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, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 1-13441
HEMISPHERX BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-0845822
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1617 JFK Boulevard Philadelphia, Pennsylvania 19103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 988-0080
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Act:
(Title of Each Class)
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer|_| Accelerated filer|X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). es |_| No |X|
The aggregate market value of Common Stock held by non-affiliates at June 30,
2005, the last business day of the registrant's most recently completed second
fiscal quarter, was $91,919,360.
The number of shares of the registrant's Common Stock outstanding as of July 12,
2006 was 62,299,252.
DOCUMENTS INCORPORATED BY REFERENCE: None.
Explanatory Note
This second amendment on Form 10-K/A amends our amended annual report for the
fiscal year ended December 31, 2005 originally filed with the Securities and
Exchange Commission ("SEC")on June 5, 2006 (the "Form 10-K/A"). Primarily, we
are filing this second amendment to correct disclosure in Note 19 - Quarterly
Results of Operations (unaudited), to the financial statements with regard to
deemed dividends recorded in the quarterly periods ended in June and September
2004.
No attempt has been made in this Form 10-K/A-2 to modify or update disclosures
in the Form 10-K/A except as required to address the above issue and certain
other issues noted below. This Form 10-K/A-2 does not reflect events occurring
after the filing of the Form 10-K/A or modify or update any related disclosures.
Information not affected by the amendment is unchanged and reflects the
disclosure made at the time of the filing of the Form 10-K/A with the SEC.
Accordingly, this Form 10-K/A-2 should be read in conjunction with the Form
10-K/A and our filings made with the SEC subsequent to the filing of the Form
10-K/A, including any amendments to those filings.
In accordance with Rule 12b-15 promulgated under the Securities and Exchange Act
of 1934, as amended, the complete texts of Part II, Item 8; Part III, Items 10
-15; and Part IV, Item 15 are set forth herein, including those portions of the
text that have not been amended from that set forth in the Form 10-K/A. The only
changes to the text from the Form 10-K/A are as follows:
Part II
Item 8. Financial Statements and Supplementary Data.
o Note 19 to the financial statements (located at the end of
this 10-K/A-2) has been revised.
Part III
Item 10. Directors and Executive Officers of the Registrant.
o The subsection "Audit Committee and Audit Committee Expert"
has been revised.
Item 11. Executive Compensation.
o The table that sets forth certain information regarding stock
options and warrants granted during 2005 to the executive
officers named in the Summary Compensation Table (page zz
hereof) has been revised.
o Footnote 6 to the "Aggregated Option Exercises In Last Fiscal
Year And Fiscal Year-End Option/Warrant Value" table has been
revised.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
o Footnote 3 to the Principal Stockholders table has been
revised.
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Item 13. Certain Relationships and Related Transactions.
o Disclosure concerning Antoni Esteve, one of our former
directors, was corrected to reflect that he no longer is a
Member of the Executive Committee.
ITEM 14. Principal Accounting Fees and Services.
o The disclosure has been revised to correct audit fees paid to
BDO Seidman, LLP.
Part IV
Item 15. Exhibits and Financial Statement Schedules.
o Updated certifications from our Chief Executive Officer and
Chief Financial Officer are attached as Exhibits 31.1, 31.2,
32.1, and 32.2.
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ITEM 8. Financial Statements and Supplementary Data.
The consolidated balance sheets as of December 31, 2004 and 2005, 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, 2005, together with the report of BDO Seidman, LLP,
independent registered public accountants, are included at the end of this
report. Reference is made to the "Index to Financial Statements and Financial
Statement Schedule" on page F-1.
PART III
Item 10. Directors and Executive Officers of the Registrant.
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. 68 Chairman, Chief Executive Officer
R. Douglas Hulse 62 President
Robert E. Peterson 69 Chief Financial Officer
David R. Strayer, M.D. 60 Medical Director, Regulatory Affairs
Mei-June Liao, Ph.D. 55 Vice President of Regulatory Affairs,
Quality Control and Research and
Development
Robert Hansen 62 Vice President of Manufacturing
Carol A. Smith, Ph.D. 56 Director of Process Development
Richard C. Piani 79 Director
William M. Mitchell, M.D. 71 Director
Ransom W. Etheridge 66 Director, Secretary and General Counsel
Steven D. Spence 46 Director
Iraj Eqhbal Kiani, Ph.D. 60 Director
Each director has been elected to serve until the next annual meeting of
stockholders, or until his earlier resignation, removal from office, death or
incapacity. Each executive officer serves at the discretion of the Board of
Directors, subject to rights, if any, under contracts of employment.
WILLIAM A. CARTER, M.D., the co-inventor of Ampligen(R), joined us in
1978, and has served as: (a) our Chief Scientific Officer since May 1989; (b)
the Chairman of our Board of Directors since January 1992; (c) our Chief
Executive Officer since July 1993; (d) our President since April, 1995; and (e)
a director since 1987. From 1987 to 1988, Dr. Carter served as our Chairman. Dr.
Carter was a leading innovator in the development of human interferon for a
variety of treatment indications including various viral diseases and cancer.
Dr. Carter received the first FDA approval to initiate clinical trials on a beta
interferon product manufactured in the U.S. under his supervision. From 1985 to
October 1988, Dr. Carter served as our Chief Executive Officer and Chief
Scientist. He received his M.D. degree from Duke University and underwent his
post-doctoral training at the National Institutes of Health and Johns Hopkins
University. Dr. Carter also served as Professor of Neoplastic Diseases at
Hahnemann Medical University, a position he held from 1980 to 1998. Dr. Carter
served as Director of Clinical Research for Hahnemann Medical University's
Institute for Cancer and Blood Diseases, and as a professor at Johns Hopkins
School of Medicine and the State University of New York at Buffalo. Dr. Carter
is a Board certified physician and author of more than 200 scientific articles,
including the editing of various textbooks on anti-viral and immune therapy.
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R. DOUGLAS HULSE was appointed our President and Chief Operating Officer
in February 2005. Mr. Hulse has been an executive director at Sage Group, Inc.,
an international organization providing senior level strategic management
services to the biotechnology and pharmaceutical sector, since 1995. Mr. Hulse
is a Phi Beta Kappa graduate of Princeton University with a cum laude degree in
chemistry and the holder of S.M. Degrees in both management and Chemical
Engineering from M.I.T., previously served as our Chief Operating Officer in
1996 and 1997. Mr. Hulse devotes approximately 40 to 50% of his time to our
business.
ROBERT E. PETERSON has served as our Chief Financial Officer since April,
1993 and served as an Independent Financial Advisor to us from 1989 to April,
1993. Also, Mr. Peterson has served as Vice President of the Omni Group, Inc., a
business consulting group based in Tulsa, Oklahoma since 1985. From 1971 to
1984, Mr. Peterson worked for PepsiCo, Inc. and served in various financial
management positions including Vice President and Chief Financial Officer of
PepsiCo Foods International and PepsiCo Transportation, Inc. Mr. Peterson is a
graduate of Eastern New Mexico University.
DAVID R. STRAYER, M.D. who served as Professor of Medicine at the Medical
College of Pennsylvania and Hahnemann University, has acted as our Medical
Director since 1986. He is Board Certified in Medical Oncology and Internal
Medicine with research interests in the fields of cancer and immune system
disorders. Dr. Strayer has served as principal investigator in studies funded by
the Leukemia Society of America, the American Cancer Society, and the National
Institutes of Health. Dr. Strayer attended the School of Medicine at the
University of California at Los Angeles where he received his M.D. in 1972.
MEI-JUNE LIAO, Ph.D. has served as Vice President of Regulatory Affairs,
Quality and Research & Development since October 2003 and as Vice President of
Research & Development since March 2003 with responsibilities for the
regulatory, quality control and product development of Alferon(R). Before the
acquisition of certain assets of ISI, Dr. Liao was Vice President of Research
and Development from 1995 to 2003 and held senior positions in the Research and
Development Department of ISI from 1983 to 1994. Dr. Liao received her Ph.D.
from Yale University in 1980 and completed a three year postdoctoral appointment
at the Massachusetts Institute of Technology under the direction of Nobel
Laureate in Medicine, Professor H. Gobind Khorana. Dr. Liao has authored many
scientific publications and invention disclosures.
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ROBERT HANSEN joined us as Vice President of Manufacturing in 2003 upon
the acquisition of certain assets of ISI. He is responsible for the manufacture
of Alferon(R) N. Mr. Hansen had been Vice President of Manufacturing for ISI
since 1997, and served in various capacities in manufacturing since joining ISI
in 1987. He has a B.S. degree in Chemical Engineering from Columbia University
in 1966.
CAROL A. SMITH, Ph.D. is Director of Process Development and has served as
our Director of Manufacturing and Process Development since April 1995, as
Director of Operations since 1993 and as the Manager of Quality Control from
1991 to 1993, with responsibility for the manufacture, control and chemistry of
Ampligen(R). Dr. Smith was Scientist/Quality Assurance Officer for Virotech
International, Inc. from 1989 to 1991 and Director of the Reverse Transcriptase
and Interferon Laboratories and a Clinical Monitor for Life Sciences, Inc. from
1983 to 1989. She received her Ph.D. from the University of South Florida
College of Medicine in 1980 and was an NIH post-doctoral fellow at the
Pennsylvania State University College of Medicine.
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.
RANSOM W. ETHERIDGE has been a director since October 1997, and presently
serves as our secretary and general counsel. Mr. Etheridge first became
associated with us in 1980 when he provided consulting services to us and
participated in negotiations with respect to our initial private placement
through Oppenheimer & Co., Inc. Mr. Etheridge has been practicing law since
1967, specializing in transactional law. Mr. Etheridge is a member of the
Virginia State Bar, a Judicial Remedies Award Scholar, and has served as
President of the Tidewater Arthritis Foundation. He is a graduate of Duke
University, and received his Law degree from the University of Richmond School
of Law.
WILLIAM M. MITCHELL, M.D., Ph.D. has been a director since July 1998. Dr.
Mitchell is a Professor of Pathology at Vanderbilt University School of
Medicine. Dr. Mitchell earned a M.D. from Vanderbilt and a Ph.D. from Johns
Hopkins University, where he served as an Intern in Internal Medicine, followed
by a Fellowship at its School of Medicine. Dr. Mitchell has published over 200
papers, reviews and abstracts dealing with viruses and anti-viral drugs. Dr.
Mitchell has worked for and with many professional societies, including the
International Society for Interferon Research, and committees, among them the
National Institutes of Health, AIDS and Related Research Review Group. Dr.
Mitchell previously served as one of our directors from 1987 to 1989.
STEVEN D. SPENCE was appointed to the Board of Directors in March 2005.
Mr. Spence is currently Managing Partner of Valued Ventures, a consultancy Mr.
Spence founded in 2003 to foster the development of micro and small cap
companies. For the six years prior to founding Valued Ventures, Mr. Spence
performed the duties as Managing Director at Merrill Lynch. Prior to his tenure
as Managing Director, Mr. Spence has held several high-ranking management
positions within Merrill Lynch including Chief Operating Officer for the
Security Services Division, Global Head of the Broker Dealer Security Services
Division, and Global Head of Financial Futures and Options. Mr. Spence is a
graduate of Columbia University in New York City.
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IRAJ EQHBAL KIANI, M.B.A., Ph.D., was appointed to the Board of Directors
on May 1, 2002. Dr. Kiani is a citizen of England and resides in Newport,
California. Dr. Kiani served in various local government position including the
Governor of Yasoi, Capital of Boyerahmand, Iran. In 1980, Dr. Kiani moved to
England, where he established and managed several trading companies over a
period of some 20 years. Dr. Kiani is a planning and logistic specialist who is
now applying his knowledge and experience to build a worldwide immunology
network, which will use our proprietary technology. Dr. Kiani received his Ph.D.
degree from the University of Warwick in England.
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 believe that, during the fiscal year ended December 31,
2005, all of our officers, directors and ten percent stockholders complied with
all applicable Section 16(a) filing requirements on a timely basis.
Audit Committee and Audit Committee Expert
Hemispherx's Audit Committee of the Board of Directors consists of Steven
Spence, Committee Chairman, William Mitchell, M.D. and Richard Piani. Mr.
Spence, Dr. Mitchell, and Mr. Piani are all determined by the Board of Directors
to be independent directors as required under Section 121B(2)(a) of the AMEX
Company Guide. Mr. Spence serves as the financial expert as defined in
Securities and Exchange Commission rules on the committee. Hemispherx believes
Mr. Spence, Dr. Mitchell, and Mr. Piani 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 Hemispherx's 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 AMEX or
the securities laws, (iii) assist the Board in fulfilling its oversight
responsibility relating to the integrity of Hemispherx's financial statements
and financial reporting process and Hemispherx's 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 (vi)
review disclosures by Hemispherx's independent registered public accounting firm
concerning relationships with Hemispherx and the performance of Hemispherx's
independent registered public accounting firm.
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Code of Ethics
Our Board of Directors adopted a code of ethics and business conduct for
officers, directors and employees that went into effect on May 19, 2003. This
code has been presented, reviewed and signed by each officer, director and
employee. You may obtain a copy of this code by visiting our web site at
www.hemispherx.net (Corporate Info) or by written request to our office at 1617
JFK Boulevard, Suite 660, Philadelphia, PA 19103.
Item 11. Executive Compensation.
The summary compensation table below sets forth the aggregate compensation
paid or accrued by us for the fiscal years ended December 31, 2005, 2004 and
2003 to (i) our Chief Executive Officer and (ii) our five most highly paid
executive officers other than the CEO who were serving as executive officers at
the end of the last completed fiscal year and whose total annual salary and
bonus exceeded $100,000 (collectively, the "Named Executives").
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Restricted Warrants & Options All Other
Name and Principal Position Year Salary ($) Stock Awards Awards Compensation (1)
------------------------------------- ------- ---------- ------------ ------------------ ----------------
William A. Carter 2005 (2) 623,330 -- (3) 645,000 $44,443
Chairman of the Board and 2004 (2) 605,175 -- (4) 320,000 32,003
CEO 2003 (2) 582,461 -- (5) 1,450,000 28,375
R. Douglas Hulse 2005 (6) $110,000 -- (6) 250,000 --
President and COO 2004 -- -- -- --
2003 -- -- -- --
Robert E. Peterson 2005 (7) 253,350 -- (8) 110,000 --
Chief 2004 (7) 221,242 -- (9) 63,824 --
Financial 2003 (7) 193,816 -- -- --
Officer
David R. Strayer, M.D. 2005(10) 207,304 --(11) 10,000 --
Medical Director 2004 180,394 --(12) 10,000 --
2003 190,096 -- -- --
Carol A. Smith, Ph.D. 2005 138,697 --(11) 10,000 --
Director of 2004 134,658 --(12) 10,000 --
Process Development 2003 140,576 -- -- --
Mei-June Liao, Ph.D., V.P. of Quality 2005 153,470 --(11) 10,000 --
Control 2004 149,000 --(12) 10,000 --
2003(13) 100,575 -- -- --
Robert Hansen 2005 135,968 --(11) 10,000 --
V.P. of Manufacturing 2004 132,000 --(12) 10,000 --
2003(13) 104,500 -- -- --
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----------
(1) Consists of insurance premiums paid by us with respect to term life and
disability insurance for the benefit of the named executive officer.
(2) Includes bonuses of $99,481, $121,035 and $124,666 in 2003, 2004 and 2005,
respectively.
(3) Consists of stock option grants to a) acquire 100,000 shares at $1.75 per
share, b) acquire 10,000 shares at $2.61 per share, c) acquire 70,000
shares at $2.87 and d) to acquire 465,000 shares at $1.86. In 2005, Dr.
Carter had 535,000 previously issued options expire.
(4) Consist of a stock option grant of 320,000 shares exercisable at $2.60 per
share.
(5) Represents warrants to purchase 1,450,000 shares of common stock
exercisable at $2.20 per share.
(6) Reflects compensation beginning February 2005. Stock options issued to
Sage Healthcare Advisors, LLC, pursuant to Mr. Hulse's employment
agreement. Mr. Hulse has direct interest in 41,667 of these options.
(7) 2003 includes a bonus of $37,830, 2004 includes a bonus of $44,248 and
2005 includes a bonus of $50,670.
(8) Reflects options to purchase 100,000 shares of Common Stock at $1.75 and
10,000 shares at $2.61 per share.
(9) Consist of stock option grant of 50,000 shares exercisable at $3.44 per
share and 13,824 stock options to purchase common stock at $2.60 per
share.
(10) Includes a bonus of $30,000.
(11) Consists of stock options exercisable at $2.61 per share.
(12) Consists of stock option grant exercisable at $1.90 per share.
(13) Compensation from March 2005. Employed by ISI prior to that.
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The following table sets forth certain information regarding stock options
and warrants granted during 2005 to the executive officers named in the Summary
Compensation Table.
Individual Grants
-----------------------------
Number Of Percentage Of Potential Realizable Value At
Securities Total Options/ Assumed Rates Of Stock Price
Underlying Warrants Granted Appreciation For Options/Warrant
Options/ To Employees In Exercise Term
Warrants Fiscal Year Price Per -------------------------------
Name Granted 2005(1) Share (2) Expiration Date 5% (3) 10%(3)
-------------------- ------------ ---------------- --------- --------------- ------- --------
Carter, W.A. 100,000 47.6 $1.75 4/26/15 $63,345 $126,690
70,000 2.87 12/9/15
10,000 2.61 12/8/15
465,000 1.86 7/1/11
Hulse, R.D.(4) 250,000 18.5 $1.55 2/14/15 20,000 40,000
Peterson, R. 100,000 8.1 $1.75 4/26/15 10,055 20,110
10,000 $2.61 12/8/15
Strayer, D. 10,000 * $2.61 12/8/15 1,300 2,600
Smith, C. 10,000 * $2.61 12/8/15 1,300 2,600
Liao, M. 10,000 * $2.61 12/8/15 1,300 2,600
Hansen, R. 10,000 * $2.61 12/8/15 1,300 2,600
(1) Total stock options and warrants issued to employees in 2005 were
1,352,600.
(2) The exercise price is equal to the closing price of our common stock at
the date of issuance.
(3) Potential realizable value is based on an assumption that the market price
of the common stock appreciates at the stated rates compounded annually,
from the date of grant until the end of the respective option term. These
values are calculated based on requirements promulgated by the Securities
and Exchange Commission and do not reflect our estimate of future stock
price appreciation.
(4) Reflects compensation beginning February 2005. Stock options issued to
Sage Healthcare Advisors, LLC, pursuant to Mr. Hulse's employment
agreement. Mr. Hulse has direct interest in 41,567 of these options.
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The following table sets forth certain information regarding the stock
options and warrants held as of December 31, 2005 by the individuals named
in the above Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/WARRANT VALUE
Securities Underlying Unexercised Value of Unexercised
Warrants/Options at In-the-Money-Option/Warrant At
Shares Value Fiscal Year End Numbers Fiscal Year End (1) Dollars
Acquired on Realized --------------------------------- ------------------------------
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ------------ ------------- ----------- -------------
William Carter -- -- 5,515,378(2) 257,500 (3) $313,650 $42,500
Robert Peterson -- -- 567,574 (4) 10,000 (5) 76,000 --
David Strayer -- -- 137,500 (6) 12,500 (7) 9,850 1,350
Carol Smith -- -- 49,291 (8) 12,500 (7) 4,750 1,350
Mei-June Liao -- -- 7,500 (9) 12,500 (7) 1,350 1,350
Robert Hansen -- -- 7,500 (9) 12,500 (7) 1,350 1,350
---------
(1) Computation based on $2.17, the December 31, 2005 closing bid price for
the common stock on the American Stock Exchange.
(2) Includes shares issuable upon the exercise of (i) warrants issued in 2001
to purchase 376,650 shares of common stock consisting of 188,325
exercisable at $6.00 per share and 188,325 exercisable at $9.00 per share,
all of which expired on February 22, 2006; (ii) stock options issued in
2001 to purchase 10,000 shares of common stock at $4.03 per share expiring
January 3, 2011; (iii) warrants issued in 2002 to purchase 750,000 shares
of common stock exercisable at $2.00 per share expiring on August 7, 2007;
(iv) warrants issued in 2003 to purchase 1,450,000 shares of common stock
exercisable at $2.20 per share expiring on September 8, 2008; (v) stock
options issued in 2004 to purchase 320,000 shares of common stock at $2.60
per share expiring on September 7, 2014; (vi) Stock Options issued in 2005
to purchase 100,000 shares of common stock at $1.75 per share expiring on
April 26, 2015; (vii) stock options issued in 2005 to purchase 465,000
shares of common stock at $1.86 per share expiring July 1, 2011; (viii)
stock options issued in 2005 to purchase 70,000 shares of common stock at
$2.87 per share expiring December 9, 2015; and (ix) stock options issued
in 2005 to purchase 10,000 shares of common stock at $2.61 per share
expiring Decemner 8, 2015. Also includes 1,963,728 warrants and options
originally issued to William A. Carter and subsequently transferred to
Carter Investments of which Dr. Carter is the beneficial owner. These
securities consist of warrants issued in 1998(a) to purchase 490,000
shares of common stock consisting of 190,000 exercisable at $4.00 per
share expiring on January 1, 2008 and 300,000 exercisable at $6.00 per
share that expired on January 1, 2006; (b)stock options granted in 1991
and extended in 1998 to purchase 73,728 shares of common stock exercisable
at $2.71 per share expiring on August 8, 2008 and (c)Warrants issued in
2002 to purchase 1,400,000 shares of common stock at $3.50 per share
expiring on September 30, 2007. The 376,650 warrants expired on February
22, 2006 and the 300,000 warrants that expired on January 1, 2006 were
replaced by the Board of Directors (refer to Item 12. Security Ownership
of Certain Beneficial Owners and Management).
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(3) Consists of (i) 250,000 warrants exercisable at $2.00 per share expiring
on August 13, 2007 and 7,500 stock options exercisable at $2.61 per share
expiring on December 8, 2015.
(4) Includes shares issuable upon exercise of (i) options issued in 1997 to
purchase 13,750 shares of common stock at $3.50 per share and expiring on
January 22, 2007, (ii) options issued in 2001 to purchase 10,000 shares of
common stock at $4.03 per share and expiring on January 3, 2011, (iii)
warrants issued in 2002 to purchase 200,000 shares of common stock at
$2.00 per share expiring on August 13, 2007; and (iv) options issued in
2005 to purchase 100,000 shares of common stock at $1.75 per share
expiring April 26, 2015. Also includes 243,824 warrants/options originally
issued to Robert E. Peterson and subsequently transferred to the Robert E.
Peterson Trust of which Robert E. Peterson is owner and Trustee. These
securities include options issued in 1996 to purchase 50,000 shares of
common stock exercisable at $3.50 per share and expired on February 28,
2006; warrants issued in 1998 to purchase 100,000 shares of common stock
at $5.00 per share expiring on April 14, 2006; warrants issued in 2002 to
purchase 30,000 shares of common stock exercisable at $5.00 per share
expiring on April 30, 2006 and 63,824 stock options issued in 2004
consisting of 50,000 options to acquire common stock at $3.44 per share
expiring on June 22, 2014 and 13,824 options to acquire common stock at
$2.60 per share expiring on September 7, 2014. The 50,000 options that
expired on February 28, 2006 were replaced by the Board of Directors
(refer to Item 12. Security Ownership of Certain Beneficial Owners and
Management).
(5) Consists of 10,000 options issued in 2005 exercisable at $2.61 per share.
(6) Consists of (i) 50,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007, (ii) 50,000 warrants exercisable at $4.00 per share
expiring on February 28, 2008, (iii) 10,000 stock options exercisable at
$4.03 expiring on January 3, 2011; (iv) 20,000 stock options exercisable
at $3.50 per share expiring on January 22, 2007; and (v) 10,000 stock
options exercisable at $1.90 per share expiring on December 7, 2014 and
10,000 stock options exercisable at $2.61 per share expiring on December
8, 2015.
(7) Consists of 5,000 stock options exercisable at $1.90 per share expiring on
December 7, 2014 and 7,500 stock options exercisable at $2.61 per share
expiring on December 8, 2015.
(8) Consists of (i) 20,000 warrants exercisable at $2.00 per share expiring on
August 13, 2007, (ii) 5,000 warrants exercisable at $4.00 per share
expiring on June 7, 2008, (iii) 10,000 stock options exercisable at $4.03
per share expiring on January 3, 2016; (iv) 6,791 stock options
exercisable at $3.50 per share expiring on January 22, 2007; and (v) 5,000
stock options exercisable at $1.90 per share expiring on December 7, 2014
and 2,500 stock options exercisable at $2.61 per share expiring on
December 8, 2015.
-11-
(9) Consists of 5,000 options to purchase common stock at $1.90 per share
expiring on December 7, 2014 and 2,500 stock options exercisable at $2.61
per share expiring on December 8, 2015.
Employment and Change in Control Agreements
On March 11, 2005, our board of directors, at the recommendation of the
Compensation Committee, approved an amended and restated employment agreement
and an amended and restated engagement agreement with Dr. William A. Carter.
The amended and restated employment agreement provides for Dr. Carter's
employment as our Chief Executive Officer and Chief Scientific Officer until
December 31, 2010 unless sooner terminated for cause or disability. The
agreement automatically renews for successive one year periods after the initial
termination date unless we or Dr. Carter give written notice otherwise at least
ninety days prior to the termination date or any renewal period. Dr. Carter has
the right to terminate the agreement on 30 days' prior written notice. The
initial base salary retroactive to January 1, 2005 is $290,888, 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 salary, at the sole discretion of the
Compensation Committee of the board of directors, based on his performance or
our operating results. Dr. Carter will not participate in any discussions
concerning the determination of his annual bonus. Dr. Carter is also entitled to
an incentive bonus of 0.5% of the gross proceeds received by us from any joint
venture or corporate partnering arrangement. Dr. Carter's agreement also
provides that he be paid a base salary and benefits through the last day of the
then term of the agreement if he is terminated without "cause", as that term is
defined in agreement. In addition, should Dr. Carter terminate the agreement or
the agreement be terminated due to his death or disability, the agreement
provides that Dr Carter be paid a base salary and benefits through the last day
of the month in which the termination occurred and for an additional twelve
month period. Pursuant to his original agreement, Dr. Carter was granted options
to purchase 73,728 (post split) shares in 1991. The exercise period of these
options was extended through December 31, 2010 and, should Dr. Carter's
employment agreement be extended beyond that date, the option exercise period is
further extended to the last day of the extended employment period.
The amended and restated engagement agreement, retroactive to January 1,
2005, provides for our engagement of Dr. Carter as a consultant related to
patent development, as one of our directors and as chairman of the Executive
Committee of our board of directors until 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 initial base fee as of January 1, 2004 is $207,777, subject
to annual adjustments equal to the percentage increase or decrease of annual
dollar value of directors' fees provided to our directors during the prior year.
