMITTEE
Dr. Iraj Eqhbal Kiani, Committee
Chairman
Dr. William M/ Mitchell
Richard C. Piani
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.
Compliance
With Internal Revenue Code Section 162(m) and 409(b).
One of
the factors the Compensation Committee considers in connection with compensation
matters is the anticipated tax treatment to Hemispherx and to the Executives of
the compensation arrangements. The deductibility of certain types of
compensation depends upon the timing of an executive’s vesting in, or exercise
of, previously granted rights. Moreover, interpretation of, and changes
in, the tax laws and other factors beyond the Compensation Committee’s control
also affect the deductibility of compensation. Accordingly, the
Compensation Committee will not necessarily limit executive compensation to that
deductible under Section 162(m) or 409(b) of the Code. The Compensation
Committee will consider various alternatives to preserving the deductibility of
compensation payments and benefits to the extent consistent with its other
compensation objectives.
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our
Compensation Committee of the Board of Directors, consisting of Dr. Iraj Eqhbal
Kiani, the Committee Chair, Dr. William M. Mitchell and, Richard C. Piani are
all independent directors. There are no interlocking
relationships.
73
EXECUTIVE
COMPENSATION
The
following table provides information on the compensation during the fiscal years
ended December 31, 2007, 2008 and 2009 of our Chief Executive Officer, Chief
Financial Officers and three other most highly compensated Executive officers,
constituting the NEO, in 2009 for each fiscal year.
Summary
Compensation Table
Name & Principal
Position
|
Year
|
Salary
/
Fees
(7)
|
Bonus
|
Stock
Awards
(3)
|
Option
Awards
(3)
|
Non-Equity
Incentive
Plan
Compensation
|
Change
in
Pension
Valued
and
NQDC
Earnings
($)
|
All
Other
Compensation
|
Total
|
|||||||||||||||||||||||||
William
A. Carter
|
2009
|
$ | 554,105 | $ | 482,072 | (8)(9) | $ | 188,311 | (7) | $ | -0- | $ | -0- | — | $ | 76,896 | (4) | $ | 1,301,384 | |||||||||||||||
Chief
Executive Officer
|
2008
|
$ | 664,624 | $ | -0- | $ | -0- | $ | 316,571 | (10) | $ | -0- | — | $ | 106,094 | (5) | $ | 1,087,289 | ||||||||||||||||
2007
|
$ | 637,496 | $ | 166,156 | $ | -0- | $ | 1,688,079 | $ | -0- | — | $ | 123,063 | (6) | $ | 2,614,794 | ||||||||||||||||||
Charles
T. Bernhardt
|
2009
|
$ | 134,662 | $ | 44,000 | (9) | $ | 45,334 | (7) | $ | -0- | $ | -0- | — | $ | 9,380 | (11) | $ | 233,376 | |||||||||||||||
Chief
Financial Officer (1)
|
2008
|
$ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | — | $ | 26,000 | (1) | $ | 26,000 | |||||||||||||||||
2007
|
$ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | — | $ | -0- | $ | -0- | |||||||||||||||||||
David
Strayer
|
2009
|
$ | 167,484 | $ | 194,306 | (8)(9) | $ | 53,054 | (7) | $ | -0- | $ | -0- | — | $ | 3,229 | (11) | $ | 418,073 | |||||||||||||||
Medical
Director
|
2008
|
$ | 201,389 | $ | -0- | $ | -0- | $ | 16,168 | (10) | $ | -0- | — | $ | -0- | $ | 217,557 | |||||||||||||||||
2007
|
$ | 240,348 | $ | 50,347 | $ | -0- | $ | 79,810 | $ | -0- | — | $ | -0- | $ | 370,505 | |||||||||||||||||||
Robert
Dickey (2)
|
2009
|
$ | 152,131 | $ | -0- | $ | -0- | $ | 252,312 | $ | -0- | — | $ | 4,824 | (11) | $ | 409,267 | |||||||||||||||||
Sr.
Vice President
|
2008
|
$ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | — | $ | -0- | $ | -0- | ||||||||||||||||||
2007
|
$ | -0- | $ | -0- | $ | -0- | $ | -0- | $ | -0- | — | $ | -0- | $ | -0- | |||||||||||||||||||
Wayne
Springate
|
2009
|
$ | 126,250 | $ | 33,000 | (9) | $ | 42,500 | (7) | $ | -0- | $ | -0- | — | $ | 3,229 | (11) | $ | 204,979 | |||||||||||||||
V.P.,
Operations
|
2008
|
$ | 150,000 | $ | -0- | $ | -0- | $ | -0- | $ | -0- | — | $ | 7,354 | (12) | $ | 157,354 | |||||||||||||||||
2007
|
$ | 150,000 | $ | 37,500 | $ | -0- | $ | 36,253 | $ | -0- | — | $ | 13,429 | (12) | $ | 237,182 |
Notes:
(1)
|
Mr.
Bernhardt transitioned from the role of a contract consultant in
4th
Quarter 2008 to Chief Financial Officer effective January 1,
2009.
|
(2)
|
Mr.
Dickey joined Hemispherx effective June 11, 2010 and was granted the
Options to purchase Hemispherx common stock as an element of his
Employment Agreement. The value was obtained using the Black-Scholes
pricing model for stock based compensation in accordance with FASB ASC 718
(formerly SFAS 123R).
|
(3)
|
The
value was obtained using the Black-Scholes pricing model for stock based
compensation in accordance with FASB ASC 718 (formerly SFAS 123R). See
Note 2(j) Equity based compensation in the financial
statements.
|
(4)
|
Consists
of a) Life Insurance premiums totaling $38,679; b) Healthcare premiums of
$28,586; and d) Company car expenses of
$9,631.
|
(5)
|
Consists
of a) Life Insurance premiums totaling $66,411; b) Healthcare premiums of
$28,586; and d) Company car expenses of
$11,097.
|
(6)
|
Consists
of a) Life Insurance premiums totaling $63,627; b) Healthcare premiums of
$28,586; d) Company car expenses of $12,017; and 401(k) matching funds of
$18,833.
|
74
(7)
|
Hemispherx’
“Employee Wage Or Hours Reduction Program” allowed an individual to
elected a 50% reduction in salary/fees which would them to be eligible for
an incentive award of three times the value of Stock based on the average
NYSE Amex closing value of the stock during the respective months of
January through May, 2009. The value was obtained using the Black-Scholes
pricing model for stock based compensation in accordance with FASB ASC 718
(formerly SFAS 123R).
|
(8)
|
On
May 20, 2009, our Board of Directors awarded bonuses of $300,000 to Dr.
William Carter, and $150,000 to Dr. David Strayer in recognition for their
accomplishment of 2008 corporate goals and
objectives.
|
(9)
|
On
February 8, 2009, our Board of Directors awarded bonuses to certain NEO
and senior, non-officer Executives in recognition for their achievement
towards of 2009 Company-wide and individual
goals.
|
(10)
|
Issue
of options for options previously granted that expired
unexercised.
|
(11)
|
Consists
of Healthcare premiums.
|
(12)
|
Consists
of Healthcare premiums and 401(k) matching
funds.
|
Grants
Of Plan Based Awards
Name
|
Grant Date
(3)
|
Estimated Future Payouts Under
Non-Equity
Incentive Plan
Awards(1)
|
Estimated
Future Payouts
Under
Equity Incentive Plan
Awards
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards:
Number
of
Securities
of
Underlying
Options
(#)(2)
|
Exercise
or
Base
Price
of
Option
Awards
($/Sh)
|
Grant
Date
Fair
Value
of
Stock
and
Option
Awards
($)
|
|||||||||||||||||||||||||||||||||||||
Threshold
($)
|
Target
($)
|
Maximum
($)
|
Threshold
($)
|
Target
($)
|
Maximum
($)
|
|||||||||||||||||||||||||||||||||||||||
William
A. Carter,
|
N/A | — | 146,217 | 182,771 | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||
Chief
Executive Officer
|
||||||||||||||||||||||||||||||||||||||||||||
Charles
T. Bernhardt,
|
N/A | — | 38,720 | 44,000 | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||
Chief
Financial Officer
|
||||||||||||||||||||||||||||||||||||||||||||
David
Strayer,
|
N/A. | — | 44,306 | 55,363 | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||
Medical
Director
|
||||||||||||||||||||||||||||||||||||||||||||
Robert
Dickey,
|
N/A. | — | 55,000 | 68,750 | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||
Senior
Vice President
|
6/11/2009
|
131,200 | $ | 2.55 | 252,312 | |||||||||||||||||||||||||||||||||||||||
Wayne
Springate,
|
N/A. | — | 33,000 | 41,250 | — | — | — | — | — | $ | — | — | ||||||||||||||||||||||||||||||||
V.P.,
Operations
|
Notes:
(1)
|
For
2009, the Compensation Committee did not establish or estimate possible
future payouts to the NEO under a Cash Bonus Plan. Using existing
Employment Agreements as a benchmark, the “Target” was estimated at 20% of
Base Salary and “Maximum” estimated at 25% of Base Salary. Details
regarding all of which reported as Non-Equity Incentive Plan Compensation
in the 2009 is reported in the Summary Compensation Table
above.
|
(2)
|
Consists
of stock options awarded during 2009 under our 2009 Equity Incentive
Plan. The stock option awards vest 25% on each of the first four
anniversaries of the grant date. The stock options have a ten-year
term and an exercise price equal to 110% of the closing market price of
the our common stock on the date of
grant.
|
(3)
|
N/A
represents Not Applicable.
|
75
Outstanding
Equity Awards At Fiscal Year End
Option Awards
|
Stock Awards
|
||||||||||||||||||||||||||||||||
Name
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number of
Shares or
Units of
Stock
That Have
Not
Vested (#)
|
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested (#)
|
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights that
Have Not
Vested (#)
|
||||||||||||||||||||||||
Willam
A. Carter,
|
1,450,000 | 0 | 0 | 2.20 |
09/17/18
|
||||||||||||||||||||||||||||
Chief
Executive Officer
|
1,000,000 | 0 | 0 | 2.00 |
09/9/17
|
||||||||||||||||||||||||||||
190,000 | 0 | 0 | 4.00 |
02/18/18
|
|||||||||||||||||||||||||||||
73,728 | 0 | 0 | 2.71 |
12/31/10
|
|||||||||||||||||||||||||||||
10,000 | 0 | 0 | 4.03 |
01/3/11
|
|||||||||||||||||||||||||||||
167,000 | 0 | 0 | 2.60 |
09/7/14
|
|||||||||||||||||||||||||||||
153,000 | 0 | 0 | 2.60 |
012/7/14
|
|||||||||||||||||||||||||||||
100,000 | 0 | 0 | 1.75 |
04/26/15
|
|||||||||||||||||||||||||||||
465,000 | 0 | 0 | 1.86 |
06/30/15
|
|||||||||||||||||||||||||||||
70,000 | 0 | 0 | 2.87 |
12/9/15
|
|||||||||||||||||||||||||||||
300,000 | 0 | 0 | 2.38 |
01/1/16
|
|||||||||||||||||||||||||||||
10,000 | 0 | 0 | 2.61 |
12/9/15
|
|||||||||||||||||||||||||||||
376,650 | 0 | 0 | 3.78 |
02/22/16
|
|||||||||||||||||||||||||||||
1,400,000 | 0 | 0 | 3.50 |
09/30/17
|
|||||||||||||||||||||||||||||
Charles
T. Bernhardt
|
0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||
Chief
Financial
|
|||||||||||||||||||||||||||||||||
Officer
|
|||||||||||||||||||||||||||||||||
David
Strayer,
|
50,000 | 0 | 0 | 2.00 |
09/9/17
|
||||||||||||||||||||||||||||
Medical
Director
|
50,000 | 0 | 0 | 4.00 |
02/28/18
|
||||||||||||||||||||||||||||
10,000 | 0 | 0 | 4.03 |
01/3/11
|
|||||||||||||||||||||||||||||
20,000 | 0 | 0 | 3.50 |
01/23/07
|
|||||||||||||||||||||||||||||
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
|
|||||||||||||||||||||||||||||
Robert
Dickey,
|
18,750 | 131,250 | 0 | 2.55 |
06/11/19
|
||||||||||||||||||||||||||||
Sr.
Vice President
|
|||||||||||||||||||||||||||||||||
Wayne
Springate,
|
1,812 | 0 | 0 | 1.90 |
12/7/14
|
||||||||||||||||||||||||||||
V.P.,
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 |
04/30/17
|
|||||||||||||||||||||||||||||
13,333 | 6,667 | 0 | 1.30 |
12/6/17
|
76
Option
Exercises And Stock Vested
Option Awards
|
Stock Awards
|
|||||||||||||||
Name
and Principal Position
|
Number of Shares
Acquired on Exercise (#)
|
Value Realized on
Exercise ($)
|
Number of Shares
Acquired on Vesting (#)
|
Value Realized
on Vesting ($)
|
||||||||||||
William
A. Carter,
|
— | — | — | — | ||||||||||||
Chief
Executive Officer
|
||||||||||||||||
Charles
T. Bernhardt,
|
— | — | — | — | ||||||||||||
Chief
Financial Officer
|
||||||||||||||||
David
Strayer,
|
— | — | — | — | ||||||||||||
Medical
Director
|
||||||||||||||||
Robert
Dickey,
|
— | — | — | — | ||||||||||||
Senior
Vice President
|
||||||||||||||||
Wayne
Springate,
|
— | — | — | — | ||||||||||||
VP,
Operations
|
Payments
on Disability
Each
current NEO has the same short and long-term disability coverage which are
available to all eligible employees. The coverage for short-term
disability provides up to six months of full salary continuation up to 60% of
weekly pay, less other income, with a $1,500 weekly maximum limit. The
coverage for group long-term disability provides coverage at the exhaustion of
short-term disability benefits of full salary continuation up to 60% of monthly
pay, less other income, with a $10,000 monthly maximum limit. The maximum
benefit period for the group long-term disability coverage is 60 months for
those age 60 and younger at the time of the claim with the coverage period
proportionately reduced with the advanced age of the eligible employee to a
minimum coverage period of 12 months for those of 69 years old and elder as of
the date of the claim. Additionally, William A. Carter, Chief Executive
Officer received additional coverage of $200,000 per annum payable under the
terms of a disability insurance policy paid for by us.
Payments
on Death
Each NEO
has coverage of group life insurance, along with accidental death and
dismemberment benefits, consistent to the dollar value available to all eligible
employees. The benefit is equal to two times current salary or wage with a
maximum limit of $300,000, plus any supplemental life insurance elected and paid
for by the NEO. Additionally, in 2009, William A. Carter, Chief Executive
Officer’s beneficiaries would also receive a benefit of $4,850,000 payable under
the terms of a term life insurance policies paid for by us.
77
Estimated
Payments Following Severance — Named Executive Officers
During
2009, we had employment agreements with Dr. Carter, Mr. Dickey and Mr. Springate
that entitled them to severance benefits on certain types of employment
terminations not related to a change in control. Mr. Bernhardt and Dr.
Strayer were not covered under a general severance plan and any severance
benefits payable to them under similar circumstances would be determined by the
Compensation Committee in its discretion. The dollar amounts below
assume that the termination occurred on December 31, 2009. The actual
dollar amounts to be paid can only be determined at the time of the NEO’s
separation from Hemispherx based on their prevailing compensation and employment
agreements along with any determination by the Compensation Committee in its
discretion.
