10KSB 1 form10ksb.txt FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ____________________ Commission file number: 0-15070 REGENERX BIOPHARMACEUTICALS, INC. (Name of small business issuer in its charter)
DELAWARE 52-1253406 (State or other jurisdiction of (I.R.S. Employer Identification number) incorporation or organization)
3 BETHESDA METRO CENTER, SUITE 700, BETHESDA, MARYLAND 20814 (Address of principal executive offices including zip code) Issuer's telephone number: 301-961-1992 ------------ Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 __ Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [ X ] State the issuer's revenues for its most recent fiscal year: $0. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on the OTC Bulletin Board on March 15, 2002, was approximately $8.6 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) The number of shares of issuer's Common Stock outstanding as of March 15, 2002 was 26,783,812. Documents Incorporated by Reference None ----------------------------------- TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES NO X ---- ---- PART I ITEM 1. BUSINESS GENERAL RegeneRx Biopharmaceuticals, Inc. (the "Company") was formed in 1982 and is a pharmaceutical research and development company focusing on the development of products to treat a variety of human diseases. Following a vote of its stockholders on December 15, 2000, the Company changed its name from Alpha 1 Biomedicals, Inc. to RegeneRx Biopharmaceuticals, Inc. In September 1998, the Company suspended its operations due to the insufficiency of funds. In August 1999, the Company resumed operations, on a limited basis, beginning with the appointment by its Board of Directors of the Company's Chairman and co-founder, Dr. Allan L. Goldstein, as the Company's new president and chief executive officer and the Board's appointment of four individuals, including Dr. Goldstein, to serve as financial and business consultants to the Company and to manage the Company's affairs on an interim basis. The consultants are responsible for general corporate activities, product development planning and the selection and management of the various external resources necessary to conduct pre-clinical and clinical studies. See "Item 12. Certain Relationships and Related Transactions--Consulting Agreement." Currently, the Company has no products that have received regulatory approval. The Company's primary business focus for most of its history was the commercialization of Thymosin alpha 1 ("T(alpha)1"), a 28 amino acid peptide shown to regulate the immune system in animal models. T(alpha)1 is now approved for the treatment of hepatitis b and c and as an immune adjuvant in 23 countries outside the United States and is in registration for approval in several more. In 1998, the Company sold all rights and interests it had in T(alpha)1 to SciClone Pharmaceuticals, Inc. See "--Previous Commercial Development - Thymosin Alpha 1" below. The Company's current primary business focus is the commercialization of Thymosin beta 4, a 43 amino acid peptide ("T(beta)4"). The Company is concentrating its efforts on the use of T(beta)4 for the treatment of injured tissue and non-healing wounds to enable more rapid repair and/or tissue regeneration. The Company utilizes a virtual company strategy in order to effectively control costs while focusing on the clinical development of T(beta)4. The Company uses this model for certain research and development, clinical trials, and manufacturing operations, as well as other functions critical to its mission. The Company believes this approach enhances its ability to allocate resources rapidly to different projects. The strategy consists of (i) identifying, evaluating and licensing pharmaceutical product opportunities that appear to have a significant commercial potential; (ii) designing pre-clinical and/or clinical protocols to test such products; (iii) utilizing third party contract manufacturers to supply clinical grade material and third party contract research organizations to perform pre-clinical and/or clinical studies in accordance with its designed protocols; and (iv) pursuing sublicense arrangements with established pharmaceutical companies to support late stage clinical testing and ultimately marketing if regulatory approval is obtained. RECENT DEVELOPMENTS On March 7, 2002 the Company completed the sale of 7,306,383 shares of the common stock of the Company pursuant to a private placement at a price of $.235 per share. The Company received approximately $1.7 million in proceeds from this private placement of its common stock. The lead investor in the transaction was Defiante Farmaceutica Unipessoal, L.d.a., a Portuguese company which is part of an Italian pharmaceutical group, Sigma-Tau, S.p.A., headquartered in Rome, Italy. Defiante Farmaceutica Unipessoal, L.d.a. purchased 4,255,319 shares of Company common stock in the private placement. On March 19, 2002, J.J. Finkelstein was appointed as the Company's President and Chief Executive Officer, replacing Dr. Allan L. Goldstein who will remain as Chairman and Chief Scientific Advisor of the Company. Mr. Finkelstein was also appointed to the Company's board of directors. Mr. Finkelstein was one of the early founders of RegeneRx, having helped finance the Company during its start-up in 1982. He was appointed 2 President and CEO in 1984 and remained in that position through 1989, during which time he was responsible for several rounds of financing including the Company's initial public offering. Mr. Finkelstein served as a financial and business consultant to the Company since August 1999. PRIMARY COMMERCIAL DEVELOPMENT FOCUS - THYMOSIN BETA 4 General. Originally isolated from the thymus, T(beta)4 is a chemically synthesized copy of a natural human peptide that circulates in the blood and plays a vital role in the regeneration, remodeling and healing of tissues. Although it is recognized that wound healing is a complex process, most companies working to develop new drugs in this area have focused primarily on adding different growth factors to stimulate healing and have, to date, failed to demonstrate dramatic improvements in the healing process. T(beta)4 represents a new type of compound being developed to speed the healing of injured tissues, accelerate the growth of blood vessels and reduce inflammation. Unlike compounds such as Platelet-Derived Growth Factor ("PDGF"), Keratinocyte Growth Factor ("KGF-2"), Epidermal Growth Factor ("EGF"), or basic Fibroblast Growth Factor ("bFGF"), T(beta)4 is not a growth factor and, unlike Interleukin-1 ("IL-1") or Tumor Necrosis Factor ("TNF-a"), T(beta)4 is not a cytokine. (Cytokines are proteins and peptides, which act as immune regulators and modulate the functional activities of individual cells and tissues.) Rather, it regulates the actin molecule in most mammalian cells and as such plays a vital role in the healing of injured or damaged tissues. Actin comprises up to 10% of the protein of non-muscle cells and plays a central role in cell structure (formation of the cytoskeleton) and in the movement of cells throughout the body. Research studies from the National Institutes of Health ("NIH") published in 1995, 1997, and 1999 established that T(beta)4 stimulates the migration of human keratinocytes (skin cells) and the migration of human endothelial cells. Endothelial cells are the major cell types responsible for the formation of blood vessels and other tissues. These studies were the first to document the important role of T(beta)4 in wound healing. Product Development. The Company's first efforts to commercialize T(beta)4 focused on the development of T(beta)4 for the treatment of cystic fibrosis. The Company suspended this development work in February 1996 upon learning that it would potentially infringe upon a U.S. patent issued for certain therapeutic compounds which might be used for the treatment of cystic fibrosis. The Company attempted but was not able to negotiate a license to this patent. In March 1997, the Company provided limited funding under a research contract with Vanderbilt University to determine the effect of T(beta)4 in a sheep model of Adult Respiratory Distress Syndrome ("ARDS"), a syndrome associated with septic shock. In animal models of septic shock, T(beta)4 has been shown to reduce endotoxin-induced death, presumably by modulating pathologic mediators of inflammation and cell death. Additional pre-clinical research studies would be required to determine the value of T(beta)4 in the treatment of septic shock and syndromes associated with septic shock. The Company is considering additional studies for this use of T(beta)4 and holds two patents related to this application. See "--Proprietary Rights" below. The Company's main product development focus is its involvement with and support of studies using T(beta)4 for the treatment of non-healing wounds and similar medical problems. The Company entered into a Material Transfer - Cooperative Research and Development Agreement with the NIH during the second quarter of 1997. Under this agreement, the Company provided an NIH investigator with T(beta)4 purchased from a third party vendor for testing in animal models in a wound healing study. In exchange, the Company received an option to elect an exclusive or non-exclusive commercialization license from the NIH for any patent rights that might result from the research study that relate to the use of T(beta)4 as a tissue growth and repair factor. Under the agreement, the Company was required to exercise this option within three months after the NIH notified the Company that a patent or other intellectual property application had been filed. A provisional patent application was filed by NIH in July 1998, with a Patent Cooperation Treaty (PCT) application filed in July 1999, pertaining to the work performed on T(beta)4. On February 6, 2001, the Company executed an agreement with the NIH giving the Company an exclusive worldwide license from the NIH for all claims to T(beta)4 within the patent application. In exchange for the exclusive license, the Company must make certain royalty and milestone payments to the NIH. No assurance can be given as to whether or when a patent will be issued, or as to any conditions that might be attached to the patent. 3 To date, the NIH has performed pre-clinical animal studies using T(beta)4, supplied by the Company, which have indicated that T(beta)4 is effective in healing injured tissue and improving wound healing and chemical burns in steroid-treated rodents and other mammals. Before clinical trials may begin the Company must file with the U.S. Food and Drug Administration (the "FDA") an Investigational New Drug Application ("IND"), and the IND must be approved by the FDA. Product development activities generally required to support the filing of an IND include (i) manufacturing of pre-clinical supplies; (ii) pharmacology studies; (iii) toxicology studies; (iv) manufacture of clinical supplies; and (v) development of a biochemical assay and immunoassay for T(beta)4. In June 2000, the Company and the NIH met with the FDA to discuss the proposed IND application which, if approved, would allow initiation of Phase I clinical trials on the use of T(beta)4 as a wound-healing treatment. The Company has received correspondence from the FDA which specifies the remaining pre-clinical work the Company must undertake in order to have the IND approved. The Company is currently preparing to complete the pre-clinical work necessary for approval of the IND and Phase I clinical trials. See "Forward-Looking Statements -- Uncertainties Related to Limited Capital Resources" and "-- Dependence on Collaborative Relationships" contained in Exhibit 99 to this Report. For additional information regarding the regulatory approval process for the Company's products, see "-- Government Regulation." Other areas the Company may explore with T(beta)4 are the healing of eye injuries, including chemical burns and inflammatory processes, post surgical healing, and wound healing in patients undergoing steroidal therapy, among other indications. The Company also is reconsidering the possible applications of T(beta)4 for the treatment of septic shock and cystic fibrosis. All of the Company's efforts to develop additional