The annual fee is further subject to adjustment based on the average increase or
decrease in the Consumer Price Index for the prior year. In addition, Dr. Carter
could receive an annual performance bonus of up to 25% of his base fee, at the
sole direction of the Compensation Committee of the board of directors, based on
his performance. Dr. Carter will not participate in any discussions concerning
the determination of this annual bonus. Dr. Carter's agreement also provides
that he be paid his base fee through the last day of the then term of the
agreement if he is terminated without "cause", as that term is defined in the
agreement. In addition, should Dr. Carter terminate the agreement or the
agreement be terminated due to his death or disability, the agreement provides
that Dr. Carter be paid fees due him through the last day of the month in which
the termination occurred and for an additional twelve month period.
-12-
On February 14, 2005 we entered into an agreement with The Sage Group of
Branchburg, New Jersey for R. Douglas Hulse, an Executive Director of The Sage
Group, to serve as President and Chief Operating Officer of our company. In
addition, other Sage Group principals and Senior Directors will be made
available to assist as needed. The engagement is expected to continue for a
period of 18 months; however, it is terminable on 30 days written notice by
either party after 12 months. Compensation for the services include a ten year
warrant to purchase 250,000 shares of our common stock at an exercise price of
$1.55. These warrants were issued to Sage Healthcare Advisors, LLC and are to
vest at the rate of 12,500 per month of the engagement with 25,000 vesting upon
completion of the eighteenth month. Vesting accelerates in the event of a merger
or a purchase of a majority of our assets or equity. We valued these warrants at
$256,000 utilizing the Black-Scholes Method. As of December 31, 2005, the
$150,000 was expensed to stock compensation expense. The Sage Group also is to
receive a monthly retainer of $10,000 for the period of the engagement. In
addition, for each calendar year (or part thereof) during which the agreement is
in effect, The Sage Group will be entitled to an incentive bonus in an amount
equal to 0.5% of the gross proceeds received by us during such year from any
joint ventures or corporate partnering arrangements. After termination of the
agreement, The Sage Group will only be entitled to receive the incentive bonus
based upon gross proceeds received by us during the two year period commencing
on the termination of the agreement with respect to any joint ventures or
corporate partnering arrangements entered into by us during the term of the
agreement. Mr. Hulse will devote approximately two to two and one half days per
week to our business.
We entered into an engagement agreement, retroactive to January 1, 2005,
with Ransom W. Etheridge which provides for Mr. Etheridge's engagement as our
General Counsel until December 31, 2009 unless sooner terminated for cause or
disability. The agreement automatically renews for successive one year periods
after the initial termination date unless we or Mr. Etheridge give written
notice otherwise at least ninety days prior to the termination date or any
renewal period. Mr. Etheridge has the right to terminate the agreement on 30
days' prior written notice. The initial annual fee for services is $96,000 and
is annually subject to adjustment based on the average increase or decrease in
the Consumer Price Index for the prior year. Mr. Etheridge's agreement also
provides that he be paid all fees through the last day of then current term of
the agreement if he is terminated without "cause" as that term is defined in the
agreement. In addition, should Mr. Etheridge terminate the agreement or the
agreement be terminated due to his death or disability, the agreement provides
that Mr. Etheridge be paid the fees due him through the last day of the month in
which the termination occurred and for an additional twelve month period. Mr.
Etheridge will devote approximately 85% of his business time to our business.
We entered into an amended and restated engagement agreement, retroactive
to January 1, 2005, with Robert E. Peterson which provides for Mr. Peterson's
engagement as our Chief Financial Officer until December 31, 2010 unless sooner
terminated for cause or disability. Mr. Peterson has the right to terminate the
agreement on 30 days' prior written notice. The initial annual fee for services
is $202,680 and is annually subject to increases based on the average increase
in the cost of inflation index for the prior year. Mr. Peterson shall receive an
annual bonus in each year that our Chief Executive Officer is granted a bonus.
The bonus shall equal a percentage of Mr. Peterson's base annual compensation
comparable to the percentage bonus received by the Chief Executive Officer. In
addition, Mr. Peterson shall receive bonus compensation upon Federal Drug
Administration approval of commercial application of Ampligen(R). Mr. Peterson's
agreement also provides that he be paid all fees through the last day of then
current term of the agreement if he is terminated without "cause" as that term
is defined in the agreement. In addition, should Mr. Peterson terminate the
agreement or the agreement be terminated due to his death or disability, the
agreement provides that Mr. Peterson be paid the fees due him through the last
day of the month in which the termination occurred and for an additional twelve
month period. Mr. Peterson will devote approximately 85% of his business time to
our business.
-13-
On March 11, 2005 the Board of Directors, deeming it essential to the best
interests of our shareholders to foster the continuous engagement of key
management personnel and recognizing that, as is the case with many publicly
held corporations, a change of control might occur and that such possibility,
and the uncertainty and questions which it might raise among management, might
result in the departure or distraction of management personnel to the detriment
of our company and our shareholders, determined to reinforce and encourage the
continued attention and dedication of members of our management to their
engagement without distraction in the face of potentially disturbing
circumstances arising from the possibility of a change in control of our company
and entered into identical agreements regarding change in control with William
A. Carter, our Chief Executive Officer and Chief Scientific Officer, Robert E.
Peterson, our Chief Financial Officer and Ransom W. Etheridge, our General
Counsel. Each of the agreements regarding change in control became effective
March 11, 2005 and continue through December 31, 2007 and shall extend
automatically to the third anniversary thereof unless we give notice to the
other party prior to the date of such extension that the agreement term will not
be extended. Notwithstanding the foregoing, if a change in control occurs during
the term of the agreements, the term of the agreements will continue through the
second anniversary of the date on which the change in control occurred. Each of
the agreements entitles William A. Carter, Robert E. Peterson and Ransom W.
Etheridge, respectively, to change of control benefits, as defined in the
agreements and summarized below, upon their respective termination of
employment/engagement with our 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 us for any
reason other than permanent disability or cause, as defined in the agreement (2)
by William A. Carter, Robert E. Peterson and/or Ransom W. Etheridge,
respectively, for good reason as defined in the agreement or, (3) by William A.
Carter, Robert E. Peterson and/or Ransom W. Etheridge, respectively for any
reason during the 30 day period commencing on the first date which is six months
after the date of the change in control.
The benefits for each of the foregoing executives would be as follows:
o A lump sum cash payment of three times his base salary and annual
bonus amounts; and
o Outplacement benefits.
Each agreement also provides that the executive is entitled to a "gross-up"
payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him.
-14-
Dr. Carter's agreement also provides for the following benefits:
o Continued insurance coverage through the third anniversary of his
termination; and
o Retirement benefits computed as if he had continued to work for the
above period.
Compensation of Directors
The compensation package for non-employee members of the Board of
Directors was changed on September 9, 2003. Board member compensation consists
of an annual retainer of $100,000 to be paid 50% in cash and 50% in our common
stock. On September 9, 2003 the Directors approved a 10 year plan which
authorizes up to 1,000,000 shares for use in supporting this compensation plan.
The number of shares paid shall have a value of $12,500 with the value of the
shares being determined by the closing price of our common stock on the American
Stock Exchange on the last day of the calendar quarter. In addition, all
non-employee directors received some compensation in 2003 for special project
work performed on our behalf. This project work ceased as of September 30, 2003.
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.
2004 Equity Incentive Plan
Our 2004 Equity Incentive Plan ("2004 Plan") provides for the grant of
non-qualified and incentive stock options, stock appreciation rights, restricted
stock and other stock awards to our employees, directors, officers, consultants
and advisors for the purchase of up to an aggregate of 8,000,000 shares of
common stock. The 2004 plan is administered by the board of directors, which has
complete discretion to select eligible individuals to receive and to establish
the terms of grants under the plan. Stock options awarded under the Equity
Incentive 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" as defined
in the plan. The number of shares of common stock available for grant under the
2004 Plan is subject to adjustment for changes in capitalization. As of December
31, 2005, 6,014,320 shares were available for grants under the 2004 Plan,
633,080 and 1,352,600 options were issued in 2004 and 2005, respectively. Unless
sooner terminated, the Equity Incentive Plan will continue in effect for a
period of 10 years from its effective date
1990 Stock Option Plan
Our 1990 Stock Option Plan, as amended ("1990 Plan"), provides for the
grant of options to our employees, directors, officers, consultants and advisors
for the purchase of up to an aggregate of 460,798 shares of common stock. The
1990 Plan is administered by the Compensation Committee of the board of
directors, which has complete discretion to select eligible individuals to
receive and to establish the terms of option grants. The number of shares of
common stock available for grant under the 1990 Plan is subject to adjustment
for changes in capitalization. As of December 31, 2004 and 2005, 18,881 options
were available for grants under the 1990 Plan. This plan remains in effect until
terminated by the Board of Directors or until all options are issued.
-15-
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. Participants'
contributions to the 401(K) plan may be 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. See Note 12 to the consolidated financial statements
contained herein.
Compensation Committee Interlocks and Insider Participation
Our Compensation Committee of the Board of Directors consists of , the
Committee Chairman, William Mitchell, M.D., Richard Piani, Dr. Iraj E. Kiani and
are all independent directors. There are no interlocking relationships.
Compensation Committee Report on Compensation
The Compensation Committee makes recommendations concerning salaries and
compensation for our employees and consultants.
The following report of the compensation committee discusses our executive
compensation policies and the basis of the compensation paid to our executive
officers in 2005.
In general, the compensation committee seeks to link the compensation paid
to each executive officer to the experience and performance of such executive
officer. Within these parameters, the executive compensation program attempts to
provide an overall level of executive compensation that is competitive with
companies of comparable size and with similar market and operating
characteristics.
There are three elements in our executive total compensation program, all
determined by individual and corporate performance as specified in the various
employment agreements; base salary, annual incentive, and long-term incentives.
Base Salary
The Summary Compensation Table shows amounts earned during 2005 by our
executive officers. The base compensation of such executive officers is set by
terms of the employment agreement entered into with each such executive officer.
We established the base salaries for Chief Executive Officer, Dr. William A.
Carter under an employment agreement in December 3, 1998 (as amended and
restated on March 11, 2005), which provides for a base salary of $290,888. In
addition, we entered into an agreement with Dr. Carter for his services as a
consultant related to patient development, development of patents and as a
member of our Board of Directors. This agreement establishes a base annual fee
of $207,777. Both agreements are subject to annual cost of living adjustments.
Dr. Carter is entitled to an annual performance bonus of up to 25% of the base
salary of each agreement at the discretion of the compensation committee of the
Board of Directors.
-16-
On March 11, 2005, we entered into an extended engagement agreement with
Robert E. Peterson, Chief Financial Officer retroactive to January 1, 2005 for a
base annual fee of $202,680 until December 31, 2010. Mr. Peterson's agreement
allows for annual cost of living increases and a performance bonus.
On March 11, 2005, we entered into an engagement agreement with Ransom W.
Etheridge, Corporate General Counsel, retroactive to January 1, 2005 for an
annual fee of $96,000 until December 31, 2009.
Annual Incentive
Our Chief Executive Officer and our Chief Financial Officer are entitled
to an annual incentive bonus as determined by the compensation committee based
on such executive officers' performance during the previous calendar year. The
cash bonus awarded to our Chief Executive Officer in 2004 and 2005 and the cash
bonus awarded to the Chief Financial Officer in 2004 and 2005 were determined
based on this provision in their employment agreements.
Long-Term Incentives
We grant long-term incentive awards periodically to align a significant
portion of the executive compensation program with stockholder interest over the
long-term through encouraging and facilitating executive stock ownership.
Executives are eligible to participate in our incentive stock option plans. Our
Chief Executive Officer and President, Dr. William Carter, received a grant of
645,000 stock options in 2005 of which 535,000 were issued to replace options
previously awarded that expired. These options are exercisable at rates varying
from $1.75 to $2.87 per share. The options vested on the date of grant.
On April 26, 2005, our Chief Financial Officer, Robert E. Peterson, was
granted 100,000 stock options exercisable at $1.75 per share expiring on April
26, 2015 unless previously exercised. On December 8, 2005 Mr. Peterson was
granted 10,000 stock options exercisable at $2.61 per share expiring on December
8, 2015.
Ransom Etheridge, our Corporate Secretary and General Counsel, was awarded
100,000 stock options on April 26, 2005 exercisable at $1.75 per share expiring
April 26, 2015, unless previously exercised.
-17-
Performance Graph
Total Return to Shareholders
(Includes reinvestment of dividends)
ANNUAL RETURN PERCENTAGE
Years Ending
------------------------------------------
Company Name / Index Dec 01 Dec 02 Dec 03 Dec 04 Dec 05
------------------------ ------ ------ ------ ------ ------
HEMISPHERX BIOPHARMA INC -5.26 -52.67 6.10 -15.93 14.21
S&P 600 INDEX 6.54 -14.63 38.79 22.65 7.68
PEER GROUP 48.39 -45.76 5.33 -52.63 -41.59
INDEXED RETURNS
Base Years Ending
Period ------------------------------------------
Company Name / Index Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05
------------------------ ------ ------ ------ ------ ------ ------
HEMISPHERX BIOPHARMA INC 100 94.74 44.84 47.58 40.00 45.68
S&P 600 INDEX 100 106.54 90.95 126.23 154.82 166.71
PEER GROUP 100 148.39 80.49 84.78 40.16 23.46
Peer Group Companies
AVI BIOPHARMA INC
IMMUNE RESPONSE CORP/DE
LA JOLLA PHARMACEUTICAL CO
MAXIM PHARMACEUTICALS INC
-18-
[GRAPHIC]
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The following table sets forth as of May 26, 2006, the number and
percentage of outstanding shares of common stock beneficially owned by:
o Each person, individually or as a group, known to us to be
deemed the beneficial owners of five percent or more of our
issued and outstanding common stock;
o each of our directors and the Named Executives; and
o all of our officers and directors as a group.
As of March 24, 2006, there were no other persons, individually or as a
group, known to the Hemispherx to be deemed the beneficial owners of five
percent or more of the issued and outstanding common stock.
% Of
Shares
Beneficially
Name and Address of Beneficial Owner Shares Beneficially Owned Owned
------------------------------------ ------------------------- ------------
William A. Carter, M.D. 6,272,868 (1) 9.3
Robert E. Peterson 585,574 (2) *
Ransom W. Etheridge 642,560 (3) 1.0
2610 Potters Rd.
Virginia Beach, VA 23452
Richard C. Piani 450,602 (4) *
97 Rue Jeans-Jaures
Levaillois-Perret
France 92300
Doug Hulse 131,067 (5) *
Sage Group, Inc.
3322 Route 22 West
Building 2, Suite 201
Branchburg, NJ 08876
William M. Mitchell, M.D. 397,884 (6) *
Vanderbilt University
Department of Pathology
Medical Center North
21st and Garland
Nashville, TN 37232
David R. Strayer, M.D. 160,746 (7) *
Carol A. Smith, Ph.D. 61,791 (8) *
Iraj-Eqhbal Kiani, Ph.D. 97,797 (9) *
Orange County Immune Institute
18800 Delaware Street
Huntingdon Beach, CA 92648
Steven Spence 197,883(10) *
Mei-June Liao, Ph.D. 20,000(11) *
Robert Hansen 20,000(11) *
All directors and executive
officers as a group (11 persons) 9,038,772 12.9%
-19-
* Less than 1%
(1) Includes shares issuable upon the exercise of (i) replacement options
issued in 2006 to purchase 376,650 shares of common stock exercisable at
$3.78 per share expiring on February 22, 2016; (ii) stock options issued
in 2001 to purchase 10,000 shares of common stock at $4.03 per share
expiring January 3, 2011; (iii) warrants issued in 2002 to purchase
1,000,000 shares of common stock exercisable at $2.00 per share expiring
on August 7, 2007; (iv) warrants issued in 2003 to purchase 1,450,000
shares of common stock exercisable at $2.20 per share expiring on
September 8, 2008; (v) stock options issued in 2004 to purchase 320,000
shares of common stock at $2.60 per share expiring on September 7, 2014;
(vi) Stock Options issued in 2005 to purchase 100,000 shares of common
stock at $1.75 per share expiring on April 26, 2015; (vii) Stock options
issued in 2005 to purchase 465,000 shares of common stock at $1.86 per
share expiring July 1, 2011; and (viii) stock options issued in 2005 to
purchase 70,000 shares of Common Stock at $2.87 per share expiring
December 9, 2015; (ix) stock options issued in 2005 to purchase 10,000
shares of Common Stock at $2.61 per share expiring December 8, 2015; and
(x) 507,490 shares of Common Stock. Also includes 1,963,728 warrants and
options originally issued to William A. Carter and subsequently
transferred to Carter Investments of which Dr. Carter is the beneficial
owner. These securities consist of warrants issued in 1998(a) to purchase
490,000 shares of common stock consisting of 190,000 exercisable at $4.00
per share expiring on January 1, 2008 and 300,000 exercisable at $2.38 per
share expiring January 1, 2016; (b)stock options granted in 1991 and
extended in 1998 to purchase 73,728 shares of common stock exercisable at
$2.71 per share expiring on August 8, 2008 and (c)Warrants issued in 2002
to purchase 1,400,000 shares of common stock at $3.50 per share expiring
on September 30, 2007.
-20-
(2) Includes shares issuable upon exercise of (i) options issued in 1997 to
purchase 13,750 shares of common stock at $3.50 per share and expiring on
January 22, 2007; (ii) options issued in 2001 to purchase 10,000 shares of
common stock at $4.03 per share and expiring on January 3, 2011; (iii)
warrants issued in 2002 to purchase 200,000 shares of common stock at
$2.00 per share expiring on August 13, 2007; (iv) options issued in 2005
to purchase 100,000 shares of common stock at $1.75 per share expiring
April 26, 2015; (v) options issued in 2005 to purchase 10,000 shares of
Common Stock at $2.61 per share expiring December 8, 2015; and (vi) 8,000
shares of Common Stock. Also includes 243,824 warrants/options originally
issued to Robert E. Peterson and subsequently transferred to the Robert E.
Peterson Trust of which Robert E. Peterson is owner and Trustee. These
securities include options issued in 2006 to purchase 50,000 shares of
common stock exercisable at $3.66 per share expiring on February 28, 2016;
replacement options issued in 2006 to purchase 100,000 shares of common
stock at $3.48 per share expiring on April 14, 2016; replacement options
issued in 2006 to purchase 30,000 shares of common stock exercisable at
$3.55 per share expiring on April 30, 2016 and 63,824 stock options issued
in 2004 consisting of 50,000 options to acquire common stock at $3.44 per
share expiring on June 22, 2014 and 13,824 options to acquire common stock
at $2.60 per share expiring on September 7, 2014.
Includes shares issuable upon exercise of (i) 20,000 warrants issued in
1998 to purchase common stock at $4.00 per share, originally expiring on
January 1, 2003 and extended to January 1, 2008; (ii) 100,000 warrants
issued in 2002 exercisable $2.00 per share expiring on August 13, 2007;
(iii) stock options issued in 2005 to purchase 100,000 shares of common
stock exercisable at $1.75 per share expiring on April 26, 2015; and(iv)
stock options issued in 2004 to purchase 50,000 shares of common stock
exercisable at $2.60 per share expiring on September 7, 2014; (v) stock
options issued in 2006 to purchase 50,000 shares of common stock
exercisable at $3.86 per share expiring February 24, 2006 and (vi) 122,560
shares of common stock. Also includes 200,000 stock options originally
granted to Ransom Etheridge in 2003 and subsequently transferred to
relatives and family trusts. These stock options are exercisable at $2.75
per share and expires on December 4, 2013. The transfers consist of 37,500
options to Julianne Inglima; 37,500 options to Thomas Inglima; 37,500
options to R. Etheridge-BMI Trust; and 37,500 options to R. Etheridge-TCI
Trust and 50,000 options to the Family Trust. Julianne and Thomas are Mr.
Etheridge's daughter and son-in-law.
(3) Includes shares issuable upon exercise of (i) 20,000 warrants issued in
1998 to purchase common stock at $4.00 per share originally expiring on
January 1, 2005 and extended to January 1, 2008; (ii) 100,000 warrants
issued in 2003 exercisable at $2.00 per share expiring on August 13, 2007;
(iii)options granted in 2004 to purchase 54,608 shares of common stock
exercisable at $2.60 per share expiring on September 17, 2014; (iv)
options granted in 2005 to purchase 100,000 shares of common stock
exercisable at $1.75 per share expiring on April 26, 2015; (v) stock
options issued in 2006 to purchase 50,000 shares of common stock
exercisable at $3.86 per share expiring February 24, 2006; (vi) 108,094
shares of common stock owned by Mr. Piani; vii) 12,900 shares of common
stock owned jointly by Mr. and Mrs. Piani; and (viii) and 5,000 shares of
common stock owned by Mrs. Piani.
-21-
(4) Consists of 41,667 options exercisable at $1.55 per share expiring
February 14, 2015. Shares owned includes 89,400 shares of common stock in
which Mr. Hulse has an undivided interest. These shares are held by Sage
Healthcare Advisors, LLC of which Mr. Hulse is a principal.
(5) Includes shares issuable upon exercise of (i) warrants issued in 1998 to
purchase 12,000 shares of common stock at $6.00 per share, expiring on
August 25, 2008; (ii) 100,000 warrants issued in 2002 exercisable at $2.00
per share expiring on August 13, 2007; (iii) 50,000 stock options issued
in 2004 exercisable at $2.60 per share expiring on September 7, 2014; (iv)
100,000 stock options issued in 2005 exercisable at $1.75 per share
expiring on April 26, 2015; (v) stock options issued in 2006 to purchase
50,000 shares of common stock exercisable at $3.86 per share expiring
February 24, 2006; and (vi) 85,884 shares of common stock.
(6) (i) stock options issued in 1997 to purchase 20,000 shares of common stock
at $3.50 per share expiring on February 22, 2007; (ii) warrants issued in
1998 to purchase 50,000 shares of common stock exercisable at $4.00 per
share expiring on February 28, 2008; (iii) stock options granted in 2001
to purchase 10,000 shares of common stock exercisable at $4.03 per share
expiring on January 3, 2011; (iv) warrants issued in 2002 to purchase
50,000 shares of common stock exercisable at $2.00 per share expiring on
August 13, 2007; (v) stock options issued in 2004 to purchase 10,000
shares of common stock exercisable at $1.90 per share expiring on December
7, 2014; (vi) stock options issued in 2005 to purchase 10,000 shares of
Common Stock at $2.61 per share expiring December 8, 2015 and (vii) 10,746
shares of common stock.
(7) Consists of shares issuable upon exercise of(i) 5,000 warrants issued in
1998 to purchase common stock at $4.00 per share expiring June 7, 2008;
(ii) 20,000 warrants issued in 2002 exercisable at $2.00 per share
expiring in August 13, 2007; (iii) 6,791 stock options issued in 1997
exercisable at $3.50 expiring January 22, 2007; (iv) 10,000 stock options
issued in 2001 exercisable at $4.03 per share expiring January 3, 2011;
(v) 10,000 stock options issued in 2004 exercisable at $1.90 expiring on
December 7, 2014; and 10,000 stock options issued in 2005 to purchase
Common Stock at $2.61 per share expiring December 8, 2015.
(8) Consists of shares issuable upon exercise of (i) 12,000 options issued in
2005 exercisable at $1.63 per share expiring on June 2, 2015; (ii) 15,000
options issued in 2005 exercisable at $1.75 per share expiring on April
26, 2015; (iii) stock options issued in 2006 to purchase 50,000 shares of
common stock exercisable at $3.86 per share expiring February 24, 2006;
and (iv) 20,797 shares of common stock.
(9) Consists of 15,000 stock options granted in 2005 exercisable at $1.75 per
share expiring on April 26, 2015; stock options issued in 2006 to purchase
50,000 shares of common stock exercisable at $3.86 per share expiring
February 24, 2006; and 132,883 shares of common stock.
(10) Consists of 10,000 stock options granted in 2004 exercisable at $1.90 per
share of common stock expiring on December 7, 2014; and 10,000 stock
options issued in 2005 to purchase Common Stock at $2.61 per share
expiring December 8, 2015.
-22-
Item 13. Certain Relationships and Related Transactions.
We have employment agreements with certain of our executive officers and
have granted such officers and directors options and warrants to purchase our
common stock, as discussed under the headings, "Item 11. Executive
Compensation," and "Item 12. Security Ownership of Certain Beneficial Owners and
Management," above.
Ransom W. Etheridge, our Secretary, General Counsel and one of our
directors, is an attorney in private practice, who renders corporate legal
services to us from time to time, for which he has received fees totaling
$88,000 in 2005. In addition, Mr. Etheridge serves on the Board of Directors for
which he received Director's Fees of cash and stock valued at $100,000 in 2005.
We loaned $60,000 to Ransom W. Etheridge in November, 2001 for the purpose of
exercising 15,000 class A redeemable warrants. This loan bore interest at 6% per
annum. This loan was granted prior to the enactment of the Sarbanes Oxley Act of
2002 prohibiting such transactions. In lieu of granting Mr. Etheridge a bonus
for outstanding legal work performed on behalf of the Company, the Board of
Directors forgave the loan and accrued interest on February 24, 2006.
Richard Piani, a Director, lives in Paris, France and assisted our
European subsidiaries in their dealings with medical institutions and the
European Medical Evaluation Authority. Mr. Piani assisted us in establishing
clinical trial protocols as well as performed other scientific work for us. The
services provided by Mr. Piani terminated in September 2003. For these services,
Mr. Piani was paid an aggregate of $100,100 for the year ended December 31,
2003.
We paid $18,800, and $7,600 for the years ended December 31, 2003 and
2004, respectively to Carter Realty for the rent of property used by us at
various times in years 2003 and 2004 by us. The property was owned by others,
but was 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 $54,400 for the use of the property at various times in 2005.
Antoni Esteve, one of our former directors, was a Member of the Executive
Committee and Director of Scientific and Commercial Operations of Laboratorios
Del Dr. Esteve S.A. In March 2002, our European subsidiary Hemispherx S.A.
entered into a Sales and Distribution Agreement with Laboratorios Del Dr. Esteve
S.A. In addition, in March 2003, we issued 347,445 shares of our common stock to
Provesan SA, an affiliate of Laboratorios Del Dr. Esteve S.A., in exchange for
1,000,000 Euros of convertible preferred equity certificates of Hemispherx S.A.,
owned by Laboratorios Del Dr. Esteve S.A.
We have engaged the Sage Group, Inc., a health care, technology oriented,
strategy and transaction advisory firm, to assist us in obtaining a strategic
alliance in Japan for the use of Ampligen(R) in treating Chronic Fatigue
Syndrome (CFS) and Avian Flu. R. Douglas Hulse, our President and Chief
Operating Officer, is a member and an executive director of The Sage Group, Inc.
Please see "Employment and Change in Control Agreements" in Item 11. Executive
Compensation above for more information.
ITEM 14. Principal Accounting Fees and Services.