Name
|
Event
|
Cash Severance
($)
|
Value of
Stock
Awards That
Will Become
Vested ($)
|
Continuation of
Medical Benefits
(1) ($)
|
Additional
Life
Insurance
(2) ($)
|
Total
($)
|
||||||||||||||||
William
A. Carter
|
Involuntary
(no cause)
|
731,086 | — | 67,265 | — | 798,351 | ||||||||||||||||
Chief
Executive Officer
|
Termination
(for cause)
|
— | — | — | — | — | ||||||||||||||||
Death
or disability
|
731,086 | — | 134,530 | — | 865,616 | |||||||||||||||||
Termination
by employee or retirement
|
60,924 | — | 5,605 | — | 66,529 | |||||||||||||||||
Charles
T. Bernhardt
|
Involuntary
(no cause)
|
6,769 | — | — | — | 6,769 | ||||||||||||||||
Chief
Financial Officer
|
Termination
(for cause)
|
6,769 | — | — | — | 6,769 | ||||||||||||||||
Death
or disability
|
— | — | — | — | — | |||||||||||||||||
Termination
by employee or retirement
|
6,769 | — | — | — | 6,769 | |||||||||||||||||
David
Strayer
|
Involuntary
(no cause)
|
— | — | — | — | — | ||||||||||||||||
Medical
Director
|
Termination
(for cause)
|
— | — | — | — | — | ||||||||||||||||
Death
or disability
|
— | — | — | — | — | |||||||||||||||||
Termination
by employee or retirement
|
— | — | — | — | — | |||||||||||||||||
Robert
Dickey
|
Involuntary
(no cause)
|
68,750 | — | — | — | 68,750 | ||||||||||||||||
Senior
Vice President
|
Termination
(for cause)
|
10,577 | — | — | — | 10,577 | ||||||||||||||||
Death
or disability
|
— | — | — | — | — | |||||||||||||||||
Termination
by employee or retirement
|
10,577 | — | — | — | 10.577 | |||||||||||||||||
Wayne
Springate
|
Involuntary
(no cause)
|
165,000 | — | — | — | 165,000 | ||||||||||||||||
VP,
Operations
|
Termination
(for cause)
|
— | — | — | — | — | ||||||||||||||||
Death
or disability
|
41,250 | — | — | — | 41,250 | |||||||||||||||||
Termination
by employee or retirement
|
13,750 | — | — | — | 13,750 |
78
Notes:
(1)
|
This
amount reflects the current premium incremental cost to us for
continuation of elected benefits to the extent required under an
applicable agreement.
|
(2)
|
The
life insurance benefit represents additional life insurance paid for by us
over the standard coverage.
|
Payments
On Termination in Connection With a Change in Control - Named Executive
Officers
At
December 31, 2009, we had employment agreements with Dr. Carter and Mr. Dickey
that entitled them to severance benefits on certain types of employment
terminations related to a change in control. Mr. Bernhardt, Dr. Strayer
and Mr. Springate are not covered under a severance plan specific to a change in
control with severance benefits payable to them under similar circumstances to
be determined by the Compensation Committee in its discretion. The
dollar amounts below assume that the termination occurred on December 31,
2009. The actual dollar amounts to be paid can only be determined at the
time of the NEO’s separation from Hemispherx based on their prevailing
compensation and employment agreements along with any determination by the
Compensation Committee in its discretion.
As of
June 2010, we entered into a new employment agreement with Dr. Carter and an
employment agreement with Mr. Equels that entitle them to severance benefits on
certain types of employment terminations related to a change in control.
Currently, no other Executive Officers, non-officer Executives or non-Executives
are covered under a severance plan specific to a change in control. The
dollar amounts in the chart below assume that change in control termination
occurred on December 31, 2009, based on the employment agreements that existed
at that time. The actual dollar amounts to be paid can only be determined
at the time of the NEO’s separation from Hemispherx based on their prevailing
compensation and employment agreements along with any determination by the
Compensation Committee in its discretion.
Estimated
Benefits on Termination Following a Change in Control — December 31,
2009
The
following table shows potential payments to the NEO if their employment
terminates following a change in control under contracts, agreements, plans or
arrangements at December 31, 2009. The amounts assume a December 31, 2009
termination date and use the closing price of $0.56 for our common stock at that
date.
Name
|
Aggregate
Severance Pay
($)
|
PVSU
Acceleration
(3) ($)
|
Early
Vesting
of
Restricted
Stock (4) ($)
|
Early
Vesting
of Stock
Options
and SARs
(5) ($)
|
Acceleration
and
Vesting of
Supplemental
Award (6) ($)
|
Welfare
Benefits
Continuation
(7) ($)
|
Outplacement
Assistance
(8) ($)
|
Parachute
Tax
Gross-up
Payment
(9) ($)
|
Total
($)
|
|||||||||||||||||||||||||||
William
A. Carter
|
3,641,573 | (1) | -0- | -0- | -0- | -0- | 201,795 | 35,000 | 1,745,266 | 5,623,634 | ||||||||||||||||||||||||||
Charles
T. Bernhardt
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||||
David
Strayer
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||||
Robert
Dickey
|
412,500 | (2) | -0- | -0- | 220,773 | (10) | -0- | -0- | -0- | -0- | 633,273 | |||||||||||||||||||||||||
Wayne
Springate
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- |
79
Notes:
(1)
|
This
amount represents three times the sum of the NEO’s (a) highest annual base
salary in effect during the year of termination and (b) bonus received in
the prior year. These amounts are based on the salary rates in
effect on December 31, 2009 and bonuses paid during or related to
2009.
|
(2)
|
This
amount represents one and a half times the sum of the NEO’s (a) highest
annual base salary in effect during the year of termination and (b) bonus
received in the prior year. These amounts are based on the salary
rates in effect on December 31, 2009 and bonuses paid during or related to
2009.
|
(3)
|
This
amount represents the payout of all outstanding performance-vesting share
units (“PVSU”) awards on a change in control at the target payout level
with each award then pro-rated based on the time elapsed for the
applicable three-year performance
period.
|
(4)
|
This
amount represents the value of all unvested restricted awards which would
become vested on a change in control (whether or not the awards were
deferred). The amount would be calculated by multiplying an NEO’s
number of unvested shares by the fair market value of a single share on
December 31, 2009, which was $0.56.
|
(5)
|
This
amount is the intrinsic value [fair market value on December 31, 2009
($0.56 per share) minus the per share exercise price] of all unvested
stock options for each NEO, including Stock Appreciation Rights
(“SAR”). Any option with an exercise price of greater than fair
market value was assumed to be cancelled for no consideration and,
therefore, had no intrinsic value.
|
(6)
|
This
amount represents the payout of the supplemental award on a change in
control at the target payout level with each award then pro-rated based on
the time elapsed for the applicable three-year performance
period.
|
(7)
|
This
amount represents the employer-paid portion of the premiums for medical,
dental and life insurance coverage.
|
(8)
|
This
amount represents the estimated cost of providing outplacement
assistance.
|
(9)
|
This
amount reflects the gross-up an NEO would receive if he is subject to
income tax under Internal Revenue Code, Commonwealth of Pennsylvania and
City of Philadelphia. The estimated gross-up is calculated using the
assumption of a 45% tax imputed amount on the total value of all elements
in the severance agreement.
|
(10)
|
Based
on a Black-Scholes
pricing model of valuing options utilizing the fair market value of
a single share on December 31, 2009, which was
$0.56.
|
Definition of
“Change in Control”. For
each agreement, a “Change in Control” is defined generally as any such event
that requires a report to the SEC, but includes any of the
following:
|
·
|
Any person or entity other than
Hemispherx, any of our current directors or officers or a trustee or
fiduciary holding our securities, becomes the beneficial owner of more
than 50% of the combined voting power of our outstanding
securities;
|
|
·
|
An acquisition, sale, merger or
other transaction that results in a change in ownership of more than 50%
of the combined voting power of our stock or the sale/transfer of more
than 75% of our assets;
|
|
·
|
A change in the majority of our
Board of Directors over a two-year period that is not approved by at least
two-thirds of the directors then in office who were directors at the
beginning of the period; or
|
|
·
|
Execution of an agreement with
Hemispherx, which if consummated, would result in any of the above
events.
|
80
Definition of
“Constructive Termination”. A “Constructive Termination” generally
includes any of the following actions taken by Hemispherx without the
executive’s written consent following a change in control:
|
·
|
Significantly reducing or
diminishing the nature or scope of the executive’s authority or
duties;
|
|
·
|
Materially reducing the
executive’s annual salary or incentive compensation
opportunities;
|
|
·
|
Changing the executive’s office
location so that he must commute more than 50 miles, as compared to his
commute as of the date of the
agreement;
|
|
·
|
Failing to provide substantially
similar fringe benefits, or substitute benefits that were substantially
similar taken as a whole, to the benefits provided as of the date of the
agreement; or
|
|
·
|
Failing to obtain a satisfactory
agreement from any successor to Hemispherx to assume and agree to perform
the obligations under the
agreement.
|
However,
no constructive termination occurs if the executive:
|
·
|
Fails to give us written notice
of his intention to claim constructive termination and the basis for that
claim at least 10 days in advance of the effective date of the executive’s
resignation; or
|
|
·
|
We cure the circumstances giving
rise to the constructive termination before the effective date of the
executive’s resignation.
|
Available
Information
Our
Internet website is www.hemispherx.net and you may find our SEC filings in the
“Investor Relations” under “SEC Filings”. We provide access to our filings
with the SEC, free of charge through www.sec.gov, as soon as reasonably
practicable after filing with the SEC. Our Internet website and the
information contained on that website, or accessible from our website, is not
intended to be incorporated into this Annual Report on Form 10-K or any other
filings we make with the SEC.
The
provision for change in control within the employment agreement for Thomas K.
Equels did not become effective until June 1, 2010 while the amended employment
agreement with Robert Dickey IV, effective February 1, 2010, no longer includes
a change in control provision.
Post-Employment
Compensation
We have
agreements with the following NEO who have benefits upon termination: an
employment and an engagement agreement with Dr. William Carter, our Chairman and
Chief Executive Officer; an employment agreement with Thomas K. Equels
(effective June 1, 2010), our Executive Vice Chairman, Secretary and General
Counsel; and an employment agreement with Wayne Springate, our Vice President of
Operations.
The
following is a description of post-employment compensation payable to the
NEO. If a NEO does not have a specific benefit, he is not mentioned in the
subsection. In such event, the NEO does not have any such benefits upon
termination unless otherwise required by law.
81
Termination For
Cause
Dr.
Carter and Mr. Equels can be terminated for cause. For each, “Cause” means
the willful engaging by the him in illegal conduct or gross misconduct or gross
violation of the Company’s Code of Ethics and Business Conduct for Officers
which is demonstrably and materially injurious to the Company. For
purposes of their respective agreement, no act, or failure to act, on his part
shall be deemed "willful" unless done intentionally by him and not in good faith
and without reasonable belief that his action or omission was in the best
interest of the Company. Notwithstanding the foregoing, he shall not be
deemed to have been terminated for Cause unless and until the Company delivers
to him a copy of a resolution duly adopted by the affirmative vote of not less
than three-quarters of the directors of the Board at a meeting of the Board
called and held for such purpose (after reasonable notice to him and an
opportunity for him, together with counsel, to be heard before the Board)
finding that, in the good faith opinion of the Board, he was guilty of conduct
set forth above and specifying the particulars thereof in detail. In the
event that his employment is terminated for Cause, the Company shall pay him, at
the time of such termination, only the compensation and benefits otherwise due
and payable to him through the last day of his actual employment by the
Company.
Mr.
Springate can be terminated for cause. “Cause” means his failure, other
than by reason of disability, to perform his services under his employment
agreement or his willful engaging in illegal conduct or gross misconduct which
is injurious to the Company. If he is terminated for cause, he is entitled
to only the fees due and payable to him through the date of the termination of
his employment agreement.
Termination
Without Cause
Dr.
Carter, Mr. Equels and Mr. Springate are each entitled to the compensation and
benefits otherwise due and payable to him through the last day of the then
current term of his agreements. In the event that he
is terminated at any time without "Cause" the Company shall pay to him, at the
time of such termination, the compensation and benefits otherwise due and
payable to him through the last day of the then current term of his
Agreement. However, benefit distributions that are made due to a
“separation from service” occurring while he is a Named Executive Officer shall
not be made during the first six months following “separation from
service”. Rather, any distribution which would otherwise be paid to him
during such period shall be accumulated and paid to him in a lump sum on the
first day of the seventh month following the “separation from service”.
All subsequent distributions shall be paid in the manner specified.
Death
or Disability
Dr.
Carter and Mr. Equels can be terminated for death or disability. For
each, “Disability” means his inability to effectively carry out substantially
all of his duties under his agreement by reason of any medically determinable
physical or mental impairment which can be expected to result in death or which
has lasted for a continuous period of not less than 12 months. In the
event his employment is terminated due to his death or disability, the Company
will pay to him (or his estate as the case may be), at the time of such
termination, the Base Salary and applicable benefits otherwise due and payable
through the last day of the month in which such termination occurs and for an
additional 12 month period.
82
Mr.
Springate can be terminated for death or disability which lasts for a continuous
period of not less than three months. If he is terminated due to his death
or disability, he (or his estate as the case may be) are entitled to the fees
due him through the last day of the month in which such termination
occurs.
Termination
by Officer and Employee
All
executive Officers, other non-officer Executives and non-Executives have the
right to terminate their respective agreement upon not less than thirty (30)
days of prior written notice of termination. In such event, Dr.
Carter and Mr. Equels are entitled to fees due to them through the last day of
the month in which such termination occurs and for 12 months thereafter.
All others are entitled to the fees due to them through the last day of the
month in which such termination occurs.
Change
in Control
Dr.
Carter and Mr. Equels are entitled to benefits upon a Change of Control or
Constructive Termination. Dr. Carter’s Change of Control agreement
currently runs through December 31, 2012 and as of each December 31st
automatically renews through the third anniversary thereof, unless we notify him
by written notice of refusal to renew at least 180 days prior to the initial
termination date or the expiration date of any renewal period. Dr.
Carter’s and Mr. Equels’ employment agreements also provide that, upon the
happening of a Change of Control, the terms of such agreements automatically
extend for an additional three years.
Compensation
of Directors
Our
Compensation, Audit and Corporate Governance and Nomination Committees, consist
of Dr. Iraj Eqhbal Kiani, Compensation Committee Chair, Dr. William M. Mitchell,
Corporate Governance and Nomination Committee Chair, and Richard C. Piani, Audit
Committee Chair, all of whom are independent Board of Director
members.
In 2008
and 2009, Non-employee Board member compensation consisted of an annual retainer
(“Directors’ fees”) of $150,000. In 2008 the Non-employee Board members
were paid two-thirds in cash and one-third in our common stock. As a
further cash conservation measure for first three months of 2009, the
Non-employee Board Member Compensation was paid 16.7% in cash and 83.3% in our
common stock. Effective April 1, 2009, the Non-employee Board members
returned to being paid 100% in cash for their proportionate portion of annual
retainer. 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 or $31,250
with the value of the shares being determined by the closing price of our common
stock on the NYSE Amex on the last day of the calendar quarter. Director’s
fees are paid quarterly at the end of each calendar quarter.
On
November 28, 2008, 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. The number of
shares paid were determined by the closing price of our common stock on the NYSE
Amex on the last day of the calendar quarter. Effective April 1, 2009, Mr.
Equels began receiving payment in cash for his proportionate portion of annual
retainer.
Hemispherx
reimburses Directors for travel expenses incurred in connection with attending
board, committee, stockholder and special meetings along with other Company
business-related expenses. Hemispherx does not provide retirement benefits
or other perquisites to non-employee Directors under any current
program.
83
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. 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.
Commencing
as of January 1, 2010, Board member Directors’ fee compensation was increased to
an annual retainer of $165,000. Director’s fees will continue to be paid
in cash quarterly at the end of each calendar quarter.
Director
Compensation - 2009
Name and
Title
|
Fees
Earned
or Paid
in Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
(2)
|
Non-
Equity
Incentive
Plan
Compensation ($)
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
|
All Other
Compensation ($)
|
Total
($)
|
|||||||||||||||||||||
T.
Equels, Director, Secretary & General Counsel
|
112,500 | 37,500 | 0 | 0 | 0 | 386,809 | (1) | 536,809 | ||||||||||||||||||||
W.
Mitchell, Director
|
118,750 | 31,250 | 0 | 0 | 0 | 0 | 150,000 | |||||||||||||||||||||
R.
Piani, Director
|
118,750 | 31,250 | 0 | 0 | 0 | 0 | 150,000 | |||||||||||||||||||||
I.
Kiani, Director
|
118,750 | 31,250 | 0 | 0 | 0 | 39,764 | (3) | 189,764 |
Notes:
(1)
|
General
Counsel fees as per Engagement Agreement in effect during
2009.
|
(2)
|
No
options were awarded in 2009.
|
(3)
|
Director
was unintentionally overlooked in the September 10, 2007 issuance of an
option to purchase 100,000 shares of our common stock at the original
valuation of $67,406. This cash payment was based on the
Black-Scholes valuation of these options at December 4,
2009.
|
84
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
The
following table sets forth as of March 1, 2010, the number and percentage of
outstanding shares of common stock beneficially owned by:
|
·
|
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;
|
|
·
|
Each
of our directors and the Named Executives;
and
|
|
·
|
All
of our officers and directors as a
group.
|
As of
March 1, 2010, 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. “Incentive Rights” are rights to receive common
stock issuable upon exercise under our “Employee Wage Or Hours Reduction
Program” that was in effect from January 1, 2009 to May 31, 2009 (see “Liquidity and Capital
Resources” in Part II, Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations).