applications would likely require substantial additional capital or a strategic alliance or other partnership arrangement with a firm providing the capital and/or necessary expertise. The Company has placed development of T(beta)4 for wound healing as its highest product development priority. For additional information regarding the Company's efforts to commercialize T(beta)4, see "--Proprietary Rights." PREVIOUS COMMERCIAL DEVELOPMENT - THYMOSIN ALPHA 1 The Company's first commercial development project was focused on T(alpha)1, a 28 amino acid peptide shown to regulate the immune system in animal models. T(alpha)1 is now approved for the treatment of hepatitis b and c and as an immune adjuvant in 23 countries outside the United States and is in registration for approval in several more. The commercial development of this product was licensed to SciClone Pharmaceuticals, Inc. ("SciClone") in November 1994. Under the license agreement with SciClone, the Company was entitled to receive certain royalties on SciClone's net sales revenue from licensed products that ranged from 3% to 7% depending on SciClone's rights in the country in which the sales occurred. The Company's right to receive royalties was to continue at least until September 30, 2002. If, at the end of this eight-year period, the Company had not realized royalty payments in the amount of $35 million, then SciClone's royalty obligations were to continue until the earlier of (i) the payment to the Company of royalties aggregating $35 million or (ii) September 30, 2009. In 1996, the Company entered into a second agreement with SciClone whereby the Company received a non-refundable payment of royalties in the amount of $500,000, which was included in revenues in 1996. In exchange, the Company agreed that after royalty payments totaling $1.75 million were made, the Company would forgo future royalties, if and when earned, in an amount equal to $2.5 million. 4 In August 1997, the Company entered into a third agreement with SciClone whereby the Company received $70,000 as a non-refundable royalty payment in exchange for the Company's agreement to forgo an additional $700,000 in future royalties. This payment was included in revenues in 1997. In December 1997, the Company entered into an agreement with SciClone whereby the Company's rights to receive royalty payments from the future sale by SciClone and its licensees of T(alpha)1 would be sold to SciClone in exchange for $130,000 in cash and 444,115 shares of SciClone common stock, plus an additional 155,885 shares if the market value of SciClone common stock was below $4.053 per share during prescribed trading periods following the closing of the transaction. To assist the Company in funding its operations pending the closing of the transaction, SciClone agreed in 1998 to advance the Company up to $350,000, to be repaid in several installments following the closing of the transaction. These advances were secured by shares of SciClone common stock having a market value equal to the principal amount of the loans. The royalty sale transaction was approved by the Company's stockholders on July 15, 1998 and completed on July 28, 1998. In 1998 and 1999, because the market value of the SciClone common stock was below $4.053 per share during the prescribed post-closing trading periods, the Company received an additional 155,885 shares of SciClone common stock. As of December 31, 1999, the Company owed SciClone $301,722 on the outstanding advances (exclusive of accrued interest) and was in default in its obligations to repay these amounts. On January 25, 2000, the Company and SciClone entered into an Omnibus and Mutual Release of Claims Agreement under which SciClone agreed to cancel all amounts payable by the Company upon the Company's payment to SciClone a sum of $162,500. This amount was paid by the Company to SciClone in February 2000. SciClone further agreed to return to the Company the 69,085 shares of stock of SciClone common stock which were being held by SciClone as collateral for the loans. Each company agreed to release the other from any and all claims whatsoever which they may have relating to or arising under the agreement, the loans and the shares of SciClone common stock. As of December 31, 2000, the Company held 37,673 shares of SciClone common stock. The closing price per share of the SciClone common stock on that date, as reported by The Nasdaq Stock Market, was $4.00. In February 2001, the Company sold all 37,673 remaining shares of SciClone common stock at a price of $6.42 resulting in cash proceeds totaling $241,883. MANUFACTURING In anticipation of Phase I clinical trials, the Company has contracted with a manufacturer to produce T(beta)4 for this study, and future studies, of T(beta)4. In March 2000, the Company pre-paid $50,000 of the $100,000 cost of an initial quantity of the material. Pursuant to the agreement with the manufacturer, the remaining $50,000 became due in 2001 as a result of the Company's obtainment of exclusive rights under the patent application filed by the NIH. The remaining $50,000 was placed in escrow pending completion of production. See "Item 6. Management's Discussion and Analysis or Plan of Operation." For the Phase I clinical trials, it is expected that the T(beta)4 supplied by the Company will be given to another manufacturer to produce a topical formulation that will be administered to test subjects. Several manufacturers have been identified to formulate and test this material. No agreements with these manufacturers have been entered into, however, and no assurance can be given that such agreements will be negotiated on terms favorable to the Company, or at all. Contractors will be selected on the basis of their supply capability, ability to produce a drug substance in accordance with current Good Manufacturing Practice requirements of the FDA and to meet Company-established specifications. The Company does not know at this time what the cost of manufacturing this material will be, or whether it will have sufficient funds to cover this cost. 5 COMPETITION The Company is engaged in a business that is highly competitive. Research and development activities for the development of drugs to treat patients with cystic fibrosis, septic shock and non-healing wounds are being sponsored or conducted by private and public institutions and by major pharmaceutical companies located in the United States and a number of foreign countries. Most of these companies and institutions have financial and human resources that are substantially greater than those of the Company, and that have extensive experience in conducting research and development activities and clinical testing and in obtaining the regulatory approvals necessary to market pharmaceutical products. With respect to wound-healing, Johnson & Johnson has recently begun marketing of Regranex(TM) for this purpose. Another company, Human Genome Sciences, Inc., announced on October 17, 2000 that SmithKline Beecham Corporation had exercised rights to jointly develop a wound healing drug with Human Genome Sciences. GOVERNMENT REGULATION Regulation by governmental authorities in the United States and foreign countries will be a significant factor in the manufacturing and marketing of the Company's products and in its ongoing research and product development activities. Any product developed by the Company will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous pre-clinical and clinical testing and other approval procedures by the FDA and similar health authorities in foreign countries. Various federal statutes and regulations also govern or influence the manufacturing, labeling, storage, record keeping and marketing of such products. The process of obtaining these approvals and the subsequent compliance with appropriate federal statutes and regulations require the expenditure of substantial resources. Any failure by the Company to obtain regulatory approvals, or any delay in obtaining such approvals, could adversely affect the marketing of products being developed by the Company, its ability to receive product or royalty revenues and its liquidity and capital resources. Pre-clinical testing in the laboratory must be conducted to evaluate the potential efficacy and the safety of an investigational drug. The results of these studies are submitted to the FDA as part of an IND, which must be reviewed and approved before clinical testing can begin. Typically, clinical evaluation involves a three stage process. In Phase I, trials are conducted with a small number of subjects to determine the safety profile, the pattern of drug distribution and metabolism. In Phase II, trials are conducted with groups of patients afflicted with a specific disease in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In Phase III, large scale, multi-center, comparative trials are conducted with patients afflicted with a target disease in order to provide enough data for the statistical proof of efficacy and safety required by the FDA and other regulatory authorities. The results of the pre-clinical and clinical testing with detailed information on manufacturing are submitted to the FDA in the form of a New Drug Application ("NDA") or a Product License Application ("PLA") accompanied by an Establishment License Application ("ELA") for approval to commence commercial sales. In responding to an NDA, PLA or ELA, the FDA may grant marketing approval, request additional information or deny the application if the FDA determines that the application does not satisfy its regulatory approval criteria. Therefore, even if the Company completes Phase III clinical trials for certain of its products, there can be no assurance that the FDA will grant marketing approvals, or if granted, that they will be granted on a timely basis. If the FDA does approve a product, it may require, among other things, post-marketing testing, including potentially expensive Phase IV studies, and surveillance to monitor the safety and effectiveness of the drug. In addition, the FDA may in some circumstances impose restrictions on the use of the drug that may be difficult and expensive to administer. Product approvals may be withdrawn if compliance with regulatory requirements are not maintained or if problems occur after the product reaches the market. 6 Under the Orphan Drug Act, the FDA may designate a product or products as having Orphan Drug status to treat "a rare disease or condition" which is a disease or condition that affects populations of less than 200,000 individuals in the United States, or, if victims of a disease number more than 200,000, the sponsor establishes that it does not realistically anticipate its product sales will be sufficient to recover its costs. If a product is designated as an Orphan Drug, then the sponsor is entitled to receive certain incentives to undertake the development and marketing of the product. One such incentive is market exclusivity. The sponsor that obtains the first marketing for a designated Orphan Drug for a given indication is eligible to receive marketing exclusivity for a period of seven years. There may be multiple designations of Orphan Drug status for a given drug and for different indications. However, only the sponsor of the first approved NDA (or PLA) for a given drug for its use in treating a given rare disease may receive marketing exclusivity for such use. Even if a sponsor of a product for an indication for use with an Orphan Drug designation is the first to obtain FDA approval of an NDA (or PLA) for that designation and obtains marketing exclusivity, another sponsor's application for the same drug product may be approved by the FDA during the period of exclusivity if the FDA concludes that it is clinically superior. PROPRIETARY RIGHTS Under a research agreement with The George Washington University ("GWU"), the Company funded T(beta)4 research at GWU and was granted a sole and exclusive world-wide license to any patents that resulted from such research. While the Company no longer funds research under this agreement, the Company remains obligated under the research agreement to pay GWU a royalty of 4% of the net sales, if any, of specified products covered by patents issued in connection with the agreement. Pursuant to the research agreement, the Company has