All audit and professional services provided by BDO Seidman, LLP are
approved in advance by the Audit Committee to assure such services do not impair
the auditor's independence from us. The total fees billed by BDO Seidman, LLP
were $226,484 in 2004 and $591,000 in 2005. The following table shows the
aggregate fees billed to us by BDO Seidman, LLP for professional services
rendered during the year ended December 31, 2005.
-23-
Amount ($)
--------------------
Description of Fees 2004 2005*
------------------- -------- ---------
Audit Fees $189,475 $591,000
Audit-Related Fees 37,009 --
Tax Fees -- --
All Other Fees -- --
-------- --------
Total $226,484 $591,000
======== ========
* Fees for 2005 have not yet been finalized.
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 are reasonably
related to the performance of the audit or review of our financial statements.
The Audit Committee has determined that BDO Seidman, LLP's rendering of
these non-audit services is compatible with maintaining auditors independence.
The Board of Directors considers BDO Seidman, LLP to be well qualified to serve
as our independent public accountants. The committee also pre-approved the
charges for services performed in 2005.
The Audit Committee pre-approves all auditing services and the terms
thereof (which may include providing comfort letters in connection with
securities underwriting) and non-audit services (other than non-audit services
prohibited under Section 10A(g) of the Exchange Act or the applicable rules of
the SEC or the Public Company Accounting Oversight Board) to be provided to us
by the independent auditor; provided, however, the pre-approval requirement is
waived with respect to the provisions of non-audit services for us if the "de
minimus" provisions of Section 10A (i)(1)(B) of the Exchange Act are satisfied.
This authority to pre-approve non-audit services may be delegated to one or more
members of the Audit Committee, who shall present all decisions to pre-approve
an activity to the full Audit Committee at its first meeting following such
decision.
-24-
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a) Financial Statements and Schedules - See index to financial statements on
page F-1 of this Annual Report.
All other schedules called for under regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is included in the financial statements or notes thereto.
(b) Exhibits - See exhibit index below.
Except as disclosed in the footnotes, the following exhibits were filed with the
Securities and Exchange Commission as exhibits to our Form S-1 Registration
Statement (No. 33-93314) or amendments thereto and are hereby incorporated by
reference:
Exhibit
No. Description
------- -----------
2.1 First Asset Purchase Agreement dated March 11, 2003, by and between the
Company and ISI.(1)
2.2 Second Asset Purchase Agreement dated March 11, 2003, by and between
the Company and ISI.(1)
3.1 Amended and Restated Certificate of Incorporation of the Company, as
amended, along with Certificates of Designations.
3.1.1 Series E Preferred Stock.
3.2 By-laws of Registrant, as amended.
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.(2)
4.3 Form of 6% Convertible Debenture of the Company issued in March
2003.(1)
4.4 Form of Warrant for Common Stock of the Company issued in March
2003.(1)
4.5 Form of Warrant for Common Stock of the Company issued in June
2003.(3)
4.6 Form of 6% Convertible Debenture of the Company issued in July
2003.(4)
4.7 Form of Warrant for Common Stock of the Company issued in July
2003.(4)
4.8 Form of 6% Convertible Debenture of the Company issued in October 2003.
(5)
4.9 Form of Warrant for Common Stock of the Company issued in October 2003.
(5)
4.10 Form of 6% Convertible Debenture of the Company issued in January 2004.
(6)
4.11 Form of Warrant for Common Stock of the Company issued in January 2004.
(6)
4.12 Form of Warrant for Common Stock of the Company. (9)
4.13 Amendment Agreement, effective October 6, 2005, by and among the
Company and debenture holders.(11) 4.14 Form of Series A amended 7%
Convertible Debenture of the Company (amending Debenture due
October 31, 2005).(11)
4.15 Form of Series B amended 7% Convertible Debenture of the Company
(amending Debenture issued on January 26, 2004 and due January 31,
2006).(11)
4.16 Form of Series C amended 7% Convertible Debenture of the Company
(amending Debenture issued on July 13, 2004 and due January 31,
2006).(11)
-25-
4.17 Form of Warrant issued effective October 6, 2005 for Common Stock of
the Company.(11)
10.1 1990 Stock Option Plan.
10.2 1992 Stock Option Plan.
10.3 1993 Employee Stock Purchase Plan.
10.4 Form of Confidentiality, Invention and Non-Compete Agreement.
10.5 Form of Clinical Research Agreement.
10.6 Form of Collaboration Agreement.
10.7 Amended and Restated Employment Agreement by and between the Company
and Dr. William A. Carter, dated as of July 1, 1993. (7)
10.8 Employment Agreement by and between the Registrant and Robert E.
Peterson, dated April 1, 2001.
10.9 License Agreement by and between the Company and The Johns Hopkins
University, dated December 31, 1980.
10.10 Technology Transfer, Patent License and Supply Agreement by and between
the Company, Pharmacia LKB Biotechnology Inc., Pharmacia
P-LBiochemicals Inc. and E.I. du Pont de Nemours and Company, dated
November 24, 1987.
10.11 Pharmaceutical Use Agreement, by and between the Company and Temple
University, dated August 3, 1988.
10.12 Assignment and Research Support Agreement by and between the Company,
Hahnemann University and Dr. David Strayer, Dr. lsadore Brodsky and Dr.
David Gillespie, dated June 30, 1989.
10.13 Lease Agreement between the Company and Red Gate Limited Partnership,
dated November 1, 1989, relating to the Company's Rockville, Maryland
facility.
10.14 Agreement between the Company and Bioclones (Proprietary) Limited.
10.15 Amendment, dated August 3, 1995, to Agreement between the Company and
Bioclones (Proprietary) Limited (contained in Exhibit 10.14).
10.16 Licensing Agreement with Core BioTech Corp.
10.17 Licensing Agreement with BioPro Corp.
10.18 Licensing Agreement with BioAegean Corp.
10.19 Agreement with Esteve.
10.20 Agreement with Accredo (formerly Gentiva) Health Services.
10.21 Agreement with Biovail Corporation International.
10.22 Forbearance Agreement dated March 11, 2003, by and between ISI, the
American National Red Cross and the Company.(1)
10.23 Forbearance Agreement dated March 11, 2003, by and between ISI, GP
Strategies Corporation and the Company.(1)
10.24 Securities Purchase Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(1)
10.25 Registration Rights Agreement, dated March 12, 2003, by and among the
Company and the Buyers named therein.(1)
10.26 Securities Purchase Agreement, dated July 10, 2003, by and among the
Company and the Buyers named therein.(4)
10.27 Registration Rights Agreement, dated July 10, 2003, by and among the
Company and the Buyers named therein.(4)
10.28 Securities Purchase Agreement, dated October 29, 2003, by and among the
Company and the Buyers named therein.(5)
10.29 Registration Rights Agreement, dated October 29, 2003, by and among the
Company and the Buyers named therein.(5)
10.30 Securities Purchase Agreement, dated January 26, 2004, by and among the
Company and the Buyers named therein.(6)
10.31 Registration Rights Agreement, dated January 26, 2004, by and among the
Company and the Buyers named therein.(6)
10.32 Memorandum of Understanding with Fujisawa. (8)
10.33 Securities Purchase Agreement, dated July 30, 2004, by and among the
Company and the Purchasers named therein.(9)
-26-
10.34 Registration Rights Agreement, dated July 30, 2004, by and among the
Company and the Purchasers named therein. (9)
10.35 Agreement for services of R. Douglas Hulse, (12)
10.36 Amended and Restated Employment Agreement of Dr. William A.
Carter. (10)
10.37 Engagement Agreement with Dr. William A. Carter. (10)
10.38 Amended and restated employment agreement of Dr. William A. Carter (12)
10.39 Amended and restated engagement agreement with Dr. William A.
Carter(12)
10.40 Amended and restated engagement agreement with Robert E. Peterson (12)
10.41 Engagement Agreement with Ransom W. Etheridge (12)
10.42 Change in control agreement with Dr. William A. Carter (12)
10.43 Change in control agreement with Dr. William A. Carter (12)
10.44 Change in control agreement with Robert E. Peterson (12)
10.45 Change in control agreement with Ransom Etheridge (12)
10.46 Supply Agreement with Hollister-Stier Laboratories LLC
10.47 Manufacturing and Safety Agreement with Hyaluron, Inc.
10.48 Common Stock Purchase Agreement, dated July 8, 2005, by and among the
Company and Fusion Capital.(13)
10.49 Registration Rights Agreement, dated July 8, 2005, by and among the
Company and Fusion Capital.(13)
21 Subsidiaries of the Registrant.
23.1 BDO Seidman, LLP consent.(15)
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.(15)
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.(15)
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Executive Officer.(15)
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
from the Company's Chief Financial Officer.(15)
----------
(1) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated March 12, 2003 and is
hereby incorporated by reference.
(2) Filed with the Securities and Exchange Commission on November 20, 2002 as an
exhibit to the Company's Registration Statement on Form 8-A (No. 0-27072) and is
hereby incorporated by reference.
(3) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated June 27, 2003 and is
hereby incorporated by reference.
(4) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated July 14, 2003 and is
hereby incorporated by reference.
-27-
(5) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated October 30, 2003 and is
hereby incorporated by reference.
(6) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated January 27, 2004 and is
hereby incorporated by reference.
(7) Filed with the Securities and Exchange Commission as an exhibit to the
Company's quarterly report on Form 10-Q (No. 1-13441) for the period ended
September 30, 2001 and is hereby incorporated by reference.
(8) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Form S-1 Registration Statement (No. 333-113796) and is hereby
incorporated by reference.
(9) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated August 6, 2004 and is
hereby incorporated by reference.
(10) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated September 15, 2004 and
is hereby incorporated by reference.
(11) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K/A-1 (No. 1-13441) filed on October 28, 2005
and is hereby incorporated by reference.
(12) Filed with the Securities and Exchange Commission as an exhibit to the
Company's annual report on Form 10-K (No. 1-13441) for the year ended December
31, 2004 and is hereby incorporated by reference.
(13) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated September 15, 2005 and
is hereby incorporated by reference.
(14) Filed with the Securities and Exchange Commission as an exhibit to the
Company's Current Report on Form 8-K (No. 1-13441) dated April 12, 2006 and is
hereby incorporated by reference.
(15) Filed herewith.
-28-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amended 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
July 31, 2006
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
of 1934, as amended, this amended 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, July 31, 2006
------------------------------ Chief Executive
William A. Carter, M.D. Officer and Director
/s/ Richard Piani Director July 28, 2006
------------------------------
Richard Piani
/s/ Robert E. Peterson Chief Financial Officer July 31, 2006
------------------------------
Robert E. Peterson
/s/ Ransom Etheridge Secretary And Director July 27, 2006
------------------------------
Ransom Etheridge
/s/ William Mitchell Director July 27, 2006
------------------------------
William Mitchell, M.D., Ph.D.
/s/ Steven Spence Director July 31, 2006
------------------------------
Steven Spence
/s/ Iraj E. Kiani Director July 29, 2006
------------------------------
Iraj E. Kiani, Ph.D.
-29-
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, 2004 (as restated) and 2005 ...................................... F-3
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2005 (as restated for the years
ended December 31, 2003 and 2004) .................................... 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, 2005 (as restated for the years ended December 31, 2003
and 2004) ............................................................. F-5
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2005 (as restated for the years
ended December 31, 2003 and 2004) .................................... F-7
Notes to Consolidated Financial Statements .............................. F-9
Schedule II - Valuation and qualifying Accounts
for each of the years in the three year period
ended December 31, 2005 .............................................. F-65
F-1
Report of Independent Registered Public Accounting Firm
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, 2004 and 2005 and the
related consolidated statements of operations, changes in stockholders' equity
and comprehensive loss and cash flows for each of the three years in the period
ended December 31, 2005. We have also audited the financial statement schedule
listed under Item 15(a). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards 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 and financial statement schedule 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, 2004 and 2005 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein for each of the three years in the period ended December 31,
2005.
As discussed in Note 2, the Company has restated its balance sheet as of
December 31, 2004 and the statements of operations, changes in stockholders
equity and comprehensive loss and cash flows for the years ended December 31,
2003 and 2004.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
Hemispherx Biopharma, Inc.'s internal control over financial reporting as of
December 31, 2005, 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 June 1, 2006 expressed an
unqualified opinion on management's assessment of the effectiveness of internal
control over financial reporting and adverse opinion on the effectiveness of
internal control over financial reporting because of the existence of material
weaknesses.
/s/ BDO SEIDMAN, LLP
Philadelphia, Pennsylvania
June 1, 2006
F-2
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2005
(in thousands)
2004 2005
---------- ---------
(restated)
ASSETS
Current assets:
Cash and cash equivalents (Note 3 & 18) $ 8,813 $ 3,827
Short term investments (Note 3 & 6) 7,924 12,377
Inventories (Note 4) 2,148 1,767
Accounts and other receivables (Note 3) 139 96
Prepaid expenses and other current assets 266 142
--------- ---------
Total current assets 19,290 18,209
--------- ---------
Property and equipment, net (Note 3) 3,303 3,364
Patent and trademark rights, net (Note 3) 908 795
Investment (Note 3) 35 35
Construction in progress (Note 3) -- 821
Deferred financing costs (Note 3) 440 113
Advance receivable (Note 8) 1,300 1,300
Other assets 17 17
--------- ---------
Total assets $ 25,293 $ 24,654
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 526 $ 991
Accrued expenses (Note 7) 1,012 865
Current portion of long-term debt (Notes 3, 8 & 20) 3,818 --
--------- ---------
Total current liabilities 5,356 1,856
--------- ---------
Long-term debt-net of current portion (Notes 3, 8 & 20) 494 4,171
Commitments and contingencies
(Notes 11, 13, 14, 16 and 20)
Stockholders' equity (Notes 9 and 20):
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 100,000,000 shares;
issued and outstanding 49,631,766 and 56,264,155, respectively 50 56
Additional paid-in capital 154,609 166,394
Accumulated other comprehensive loss (10) (171)
Accumulated deficit (135,206) (147,652)
--------- ---------
Total stockholders' equity 19,443 18,627
--------- ---------
Total liabilities and stockholders' equity $ 25,293 $ 24,654
========= =========
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,
---------------------------------------
2003 2004 2005
----------- ----------- -----------
(restated) (restated)
Revenues:
Sales of product net $ 509 $ 1,050 $ 910
Clinical treatment programs 148 179 173
----------- ----------- -----------
Total Revenues: 657 1,229 1,083
Costs and expenses:
Production/cost of goods sold 502 2,112 391
Research and development 3,150 3,842 5,218
General and administrative 4,257 6,164 5,389
----------- ----------- -----------
Total costs and expenses 7,909 12,118 10,998
Write off of investments in unconsolidated
affiliates (Note 3c) -- (373) --
Interest and other income 80 49 590
Interest expense (253) (384) (388)
Financing costs (Note 8) (6,470) (5,290) (2,733)
----------- ----------- -----------
Net loss (13,895) (16,887) (12,446)
Deemed Dividend (Note 8) (1,320) (4,031) --
----------- ----------- -----------
Net loss applicable to common stockholders $ (15,215) $ (20,918) $ (12,446)
=========== =========== ===========
Basic and diluted loss per share $ (.43) $ (.46) $ (.24)
=========== =========== ===========
Weighted average shares outstanding 35,234,526 45,177,862 51,475,192
=========== =========== ===========
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)
See accompanying notes to consolidated financial statements
Common Accumulated
Stock other
Common .001 Additional Comprehensive
Stock Par paid-in Income
Shares Value capital (loss)
---------- ------ ---------- -------------
Balance at December 31, 2002 32,650,178 33 107,155 35
Debt conversion and interest payments 4,334,916 4 6,741 --
Fair value ascribed to debenture beneficial conversion features
and related warrants issued -- -- 7,119 --
Loan settlement costs -- -- 538 --
Deemed dividend upon issuance of inducement warrants -- -- 1,320 --
Warrants exercised 790,745 1 1,234 --
Common stock issued in connection with ISI acquisition 1,068,789 1 1,667 --
Reclassification of redeemable Common Stock in connection with
ISI acquisition -- -- (491) --
Treasury stock purchased -- -- -- --
Treasury Stock retired (339,543) -- (4,272) --
Conversion of minority interest of subsidiary into common stock 347,445 -- 946 --
Stock issued in settlement of debt 215,047 -- 474 --
Stock warrant compensation expense -- -- 237 --
Net comprehensive loss -- -- -- (35)
---------- ---- -------- -----
Balance December 31, 2003 (restated) 39,067,577 39 122,668 --
Treasury shares sold -- -- -- --
Shares issued for:
Payment of accounts payable 127,243 -- 382 --
Original Issue Discount on convertible debt 158,104 -- 465 --
Purchase of building 487,028 1 1,626 --
Conversion of debt 3,691,695 5 7,239 --
Interest on convertible debt 170,524 -- 430 --
Private placement, net of issuance costs 3,617,306 3 6,981 --
Warrants exercised 2,268,586 2 5,091 --
Stock Issued with convertible debt 43,703 -- 45 --
Fair value ascribed to debenture beneficial conversion features
and related warrant issued -- -- 2,481 --
Deemed dividend upon issuance of inducement warrants -- -- 4,031 --
Loan settlement costs -- -- 149 --
Reclassification of redeemable Common Stock in connection with
ISI acquisition -- -- 491 --
Options and warrants issued for services -- -- 2,000 --
Revaluation of redemption obligation -- -- 530 --
Net comprehensive loss -- -- -- (10)
---------- ---- -------- -----
Balance December 31, 2004 (restated) 49,631,766 50 154,609 (10)
========== ==== ======== =====
Shares issued for:
Payment of accounts payable 338,995 -- 413 --
Conversion of debt 1,358,887 1 2,219 --
Warrants converted 5,000 -- 9 --
Interest on convertible debt 255,741 409 -- --
Private placement, net of issuance costs 4,673,766 5 8,015 --
Options and warrants issued for services -- -- 391 --
Conversion price adjustment -- -- 140 --
Discount resulting from debt refinance -- -- 189 --
Net comprehensive loss -- -- -- (161)
---------- ---- -------- -----
Balance December 31, 2005 56,264,155 $ 56 $166,394 $(171)
========== ==== ======== =====
Treasury Total
Accumulated stock Treasury stockholders
deficit shares Stock Treasury
----------- -------- -------- ------------
Balance at December 31, 2002 (99,073) 543,206 (4,520) 3,630
Debt conversion and interest payments -- -- -- 6,745
Fair value ascribed to debenture beneficial conversion features
and related warrants issued -- -- -- 7,119
Loan settlement costs -- -- -- 538
Deemed dividend upon issuance of inducement warrants (1,320) -- -- --
Warrants exercised -- -- -- 1,235
Common stock issued in connection with ISI acquisition -- -- -- 1,668
Reclassification of redeemable Common Stock in connection with
ISI acquisition -- -- -- (491)
Treasury stock purchased -- 43,000 (83) (83)
Treasury Stock retired -- (339,543) 4,144 (128)
Conversion of minority interest of subsidiary into common stock -- -- -- 946
Stock issued in settlement of debt -- (246,220) 457 931
Stock warrant compensation expense -- -- -- 237
Net comprehensive loss (13,895) -- -- (13,930)
--------- -------- ------- --------
Balance December 31, 2003 (restated) (114,288) 443 (2) 8,417
Treasury shares sold -- (443) 2 2
Shares issued for:
Payment of accounts payable -- -- -- 382
Original Issue Discount on convertible debt -- -- -- 465
Purchase of building -- -- -- 1,627
Conversion of debt -- -- -- 7,244
Interest on convertible debt -- -- -- 430
Private placement, net of issuance costs -- -- -- 6,984
Warrants exercised -- -- -- 5,093
Stock Issued with convertible debt -- -- -- 45
Fair value ascribed to debenture beneficial conversion features
and related warrant issued -- -- -- 2,481
Deemed dividend upon issuance of inducement warrants (4,031) -- -- --
Loan settlement costs -- -- -- 149
Reclassification of redeemable Common Stock in connection with
ISI acquisition -- -- -- 491
Options and warrants issued for services -- -- -- 2,000
Revaluation of redemption obligation -- -- -- 530
Net comprehensive loss (16,887) -- -- (16,897)
--------- -------- ------- --------
Balance December 31, 2004 (restated) (135,206) -- -- 19,443
========= ======== ======= ========
Shares issued for:
Payment of accounts payable -- -- -- 413
Conversion of debt -- -- -- 2,220
Warrants converted -- -- -- 9
Interest on convertible debt -- -- 409
Private placement, net of issuance costs -- -- -- 8,020
Options and warrants issued for services -- -- -- 391
Conversion price adjustment -- -- -- 140
Discount resulting from debt refinance -- -- -- 189
Net comprehensive loss (12,446) -- -- (12,607)
--------- -------- ------- --------
Balance December 31, 2005 $(147,652) -- $ -- $ 18,627
========= ======== ======= ========
F-5
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years ended December 31,
----------------------------------
2003 2004 2005
---------- ---------- --------
Cash flows from operating activities: (restated) (restated)
Net loss $(13,895) $(16,887) $(12,446)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation of property and
equipment 80 113 114
Amortization and write off of patent and trademark
rights 127 327 281
Amortization of deferred
financing costs 6,470 5,290 2,733
Write off of Investments in unconsolidated
affiliates
-- 373 --
Stock option and warrant
compensation and service
expense 237 2,000 391
Inventory reserve -- 225 (125)
Interest on Convertible Debt 253 430 409
Changes in assets and liabilities:
Inventory (1,429) 523 505
Accounts and other receivables 1,225 143 43
Prepaid expenses and other
current assets (98) (96) 124
Accounts payable (551) 36 687
Accrued expenses 553 277 53
Other assets 6 6 --
-------- -------- --------
Net cash used in operating
activities (7,022) (7,240) (7,231)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and
equipment, net (19) (150) (175)
Additions to patent and trademark
rights (154) (208) (168)
Construction in progress -- -- (827)
Maturity of short term
investments 520 1,496 7,934
Purchase of short term
investments (1,496) (7,934) (12,548)
Deferred acquisition costs (638) -- --
-------- -------- --------
Net cash used in
Investing Activities (1,787) (6,796) (5,784)
-------- -------- --------
F-6
(CONTINUED)
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Years ended December 31,
----------------------------------
2003 2004 2005
---------- ---------- --------
Cash flows from financing activities: (restated) (restated)
Proceeds from issuance of common
stock, net $ -- $ 6,984 $ 8,020
Deferred financing costs (835) (542) --
Proceeds from long-term borrowing 11,300 7,550 --
Advance receivable (1,300) -- --
Proceeds from exercise of stock
warrants 1,235 5,093 9
Purchase of treasury stock (83) -- --
-------- -------- --------
Net cash provided by financing
Activities 10,317 19,085 8,029
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 1,508 5,049 (4,986)
Cash and cash equivalents at beginning of year
2,256 3,764 8,813
-------- -------- --------
Cash and cash equivalents at end of year
$ 3,764 $ 8,813 $ 3,827
======== ======== ========
Supplemental disclosures of cash flow information:
Issuance of common stock for
accounts payable and accrued
expenses $ 931 $ 382 $ 413
======== ======== ========
Issuance of Common Stock for
Acquisition of ISI assets $ 1,667 $ 1,626 $ --
======== ======== ========
Stock Options and Warrants
Issued for Services $ 237 $ 2,000 $ 391
======== ======== ========
Issuance of Common Stock for
Debt Conversion, Interest
Payments and debt payments $ 6,741 $ 7,669 $ 2,628
======== ======== ========
Common Stock Issued for
Conversion of Minority Interest
in Subsidiary $ 946 -- --
======== ======== ========
See accompanying notes to consolidated financial statements.
F-7
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Business
Hemispherx Biopharma, Inc. and subsidiaries (the Company) is a
biopharmaceutical company engaged in the clinical development, manufacture,
marketing and distribution of new drug entities 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, as a contract researcher
for the National Institutes of Health. 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 chronic diseases. The Company owns a U.S. Food and Drug
Administration ("FDA") approved GMP (good manufacturing practice) manufacturing
facility in New Jersey.
The Company's flagship products include Ampligen(R) and Alferon N
Injection(R). Ampligen(R) is an experimental drug undergoing clinical
development for the treatment of: Myalgic Encephalomyelitis/Chronic Fatigue
Syndrome ("ME/CFS" or "CFS"), and HIV. In August 2004, we completed a Phase III
clinical trial ("AMP 516") treating over 230 ME/CFS patients with Ampligen(R)
and are in the process of preparing a new drug application ("NDA") to be filed
with the FDA.
In March 2004, the Company completed the step-by-step acquisition from
Interferon Sciences, Inc. ("ISI") of ISI's commercial assets, Alferon N
Injection(R) inventory, a worldwide license for the production, manufacture,
use, marketing and sale of Alferon N Injection(R), as well as, a 43,000 square
foot manufacturing facility in New Jersey and the acquisition of all
intellectual property related to Alferon N Injection(R). Alferon N Injection(R)
is a natural alpha interferon that has been approved by the FDA for commercial
sale for the intra-lesional treatment of refractory or recurring external
genital warts in patients 18 years of age or older. The acquisition was
completed in Spring 2004 with the acquisition of all world wide commercial
rights.
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 subsidiaries include Hemispherx Biopharma Europe N.V./S.A. established
in Belgium in 1998 and Hemispherx Biopharma Europe S. A. incorporated in
Luxemburg in 2002, which have limited or no activity. All significant
intercompany balances and transactions have been eliminated in consolidation.
(2) Restatements
(a) Based on SEC guidance presented at the 2005 annual AICPA National
Conference on current SEC and PCAOB developments, the Company
re-evaluated its accounting for its March 2003, July 2003, October
2003, January 2004 and July 2004 Debentures (collectively, "the
Debentures") to determine whether the embedded conversion options
required bifurcation and fair value accounting in accordance with
FASB Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", and EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in a
Company's Own Stock". The Company concluded that bifurcation was not
required and that EITF 00-27: "Application of Issue No. 98-5 to
Certain Convertible Instruments" ("EITF 00-27") should have been
applied. The Company did initially apply EITF 00-27, however as part
of performing an analysis on the guidelines set forth in EITF 00-27
it was determined that the initial accounting treatment for the
Debentures and conversion price resets that was originally applied
and reflected in the financial statements included in the Company's
Annual Reports on Form 10-K for the years ended December 31, 2004
and 2003, and in the Company's Quarterly Reports on Form 10-Q during
the quarterly periods in fiscal 2003, 2004 and 2005 were not
correctly applied and that, therefore, a restatement of the
Company's financial statements for the periods referenced above was
required. To properly account for the initial calculation of the
discount and the conversion price resets triggered upon the issuance
of the issuance of the October 2003 Debenture and the August 2004
Private Placement (See Notes 8 & 9 below for more details on these
resets), it was determined, under guidance from EITF 00-27 that the
debt discount should be restated for the Debentures. The total
impact of this restatement on the Company's statement of operations
was to decrease the net loss applicable to common stockholders for
the year ended December 31, 2004 by $2,959,000 or $0.07 per share,
and to increase the net loss applicable to common stockholders by
$287,000 or $0.01 per share for the year ended December 31, 2003.