Name and Address of
Beneficial Owner
|
Shares Beneficially
Owned
|
% Of Shares
Beneficially Owned
|
||||||
William
A. Carter, M.D.
|
7,565,360 | (1)(2) | 5.4 | % | ||||
Richard
C. Piani
97
Rue Jeans-Jaures
Levaillois-Perret
France
92300
|
757,420 | (3) | * | |||||
Charles
T. Bernhardt CPA
|
265,214 | (4) | * | |||||
Thomas
K. Equels
|
1,428,622 | (5) | 1.1 | % | ||||
William
M. Mitchell, M.D.
Vanderbilt
University
Department
of Pathology
Medical
Center North
21st
and Garland
Nashville,
TN 37232
|
616,025 | (6) | * | |||||
Iraj
Eqhbal Kiani, N.D., Ph.D.
Orange
County Immune Institute
18800
Delaware Street
Huntingdon
Beach, CA 92648
|
323,271 | (7) | * | |||||
David
R. Strayer, M.D.
|
471,832 | (8) | * | |||||
Wayne
Springate
|
235,525 | (9) | * | |||||
Robert
Dickey, IV
|
152,500 | (10) | * | |||||
Russel
Lander, Ph.D.
|
168,073 | (11) | * | |||||
Katalin
Ferencz-Biro, Ph.D.
|
15,000 | (12) | * | |||||
Carol
A. Smith, Ph.D.
|
87,999 | (13) | * | |||||
All
directors and executive officers as a group (12 persons)
|
12,086,841 | 9.1 | % |
*
Ownership of less than 1%
85
(1)
|
Dr.
Carter is our Chairman and Chief Executive Officer. He owns 487,960
shares of common stock and beneficially owns 7,075,256 shares issuable or
issued upon exercise of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
||||||||||
Options
|
||||||||||||||
1990 |
08/08/91
|
$ | 2.71 | 73,728 |
12/31/10
|
|||||||||
1990
|
12/03/01
|
$ | 4.03 | 10,000 |
01/03/11
|
|||||||||
2004
|
09/08/04
|
$ | 2.60 | 167,000 |
09/07/14
|
|||||||||
2004
|
12/07/04
|
$ | 2.60 | 153,000 |
12/07/14
|
|||||||||
2004
|
04/26/05
|
$ | 1.75 | 100,000 |
04/26/15
|
|||||||||
2004
|
07/01/05
|
$ | 1.86 | 465,000 |
06/30/15
|
|||||||||
2004
|
12/09/05
|
$ | 2.61 | 10,000 |
12/08/15
|
|||||||||
2004
|
12/09/05
|
$ | 2.87 | 70,000 |
12/09/15
|
|||||||||
2004
|
01/01/06
|
$ | 2.38 | 300,000 |
01/01/16
|
|||||||||
2004
|
02/22/06
|
$ | 3.78 | 376,650 |
02/22/16
|
|||||||||
2004
|
09/10/07
|
$ | 2.00 | 1,000,000 |
09/09/17
|
|||||||||
2004
|
10/01/07
|
$ | 3.50 | 1,400,000 |
09/30/17
|
|||||||||
2004
|
02/18/08
|
$ | 4.00 | 190,000 |
02/18/18
|
|||||||||
2007
|
09/17/08
|
$ | 2.20 | 1,450,000 |
09/17/18
|
|||||||||
Total
Options
|
5,765,378 | |||||||||||||
Warrants
|
||||||||||||||
Total
Warrants
|
2009
|
02/1/09
|
$ | 0.51 | 491,196 |
02/01/19
|
Incentive Rights
|
||||||||||||||
Date
|
Number
|
|||||||||||||
Plan
|
Issued
|
Of Shares
|
||||||||||||
2007 |
01/31/09
|
206,646 | ||||||||||||
2007
|
02/28/09
|
199,263 | ||||||||||||
2007
|
03/31/09
|
192,870 | ||||||||||||
2007
|
04/30/09
|
154,527 | ||||||||||||
2007
|
05/31/09
|
65,376 | ||||||||||||
Total
Incentive Rights
|
818,682 |
(2)
|
Dr.
Kovari is the spouse of Dr. Carter and accordingly all shares owned by
each are deemed to be beneficially owned by the other. She
beneficially owns 2,144 shares issuable upon exercise
of:
|
Date
|
Number
|
|||||||||||||
Incentive Rights
|
Plan
|
Issued
|
Of Shares
|
|||||||||||
2007 |
01/31/09
|
536 | ||||||||||||
2007
|
02/28/09
|
494 | ||||||||||||
2007
|
03/31/09
|
510 | ||||||||||||
2007
|
04/30/09
|
408 | ||||||||||||
2007
|
05/31/09
|
196 | ||||||||||||
Total
Incentive Rights
|
2,144 |
(3)
|
Mr.
Piani is a member of our Board of Directors who owns 432,812 shares of
common stock and beneficially owns 324,608 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
2004 |
09/08/04
|
$ | 2.60 | 54,608 |
09/07/14
|
|||||||||
2004
|
04/26/05
|
$ | 1.75 | 100,000 |
04/26/15
|
|||||||||
2004
|
02/24/06
|
$ | 3.86 | 50,000 |
02/24/16
|
|||||||||
2004
|
09/10/07
|
$ | 2.00 | 100,000 |
09/09/17
|
|||||||||
2004
|
02/18/08
|
$ | 4.00 | 20,000 |
02/18/18
|
|||||||||
Total
Options
|
324,608 |
86
(4)
|
Charles
T. Bernhardt is our Chief Financial Officer and owns 67,079 shares of
common stock along with the following rights to received 198,135 shares
issuable upon exercise of:
|
Date
|
Number
|
|||||||||||||
Incentive Rights
|
Plan
|
Issued
|
Of Shares
|
|||||||||||
2007 |
01/31/09
|
49,569 | ||||||||||||
2007
|
02/28/09
|
45,642 | ||||||||||||
2007
|
03/31/09
|
47,118 | ||||||||||||
2007
|
04/30/09
|
37,791 | ||||||||||||
2007
|
05/31/09
|
18,015 | ||||||||||||
Total
Incentive Rights
|
198,135 |
(5)
|
Mr.
Equels is a member of our Board of Directors, Secretary and General
Counsel who owns 937,426 shares of common stock and beneficially owns
491,196 shares issuable or issued upon exercise of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Warrants
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
Total
Warrants
|
2009 |
02/1/09
|
$ | 0.51 | 491,196 |
02/01/19
|
(6)
|
Dr.
Mitchell is a member of our Board of Directors that owns 304,025 shares of
common stock and beneficially owns 312,000 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
2004 |
09/08/04
|
$ | 2.60 | 50,000 |
09/07/14
|
|||||||||
2004
|
04/26/05
|
$ | 1.75 | 100,000 |
04/26/15
|
|||||||||
2004
|
02/24/06
|
$ | 3.86 | 50,000 |
02/24/16
|
|||||||||
2004
|
09/10/07
|
$ | 2.00 | 100,000 |
09/09/17
|
|||||||||
2004
|
09/17/08
|
$ | 6.00 | 12,000 |
09/17/18
|
|||||||||
Total
Options
|
312,000 |
(7)
|
Dr.
Kiani is a member of our Board of Directors who owns 246,271 shares of
common stock and beneficially owns 77,000 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
2004 |
04/26/05
|
$ | 1.75 | 15,000 |
04/26/15
|
|||||||||
2004
|
06/02/05
|
$ | 1.63 | 12,000 |
06/30/15
|
|||||||||
2004
|
02/24/06
|
$ | 3.86 | 50,000 |
02/24/16
|
|||||||||
Total
Options
|
77,000 |
(8)
|
Dr.
Strayer is our Medical Director that has ownership of 51,246 shares of
common stock and beneficially owns 420,586 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
||||||||||
Options
|
||||||||||||||
1990 |
12/03/01
|
$ | 4.03 | 10,000 |
01/03/11
|
|||||||||
2004
|
12/07/04
|
$ | 1.90 | 10,000 |
12/07/14
|
|||||||||
2004
|
12/09/05
|
$ | 2.61 | 10,000 |
12/08/15
|
|||||||||
2004
|
11/20/06
|
$ | 2.20 | 15,000 |
11/20/16
|
|||||||||
2004
|
01/23/07
|
$ | 2.37 | 20,000 |
01/23/17
|
|||||||||
2004
|
09/10/07
|
$ | 2.00 | 50,000 |
09/09/17
|
|||||||||
2004
|
12/06/07
|
$ | 1.30 | 25,000 |
12/06/17
|
|||||||||
2004
|
02/18/08
|
$ | 4.00 | 50,000 |
09/18/18
|
|||||||||
Total
Options
|
190,000 | |||||||||||||
Incentive Rights
|
||||||||||||||
2007
|
01/31/09
|
58,089 | ||||||||||||
2007
|
02/28/09
|
54,453 | ||||||||||||
2007
|
03/31/09
|
54,015 | ||||||||||||
2007
|
04/30/09
|
43,962 | ||||||||||||
2007
|
05/31/09
|
20,067 | ||||||||||||
Total
Incentive Rights
|
230,586 |
87
(9)
|
Mr.
Springate is our Vice President of Operations who owns 877 shares of
common stock and beneficially owns 234,648 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
||||||||||
Options
|
||||||||||||||
2004 |
12/07/04
|
$ | 1.90 | 1,812 |
12/07/14
|
|||||||||
2004
|
12/09/05
|
$ | 2.61 | 2,088 |
12/08/15
|
|||||||||
2004
|
11/20/06
|
$ | 2.20 | 5,000 |
11/20/16
|
|||||||||
2004
|
05/01/07
|
$ | 1.78 | 20,000 |
09/09/17
|
|||||||||
2004
|
12/06/07
|
$ | 1.30 | 20,000 |
12/06/17
|
|||||||||
Total
Options
|
48,900 | |||||||||||||
Incentive Rights
|
||||||||||||||
2007
|
01/31/09
|
46,473 | ||||||||||||
2007
|
02/28/09
|
42,789 | ||||||||||||
2007
|
03/31/09
|
44,172 | ||||||||||||
2007
|
04/30/09
|
35,427 | ||||||||||||
2007
|
05/31/09
|
16,887 | ||||||||||||
Total
Incentive Rights
|
185,748 |
88
(10)
|
Mr.
Dickey is our Senior Vice President and owns 2,500 shares of common stock
and beneficially owns 150,000 shares issuable upon exercise of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
Total
Options
|
2009 |
07/01/09
|
$ | 2.81 | 150,000 |
07/01/19
|
(11)
|
Dr.
Lander is our Vice President of Quality Assurance who owns 153,073 shares
of common stock and beneficially owns 15,000 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
Total
Options
|
2004 |
12/06/07
|
$ | 1.30 | 15,000 |
12/06/17
|
(12)
|
Dr.
Ferencz-Biro is our Senior Vice President of Regulatory Affairs who
beneficially owns 15,000 shares issuable upon exercise of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
Total
Options
|
2004 |
12/06/07
|
$ | 1.30 | 15,000 |
12/06/17
|
(13)
|
Dr.
Smith is our Vice President of Manufacturing Quality and Process
Development who owns 23,708 shares of common stock and beneficially owns
64,291 shares issuable upon exercise
of:
|
Date
|
Exercise
|
Number
|
Expiration
|
|||||||||||
Options
|
Plan
|
Issued
|
Price
|
Of Shares
|
Date
|
|||||||||
1990 |
11/20/96
|
$ | 2.20 | 7,500 |
11/20/16
|
|||||||||
2004
|
01/22/97
|
$ | 2.37 | 6,791 |
01/22/17
|
|||||||||
2004
|
01/03/01
|
$ | 4.03 | 10,000 |
01/03/11
|
|||||||||
2004
|
12/07/04
|
$ | 1.90 | 10,000 |
12/07/14
|
|||||||||
2004
|
12/08/05
|
$ | 2.61 | 10,000 |
12/08/15
|
|||||||||
2004
|
09/10/07
|
$ | 2.00 | 20,000 |
09/09/17
|
|||||||||
Total
Options
|
64,291 |
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 10. Executive Compensation,” and “Item
11. Security Ownership of Certain Beneficial Owners and Management,” as noted
above.
Ransom W. Etheridge was our General
Counsel through December 31, 2009. Currently he is an attorney in private
practice who renders corporate legal services to us from time to time. As
General Counsel, he received fees totaling approximately $144,469 and $105,400
in 2009 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 valued at $150,000 for the time served in 2008.
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 $82,400 and $41,200
in 2009 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 services to us for
several years. In 2009 and 2008, we paid Mr. Equels’ law firm $386,809 and
$395,000, respectfully, for services rendered. Mr. Equels received
$150,000 and $37,500 in cash and stock for his Board fees in each 2009 and 2008,
respectively.
89
For her
part-time services to us as Assistant Medical Director Kati Kovari, M.D. was
paid $13,000 and $13,000 in 2009 and 2008, respectively. Dr. Kovari is the
spouse of W. A. Carter, our CEO. From January 1 through May 31, 2009, Dr.
Kovari’s compensation as an employee was changed pursuant to our “Employee Wage
Or Hours Reduction Program” pursuant to which she elected to receive 50% of her
wages in Incentive Rights on a three-to-one conversion basis.
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 2009 and 2008 were $322,000 and $315,000,
respectively. The following table shows the aggregate fees for
professional services rendered during the year ended December 31, 2009 and
2008.
Amount
($)
|
||||||||
Description
of Fees
|
2009
|
2008
|
||||||
Audit
Fees
|
$ | 322,000 | $ | 315,000 | ||||
Audit-Related
Fees
|
-0- | -0- | ||||||
Tax
Fees
|
-0- | -0- | ||||||
All
Other Fees
|
-0- | -0- | ||||||
Total
|
$ | 322,000 | $ | 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.
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 2009 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 minimis” 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.
90
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
|
|
1.1
|
Engagement
Letter between the Company and Rodman & Renshaw, LLC.
(1)
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of the Company, as amended,
along with Certificates of Designations.
|
|
3.2
|
Amended
and Restated By-laws of Registrant. (2)
|
|
4.1
|
Specimen
certificate representing our Common Stock.
|
|
4.2
|
Rights
Agreement, dated as of November 19, 2002, between the Company and
Continental Stock Transfer & Trust Company. The Right Agreement
includes the Form of Certificate of Designation, Preferences and Rights of
the Series A Junior Participating Preferred Stock, the Form of Rights
Certificate and the Summary of the Right to Purchase Preferred
Stock.(3)
|
|
4.3
|
Form
of Commitment Warrant issued in February 2009 under the Standby Financing
Agreement.*
|
|
4.4
|
Form
of Indenture filed with Universal shelf registration statement.
(4)
|
|
4.5
|
Form
of Series I common stock purchase warrant pursuant to May 10, 2009
Securities Purchase Agreement. (1)
|
|
4.6
|
Form
of Series II common stock purchase warrant pursuant to May 10, 2009
Securities Purchase Agreement. (1)
|
|
4.7
|
Form
of common stock purchase warrant pursuant to May 18, 2009 Securities
Purchase Agreement. (5)
|
|
10.1
|
Form
of Confidentiality, Invention and Non-Compete
Agreement.
|
|
10.2
|
Form
of Clinical Research Agreement.
|
|
10.3
|
Amended
and restated employment agreement of Dr. William A. Carter dated March 11,
2005. (6)
|
|
10.4
|
Amended
and restated engagement agreement with Dr. William A. Carter dated March
11, 2005. (6)
|
|
10.5
|
Change
in control agreement with Dr. William A. Carter. (6)
|
|
10.6
|
Change
in control agreement with Dr. William A. Carter. (6)
|
|
10.7
|
Supply
Agreement with Hollister-Stier Laboratories LLC. (7)
|
|
10.8
|
Biken
Activating Agreement. (8)
|
|
10.9
|
Biken
Material Evaluation Agreement. (8)
|
|
10.10
|
Common
Stock Purchase Agreement, dated July 2, 2008, by and among the Company and
Fusion Capital. (9)
|
|
10.11
|
Registration
Rights Agreement, dated July 2, 2008, by and among the Company and Fusion
Capital. (9)
|
|
10.12
|
Amendment
to Common Stock Purchase Agreement, dated July 23, 2008, by and among the
Company and Fusion Capital. (10)
|
|
10.13
|
Employee
Wage Or Hours Reduction Program. (11)
|
|
10.14
|
Standby
Financing Agreement.(11)
|
|
10.15
|
Engagement
Agreement with Charles T. Bernhardt, CPA. (11)
|
|
10.16
|
Goal
Achievement Incentive Award Program. (12)
|
|
10.17
|
Form
of Securities Purchase Agreement entered into on May 10, 2009.