exclusive rights to patent applications filed in the United States and in Europe disclosing the use of T(beta)4 for the treatment of septic shock and associated syndromes, including ARDS. Two U.S. patents have issued. The first patent, No. 5,578,570, entitled "Method of Treating Septic Shock Using T(beta)4," issued on November 26, 1996 and the second patent, No. 5,593,964, entitled "Method of Treating Septic Shock By Preventing Actin Polymerization," issued on January 14, 1997. No sales have occurred and as a result, no royalty payments have yet been incurred or paid to GWU pursuant to the research agreement. The Company has also filed numerous other patents related to T(beta)4 and related compounds and indications for their use. As discussed above under "--Primary Commercial Development Focus - Thymosin Beta 4 - Product Development," the Company has obtained exclusive rights under a patent application filed by the NIH for the use of T(beta)4 in the treatment of non-healing wounds. There can be no assurance that this, or any other future patent application under which the Company has rights, will result in the issuance of a patent or that any patent issued will not be subject to challenge. In the case of a claim of patent infringement by or against the Company, there can be no assurance that the Company will be able to afford the expense of any litigation that may be necessary to enforce its proprietary rights. EMPLOYEES The Company utilizes a business strategy that involves contracting out research, development, manufacturing, and other functions to third parties partially in order to minimize the expense and overhead associated with the maintenance of permanent employees and laboratory and manufacturing facilities. Consistent with this strategy, the Company currently utilizes several consultants, along with various other professional advisors, to advise its Chief Executive Officer and Board of Directors on all company matters. See "Item 12. Certain Relationships and Related Transactions -- Consulting Agreement." The Company currently has two employees in addition to retaining several outside consultants. 7 CLINICAL TRIALS Under its current business model, the Company intends to use a Clinical Research Organization (CRO) to conduct all facets related to clinical trials. This includes any preclinical pharmacokinetics, toxicology, and formulation work remaining prior to beginning human clinical trials. The CRO will also be responsible for the conduct of clinical trials on behalf of the Company. This will enable the Company to efficiently perform high quality clinical trials without the need to build infrastructure to support such trials and without giving up any rights to its products. The Company intends to file an IND and begin human clinical trials this year. ITEM 2. PROPERTIES The Company's corporate headquarters are located in Bethesda, Maryland where it leases office space in an executive office suite. The Company entered into the lease agreement for this property in August 1999. The lease agreement provides for three-month term, which automatically renews upon expiration for an additional three months unless either the Company or the lessor provides notice of termination 60 days prior to expiration. In addition, the Company had an operating lease for production facility space in Sunnyvale, California. The term of this lease expired in January 2002. In March 1995, the Company assigned its interest in the lease to a third party for the remaining term of the lease. The Company was liable under the original lease agreement to pay rent and other amounts owed by the assignee if the assignee defaults in payment of these amounts to the landlord. For additional information, see Note 10 of the Notes to Financial Statements contained in Item 7 of this Report and "Forward-Looking Statements-- Obligations Under Prior Laboratory Lease Agreement" contained in Exhibit 99 to this Report. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 8 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In March 2001, the Company's common stock began trading on the OTC Bulletin Board under the symbol RGRX. Prior to that date, and during 2000 and 1999, the Company's common stock traded in the over-the-counter market in the "pink sheets." The Company also has outstanding several classes of warrants to purchase Company common stock for which there is no public market. The following table sets forth the high and low bid prices for the Company's common stock for the periods indicated as reported by hdvest.com. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. High Low For the year ended December 31, 2001: First Quarter $.20 $.06 Second Quarter $.73 $.03 Third Quarter $.62 $.16 Fourth Quarter $.32 $.18 December 31, 2000: First Quarter $.45 $.01 Second Quarter $.17 $.09 Third Quarter $.16 $.06 Fourth Quarter $.17 $.04 As of December 31, 2001, there were approximately 1,120 holders of record of the Company's common stock. The Company has never paid a cash dividend on its common stock and does not anticipate that any cash dividends will be paid on the common stock in the foreseeable future due to the Company's limited funds for operations. 9 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO OF THE COMPANY CONTAINED IN ITEM 7 OF THIS REPORT. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. SEE EXHIBIT 99, ATTACHED HERETO. FINANCIAL CONDITION The Company's total assets at December 31, 2001 were $124,050, compared with $499,657 at December 31, 2000. This decrease in total assets was primarily due to decreases in the Company's cash and investment in SciClone common stock. Cash and cash equivalents decreased to $100,490 at December 31, 2001 from $335,421 at December 31, 2000, primarily as a result of operating expenses paid. Investments decreased to $0 at December 31, 2001 from $150,691 at December 31, 2000. This change resulted from the sale of all remaining SciClone shares held by the Company. Accounts payable decreased to $51,289 at December 31, 2001 from $109,293 at December 31, 2000, and accrued expenses increased to $32,717 at December 31, 2001 from $29,256 at December 31, 2000. The decrease in accounts payable resulted from payments to vendors and the forgiveness of debt. The Company's obligations under letter agreements with certain of its other vendors were reduced to $20,046 at December 31, 2001 from $106,912 at December 31, 2000 as a result of the forgiveness of debt. Stockholders' equity decreased to $19,998 at December 31, 2001 from $254,196 at December 31, 2000. This amount decreased primarily because of the increase in accumulated deficit to $36,114,768 from $35,964,159 as a result of a net loss for 2001 of $150,609, and by the decrease in accumulated other comprehensive income to $0 at December 31, 2001 from $83,589 at December 31, 2000. COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001 AND 2000 Net Income (Loss). The Company had a net loss of $150,609, or $0.01 per basic and diluted share, for the year ended December 31, 2001, compared with net income of $1,041,432, or $0.06 per basic and $0.05 per diluted share, for the year ended December 31, 2000. The net loss for 2001 stemmed primarily from the ongoing operating expenses net of the realized gain on sale of investments of $174,780 and a $118,274 extraordinary gain resulting from the forgiveness of debt. Net income in 2000 included a realized gain on sale of investments of $694,931 and an extraordinary gain of $781,775 related to the settlement of vendor payables and notes payable. Operating Loss. The Company had an operating loss of $495,697 for the year ended December 31, 2001 compared to an operating loss of $463,430 for the year ended December 31, 2000. This increase in operating loss resulted from an increase in operating expenses for 2000, discussed below. Revenues for the years ended December 31, 2001 and 2000 were zero. As noted below, under "--Liquidity and Capital Resources," the Company does not anticipate it will generate revenues in the foreseeable future. Operating expenses in 2001 totaled $495,697, compared to $463,430 in 2000. This increase was attributable primarily to an increase in research and development expenses. Operating expenses are comprised of research and development expenses, which were $139,115 for 2001 and $64,795 for 2000, and general and administrative expenses, which were $356,582 for 2001 and $398,635 for 2000. Research and development expenses increased as a result of an increase in research projects and in personnel related expenses. General and administrative expenses decreased as a result of a reduction in professional fees. 10 The Company expects that its operating losses will continue in 2002, since as with 2001 and 2000, the Company does not anticipate it will generate any revenues in 2002. Other Income (Expense) and Extraordinary Items. Realized gain on sales of investments for 2001 and 2000 were $174,780 and $694,931, respectively, representing gains from the sale of SciClone shares received in the royalty sale transaction. Other income of $22,000 in 2001 and $10,000 in 2000 was related to payments made by the President of the Company on a note receivable that has been fully reserved as a doubtful collection. Interest income for 2001 and 2000 was $30,034 and $18,699, respectively. As explained below, under "--Liquidity and Capital Resources," during 2001 and 2000, the Company renegotiated payments to vendors and had forgiveness of debt that resulted in an extraordinary gain of $118,274 and $618,948, respectively. The Company also entered into an agreement with SciClone that resulted in a forgiveness of debt of $162,827 that was recognized in 2000 as an extraordinary gain. Income Taxes. At December 31, 2001, the Company had net operating loss, capital loss and research and development tax credit carryforwards of approximately $35 million, $600,000 and $600,000, respectively, for income tax purposes which expire in various years through 2021. Certain substantial changes in the Company's ownership would result in an annual limitation on the amount of the net operating loss carryforwards which can be utilized. The Company has provided a full valuation allowance for deferred tax assets since realization of these future benefits cannot be reasonably assured as a result of recurring operating losses. For years in which the Company is profitable, these deferred tax assets are available to offset income tax liabilities and expense, subject to certain limitations. LIQUIDITY AND CAPITAL RESOURCES Since its inception in 1982, the Company's activities have consisted of conducting research and development, sponsoring clinical trials of its proprietary products, the construction and equipping of laboratory and production facilities, and the manufacture of products for research, testing and clinical trials. The Company's accumulated deficit of $36,114,768 through December 31, 2001 has been funded primarily by the proceeds from the issuance of equity securities (and interest earned on such funds), the licensing of technology developed or acquired by the Company, limited product sales and royalties, and the sale of royalty rights. The Company continues its development program for T(beta)4, and has no products that have received regulatory approval. The Company has not generated significant revenues from operations and does not anticipate generating product revenues or other revenues from operations for the foreseeable future. During 2001 and 2000, the Company earned no revenues. The Company will require substantial funding in order to complete its research and development activities and to manufacture and market any products which the Company intends to develop. In 2000, the Company entered into settlement agreements with several of its creditors. Pursuant to the settlement agreements, liability balances totaling $759,176 at December 31, 1999 were settled for payments in the aggregate of $168,164. As noted above under "Comparison of Results of Operations for Years Ended December 31, 2000 and 1999," this included payments totaling $148,164 to two vendors with whom the Company had letter agreements in settlement of amounts owed to such vendors totaling $586,482, and payments totaling $20,000 to two other vendors in settlement of amounts owed to such vendors totaling $172,694. In connection with the settlement agreement with one creditor, the Company's supplier of T(beta)4 for wound-healing studies to which the Company was indebted approximately $529,000, the Company paid a deposit of $50,000 for a commitment to purchase $100,000 of T(beta)4. Pursuant to the agreement with this creditor, the $50,000 balance of the purchase price became due in 2001 as a result of the Company's obtainment of an exclusive license from the NIH under the patent application filed in connection with the wound-healing study. See "Item 1. Business--Manufacturing." The Company also paid this creditor $125,000 as repayment and settlement in full of the $529,000 amount owed. 11 Currently, there are two other outstanding obligations to vendors which are under dispute. Amounts owed to these vendors totaled approximate $65,000 at December 31, 2000 and no payments have been made to such vendors since that date. In 2001, the Company recognized $118,274 in extraordinary income as a result of debt forgiveness. Cash balance at December 31, 2001 were $100,490. Working capital at December 31, 2001 was 9,069. Subsequent Event On March 7, 2002, the Company completed a private placement of its common stock. Under the terms of the private placement, the company sold 7,306,383 restricted shares at a stock price of $.235 per share. The total funds raised in the private placement amounted to $1,717,000. The capital will be used for general working capital purposes focused primarily on obtaining and IND from the FDA and initiating human clinical trials for T(beta)4. Although no assurance can be given, the Company believes that with the cash generated by the above equity transaction, together with its other readily available funds, it will be sufficient to sustain current operations through at least June 30, 2003. If substantial additional funding is not obtained by that point, the Company may be forced to suspend or discontinue certain operations. The effect of inflation and changing prices on the continuing operations of the Company is not expected to be significant. 12 ITEM 7. FINANCIAL STATEMENTS PAGE INDEPENDENT AUDITORS' REPORT 14 FINANCIAL STATEMENTS BALANCE SHEETS 15 STATEMENTS OF OPERATIONS 16 STATEMENTS OF STOCKHOLDERS' EQUITY 17 STATEMENTS OF CASH FLOWS 18 NOTES TO FINANCIAL STATEMENTS 19 13 INDEPENDENT AUDITORS' REPORT To the Board of Directors RegeneRx Biopharmaceuticals, Inc. We have audited the accompanying balance sheets of RegeneRx Biopharmaceuticals, Inc. as of December 31, 2001 and 2000, and the related statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of RegeneRx Biopharmaceuticals, Inc. as of December 31, 2001 and 2000, the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ REZNICK FEDDER AND SILVERMAN Bethesda, Maryland February 27, 2002, except for note 11 which is dated March 7, 2002 14 REGENERX BIOPHARMACEUTICALS, INC. BALANCE SHEETS
December 31, ------------------------------ 2001 2000 ---- ---- ASSETS Current assets Cash and cash equivalents $ 100,490 $ 335,421 Investments -- 150,691 Other current assets 12,631 8,000 ----------- ----------- Total current assets 113,121 494,112 Fixed assets, net 1,731 1,158 Due from related party, net of allowance 9,198 4,387 ----------- ----------- Total assets $ 124,050 $ 499,657 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 51,289 $ 109,293 Accrued expenses 32,717 29,256 Letter agreements with vendors 20,046 106,912 ----------- ----------- Total current liabilities 104,052 245,461 ----------- ----------- Commitments -- -- Stockholders' equity Preferred stock, $.001 par value per share, 1,000,000 authorized; no shares issued -- -- Common stock, par value $.001 per share, 100,000,000 shares authorized; 19,477,429 issued and outstanding 19,477 19,477 Additional paid-in capital 36,415,289 36,415,289 Accumulated deficit (36,114,768) (35,964,159) Accumulated other comprehensive income -- 83,589 Stock subscriptions (300,000) (300,000) ----------- ----------- Total stockholders' equity 19,998 254,196 ----------- ----------- Total liabilities and stockholders' equity $ 124,050 $ 499,657 =========== ===========
The accompanying notes are an integral part of these financial statements. 15 REGENERX BIOPHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS
Year ended December 31, ----------------------------------------- 2001 2000 ---- ---- Revenues $ -- $ -- Expenses Research and development 139,115 64,795 General and administrative 356,582 398,635 ------------ ------------ Total expenses 495,697 463,430 ------------ ------------ Operating loss (495,697) (463,430) ------------ ------------ Other income (expense) Realized gain on sale of investments 174,780 694,931 Other income 22,000 10,000 Interest income 30,034 18,699 Other expense -- (543) ------------ ------------ Total other income 226,814 723,087 ------------ ------------ (Loss) income before extraordinary items (268,883) 259,657 Extraordinary items Debt forgiveness 118,274 -- Settlement of vendor payables -- 618,948 Settlement of note payable & interest -- 162,827 ------------ ------------ Net (loss) income $ (150,609) $ 1,041,432 ============ ============ Basic and diluted net (loss) income per common share before extraordinary items $ (0.01) $ 0.01 ------------ ------------ Extraordiniary items Basic $ -- $ 0.05 ------------ ------------ Diluted $ -- $ 0.04 ------------ ------------ Basic net (loss) income per common share $ (0.01) $ 0.06 ============ ============ Diluted net (loss) income per common share $ (0.01) $ 0.05 ============ ============ Weighted average number of common shares outstanding 19,477,429 18,852,429 ============ ============
The accompanying notes are an integral part of these financial statements. 16 REGENERX BIOPHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED 2001 AND 2000
Common stock Additional Accumulated Other Total ------------------- paid-in Accumulated Stock Comprehensive stockholders' Shares Amount capital deficit Subscription income (loss) equity (deficit) ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 11,977,429 $11,977 $36,115,289 $(37,005,591) $ -- $ 483,326 $ (394,999) Unrealized loss on investments -- -- -- -- -- (399,737) (399,737) Exercise of stock options 7,500,000 7,500 300,000 -- (300,000) -- 7,500 Net income -- -- -- 1,041,432 -- -- 1,041,432 ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 19,477,429 19,477 36,415,289 (35,964,159) (300,000) 83,589 254,196 Unrealized loss on investments -- -- -- -- -- (83,589) (83,589) Net loss -- -- -- (150,609) -- -- (150,609) ----------------------------------------------------------------------------- ----------------------------------------------------- Balance, December 31, 2001 19,477,429 $19,477 $36,415,289 $(36,114,768) $(300,000) $ -- $ 19,998 ===================================================================================================================================
The accompanying notes are an integral part of these financial statements. 17 REGENERX BIOPHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS
Year ended December 31, -------------------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net (loss) income $ (150,609) $ 1,041,432 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 1,232 731 Realized gain on sale of investments (174,780) (694,931) Debt forgiveness (118,274) -- Settlement of vendor payables -- (618,948) Settlement of note payable and accrued interest -- (162,827) Stock issued for consulting services -- 7,500 Changes in operating assets and liabilities: Increase in other current assets (4,631) (8,000) Increase in due from related party (4,811) (3,422) Decrease in accounts payable (26,596) (131,626) Increase (decrease) in accrued expenses 3,461 (6,000) ----------- ----------- Net cash used in operating activities (475,008) (576,091) ----------- ----------- Cash flows from investing activities: Purchase of fixed assets (1,806) -- Cash received on sale of investments 241,883 1,030,625 ----------- ----------- Net cash provided by investing activities 240,077 1,030,625 ----------- ----------- Cash flows from financing activities: Principal payments of notes payable -- (162,500) ----------- ----------- Net cash used in financing activities -- (162,500) ----------- ----------- Net (decrease) increase in cash and cash equivalents (234,931) 292,034 Cash and cash equivalents at beginning of period 335,421 43,387 ----------- ----------- Cash and cash equivalents at end of period $ 100,490 $ 335,421 =========== =========== Supplemental disclosure of significant noncash investing and financing activities: Unrealized loss on investments recorded as accummulated other comprehensive income $ (83,589) $ (399,737) =========== ============= Issuance of common stock for subscriptions receivable $ -- $ 300,000 =========== =============
The accompanying notes are an integral part of these financial statements. 18 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 ORGANIZATION AND BUSINESS Organization and Nature of Operations RegeneRx Biopharmaceuticals, Inc. (the "Company"), a Delaware corporation, was incorporated in 1982. The Company operates predominantly in a single industry segment, the biotechnology industry, which consists of researching and developing new pharmaceutical products for the treatment of diseases or conditions that arise as a result of immune system disorders, including chronic viral infections, cancer and autoimmune disease. In early 1996, the Company substantially halted its development program and all other research and currently has no products that have received regulatory approval. During 1997, the Company entered into a Material Transfer Agreement - Cooperative Research and Development Agreement ("MTA-CRADA") with the National Institutes of Health ("NIH"), pursuant to which an NIH investigator used Thymosin beta 4, provided by the Company, in several studies including clinical trials, for the treatment of non-healing wounds. In exchange for providing the product and other data, the Company received an option to elect to negotiate for an exclusive or non-exclusive commercialization license from NIH pursuant to a patent application filed by NIH in 1998. The Company's option expired on February 11, 1999. The Company's President is a co-inventor on the patent application filed by the NIH. As a result, he had an equal, undivided interest in the intellectual property described in the patent which he subsequently assigned to the Company on May 1, 2000, resulting in full but non-exclusive rights to the Company. On February 6, 2001, the Company signed an exclusive licensing agreement with NIH whereby the Company obtained on exclusive worldwide license to Thymosin beta 4 as a wound-healing drug. In exchange for the exclusive license, the Company must make certain royalty and milestone payments to NIH. On December 17, 1997, the Company entered into the Alpha Rights Acquisition Agreement (the "Acquisition Agreement") with SciClone Pharmaceuticals, Inc. (SciClone) to sell its rights to receive from SciClone royalties on the future sales of Thymosin alpha 1 (see note 4). Prior to the Acquisition Agreement, the Company licensed to SciClone, on an exclusive basis, all of the Company's patent and proprietary rights with respect to Thymosin alpha 1. Under the license, SciClone had the right to develop, test, make, use and sell Thymosin alpha 1 and products containing Thymosin alpha 1 for all human and animal therapeutic and diagnostic uses (collectively, "Licensed Products"). In consideration for the license, the Company was entitled to receive from SciClone royalties on the sale by SciClone of Licensed Products that ranged from 3% to 7% of SciClone's net sales revenues, depending upon the date the license in a particular country was obtained by SciClone and on whether SciClone has patent protection in the country in which the Licensed Products are sold. On September 25, 1998, the Company announced that it was suspending operations due to insufficient funds to continue operations. During 1998, operations were funded from cash proceeds received from the sale of SciClone stock. The Company continued to pay debts and other obligations after operations ceased by selling SciClone Common Stock. 