F-8
(b) The estimation of fair value ascribed to and the accounting
treatment of the investment banking fees paid to Cardinal Capital,
LLC ("Cardinal") in connection with the Debenture issuances, at
inception, was inaccurately reflected in the financial statements
included in the Company's Annual Report on Form 10-K for the years
ended December 31, 2004 and 2003, and the Company's Quarterly
reports on Form 10-Q during the quarterly periods in fiscal 2003,
2004 and 2005 and as a result a restatement of the Company's
financial statements for the periods referenced above was required.
In connection with the initial recording of the Debentures mentioned
above, it was determined that the fair value of the warrants issued
as investment banking fees paid to Cardinal, be accounted for as a
discount to the Debentures. These investment banking fees should
have been capitalized as deferred financing costs and amortized over
the life of the Debentures or charged to earnings on the earlier
conversion thereof. In addition, the initial calculation of the fair
value of the warrants issued to Cardinal as part of the Debenture
issuances was determined to be computed incorrectly at the time of
issuance. The total impact of this restatement on the Company's
statement of operations was to decrease the net loss applicable to
common stockholders for the year ended December 31, 2004 by $263,000
or $0.01 per share and to increase the net loss applicable to common
stockholders for the year ended December 31, 2003 by $158,000 or
$0.00 per share.
(c) The accounting treatment set forth in FASB Statement No. 123,
"Accounting for Stock-Based Compensation", for the issuance of the
June 2008, May 2009 and June 2009 Warrants (collectively "the
Warrants") (See Note 8 below for more details on these transactions)
that was originally interpreted and reflected in the financial
statements included in our Annual Report on Form 10-K for the years
ended December 31, 2003 and 2004, was not correctly applied and as a
result a restatement of our financial statements for the period
referenced above was required. The Warrants issued as incentive to
exercise prior warrant issuances should be reflected as a deemed
dividend at the date of issuance where previously these warrants
were either recorded as additional debt discount or as a financing
charge at date of issuance. The total impact of this restatement on
our statement of operations was to decrease finance charges for the
years ended December 31, 2003 and 2004 by $1,320,000 and $4,031,000
or $0.04 and $0.08 per share, respectively and increase the net loss
applicable to common stockholders due to the deemed dividend for the
years ended December 31, 2003 and 2004 by $1,320,000 and $4,031,000
or $0.04 and $0.08 per share, respectively.
F-9
As a result of the corrections of the errors described above, the Company
restated its financial statements included in this Annual Report on Form 10-K/A
as follows:
HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES
Audited Consolidated Balance Sheet
(in Thousands)
December 31,
2004 December 31,
As previously 2004
Reported Adjustments Restated
------------- ----------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,813 $ 8,813
Short term investments 7,924 7,924
Inventory 2,148 2,148
Accounts and other receivables 139 139
Prepaid expenses and other current assets 266 266
--------- ---------
Total current assets 19,290 19,290
--------- ---------
Property and equipment, net 3,303 3,303
Patent and trademark rights, net 908 908
Investment 35 35
Deferred financing costs 319 121 (b) 440
Advance receivable 1,300 1,300
Other assets 17 17
--------- ---------
Total assets $ 25,172 121 $ 25,293
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 526 $ 526
Accrued expenses 1,012 1,012
Current portion of long-term debt 3,248 570 (a)(b)(c) 3,818
--------- ---------
Total current liabilities 4,786 570 5,356
--------- ---------
Long-term debt-net of current portion
305 189 (a)(b)(c) 494
Commitments and contingencies
Stockholders' equity:
Preferred stock -- -- --
Common stock 50 50
Additional paid-in capital 158,024 (3,415) (a)(b)(c) 154,609
Accumulated other comprehensive income
(10) (10)
Accumulated deficit (137,983) 2,777 (a)(b)(c) (135,206)
--------- ---------
Total stockholders' equity 20,081 (638) 19,443
--------- ---------
Total liabilities and stockholders' equity
$ 25,172 121 $ 25,293
========= =========
(a) Includes restatement adjustments for the Debentures relating to the
initial recording of and the effect of certain Conversion Price Resets on
the Debentures, as described above.
(b) Includes restatement adjustment for investment banking fees related to
Cardinal, as described above.
(c) Includes restatement adjustments for the issuance of the June 2008, May
2009 and June 2009 warrants as incentive to exercise prior warrant
issuance, as described above.
F-10
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Audited Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31, 2003
December 31,
2003 December 31,
As previously 2003
Reported Adjustments Restated
------------- ----------------- ------------
Revenues:
Sales of product net $ 509 $ 509
Clinical treatment programs 148 148
----------- -----------
Total Revenues: 657 657
Costs and expenses:
Production/cost of goods sold 502 502
Research and development 3,150 3,150
General and administrative 4,257 4,257
----------- -----------
Total costs and expenses 7,909 7,909
Interest and other income 80 80
Interest expense (253) (253)
Financing costs (7,345) 875 (a)(b)(c) (6,470)
----------- ------- -----------
Net loss $ (14,770) 875 (a)(b)(c) $ (13,895)
Deemed dividend -- (1,320) (c) (1,320)
-- ------- -----------
Net loss applicable to common
stockholders $ (14,770) (445) (a)(b)(c) $ (15,215)
=========== ===========
Basic and diluted loss per share
$ (.42) $ (0.01) $ (.43)
=========== ======= ===========
Weighted average shares outstanding
35,234,526 35,234,526
=========== ===========
(a) Includes restatement adjustments for the Debentures relating to the
initial recording of and the effect of certain Conversion Price Resets on
the Debentures, as described above.
(b) Includes restatement adjustment for investment banking fees related to
Cardinal, as described above.
(c) Includes restatement adjustments for the issuance of the June 2008, May
2009 and June 2009 warrants as incentives to exercise prior warrant
issuance, as described above.
F-11
HEMISPHERX BIOPHARMA, INC. AND SUBSIDIARIES
Audited Consolidated Statements of Operations
(in thousands, except share and per share data)
Year Ended December 31, 2004
December 31,
2004 December 31,
As previously 2004
Reported Adjustments Restated
------------- ----------------- ------------
Revenues:
Sales of product net $ 1,050 $ 1,050
Clinical treatment programs 179 179
----------- -----------
Total Revenues: 1,229 1,229
Costs and expenses:
Production/cost of goods sold 2,112 2,112
Research and development 3,842 3,842
General and administrative 6,164 6,164
----------- -----------
Total costs and expenses 12,118 12,118
Equity loss and write off of investments in
unconsolidated affiliates (373) (373)
Interest and other income 49 49
Interest expense (384) (384)
Financing costs (12,543) 7,253 (a)(b)(c) (5,290)
----------- ------- -----------
Net loss $ (24,140) 7,253 $ (16,887)
Deemed dividend -- (4,031) (c) (4,031)
-- ------- -----------
Net loss applicable to common stockholders
$ (24,140) 3,222 $ (20,918)
=========== ===========
Basic and diluted loss per share $ (.53) $ 0.07 $ (.46)
=========== ======= ===========
Weighted average shares outstanding 45,177,862 45,177,862
=========== ===========
(a) Includes restatement adjustments for the Debentures relating to the
initial recording of and the effect of certain Conversion Price Resets on
the Debentures, as described above.
(b) Includes restatement adjustment for investment banking fees related to
Cardinal, as described above.
(c) Includes restatement adjustments for the issuance of the June 2008, May
2009 and June 2009 warrants as incentive to exercise prior warrant
issuance, as described above.
The Company and the Company's audit committee have discussed the above errors
and adjustments with the Company's current independent registered public
accounting firm and have determined that a restatement is necessary for the
periods described above. This Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2005 reflects the changes for the annual results for the
years ended December 31, 2003 and December 31, 2004. The Company will file the
Company's Quarterly Reports on Form 10-Q/A for the quarterly periods ended March
31, 2005, June 30, 2005 and September 30, 2005, which will include the quarters
ended in 2004, as soon as practicable in connection with the restatements
described above.
(3) Summary of Significant Accounting Policies
(a) Cash and Cash Equivalents
Cash equivalents consist of money market certificates and overnight
repurchase agreements collateralized by money market securities with original
maturities of less than three months, with both a cost and fair value of
$8,813,000 and $3,827,000 at December 31, 2004 and 2005, respectively.
F-12
(b) Short-term Investments
Investments with original maturities of more than three months and less
than 12 months and marketable equity securities are considered available for
sale. The investments classified as available for sale include debt securities
and equity securities carried at estimated fair value of $7,924,000 and
$12,377,000 at December 31, 2004 and 2005 respectively. The unrealized gains and
losses are recorded as a component of shareholders' equity.
(c) Investments in unconsolidated affiliates
Investments in companies in which the Company owns 20% or more and not
more than 50% are accounted for using the equity method of accounting.
Investments in companies in which the Company owns less than 20% and does
not exercise a significant influence are accounted for using the cost method of
accounting.
In May 2000, the Company acquired an interest in Chronix Biomedical Corp.
("CHRONIX"). Chronix focuses upon the development of diagnostics for chronic
diseases. The Company issued 100,000 shares of common stock to Chronix toward a
total equity investment of $700,000. Pursuant to a strategic alliance agreement,
the Company provided Chronix with $250,000 for research and development in an
effort to develop intellectual property on potential new products for diagnosing
and treating various chronic illnesses such as ME/CFS. These costs were expensed
as incurred. The strategic alliance agreement provides the Company certain
royalty rights with respect to certain diagnostic technology developed from this
research and a right of first refusal to license certain therapeutic technology
developed from this research. The strategic alliance agreement provides the
Company with a royalty payment of 10% of all net sales of diagnostic technology
developed by Chronix for diagnosing Chronic Fatigue Syndrome, Gulf War Syndrome
and Human Herpes Virus-6 associated diseases. The royalty continues for the
longer of 12 years from September 15, 2000 or the life of any patent(s) issued
with regard to the diagnostic technology. The strategic alliance agreement also
provides the Company with the right of first refusal to acquire an exclusive
worldwide license for any and all therapeutic technology developed by Chronix on
or before September 14, 2012 for treating Chronic Fatigue Syndrome, Gulf War
Syndrome and Human Herpes Virus-6 associated diseases. During the quarters ended
December 31, 2002 and September 30, 2004, the Company recorded a non-cash charge
of $292,000 and $373,000, respectively, with respect to the Company's investment
in Chronix. This impairment reduces the Company's carrying value to reflect a
permanent decline in Chronix's market value based on its then proposed equity
offerings.
(d) Property and Equipment
(in thousands)
December 31,
---------------
2004 2005
------ ------
Land and buildings $3,316 $3,371
Furniture, fixtures, and equipment 786 907
Leasehold improvements 85 85
------ ------
Total property and equipment 4,187 4,363
Less accumulated depreciation and amortization
884 999
------ ------
Property and equipment, net $3,303 $3,364
====== ======
F-13
Property and equipment consist of land, building, furniture, fixtures,
office equipment, and leasehold improvements and 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. Depreciation and amortization expense was $80,000, $113,000
and $114,000 for 2003, 2004 and 2005, respectively.
Construction in progress consists of funds used for the construction and
installation of the Company's Ampligen(R) raw material production line within
the Company's New Jersey facility. As of December 31, 2005, construction in
progress was $821,000. The Company estimates the total cost of establishing the
production line to be $1,900,000.
(e) Patent and Trademark Rights
Patents and trademarks are stated at cost (primarily legal fees) and are
amortized using the straight line method over the established useful life of 17
years. The Company reviews its patents and trademark rights periodically to
determine whether they have continuing value. Such review includes an analysis
of the patent and trademark's ultimate revenue and profitability potential.
Management's review addresses whether each patent continues to fit into the
Company's strategic business plans. During the years ended December 31, 2003,
2004 and 2005, the Company decided not to pursue the technology in certain
countries for strategic reasons and recorded impairment charges of $5,000,
$223,000 and $194,000 respectively. Amortization expense was $122,000, $104,000
and $87,000 in 2003, 2004 and 2005, respectively. The accumulated amortization
as of December 31, 2003, 2004 and 2005 is $2,150,000, $1,807,000 and $1,572,000,
respectively.
As of December 31, 2005, the weighted average remaining life of the
patents and trademarks was 9 years. Amortization of patents and trademarks for
each of the next five years is as follows: 2006 - $86,000, 2007 - $86,000, 2008
- $86,000, 2009 - $86,000 and 2010 - $86,000.
(f) Revenue and License Fee Income
The Company executed a Memorandum of Understanding (MOU) in January 2004
with Astellas Pharma ("Astellas"), formally Fujisawa Deutschland GmbH, a major
pharmaceutical corporation, granting them an exclusive option for a limited
number of months to enter a Sales and Distribution Agreement with exclusive
rights to market Ampligen(R) for ME/CFS in Germany, Austria and Switzerland. The
Company received an initial fee of 400,000 Euros (approximately $497,000 US) in
2004. On November 9, 2004, Astellas exercised their right to terminate the MOU.
The Company did not agree on the process to be utilized in certain European
Territories for obtaining commercial approval for the sale of Ampligen(R) in the
treatment of patients suffering from Chronic Fatigue Syndrome (CFS). Instead of
a centralized procedure, and in order to obtain an earlier commercial approval
of Ampligen(R) in Europe, the Company has determined to follow a decentralized
filing procedure which was not anticipated in the MOU. The Company believed that
it was in the best interest of the Company's stockholders to potentially
accelerate entry into selected European markets whereas the original MOU
specified a centralized registration procedure. Pursuant to the agreement of the
parties the Company refunded 200,000 Euros ($248,000 USD) to Astellas during the
fourth quarter 2004. The Company recorded the remaining 200,000 Euros ($271,000
USD and $241,000 USD) as an accrued liability as of December 31, 2004 and 2005,
respectively.
F-14
Revenue from the sale of Ampligen(R) under cost recovery clinical
treatment protocols approved by the FDA is recognized when the treatment is
provided to the patient.
Revenues from the sale of Alferon N Injection(R) are recognized when the
product is shipped, as title is transferred to the customer. The Company has no
other obligation associated with its products once shipment has occurred.
(g) Net Loss Per Share
Basic and diluted net loss per share is computed using the weighted
average number of shares of common stock outstanding during the period.
Equivalent common shares, consisting of stock options and warrants including the
Company's convertible debentures, amounted to 19,566,217, 20,413,024 and
25,635,142 shares, are excluded from the calculation of diluted net loss per
share for the years ended December 31, 2003, 2004 and 2005, respectively, since
their effect is antidilutive.
(h) Accounting for Income taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws in effect
when the differences are expected to reverse. The measurement of deferred income
tax assets is reduced, if necessary, by a valuation allowance for any tax
benefits, which are not expected to be realized. The effect on deferred income
tax assets and liabilities of a change in tax rates is recognized in the period
that such tax rate changes are enacted.
(i) Comprehensive loss
Comprehensive loss consists of net loss and net unrealized gains (losses)
on securities and is presented in the consolidated statements of changes in
stockholders' equity and comprehensive loss.
(j) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the reporting
period. Actual results could differ from those estimates.
(k) Foreign currency translations
Assets and liabilities of the Company's foreign operations are generally
translated into U.S. dollars at current exchange rates as of balance sheet date.
Revenues and expenses are translated at average exchange rates during each
period. Transaction gains and losses that arise from exchange rate fluctuations
are included in the results of operations as incurred. The resulting translation
adjustments are immaterial for all years presented and are included in interest
and other income on the consolidated statement of operations.
F-15
(l) Recent Accounting Standard and Pronouncements:
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). On April
14, 2005, the Securities and Exchange Commission issued an amendment to Rule
4-01 of Regulation S-X that allows companies to implement SFAS 123R at the
beginning of their next fiscal year, instead of the next reporting period that
begins after June 15, 2005 as originally required. Accordingly, the Company will
adopt SFAS 123R effective January 1, 2006 using the "modified prospective"
method in which compensation cost is recognized beginning with the effective
date based on (a) the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) the requirements of SFAS 123 for all
awards granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date. In addition, the Company expects to continue to
utilize the Black-Scholes option-pricing model, which is an acceptable option
valuation model in accordance with SFAS 123R, to estimate the value of stock
options granted to employees.
Beyond those restricted stock and stock option awards previously granted,
the Company cannot predict with certainty the impact of SFAS 123R on its future
consolidated financial statements as the type and amount of such awards are
determined on an annual basis and encompass a potentially wide range depending
upon the compensation decisions made by the Compensation Committee of the
Company's Board of Directors. SFAS 123R also requires the benefits of tax
deductions in excess of compensation cost recognized in the financial statements
to be reported as a financing cash flow, rather than an operating cash flow as
currently required under Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows" ("SFAS 95"). This requirement, to the extent it
exists, will decrease net operating cash flows and increase net financing cash
flows in periods subsequent to adoption. The Company believes this pronouncement
will have a material impact on its consolidated financial statements.
On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
107") which expresses the view of the SEC Staff regarding the interaction of
SFAS 123R and certain SEC rules and regulations and provides the staff's views
regarding the valuation of share-based payment arrangements. The Company
believes that the views provided in SAB 107 are consistent with the approach
taken in the valuation and accounting associated with share-based compensation
issued in prior periods as well as those issued during 2005.
In June 2005, the FASB's Emerging Issues Task Force ("EITF") issued EITF
Issue No. 05-02 "The Meaning of "Conventional Convertible Debt Instrument" in
EITF Issue 00-19 "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, A Company's Own Stock", which retains the exception
in paragraph 4 of EITF Issue No. 00-19 for conventional debt instruments. Those
instruments in which the holder has an option to convert the instrument into a
fixed number of shares (or a corresponding amount of cash at the issuer's
discretion) and its ability to exercise the option is based on either (a) the
passage of time or (b) a contingent event, should be considered "conventional"
for purposes of applying that exception. The consensus should be applied on a
prospective basis for new or modified instruments starting from the third
quarter of 2005. The adoption of EITF No. 05-02 did not have a material effect
on the Company's consolidated financial statements or results of operations.
F-16
In November 2005, FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"
("FSP FAS 115-1"), which provides guidance on determining when investments in
certain debt and equity securities are considered impaired, whether an
impairment is other-than-temporary, and on measuring such impairment loss. FSP
FAS 115-1 also includes accounting considerations subsequent to the recognition
of an other-than-temporary impairment and requires certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. FSP FAS 115-1 is required to be applied to reporting periods
beginning after December 15, 2005. The Company is required to adopt FSP FAS
115-1 in the first quarter of 2006. The Company does not expect the adoption of
this statement to have a material impact on the Company's consolidated results
of operations or financial condition.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An
amendment of ARB No. 43, Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the
guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing,"
to clarify the accounting for abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage). Additionally, SFAS No.
151 requires that the allocation of fixed production overheads to the cost of
conversion be based on the normal capacity of the production facilities. SFAS
No. 151 is required to be adopted in the first quarter of 2006. The Company has
determined that the adoption of SFAS No. 151 will not have a material impact on
the consolidated financial statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 153 (SFAS 153"), "Exchanges of Non-monetary Assets-an amendment of
APB Opinion No. 29." SFAS 152 addresses the measurement of exchanges of
non-monetary assets. It eliminates the exception from fair value measurement for
non-monetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29 "Accounting for Non-monetary Transactions" and replaces it with
an exception for exchanges that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. As required by
SFAS 153, the Company adopted this new accounting standard effective July 1,
2005. The adoption of SFAS 153 did not have a material impact on the Company's
financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 establishes retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle. SFAS
No. 154 also provides guidance for determining whether retrospective application
is impractical. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. The Company
does not expect that the adoption of SFAS No. 154 will have a material impact on
its results of operations or financial position.
(m) Research and Development Costs
Research and development related to both future and present products are
charged to operations as incurred.
F-17
(n) Stock Based Compensation
The Company follows Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation." We chose to apply Accounting
Principal Board Opinion 25 and related interpretations in accounting for stock
options granted to the Company's employees.
The Company provides pro forma disclosures of compensation expense under
the fair market value method of SFAS No. 123, "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure."
The weighted average assumptions used for the years presented are as follows:
December 31,
---------------------------------------
2003 2004 2005
---------- ------------- ----------
Risk-free interest rate 5.23% 2.25 - 3.4% 4.81%
Expected dividend yield -- -- --
Expected lives 2.5 yrs 5-10 yrs 2.5-5 yrs
Expected volatility 98.07% 68.92 - 71.16% 78.12%
Weighted average fair value of
options and warrants issued
in the years 2003, 2004 and
2005 respectively $1,825,000 $638,000 $1,371,000
Had compensation cost for the Company's option plan been determined using
the fair value method at the grant dates, the effect on the Company's net loss
and loss per share for the years ended December 31, 2003, 2004, and 2005 would
have been as follows:
For the years ended December 31, 2003 2004 2005
-------------------------------- ---------- ---------- --------
(restated) (restated)
(In Thousands except for
per share data)
Net loss applicable to common stockholders,
as reported $(15,215) $(20,918) $(12,446)
Add: Stock based compensation included in net loss
as reported, net of related tax effects -- 1,769 391
Deduct: Stock based compensation determined under
fair value based method for all awards, net of
related tax effects (1,825) (638) (1,371)
-------- -------- --------
Pro forma - net loss $(17,040) $(19,787) $(13,426)
======== ======== ========
Basic and diluted loss
per share - as reported $ (.43) $ (.46) $ (.24)
Basic and diluted loss
per share - pro forma $ (.48) $ (.44) $ (.26)
For stock warrants or options granted to non-employees, the Company measures
fair value of the equity instruments utilizing the Black-Scholes method if that
value is more reliably measurable than the fair value of the consideration or
service received. The Company amortizes such cost over the related period of
service.
F-18
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 compensation expense in 2004 resulted from having a limited number of
shares of Common Stock authorized but not issued or reserved for issuance upon
conversion or exercise of outstanding convertible and exercisable securities
such as debentures, options and warrants prior to the Company's annual meeting
of stockholders in September 2003. Prior to the meeting, to permit consummation
of the sale of the July 2003 Debentures and the related warrants, the Chief
Executive Officer, Dr. Carter, agreed that he would not exercise his warrants or
options unless and until the Company's stockholders approve an increase in the
Company's authorized shares of common stock. For Dr. Carter's waiver of his
right to exercise certain options and warrants prior to approval of the increase
in the Company's authorized shares, the Company agreed to compensate Dr. Carter
and issued Dr. Carter 1,450,000 warrants to purchase common stock at $2.20 per
share in 2003 that vested in the first quarter 2004 upon the second ISI asset
closing. The Company recorded a charge to stock compensation expense of
$1,769,000 for the intrinsic value of these warrants in the first quarter of
2004.
(o) Accounts Receivable
Concentration of credit risk, with respect to accounts receivable, is limited
due to the Company's credit evaluation process. The Company does not require
collateral on its receivables. The Company's receivables primarily consist of
amounts due from wholesale drug companies as of December 31, 2004 and 2005 and
all amounts are deemed collectible. The Company has agreements requiring its
wholesaler drug companies to assess credit worthiness. The Company assesses
collectability monthly by review of the accounts receivable aging report.
(p) Deferred Financing Issuance Costs
Deferred financing issuance costs represent costs incurred by the Company to
issue convertible debt instruments. The costs are being amortized in accordance
with the interest method of accounting over the terms of the debt.
(q) Convertible Securities with Beneficial Conversion Features
The March 2003, July 2003, October 2003, January 2004 and July 2004 Debenture
issuances and related embedded conversion features and warrants issuances were
accounted for in accordance with EITF 98-5: Accounting for convertible
securities with beneficial conversion features or contingency adjustable
conversion and with EITF No. 00-27: Application of issue No. 98-5 to certain
convertible instruments. The Company determined the fair values to be ascribed
to detachable warrants issued with the convertible debentures utilizing the
Black-Scholes method. Discounts derived from determining the beneficial
conversion feature and fair value of the warrants based on the relative fair
value of the proceeds are amortized to financing costs over the remaining life
of the debenture in accordance with the effective interest method of accounting.
The unamortized discount upon the conversion of the debentures is expensed to
financing costs on a pro-rata basis.
F-19
(4) Inventories
The Company uses the lower of first-in, first-out ("FIFO") cost or market
method of accounting for inventory.
Inventories consist of the following:
(in thousands)
December 31,
---------------
2004 2005
------ ------
Raw materials and work in process $1,711 $ 444
Finished goods, net of reserves of
$225,000 and $100,000 at
December 31, 2004 and 2005 437 1,323
------ ------
$2,148 $1,767
====== ======
(5) Acquisition of Assets of Interferon Sciences, Inc.
On March 11, 2003, the Company acquired from ISI, ISI's inventory of
Alferon N Injection(R) and a limited license for the production, manufacture,
use, marketing and sale of this product. As partial consideration, the Company
issued 487,028 shares of its common stock to ISI. Pursuant to their agreements
with ISI, the Company registered these shares for public sale and ISI reported
that it sold all of these shares. The Company also agreed to pay ISI 6% of the
net sales of Alferon N Injection(R).
On March 11, 2003, the Company also entered into an agreement to purchase from
ISI all of its rights to the product and other assets related to the product
including, but not limited to, real estate and machinery. For these assets, the
Company issued to ISI an additional 487,028 shares and issued 314,465 shares and
267,296 shares, respectively to the American National Red Cross and GP
Strategies Corporation, two creditors of ISI. The Company guaranteed the market
value of all but 62,500 of these shares to be $1.59 per share on the termination
date. ISI, GP Strategies and the American National Red Cross reported that they
sold all of their shares.
Pursuant to the acquisition agreement, the Company satisfied other liabilities
of ISI which were past due and secured by a lien on ISI's real estate and pays
ISI a 6% royalty on the net sales of products containing natural alpha
interferon.
On May 30, 2003, the Company issued the shares to GP Strategies and the American
National Red Cross. Pursuant to the Company's agreements with ISI and these two
creditors, the Company registered the foregoing shares for public sale. As a
result at December 31, 2003 the guaranteed value of these shares ($491,000),
which had not been sold by these two creditors, were reclassified to redeemable
common stock. At December 31, 2004, all shares had been sold by these two
creditors and the redeemable common stock was reclassified to equity.
On November 6, 2003, the Company acquired and subsequently paid, the outstanding
ISI property tax lien certificates in the aggregate amount of $457,000 from
certain investors. These tax liens were issued for property taxes and utilities
due for 2000, 2001 and 2002.
In March 2004, the Company issued 487,028 shares to ISI to complete the
acquisition of the balance of ISI's rights to market its product as well as its
production facility in New Brunswick, New Jersey. ISI has sold all of its
shares. The aggregated cost of the land and buildings was approximately
$3,316,000. The cost of the land and buildings was allocated as follows:
F-20
Land $ 423,000
Buildings 2,893,000
----------
Total cost $3,316,000
==========
The Company accounted for these transactions as a Business Combination under
SFAS No. 141 Accounting for Business Combinations.