(1)
|
|
10.18
|
Form
of Securities Purchase Agreement entered into on May 18, 2009.
(5)
|
|
10.19
|
Engagement
Agreement with Robert Dickey IV, dated June 11, 2009. *
|
|
10.20
|
Engagement
Agreement with Robert Dickey IV, dated February 1, 2010.
*
|
|
10.21
|
Amended
and Restated Employment Agreement with Robert Dickey IV, dated September
1, 2010. (14)
|
|
10.22
|
Amendment
to Supply Agreement with Hollister-Stier Laboratories LLC dated February
25, 2010. *
|
91
10.23
|
August
2009 Material Evaluation Agreement with Biken.*
|
|
10.24
|
Employment
Agreement of Dr. William A. Carter dated June 11, 2010
(13)
|
|
10.25
|
Amended
and Restated Employment Agreement of Dr. William A. Carter dated July 15,
2010. (15)
|
|
10.25
|
Amended
and Restated Engagement Agreement with Dr. William A. Carter dated June
11, 2010. (13)
|
|
10.23
|
Employment
Agreement with Thomas K. Equels. (13)
|
|
10.24
|
Amended
Employment Agreement with Thomas K. Equels dated July 15, 2010.
(14)
|
|
10.25
|
Amended
Adviser’s Agreement with The Sage Group Inc. dated July 15, 2010.
(14)
|
|
10.26
|
Employment
Agreement with Wayne Springate dated January 1,
2007 **
|
|
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.
**
|
*
Previously filed with the Original Filing.
**
Filed herewith.
(1)
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 March 31, 2009
and is hereby incorporated by reference.
(2)
Filed with the Securities and Exchange Commission as an exhibit to the Company’s
Current Report on Form 8-K (No. 1-13441) filed September 3, 2010 and is hereby
incorporated by reference.
(3)
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.
(4)
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.
(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 May 18, 2009 and is hereby
incorporated by reference.
(6)
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.
(7)
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.
(8)
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.
(9)
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.
(10)
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.
92
(11)
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, 2008
and is hereby incorporated by reference.
(12)
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.
(13)
Filed with the Securities and Exchange Commission as an exhibit to the Company’s
Current Report on Form 8-K (No. 1-13441) filed June 15, 2010 and is hereby
incorporated by reference.
(14)
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, 2010
and is hereby incorporated by reference.
93
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HEMISPHERx
BIOPHARMA, INC.
|
|
By:
|
/s/ William A. Carter
|
William
A. Carter, M.D.
|
|
Chief
Executive Officer
|
February
11, 2011
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, Chief
|
February
11, 2011
|
||
William
A. Carter, M.D.
|
Executive
Officer and Director
|
|||
/s/ Richard Piani
|
Director
|
February
11, 2011
|
||
Richard
Piani
|
||||
/s/ Charles T. Bernhardt
|
Chief
Financial Officer and
|
February
11, 2011
|
||
Charles
T. Bernhardt CPA
|
Chief
Accounting Officer
|
|||
/s/ Thomas K. Equels
|
Director,
Secretary and
|
February
11, 2011
|
||
Thomas
Equels
|
General
Counsel
|
|||
/s/ William Mitchell
|
Director
|
February
11, 2011
|
||
William
Mitchell, M.D., Ph.D.
|
||||
/s/ Iraj E. Kiani
|
Director
|
February
11, 2011
|
||
Iraj
E. Kiani, N.D., Ph.D.
|
|
|
94
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, 2008 and 2009 (restated for the year ended
December 31, 2009)
|
F-3
|
|
Consolidated
Statements of Operations for each of the years in the three-year period
ended December 31, 2009 (restated for the year ended December 31,
2009)
|
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, 2009
(restated for the year ended December 31, 2009)
|
F-5
|
|
Consolidated
Statements of Cash Flows for each of the years in the three-year period
ended December 31, 2009 (restated for the year ended December 31,
2009)
|
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, 2009
|
F-41
|
F-1
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
Hemispherx
Biopharma, Inc.
We have
audited the accompanying consolidated balance sheets of Hemispherx Biopharma,
Inc. and Subsidiaries as of December 31, 2008 and 2009 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,
2009. Our audits also included the financial statement schedule of Hemispherx
Biopharma, Inc. listed in Item 14(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, 2008 and 2009, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule for each of the three years in the period ended December 31, 2009, 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.
As
discussed in Note 18, the Company has restated its balance sheet as of December
31, 2009 and the statements of operations, changes in stockholders equity and
comprehensive loss and cash flows for the years ended December 31,
2009.
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, 2009, 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 12, 2010, except for Notes
17 and 18, as to which the date is February 11, 2011, 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 12,
2010, except for Notes 17 and 18, as to which the date is February 11,
2011
F-2
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
December
31, 2008 and 2009
(in
thousands, except for share and per share amounts)
2008
|
2009
|
|||||||
(restated)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents (Notes 2 & 16)
|
$ | 6,119 | $ | 58,072 | ||||
Inventories
(Note 3)
|
864 | - | ||||||
Prepaid
expenses and other current assets
|
330 | 332 | ||||||
Total
current assets
|
7,313 | 58,404 | ||||||
Property
and equipment, net (Note 2)
|
4,877 | 4,704 | ||||||
Patent
and trademark rights, net (Notes 2 & 4)
|
969 | 830 | ||||||
Investment
|
35 | 35 | ||||||
Construction
in progress (Note 2)
|
- | 135 | ||||||
Other
assets(Note 3)
|
17 | 886 | ||||||
Total
assets
|
$ | 13,211 | $ | 64,994 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 791 | $ | 1,294 | ||||
Accrued
expenses (Notes 2 & 5)
|
876 | 1,321 | ||||||
Total
current liabilities
|
1,667 | 2,615 | ||||||
Redeemable
warrants (Note 18)
|
- | 3,684 | ||||||
Total
liabilities
|
1,667 | 6,299 | ||||||
Commitments
and contingencies (Notes 10, 12, 13 & 14)
|
||||||||
Stockholders’
equity (Note 7):
|
||||||||
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 78,750,995 and 132,787,447, respectively
|
79 | 133 | ||||||
Additional
paid-in capital
|
208,874 | 263,151 | ||||||
Accumulated
deficit
|
(197,409 | ) | (204,589 | ) | ||||
Total
stockholders’ equity
|
11,544 | 58,695 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 13,211 | $ | 64,994 |
See
accompanying notes to consolidated financial statements.
F-3
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(in thousands, except
share and per share data)
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
(restated)
|
||||||||||||
Revenues:
|
||||||||||||
Sales
of product, net
|
$ | 925 | $ | 173 | $ | - | ||||||
Clinical
treatment programs
|
134 | 92 | 111 | |||||||||
Total
Revenues
|
1,059 | 265 | 111 | |||||||||
Costs
and Expenses:
|
||||||||||||
Production/cost
of goods sold
|
930 | 798 | 584 | |||||||||
Research
and development
|
10,444 | 5,800 | 6,995 | |||||||||
General
and administrative
|
8,974 | 6,478 | 5,796 | |||||||||
Total
Costs and Expenses:
|
20,348 | 13,076 | 13,375 | |||||||||
Operating
loss
|
(19,289 | ) | (12,811 | ) | (13,264 | ) | ||||||
Reversal
of previously accrued interest expense
|
346 | - | - | |||||||||
Interest
and other income
|
1,200 | 592 | 67 | |||||||||
Interest
expense
|
(116 | ) | - | - | ||||||||
Financing
costs (Note 7)
|
(280 | ) | - | (241 | ) | |||||||
Redeemable
warrants valuation adjustment (Note 18)
|
- | - | 6,258 | |||||||||
Net
loss
|
$ | (18,139 | ) | $ | (12,219 | ) | $ | (7,180 | ) | |||
Basic
and diluted loss per share
|
$ | (.25 | ) | $ | (.16 | ) | $ | (.07 | ) | |||
Weighted
average shares outstanding Basic and Diluted
|
71,839,782 | 75,142,075 | 109,514,401 |
See
accompanying notes to consolidated financial statements.
F-4
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders' Equity and Comprehensive
Loss
(in
thousands except share data)
Common
Stock
Shares
|
Common
Stock .001
Par Value
|
Additional
Paid-in
Capital
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Accumulated
Deficit
|
Total
Stockholders
Equity
|
|||||||||||||||||||
(Restated)
|
(Restated)
|
(Restated)
|
||||||||||||||||||||||
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 settlement 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 | |||||||||||||||||
Shares
issued for:
|
||||||||||||||||||||||||
Warrants
exercised
|
5,589,790 | 6 | 6,133 | - | - | 6,139 | ||||||||||||||||||
Options
exercised
|
293,831 | - | 130 | - | - | 130 | ||||||||||||||||||
Private
placement, net of issuance costs
|
45,591,304 | 46 | 55,524 | - | - | 55,570 | ||||||||||||||||||
Settlement
of accounts payable
|
1,925,408 | 2 | 1,365 | - | - | 1,367 | ||||||||||||||||||
Stock
based compensation
|
636,119 | - | 826 | - | - | 826 | ||||||||||||||||||
Standby
Finance- finance costs
|
- | - | 241 | - | - | 241 | ||||||||||||||||||
Redeemable
warrants valuation adjustment - restated
|
- | - | (9,942 | ) | - | - | (9,942 | ) | ||||||||||||||||
Net
comprehensive loss- restated
|
- | - | - | - | (7,180 | ) | (7,180 | ) | ||||||||||||||||
Balance
December 31, 2009 - restated
|
132,787,447 | $ | 133 | $ | 263,151 | $ | - | $ | (204,589 | ) | $ | 58,695 |
See
accompanying notes to consolidated financial statements
F-5
HEMISPHERx
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(in
thousands)
Years ended December 31
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
|
(restated)
|
|||||||||||
Cash flows from operating activities: | ||||||||||||
Net
loss - restated
|
$ | (18,139 | ) | $ | (12,219 | ) | $ | (7,180 | ) | |||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||||
Depreciation
of property and equipment
|
266 | 342 | 359 | |||||||||
Amortization
of patent, trademark rights, and royalty interest
|
170 | 374 | 381 | |||||||||
Finance
costs amortization and for Standby financing
|
281 | - | 241 | |||||||||
Redeemable
warrants valuation adjustment
|
- | - | (6,258 | ) | ||||||||
Stock
option and warrant compensation and service expense
|
2,291 | 573 | 826 | |||||||||
Gain
on disposal of equipment
|
- | - | (83 | ) | ||||||||
Impairment
losses
|
526 | - | - | |||||||||
Inventory
reserve
|
109 | (65 | ) | - | ||||||||
Interest
on convertible debt
|
181 | - | - | |||||||||
Changes
in assets and liabilities:
|
||||||||||||
Inventory
|
337 | (288 | ) | - | ||||||||
Accounts
and other receivables
|
(148 | ) | 77 | - | ||||||||
Assets
held for sale
|
(678 | ) | 450 | - | ||||||||
Prepaid
expenses and other current assets
|
22 | (184 | ) | 93 | ||||||||
Other
assets
|
- | - | (5 | ) | ||||||||
Accounts
payable
|
(138 | ) | 1,702 | 1,884 | ||||||||
Accrued
expenses
|
(192 | ) | (120 | ) | 45 | |||||||
Net
cash used in operating activities
|
(15,112 | ) | (9,358 | ) | (9,297 | ) | ||||||
Cash
flows from investing activities:
|
||||||||||||
Purchases
of property and equipment and construction in progress,
net
|
(212 | ) | (73 | ) | (332 | ) | ||||||
Additions
to patent and trademark rights
|
(211 | ) | (142 | ) | (242 | ) | ||||||
Maturities
of short term investments
|
21,132 | 3,951 | - | |||||||||
Purchase
of short term investments
|
(6,754 | ) | - | - | ||||||||
Net
cash (used in) provided by investing activities
|
$ | 3,955 | $ | 3,736 | $ | (574 | ) |
F-6
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Continued)
(in thousands)
Years ended December 31,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
|
(restated)
|
|||||||||||
Cash flows from financing activities: | ||||||||||||
Proceeds
from issuance of common stock, net
|
$ | 11,620 | $ | 270 | $ | 55,570 | ||||||
Payment
of long-term debt
|
(4,102 | ) | - | - | ||||||||
Collection
of advance receivable
|
1,464 | - | - | |||||||||
Proceeds
from exercise of stock Warrants and options
|
- | - | 6,254 | |||||||||
Net
cash provided by financing activities
|
8,892 | 270 | 61,824 | |||||||||
Net
(decrease) increase in cash and cash equivalents
|
7,825 | (5,352 | ) | 51,953 | ||||||||
Cash
and cash equivalents at beginning of year
|
3,646 | 1,471 | 6,119 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 11,471 | $ | 6,119 | $ | 58,072 | ||||||
Supplemental
disclosures of cash flow information:
|
||||||||||||
Issuance
of common stock for accounts payable and accrued expenses
|
$ | 292 | $ | 1,958 | $ | 1,382 | ||||||
Issuance
of common stock for debt conversion, interest payments and debt
payments
|
$ | 181 | - | - | ||||||||
Unrealized
gains/(losses) on investments
|
$ | (53 | ) | $ | 7 | $ | - | |||||
Redeemable
warrants valuation adjustment
|
$ | - | $ | - | $ | (6,258 | ) |
See
accompanying notes to consolidated financial statements.
F-7
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Business
The
Company is a specialty pharmaceutical engaged in the clinical development 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, and has no activity. All significant
intercompany balances and transactions have been eliminated in
consolidation.
On July
7, 2008, the U.S. Food and Drug Administration (FDA) accepted for review the
Company’s New Drug Application (NDA) for Ampligen®, 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
November 25, 2009, the Company was notified in a Complete Response Letter
(“CLR”) from the FDA that described specific additional recommendations related
to the Ampligen® NDA. In accordance with its 2008 "Complete Response"
procedure, the FDA reviewers determined that they could not approve the
application in its present form and provided specific recommendations to address
the outstanding issues. The Company is carefully reviewing the CRL
and will seek a meeting with the FDA to discuss its recommendations upon the
compilation of necessary data to be used in their response.
(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 $6,119,000 and $58,072,000 at December
31, 2008 and 2009, respectively.
(b)
Assets held for sale (FASB ASC 360-45-9 Long Lived Assets Classified as
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 FASB ASC 360-45-9. In December
2008, the asset was sold for $450,000 without the need to recognize gain or loss
on sale.
F-8
(c)
Property and Equipment
(in thousands)
|
||||||||
December 31,
|
||||||||
2008
|
2009
|
|||||||
Land,
buildings and improvements
|
$ | 4,094 | $ | 4,139 | ||||
Furniture,
fixtures, and equipment
|
2,495 | 2,629 | ||||||
Leasehold
improvements
|
85 | 85 | ||||||
Total
property and equipment
|
6,674 | 6,853 | ||||||
Less
accumulated depreciation and amortization
|
1,797 | 2,149 | ||||||
Property
and equipment, net
|
$ | 4,877 | $ | 4,704 |
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, 2009,
construction in progress was $135,000 as compared to $-0- for year-end 2008 when
all construction was on hold.
(d)
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.
(e)
Revenue
Revenue from the sale of Ampligen®
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® 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® were halted in March 2008 as the current
expiration date of our finished goods inventory expired in March
2008. The Company is undertaking a major capital improvement program
to enhance their manufacturing capability for Alferon N Injection® at the New
Brunswick facility that will continue throughout 2010. As a result,
Alferon N Injection® could be available for commercial sales in mid to late
2011.
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 16,686,281, 29,335,536 and 21,241,453
shares, are excluded from the calculation of diluted net loss per share for the
years ended December 31, 2007, 2008 and 2009, respectively, since their effect
is antidilutive.
(f)
Accounting for Income taxes (FASB ASC 740 Income Taxes)
The
Company adopted the provisions of FASB ASC 740-10 Uncertainty in Income
Taxes. As a result of the implementation, 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.
F-9
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.
(g)
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.
(h)
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.