19 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 1. ORGANIZATION AND BUSINESS (Continued) In August 1999, the Company contracted with a group of four consultants, including the President of the Company, to advise the Company on the most viable approaches for resuming business operations, including raising capital and funding research and development. At that time the Company resumed operations. The consultants each received consideration in the form of 1,875,000 stock options, exercisable at its fair market value of $.04 per share. Currently, two consultants receive monthly fees of $5,000 and $9,167 for assistance with the Company's management and operations. The Company continues to pursue strategic alliances or other partnership arrangements with entities interested in and with resources to develop Thymosin beta 4, or other business transactions which would allow the Company to generate resources to permit continuation of the Company's operations. Should the Company obtain substantial additional funding, other factors including competition, dependence on third parties, uncertainty regarding patents, protection of proprietary rights, manufacturing of peptides and technology obsolescence could have a significant impact on the Company and its operations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates ---------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents ------------------------- The Company considers all highly liquid investments with original maturities of three months or less when acquired to be cash equivalents. Cash and cash equivalents are stated at cost which approximates fair value. Fixed Assets ------------ Fixed assets are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs which do not significantly prolong the useful lives of the assets are charged to expense. Depreciation is computed using the straight-line method over the estimated useful lives of two to ten years. Investments ----------- Investments consist of shares of SciClone Common Stock, which have been classified as available for sale securities. Available-for-sale securities are stated at fair value, and unrealized gains and losses are reported as a separate component of stockholders' equity (deficit). 20 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Comprehensive Income -------------------- The Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components. Comprehensive income reflects the change in equity of a business enterprise during a period from transactions other events and circumstances from non-owner sources. For the Company, comprehensive income represents net income (loss) adjusted for changes in unrealized gains or losses on the Company's available-for-sale securities. Changes in accumulated other comprehensive income (loss) are recorded directly to stockholders' equity (deficit) and do not affect the net income (loss) or cash flow of the Company. During the year ended December 31, 2001, the securities were sold for a realized gain of $174,780. Net comprehensive income for the years ended December 31, 2001 and 2000 consists of the following components, net of taxes:
2001 2000 ---------- ---------- Net income (loss) $ (150,609) $1,041,432 Net unrealized gain (loss) arising during the period on available-for-sale securities (83,589) (399,737) ---------- ---------- Total comprehensive income (loss) $ (234,198) $ 641,695 ========== ==========
Revenue Recognition ------------------- The Company will recognize revenue from royalties and sales when received. The Company will recognize consulting revenue as the consulting services are performed. Research and Development ------------------------ Research and development costs are expensed as incurred. Research and development performed by third parties is expensed based upon the third party's stage of product development. Income Taxes ------------ The Company accounts for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying and tax bases of assets and liabilities. A valuation allowance is recorded if, based upon the evidence available, it is more likely than not that some portion or all of the deferred tax assets will not be realized. 21 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Letter of Agreements with Vendors --------------------------------- During 1996, the Company entered into four separate letter agreements with vendors which allowed the Company to defer payments of current obligations. The four letter agreements were due on demand, but stipulated that a percentage of future royalties received from SciClone would be used to pay down their obligation. In January and February 1998, the Company entered into amended agreements with the four companies, subject to the completion of the royalty sale transaction with SciClone (see note 4), which would accelerate payments due. In consideration for the acceleration of payments, the vendors agreed to reduce the Company's aggregate obligation, including accrued interest, from $1,559,756 to $902,000, which the Company agreed to pay from the proceeds of the sale of the shares of SciClone Common Stock received under the Acquisition Agreement (see note 1). Due to the decrease in value of the SciClone Common Stock and discontinuance of operations during 1998 and 1999, the Company was unable to maintain the payment schedule outlined in the agreements discussed above. During 2000, the Company renegotiated its letter agreements with two of the vendors whereby liabilities of $586,482 were settled in full for payments totaling $148,164. In connection with one settlement agreement, one creditor was paid $50,000 for a future commitment to purchase $100,000 of Thymosin Beta 4. In addition, the Company entered into settlement agreements with two new vendors with outstanding balances of $172,694 for payments totaling $20,000. There were three other accounts payable items in the amount of $27,936 that were written off in 2000. During the year ended December 31, 2001 a letter agreement for $86,866 and two other accounts payable items in the amount of $31,408 were forgiven. As of December 31, 2001 and 2000, $20,046 and $106,912, respectively, remains payable to these vendors. Fair Value of Financial Instruments ----------------------------------- The estimated fair values of the Company's cash and cash equivalents, due from related party, accounts payable, letter agreements with vendors and accrued expenses approximate their carrying values, due to their short-term nature. Earnings (loss) Per Share
2001 2000 ------------ ------------ Net income (loss) available for common shareholders (A) $ (150,609) $ 1,041,432 ============ ============ Average outstanding: Common stock (B) 19,477,429 18,852,429 ============ ============ Stock options and warrants -- 360,000 ------------ ------------ Common stock and stock equivalents (C) 19,477,429 19,212,429 Earnings (loss) per share: Basic (A/B) $ (.01) $ .06 Diluted (A/C) $ (.01) $ .05
22 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings (loss) Per Share (Continued) ------------------------- Unexercised employee stock options and warrants, which were previously granted, to purchase 1,556,666 and 1,356,666 shares of the Company's common stock as of December 31, 2001 and 2000, respectively, were not included in the computations of diluted earnings per share. The Company incurred a net loss for the year ended December 31, 2001, therefore, all potential common shares are antidilutive and not included in the calculation of diluted net loss per share. As of December 31, 2000, the options and warrants' exercise prices were greater than the average market price of the Company's common stock during the respective period. Stock Based Compensation ------------------------ The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for employee stock options. Accordingly, when the Company grants employee stock options with an exercise price equal to the NASDAQ bulletin board price ("quoted price") of the shares on the date of the grant, no compensation expense is recorded. If employee stock options are granted at an exercise price less than the quoted price, compensation expense is recorded to the extent of the intrinsic value. Transactions with nonemployees in which consideration is received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. 3. INVESTMENTS The following is a summary of the Company's investments as of December 31, 2000:
Gross unrealized Estimated Amortized cost gains fair value ------------------- ------------------ ------------------- Equity securities $ 67,102 $ 83,589 $ 150,691 =================== ================== ===================
4. SALE OF ROYALTY RIGHTS On December 17, 1997, the Company entered into the Acquisition Agreement with SciClone, pursuant to which the Company agreed to sell to SciClone its right to receive from SciClone royalties on the future sales of Thymosin alpha 1. In exchange, during 1997 at initial settlement, $65,000 cash was received. In October 1998, additional consideration was received at closing that included $65,000 cash and 444,115 shares of SciClone stock, valued at $4.053 per share, and the potential to receive a maximum of 155,885 additional shares of SciClone stock based on the stock's market value. The additional shares were contingent upon the average closing sales price of the SciClone Common Stock at certain predetermined dates. An additional 50,297 and 105,588 shares of SciClone Common Stock were received in 1999 and 1998, respectively. In addition to the Acquisition Agreement, SciClone made advances to the Company totaling $350,000 (see note 8). 23 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 4. SALE OF ROYALTY RIGHTS (Continued) Under the Acquisition Agreement, the Company relinquished its future rights to royalties, effective as of the date of the Acquisition Agreement. In addition, the Company assigned to SciClone (i) all patents held by the Company with respect to Thymosin alpha 1 and (ii) all of the Company's rights and obligations under licenses with third parties pursuant to which the Company has acquired rights to Thymosin alpha 1 (subject to all required consents of such third-party licensors). Throughout 2000 and 2001, the Company sold shares of SciClone Common Stock to fund operations and pay outstanding liabilities. Under the Acquisition Agreement, sales were restricted to a maximum of 50,000 shares monthly. During 2000, a total of 107,000 shares were sold, resulting in cash proceeds of $1,030,625 and a realized gain on the sales of $694,931. During 2001, a total of 37,673 shares were sold, resulting in cash proceeds of $241,883 and a realized gain on the sales of $174,780. As of December 31, 2001 and 2000, the Company held a total of -0- and 37,673 shares, respectively, of SciClone Common Stock with a fair value of $-0- and $150,691, respectively. 5. PROPRIETARY RIGHTS AND LICENSES The Company held certain proprietary rights to Thymosin beta 4 in the United States under a Commercial Text Agreement ("CTA") between the Company and Hoffman-LaRoche, Inc. and its foreign affiliate ("HLR") effective September 15, 1982. Pursuant the CTA, the Company was obligated to pay HLR a royalty of 8% on commercial sales (or 4% of commercial sales, if the FDA approved Thymosin beta 4 for sale by a competitor). The CTA was amended by an agreement ("Amendment Agreement") dated August 6, 1991 whereby the Company's royalty obligation would extend to the latter of expiration of the U.S. Patents that are the subject of the obligation, or any continuation, continuation in part, division or reissue thereof, or ten (10) years from the date of the first commercial sale of Thymosin beta 4. The U.S. Patents identified in the CTA and Amendment Agreement have all expired and no continuation, continuation in part, division or reissue thereof has occurred nor has there been any commercial sale of Thymosin beta 4. As of December 31, 2000, the Company no longer has any obligations under this agreement. The Company also has a worldwide license to certain uses of Thymosin beta 4 under a research agreement with George Washington University ("GWU") under which the Company is obligated to pay GWU a royalty of 4% on commercial sales. No such royalties have been incurred or paid as of December 31, 2001. 