The following table represents the audited pro forma results of operations
as though the ISI acquisitions had occurred on January 1, 2003.
Year Ended December 31,
2003
-----------------------
(in thousands except
for share data)
Net revenues $ 899
Expenses, as restated (15,340)
Net Loss, as restated (14,441)
Deemed dividend (1,320)
Net loss applicable to common stockholders (15,761)
Basic and diluted loss per share $ (.45)
-----------
Weighted average shares outstanding 35,326,594
===========
(6) Short-term investments:
Securities classified as available for sale consisted of:
December 31, 2004
------------------------ Unrealized
Market gain Maturity
Name of security Cost value (loss) Date
------------------------- ----------- ---------- -------- --------------
General Motors $ 988,000 $ 991,000 $ 3,000 May, 2005
Ford Motor Credit 3,194,000 3,142,000 (52,000) February, 2006
General Motors 3,655,000 3,591,000 (64,000) January, 2006
Accrued interest acquired 97,000 200,000 103,000
---------- ---------- --------
$7,934,000 $7,924,000 $(10,000)
========== ========== ========
No investment securities were pledged to secure public funds at December 31,
2004.
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at December 31, 2004.
Less than 12 months 12 months or longer Total
----------------------- ----------------------- -----------------------
Number of Unrealized Unrealized Unrealized
Name of security Securities Fair value loss Fair value loss Fair value loss
---------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Ford Motor
Credit 1 $3,142,000 $ -- $-- $-- $-- $--
General Motors 1 3,591,000 -- -- -- -- --
--- ---------- --------- --- --- --- ---
Total temporary
impairment
securities 2 $6,733,000 (116,000) -- -- -- --
=== ========== ========= === === === ===
F-21
In management's opinion, the unrealized losses reflect changes in interest rates
subsequent to the acquisition of specific securities. There are two securities
in the less than 12 month category.
The Company has the ability to hold these securities until maturity or market
price recovery; therefore, management believes that the unrealized losses
represent temporary impairment of the securities.
December 31, 2005
--------------------------- Unrealized Maturity
Name of security Cost Market value gain (loss) date
----------------------------- ------------ ------------ ----------- ---------------
Ford Motor Credit $ 3,194,000 $ 3,043,000 $(151,000) February, 2006
General Motors 3,655,000 3,497,000 (158,000) January, 2006
General Electric 791,000 790,000 (1,000) April, 2006
American General Finance 788,000 787,000 (1,000) May, 2006
LaSalle Bank Corp. 784,000 782,000 (2,000) June, 2006
Prudential Corp. 783,000 781,000 (2,000) July, 2006
Federal Home Loan 781,000 780,000 (1,000) July, 2006
General Electric 775,000 774,000 (1,000) September, 2006
AIG Discount Commercial Paper 946,000 943,000 (3,000) September, 2006
Accrued interest acquired 51,000 200,000 149,000
----------- ----------- ---------
$12,548,000 $12,377,000 $(171,000)
=========== =========== =========
No investment securities were pledged to secure public funds at December 31,
2005.
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at December 31, 2005.
Less than 12 months 12 months or longer Total
----------------------- ----------------------- ------------------------
Number of Unrealized Unrealized Unrealized
Name of security Securities Fair value loss Fair value loss Fair value loss
------------------ ---------- ---------- ---------- ---------- ---------- ----------- ----------
Ford Motor
Credit 1 $ -- $ -- $3,043,000 $(151,000) $ 3,043,000 $(151,000)
General Motors 1 -- -- 3,497,000 (158,000) 3,497,000 (158,000)
Accrued
interest -- -- 200,000 149,000 200,000 149,000
acquired
General Electric 2 1,564,000 (2,000) -- -- 1,564,000 (2,000)
American
General Finance 1 787,000 (1,000) -- -- 787,000 (1,000)
LaSalle Bank
Corp 1 782,000 (2,000) -- -- 782,000 (2,000)
Prudential Corp. 1 781,000 (2,000) -- -- 781,000 (2,000)
Federal Home
Loan 1 780,000 (1,000) -- -- 780,000 (1,000)
AIG Discount
Commercial Paper 1 943,000 (3,000) -- -- 943,000 (3,000)
--- ---------- -------- ---------- --------- ----------- ---------
Total temporary
impairment 9 $5,637,000 $(11,000) $6,740,000 $(160,000) $12,377,000 $(171,000)
securities
=== ========== ======== ========== ========= =========== =========
In management's opinion, the unrealized losses reflect changes in interest rates
subsequent to the acquisition of specific securities. There are seven securities
in the less than 12 months category and two in the more than a twelve month
category.
The Company has the ability to hold these securities until maturity or market
price recovery; therefore, management believes that the unrealized losses
represent temporary impairment of the securities.
F-22
(7) Accrued Expenses
Accrued expenses at December 31, 2004 and 2005 consists of the following:
(in thousands)
December 31,
--------------
2004 2005
------ -----
Compensation 385 337
Interest 112 91
Commissions and royalties 47 14
Professional fees 50 42
Other expenses 147 140
Other liability 271 241
------ ----
$1,012 $865
====== ====
(8) Debenture Financing
Long term debt consists of the following:
(in thousands)
--------------------------------------
December 31, 2004 December 31, 2005
----------------- -----------------
(Restated)
October 2003 $ 2,071 $2,071
January 2004 3,083 1,365
July 2004 2,000 1,500
------- ------
Total 7,154 4,936
Less Discounts (2,842) (765)
------- ------
Balance 4,312 4,171
Less Current Portion of
long-term debt (net
of discounts of $2,377)
3,818 --
------- ------
Total long-term debt $ 494 $4,171
======= ======
As of December 31, 2004, the Company made installment payments of $777,777
and the investors converted an aggregate $13,062,328 principal amount of debt
from the debentures as noted below:
Original Debt Installment Remaining Common Shares Common Shares
Principal Conversion payments in Principal issued for issued in
Debenture Amount to Common Shares Common Shares Amount Conversion installments
------------ ----------- ---------------- ------------- ---------- ------------- -------------
March 2003 $ 5,426,000 $ 5,426,000 $ -- $ -- 3,716,438 --
July 2003 5,426,000 5,426,000 -- -- 2,870,900 --
October 2003 4,142,357 2,071,178 -- 2,071,179 1,025,336 --
January 2004 4,000,000 139,150 777,777 3,083,073 55,000 358,932
July 2004 2,000,000 -- -- 2,000,000 -- --
Totals $20,994,357 $13,062,328 $777,777 $7,154,252 7,667,674 358,932
F-23
As of December 31, 2005, the Company made installment payments of
$2,388,888 and investors converted an aggregate $13,669,688 principal amount of
debt from the debentures as noted below:
Original Debt Installment Remaining Common Shares Common Shares
Principal Conversion payments in Principal issued for issued in
Debenture Amount to Common Shares Common Shares Amount Conversion installments
------------ ----------- ---------------- ------------- ---------- ------------- -------------
Mar 2003 $ 5,426,000 $ 5,426,000 $ -- $ -- 3,716,438 --
Jul 2003 5,426,000 5,426,000 -- -- 2,870,900 --
Oct 2003 4,142,357 2,071,178 -- 2,071,179 1,025,336 --
Jan 2004 4,000,000 746,510 1,888,888 1,364,602 347,000 1,094,149
Jul 2004 2,000,000 -- 500,000 1,500,000 -- 331,669
Totals $20,994,357 $13,669,688 $2,388,888 $4,935,781 7,959,674 1,425,818
March 2003 Debentures
On March 12, 2003, the Company issued an aggregate of $5,426,000 in
principal amount of 6% Senior Convertible Debentures due January 2005 (the
"March 2003 Debentures") and an aggregate of 743,288 warrants to two investors
in a private placement for aggregate gross proceeds of $4,650,000. Pursuant to
the terms of the March 2003 Debentures, $1,550,000 of the proceeds from the sale
of the March 2003 Debentures was held back and to be released to the Company if,
and only if, the Company acquired ISI's facility with in a set timeframe (see
Note 5 above). These funds were released to the Company in July 2003 although
the Company had not acquired ISI's facility at that time. The Company recorded
an additional debt discount of $259,000 upon receiving the held back proceeds of
$1,550,000 in July 2003. The March 2003 Debentures were to mature on January 31,
2005 and bore interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest were valued at 95% of the average
closing price of the common stock during the five consecutive business days
ending on the third business day immediately preceding the applicable interest
payment date. Pursuant to the terms and conditions of the March 2003 Debentures,
the Company pledged all of the Company's assets, other than the Company's
intellectual property, as collateral and was subject to comply with certain
financial and negative covenants, which included but were not limited to the
repayment of principal balances upon achieving certain revenue milestones (see
"Collateral and Financial Covenants" below).
The March 2003 Debentures were convertible at the option of the investors
at any time through January 31, 2005 into shares of the Company's common stock.
The conversion price under the March 2003 Debentures was fixed at $1.46 per
share, subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect. In addition, in the event that
the Company did pay the redemption price at maturity, the Debenture holders, at
their option, could have converted the balance due at the lower of (a) the
conversion price then in effect and (b) 95% of the lowest closing sale price of
the Company's common stock during the three trading days ending on and including
the conversion date.
F-24
The investors also received detachable Warrants to acquire at any time
through March 12, 2008 an aggregate of 743,288 shares of common stock at a price
of $1.68 per share (the "March 2008 Warrants"). As of December 31, 2005 all of
these warrants have been exercised.
Pursuant to the Company's agreement with these investors, as discussed
below in "Registration Rights Agreements"), the Company registered the shares
issuable upon conversion of the March 2003 Debentures and upon exercise of the
June 2008 Warrants for public sale.
The March 2003 Debentures, were recorded at a discount on issuance and
with an original issue discount of approximately $2,098,000 and $776,000,
respectively, due to ascribing value to the beneficial conversion feature and
fair value of warrants based on the relative fair value of the proceeds.
The conversion option and detachable warrant carry registration rights and
a feature that in certain circumstances, deemed in the control of the Company,
could require partial settlement of the conversion options to be in cash. In
addition the March 2003 Debentures include other features including mandatory
conversion option and optional redemption rights if contingent transactions
occur. To determine whether the March 2003 Debentures had embedded derivatives,
including the conversion option, that required bifurcation and fair value
accounting, the Company analyzed the terms of the debentures in accordance with
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock" ("EITF
00-19"). The Company concluded that bifurcation was not required for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27") was the appropriate accounting to be
applied. The warrants were deemed to be permanent equity. The mandatory
conversion option and optional redemption rights were deemed to be derivatives
requiring bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these derivatives that showed the fair value to be
immaterial at inception and for each subsequent reporting period.
On June 25, 2003, the Company issued to each of the March 2003 Debenture
holders warrants to acquire at any time through June 25, 2008 an aggregate of
1,000,000 shares of common stock at a price of $2.40 per share (the "June 2008
Warrants"). These warrants were issued as incentive for the Debenture holders to
exercise prior warrant issuances and were fair valued utilizing the
Black-Scholes Method at $1,320,000. This issuance, as restated (See Note 2), was
reflected as a deemed dividend and a related increase to additional paid in
capital.
The investors exercised all 743,288 of the March 2008 Warrants in July
2003 which produced gross proceeds in the amount of approximately $1,249,000.
Pursuant to the Company's agreement with the Debenture holders, as discussed
below in "Registration Rights Agreements"), the Company registered the shares
issuable upon exercise of these June 2008 Warrants for public sale.
F-25
On May 14, 2004, in consideration for the March 2003 Debenture holders'
exercise of all of the June 2008 Warrants, the Company issued to the holders
warrants (the "May 2009 Warrants") to purchase an aggregate of 1,300,000 shares
of the Company's common stock. The Company issued 1,000,000 shares of common
stock and received gross proceeds of $2,400,000 from the exercise of the June
2008 Warrants.
Pursuant to the Company's agreement with the holders, as discussed below
in "Registration Rights Agreements", the Company registered the shares issuable
upon exercise of the May 2009 Warrants for public sale.
The May 2009 Warrants are to acquire at any time commencing on November
14, 2004 through April 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $4.50 per share. This warrant issuance, as restated, was fair
valued using the Black-Scholes Method, and was reflected as a deemed dividend of
approximately $2,355,000 during the second quarter of 2004. The exercise price
(and the reset price) under the May 2009 Warrants also is subject to adjustments
for anti-dilution protection similar to those in the other Warrants.
Notwithstanding the foregoing, the exercise price as reset or adjusted for
anti-dilution, will in no event be less than $4.008 per share. Upon completion
of the August 2004 Private Placement (see Note 9), the exercise price was
lowered to $4.008 per share. On May 14, 2005, the exercise price of these May
2009 Warrants was set to reset to the lesser of the exercise price then in
effect or a price equal to the average of the daily price of the common stock
between May 15, 2004 and May 13, 2005; however, since the exercise price was
previously set to the floor price of $4.008 per share this provision did not
impact these warrants.
As of December 31, 2003, the investors had converted the total $5,426,000
principal of the March 2003 Debentures into 3,716,438 shares of the Company's
common stock. Financing costs and interest expense incurred for the year ended
December 31, 2003, on the March 2003 Debenture amounted to $2,874,000 and
$111,000, respectively. The interest due on this debenture was paid in cash of
$17,000 with $94,000 being paid by the issuance of shares of the Company's
common stock.
July 2003 Debentures
On July 10, 2003, the Company issued an aggregate of $5,426,000 in
principal amount of 6% Senior Convertible Debentures due July 31, 2005 (the
"July 2003 Debentures") and an aggregate of 507,102 Warrants (the "July 2008
Warrants") in a private placement for aggregate proceeds of $4,650,000. At this
time, the $1,550,000 of proceeds from the March 2003 Debentures previously held
back from the Company was released to the Company. However, pursuant to the
terms of the July 2003 Debentures, $1,550,000 of the proceeds from the sale of
the July 2003 Debentures was held back and to be released to the Company if, and
only if, the Company acquired ISI's facility with in a set timeframe (see Note 5
above). These funds were released to the Company in October 2003 although the
Company had not acquired ISI's facility at that time. The Company recorded an
additional debt discount of $259,000 upon receiving the held back proceeds of
$1,550,000 in October 2003. The July 2003 Debentures were to mature on July 31,
2005 and bore interest at 6% per annum, payable quarterly in cash or, subject to
satisfaction of certain conditions, common stock. Any shares of common stock
issued to the investors as payment of interest were valued at 95% of the average
closing price of the common stock during the five consecutive business days
ending on the third business day immediately preceding the applicable interest
payment date. Pursuant to the terms and conditions of the July 2003 Debentures,
the Company pledged all of the Company's assets, other than the Company's
intellectual property, as collateral and was subject to comply with certain
financial and negative covenants, which included but were not limited to the
repayment of principal balances upon achieving certain revenue milestones (see
"Collateral and Financial Covenants" below).
F-26
The July 2003 Debentures were convertible at the option of the investors
at any time through July 31, 2005 into shares of the Company's common stock. The
conversion price under the July 2003 Debentures was fixed at $2.14 per share;
however, as part of the subsequent debenture placement closed on October 29,
2003 (see below), the conversion price under the July 2003 Debentures was
lowered to $1.89 per share. The conversion price was subject to adjustment for
anti-dilution protection for issuance of common stock or securities convertible
or exchangeable into common stock at a price less than the conversion price then
in effect. In addition, in the event that the Company did pay the redemption
price at maturity, the Debenture holders, at their option, could have converted
the balance due at the lower of (a) the conversion price then in effect and (b)
95% of the lowest closing sale price of the Company's common stock during the
three trading days ending on and including the conversion date. In 2003, the
Company recorded a debt discount of approximately $741,000 upon the conversion
price reset to $1.89 per share. The additional debt discount is amortized over
the remaining life of these Debenture or, in the event of a conversion, written
off to financing costs on a pro-rata basis.
The July 2008 Warrants received by the investors, as amended, were
exercisable for an aggregate of 507,102 shares of common stock at a price of
$2.46 per share. These Warrants, as amended, did not result in any additional
debt. These Warrants were exercised in July 2004 which produced gross proceeds
in the amount of $1,247,000.
Pursuant to the Company's agreement with the holders, as discussed below
in "Registration Rights Agreements", the Company registered the shares issuable
upon conversion of the July 2003 Debentures and upon exercise of the July 2008
Warrants for public sale.
The July 2003 Debentures were recorded at a discount on issuance and with
an original issue discount of approximately $2,280,000 and $517,000,
respectively, due to ascribing value to the beneficial conversion feature and
fair value of warrants based on the relative fair value of the proceeds.
The conversion option and detachable warrant carry registration rights and
a feature that in certain circumstances, deemed in the control of the Company,
could require partial settlement of the conversion options to be in cash. In
addition, the July 2003 Debentures include other features including mandatory
conversion option and optional redemption rights if contingent transactions
occur. To determine whether the July 2003 Debentures had embedded derivatives,
including the conversion option, that required bifurcation and fair value
accounting, the Company analyzed the terms of the debentures in accordance with
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock" ("EITF
00-19"). The Company concluded that bifurcation was not required for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27") was the appropriate accounting to be
applied. The warrants were deemed to be permanent equity. The mandatory
conversion option and optional redemption rights were deemed to be derivatives
requiring bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these derivatives that showed the fair value to be
immaterial at inception and for each subsequent reporting period.
F-27
During 2003, the investors had converted approximately $1,169,000
principal of the July 2003 Debentures into 618,478 shares of the Company's
Common Stock.
During 2004, the investors had converted $4,257,071 principal of the July
2003 Debentures into 2,252,417 shares of the Company's Common Stock. As of
December 31, 2004, the investors had converted the total $5,426,000 principal of
the July 2003 Debentures into 2,870,900 shares of common stock.
The Company recorded financing costs for the years ended December 31, 2004
and 2003, with regard to the July 2003 Debentures of $2,301,000 and $1,496,000,
respectively. Interest incurred for the years ended December 31, 2003 and 2004
was $117,000 and $3,000, respectively.
October 2003 Debentures
On October 29, 2003, the Company issued an aggregate of $4,142,357 in
principal amount of 6% Senior Convertible Debentures due October 31, 2005 (the
"October 2003 Debentures") and an aggregate of 410,134 Warrants (the "October
2008 Warrants") in a private placement for aggregate gross proceeds of
$3,550,000. Pursuant to the terms of the October 2003 Debentures, $1,550,000 of
the proceeds from the sale of the October 2003 Debentures were held back and
were to be released to the Company if, and only if, the Company acquired ISI's
facility within 90 days of January 26, 2004 and provided a mortgage on the
facility as further security for the October 2003 Debentures (see Note 5 above).
In April 2004, the Company acquired the facility and the Company subsequently
provided the mortgage of the facility to the Debenture holders and the above
funds were released. The Company recorded an additional debt discount of
$259,000 upon receiving these held back proceeds. The October 2003 Debentures
were to mature on October 31, 2005 and bore interest at 6% per annum, payable
quarterly in cash or, subject to satisfaction of certain conditions, common
stock. Any shares of common stock issued to the investors as payment of interest
are to be valued at 95% of the average closing price of the common stock during
the five consecutive business days ending on the third business day immediately
preceding the applicable interest payment date. Pursuant to the terms and
conditions of the October 2003 Debentures, the Company pledged all of the
Company's assets, other than the Company's intellectual property, as collateral
and was subject to comply with certain financial and negative covenants, which
included but were not limited to the repayment of principal balances upon
achieving certain revenue milestones (see "Collateral and Financial Covenants"
below).
The October 2003 Debentures are convertible at the option of the investors
at any time through October 31, 2005 into shares of the Company's common stock.
The conversion price under the October 2003 Debentures is fixed at $2.02 per
share, subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect. In addition, in the event that
the Company does not pay the redemption price at maturity, the Debenture
holders, at their option, may convert the balance due at the lower of (a) the
conversion price then in effect and (b) 95% of the lowest closing sale price of
the Company's common stock during the three trading days ending on and including
the conversion date.
F-28
The October 2008 Warrants, as amended, received by the investors were to
acquire an aggregate of 410,134 shares of common stock at a price of $2.32 per
share. These Warrants were exercised in July 2004 which produced gross proceeds
in the amount of approximately $952,000.
Pursuant to the Company's agreement with the holders, as discussed below
in "Registration Rights Agreements", the Company registered the shares issuable
upon conversion of the October 2003 Debentures and upon exercise of the October
2008 Warrants for public sale.
The October 2003 Debentures were recorded at a discount on issuance and
with an original issue discount of $2,000,000 and $333,000, respectively, due to
ascribing value to the beneficial conversion feature and fair value of warrants
based on the relative fair value of the proceeds.
The conversion option and detachable warrant carry registration rights and
a feature that in certain circumstances, deemed in the control of the Company,
could require partial settlement of the conversion options to be in cash. In
addition, the October 2003 Debentures include other features including mandatory
conversion option and optional redemption rights if contingent transactions
occur. To determine whether the October 2003 Debentures had embedded
derivatives, including the conversion option, that required bifurcation and fair
value accounting, the Company analyzed the terms of the debentures in accordance
with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock" ("EITF
00-19"). The Company concluded that bifurcation was not required for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27") was the appropriate accounting to be
applied. The warrants were deemed to be permanent equity. The mandatory
conversion option and optional redemption rights were deemed to be derivatives
requiring bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these derivatives that showed the fair value to be
immaterial at inception and for each subsequent reporting period.
In October 2005, the Company entered into an amendment agreement with the
October 2003 Debenture holders to amend the maturity date from October 31, 2005
to June 30, 2007, and increase the interest rate from 6% to 7% (see "Debenture
Agreement Amendment" below for more details).
On July 13, 2004, in consideration for the Debenture holders' exercise of
all of the July 2003 ("July 2008 Warrants") and October 2003("October 2008
Warrants") Warrants amounting to approximately $2,199,000 in gross proceeds, the
Company issued to these holders warrants (the "June 2009 Warrants") to purchase
an aggregate of 1,300,000 shares of common stock. The Company recorded charges
associated with the issuance of these warrants, as restated, fair valued using
the Black-Scholes Method, at $1,676,000, which has been reflected as a deemed
dividend.
Pursuant to the Company's agreement with the holders, as discussed below
in "Registration Rights Agreements", the Company registered the shares issuable
upon exercise of these Warrants for public sale.
The June 2009 Warrants are to acquire at any time commencing on January
13, 2005 through June 30, 2009 an aggregate of 1,300,000 shares of common stock
at a price of $3.75 per share. On July 13, 2005, the exercise price of these
June 2009 Warrants was reset to $3.33, the lesser of the exercise price then in
effect or a price equal to the average of the daily price of the common stock
between July 14, 2004 and July 12, 2005. The exercise price (and the reset
price) under the June 2009 Warrants also is subject to adjustments for
anti-dilution protection similar to those in the other Warrants. Notwithstanding
the foregoing, the exercise price as reset or adjusted for anti-dilution, will
in no event be less than $3.33 per share. Upon completion of the August 2004
Private Placement (see below), the exercise price was lowered to $3.33 per
share. The Company agreed to register the shares issuable upon exercise of the
June 2009 Warrants pursuant to substantially the same terms as the registration
rights agreements between the Company and the holders. Pursuant to this
obligation, the Company has registered the shares.
F-29
The Company has paid $1,300,000 into the debenture cash collateral account
as required by the terms of the October 2003 Debentures. The amounts paid
through December 31, 2005 have been accounted for as advances receivable and are
reflected as such on the accompanying balance sheet as of December 31, 2005. The
cash collateral account provides partial security for repayment of the
outstanding principal and accrued interest on the Debentures in the event of
default.
As of December 31, 2005, the investors had converted $2,071,178 principal
amount of the October 2003 Debenture into 1,025,336 shares of Common Stock. The
remaining balance of $2,071,178 is convertible into 1,025,336 shares of common
stock.
The Company recorded financing costs for the years ended December 31,
2003, 2004 and 2005, with regard to the October 2003 Debentures of $361,000,
$1,366,000 and $865,000, respectively. Interest expense for the years ended
December 31, 2005, 2004 and 2003, with regard to the October 2003 Debentures was
$129,000, $118,000 and $24,000, respectively.
January 2004 Debentures
On January 26, 2004, the Company issued an aggregate of $4,000,000 in
principal amount of 6% Senior Convertible Debentures due January 31, 2006 (the
"January 2004 Debentures"), an aggregate of 790,514 warrants (the "July 2009
Warrants") and 158,104 shares of common stock, and Additional Investment Rights
(to purchase up to an additional $2,000,000 principal amount of January 2004
Debentures commencing in six months) in a private placement for aggregate net
proceeds of $3,695,000. The January 2004 Debentures were to mature on January
31, 2006 and bear interest at 6% per annum, payable quarterly in cash or,
subject to satisfaction of certain conditions, common stock. As discussed below,
the maturity date and interest rate were amended. Any shares of common stock
issued to the investors as payment of interest shall be valued at 95% of the
average closing price of the common stock during the five consecutive business
days ending on the third business day immediately preceding the applicable
interest payment date. Pursuant to the terms of the January 2004 Debentures,
commencing July 26, 2004, the Company began to repay the then outstanding
principal amount under the Debentures in monthly installments amortized over 18
months in cash or, at the Company's option, in shares of common stock. Any
shares of common stock issued to the investors as installment payments shall be
valued at 95% of the average closing price of the common stock during the 10-day
trading period commencing on and including the eleventh trading day immediately
preceding the date that the installment is due. Pursuant to the terms and
conditions of the January 2004 Debentures, the Company pledged all of the
Company's assets, other than the Company's intellectual property, as collateral
and was subject to comply with certain financial and negative covenants, which
included but were not limited to the repayment of principal balances upon
achieving certain revenue milestones (see "Collateral and Financial Covenants"
below).
F-30
The January 2004 Debentures are convertible at the option of the investors
at any time through January 31, 2006 into shares of the Company's common stock.
The conversion price under the January 2004 Debentures was fixed at $2.53 per
share, subject to adjustment for anti-dilution protection for issuance of common
stock or securities convertible or exchangeable into common stock at a price
less than the conversion price then in effect. In addition, in the event that
the Company does not pay the redemption price at maturity, the Debenture
holders, at their option, may convert the balance due at the lower of (a) the
conversion price then in effect and (b) 95% of the lowest closing sale price of
the Company's common stock during the three trading days ending on and including
the conversion date. Upon completion of the August 2004 Private Placement (see
Note 9), the conversion price was lowered to $2.08 per share. The Company
recorded an additional debt discount as restated (see Note 2), of approximately
$915,000 due to this conversion price reset.
In October 2005, the Company entered into an amendment agreement with the
January 2004 Debenture holders to amend the maturity date from October 31, 2005
to June 30, 2007, and increase the interest rate from 6% to 7% (see "Debenture
Agreement Amendment" below for more details).