(i)
Recent Accounting Standards and Pronouncements:
In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 168 (“SFAS 168”), the Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting
Principles. SFAS 168 names the FASB Accounting Standards
Codification (“ASC”) as the source of authoritative accounting and
reporting standards in the United States, in addition to guidance issued by the
SEC. The ASC is a restructuring of accounting and reporting standards
designed to simplify user access to all authoritative U.S. Generally Accepted
Accounting Principals (“GAAP”) by providing the authoritative literature in a
topically organized structure. The ASC reduces the U.S. GAAP
hierarchy to two levels, one that is authoritative and one that is
not. The ASC is not intended to change U.S. GAAP or any requirements
of the SEC. The ASC became authoritative upon its release on July 1,
2009 and is effective for interim and annual periods ending after September 15,
2009.
The
Codification supersedes all existing non-SEC accounting and reporting
standards. All other nongrandfathered non-SEC accounting literature
not included in the Codification are nonauthoritative. Following
Statement 168, the FASB will not issue new standards in the form of Statements,
FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB
will issue Accounting Standards Updates, which will serve only to: (a) update
the Codification; (b) provide background information about the guidance; and (c)
provide the bases for conclusions on the change(s) in the
Codification.
The FASB
has published FASB Accounting Standards Update 2009-01 through
2009-17.
The
adoption of SFAS 168 and published FASB Accounting Standards Update 2009-01
through 2009-17 have no material effect on the Company’s financial statements
for the year-ended December 31, 2009.
(j)
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.
F-10
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.
The
Equity Incentive Plan of 2009, effective June 24, 2009, authorizes the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards. A maximum of 15,000,000 shares of
common stock is reserved for potential issuance pursuant to awards under the
Equity Incentive Plan of 2009. Unless sooner terminated, the Equity
Incentive Plan of 2007 will continue in effect for a period of 10 years from its
effective date.
The Equity Plan of 2004 and the Equity
Incentive Plans of 2007 and 2009 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.
The fair value of each option award is
estimated on the date of grant using a Black-Scholes-Merton 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,
|
||||||||||||
2007
|
2008
|
2009
|
||||||||||
Risk-free
interest rate
|
3.39
- 4.77%
|
2.52
– 3.74%
|
1.76
- 2.69%
|
|||||||||
Expected
dividend yield
|
-
|
-
|
-
|
|||||||||
Expected
lives
|
5
yrs.
|
2.5
- 5 yrs.
|
2 -
5 yrs.
|
|||||||||
Expected
volatility
|
70.01
– 77.52%
|
73.84
– 79.2%
|
86.78
- 137.47%
|
|||||||||
Weighted
average fair value of options and warrants issued in the years 2007, 2008
and 2009 respectively
|
$ | 2,216,091 | $ | 473,954 | $ | 536,378 |
For stock warrants or options granted
to non-employees, the Company measures fair value of the equity instruments
utilizing the Black-Scholes-Merton 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.
F-11
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, 2008 and 2009 is as
follows:
Stock
option activity for employees:
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contracted
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
January 1, 2007
|
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 | - | |||||||||||
Options
granted
|
- | - | - | - | ||||||||||||
Options
forfeited
|
(29,856 | ) | 2.24 | 5.75 | - | |||||||||||
Outstanding
December 31, 2009
|
6,228,752 | $ | 2.60 | 6.95 | - | |||||||||||
Exercisable
December 31, 2009
|
6,190,419 | $ | 2.60 | 6.96 | - |
The
weighted-average grant-date fair value of employee options granted during the
year 2009 was $-0-.
F-12
Unvested
stock option activity for employees:
Number of
Options
|
Weighted
Average
Exercise
Price
|
Average
Remaining
Contracted
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
January 1, 2007
|
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 | - | |||||||||||
Options
granted
|
- | - | - | - | ||||||||||||
Options
vested
|
(38,611 | ) | 1.28 | 7.92 | - | |||||||||||
Options
forfeited
|
- | - | - | - | ||||||||||||
Outstanding
December 31, 2009
|
38,333 | $ | 1.54 | 8.00 | - |
Stock
option activity for non-employees during the year:
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contracted
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
January 1, 2007
|
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 | - | |||||||||||
Options
granted
|
361,250 | 2.12 | 7.00 | - | ||||||||||||
Options
exercised
|
(293,831 | ) | 1.56 | 7.93 | - | |||||||||||
Options
forfeited
|
(251,469 | ) | 2.14 | 7.43 | - | |||||||||||
Outstanding
December 31, 2009
|
2,233,432 | $ | 2.44 | 5.73 | - | |||||||||||
Exercisable
December 31, 2009
|
2,093,848 | $ | 2.42 | 6.05 | - |
The
weighted-average grant-date fair value of non-employee options granted during
the year 2009 was $1.27.
Unvested
stock option activity for non-employees:
F-13
Number of
Options
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contracted
Term
(Years)
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Outstanding
January 1, 2007
|
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
|
- | - | - | - | ||||||||||||
Options
vested
|
(13,333 | ) | (1.64 | ) | 6.91 | - | ||||||||||
Outstanding
December 31, 2008
|
26,667 | $ | 1.43 | 9.00 | - | |||||||||||
Options
granted
|
131,250 | 2.81 | 3.42 | - | ||||||||||||
Options
vested
|
(18,333 | ) | 1.79 | 7.45 | - | |||||||||||
Outstanding
December 31, 2009
|
139.584 | $ | 2.68 | 3.76 | - |
The
impact on the Company’s results of operations of recording stock-based
compensation for the year ended December 31, 2009 was to increase general and
administrative expenses by approximately $353,000 and reduce earnings per share
by $.01 per basic and diluted share.
As of
December 31, 2009, there was $230,000 of unrecognized stock-based compensation
cost related to options granted under the Equity Incentive Plans.
(k)
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 did not have any receivables as of December
31, 2008 and 2009.
(3)
Inventories and Other assets
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,
|
||||||||
2008
|
2009
|
|||||||
Raw
materials and work in process
|
$ | 864 | $ | - | ||||
Finished
goods, net of reserves of $286,000 and $282,000 at December 31, 2008 and
2009
|
- | - | ||||||
$ | 864 | $ | - |
The
production of Alferon N Injection® from our Work-In-Progress Inventory, which
has an approximate expiration date of 2012, has remained on hold for conversion
due to the dedication of resources to prepare the New Brunswick facility for the
FDA preapproval inspection with respect to Ampligen® NDA. Since
adequate financial resources were obtained to commence upgrades to the Ampligen®
and Alferon® manufacturing process, the project has commenced and will be
undertaken throughout 2010. As a result, conversion of Alferon N
Injection® Work-In-Progress inventory is projected to begin in late 2010 or
early 2011 to allow for the creation of new Finished Goods available for
commercial sales in mid to late 2011. As a result of delaying the
conversion of Work-In-Progress until potentially 2011, in 2009 the Company has
reclassed the $864,000 value of inventory to “Other assets”.
F-14
Other
assets consist of the following:
|
(in thousands)
|
|||||||
December 31,
|
||||||||
2008
|
2009
|
|||||||
Inventory
work in process
|
$ | - | $ | 864 | ||||
Security
deposit
|
17 | 15 | ||||||
Internet
Domain Names
|
- | 7 | ||||||
$ | 17 | $ | 886 |
Alferon®
LDO is undergoing pre-clinical testing for possible prophylaxis against
influenza. The Company’s testing of the product supports their belief
that a significant portion of this product is not impaired and could be safely
utilized in clinical trails. Subject to FDA authorization and/or
authorization of regulatory authorities in other countries, the finished goods
inventory of Alferon N Injection® 5ml vials may be used to produce approximately
11,000,000 sachets of Alferon® Low Dose Oral (“LDO”) for clinical
trials. However, no assurance can be given that this inventory will
be permitted for use in future clinical trials or for any other clinical
use. While the studies to date on Alferon ® LDO have been
encouraging, preliminary testing in the laboratory and in animals 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 Alferon® LDO as a possible
prevention or treatment of any influenza requires prior regulatory
approval. Only the FDA can determine whether a drug is safe,
effective or appropriate for use in clinical testing or for treating a specific
application.
In
October 2009, the Company submitted a protocol to the FDA proposing to conduct a
Phase II Trial, well-controlled, clinical study for the prophylaxis and
treatment of seasonal and pandemic influenza of more than 200
subjects. Following a teleconference with the FDA in November 2009,
the FDA placed the proposed study on “Clinical Hold” because the protocol was
deemed by the FDA to be deficient in design and because additional information
was required to be submitted in the area of chemistry, manufacturing and
controls (“CMC”). Thereafter in December 2009, the Company submitted
additional information by Amendment with respect to both the clinical protocol
design issues and the CMC items. In January 2010, the FDA
acknowledged that our responses to the clinical issues were acceptable; however,
the Clinical Hold remained in effect because the FDA believed that certain CMC
issues had not yet been satisfactorily resolved. In this regard, the
FDA communicated concern regarding the extended storage of Alferon® LDO drug
product clinical lots which had been manufactured from an active pharmaceutical
ingredient (“API”) of Alferon N Injection® manufactured in the year
2001. While the biological (antiviral) potency of the product had
remained intact, the Company learned through newly conducted physico-chemical
tests (the “new tests” of temperature, pH, oxidation and light on the chemical
stability of an active API), that certain changes in the drug over approximately
nine storage years (combined storage of Alferon N Injection® plus storage of
certain LDO sachets) had introduced changes in the drug which might adversely
influence the human safety profile. The “new tests” are part of
recent FDA requirements for biological products, such as interferon, which did
not exist at the time of the original FDA approval of Alferon N Injection® for
commercialization and at the time of FDA approval of the “Establishment License”
for Hemispherx’ manufacturing facility. Based on the recent FDA
request, the Company has now established and implemented the “new test”
procedures. As a result, the Company has found that certain Alferon N
Injection® lots with extended storage (i.e., approximately eight to nine years)
do appear to demonstrate some altered physico-chemical
properties. However the Company has also observed in more recent
lots, including those manufactured beginning in the year 2006, are superior with
respect to the enhanced scrutiny of these tests and, in the Company’s view, may
be considered appropriate for clinical trials in the Alferon® LDO sachet
format. The Company expects to submit these new data to the FDA in
the Spring of 2010 and believes that the Clinical Hold could be thereafter
lifted if the FDA agrees that these data address the outstanding CMC issues
cited in the January 2010 FDA recommendations.
F-15
(4)
Patents, Trademark Rights and Other Intangibles (FASB ASC 350-30 General
Intangibles Other than Goodwill)
Patents
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.
The
Company records the acquisition of patents as an intangible asset to be
amortized over the remaining life of the patent under guidance set forth in FASB
ASC 350-30.
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 FASB ASC
350-30. The total consideration paid to Stem Cell under the agreement
amounted to $620. The intangible asset was 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, 2008 and 2009, was $-0-. The balance was
written-off in 2008 as we had no more Alferon® to sell.
During
the years ended December 31, 2007, 2008 and 2009, the Company decided not to
pursue certain patents in various countries for strategic reasons and recorded
abandonment charges of $7,000, $4,000 and $228,000 respectively, which are
included in research and development. Amortization expense was
$103,000, $122,000 and $153,000 in 2007, 2008 and 2009,
respectively. The total cost of the patents was $2,760,000 and
$1,814,000 as of December 31, 2008 and 2009, respectively. The
accumulated amortization as of December 31, 2008 and 2009 is $1,791,000 and
$984,000, respectively.
As of
December 31, 2009, the weighted average remaining life of the patents and
trademarks was 5.4 years. Amortization of patents and trademarks for
each of the next five years is as follows: 2010 - $153,000, 2011 -
$153,000, 2012 - $153,000, 2013 - $153,000 and 2014 – $153,000.
F-16
(5) Accrued Expenses
Accrued
expenses at December 31, 2008 and 2009 consists of the following:
(in thousands)
|
||||||||
December 31,
|
||||||||
2008
|
2009
|
|||||||
Compensation
|
$ | 192 | $ | 716 | ||||
Professional
fees
|
497 | 421 | ||||||
Other
expenses
|
54 | 71 | ||||||
Other
liability
|
133 | 113 | ||||||
$ | 876 | $ | 1,321 |
(6)
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
Interest
expense for the years ended December 31, 2007, 2008 and 2009, with regard to the
October 2003 Debentures was approximately $72,000, $-0- and $-0-,
respectively.
January
2004 Debentures
Interest
expense for the years ended December 31, 2007, 2008 and 2009, with regard to the
January 2004 Debentures was approximately $9,000, $-0- and $-0-,
respectively.
July
2004 Debentures
The Company recorded financing costs
for the years ended December 31, 2007, 2008 and 2009, with regard to the July
2004 Debentures of $231,000, $-0- and $-0-, respectively. Interest
expense for the year ended December 31, 2007, 2008 and 2009, with regard to the
July 2004 Debentures was approximately $35,000, $-0- and $-0-,
respectively.
(7) 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, 2008 and
2009.
(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, 2008 and 2009,
78,750,995 and 132,787,447 shares, were outstanding, respectively.
F-17
(c)
Equity Financings
On April 12, 2006, the Company entered
into a Common Stock Purchase Agreement (“Purchase Agreement”) with Fusion
Capital Fund II, LLC (“Fusion Capital”) an Illinois limited liability
company. Pursuant to the terms of the Purchase Agreement, Fusion
Capital had 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 had the right to sell to Fusion Capital 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 Capital was 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 Capital as
commitment shares 321,751 shares of common stock and the Company was obligated
to issue an additional 321,751 commitment shares. These additional
commitment shares were 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 were being purchased by Fusion and the denominator of which is
$50,000,000.
The purchase price was be adjusted for
any reorganization, recapitalization, non-cash dividend, stock split, or other
similar transaction. Fusion Capital could 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 Capital. Fusion
Capital had 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 NYSE Amex guidelines, without prior stockholder
approval, we did not have the right or the obligation under the Agreement to
sell shares to Fusion Capital 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
Capital under the Agreement. In addition, Fusion Capital could not 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 Capital
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
Capital 127,065 shares towards the remaining commitment fee. No
purchases were made by Fusion in 2008 or 2009 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. Concurrently with entering into the Purchase
Agreement, we entered into a registration rights agreement with Fusion
Capital. Under the registration rights agreement, we filed a
registration statement related to the transaction with the U.S. Securities &
Exchange Commission (“SEC”) covering the shares that have been issued or may be
issued to Fusion Capital under the common stock purchase
agreement. That registration statement was declared effective by the
SEC on August 12, 2008. As reported in the registration statement
related to the transaction, we had the right over a 25 month period from August
2008 to sell our shares of common stock to Fusion Capital 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 was based on
the prevailing market prices of the Company’s shares at the time of sales as
computed under the Purchase Agreement without any fixed discount, and the
Company had control of the timing and amount of any sales of shares to Fusion
Capital. However, Fusion Capital could not purchase any shares of our
common stock pursuant to the Purchase Agreement if the price of our common stock
had three trading days with an average value below $0.40 over the prior twelve
trading days. There were no negative covenants, restrictions on
future funding, penalties or liquidated damages in the agreement. In
consideration for entering into the Purchase Agreement, we issued to Fusion
Capital 650,000 shares as a commitment fee. Also, we were to issue to
Fusion Capital 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. As of
September 1, 2009, Fusion Capital had purchased the maximum number of shares
that were registered under the Registration Statement, an aggregate of
20,000,000 shares for $28,111,695 and received 1,259,086 commitment shares.
F-18
On May 8,
2009, the Company entered into a letter agreement (the “Engagement Letter”) with
Rodman & Renshaw, LLC (“Rodman”) as placement agent, relating to a proposed
offering of the our securities. The proceeds from the May 10 and 18,
2009 equity transactions are net of all related offering costs, including the
fair value of warrants issued.
On May 10, 2009, the Company entered
into Securities Purchase Agreements with two institutional
investors. Pursuant to the Securities Purchase Agreements, the
Company issued to these investors in the aggregate: (a) 13,636,363 shares of our
common stock; (b) Series I warrants to purchase an additional 6,136,363 shares
of common stock at an exercise price of $1.65 per share (“Series I Warrants”);
and (c) Series II warrants to purchase up to 3,000,000 shares of common stock at
an exercise price of $1.10 per share (“Series II Warrants”, and together with
the Series I Warrants, the “Warrants”). The warrants include a cash
settlement right if certain conditions are met. The Series I Warrants
could be exercised at any time on or after the six month anniversary of the May
18, 2009 closing date of the offering and for a five year period
thereafter. The Series II Warrants could be exercised at any time on
or after the May 18, 2009 date of delivery of the Series II Warrants and for a
period of 45 days thereafter. As of December 31, 2009, all Series II
Warrants were exercised and none of the Series I Warrants have been
exercised.