6. RELATED PARTIES In 1994, the Company entered into a note receivable agreement with the President of the Company, covering a loan of $149,000 due December 30, 1994, which accrued interest at the prime rate calculated monthly. The loan was repaid on January 1, 1995, in part with the proceeds of an unsecured second loan to the President from the Company in the amount of $115,617. The second loan has an interest rate of 11.5% and was to be repaid in 36 equal monthly installments. In February 1996, the terms of the loan were amended to provide for the suspension of installment payments for 12 months, but with interest continuing to accrue. In March 1997 and December 1997, the terms of the loan were further amended to suspend installment payments an additional nine and twelve months, respectively, with interest continuing to accrue through December 31, 1997. During 2000, a payment plan between the President and the Company was instituted whereby $2,000 of the monthly consulting fee of 24 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 6. RELATED PARTIES (Continued) $5,000 (see below) is withheld as repayment of the note. Payments on the note receivable are recognized as income by the Company when received and a total of $22,000 and $10,000 in payments were received in 2001 and 2000, respectively. As of December 31, 2001 and 2000, the outstanding balance on the loan was $37,674 and $59,674, respectively, which has been fully reserved. Prior to February 2001, the President serves the Company as a consultant for which he was paid a monthly consulting fee of $5,000. In addition to his position with the Company, the President is also Chairman of the Department of Biochemistry and Molecular Biology at GWU. The Company has not funded any research personally conducted by the President, and anticipates that any future funding, if any, will also be limited to research projects performed by principal investigators at GWU other than the President. No funding was provided during 2000 or 2001. 7. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS Fixed assets consist of the following: December 31, ----------------- 2001 2000 ------- ------- Furniture and equipment $4,928 $3,123 Less accumulated depreciation 3,197 1,965 ------ ------ $1,731 $1,158 ====== ====== Accrued expenses consist of the following: December 31, ------------------ 2001 2000 ------- -------- Directors' fees $ 7,293 $ 9,082 Professional fees 18,000 12,750 Other 7,424 7,424 ------- ------- $32,717 $29,256 ======= ======= 8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY Common Stock and Warrants ------------------------- During 1997, the Company completed a private placement of Units in which it sold a total of five Units at a price of $50,000 per Unit. Each Unit consisted of (i) 500,000 shares of Common Stock and (ii) 165,000 Class D Warrants, each of which is exercisable to purchase one share of Common Stock at an exercise price of $.10 per share and has a term of 10 years. 25 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued) Common Stock and Warrants (Continued) ------------------------- In June 1997, the Company entered into an agreement with an unrelated third party to provide financial advisory services. The agreement stipulated compensation for services to be performed at $10,000 and warrants to purchase 360,000 shares of the Company's Common Stock. The warrants became exercisable one year after the date of grant at a price equal to the 20-day average price per share for the period immediately prior to the grant date. The warrants expire five years subsequent to the grant date. As of December 31, 2001, $7,424 remains payable to the third party. Notes Payable and Warrants -------------------------- During October 1997, the Company received a $60,000 unsecured loan bearing interest of 8% per annum. The note was paid in full during 1999, including accrued interest. Additionally, during July 1997, the Company received a $50,000 unsecured loan from an individual to provide additional operating capital. The terms of the loan agreement provided for repayment within six months with interest at the rate of 8% per annum. Additionally, the noteholder received a warrant to purchase 100,000 shares of the Company's Common Stock at $.13 per share. The warrant has a term of five years. In January 1998, the terms of the note were amended to provide for monthly repayment of the loan in equal amounts from January through June 1998. In consideration of the amended terms, the noteholder received an additional warrant to purchase 41,666 shares of the Company's Common Stock at $.13 per share with a term of five years. The note principal and accrued interest was repaid in full during 1998 and, as of December 31, 2000, none of the warrants have been exercised. In conjunction with the Acquisition Agreement (see note 4), the Company entered into a note agreement with SciClone in which the Company received advances totaling $350,000. Under the note agreement, interest accrued at the rate of 8% per annum and, as of December 31, 1999, there was outstanding principal and accrued interest of $301,722 and $23,605, respectively. In January 2000, the Company and SciClone entered into a Mutual Release of Claim Agreement where SciClone would accept a one-time payment of $162,500 in satisfaction of outstanding principal and accrued interest. This payment was made in February 2000 and resulted in a forgiveness of debt of $162,827. SciClone returned to the Company the remaining 69,085 shares of SciClone stock held as collateral under the note agreement. Shareholders Rights Plan ------------------------ In April 1994, the Board of Directors adopted a Shareholders Rights Plan, pursuant to which it declared a dividend distribution of one Preferred Stock Purchase Right ("Right") for each outstanding share of Common Stock. The dividend distribution was payable to stockholders of record at the close of business April 29, 1994. The Rights can become exercisable only if a person or group acquires more than 25% of the Common Stock or announces a tender offer, the consummation of which would result in ownership by a person or group of more than 25% of the Common Stock. Each Right would then entitle the holder to purchase one-hundredth (1/100) of a share of a new series of preferred stock at an exercise price of $16.00. 26 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued) Shareholders Rights Plan (Continued) ------------------------ If the Company is acquired in a merger or other business combination transaction with, or a significant portion of the Company's business is acquired by, a person or group that has acquired more than 25% of its outstanding Common Stock, each Right will entitle its holder (other than such person or group or any of their affiliates or associates) to purchase, at the then-current exercise price of the Right, a number of the acquiring company's common shares having a value that is twice such exercise price. In addition, if a person or group acquires more than 25% of the Company's outstanding Common Stock, each Right will entitle its holder (other than such person or group or any of their affiliates or associates) to purchase, at the then-current exercise price of the Right, a number of shares of Common Stock having a market value that is twice such exercise price. Prior to the time that the Rights become exercisable, they are redeemable at the option of the Board of Directors at a redemption price of $0.01 per Right. The Board of Directors is required to redeem the Rights in the event of an all-cash tender offer for all of the outstanding shares of the Common Stock that meets certain requirements. The Rights will expire on April 29, 2004. Stock Based Compensation ------------------------ The Company accounts for stock based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price on the Company's Common Stock at the date of the grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. Generally, the Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's Common Stock on the grant date. The Company has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Had compensation cost been determined in accordance with FASB Statement No. 123, the Company's net earnings (loss) and net earnings (loss) per share would have been the pro forma amounts indicated below: Years ended ----------------------- 2001 2000 --------- ---------- Net income (loss): As reported $(150,609) $1,041,432 Pro forma (158,033) 1,041,432 Net income (loss) per common share: As reported (0.01) 0.06 Pro forma (0.01) 0.06 During 2001, the Company granted 200,000 options to members of the Board of Directors. The fair value of each option grant under these plans is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumption: dividend yield of 0.0% and expected volatility of 122.08%. In addition, in estimating the fair value of the options granted the following weighted-average assumptions were used: risk free interest rate of 4.88% and an expected life of 10 years. 27 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued) 2000 Stock Options and Incentive Plan ------------------------------------- During 2000, a Stock Option and Incentive Plan was approved under which a Board of Directors committee may grant options to purchase shares of common stock of the Company up to 1,000,000 shares. The number of options that can be granted may increase based on shares repurchased by the Company or surrendered to the Company in payment of the exercise prices of options granted under the plan. Options may be granted only to directors, officers or employees of or consultants or advisors to the Company and options granted to any participant cannot exceed 100,000 shares in any one year. The exercise price of the options are to be determined by the Plan committee but shall never be less than the fair market value of the Common Stock on the date of the grant. Directors Stock Option Plan --------------------------- The Directors Stock Option Plan was adopted by the Board of Directors and approved by the stockholders in 1987. Under the Plan, options to purchase 10,000 shares of Common Stock are granted automatically to each person who becomes a director after April 10, 1987, and who, at the time such person becomes a director, is not an employee of the Company. Options granted under the Plan have an exercise price per share equal to the fair market value of the Common Stock on the date of the grant. In 1992, the Plan was amended, with the approval of stockholders at the 1992 Annual Meeting (i) to add an automatic annual grant to each non-employee director of an option to purchase 5,000 shares of Common Stock if the individual is re-elected as a Director at the Annual Meeting, and (ii) to increase to 200,000 the number of shares of Common Stock issuable under the Plan. Options granted under the Plan have a ten-year term and become exercisable in 20% increments beginning on the date of the grant and on each anniversary date thereafter. The Plan expired in 1997. As of December 31, 2001, 30,000 options were outstanding under the Plan. Options, Warrants and Rights Outstanding And Exercisable -------------------------------------------------------- The following table summarizes the Company's stock options, warrants and rights activity for 2000 and 2001:
Weighted Number Exercise average of shares price range exercise price ------------- ----------------- -------------- Outstanding, December 31, 1999 8,856,666 $0.04 to $10.50 $ 0.07 Granted -- -- -- Exercised (7,500,000) 0.04 0.04 Terminated -- -- -- ------------- ----------------- -------------- Outstanding December 31, 2000 1,356,666 $0.04 to $10.50 $ 0.23 Granted 200,000 0.28 0.28 Exercised -- -- -- Terminated -- -- -- ------------- ----------------- -------------- Outstanding December 31, 2001 1,556,666 $0.04 to $10.50 $ 0.24 ============= ================= ===============
28 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 8. NOTES PAYABLE AND STOCKHOLDERS' EQUITY (Continued) Options, Warrants and Rights Outstanding And Exercisable (Continued) -------------------------------------------------------- The following table summarizes information about the options, warrants and rights outstanding at December 31, 2001:
Options, warrants and rights Options, warrants and rights outstanding exercisable ----------------------------------------------------- -------------------------------- Weighted- average Weighted Weighted Range of remaining average average exercise Number contractual exercise Number exercise prices outstanding life (Years) price outstanding price ----------------- --------------- --------------- --------------- --------------- ------------- $9.50 10,000 .3 $ 9.50 10,000 $ 9.50 10.50 10,000 1.3 10.50 10,000 10.50 0.10 to 0.53 1,176,666 5.4 0.58 1,004,337 0.58 0.04 360,000 1.5 0.04 360,000 0.04 --------------- --------------- 1,556,666 1,384,337 =============== ===============
In August 1999, the Company granted 7,500,000 options, at an exercise price of $0.04. All 7,500,000 of these options were exercised in 2000 with payment in the form of four subscription notes receivable agreements totaling $300,000 and consulting services valued at $7,500. The notes bear interest at the rate of 6.09% with interest paid quarterly. The Company earned interest income of $19,532 and $17,966 on these notes and as of December 31, 2001 and 2000, respectively, there is a stock subscription receivable of $300,000 and interest receivable of $9,129. The notes mature in February 2003. 9. INCOME TAXES Income tax expense for the years ended December 31, 2001 and 2000 consists of the following:
2001 2000 -------------------- --------------------- Income tax currently payable $ 57,000 $ 388,000 Utilization of capital loss carryforward (57,000) (253,000) Utilization of NOL carryforward -- (135,000) -------------------- --------------------- Income tax provision $ -- $ -- ==================== =====================
29 REGENERX BIOPHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 9. INCOME TAXES (Continued) Deferred tax assets are comprised of the following:
December 31, December 31, 2001 2000 ----------------------------------- Net operating loss carryforwards $ 13,252,000 $ 13,126,000 Capital loss carryforward 231,000 288,000 Research and development tax credit 614,000 614,000 -------------- -------------- 14,097,000 14,028,000 Valuation allowance (14,097,000) (14,028,000) -------------- -------------- Net deferred tax assets $ -- $ -- ============== ==============
The Company has provided a full valuation allowance for deferred tax assets since realization of these future benefits cannot be reasonably assured as a result of recurring operating losses. If the Company achieves profitability, these deferred tax assets would be available to offset future income tax liabilities and expense, subject to certain limitations. At December 31, 2001, the Company had net operating loss, capital loss and research and development tax credit carryforwards of approximately $35 million, $.6 million and $.6 million, respectively, for income tax purposes which expire in various years through 2021. Certain substantial changes in the Company's ownership would result in an annual limitation on the amount of the net operating loss carryforwards which can be utilized. 10. COMMITMENTS Leases ------ In August 1999, the Company entered into an agreement to lease office space in Bethesda, Maryland. The lease was for a period of three months and expired on November 30, 1999. Under the terms of the lease agreement, the lease automatically renews upon expiration for an additional three months, unless either the Company or the lessor provides notice of termination of the lease 60 days prior to expiration. The Company's rent expense for 2001 and 2000 was $21,139 and $9,859, respectively. The Company has an operating lease (the "Master Lease") for a production facility space in Sunnyvale, California, which expires in January 2002. The Sunnyvale lease was assigned to a third party in March 1995 on the same terms for the remaining term of the Master Lease. The assignment is subordinate to the Master Lease and the Company is still liable under the terms of the Master Lease. Under the Master Lease, future minimum lease payments for the year ending December 31, 2002 is $33,650. 11. SUBSEQUENT EVENT On March 7, 2002, the Company completed a private placement of its common stock. Under the terms of the private placement, the company sold 7,306,383 restricted shares at a stock price of $.235 per share. The total funds raised in the private placement amounted to $1,717,000. 30 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE OFFICERS The Company's Board of Directors consists of three directors, Allan L. Goldstein, Joseph C. McNay and Albert Rosenfeld. Directors are elected annually to serve one-year terms. The Company's executive officers are Dr. Goldstein, Chairman, President and Chief Executive Officer, and Albert Rosenfeld, Secretary-Treasurer. The following table sets forth, with respect to each director and executive officer, his name and age, the year in which he first became a director of the Company, and his principal occupation and business experience during the past five years.
-------------------------------------------------------------------------------------------------------------------- Name, Year First Age Principal Occupation and Became Director of Company Business Experience -------------------------------------------------------------------------------------------------------------------- Allan L. Goldstein, 1982 64 Chairman of the Board of the Company since 1982; Chief Executive Officer of the Company from 1982 to 1986, and 1999 to 2002; Chief Scientific Advisor of the Company from 1982 to present; Professor and Chairman of Department of Biochemistry and Molecular Biology at The George Washington University School of Medicine and Health Sciences from 1978 to present. -------------------------------------------------------------------------------------------------------------------- Joseph C. McNay, 1987 67 Chairman and Director of Essex Investment Management Company, Inc., a registered investment advisor, from 1976 to present; Director of Softech, Inc. and MPSI System, Inc. -------------------------------------------------------------------------------------------------------------------- Albert Rosenfeld, 1982 81 Secretary - Treasurer of the Company from 1999 to present; Consultant on Future Programs for March of Dimes Birth Defect Foundation from 1973 to present; Adjunct Assistant Professor, Department of Human Biological Chemistry and Genetics at University of Texas Medical Branch, from 1974 to 1998; author and lecturer on scientific matters. --------------------------------------------------------------------------------------------------------------------
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors and executive officers, and persons who own more than 10% of the Company's common stock, to report to the SEC their initial ownership of the Company's common stock and any subsequent changes in that ownership. Specific due dates for these reports have been established by the SEC and the Company is required to disclose any late filings or failures to file. To the Company's knowledge, based solely on its review of the copies of such reports furnished to the Company and written representations that no reports were required during the fiscal year ended December 31, 2001, and that all Section 16(a) filing requirements applicable to the Company's executive officers and directors during 2001 were met. 31 ITEM 10. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table summarizes for the years indicated the compensation paid by the Company to the Company's Chief Executive Officer during 2001. No executive officer of the Company earned a salary and bonus for 2001 in excess of $100,000.
Long Term Annual Compensation Compensation Awards ------------------- ------------------- Other Restricted Annual Stock All Other Fiscal Compensation Award Options Compen- Name and Principal Position Year Salary Bonus $(2) ($) (#) sation --------------------------- ------ ------ ----- ---- --- --- ------ Allan L. Goldstein, President 2001 55,000 -- -- -- -- $5,000 (4) and Chief Executive Officer(1) 2000 -- -- -- -- -- $26,875 (3) 1999 -- -- -- -- 1,875,000 --
----------------- (1) Dr. Goldstein was appointed Chief Executive Officer in July 1999. On March 19, 2002, J.J. Finkelstein was appointed as the Company's President and Chief Executive Officer, replacing Dr. Goldstein who will remain as Chairman and Chief Scientific Advisor of the Company. (2) Dr. Goldstein did not receive personal benefits or perquisites which exceeded the lesser of $50,000 or 10% of his salary and bonus. (3) Represents consulting fees of $20,000 and a bonus of $1,875 for services rendered as a consultant. As explained below in "Item 12. Certain Relationships and Related Transactions - Loan to Dr. Goldstein," Dr. Goldstein began receiving in 2000 a $5,000 monthly consulting fee, $3,000 of which is paid in cash and the remaining $2,000 of which is retained by the Company and applied toward repayment of a loan to Dr. Goldstein. As discussed below in "Item 12. Certain Relationships and Related Transactions - Consulting Agreement," the full amount of the $1,875 bonus was applied toward payment of a portion of the exercise price of Dr. Goldstein's option to purchase 1,875,000 shares of Company common stock, exercised by him in 2000. (4) Dr. Goldstein converted from his consulting agreement to employment by the Company on February 1, 2001. The $5,000 represents his January 2002 consulting fee. The following table provides information as to the value realized and unrealized by Dr. Goldstein related to stock options during 2001. No stock options were exercised or granted to Dr. Goldstein during 2001.
=========================================================================================================== AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES ----------------------------------------------------------------------------------------------------------- Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at FY-End (#) FY-End ($) ---------------------------------------------------------------- Shares Acquired Value Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable (#) ($) (#) (#) ($) ($) ----------------------------------------------------------------------------------------------------------- Allan L. -- -- --- -- -- $-- Goldstein ===========================================================================================================
32 DIRECTORS' COMPENSATION Prior to the Company's suspension of operations in 1998, non-employee directors (Directors McNay and Rosenfeld) were each paid an annual fee of $5,000 and a fee of $1,250 for each meeting attended in person, and were reimbursed for expenses incurred in attending Board meetings. Upon the suspension of operations, the directors continued to serve while the Company discontinued paying director fees. It is uncertain when the Company will reinstitute the payment of director fees. At December 31, 2001, both of Directors McNay and Rosenfeld are owed director fees earned prior to the suspension of operations amounting to a total of $9,082. It is uncertain when these amounts will be paid and whether these amounts will be paid with interest. During 2001 Directors McNay and Rosenfeld were granted stock options to acquire 100,000 shares of common stock each at an exercise price of $.28 which equals the market price at the date of grant. 33 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table shows, as of December 31, 2001, the beneficial ownership of the Company's common stock by: o any persons or entities known by management to beneficially own more than five percent of the outstanding shares of Company common stock; o each director of the Company; and o all of the executive officers and directors of the Company as a group. The persons named in the following table have sole voting and dispositive powers for all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the footnotes to the table. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Shares of common stock subject to outstanding options, warrants or other rights to acquire held by a person that are currently exercisable or exercisable within 60 days after December 31, 2001 are included in the number of shares beneficially owned by the person and deemed outstanding shares for purposes of calculating the person's percentage ownership. These shares are not, however, deemed outstanding for the purpose of computing the percentage ownership of any other person. As of December 31, 2001, there were 19,477,429 shares of Company common stock outstanding.