There are two classes of July 2009 Warrants received by the Investors:
Class A and Class B. The Class A warrants are to acquire any time from July 26,
2004 through July 26, 2009 an aggregate of up to 395,257 shares of common stock
at a price of $3.29 per share. The Class B warrants are to acquire any time from
July 26, 2004 through July 26, 2009 an aggregate of up to 395,257 shares of
common stock at a price of $5.06 per share. On January 27, 2005, the exercise
price of these July 2009 Class A and Class B Warrants were reset to the lesser
of their respective exercise price then in effect or a price equal to the
average of the daily price of the common stock between January 27, 2004 and
January 26, 2005. The exercise price (and the reset price) under the July 2009
Warrants also is subject to similar adjustments for anti-dilution protection.
Notwithstanding the foregoing, the exercise prices as reset or adjusted for
anti-dilution, will in no event be less than $2.58 per share. Upon completion of
the August 2004 Private Placement (see Note 9), the exercise price was lowered
to $2.58 per share.
Pursuant to the Company's agreement with these investors, as discussed
below in "Registration Rights Agreements"), the Company registered the shares
issuable upon conversion of the January 2004 Debentures and upon exercise of the
July 2009 Warrants for public sale.
The January 2004 Debentures were recorded at a discount on issuance and
with an original issue discount of $366,000 and $465,000, respectively, due to
ascribing value to the beneficial conversion feature and fair value of warrants
based on the relative fair value of the proceeds.
The conversion option and detachable warrant carry registration rights and
a feature that in certain circumstances, deemed in the control of the Company,
could require partial settlement of the conversion options to be in cash. In
addition, the January 2004 Debentures include other features including mandatory
conversion option and optional redemption rights if contingent transactions
occur. To determine whether the January 2004 Debentures had embedded
derivatives, including the conversion option, that required bifurcation and fair
value accounting, the Company analyzed the terms of the debentures in accordance
with FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock" (EITF
"00-19"). The Company concluded that bifurcation was not required for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27") was the appropriate accounting to be
applied. The warrants were deemed to be permanent equity. The mandatory
conversion option and optional redemption rights were deemed to be derivatives
requiring bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these derivatives that showed the fair value to be
immaterial at inception and for each subsequent reporting period.
F-31
Section 713 of the American Stock Exchange Company Guide
Section 713 of the American Stock Exchange ("AMEX") Company Guide provides
that the Company must obtain stockholder approval before issuance, at a price
per share below market value, of common stock, or securities convertible into
common stock, equal to 20% or more of the Company's outstanding common stock
(the "Exchange Cap"). The Debentures and Warrants have provisions that require
the Company to pay cash in lieu of issuing shares upon conversion of the
Debentures or exercise of the Warrants if the Company is prevented from issuing
such shares because of the Exchange Cap. In May 2004, the Debenture holders
agreed to amend the provisions of these Debentures and Warrants to limit the
maximum amount of funds that the holders could receive in lieu of shares upon
conversion of the Debentures and/or exercise of the Warrants in the event that
the Exchange Cap was reached to 119.9% of the conversion price of the relevant
Debentures and 19.9% of the relevant Warrant exercise price. See below for the
accounting effect on this matter.
Taken separately, the March, July, October and January 2004 debenture
transactions do not trigger Section 713. However, the AMEX took the position
that these transactions should be aggregated and, as such, stockholder approval
was required for the issuance of common stock for a portion of the potential
exercise of the warrants and conversion of the Debentures in connection with the
January 2004 Debentures. The amount of potential shares that the Company could
exceed the Exchange Cap amounted to approximately 1,299,000. In accordance with
EITF 00-19, Accounting For Derivative Financial Instruments Indexed to and
Potentially Settled in a Company's Own Stock, the Company recorded on January
26, 2004, a redemption obligation of approximately $2,160,000, as restated, with
a corresponding increase to debt discount to be amortized over the life of the
debt or until the Company obtains shareholder approval. Any remaining discount
would be reclassed to additional paid in capital.
In addition, in accordance with EITF 00-19, the Company revalued this
redemption obligation as of March 31, 2004. The Company increased the redemption
obligation and recorded additional finance charge of $1,024,000 as a result of
this revaluation. The Company also incurred $104,000 in financing charges
related to the amortization of the related discount during the first quarter of
2004.
Stockholder approval was obtained at the Company's Annual Meeting of
Stockholders on June 23, 2004. In accordance with EITF 00-19, the Company
revalued this redemption obligation associated with the 1,299,000 shares as of
June 23, 2004 (date of shareholder approval). The Company recorded a reduction
in the value of the redemption obligation and financing charge of $839,000 as a
result of this revaluation and additional financing charge of $242,000 related
to the amortization of the debt discount in the second quarter 2004. In
addition, upon receiving the requisite stockholder approval on June 23, 2004,
the redemption obligation of $2,345,000 and the remaining unamortized debt
discount of $1,815,000 were reclassified as additional paid in capital.
F-32
During 2004, the investors made installment payments of $777,000 and
converted $139,150 of principal amount of the January 2004 Debenture into
358,932 and 55,000 shares of common stock respectively. During 2005, the
investors had made installment payments of $1,111,111 and converted
approximately $74,608,000 principal amount of the January 2004 Debentures into
735,217 and 292,000 shares of common stock, respectively. The remaining
principal on these Debentures was $1,364,602 as of December 31, 2005.
The Company recorded financing costs for the years ended December 31, 2004
and 2005 with regard to the January 2004 Debentures of $720,000 and $917,000,
respectively. Interest expense for the years ended December 31, 2005 and 2004,
with regard to the January 2004 Debentures was $145,000 and $207,000,
respectively.
July 2004 Debentures
Pursuant to the Additional Investment Rights issued in connection with the
January 2004 Debentures, the Company issued to the investors an additional
$2,000,000 principal amount of January 2004 Debentures (the "July 2004
Debentures"). The July 2004 Debentures are identical to the January 2004
Debentures except that the conversion price is $2.58. The investors exercised
the Additional Investment Rights on July 13, 2004 and the Company received net
proceeds of $1,860,000. Upon completion of the August 2004 Private Placement
(see Note 9), the conversion price of the July 2004 Debentures was lowered to
$2.08 per share. The Company recorded an additional debt discount of
approximately $632,000 upon the conversion price reset to $2.08 per share, which
is being amortized over the remaining life of the debenture in accordance with
the effective interest method of accounting.
The July 2004 Debentures were recorded at a discount on issuance of
$628,000 due to ascribing value to the beneficial conversion feature and fair
value of warrants based on the relative fair value of the proceeds.
The conversion option and detachable warrant carry registration rights and
a feature that in certain circumstances, deemed in the control of the Company,
could require partial settlement of the conversion options to be in cash. In
addition, the July 2004 Debentures include other features including mandatory
conversion option and optional redemption rights if contingent transactions
occur. To determine whether the July 2004 Debentures had embedded derivatives,
including the conversion option, that required bifurcation and fair value
accounting, the Company analyzed the terms of the debentures in accordance with
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and EITF 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in a Company's Own Stock" (EITF
00-19"). The Company concluded that bifurcation was not required for the
conversion option and that EITF 00-27: "Application of Issue No. 98-5 to Certain
Convertible Instruments" ("EITF 00-27") was the appropriate accounting to be
applied. The warrants were deemed to be permanent equity. The mandatory
conversion option and optional redemption rights were deemed to be derivatives
requiring bifurcation and thus the Company obtained a third party valuation for
the aggregate fair value of these derivatives that showed the fair value to be
immaterial at inception and for each subsequent reporting period.
F-33
In October 2005, the Company entered into an amendment agreement with the
July 2004 Debenture holders to amend the maturity date from October 31, 2005 to
June 30, 2007, and increase the interest rate from 6% to 7% (see "Debenture
Agreement Amendment" below for more details).
As of December 31, 2005, the Company made installment payments of $500,000
resulting in the issuance of 331,669 shares of the Company's common stock. The
Debenture holders had not converted any portion of this debenture as of December
31, 2005.
The Company recorded financing costs for the years ended December 31, 2005
and 2004 with regard to the July 2004 Debentures of $481,000 and $248,000,
respectively. Interest expense for the years ended December 31, 2005 and 2004,
with regard to the January 2004 Debentures was $113,000 and $61,000,
respectively.
Debenture Agreement Amendment
On October 6, 2005, the Company entered into a material definitive
agreement with the October 2003, January 2004 and July 2004 debenture holders to
1) amend the remaining outstanding Debentures that were to mature on October 31,
2005 (as amended, the "October 2003 Debenture") and the two traunches of
outstanding debentures due to mature on January 31, 2006 (as amended,
respectively, the "January 2004 and July 2004 Debentures"), to a maturity date
of June 30, 2007, 2) to increase the interest rate from 6% per annum to 7% per
annum. In consideration for extending the maturity date of the outstanding
debentures, the Company issued an aggregate of 225,000 Warrants (the "October
2009 Warrants") to the debenture holders to acquire common stock at a price of
$2.50 per share at any time from October 31, 2005 through October 31, 2009. The
October 2009 Warrants contain provisions for adjustment of the exercised price
in the event of certain anti-dilution events. The Company agreed to register
135% of the shares issuable as interest shares that might result due to the
amendments to the Debentures and issuable upon exercise of the October 2009
Warrants.
In accordance with EITF 96-19, "Debtor's Accounting for a Modification or
Exchange of Debt Instruments", the Company has treated the change in terms to
the original debentures as non-substantial in nature and have not accounted for
such modification as an extinguishment of debt, but rather a debt modification.
In addition, the 225,000 warrants issued to the debenture holders as
consideration for extending the maturity date were valued using the
Black-Scholes method and $189,000 of additional debt discount on the July 2004
Debenture was recorded. The discount will be amortized as interest expense over
the new term of the debt instrument in accordance with the effective interest of
accounting. Any costs incurred by third parties were expensed as incurred.
Registration Rights Agreements
The Company entered into Registration Rights Agreements with the investors
in connection with the issuance of (i) the above Debentures; (ii) the June 2008,
July 2008, October 2008, July 2009, and May 2009 Warrants (collectively, the
"Warrants"); and (iii) the shares issued in January 2004. Pursuant to the
Registration Rights Agreements the Company has registered on behalf of the
investors the shares issued to them in January 2004 and 135% of the shares
issuable upon conversion of the Debentures and upon exercise of all of the
Warrants. If, subject to certain exceptions, sales of all shares so registered
cannot be made pursuant to the registration statements, then the Company will be
required to pay to the investors their pro rata share of $.00067 times the
outstanding principal amount of the relevant Debentures for each day the above
condition exists as liquidated damages. As a result of the Company's inability
to timely file its annual report on Form 10-K for the year ended December 31,
2005, the Company currently is subject to liquidated damages until such time as
the Shares are again registered for public resale or eligible for resale
pursuant to Rule 144(k) under the Securities Act. (See Note 20- subsequent
events for more information on liquidated damages).
F-34
Investment Banking Fees
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the private debenture placements in July and
October 2003 and in January and July 2004, the Company paid Cardinal Securities,
LLC an investment banking fee equal to 7% of the investments made by the
Debenture holders and issued to Cardinal the following warrants to purchase
common stock: (i) 112,500 exercisable at $2.57 per share; (ii) 87,500
exercisable at $2.42 per share; and (iii) 100,000 exercisable at $3.04 per
share. The $2.57 warrants expire on July 10, 2008, the $2.42 warrants expire on
October 29, 2008 and the $3.04 warrants expire on January 5, 2009. With regard
to the exercise of the June 2008 Warrants and issuance of the May 2009 Warrants,
Cardinal received an investment banking fee of 7%, half in cash and half in
shares. With regard to the exercise of the Additional Investment Rights, the
July 2008 and October 2008 Warrants and issuance of the July 2009 Warrants,
Cardinal received an investment banking fee of 7%, $146,980 in cash and 22,703
in shares as well as 50,000 warrants exercisable at $4.07 expiring on July 12,
2009. By agreement with Cardinal, the Company has registered all of the
foregoing shares and shares issuable upon exercise of the above mentioned
warrants for public resale. As a result of the transactions discussed above, the
Company recorded $538,000 and $149,000, as restated, as deferred financing costs
on the balance sheet as of December 31, 2003 and 2004, respectively, with a
related increase to additional paid in capital. These costs are amortized over
the life of the debenture. Amortization expense was $360,000, $263,000 and
$161,000 as of December 31, 2003, 2004 and 2005.
Conversion of Convertible Debt
The maximum number of shares issuable upon debt conversion, including
interest as well as 135% of the shares issuable upon conversion and interest
payments were 5,011,525 and 3,667,662 shares at December 31, 2004 and 2005,
respectively.
Collateral and Financial Covenants
The Company paid $1,300,000 in 2003 into the debenture cash collateral
account held by the debenture holders as required by the terms of the October
2003 Debentures. The amounts paid have been accounted for as advances receivable
and are reflected as such on the accompanying balance sheet as of December 31,
2005. The cash collateral account provides partial security for repayment of the
outstanding Debentures in the event of default.
Pursuant to the terms and conditions of all of the outstanding Debentures,
the Company has pledged all of the Company's assets, other than the Company's
intellectual property, as collateral, and the Company is subject to comply with
certain financial covenants. The Company failed to timely file its Annual Report
on Form 10-K with the Securities and Exchange Commission pursuant to the 1934
Act, and therefore, was in violation of its covenant to timely file. See Note 20
- Subsequent Events for more details on this and the Company's receipt of a
waiver of this covenant.
F-35
Debenture Acceleration Provisions
Upon an Event of Default as described in the Debentures, and for so long
as such Event of Default shall be continuing, unless waived by a Debenture
holder, a Debenture holder, on written notice to the Company may consider the
Debenture immediately due and payable. Events of Default include: (a) any Event
of Default under any other Debenture; (b) suspension from trading or failure of
the Common Stock to be listed on the AMEX for more than an aggregate of ten
trading days in any 365-day period; (c) Any money judgment, writ or warrant of
attachment, or similar process in excess of $250,000 in the aggregate is entered
or filed against the Company, its Subsidiaries or any of their properties or
other assets and which remains unpaid, unvacated, unbonded and unstayed for a
period of 75 days; (d) the Company defaults in the payment when due of (i)
interest on the Debenture, and such default continues for 30 days, or (ii) the
outstanding principal amount of the Debenture; (e) any Company representations
or warranties in the Debentures and the related documents (the "Transaction
Documents") or any mortgage are untrue in any material respect when made and are
not cured, provided they are curable, within a specified period and such breach
of representations and warranties would have a material adverse effect on the
Company or materially impair the ability of the Company to satisfy its
obligations to the Holders; (f) the Company fails to perform or observe in any
material respect any material covenant in the Debenture or any relevant
Transaction Document (such as the failure to honor any conversion notice); (g)
the Company becomes insolvent or certain other events that trigger creditors'
rights, bankruptcy, liquidation or similar proceedings occur; (h) the Company
fails to pay any indebtedness (other than the Debentures), or any interest or
premium thereon, when due in an outstanding principal amount equal to or greater
than $1,000,000 and such failure continues after the applicable grace period, if
any, or such indebtedness is declared be due and payable prior to the stated
maturity thereof; (i) unless the Company has made cash collateral payments in an
amount equal to the entire outstanding principal amount of all Debentures,
together with accrued and unpaid interest thereon, the Registration Statement
required to register the shares issuable upon conversion of the Debentures and
exercise of the related warrants is not declared effective by the SEC and
available for the sale on or before certain specified dates; (j) the Security
Agreement, any Mortgage or any other security document, after delivery thereof
pursuant to the relevant securities purchase agreement, fails or ceases to
create a valid and perfected and, except to the extent permitted by the relevant
Transaction Documents, first priority lien in favor of the agent for the benefit
of the holders of Debentures on any collateral covered thereby; (k) the Cash
Collateral Account Bank shall fail to comply with any of the terms of the
Account Control Agreement; (l) at any time required to be in full force and
effect, the Letters of Credit ceases to be in full force and effect and such
breach is not cured within a specified time; (m) the report of the Company's
auditors on the Company's consolidated audited financial statements for the year
ended prior to the issuance of the relevant Debenture contained any going
concern qualification; or (n) any material damage to, or loss, theft or
destruction of, any Collateral, or any adverse event such as a labor dispute or
act of God, which causes, for more than 15 consecutive days, the cessation or
substantial curtailment of revenue producing activities at any material facility
of the Company or any of its Subsidiaries. Upon the occurrence of an Event of
Default described in subsection (g) above, the Debentures become automatically
due and payable. In such event the Debentures are to be redeemed at a redemption
price equal to 100% of the outstanding principal amount, plus accrued and unpaid
interest thereon. In addition, upon an Event of Default, the interest rate on
the Debentures permanently increases by two percent and, solely in the case of
an Event of Default triggered by a conversion failure ((f) above), higher, but
in no event can the interest rate increase above the lower of 20% or the highest
rate permitted by applicable law (See Note 20).
F-36
In connection with the Debenture agreements, the Company has outstanding
letters of credit of $1 million as additional collateral.
(9) 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, 2004 and 2005.
(b) Common Stock
On July 31, 2003, we had approximately 104,000 shares of the Company's
$.001 authorized shares of $.001 par value Common Stock that were not issued or
reserved for issuance. In order to accommodate the shares needed for the July
2003 Debenture, Dr. Carter, the Company's Chief Executive Officer and Cardinal
Capital, LLC, the placement agent, agreed that they would not exercise their
warrants or options unless and until the Company's stockholders approved an
increase in the Company's authorized shares of common stock. This action freed
up 3,206,650 shares. For Dr. Carter's waiver of his right to exercise certain
options and warrants prior to approval of the increase in the Company's
authorized shares, the Company agreed to compensate Dr. Carter and issued Dr.
Carter 1,450,000 warrants to purchase common stock at $2.20 per share in 2003
that vested in the first quarter 2004 upon the second ISI asset closing. The
Company recorded a charge to stock compensation expense during the first quarter
of 2004 of $1,769,000 upon the full vesting of these warrants at their intrinsic
value.
The Company's stockholders approved an amendment to the Company's
corporate charter at the Annual Shareholder meeting held in Philadelphia, PA on
September 10, 2003. This amendment increased the Company's authorized shares
from 50,000,000 to 100,000,000.
As of December 31, 2004 and 2005, 49,631,766 and 56,264,155 shares, net of
shares held in the treasury, were outstanding, respectively.
(c) Minority Shareholder Interest
On March 20, 2002 the Company's European Subsidiary Hemispherx Biopharma
Europe, S.A. ("Hemispherx, S.A.") entered into a Sales and Distribution
agreement with Laboratorios del Dr. Esteve S.A. ("Esteve")(Note 17). Pursuant to
the terms of the Agreement, Esteve was granted the exclusive right to market
Ampligen(R) in Spain, Portugal and Andorra for the treatment of Myalgic
Encephalitis/Chronic Fatigue Syndrome ("ME/CFS"). In addition to other terms and
other projected payments, Esteve paid an initial and non refundable fee of
625,000 Euros (approximately $563,000) to Hemispherx S.A. on April 24, 2002 as
the first part of a series of milestone based payments.
F-37
During March 2002, Hemispherx, S.A. was authorized to issue up to
22,000,000 Euros of seven percent (7%) convertible preferred securities. Such
securities are guaranteed by the parent company and are convertible into a
specified number of shares of Hemispherx S.A. pursuant to the securities
agreement. Conversion is to occur on the earlier of an initial public offering
of Hemispherx S.A. on a European stock exchange or September 30, 2003.
Esteve purchased 1,000,000 Euros of Hemispherx Biopharma Europe S.A.'s
convertible preferred equity certificates on May 23, 2002. During 2002, the
terms and conditions of these securities were changed so that these preferred
equity certificates could be converted into the common stock of Hemispherx
Biopharma, Inc. in the event that a European IPO was not completed by September
30, 2003. The conversion rate was 300 shares of Hemispherx Biopharma, Inc.'s
common shares for each 1,000 Euro convertible preferred certificate. As a result
the Company recorded approximately $946,000 as minority interest in subsidiary
on its balance sheet at December 31, 2002.
On December 18, 2002, we proposed that Esteve convert their convertible
preferred equity certificates into Hemispherx common stock pursuant to the terms
of the agreement and all unpaid dividends at the market price on that conversion
date. On January 9, 2003, Esteve accepted the Company's proposal and we
registered these shares for public sale.
On March 13, 2003, we issued 347,445 shares of the Company's common stock
to Provesan S.A., an affiliate of Esteve S.A., in exchange for 1,000,000 Euros
of convertible preferred equity certificates and any unpaid dividends. As a
result of the exchange, the minority interest in subsidiary was transferred to
stockholders' equity on such date.
(d) Equity Financings
On August 5, 2004, the Company closed a private placement with select
institutional investors ("August 2004 Private Placement") for
approximately
3,617,300 shares of its Common Stock and warrants to purchase an aggregate of up
to approximately 1,085,200 shares of its Common Stock. Jefferies & Company, Inc.
acted as Placement Agent for which it received a fee and warrants to purchase
Common Stock. The Company raised approximately $6,984,000 net proceeds from this
private offering.
The Warrant issued to each purchaser is exercisable for up to 30% of the
number of shares of Common Stock purchased by such Purchaser, at an exercise
price equal to $2.86 per share. Each Warrant has a term of five years and is
fully exercisable from the date of issuance. Pursuant to the Registration Rights
Agreement, made and entered into as of August 5, 2004 (the "Rights Agreement"),
the Company registered the resales of the shares issued to the Purchasers and
shares issuable upon the exercise of the Warrants.
By agreement with Cardinal Securities, LLC, for general financial advisory
services and in conjunction with the August 2004 Private Placement with select
institutional investors, the Company paid Cardinal Securities, LLC an investment
banking fee of $140,000. The Company paid Cardinal one-half of the fee in cash
with the remainder being paid with the issuance of 50,000 warrants to purchase
common stock exercisable at $2.50 per share expiring on March 31, 2010 and
46,667 shares of common stock. By agreement with Cardinal Securities, LLC, the
Company registered all of the foregoing shares and shares issuable upon exercise
of the above mentioned warrants for public resale.
F-38
On July 8, 2005, the Company entered into a common stock purchase
agreement with Fusion Capital Fund II, LLC ("Fusion Capital"), pursuant to which
Fusion Capital has agreed, under certain conditions, to purchase on each trading
day $40,000 of the Company's common stock up to an aggregate of $20.0 million
over approximately a 25 month period, subject to earlier termination at the
Company's discretion. In the Company's discretion, it may elect to sell less
common stock to Fusion Capital than the daily amount and we may increase the
daily amount as the market price of the Company's stock increases. The purchase
price of the shares of common stock will be equal to a price based upon the
future market price of the common stock without any fixed discount to the market
price. Fusion Capital does not have the right or the obligation to purchase
shares of the Company's common stock in the event that the price of the common
stock is less than $1.00.
Pursuant to the Company's agreement with Fusion Capital, the Company has
registered for public sale by Fusion Capital up to 10,795,597 shares of our
common stock. However, in the event that the Company decides to issue more than
10,113,278, i.e. greater than 19.99% of the outstanding shares of common stock
as of the date of the agreement, the Company would first seek stockholder
approval in order to be in compliance with American Stock Exchange rules. As of
December 31, 2005, Fusion Capital has purchased 4,007,255 shares amounting to
approximately $8,020,000 in gross proceeds to the Company.
In connection with entering into the above agreement with Fusion Capital,
the Company, in July 2005, issued to Fusion Capital 402,798 shares of its common
stock. 392,798 of these shares represented 50% of the commitment fee due Fusion
Capital with the remaining 10,000 shares issued as reimbursement for expenses.
An additional 392,799 shares, representing the remaining balance of the
commitment, are issuable in conjunction with daily purchases of common stock by
Fusion Capital. These additional commitment shares will be issued in an amount
equal to the product of (x) 392,799 and (y) the Purchase Amount Fraction. The
"Purchase Amount Fraction" means a fraction, the numerator of which is the
purchase price at which the shares are being purchased by Fusion Capital and the
denominator of which is $20,000,000. As of December 31, 2005, Fusion Capital was
issued 263,713 shares towards this commitment fee. In total, Fusion Capital has
purchased 4,673,766 shares in connection with this private placement as of
December 31, 2005 (See Note 20).
(e) 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.
F-39
Information regarding the options approved by the Board of Directors under the
1990 Stock Option Plan is summarized below:
2003 2004 2005
------------------------------- ----------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Exercise Option Option Exercise
Shares Price Price Shares Price Price Shares Price Price
------- ---------- -------- ------- ---------- ------ ------- ---------- --------
Outstanding,
beginning of
year 294,665 $1.06-4.34 $3.50 433,134 $1.06-4.34 $3.10 414,702 $2.71-4.03 $3.11
Granted 200,000 $ 2.75 $2.75 -- -- -- -- -- --
Canceled (61,531) $3.80-4.03 $3.97 (18,432) $ 4.34 $4.34 -- -- --
Exercised -- -- -- -- -- -- -- -- --
------- ------- -------
Outstanding,
end of year 433,134 $1.06-4.34 $3.10 414,702 $2.71-4.03 $3.11 414,702 $2.71-4.03 $3.11
======= ======= =======
Exercisable 433,134 $1.06-4.34 $3.10 414,702 $2.71-4.03 $3.11 414,702 $2.71-4.03 $3.11
======= ======= =======
Weighted
average
remaining
contractual 3.37 8.24 5.10
life (years) years -- -- years -- -- years -- --
======= ========== ======== ======= ========== ===== ======= ========== =====
Exercised in
current and
prior years (27,215) -- -- (27,215) -- -- (27,215) -- --
======= ========== ======== ======= ========== ===== ======= ========== =====
Available for
future grants 27,664 -- -- 46,096 -- -- 46,096 -- --
======= ========== ======== ======= ========== ===== ======= ========== =====
The following table summarizes information about these options outstanding at
December 31, 2005:
Exercise Price Range
----------------------
$2.71 - $2.75 $3.50 $4.03 Total
------------- ------ ------ -------
Outstanding Options:
Number Outstanding 273,728 54,974 86,000 414,702
Remaining contracted life years 8.0 2.0 5.1 5.1
Weighted average exercise price $2.68 $3.21 $4.03 $3.11
Exercisable Options:
Number outstanding 273,728 54,974 86,000 414,702
Weighted average exercise price $2.68 $3.21 $4.03 $3.11
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.
F-40
The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan)
was approved by the board of directors in July 1993. The outline of the 1993
Purchase Plan provides for the issuance, subject to adjustment for capital
changes, of an aggregate of 138,240 shares of Common Stock to employees.
The 1993 Purchase Plan is administered by the Compensation Committee of
the board of directors. Under the 1993 Purchase Plan, Company employees are
eligible to participate in semi-annual plan offerings in which payroll
deductions may be used to purchase shares of Common Stock. The purchase price
for such shares is equal to the lower of 85% of the fair market value of such
shares on the date of grant or 85% of its fair market value of such shares on
the date such right is exercised. There have been no offerings under the 1993
Purchase Plan to date and no shares of Common Stock have been issued thereunder.