Rodman, as placement agent for the May
10, 2009 Securities Purchase Agreements, acted on a best efforts basis for the
offering and received a placement fee equal to $825,000 as well as Series I
Warrants to purchase 750,000 shares of our common stock equal at an exercise
price of $1.38 per share. The Series I Warrants can be exercised at
any time on or after the six month anniversary of the May 18, 2009 closing date
of the offering and for a five year period thereafter. The warrants
include a cash settlement right if certain conditions are met. Rodman
also was entitled to a fee equal to 5.5% of the Series II Warrants that were
exercised. As of December 31, 2009, Rodman received $165,000 in fees
with regard to the exercise of the Series II Warrants.
On May 18, 2009, the Company entered
into Securities Purchase Agreements with two institutional
investors. Pursuant to the Securities Purchase Agreements, The
Company issued to these investors in the aggregate: (a) 11,906,976 shares of
common stock; and (b) warrants to purchase an additional 4,167,440 shares of
common stock at an exercise price $1.31 per share (“Warrants”). The
warrants include a cash settlement right if certain conditions are
met. The Warrants could be exercised at any time on or after their
May 21, 2009 date of issuance and for a five year period
thereafter. As of December 31, 2009, 1,895,000 of these Warrants had
been exercised.
Rodman, as placement agent for the May
18, 2009 Securities Purchase Agreements, acted on a best efforts basis for the
offering and received a placement fee equal to $797,500 as well as Warrants to
purchase 654,884 shares of common stock at an exercise price of $1.34375 per
share. The Warrants could be exercised at any time on or after the
six month anniversary of the May 21, 2009 closing date of the offering and for a
five year period thereafter. The warrants include a cash settlement
right if certain conditions are met.
F-19
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.
Information regarding the options
approved by the Board of Directors under the 1990 Stock Option Plan is
summarized below:
2007
|
2008
|
2009
|
||||||||||||||||||||||||||||||||||
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||||
Outstanding,
beginning 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 | |||||||||||||||||||||
Granted
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Canceled
|
(54,974 | ) | $ | 3.50-4.03 | $ | 3.53 | - | - | - | (10,000 | ) | $ | 4.03 | $ | 4.03 | |||||||||||||||||||||
Exercised
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Outstanding,
end of year
|
345,728 | $ | 2.71-4.03 | $ | 3.01 | 345,728 | $ | 2.71-4.03 | $ | 3.01 | 335,728 | $ | 2.71-4.03 | $ | 2.98 | |||||||||||||||||||||
Exercisable
|
345,728 | $ | 2.71-4.03 | $ | 3.01 | 345,728 | $ | 2.71-4.03 | $ | 3.01 | 335,728 | $ | 2.71-4.03 | $ | 2.98 | |||||||||||||||||||||
Weighted average
remaining contractual life (years)
|
5.86 yrs.
|
- | - |
4.86 yrs.
|
- | - |
3.86 yrs.
|
- | - | |||||||||||||||||||||||||||
Exercised
in current and prior years
|
(27,215 | ) | - | - | (27,215 | ) | - | - | (27,215 | ) | - | - | ||||||||||||||||||||||||
Available
for future grants
|
- | - | - | - | - | - | - | - | - |
F-20
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 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.
F-21
Information regarding the options
approved by the Board of Directors under the Equity Plan is summarized
below:
2007
|
2008
|
2009
|
||||||||||||||||||||||||||||||||||
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||||
Outstanding
beginning at 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 | |||||||||||||||||||||
Granted
|
3,232,870 | $ | 1.30-3.86 | $ | 2.62 | 687,000 | $ | 0.68-6.00 | $ | 2.61 | - | - | - | |||||||||||||||||||||||
Canceled
|
(5,095 | ) | $ | 1.90– 2.61 | $ | 2.40 | (17,386 | ) | $ | 1.30– 2.61 | $ | 2.00 | (281,325 | ) | $ | 0.68– 2.20 | $ | 1.86 | ||||||||||||||||||
Exercised
|
- | - | - | - | - | - | (293,831 | ) | $ | 0.68-2.20 | $ | 1.56 | ||||||||||||||||||||||||
Outstanding
end of year
|
6,556,476 | $ | 1.30-3.86 | $ | 2.59 | 7,226,090 | $ | 0.68-6.00 | $ | 2.59 | 6,650,934 | $ | 1.30-6.00 | $ | 2.66 | |||||||||||||||||||||
Exercisable
|
6,354,808 | $ | 1.75-3.86 | $ | 2.63 | 7,122,479 | $ | 0.68-6.00 | $ | 2.61 | 6,604,267 | $ | 1.30-6.00 | $ | 2.66 | |||||||||||||||||||||
Weighted average
remaining contractual life (years)
|
8-9 yrs.
|
- | - |
7-8 yrs.
|
- | - |
6-7 yrs.
|
- | - | |||||||||||||||||||||||||||
Available
for future grants
|
1,443,524 | - | - | 18,081 | - | - | 5.575 | - | - |
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 9,000,000 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 year-end, option awards
under this plan were:
December 31, 2008
|
December 31, 2009
|
|||||||||||||||||||||||
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
Outstanding
beginning at year
|
- | - | - | 1,450,000 | $ | 2.20 | $ | 2.20 | ||||||||||||||||
Granted
|
1,450,000 | $ | 2.20 | $ | 2.20 | 80,000 | $ | 0.72-3.05 | $ | 1.96 | ||||||||||||||
Canceled
|
- | - | - | - | - | - | ||||||||||||||||||
Exercised
|
- | - | - | - | - | - | ||||||||||||||||||
Outstanding
end of year
|
1,450,000 | $ | 2.20 | $ | 2.20 | 1,530,000 | $ | 0.72-3.05 | $ | 2.19 | ||||||||||||||
Exercisable
|
1,450,000 | $ | 2.20 | $ | 2.20 | 1,530,000 | $ | 0.72-3.05 | $ | 2.19 | ||||||||||||||
Remaining
contractual life
|
9 years
|
8.1 years
|
||||||||||||||||||||||
Available
for future grants
|
3,914,813 | 107,225 |
F-22
On June 24, 2009, our Stockholders
approved the 2009 Equity Incentive Plan at our Annual Shareholder
Meeting. This plan, effective September 15, 2009, authorizes the
grant of non-qualified and incentive stock options, stock appreciation rights,
restricted stock and other awards. A maximum of 15,000,000 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 year-end, option awards
under this plan were:
December
31, 2009
|
||||||||||||
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
||||||||||
Granted,
outstanding and Exercisable at end of year
|
281,250 | $ | 1.42-2.81 | $ | 2.16 | |||||||
Remaining
contractual life
|
9.5 years
|
|||||||||||
Available
for future grants
|
13,642,525 |
(ii)
Stock Warrants
Information
regarding warrants outstanding and exercisable into shares of common stock is
summarized below:
2007
|
2008
|
2009
|
||||||||||||||||||||||||||||||||||
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
Shares
|
Option
Price
|
Weighted
Average
Exercise
Price
|
||||||||||||||||||||||||||||
Outstanding
beginning of year
|
10,262,771 | $ | 1.55-6.00 | $ | 2.89 | 7,262,771 | $ | 1.32-6.00 | $ | 2.96 | 5,266,187 | $ | 0.35-4.25 | $ | 3.13 | |||||||||||||||||||||
Granted
|
20,000 | $ | 1.32-2.20 | $ | 1.71 | 20,000 | $ | 0.35-0.80 | $ | 0.68 | 15,821,080 | $ | 0.51-1.65 | $ | 1.44 | |||||||||||||||||||||
Canceled
|
(3,020,000 | ) | $ | 2.00-4.00 | $ | 2.64 | (2,016,584 | ) | $ | 2.20-6.00 | $ | 2.53 | (3,347,777 | ) | $ | 2.08-4.25 | $ | 3.37 | ||||||||||||||||||
Exercised
|
- | - | - | - | - | - | (6,731,244 | ) | $ | 0.35-3.33 | 1.56 | |||||||||||||||||||||||||
Outstanding
end of year
|
7,262,771 | $ | 1.32-6.00 | $ | 2.96 | 5,266,187 | $ | 0.35-4.25 | $ | 3.13 | 11,008,246 | $ | $0.51-3.60 | $ | 1.44 | |||||||||||||||||||||
Exercisable
|
7,262,771 | $ | 1.32-6.00 | $ | 2.96 | 5,266,187 | $ | 0.35-4.25 | $ | 3.13 | 11,008,246 | $ | $0.51-3.60 | $ | 1.44 | |||||||||||||||||||||
Weighted average
remaining contractual life (years)
|
1.99 yrs.
|
- | - |
1 yr.
|
- | - |
4.5 yr.
|
- | - | |||||||||||||||||||||||||||
Years
exercisable
|
2008-2017 | - | - | 2009-2018 | - | - | 2010-2019 | - | - |
Certain of the stock warrants
outstanding are subject to adjustments for stock splits and
dividends.
Net proceeds received from the exercise
of stock warrants were $6,138,677 for 2009. No warrants were
exercised during 2007 and 2008.
F-23
(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.
(8) Segment and Related
Information
The Company operates in one segment,
which performs research and development activities related to Ampligen® and
other drugs under development, and sales and marketing of
Alferon®. The Company’s revenues for the three year period ended
December 31, 2009, were earned in the United States.
The Company employs an insignificant
amount of net property and equipment in its foreign operations.
(9) Research, Consulting and Supply
Agreements
In 1998,
the Company entered into a strategic alliance with Accredo to develop certain
marketing and distribution capacities for Ampligen® in the United
States. Accredo, a division of MEDCO, is one of the nation's
largest Specialty Pharmacies. Pursuant to the agreement, Accredo
assumed certain responsibilities for distribution of Ampligen® 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 Trial and the Amp 719 (combining
Ampligen® with other antiviral drugs in HIV-salvage therapy and Amp 720 HIV
Phase IIb Trial 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 approval
for Ampligen® 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. There is no contractual obligation under
this agreement at December 31, 2009.
F-24
Pursuant
to the current Biken material evaluation agreement which concludes in August
2010 or when the evaluation program is completed, which ever is earlier,
Biken(the for profit operational arm of the Foundation for Microbial Diseases of
Osaka University) purchases Ampligen® for use in conducting further animal
studies of intranasal prototype vaccines containing antigens from influenza
sub-types H1N1, H3N2 and B. The collaboration, by Hideki Hasegawa, M.D., Ph.D.,
Chief of the Laboratory of
Mucosal Vaccine Development Virus Research Center at the Japan’s National
Institute of Infectious Diseases (“NIID”), is assessing the Company’s
experimental therapeutic Ampligen® as a vaccine adjuvant. The Company
sold approximately $1,000, $74,000 and $45,000 in specially formulated Ampligen®
to Biken for the years ended December 31, 2007, 2008 and 2009 respectively.
There is no contractual obligation under this agreement at December 31,
2009.
Since
October 2005, the Company has engaged the Sage Group, Inc. (“Sage”), 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® in
treating Chronic Fatigue Syndrome (“CFS”). In May 2009, the Company
agreed to a proposed engagement extension of eighteen months with Sage to assist
the Company to identify, qualify, negotiate and close one or more licensing,
partnering, alliance transactions pertaining to the Company’s products and
technology including utilization of Ampligen® to treat CFS. The
Company incurred approximately $25,000, $167,000 and $507,000 in fees to Sage
for the years ended December 31, 2007, 2008 and 2009 respectively, pursuant to
this and earlier agreements. R. Douglas Hulse, the Company’s former
President and Chief Operating Officer, is a member and an executive director of
Sage.
The
Company has a Supply Agreement through March 1, 2011 with Hollister-Stier
Laboratories LLC of Spokane, Washington (“Hollister-Stier”), for the
manufacturing of Ampligen®. Pursuant to the agreement the Company
supplies the key raw materials and Hollister-Stier formulates and packages the
Ampligen®. The Company incurred approximately $475,000, $-0- and
$225,000 in fees for the years ended December 31, 2007, 2008 and 2009,
respectively, pursuant to this agreement.
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 a participant in the Goal Achievement Incentive
Award Program and consistent with the Company’s “Employee Wage Or Hours
Reduction Program”, he elected to receive 50% of his fee in Incentive Rights on
a three-to-one conversion basis for the period of January 1 to May 31,
2009. His agreement expired May 31, 2009 and has been extended by
informal mutual consent with his rate of compensation increased 10% effective
January 1, 2010.
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 had agreed to undertake preclinical studies of new
pharmaceuticals that include Ampligen® 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. On January 14, 2010, the
Company announced that reports of preclinical studies from the combined staffs
of Hemispherx and LRRI had been completed and submitted to the FDA that showed
no evidence of antibodies against Ampligen® in lower animal species (primate and
rodent) and no evidence of an increase in certain undesirable cytokines
(specific modulators of the immune system) at clinically used doses of Ampligen®
for CFS. The Company’s Management believes that these data address
certain preclinical issues referenced in the Complete Response Letter received
from the FDA on November 25, 2009 and has concluded the contractual services
with LRRI.
There is no
contractual obligation under this agreement at December 31,
2009.
F-25
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, 2007, 2008 and 2009, the
Company incurred approximately $842,000, $704,000 and $801,000 respectively, of
consulting service fees under these agreements. These costs are charged to
research and development expense as incurred.
(10) 401(k) Plan
The Company has a defined contribution
plan, entitled the Hemispherx Biopharma Employees 401(K) Plan and Trust
Agreement (the “401(k) Plan”). 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 2007, 2008 and 2009 the Company provided matching
contributions to each employee for up to 6% of annual pay aggregating $130,000,
$21,000 and $-0-, respectively. The 6% Company matching contribution
was terminated as of March 15, 2008 and was reinstated effective January 1,
2010.
(11) Royalties, License and Employment
Agreements
In 1999,
the Company acquired a series of patents on Oragens®, potentially a set of oral
broad spectrum antivirals and immunological enhancers, through a 10 year
licensing agreement with Temple University in Philadelphia, PA. For a
$30,000 annual minimum royalty payment and costs to maintain the patents, the
Company was granted an exclusive worldwide license from Temple for the Oragen®
products. In March 2009, the Company undertook an analysis of the
Oragen® patents prior to renewing the licensing agreement with Temple University
and proposed a patent renewal agreement that significantly discounted the prior
agreement’s annual minimum royalty payment. On February 2, 2010, it
was formally communicated by Temple University that they had elected not to
pursue our proposal to renew the series of patents on
Oragens®. Accordingly as of December 2009, the Company wrote-off the
remaining value of these patents from Other Assets resulting in a net expense
for Patents Abandoned of $114,000.
The Company had contractual agreements
with three officers in 2007 and 2008 with two officers in 2009. The
aggregate annual base compensation for these officers under their respective
contractual agreements for 2007, 2008 and 2009 were $1,276,000, $1,290,000 and
$928,000 respectively. In addition, certain officers were entitled to
receive performance bonuses of up to 25% of the annual base salary at the sole
discretion of the Compensation Committee of the Board of
directors. In 2007, 2008 and 2009, officers’ bonus of $319,000, $-0-
and $526,772 respectively were granted. The Chief Executive Officer’s
employment agreement (see below) provided for bonuses based on gross proceeds
received by the Company from any joint venture or corporate partnering
agreement. 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 $1,883,000, $317,000 and $-0-
respectively, during the years ended December 31, 2007, 2008 and 2009 with
regard to these issuances.
F-26
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. From January 1 through May 31, 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.
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 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. From
January 1 through May 31, 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.
On
December 1, 2008, an Engagement Agreement with Charles T. Bernhardt, CPA as
Chief Financial Officer 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. 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 had elected to receive
50% of his wages in Incentive Rights on a three-to-one conversion basis for the
period of January 1 to May 31, 2009.
On June 11, 2009, the
Company entered into an Employment Agreement with
Robert Dickey IV as Senior Vice President. On February 1,
2010, that agreement was superseded with another agreement. Pursuant
to the February 1, 2010 agreement, Mr. Dickey serves as Senior Vice President
until September 1, 2010, unless otherwise extended by mutual written agreement
of the parties or terminated earlier. Mr. Dickey devotes his
full-time to the business of the Company. He receives an annual
salary of $302,500, less applicable withholding and taxes, through September 1,
2010, payable in accordance with Company's standard payroll
policy. The agreement terminates upon Mr. Dickey’s death and any and
all compensation then due him shall be paid to his estate. In the
event Mr. Dickey is unable to perform his duties due to disability, for a period
in excess of sixty days, or for a total sixty days consecutive or not within the
term of this agreement, the Company shall be permitted to terminate the
agreement without further liability to Mr. Dickey.