During 2003, the Company issued options to acquire 200,000 shares to its
general counsel under the 1990 plan for services rendered. As a result, the
Company charged operating expenses in the amount of $237,000. There was no stock
compensation expense in 2004 and 2005 recorded as there were no options granted
under this plan.
The Equity Incentive 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 Incentive 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 Incentive 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-41
Information regarding the options approved by the Board of Directors
under the Equity Incentive Plan is summarized below:
2004 2005
---------------------------------- ---------------------------------
Weighted Weighted
Average Average
Option Exercise Option Exercise
Shares Price Price Shares Price Price
--------- ---------- --------- --------- ---------- --------
Outstanding beginning at
year -- -- -- 633,080 $1.90-3.44 $2.56
Granted 633,080 $1.90-3.44 $2.56 1,352,600 $1.63-2.87 $1.95
Canceled -- -- -- -- -- --
Exercised -- -- -- -- -- --
Outstanding end of year 633,080 $1.90-3.44 $2.56 1,985,680 $1.63-2.87 $2.15
========= =========
Exercisable 538,432 $2.60-3.44 $2.68 1,373,250 $1.63-2.87 $2.46
========= =========
Weighted average
remaining contractual life
(years) 10 years 8-9 years
========= =========
Available for future grants 7,366,920 6,014,320
========= =========
The following table summarizes information about these options outstanding at
December 31, 2005:
Exercise Price Range
----------------------------------
$1.63-$1.90 $2.00-2.87 $3.44 Total
----------- ---------- ------- ----------
Outstanding options:
Number outstanding 1,101,648 834,032 50,000 1,985,680
Remaining contracted life years 3.0 8.7 8.5 8.5
Weighted average exercise price $ 1.81 $ 2.51 $ 3.44 $ 2.15
Exercisable options:
Number outstanding 575,918 747,332 50,000 1,373,250
Weighted average exercise price $ 1.76 $ 2.52 $ 3.44 $ 2.17
F-42
(ii) Stock warrants
Number of warrants exercisable into shares of common stock
2003 2004 2005
--------------------------------- --------------------------------- ---------------------------------
Weighted Weighted Weighted
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Price Shares Price Price Shares Price Price
---------- ----------- -------- ---------- ----------- -------- ---------- ----------- --------
Outstanding beginning of
year 7,967,810 $1.75-16.00 $3.18 11,502,796 $1.74-16.00 $3.57 13,167,037 $1.75-16.00 $3.46
Granted 4,623,024 $1.68-2.57 $2.32 4,791,187 $2.58-4.20 $3.25 565,000 $1.50-3.00 $2.08
Canceled (276,000) $4.00-10.00 $6.54 (858,360) $4.00-8.00 $5.34 (2,197,200) $1.75-12.00 $3.70
Exercised (812,038) $1.68-1.75 $1.69 (2,268,586) $1.74-3.50 $2.32 (5,000) $1.75-12.00 $1.75
---------- ---------- ----------
Outstanding end of year 11,502,796 $1.74-16.00 $3.57 13,167,037 $1.75-16.00 $3.46 11,529,837 $1.55-16.00 $3.32
========== ========== ==========
Exercisable 8,635,560 $1.74-16.00 $4.11 12,667,037 $1.75-16.00 $3.46 11,529,837 $1.55-16.00 $3.32
========== ========== ==========
Weighted average
remaining contractual
life (years) 4.04 years 4.3 years 4.43 years
========== ========== ==========
Years exercisable 2004-2008 2005-2009 2006-2015
========== ========== ==========
The following table summarizes information about stock warrants outstanding at
December 31, 2005:
Exercise price range Total
----------------------------------------- ------------
$1.75-$5.00 $6.00-$9.00 $10.00-$16.00 $1.75-$16.00
-------------------- ------------------- ---------------
Outstanding warrants
Number outstanding 10,416,187 713,650 400,000 11,529,837
Weighted average remaining
contractual life(years) 4.2 2.2 1.46 4.43
Weighted average exercise price $ 2.89 $ 6.80 $ 13.00 $ 3.32
Exercisable warrants
Number outstanding 10,416,187 713,650 400,000 11,529,837
Weighted average exercise price $ 2.89 $ 6.80 $ 13.00 $ 3.32
Certain of the stock warrants outstanding are subject to adjustments for
stock splits and dividends.
F-43
Warrants issued to stockholders
At December 31, 2001 there were 232,160 warrants issued to stockholders
remaining. In 2002, 10,000 were converted to common stock. At December 31, 2002
and 2003 there were 222,160 warrants remaining. These warrants had an exercise
price of $3.50 per share.
Other stock warrants
The Company has issued other stock warrants outstanding - totaling
11,529,837, which consists of the following:
In November 1994, the Company granted Rule 701 Warrants to purchase an
aggregate of 2,080,000 shares of Common Stock to certain officers and directors.
These Warrants are exercisable at $3.50 per share and, if not exercised, were to
expire in September, 1999. On February 19, 1999 the Board of Directors extended
the expiration date for three more years. In 1999 235,000 warrants were
exercised and 5,000 warrants were exercised in 2000. At December 31, 2000, there
were 1,840,000 Rule 701 warrants remaining. In 2001 20,000 of these warrants
expired, leaving a balance of 1,820,000 in warrants outstanding at December 31,
2001. During 2002, 420,000 warrants expired and the Company extended the
expiration date of the remaining balance of 1,400,000 for a period of five years
to now expire on September 30, 2007. These stock warrants have an exercise price
of $3.50. In accordance with FASB Interpretation No. 44, Accounting for Certain
Transactions involving Stock Compensation, no compensation expense was
recognized as the exercise price at the extension date exceeded the fair value
of the underlying common stock.
In May 1995, the Company and certain officers, directors and shareholders
entered into a standby finance agreement pursuant to which the parties agreed to
provide an aggregate of $5,500,000 in financing to the Company during 1995 in
the event that existing and additional financing was insufficient to cover the
cash needs of the Company through December 31, 1996. In exchange, the Company
issued warrants to purchase an aggregate of 2,750,000 shares of Common Stock at
$1.75 per share to the parties. In 1996, 597,000, in 1999, 290,000, in 2000,
216,500, in 2001, 200,000, in 2002, 1,300, in 2003, 35,000 and in 2004, 205,000
of these warrants were exercised leaving a balance of these warrants of
1,802,200. 5,000 of these remaining warrants were exercised in 2005 and the
remaining expired on June 30, 2005.
In the years 2001, 2002 and 2003, the Company issued 450,000, 25,000 and
no warrants, respectively, exclusive of warrants issued in connection with the
Company's 2003 Debenture issuances (see Note 8), to investment banking firms for
services performed on behalf of the Company. Accordingly, the Company recorded
stock compensation of $637,000, $133,000 and none for the years 2001, 2002 and
2003, respectively. These warrants have various vesting dates and exercisable
prices ranging from $4.00 to $16.00 per share. In total, 1,193,800 warrants were
outstanding at December 31, 2002. In 2003, 225,000 of these warrants expired
leaving a balance of 968,800 warrants at December 31, 2003. In 2004, 193,800 of
these warrants expired leaving a balance of 775,000 warrants at December 31,
2004. In 2005, 350,000 of these warrants expired leaving a balance of 425,000.
These warrants are exercisable in five years from the date of issuance.
In 2003, 2004 and 2005 the Company had warrants outstanding, issued to
employees, directors and consultants, of 5,100,650, 4,645,650 and 4,268,650
respectively. These warrants were not issued pursuant to an equity plan and are
exercisable at rates of $1.55 to $10.00 per share of common stock. The exercise
price was equal to the fair market value of the stock on the date of grant. At
December 31, 2002, 3,701,650 of the non-public warrants were outstanding. During
2003 the Company granted 1,450,000 warrants to employees with an exercise price
of $2.20 for services performed and 51,000 warrants expired. At December 31,
2003, 5,100,650 warrants were outstanding. During 2004, 15,000 warrants were
issued to consultants and 470,000 expired leaving a balance of 4,645,650 at
December 31, 2004. During 2005, 265,000 warrants were issued to consultants and
642,000 expired leaving a balance of 4,268,650 at December 31, 2005. These stock
warrants have exercise prices ranging from $3.50 to $4.00.
F-44
In 2003 the company issued warrants to acquire 3,173,024 shares in
connection with the financing of the purchase of the assets of Interferon
Sciences, Inc. During 2003, 777,038 of these warrants were exercised leaving a
balance of 2,395,986 at December 31, 2003. During 2004, 4,776,187 warrants were
issued related to debt financing and 2,035,986 warrants were exercised leaving a
balance of 5,136,189 warrants at December 31, 2004. During 2005, 300,000
warrants were issued leaving a balance of 5,436,189 at December 31, 2005.
(f) Stock Repurchase
The Company's repurchases of shares of common stock are recorded as
"Treasury Stock" and result in a reduction of "Stockholders' equity." When
treasury shares are reissued, the Company uses a first-in, first-out method and
the excess of repurchase cost over reissuance price is treated as a reduction of
"Additional paid-in capital." At December 31, 2003 there were 443 shares in the
treasury. During 2003 most of the then existing treasury shares were either
re-issued or retired. There was no Treasury Stock repurchased, re-issued and the
balance of 443 shares were sold in 2004.
(g) Rights offering
On November 19, 2002, the Board of Directors of Hemispherx Biopharma, Inc.
(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 (as defined below) that,
upon any exercise of Rights, a number of Rights be exercised so that only whole
shares of Preferred Stock will be issued.
F-45
(10) Segment and Related Information
The Company operates in one segment, which performs research and
development activities related to Ampligen(R) and other drugs under development,
and sales and marketing of Alferon(R).
The following table presents revenues by country based on the location of
the use of the product services.
(in thousands)
2003 2004 2005
----- ------ ------
United States $655 $1,225 $1,083
Belgium 2 4 --
Other -- -- --
-- -- --
---- ------ ------
$657 $1,229 $1,083
==== ====== ======
The Company employs an insignificant amount of net property and equipment in its
foreign operations.
(11) Research, Consulting and Supply Agreements
In 1994, the Company entered into a licensing agreement with Bioclones
(Proprietary) limited ("Bioclones") for manufacturing and international market
development in Africa, Australia, New Zealand, Tasmania, the United Kingdom,
Ireland and certain countries in South Africa, of Ampligen(R) and Oragen(TM). On
December 27, 2004 the Company initiated a lawsuit in Federal Court identifying a
conspiratorial group seeking to illegally manipulate the Company's stock for
purposes of bringing about a hostile takeover of Hemispherx. This conspiratorial
group includes Bioclones.
In 1998, the Company entered into a strategic alliance with Accredo to
develop certain marketing and distribution capacities for Ampligen(R) in the
United States. Accredo is one of the nation's largest home health care companies
with over 400 offices and sixty thousand caregivers nationwide. Pursuant to the
agreement, Accredo assumed certain responsibilities for distribution of
Ampligen(R) for which they received a fee. Through this arrangement, the Company
may mitigate the necessity of incurring certain up-front costs. Accredo has also
worked with the Company in connection with the Amp 511 ME/CFS cost recovery
treatment program, Amp 516 ME/CFS Phase III clinical trial and the Amp 719
(combining Ampligen(R) with other antiviral drugs in HIV-salvage therapy and Amp
720 HIV Phase IIb clinical trials now under way). There can be no assurances
that this alliance will develop a significant commercial position in any of its
targeted chronic disease markets. The agreement had an initial one year term
from February 9, 1998 with successive additional one year terms unless either
party notifies the other not less than 180 days prior to the anniversary date of
its intent to terminate the agreement. Also, the agreement may be terminated for
uncured defaults, or bankruptcy, or insolvency of either party and will
automatically terminate upon the Company's receiving an NDA for Ampligen(R) from
the FDA, at which time, a new agreement will need to be negotiated with Accredo
or another major drug distributor. There were no initial fees.
F-46
In December, 1999, the Company entered into an agreement with Biovail
Corporation International ("Biovail"). Biovail is an international full service
pharmaceutical company engaged in the formulation, clinical testing,
registration and manufacture of drug products utilizing advanced drug delivery
systems. Biovail is headquartered in Toronto, Canada. The agreement grants
Biovail the exclusive distributorship of the Company's product in the Canadian
territories subject to certain terms and conditions. In return, Biovail agrees
to conduct certain pre-marketing clinical studies and market development
programs, including without limitation, expansion of the Emergency Drug Release
Program in Canada with respect to the Company' products. Biovail agrees to work
with the Company in preparing and filing of a New Drug Submission with Canadian
Regulatory Authorities. Biovail invested $2.25 million in Hemispherx equity at
prices above the then current market price and agreed to make further payments
based on reaching certain regulatory milestones. The Agreement requires Biovail
to penetrate certain market segments at specific rates in order to maintain
market exclusivity. The agreement terminates on December 15, 2009, subject to
successive two-year extensions by the parties and subject to earlier termination
by the parties for uncured defaults under the agreement, bankruptcy or
insolvency of either party, or withdrawal of the Company's product from Canada
for a period of more than ninety days for serious adverse health or safety
reasons.
In May 2000, the Company acquired an interest in Chronix Biomedical Corp.
("CHRONIX"). Chronix focuses upon the development of diagnostics for chronic
diseases. The Company issued 100,000 shares of common stock to Chronix toward a
total equity investment of $700,000. Pursuant to a strategic alliance agreement,
the Company provided Chronix with $250,000 to conduct research in an effort to
develop intellectual property on potential new products for diagnosing and
treating various chronic illnesses such as ME/CFS. The strategic alliance
agreement provides the Company certain royalty rights with respect to certain
diagnostic technology developed from this research and a right of first refusal
to license certain therapeutic technology developed from this research. The
strategic alliance agreement provides the Company with a royalty payment of 10%
of all net sales of diagnostic technology developed by Chronix for diagnosing
Chronic Fatigue Syndrome, Gulf War Syndrome and Human Herpes Virus-6 associated
diseases. The royalty continues for the longer of 12 years from September 15,
2000 or the life of any patent(s) issued with regard to the diagnostic
technology. The strategic alliance agreement also provides the Company with the
right of first refusal to acquire an exclusive worldwide license for any and all
therapeutic technology developed by Chronix on or before September 14, 2012 for
treating Chronic Fatigue Syndrome, Gulf War Syndrome and Human Herpes Virus-6
associated diseases. During the quarter ended December 31, 2002 and September
30, 2004 the Company recorded a noncash charge of $292,000 and $373,000,
respectively, with respect to the Company's investment in Chronix. This
impairment reduces the Company's carrying value to reflect a permanent decline
in Chronix's market value based on its then proposed equity offerings.
F-47
In March 2002, the Company's European subsidiary Hemispherx S.A. entered
into a Sales and Distribution agreement with Esteve. Pursuant to the terms of
the Agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of ME/CFS. In addition to other
terms and other projected payments, Esteve agreed to conduct certain clinical
trials using Ampligen(R) in the patient population coinfected with HCV and HIV
viruses. The Agreement runs for the longer of ten years from the date of first
arms-length sale in the Territory, the expiration of the last Hemispherx patent
exploited by Esteve or the period of regulatory data protection for Ampligen(R)
in the applicable territory. Pursuant to the terms of the agreement Esteve is to
conduct clinical trials using Ampligen(R) to treat patients with both HCV and
HIV and is required to purchase certain minimum annual amounts of Ampligen(R)
following regulatory approval. Esteve initiated the HIV/HCV clinical trials in
Spain in late 2004, but did not proceed with the trials due to an inability to
enroll a sufficient number of patients. The Company is discussing with Esteve
their initiation of another clinical trial utilizing Ampligen(R) in another
indication. The agreement is terminable by either party if Ampligen(R) is
withdrawn from the territory for a specified period due to serious adverse
health or safety reasons; bankruptcy, insolvency or related issues of one of the
parties; or material breach of the agreement. Hemispherx may transform the
agreement into a non-exclusive agreement or terminate the agreement in the event
that Esteve does not meet specified percentages of its annual minimum purchase
requirements under the agreement. Esteve may terminate the agreement in the
event that Hemispherx fails to supply Ampligen(R) to the territory for a
specified period of time or certain clinical trials being conducted by
Hemispherx are not successful. The last patent with respect to this agreement
expires on June 5, 2012.
In October 2005, the Company signed a research agreement with the National
Institute of Infectious Diseases, in Tokyo, Japan. The collaboration, by Hideki
Hasegawa, M.D., Ph.D., Chief of the Laboratory of Infectious Disease Pathology,
will assess the Company's experimental therapeutic Ampligen(R) as a
co-administered immunotherapeutic to the Institution's nasal flu vaccine.
In October 2005, the Company also engaged the Sage Group, Inc., a health
care, technology oriented, strategy and transaction advisory firm, to assist the
Company in obtaining a strategic alliance in Japan for the use of Ampligen(R) in
treating Chronic Fatigue Syndrome or CFS (see Note 17). The Company is in
discussions with the Sage Group, Inc. to expand its engagement to assist the
Company in obtaining strategic alliance in Japan for the use of Ampligen(R) in
treating Avian Flu.
In November 2005, the Company entered into an agreement with Defence R&D
Canada, Suffield ("DRDC Suffield"), an agency of the Canadian Department of
National Defence, to evaluate the antiviral efficacy of the Company's
experimental therapeutic Ampligen(R) and Alferon(R) for protection against human
respiratory influenza virus infection in well validated animal models. DRDC
Suffield is conducting research and development of new drugs that could
potentially become part of the arsenal of existing antiviral weapons to combat
the bird flu. The initial study will focus on the testing of potential drugs
against the respiratory influenza virus infection on a mouse-adapted strain of
human influenza.
On December 9, 2005, the Company executed a Supply Agreement with
Hollister-Stier Laboratories LLC of Spokane, Washington ("Hollister-Stier"), for
the contract manufacturing of Ampligen(R) for a five year term. Pursuant to the
agreement the Company will supply the key raw materials and Hollister-Stier will
formulate and bottle the Ampligen(R). In November 2005, the Company paid
$100,000 as a deposit in order to initiate the manufacturing project. This
deposit was expensed as research and development during the 4th Quarter 2005.
The achievement of the initial objectives described in the agreement, in
combination with the Company's polymer production facility under construction in
New Brunswick, N.J., may enable the Company to manufacture the raw materials for
approximately 10,000 doses of Ampligen(R) per week. The Company executed a
confidentiality agreement with Hollister-Stier; therefore, the Company commenced
the transfer of the Company's manufacturing technology to Hollister-Stier.
Currently, Hollister-Stier has completed two pilot manufacturing runs of
Ampligen(R) for stability testing.
F-48
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 year ending December 31, 2003, 2004
and 2005 the Company incurred approximately $389,000, $220,000 and $236,000
respectively, of consulting service fees under these agreements. These costs are
charged to research and development expense as incurred.
(12) 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 2003,
2004 and 2005 the Company provided matching contributions to each employee for
up to 6% of annual pay aggregating $38,000, $77,000 and $89,000 respectively.
(13) Royalties, License, and Employment Agreements
The Company also has entered into a licensing agreement with a group of
individuals and Hahnemann University relating to their contributions to the
development of certain compounds, including Ampligen(R), and to obtain exclusive
information and regulatory rights relating to these compounds. Under this
agreement, the Company will pay 2% of net sales proceeds of Ampligen(R) not to
exceed an aggregate amount of $6 million per year through 2005.
The Company acquired a series of patents on Oragens, potentially a set of
oral broad spectrum antivirals and immunological enhancers, through a licensing
agreement with Temple University in Philadelphia, PA. The Company was granted an
exclusive worldwide license from Temple for the Oragens products. These
compounds have been evaluated in various academic laboratories for application
to chronic viral and immunological disorders. The 2', 5' oligoadenylate
synthetase/RNase L system is an important and widely distributed pathway for the
inhibition of viral replication and tumor growth. The 2', 5' oligoadenylate
synthetase, up activation by double-stranded RNA, synthesizes 2', 5'
oligoadenylates (2-5A) from ATP. These bioactive 2-5As directly activate RNase
L, which degrades viral and cellular RNAs resulting in the inhibition of protein
synthesis. The bioactive 2-5A molecules can be degraded by various hydrolytic
enzymes, resulting in a short half life. Analogues of these bioactive 2-5As,
termed Oragen(TM) RNA compounds, have been produced to increase stability and
maintain or increase biological activity without demonstrable toxicity. Pursuant
to the terms of the Company's agreement with Temple, the Company is obligated to
pay royalties of 2% to 4% of sales depending on the amount of technical
assistance required. The Company currently pays a royalty of $30,000 per year to
Temple. This agreement is to remain in effect until the date that the last
licensed patent expires unless terminated sooner by mutual consent or default
due to royalties not being paid. The last Oragen(TM) patent expires on June 1,
2018. The Company records the payment of the royalty as research and development
cost for the period incurred.
F-49
In October 1994, the Company entered into a licensing agreement with
Bioclones (Propriety) Limited (SAB/Bioclones) with respect to co-development of
various RNA drugs, including Ampligen(R), for a period ending three years from
the expiration of the last licensed patents. The licensing agreement provided
SAB/Bioclones with an exclusive manufacturing and marketing license for certain
southern hemisphere countries (including certain countries in South America,
Africa and Australia as well as the United Kingdom and Ireland (the licensed
territory). We deem this marketing arrangement with Bioclones void due to the
numerous and long standing failures of performance by Bioclones.
In December 2004, the Company filed a multicount complaint in federal
court (Southern District of Florida) against a conspiratorial group, which
includes Bioclones, seeking to illegally manipulate the Company's stock for
purposes of bringing about a hostile takeover of Hemispherx (see Note 16).
In October 1994, the Board of Directors granted an at the time director of
the Company the right to receive 3% of gross proceeds of any licensing fees
received by the Company pursuant to the SAB/Bioclones licensing agreement, a fee
of .75% of gross proceeds in the event that SAB Bioclones makes a tender offer
for all or substantially all of the Company's assets, including a merger,
acquisition or related transaction, and a fee of 1% on all products manufactured
by SAB Bioclones.
On March 20, 2002, the Company's European subsidiary Hemispherx Biopharma
Europe, S.A. ("Hemispherx S.A.") entered into a sales and Distribution agreement
with Laboratories Del Dr. Esteve S.A. ("Esteve"). Pursuant to the terms of the
agreement, Esteve was granted the exclusive right to market Ampligen(R) in
Spain, Portugal and Andorra for the treatment of Myalgic/Chronic Fatigue
Syndrome ("ME/CFS"). In addition to other terms and other projected payments,
Esteve paid an initial and non-refundable fee of 625,000 Euros (approximately
$563,000) to Hemispherx S.A. on April 24, 2002. Esteve is to pay a fee of
1,000,000 Euros after U.S. Food and Drug Administration approval of Ampligen(R)
for the treatment of ME/CFS and a fee of 1,000,000 Euros upon Spain's approval
of the final marketing authorization for using Ampligen(R) for the treatment of
ME/CFS.
In connection with the asset purchase agreement entered into with ISI, the
Company is obligated to pay ISI a 6% royalty on the net sales of the Alferon N
Injection(R) product.
The Company has contractual agreements with two of its officers. The
aggregate annual base compensation under these contractual agreements for 2003,
2004 and 2005 was $637,000, $761,000 and $701,000 respectively. In addition,
certain of these officers are entitled to receive performance bonuses of up to
25% of the annual base salary (in addition to the bonuses described below). In
2003, 2004 and 2005, bonuses of $266,100, $165,300 and $175,300 respectively
were granted. In 2003, the Chief Executive Officer, Dr. William A. Carter, of
the Company was granted warrants to purchase 1,450,000 shares of common stock at
$2.20 per share. The Chief Executive Officer's employment agreement (see below)
provides for bonuses based on gross proceeds received by the Company from any
joint venture or corporate partnering agreement. In 2004, the Chief Executive
Officer of the Company was granted options to purchase 320,000 shares of common
stock at $2.60 per share and $3.44 per share and the Chief Financial Officer of
the Company was granted options to purchase 63,824 shares of common stock at
$2.60 and $3.44 per share. In 2005, the Chief Executive Officer of the Company
was granted options to purchase 645,000 shares of common stock at $1.75 to $2.87
per share and the Chief Financial Officer of the Company was granted options to
purchase 110,000 shares of common stock at $1.75 to $2.61 per share.
F-50
On March 11, 2005, the Company's board of directors, at the recommendation
of the Compensation Committee, approved an amended and restated employment
agreement and an amended and restated engagement agreement with Dr. William A.
Carter.
The amended and restated employment agreement provides for Dr. Carter's
employment as the Company's Chief Executive Officer and Chief Scientific Officer
until 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 initial base salary retroactive to January 1, 2005 is $290,888,
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 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 by us from
any joint venture or corporate partnering arrangement. Dr. Carter's agreement
also provides that he be paid a base salary and benefits through the last day of
the then term of the agreement if he is terminated without "cause", as that term
is defined in agreement. In addition, should Dr. Carter terminate the agreement
or the agreement be terminated due to his death or disability, the agreement
provides that Dr Carter be paid a base salary and benefits through the last day
of the month in which the termination occurred and for an additional twelve
month period. Pursuant to his original agreement, Dr. Carter was granted options
to purchase 73,728 (post split) shares in 1991. The exercise period of these
options is extended through December 31, 2010 and, should Dr. Carter's
employment agreement be extended beyond that date, the option exercise period is
further extended to the last day of the extended employment period. In
accordance with FASB Interpretation No. 44, Accounting for Certain Transactions
involving Stock Compensation, no compensation expense was recognized as the
exercise price at the extension date exceeded the fair value of the underlying
common stock.
The amended and restated engagement agreement, retroactive to January 1,
2005, provides for 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 of directors until 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 initial base fee as of
January 1, 2004 is $207,777, 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.
F-51
On February 14, 2005 the Company entered into an agreement with The Sage
Group of Branchburg, New Jersey for R. Douglas Hulse, an Executive Director of
The Sage Group, to serve as President and Chief Operating Officer of the
Company. In addition, other Sage Group principals and Senior Directors will be
made available to assist as needed. The engagement is expected to continue for a
period of 18 months; however, it is terminable on 30 days written notice by
either party after 12 months. Compensation for the services includes a ten year
warrant to purchase 250,000 shares of the Company's common stock at an exercise
price of $1.55. These warrants are to be issued to Sage Healthcare Advisors, LLC
and are to vest at the rate of 12,500 per month of the engagement with 25,000
vesting upon completion of the eighteenth month. Vesting accelerates in the
event of a merger or a purchase of a majority of the Company's assets or equity.
The Sage Group also is to receive a monthly retainer of $10,000 for the period
of the engagement. In addition, for each calendar year (or part thereof) during
which the agreement is in effect, The Sage Group will be entitled to an
incentive bonus in an amount equal to 0.5% of the gross proceeds received by us
during such year from any joint ventures or corporate partnering arrangements.