On
January 1, 2007, the Company entered into an employment agreement with Wayne
Springate that provides for his services as Vice President of operations until
April 30, 2008 unless sooner terminated for cause, disability or
death. The agreement automatically renews for successive one year
periods after the initial termination date unless we or Mr. Springate give
written notice otherwise at least sixty days prior to the termination date or
any renewal period. Additionally, Mr. Springate has the right to
terminate the agreement on 30 days’ prior written notice. The initial
annual fee for services is $150,000 and is annually subject to adjustment based
on the average increase or decrease in the Consumer Price Index for the prior
year. In addition, Mr. Springate could receive an annual performance
bonus of up to 20% of his base salary, at the sole discretion of the
Compensation Committee of the Board of directors, based on his performance and
eligible to be paid within 60 days of the close of the calendar
year. Mr. Springate’s agreement also provides that he be paid a base
salary and benefits through the last day of the current term of the agreement if
he is terminated without “cause”, as that term is defined in
agreement. In addition, should Mr. Springate terminate the agreement
due to his death or disability, the agreement provides that he will be paid a
base salary and benefits through the last day of the month in which the
termination occurred. In the event that the Company terminates the
agreement for “cause”, as the term is defined in the agreement, Mr. Springate
would only be paid a base salary and benefits through the date of
termination. From January 1 through May 31, 2009, Mr. Springate’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.
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:
F-27
|
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 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.
|
The
Company’s agreement with Ransom Etheridge regarding his role as General Counsel
expired on December 31, 2009 and was not renewed pursuant to the terms of the
agreement. From January 1 through May 31, 2009, Mr. Ethridge’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 wages in Incentive Rights on a three-to-one conversion
basis.
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 their engagement without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a change in control of the Company with William A. Carter, the
Company’s Chief Executive Officer and Chief Scientific Officer.
F-28
The
agreement regarding change in control for William A. Carter became effective
March 11, 2005, continued through December 31, 2008 and then 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. The agreement entitles William A. Carter 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 for good reason as
defined in the agreement or, (3) by William A. Carter 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
agreement also provides that Dr. Carter is entitled to:
|
o
|
A
lump sum cash payment of three times his base salary and annual bonus
amounts;
|
|
o
|
A
“gross-up” payment to make him whole for any federal excise tax imposed on
change of control or severance payments received by
him;
|
|
o
|
Outplacement
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
shareholders approved an increase in the Company’s authorized shares of Common
Stock.
(12) Leases
The Company has a non-cancelable
operating lease for the space in which its principal office is
located.
Rent expense charged to operations for
the years ended December 31, 2007, 2008 and 2009 amounted to approximately
$231,000, $239,000 and $214,000 respectively. The term of the lease
for the Philadelphia, Pennsylvania offices is through April 30,
2010.
(13) Income Taxes (FASB ASC 740 Income
Taxes)
The
Company adopted the provisions of FASB ASC 740-10 Uncertainty in Income
Taxes. As a result of the implementation, 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, 2009, the Company
has approximately $93,000,000 of federal net operating loss carryforwards
(expiring in the years 2010 through 2029) available to offset future federal
taxable income. The Company also has approximately $38,000,000 of
Pennsylvania state net operating loss carryforwards (expiring in the years 2018
through 2029) and approximately $35,000,000 of New Jersey state net operating
loss carry forwards (expiring in the years 2010 through 2016) 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.
F-29
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, 2008 and 2009.
The components of the net
deferred tax asset of December 31, 2008 and 2009 consists of the
following:
(000’s
omitted)
|
||||||||
|
2008
|
2009
|
||||||
Deferred
tax assets:
|
||||||||
Net
operating losses
|
$ | 29,655 | $ | 31,664 | ||||
Stock
based compensation
|
191 | 281 | ||||||
Accrued
expenses and other
|
22 | - | ||||||
Amortization
& depreciation
|
(1,088 | ) | (1,018 | ) | ||||
Research
and development costs
|
1,945 | 1,924 | ||||||
Total
|
30,725 | 32,851 | ||||||
Less:
Valuation Allowance
|
(30,725 | ) | (32,851 | ) | ||||
Balance
|
$ | -0- | $ | -0- |
(14) Contingencies
(a)
|
Hemispherx
Biopharma, Inc. v. Johannesburg Consolidated Investments, et al.,U.S.
District Court for the Southern District of Florida, Case No.
04-10129-CIV.
|
In
December, 2004, we filed a multi-count complaint in federal court (Southern
District of Florida) for fraud and injunctive relief against Bioclones, Dr.
Donniger, Bart Goemare, JCI, Brett Kebble and H.C. Buidentag. However, a
motion to dismiss the complaint, in part on grounds that the matter must be
arbitrated in South Africa, was granted by the court. We appealed this
decision to the 11th Circuit
Court of Appeals. In July 2008, while the appeal was pending, we settled
our disputes with both Bioclones and Cyril Donninger and dismissed them from the
lawsuit. In 2005 Buitendag and Kebble were indicted for using JCI to
perpetrate the largest financial fraud in South African history. The
appeals court allowed the fraud action to go forward. In 2008, the Company filed
a second amended complaint for fraud against JCI, Goemare, the Estate of Kebble
and Buidentag, the only remaining defendants. In 2009, we settled our
disputes with Goemare and dismissed him from the lawsuit. In
February of 2010, the Court began considering the remaining defendants’(JCI,
estate of Kebble, and Buidentag) motion to dismiss the complaint. The
Company intends to continue vigorously prosecuting this case.
F-30
(b)
|
Hemispherx
Biopharma, Inc. v. Lovells LP et al. Federal District Court for the
Eastern District of Pennsylvania.
|
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. In
June 2009, the parties settled for $164,000 that was to be paid by way of
unsecured monthly installments through January, 2010. As a result of the
settlement, the Company has recorded a contingency for outstanding legal fees of
$129,000 for the period ended December 31, 2009, and has paid the balance in
full during January 2010.
(c)
|
Hemispherx
Biopharma, Inc. v. MidSouth Capital, Inc., Adam Cabibi, And Robert L.
Rosenstein v. Hemispherx Biopharma, Inc. and The Sage Group,
Inc., Civil Action
No. 1:09-CV-03110-CAP.
|
On June
4, 2009, the Company filed suit in the United States District Court for the
Southern District of Florida against MidSouth Capital, Inc. and its principals
seeking monetary and injunctive relief against MidSouth's tortuous interference
with certain financing transactions in which the Company was
engaged. The case was transferred to the Northern District of
Georgia, and Holland & Knight LLP was engaged as counsel by the Company on
November 13, 2009 to serve as local counsel. On November 19, 2009,
MidSouth answered the Company's Complaint and filed a Counterclaim against the
Company and The Sage Group, Inc., seeking to recover between $3,900,000 and
$4,800,000 for fees allegedly owed to it as a result of the same financing
transactions, plus attorneys' fees and punitive damages. On January
12, 2010, the Company filed a Motion for Judgment on the Pleadings, which is
pending before the Court. The Company is vigorously defending the
Counterclaim and prosecuting its own claims.
(d)
|
Cato
Capital, LLC v. Hemispherx Biopharma, Inc., U.S. District Court for the
District of Delaware, Case No.
09-549-GMS.
|
On July
31, 2009, Cato Capital LLC (“Cato”) filed suit asserting that under a November
2008 agreement, Hemispherx owes Cato a placement fee for certain investment
transactions. The Complaint seeks damages in the amount of $5,000,000
plus attorneys fees. The Company filed its Answer on August 20,
2009. On October 13, 2009, Cato filed a Motion seeking leave to file
an Amended Complaint which proposes that Cato be permitted to add The Sage Group
as an additional defendant and to bring additional causes of action against
Hemispherx arising from the defenses contained in the Company’s Answer and
increase the total amount sought to $9,830,000, plus attorneys’ fees and
punitive damages. Hemispherx filed a timely response objecting to the
Motion. Disposition of this Motion is pending before the
Court. The Company is vigorously defending against this
claim.
(e)
|
In
re Hemispherx Biopharma, Inc. Litigation, U. S. District Court for the
Eastern District of Pennsylvania, Civil Action No.
09-5262.
|
Between
November 10, 2009 and December 29, 2009, five putative class actions were filed
against the Company and its Chief Executive Officer generally asserting that
defendants misrepresented the status of the Company’s New Drug Application for
Ampligen®. Each action was purportedly brought on behalf of investors
who purchased the Company’s publicly traded securities. The suits
were consolidated by the Court as the “Securities Class Action
Lawsuit.”
F-31
Also in
December of 2009 and January of 2010, three Shareholder Derivative Complaints
were filed against the Company and some of its Officers and
Directors. Those suits also allege that the defendants caused the
Company to misrepresent the status of its New Drug Application
(“NDA”) for Ampligen®. As of this date, no defendant had been
served with a complaint in the derivative suits. On February 12,
2010, the Court consolidated the Class Action Lawsuit with the derivative suits
for purposes of discovery.
The
Company intends to vigorously defend the securities suit and the derivative
actions. Due to the preliminary state of the proceedings, the potential impact
of these actions, which seek unspecified damages, attorneys’ fees and expenses
are uncertain.
(f)
|
Summation.
|
In
reference to Contingencies identified above as (c) (d)
and (e), there can be no assurance that an adverse result in these proceedings
would not have a potentially material adverse effect on the Company’s business,
results of operations, and financial condition. With regards to
Contingency (e), the Company maintains a Directors and Officers (“D&O”)
Insurance Policy that provides coverage for claims and retention of legal
counsel.
The Company has not recorded any loss
contingencies as a result of the above matters for the years ended December 31,
2007, 2008 and 2009.
(15) Certain Relationships and Related
Transactions
The
Company has employment agreements with certain of their executive officers and
has granted such officers and directors options and warrants to purchase their
common stock. Please see details of these employment agreements in
Note 11 - Royalties, License and Employment Agreements.
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 $153,000, $41,200 and $82,400 for the use of
the property at various times in 2007, 2008 and 2009, respectively.
Ransom W. Etheridge, the Company’s
General Counsel through December 2009 as well as former Secretary and Director,
is an attorney in private practice, who renders corporate legal services, for
which he has received fees totaling approximately $105,400 and $144,000 in 2008
and 2009, 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 in 2008 and in
2007 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 services to the
Company for several years. In 2008 and 2009, the Company paid Mr.
Equels’ law firm $395,000 and $387,000, respectfully, for services
rendered. Mr. Equels’ received $37,500 in stock for his Board fees in
2008 and $150,000 in cash and stock in 2009, respectively.
Kati
Kovari, M.D. was paid $13,000 in 2008 and 2009 for her part-time services to the
Company as Assistant Medical Director. Dr. Kovari is the spouse of
William A. Carter, CEO.
(16) 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 $250,000.
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. There were no sales
in 2009.
F-32
(17)
Fair Value
The
Company is required under GAAP to disclose information about the fair value of
all the Company’s financial instruments, whether or not these instruments are
measured at fair value on the Company’s consolidated balance sheet.
The
Company estimates that the fair values of cash and cash equivalents, other
assets, accounts payable and accrued expenses approximate their carrying values
due to the short-term maturities of these items. The Company also has
certain warrants with a cash settlement right in the unlikely occurrence of a
Fundamental Transaction. For a discussion about how the Company
values these Warrants, please see “Note 18 – Restatement” below).
On
January 1, 2008, the Company adopted new accounting guidance (codified at FASB
ASC 820 and formerly Statement No. 157 Fair Value Measurements) that
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. The guidance does not impose any new requirements
around which assets and liabilities are to be measured at fair value, and
instead applies to asset and liability balances required or permitted to be
measured at fair value under existing accounting pronouncements. The
Company measures its warrant liability at fair value.
FASB ASC
820-10-35-37 (formerly SFAS No. 157) establishes a valuation hierarchy based on
the transparency of inputs used in the valuation of an asset or
liability. Classification is based on the lowest level of inputs that
is significant to the fair value measurement. The valuation hierarchy
contains three levels:
|
·
|
Level
1 – Quoted prices are available in active markets for identical assets or
liabilities at the reporting date.
|
|
·
|
Level
2 – Observable inputs other than Level 1 prices such as quote prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities.
|
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted
cash flow methodologies, or other valuation techniques, as well as
instruments for which the determination of fair value requires significant
management judgment or estimation. As of December 31, 2009, the
Company has classified the warrants with embedded call and put rights as
Level 3. Management evaluates a variety of inputs and then
estimates fair value based on those inputs. As discussed below
in Note 18 - Restatement, the Company utilized the Monte Carlo Simulation
approach in valuing these warrants.
|
The table
below presents the balances of assets and liabilities measured at fair value on
a recurring basis by level within the hierarchy as of December, 31,
2009:
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Liabilities
|
||||||||||||||||
Warrants
|
$ | 3,684,000 | $ | - | $ | - | $ | 3,684,000 |
The
changes in Level 3 Liabilities measured at fair value on a recurring basis are
summarized as follows:
F-33
Fair Value of
Redeemable Warrants
|
||||
(in thousands)
|
||||
Value
at issuance
|
$ | 17,359 | ||
Less:
value of warrants exercised in May and June 2009
|
(3,742 | ) | ||
Fair
value adjustment at June 30, 2009
|
7,186 | |||
Balance
at June 30, 2009
|
20,803 | |||
Fair
value adjustment at September 30, 2009
|
(4,951 | ) | ||
Balance
at September 30, 2009
|
15,852 | |||
Fair
value adjustment at December 31, 2009
|
(12,168 | ) | ||
Balance
at December 31, 2009
|
$ | 3,684 |
(18)
Restatement
In connection with equity
financings on May 11 and 19, 2009, the Company issued warrants (the “Warrants”)
that are single compound derivatives containing both an embedded right to obtain
stock upon exercise (a “Call”) and a series of embedded rights to settle
the Warrants for cash upon the occurrence of certain events (each, a
“Put”). Generally, the Put
provisions allow the Warrant Holders liquidity protection; the right to receive
cash in certain situations where the Holders would not have a means of readily
selling the shares issuable upon exercise of the Warrants (e.g., where there
would no longer be a significant public market for our common
stock). However because the contractual formula used to determine the
cash settlement value of the embedded Put requires use of certain assumptions,
the cash settlement value of the embedded Put can differ from the fair value of
the unexercised embedded Call option at the time the embedded Put option is
exercised. Specifically, the Put rights would be triggered upon the
happening of a “Fundamental Transaction” (as defined below) that also is (1) an
all cash transaction; (2) a “Rule 13e-3 transaction” under the Exchange Act
(where the Company would be taken private); or (3) a transaction involving a
person or entity not traded on a national securities
exchange. “Fundamental Transactions” include (i) a merger or
consolidation of the Company with or into another person or entity; (ii) a sale,
lease, license, transfer or other disposition of all or substantially all of the
Company’s assets; (iii) any purchase offer, tender offer or exchange offer in
which holders of Company Common Stock are permitted to sell, tender or exchange
their shares for other securities, cash or property, which offer has been
accepted by the holders of 50% or more of the Company’s outstanding Common
Stock; (iv) a reclassification, reorganization or recapitalization of the Common
Stock pursuant to which the Common Stock is effectively converted into or
exchanged for other securities, cash or property; or (v) a stock purchase or
other business combination with another person or entity is effected pursuant to
which such other person or entity acquires more than 50% of the outstanding
shares of Common Stock. Pursuant to the Warrants, the Put rights
enable the Warrant Holders to receive cash in the amount of the
Black-Scholes value is obtained from the “OV” function on Bloomberg, L.P.
(“Bloomberg”) determined as of the day of consummation of the applicable
Fundamental Transaction for pricing purposes and reflecting (A) a risk-free
interest rate corresponding to the U.S. Treasury rate for a period equal to the
time between the date of the public announcement of the applicable Fundamental
Transaction and the Warrant expiration date, (B) an expected volatility equal to
the greater of 100% and the 100 day volatility obtained from the HVT function on
Bloomberg as of the Trading Day immediately following the public announcement of
the applicable Fundamental Transaction, (C) the underlying price per share used
in such calculation shall be the sum of the price per share being offered in
cash, if any, plus the value of any non-cash consideration, if any, being
offered in such Fundamental Transaction and (D) a remaining option time equal to
the time between the date of the public announcement of the applicable
Fundamental Transaction and the Warrant expiration date.