After termination of the agreement, The Sage Group will only be entitled to
receive the incentive bonus based upon gross proceeds received by us during the
two year period commencing on the termination of the agreement with respect to
any joint ventures or corporate partnering arrangements entered into by us
during the term of the agreement. Mr. Hulse will devote approximately two to two
and one half days per week to the Company's business. The Company used the
Black-Scholes valuation model to value the shares received by the Sage Group
pursuant to the agreement. The Company recorded a charge to earnings of
approximately $124,000 in 2005 with a related increase to additional paid in
capital.
The Company entered into an engagement agreement, retroactive to January
1, 2005, with Ransom W. Etheridge which provides for Mr. Etheridge's engagement
as the Company's General Counsel until December 31, 2009 unless sooner
terminated for cause or disability. The agreement automatically renews for
successive one year periods after the initial termination date unless the
Company or Mr. Etheridge give written notice otherwise at least ninety days
prior to the termination date or any renewal period. Mr. Etheridge has the right
to terminate the agreement on 30 days' prior written notice. The initial annual
fee for services is $96,000 and is annually subject to adjustment based on the
average increase or decrease in the Consumer Price Index for the prior year. Mr.
Etheridge's agreement also provides that he be paid all fees through the last
day of then current term of the agreement if he is terminated without "cause" as
that term is defined in the agreement. In addition, should Mr.
Etheridge terminate the agreement or the agreement be terminated due to his
death or disability, the agreement provides that Mr. Etheridge be paid the fees
due him through the last day of the month in which the termination occurred and
for an additional twelve month period. Mr. Etheridge will devote approximately
85% of his business time to the Company's business.
F-52
The Company entered into an amended and restated engagement agreement,
retroactive to January 1, 2005, with Robert E. Peterson which provides for Mr.
Peterson's engagement as the Company's Chief Financial Officer until December
31, 2010 unless sooner terminated for cause or disability. Mr. Peterson has the
right to terminate the agreement on 30 days' prior written notice. The initial
annual fee for services is $202,680 and is annually subject to increases based
on the average increase in the cost of inflation index for the prior year. Mr.
Peterson shall receive an annual bonus in each year that the Company's Chief
Executive Officer is granted a bonus. The bonus shall equal a percentage of Mr.
Peterson's base annual compensation comparable to the percentage bonus received
by the Chief Executive Officer. In addition, Mr. Peterson shall receive bonus
compensation upon Federal Drug Administration approval of commercial application
of Ampligen(R). Mr. Peterson's agreement also provides that he be paid all fees
through the last day of then current term of the agreement if he is terminated
without "cause" as that term is defined in the agreement. In addition, should
Mr. Peterson terminate the agreement or the agreement be terminated due to his
death or disability, the agreement provides that Mr. Peterson be paid the fees
due him through the last day of the month in which the termination occurred and
for an additional twelve month period. Mr. Peterson will devote approximately
85% of his business time to the Company's business.
On March 11, 2005 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 and entered into identical agreements regarding change in control
with William A. Carter, the Company's Chief Executive Officer and Chief
Scientific Officer, Robert E. Peterson, the Company's Chief Financial Officer
and Ransom W. Etheridge, the Company's General Counsel. Each of the agreements
regarding change in control became effective March 11, 2005 and continue through
December 31, 2007 and shall extend automatically to the third anniversary
thereof unless the Company gave notice to the other party prior to the date of
such extension that the agreement term will not be extended. Notwithstanding the
foregoing, if a change in control occurs during the term of the agreements, the
term of the agreements will continue through the second anniversary of the date
on which the change in control occurred. Each of the agreements entitles William
A. Carter, Robert E. Peterson and Ransom W. Etheridge, respectively, to change
of control benefits, as defined in the agreements and summarized below, upon
their respective termination of employment/engagement with the Company during a
potential change in control, as defined in the agreements or after a change in
control, as defined in the agreements, when their respective terminations are
caused (1) by us for any reason other than permanent disability or cause, as
defined in the agreement (2) by William A. Carter, Robert E. Peterson and/or
Ransom W. Etheridge, respectively, for good reason as defined in the agreement
or, (3) by William A. Carter, Robert E. Peterson and/or Ransom W. Etheridge,
respectively for any reason during the 30 day period commencing on the first
date which is six months after the date of the change in control.
F-53
The benefits for each of the foregoing executives would be as follows:
o A lump sum cash payment of three times his base salary and annual
bonus amounts; and
o Outplacement benefits.
Each agreement also provides that the executive is entitled to a "gross-up"
payment to make him whole for any federal excise tax imposed on change of
control or severance payments received by him. Dr. Carter's agreement also
provides for the following benefits:
o Continued insurance coverage through the third anniversary of his
termination; and
o Retirement benefits computed as if he had continued to work for the
above period.
In order to facilitate the Company's need to obtain financing and prior to
the Company's shareholders approving an amendment to the Company's corporate
charter to merge the number of authorized shares, Dr. Carter, the Company's
Chief Executive Officer, agreed to waive his right to exercise certain warrants
and options unless and until the Company's shareholder approved an increase in
the Company's authorized shares of Common Stock.
In October 2003, in recognition of this action as well as Dr. Carter's
prior and on-going efforts relating to product development securing critically
needed financing and the acquisition of a new product line, the Compensation
Committee determined that Dr. Carter be awarded bonus compensation in 2003
consisting of $196,636 and a grant of 1,450,000 stock warrants for a value of
$1,769,000 with an exercise price of $2.20 per share. These warrants vested upon
the second ISI Asset closing during the first quarter 2004 and the Company
recorded stock compensation of $1,769,000.
The Company has engaged the Sage Group, Inc., a health care, technology
oriented, strategy and transaction advisory firm, to assist the Company in
obtaining a strategic alliance in Japan for the use of Ampligen(R) in treating
Chronic Fatigue Syndrome or CFS. R. Douglas Hulse, the Company's President and
Chief Operating Officer, is a member and an executive director of The Sage
Group, Inc.
(14) Leases
The Company has several noncancellable operating leases for the space in which
its principal offices are located and certain office equipment.
Future minimum lease payments under noncancellable operating leases are as
follows:
(000's omitted)
Year ending Operating
December 31, leases
---------------------------------- ---------------
2006 ............................. $193
2007 ............................. 65
----
Total minimum lease payments ..... $258
====
F-54
Rent expense charged to operations for the years ended December 31, 2003,
2004 and 2005 amounted to approximately $266,000, $269,000 and $284,000
respectively. The term of the lease for the Rockville, Maryland facility expired
June 2005. The Company transferred this operational site to the Company's New
Jersey facility. The term of the lease for the Philadelphia, Pennsylvania
offices is through April, 2007 with an average rent of $15,000 per month, plus
applicable taxes and charges.
(15) Income Taxes
As of December 31, 2005, the Company has approximately $81,500,000 of
federal net operating loss carryforwards (expiring in the years 2006 through
2026) available to offset future federal taxable income. The Company also has
approximately $28,000,000 of state net operating loss carryforwards (expiring in
the years 2006 through 2010) available to offset future state taxable income.
The utilization of certain state net operating loss carryforwards may be subject
to annual limitations.
Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and current equity transactions, the
Company's net operating loss carryforwards may be subject to an annual
limitation generally determined by multiplying the value of the Company on the
date of the ownership change by the federal long-term tax exempt rate. Any
unused annual limitation may be carried forward to future years for the balance
of the net operating loss carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the carrying amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due to
the uncertainty of the Company's ability to realize the benefit of the deferred
tax asset, the deferred tax assets are fully offset by a valuation allowance at
December 31, 2004 and 2005.
The components of the net deferred tax asset of December 31, 2004 and 2005
consists of the following:
(000's omitted)
Deferred tax assets: 2004 2005
---------- --------
(Restated)
Net operating losses $ 26,864 $ 27,715
Accrued Expenses and Other 77 (43)
Capitalized Research and development costs 1,059 1,348
--------- --------
Total 28,000 29,020
Less: Valuation Allowance (28,000) (29,020)
--------- --------
Balance $ -0- $ -0-
========= =========
F-55
(16) Contingencies
On September 30, 1998, the Company filed a multi-count complaint against
Manuel P. Asensio, Asensio & Company, Inc. ("Asensio"). The action included
claims of defamation, disparagement, tortuous interference with existing and
prospective business relations and conspiracy, arising out of Asensio's false
and defamatory statements. The complaint further alleged that Asensio defamed
and disparaged the Company in furtherance of a manipulative, deceptive and
unlawful short-selling scheme in August and September, 1998. In 1999, Asensio
filed an answer and counterclaim alleging that in response to Asensio's strong
sell recommendation and other press releases, the Company made defamatory
statements about Asensio. The Company denied the material allegations of the
counterclaim. In July 2000, following dismissal in federal court for lack of
subject matter jurisdiction, the Company transferred the action to the
Pennsylvania State Court. In March 2001, the defendants responded to the
complaints as amended and a trial commenced on January 30, 2002. A jury verdict
disallowed the claims against the defendants for defamation and disparagement
and the court granted the Company a directed verdict on the counterclaim. On
July 2, 2002 the Court entered an order granting the Company a new trial against
Asensio for defamation and disparagement. Thereafter, Asensio appealed the
granting of a new trial to the Superior Court of Pennsylvania. The Superior
Court of Pennsylvania has denied Asensio's appeal. Asensio petitioned the
Supreme Court of Pennsylvania for allowance of an appeal, which was denied. The
Company now anticipates the scheduling of a new trial against Asensio for
defamation and disparagement in the Philadelphia Common Pleas Court.
In June 2002, a former ME/CFS clinical trial patient and her husband filed
a claim in the Superior Court of New Jersey, Middlesex County, against the
Company, one of its clinical trial investigators and others alleging that she
was harmed in the ME/CFS clinical trial as a result of negligence and breach of
warranties. On June 25, 2004 all claims against the Company were dismissed with
prejudice. The former ME/CFS clinical trial patient and her husband have now
appealed the dismissal of their claims to the New Jersey Superior Court,
Apellate Division, who upheld the dismissal of all claims against the Company
and the matter is now concluded.
In June 2002, a former ME/CFS clinical trial patient in Belgium filed a
claim in Belgium, against Hemispherx Biopharma Europe, NV/SA, the Company's
Belgian subsidiary, and one of the Company's clinical trial investigators
alleging that she was harmed in the Belgium ME/CFS clinical trial as a result of
negligence and breach of warranties. The Company believes the claim is without
merit and the Company is defending the claim against the Company through its
product liability insurance carrier.
In December 2004, the Company filed a multicount complaint in federal
court (Southern District of Florida) against a conspiratorial group, which
includes Bioclones, seeking to illegally manipulate its stock for purposes of
bringing about a hostile takeover of Hemispherx. The lawsuit alleges that the
conspiratorial group commenced with a plan to seize control of its cash and
proprietary assets by an illegal campaign to drive down its stock price and
publish disparaging reports on the Company's management and current fiduciaries.
The lawsuit seeks monetary damages from each member of the conspiratorial group
as well as injunctions preventing further recurrences of their misconduct. The
conspiratorial group includes Bioclones, a privately held South African
Biopharmaceutical company that collaborated with the Company (see Note 13), and
Johannesburg Consolidated Investments, a South African corporation, Cyril
Donninger, R. B. Kebble, H. C. Buitendag, Bart Goemaere, and John Doe(s).
Bioclones, Johannesburg Consolidated Investments, Cyril Donninger, R. B. Kebble
and H.C. Buitendag filed a motion to dismiss the complaint, which was granted by
the court. The Company is in the process of appealing this decision to the 11th
federal circuit court of appeals.
F-56
On January 10, 2005, the Company initiated a multicount lawsuit in the
United States District Court for the Eastern District of Pennsylvania seeking
injunctive relief and damages against a conspiratorial group, many of whom are
foreign nationals or companies located outside the United States alleging that
the conspiratorial group has engaged in secret meetings, market manipulations,
fraudulent misrepresentations, utilization of foreign accounts and foreign
secrecy laws all in furtherance of an illegal scheme to take over Hemispherx and
enrich themselves at the expense of Hemispherx's public shareholders. On
February 18, 2005 the Company filed an amended complaint in the same lawsuit
joining Redlabs, USA, Inc. as a defendant with the existing defendants R.E.D.
Laboratories, N.V./S.A., Bart Goemaere, Jan Goemaere, Dr. Kenny De Meirleir,
Kenneth Schepmans, Johan Goossens, Lieven Vansacker and John Does. Pursuant to
an agreement in which R.E.D. Laboratories, N.V./S.A. and Dr. Kenny DeMeirleir
agreed not to participate in a hostile takeover of Hemispherx for a period of
five years, R.E.D. Laboratories, N.V./S.A. and Dr. Kenny DeMeirleir have been
dismissed as defendants in the litigation. The litigation is proceeding against
the remaining defendants.
(17) Certain Relationships and Related Transactions
The Company has employment agreements with certain of its executive
officers and have granted such officers and directors options and warrants to
purchase its common stock, as discussed in Note 9.
Ransom W. Etheridge, the Company's Secretary, General Counsel and one of
its directors, is an attorney in private practice, who renders corporate legal
services to us from time to time, for which he has received fees totaling
$88,000 in 2005. In addition, Mr. Etheridge serves on the Board of Directors for
which he received Director's Fees of cash and stock valued at $100,000 in 2005.
We loaned $60,000 to Ransom W. Etheridge in November 2001 for the purpose of
exercising 15,000 class A redeemable warrants. This loan bears interest at 6%
per annum. This loan was granted prior to the enactment of the Sarbanes Oxley
Act of 2002 prohibiting such transactions. In lieu of granting Mr. Etheridge a
bonus for outstanding legal work performance on behalf of the Company, the Board
of Directors forgave the loan and accrued interest on February 24, 2006.
Richard Piani, a Director, lives in Paris, France and assisted the
Company's European subsidiaries in their dealings with medical institutions and
the European Medical Evaluation Authority. Mr. Piani assisted the Company in
establishing clinical trial protocols as well as performed other scientific work
for the Company. The services provided by Mr. Piani terminated in September
2003. For these services, Mr. Piani was paid an aggregate of $100,100 for the
year ended December 31, 2003.
The Company paid $18,800, and $7,600 for the years ended December 31, 2003
and 2004, respectively to Carter Realty for the rent of property used by the
Company at various times in years 2003 and 2004. The property was owned by
others, but was acquired in late 2004 by Retreat House, LLC, an entity in which
the children of William A. Carter have a beneficial interest. The Company paid
Retreat House, LLC $54,000 for the use of the property at various times in 2005.
F-57
Antoni Esteve, one of the Company's former directors, was a Member of the
Executive Committee and Director of Scientific and Commercial Operations of
Laboratorios Del Dr. Esteve S.A (see Note 9(c)).
On February 14, 2005 the Company entered into an agreement with The Sage
Group of Branchburg, New Jersey for R. Douglas Hulse, an Executive Director of
The Sage Group, to serve as President and Chief Operating Officer of the Company
(See Notes 3 and 11 for additional information concerning this agreement).
(18) Concentrations of credit risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents,
investments and accounts receivable. The Company places its cash with
high-quality financial institutions. At times, such amount may be in excess of
Federal Deposit Insurance Corporation insurance limits of $100,000.
Sales to three large wholesalers represented approximately 74% and 80% of the
Company's total sales for the years ended December 31, 2004 and 2005,
respectively.
(19) Quarterly Results of Operation (unaudited)
The following is a summary of the unaudited quarterly results of operations:
2004
(in thousand except per share data)
March 31, June 30, September December
2004 2004 30, 2004 31, 2004
As March 31, As June 30, As September As December Total
previously 2004 previously 2004 previously 30, 2004 previously 31, 2004 Restated
reported(1) Restated(2) reported Restated(2) reported Restated(2) reported Restated(2)
----------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------
Revenues $ 308 $ 308 $ 331 $ 331 $ 258 $ 258 $ 332 $ 332 $ 1,229
Costs and
expenses 4,409 4,409 2,526 2,526 2,972 2,972 2,211 2,211 12,118
-------- -------- -------- ------- ------- -------- -------- ------- - --------
Net loss (8,042) (7,064) (5,956) (2,784) (7,007) (4,152) (3,135) (2,887) (16,887)
Deemed
dividend(4) -- -- -- (2,355) -- (1,676) -- -- (4,031)
-------- -------- -------- ------- ------- -------- -------- -------- --------
Net loss
applicable to
common
stockholders $(8,042) $(7,064) $(5,956) $(5,139) $(7,007) $(5,828) $(3,135) $(2,887) $(20,918)
-------- -------- -------- ------- ------- -------- -------- -------- --------
Basic and
diluted
loss per share $ (.20) $ (.17) $ (.14) $ (.12) $ (.15) $ (.12) $ (.06) $ (.05) $ (.46)
======== ======== ======== ======= ======== ======== ======== ======== ========
See Note 2 for restated year end results for the year ended December 31, 2004.
As discussed, in Note 2, the Company will file its quarterly reports on Form
10-Q/A for the quarterly periods ended March 31, 2005, June 30, 2005 and
September 30, 2005, which will include the quarters ended in 2004 as soon as
practicable.
F-58
(1) During the first quarter 2004, the Company recorded stock compensation of
$1,769,000 (See Note 9(b)) and during the third quarter 2004, the Company
recorded stock compensation of $231,000.
(2) The Company re-evaluated the accounting for the March 2003, July 2003,
October 2003, January 2004 and July 2004 Debentures (collectively, "the
Debentures") to determine whether the embedded conversion options required
bifurcation and fair value accounting in accordance with FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
and EITF 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in a Company's Own Stock". The Company
concluded that bifurcation was not required and that EITF 00-27 should
have been applied. We did initially apply EITF 00-27, however as part of
performing an analysis on the guidelines set forth in EITF 00-27 it was
determined that the initial accounting treatment and subsequent price
resets for the Debentures that were originally applied and reflected in
the financial were not correctly applied. To properly account for the
initial calculation of the discount and the conversion price resets
triggered upon the issuance of the issuance of the October 2003 Debenture
and the August 2004 Private Placement (See Notes 8 & 9 for more details on
these resets), it was determined, under guidance from EITF 00-27 that the
debt discount should be restated for the Debentures.
(3) The estimation of fair value ascribed to and the accounting treatment of
the investment banking fees paid to Cardinal Capital, LLC ("Cardinal") in
connection with the Debenture issuances, at inception, was inaccurately
reflected in the financial statements included in our Quarterly reports on
Form 10-Q and that, therefore, a restatement of our financial statements
for the periods referenced above was required. In connection with the
initial recording of the Debentures mentioned above, it was determined
that the fair value of the warrants issued as investment banking fees paid
to Cardinal, be accounted for as a discount to Debentures. These
investment banking fees should have been capitalized as deferred financing
costs and amortized over the life of the Debentures or charged to earnings
on the earlier conversion thereof. In addition, the initial calculation of
the fair value of the warrants issued to Cardinal as a part of the
Debenture issuances was determined to have been applied incorrectly at the
time of issuance.
(4) The accounting treatment set forth is FASB Statement No. 123, "Accounting
for Stock-Based Compensation", for the issuance of the June 2008, May 2009
and June 2009 Warrants (collectively "the Warrants") (See Note 8) that was
originally interpreted and reflected in the financial statements was not
correctly applied. The warrants issued as incentive to exercise prior
warrant issuances are reflected as a deemed dividend at the date of
issuance, where previously these warrants were either recorded as
additional debt discount or as a financing charge at date of issuance.
F-59
2005
(in thousand except per share data)
March 31, June 30, September
2005 March 31, 2005 June 30, 30, 2005 September December
As 2005 As 2005 As 30, 2005 31, 2005
previously Restated previously Restated previously Restated Restated Total
reported ((1)(2)(4) reported ((1)(2)(4)) reported ((1)(2)(3)) ((1)(2)(4)) Restated
---------- ---------- ---------- ----------- ---------- ---------- ----------- ---------
Revenues $ 258 $ 258 $ 300 $ 300 $ 271 $ 271 $ 254 $ 1,083
Costs and expenses 2,348 2,393 2,670 2,784 2,386 2,464 3,357 10,998
-------- -------- -------- -------- -------- -------- ------- --------
Net loss applicable to
common stockholders (3,055) (2,980) (3,816) (3,345) (2,887) (2,643) (3,478) (12,446)
-------- -------- -------- -------- -------- -------- ------- --------
Basic and diluted
loss per share $ (.07) $ (.07) $ (.08) $ (.07) $ (.06) $ (.05) $ (.05) $ (.24)
======== ======== ======== ======== ======== ======== ======= ========
(1) The Company re-evaluated the accounting for the March 2003, July 2003,
October 2003, January 2004 and July 2004 Debentures (collectively, "the
Debentures") to determine whether the embedded conversion options required
bifurcation and fair value accounting in accordance with FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
and EITF 00-19, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in a Company's Own Stock". The Company
concluded that bifurcation was not required and that EITF 00-27 should
have been applied. The Company did initially apply EITF 00-27, however as
a part of performing an analysis on the guidelines set forth in EITF 00-27
it was determined that the initial accounting treatment and subsequent
price resets for the Debentures that were originally applied and reflected
in the financial statements were not correctly applied. To properly
account for the initial calculation of the discount and the conversion
price resets triggered upon the issuance of the issuance of the October
2003 Debenture and the August 2004 Private Placement (See Notes 8 & 9 to
the consolidated financial statements contained herein for more details on
these resets), it was determined, under guidance from EITF 00-27 that the
debt discount should be restated for the Debentures. The total impact of
this restatement on our statement of operations was to decrease the net
loss applicable to common stockholders for the year ended December 31,
2004 by $2,959,000 or $0.07 per share, and to increase the net loss
applicable to common stockholders by $287,000 or $0.01 per share for the
year ended December 31, 2003.
(2) The estimation of fair value ascribed to and the accounting treatment of
the investment banking fees paid to Cardinal Capital, LLC ("Cardinal") in
connection with the Debenture issuances, at inception, was inaccurately
reflected in the financial statements included in our Quarterly Reports on
Form 10-Q and that, therefore, a restatement of our financial statements
for the periods referenced above was required. In connection with the
initial recording of the Debentures mentioned above, it was determined
that the fair value of the warrants issued as investment banking fees paid
to Cardinal, be accounted for as a discount to Debentures. These
investment banking fees should have been capitalized as deferred financing
costs and amortized over the life of the Debentures or charged to earnings
on the earlier conversion thereof. In addition, the initial calculation of
the fair value of the warrants issued to Cardinal as a part of the
Debenture issuances was determined to have been applied incorrectly at the
time of issuance. The total impact of this restatement on our statement of
operations was to decrease non-cash finance charges for the years ended
December 31, 2003 and 2004 by $1,320,000 and $4,031,000, or $0.04 and
$0.08 per share, respectively, and increase the net loss to common
stockholders for the years ended December 31, 2003 and 2004 due to the
deemed dividend by $1,320,000 and $4,031,000, or $0.04 and $0.08 per
share, respectively.
F-60
(3) The Company recorded $241,000 in other income incorrectly in the third
quarter 2005 related to the termination of the MOU notice received by
Astellas. This amount was subsequently adjusted back to an accrued
liability as of December 31, 2005, as the agreement has not yet been
formally terminated.
(4) The accounting for certain warrants and options issued to non-employees
and our interpretation and application of FASB No. 123 was not correct in
2005.
(20) Subsequent Events
On February 8, 2006, the Company executed a Manufacturing and Safety Agreement
with Hyaluron, Inc. ("Hyaluron") of Burlington, Massachusetts, for the
formulation, packaging and labeling of Alferon N Injection(R). Pursuant to the
Agreement, the Company will supply raw materials in sufficient quantity and
provide any pertinent information to the project.
On March 21, 2006, the debenture holders converted $500,000 of the July 2004
debenture into 240,385 shares of common stock.
The Company failed to timely file its Annual Report on Form 10-K with the
Securities and Exchange Commission pursuant to the 1934 Act, and therefore, was
in violation of its covenant to timely file within its debenture agreements. The
Company obtained a waiver letter from its debenture holders regarding the
failure to meet this covenant. In addition, as a result of the Company's
inability to timely file its annual report on Form 10-K for the year ended
December 31, 2005, the Company currently is subject to liquidated damages until
such time as the shares issuable upon conversion of and interest under the
debentures, and shares issuable upon exercise of the warrants are again
registered for public resale or eligible for resale pursuant to Rule 144(k)
under the Securities Act. The Company anticipates the liquidated damages not to
exceed $250,000.
During 2006, the Company has issued an additional 4,913,669 shares for proceeds
of $11,979,994 which completes the terms of the July 8, 2005, Fusion Capital
agreement (see Note 9(d)).
On April 3, 2006, the Company received a notice from the staff of The American
Stock Exchange ("AMEX") indicating that it is not in compliance with Sections
134 and 1101 of the AMEX Company Guide and its listing agreement due to the
Company's failure to file its annual report on Form 10-K for the fiscal year
ended December 31, 2005 with audited financial statements on a timely basis. The
AMEX has granted an extension of the listing of the Company's common stock until
June 30, 2006, provided that the Company files its Form 10-K for 2005 by June 2,
2006 and provided that it files its Form 10-Q for the first quarter of 2006 by
June 30, 2006. During the extension period, the Company will be subject to
periodic review by AMEX staff. If the Company fails to meet any of the foregoing
deadlines, the AMEX has indicated that it will begin delisting proceedings.
F-61
On April 12, 2006, the Company entered into a Common Stock Purchase Agreement
("Purchase Agreement") with Fusion Capital. Pursuant to the terms of the
Purchase Agreement, Fusion Capital has agreed to purchase from the Company up to
$50,000,000 of common stock over a period of approximately twenty-five (25)
months. Pursuant to the terms of the Registration Rights Agreement, dated as of
April 12, 2006, we agreed to file a registration statement (the "Registration
Statement") with the Securities and Exchange Commission on or before June 30,
2006 covering the shares which are issued to or may be issued to Fusion Capital
under the Purchase Agreement. Once the Registration Statement has been declared
effective, each trading day during the term of the Purchase Agreement we have
the right to sell to Fusion Capital up to $100,000 of our 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 our
option under certain conditions, Fusion Capital can be required to purchase
greater amounts of common stock during a given period. In connection with
entering into the Purchase Agreement, the Company issued to Fusion Capital
321,751 shares of our common stock. This offering was made pursuant to an
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
Hemispherx Biopharma, Inc.
Schedule II -Valuation and Qualifying Accounts
(dollars in thousands)
Column B
Balance at Column C Column E
Column A beginning of Charge to Column D Balance at
Description period expense Write-offs end of period
---------------------------- ------------ --------- ---------- -------------
Year Ended December 31, 2005
Reserve for inventory $225 -- (125) $100
Year Ended December 31, 2004
Reserve for inventory $ -- 225 -- $225
Year Ended December 31, 2003
Reserve for inventory $ -- -- -- $ --
F-62