F-34
Initially, the Company
determined that these Warrants created a related Liability in accordance with
ASC 480-10-55-29 & 30 due to the fact that the Warrants could be settled for
cash as discussed above. In their estimation of the value of
this Liability, the Company interpreted and applied the concept of “Fair Value”
from ASC 820 (formally SFAS 157). After reviewing current accounting
literature and the findings and opinion of an independent appraiser in
determining proper accounting treatment, the Company took into account the
extreme unlikelihood of the occurrence of a Fundamental Transaction triggering a
right to cash settlement as a probability factor in applying a
Black-Scholes-Merton valuation of the Warrants. As a result,
Management deemed the fair value of the Warrants to be immaterial and,
therefore, we stated the Warrants’ related Liability from May 31, 2009 through
December 31, 2009 at
zero.
On
September 15, 2010, the Company received a comment letter from the Securities
and Exchange Commission (“SEC”) concerning its review of our annual report on
Form 10-K, as amended, for the year ended December 31, 2009. During
the process of resolving the SEC’s comments, the SEC Staff alerted Management
that they did not agree with their method of computing the fair value of the
Warrants as discussed above.
As a result, on December
22, 2010, after discussion with McGladrey & Pullen, LLP, the Company’s
independent registered public accounting firm, the Company’s Audit Committee
determined that the previously issued financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2009 and in our
Forms 10-Q for the periods ended March 31, 2010, June 30, 2010 and September 30,
2010 and in our Forms 10-Q for the periods ended June 30, 2009 and September 30,
2009, should not be relied upon. Management has restated the
financial statements for the year ended December 31, 2009 contained
herein and will restate the financial statements contained in our Forms 10-Q for
the periods ended March 31, 2010, June 30, 2010 and September 30, 2010
(including the comparable periods ended June 30, 2009 and September 30, 2009) to
reflect the revised value of this Liability.
The
restatements reflect the recalculation of the fair value of the Warrants using a
Monte Carlo Simulation approach, applying critical assumptions provided by
Management reflecting conditions at the valuation date. The Monte
Carlo Simulation approach incorporates the incremental value of the Put rights
available to the Warrant Holders. The fair value of Warrants ranged
from $0.37 to $2.14 during 2009 and ranged from $0.37 to $0.38 at December 31,
2009.
The
Company recomputes the fair value of the Warrants at the end of each quarterly
reporting period. Such value computation includes subjective input
assumptions that are consistently applied each period. If the Company
were to alter its assumptions or the numbers input based on such assumptions,
the resulting fair value could be materially different.
Fair
value at measurement dates during the period from Warrants’ issuances at May 10.
2009, May 18, 2009 and May 21, 2009 to December 31, 2009, were estimated using
the following assumptions:
Underlying
price per share
|
$0.56
- $2.54
|
|
Exercise
price per share
|
$1.10
– $1.65
|
|
Risk-free
interest rate
|
0.19%
- 2.67%
|
|
Expected
holding period
|
0.122
- 5.50 years
|
|
Expected
volatility
|
94.99%
– 226.46%
|
|
Expected
dividend yield
|
None
|
F-35
The
significant assumptions using the Monte Carlo Simulation approach for valuation
of the Warrants are:
(i) Risk-Free Interest
Rate. The risk-free interest rates for the Warrants are based
on U.S Treasury constant maturities for periods commensurate with the remaining
expected holding periods of the warrants.
(ii) Expected Holding Period. The
expected holding period represents the period of time that the Warrants are
expected to be outstanding until they are exercised. The Company
utilizes the remaining contractual term of the Warrants at each valuation date
as the expected holding period.
(iii) Expected
Volatility. Expected stock volatility is based on daily
observations of the Company’s historical stock values for a period commensurate
with the remaining expected holding period on the last day of the period for
which the computation is made.
(iv) Expected Dividend
Yield. Expected dividend yield is based on the Company’s
anticipated dividend payments over the remaining expected holding
period. As the Company has never issued dividends, the expected
dividend yield is $-0- and this assumption will be continued in future
calculations unless the Company changes its dividend policy.
(v) Expected Probability of a
Fundamental Transaction. The possibility of the occurrence of
a Fundamental Transaction triggering a Put right is extremely
remote. As discussed above, a Put right would only arise if a
Fundamental Transaction 1) is an all cash transaction; (2) results in the
Company going private; or (3) is a transaction involving a person or entity not
traded on a national securities exchange. The Company believes such
an occurrence is highly unlikely because:
|
a.
|
The
Company only has one product that is FDA
approved;
|
|
b.
|
The
Company will have to perform additional clinical trials for FDA approval
of its flagship product;
|
|
c.
|
Industry
and market conditions continue to include a global market recession,
adding risk to any transaction;
|
|
d.
|
Available
capital for a potential buyer in a cash transaction continues to be
limited;
|
|
e.
|
The
nature of a life sciences company is heavily dependent on future funding
and high fixed costs, including Research &
Development;
|
|
f.
|
According
to Forbes.com, of approximately 17,000 public companies, fewer than 30
went private in 2008 and less than 100 were completed in 2007,
representing 0.18% and 0.6%, respectively. This would be
further reduced based on the nature of a life sciences company and the
potential lack of revenues, cash flows and the Company’s funding needs;
and
|
|
g.
|
The
Company's Rights Agreement makes it less attractive to a potential
buyer.
|
With the
above factors utilized in analysis of the likelihood of the Put's potential
Liability, the Company estimated the range of probabilities related to a Put
right being triggered as:
F-36
Range of Probability
|
Probability
|
|||
Low
|
0.5 | % | ||
Medium
|
1.0 | % | ||
High
|
5.0 | % |
The Monte
Carlo Simulation incorporated a 5.0% probability of a Fundamental
Transaction.
(vi)
Expected Timing of
Announcement of a Fundamental Transaction. As the Company has
no specific expectation of a Fundamental Transaction, for reasons elucidated
above, the Company utilized a discrete uniform probability distribution over the
Expected Holding Period to model in the potential announcement of a Fundamental
Transaction occurring during the Expected Holding Period.
(vii)
Expected 100 Day Volatility at
Announcement of a Fundamental Transaction. An estimate of
future volatility is necessary as there is no mechanism for directly measuring
future stock price movements. Daily observations of the Company’s
historical stock values for the 100 days immediately prior to the Warrants’
grant dates, with a floor of 100%, were utilized as a proxy for the future
volatility.
(viii)
Expected Risk-Free Interest
Rate at Announcement of a Fundamental Transaction. The Company
utilized a risk-free interest rate corresponding to the forward U.S. Treasury
rate for the period equal to the time between the date forecast for the public
announcement of a Fundamental Transaction and the Warrant expiration date for
each simulation.
(ix)
Expected Time Between Announcement and Consummation of a Fundamental
Transaction. The expected time between the announcement and
the consummation of a Fundamental Transaction is based on the Company’s
experience with the due diligence process performed by acquirers, and is
estimated to be six months. The Monte Carlo Simulation approach
incorporates this additional period to reflect the delay Warrant Holders would
experience in receiving the proceeds of the Put.
As a
result of the corrections in the valuation of the Liabilities as of December 31,
2009 described above, the Company has restated its consolidated financial
statements in this amended report as follows:
F-37
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Balance Sheet
December
31, 2009
(in
thousands)
December
31, 2009
As
Previously
Reported
|
Adjustments
|
December 31,
2009
As
Restated
|
||||||||||
ASSETS
|
||||||||||||
Current
Assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 58,072 | $ | 58,072 | ||||||||
Prepaid
expenses and other current assets
|
332 | 332 | ||||||||||
Total
current assets
|
58,404 | 58,404 | ||||||||||
Property
and equipment, net
|
4,704 | 4,704 | ||||||||||
Patent
and trademark rights, net
|
830 | 830 | ||||||||||
Investment
|
35 | 35 | ||||||||||
Construction
in progress
|
135 | 135 | ||||||||||
Other
assets
|
886 | 886 | ||||||||||
Total
assets
|
$ | 64,994 | $ | 64,994 | ||||||||
LIABILITIES
AND STOCKHOLDERS’
EQUITY
|
||||||||||||
Current
liabilities:
|
||||||||||||
Accounts
Payable
|
$ | 1,294 | $ | 1,294 | ||||||||
Accrued
expenses
|
1,321 | 1,321 | ||||||||||
Total
current liabilities
|
2,615 | 2,615 | ||||||||||
Redeemable
warrants
|
- | 17,359 | (a) | 3,684 | ||||||||
(7,417 | )(b) | |||||||||||
(6,258 | )(b)(c) | |||||||||||
Total
liabilities
|
2,615 | 3,684 | 6,299 | |||||||||
Commitment
and contingencies
|
||||||||||||
Stockholders’
equity
|
||||||||||||
Preferred
stock
|
- | - | ||||||||||
Common
stock
|
133 | 133 | ||||||||||
Additional
paid-in capital
|
273,093 | (17,359 | )(a) | 263,151 | ||||||||
7,417 | (b) | |||||||||||
Accumulated
deficit
|
(210,847 | ) | 6,258 | (b)(c) | (204,589 | ) | ||||||
Total
stockholders' equity
|
62,379 | (3,684 | ) | 58,695 | ||||||||
Total
liabilities and stockholders’ equity
|
$ | 64,994 | $ | 64,994 |
F-38
HEMISPHERX
BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated
Statement of Operations
Year
ended December 31, 2009
(in
thousands, except per share data)
December
31, 2009
As
Previously
Reported
|
Adjustments
|
December 31,
2009
As
Restated
|
||||||||||
Revenues:
|
||||||||||||
Sales
of product, net
|
$ | $ | $ | |||||||||
Clinical
treatment programs
|
111 | 111 | ||||||||||
Total
revenues
|
111 | 111 | ||||||||||
Costs
and expenses:
|
||||||||||||
Production/cost
of goods sold
|
584 | 584 | ||||||||||
Research
and development
|
6,995 | 6,995 | ||||||||||
General
and administrative
|
5,796 | 5,796 | ||||||||||
Total
costs and expenses
|
13,375 | 13,375 | ||||||||||
Operating
loss
|
(13,264 | ) | (13,264 | ) | ||||||||
Interest
and other income
|
67 | 67 | ||||||||||
Financing
costs
|
(241 | ) | (241 | ) | ||||||||
Redeemable
warrants valuation adjustment
|
- | 6,258(b)(c) | 6,258 | |||||||||
Net
loss
|
$ | (13,438 | ) | $ | 6,258 | $ | (7,180 | ) | ||||
Basic
and diluted loss per share
|
$ | (0.12 | ) | $ | .04 | $ | (0.07 | ) | ||||
Weighted
average shares outstanding Basic and Diluted
|
109,514,401 | 109,514,401 |
NOTES:
(a)
|
The
total initial estimated fair value of the Liability related to the
Warrants was $17,359,000 at the date of their issuance in May
2009. In order to record this Liability, an adjustment will be
made to decrease Additional Paid-In Capital and increase Liabilities by
$17,359,000.
|
(b)
|
In
May 2009 and June 2009, some of these Warrants were exercised resulting in
total non-cash losses of $3,675,000. Prior to each exercise,
the individual Warrant’s fair value was revalued. The
revaluation adjustments were made to increase the above mentioned
Warrants’ Liability of $17,359,000 by the related $3,675,000 loss and
then, upon exercise, reduce the Warrants’ Liability value by $7,417,000
for the exercised
Warrants.
|
F-39
(c)
|
The
estimated fair value of the Liability related to the Warrants was revalued
at the end of each fiscal quarter from June 2009 through December 31,
2009. Due to the decreasing trading value of our stock during
this period, at December 31, 2009, the value of the Liability related to
the remaining outstanding Warrants will be $3,684,000. The June
to December 2009 year to date adjustments to record the change in fair
value for the remaining Warrants’ Liability will be $9,933,000, resulting
in a related non-cash gain of
$9,933,000.
|
None of
the above issues from this non-cash adjustment affected the Company’s revenues,
operating expenses, liquidity or cash flows from past, nor should they affect
future operations, except in the highly unlikely event that a Put right is
triggered under the Warrants.
(19) Quarterly Results of Operation
(unaudited and restated)
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 | ) | ||||||||||
Financing
costs
|
- | - | - | - | - | |||||||||||||||
Interest
& other
|
||||||||||||||||||||
income
|
80 | 328 | 36 | 148 | 592 | |||||||||||||||
Redeemable
warrants
|
||||||||||||||||||||
valuation
adjustment
|
- | - | - | - | - | |||||||||||||||
Net
loss
|
$ | (3,165 | ) | $ | (2,802 | ) | $ | (3,415 | ) | $ | (2,837 | ) | $ | (12,219 | ) | |||||
Basic
and diluted loss
per share
|
$ | (.04 | ) | $ | (.04 | ) | $ | (.05 | ) | $ | (.03 | ) | $ | (.16 | ) |
2009
As Previously Stated
(in
thousands except per share data)
March 31,
2009
|
June 30,
2009
|
September 30,
2009
|
December 31,
2009
|
Total
|
||||||||||||||||
(previously
|
(previously
|
(previously
|
(previously
|
(previously
|
||||||||||||||||
reported)
|
reported)
|
reported)
|
reported)
|
reported
|
||||||||||||||||
Revenues
|
$ | 29 | $ | 17 | $ | 25 | $ | 40 | $ | 111 | ||||||||||
Costs
and expenses
|
(2,882 | ) | (3,996 | ) | (2,483 | ) | (4,014 | ) | (13,375 | ) | ||||||||||
Finance
Costs
|
(241 | ) | - | - | - | (241 | ) | |||||||||||||
Interest
& other
|
||||||||||||||||||||
Income
(expense)
|
7 | 109 | 23 | (72 | ) | 67 | ||||||||||||||
Redeemable
warrants
|
||||||||||||||||||||
valuation
adjustment
|
- | - | - | - | - | |||||||||||||||
Net
loss
|
$ | (3,087 | ) | $ | (3,870 | ) | $ | (2,435 | ) | $ | (4,046 | ) | $ | (13,438 | ) | |||||
Basic
and diluted loss
per share
|
$ | (.04 | ) | $ | (.04 | ) | $ | (.02 | ) | $ | (.03 | ) | $ | (.12 | ) |
F-40
2009
Restated As Necessary
(in
thousands except per share data)
March 31,
2009
|
June 30,
2009
|
September 30,
2009
|
December 31,
2009
|
Total
|
||||||||||||||||
(previously
|
(restated)
|
(restated)
|
(restated)
|
(restated)
|
||||||||||||||||
reported)
|
||||||||||||||||||||
Revenues
|
$ | 29 | $ | 17 | $ | 25 | $ | 40 | $ | 111 | ||||||||||
Costs
and expenses
|
(2,882 | ) | (3,996 | ) | (2,483 | ) | (4,014 | ) | (13,375 | ) | ||||||||||
Finance
costs
|
(241 | ) | - | - | - | (241 | ) | |||||||||||||
Interest
& other
|
||||||||||||||||||||
Income
(expense)
|
7 | 109 | 23 | (72 | ) | 67 | ||||||||||||||
Redeemable
warrants
|
||||||||||||||||||||
valuation
adjustment
|
- | (10,861 | ) | 4,950 | 12,169 | 6,258 | ||||||||||||||
Net
loss
|
$ | (3,087 | ) | $ | (14,731 | ) | $ | 2,515 | $ | 8,123 | $ | (7,180 | ) | |||||||
Basic
and diluted loss per share
|
$ | (.04 | ) | $ | (.15 | ) | $ | .02 | $ | .06 | $ | (.07 | ) |
The
difference between the previously reported and restated presentation relates to
the recording of an adjustment to the liability related to the Warrants issued
in May 2009. See Note 18 Restatement.
Hemispherx
Biopharma, Inc.
Schedule
II -Valuation and Qualifying Accounts
(dollars
in thousands)
Description
|
Balance at
beginning of
period
|
Charge to
expense
|
Write-
offs
|
Balance at
end of
period
|
||||||||||||
Year Ended
December 31, 2007
Reserve for inventory
|
$ | 241 | $ | 109 | $ | - | $ | 350 | ||||||||
Year
Ended December 31, 2008 Reserve for inventory
|
$ | 350 | $ | - | $ | (64 | ) | $ | 286 | |||||||
Year
Ended December 31, 2009 Reserve for inventory
|
$ | 286 | $ | - | $ | (4 | ) | $ | 282 |
F-41