Percent of Beneficial Common Stock Name of Beneficial Owner Ownership Outstanding ------------------------------------------------------------------ ----------------------- ------------------ Roger H. Samet 997,050(1) 5.04% J. J. Finkelstein, Director, President and Chief Executive Officer 1,875,000(2) 9.63 Richard J. Hindin 1,885,000(3) 9.68 Sidney J. Silver 1,875,000(4) 9.63 Allan L. Goldstein, Chairman and Chief Scientific Officer 2,342,491(5) 12.03 Joseph C. McNay, Director 892,000(6) 4.55 Albert Rosenfeld, Director, Secretary and Treasurer 125,100(7) 0.64 All executive officers and directors as a group (4 persons) 5,234,591(8) 26.72
---------- (1) As reported by Mr. Samet on Amendment No. One to a Schedule 13D filed with the SEC on February 26, 1999. Mr. Samet reported sole voting and dispositive powers as to all shares listed. Included among the shares listed are 292,050 shares which Mr. Samet has the right to acquire pursuant to Class D warrants issued to him by the Company. Mr. Samet's address is 254 East 68th Street, #29B, New York, NY 10021. (2) As reported by Mr. Finkelstein on a Schedule 13D filed with the SEC on November 7, 2000. The address for Mr. Finkelstein is c/o RegeneRx Biopharmaceuticals, Inc., 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814. (3) As reported by Mr. Hindin on a Schedule 13D filed with the SEC on November 7, 2000. The address for Mr. Hindin is 407 Chain Bridge Road, McLean, Virginia 22101. 34 (4) As reported by Mr. Silver on a Schedule 13D filed with the SEC on November 7, 2000. The address for Mr. Silver is c/o Silver, Freedman & Taff, L.L.P., 1100 New York Avenue, N.W., Washington, D.C. 20005. (5) As reported by Dr. Goldstein on a Schedule 13D filed with the SEC on November 7, 2000. Consists of (i) 2,249,285 shares owned directly by Dr. Goldstein over which he has sole voting and dispositive powers; and (ii) 93,206 shares held by Dr. Goldstein's wife with respect to which Dr. Goldstein shares voting and dispositive powers. The address for Dr. Goldstein is c/o RegeneRx Biopharmaceuticals, Inc., 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814. (6) Consists of (i) 612,000 shares owned directly by Mr. McNay over which he has sole voting and dispositive powers; (ii) 115,000 shares which Mr. McNay has the right to acquire through the exercise of stock options that are currently exercisable; and (iii) 165,000 shares which Mr. McNay has the right to acquire pursuant to the exercise of Class D warrants. The address for Mr. McNay is c/o RegeneRx Biopharmaceuticals, Inc., 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814. (7) Consists of (i) 10,100 shares owned directly by Mr. Rosenfeld over which he has sole voting and dispositive powers; and (ii) 115,000 shares which Mr. Rosenfeld has the right to acquire through the exercise of stock options that are currently exercisable. The address for Mr. Rosenfeld is c/o RegeneRx Biopharmaceuticals, Inc., 3 Bethesda Metro Center, Suite 700, Bethesda, Maryland 20814. (8) Consists of (i) 4,746,385 shares owned directly by all directors and executive officers of the Company as a group; (ii) 30,000 shares which all directors and executive officers as a group have the right to acquire through the exercise of stock options that are currently exercisable; (iii) 93,206 shares owned by family members of all directors and executive officers as a group; and (iv) 165,000 shares which all directors and executive officers as a group have the right to acquire pursuant to the exercise of Class D warrants. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS LOAN TO DR. GOLDSTEIN In May 1994, the Company extended a loan in the amount of $149,000 to Dr. Goldstein for the purpose of enabling Dr. Goldstein to meet a margin call on a brokerage account collateralized by Company common stock at a time when the Board of Directors concluded that it would be contrary to the best interests of the Company for Dr. Goldstein to sell the shares. The loan was unsecured and had an interest rate equal to the prime rate, with all principal and interest due on the December 31, 1994 maturity date. The loan was repaid on January 1, 1995, in part with the proceeds of a second loan to Dr. Goldstein from the Company in the amount of $115,617 that was unsecured. The second loan has an interest rate of 11.5% and was to be repaid in 36 equal monthly installments. In February 1996, the terms of the second loan were amended to provide for the suspension of installment payments for 12 months, but with interest continuing to accrue. In March 1997 and December 1997, the terms of the loan were further amended to suspend installment payments an additional nine and twelve months, respectively, with interest continuing to accrue. The Company suspended operations in 1998 and principal and interest payments by Dr. Goldstein ceased during and subsequent to the suspension of operations. As of December 31, 1999, the balance owed by Dr. Goldstein was $69,674, which has been fully reserved by the Company as a doubtful collection. In July 2000, the Company agreed to waive all prior and subsequent interest during and after suspension of the Company's operations and approved a payment plan for the $69,674 owed by Dr. Goldstein to the Company in 36 equal monthly installments of $1,935.38. In August 2000, the Company agreed to pay Dr. Goldstein a consulting fee of $5,000 per month, $3,000 of which is paid in cash and the remaining $2,000 of which is retained by the Company and applied toward repayment of the loan. In February 2001, Dr. Goldstein was converted from a consultant to an employee of the Company. His salary was $5,000 per month of which $2,000 was retained by the Company and applied toward repayment of the loan. As of December 31, 2001, the outstanding balance on the loan was $37,674, which has been fully reserved as a doubtful collection. CONSULTING AGREEMENT On August 16, 1999, the Company entered into an agreement with Dr. Goldstein, J.J. Finkelstein, Richard J. Hindin and Sidney J. Silver to serve as financial and business consultants to the Company and manage the 35 Company's affairs on an interim basis. This agreement was executed following suspension of the Company's operating activities due to insufficient funds. The agreement provides for the consultants to prepare a business plan specifying a proposed business strategy for the Company and evaluate financing and recapitalization proposals. The agreement also provides for the consultants to, among other things: work with the Company's creditors to eliminate or restructure its debts; work with governmental agencies to ensure regulatory compliance and allow continuation of the Company's business; recruit necessary management for the Company; and negotiate with companies interested in licensing or other business and financial relationships with the Company. In consideration for services provided to the Company, each of the consultants was granted an option to purchase 1,875,000 shares of Company common stock at an exercise price of $0.04 per share, the then-fair market value. In February 2000, each consultant exercised his option in full. The Company accepted from each consultant as payment of the exercise price, a note payable to the Company in the amount of $75,000, accruing interest at 6.09% per annum and payable quarterly for 36 months beginning June 1, 2000, as well as the cancellation of an $1,875 bonus awarded to each consultant for services rendered. Each note is secured by the shares of Company common stock issued upon exercise of the consultant's option. Mr. Finkelstein has become a full-time employee and Dr. Goldstein serves as the Company's chief scientific advisor. Mr. Silver is a partner in the law firm of Silver, Freedman & Taff, L.L.P. This firm has represented the Company in a variety of legal matters, including the negotiation of settlements with certain creditors and agreements with certain other parties. In 2001, the firm was paid $41,616 for legal services performed during the year and was due $11,552 in payables on December 31, 2001. 36 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits
Exhibit No. Description of Exhibit Reference* 3.1 Restated Certificate of Incorporation of Company Exhibit 3.1 to Registration Statement No. 33-9370, Amendment No. 1 (filed 11/26/86) 3.2 Amendment to Restated Certificate of Incorporation of Company Exhibit 3.2 to the Company's Transitional Report on Form 10-K, File No. 1-15070 (filed 3/18/91) 3.3 Amendment to Restated Certificate of Incorporation of Company Filed herewith 3.4 Bylaws of Company Exhibit 3.2 to Registration Statement No. 33-9370 (filed 10/8/86) 3.5 Amendment No. 1 to Bylaws of Company adopted 8/11/89 Exhibit 4.7 to Registration Statement No. 33-34551, Amendment No. 3 (filed 6/21/90) 3.6 Amendment No. 2 to Bylaws of Company Exhibit 4.8 to Registration Statement adopted 6/18/90 No. 33-34551, Amendment No. 3 (filed 6/21/90) 3.7 Amendment No. 3 to Bylaws of Company Exhibit 3.6 to the Company's adopted 11/30/90 Transitional Report on Form 10-K, File No. 1-15070 (filed 3/18/91) 4.1 Form of Stock Certificate Exhibit 4.1 to Registration Statement No. 33-9370, Amendment No. 1 (filed 11/26/86) 4.2 Rights Agreement, dated as of April 29, 1994, Exhibit 1 to the Company's between the Company and American Stock Current Report on Form 8-K, File No. Transfer & Trust Company, as Rights Agent 1-15070 (filed May 2, 1994) 4.3 Warrant Agreement, dated March 12, 1997 Exhibit 4.3 to the Company's Annual Report on Form 10-K, File No. 1-15070 (filed 3/31/97) 4.4 Warrant Agreement, dated July 7, 1997 Exhibit 4.4 to the Company's Annual Report on Form 10-K/A, File No. 1-15070 (filed 5/13/98)
37
10.1 Patent License Agreement - Exclusive, between the U.S. Public Filed herewith ** Health Service and the Company 10.2 Settlement Agreement and Mutual Release, dated March 17, 2000, Filed herewith ** between the Company and Bachem Biosciences, Inc. 10.3 Consulting Agreement, dated August 16, 1999, among the Company, Exhibit 99.2 to the Company's Current Allan L. Goldstein, J.J. Finkelstein, Richard J. Hindin and Report on Form 8-K, File No. 1-15070 Sidney J. Silver (filed 11/09/99) 10.4 Amended and Restated Directors Stock Option Exhibit 10.25 to the Plan Company's Annual Report on Form 10-K, File No. 1-15070 (filed 3/26/93) 10.5 2000 Stock Option and Incentive Plan Filed as an Appendix to the Company's preliminary proxy materials, File No. 1-15070 (filed 9/29/00) 10.6 Lease Agreement, dated February 10, 1993, Exhibit 10.28 to the Company's between the Company and John Arrillaga, Trustee, and Richard T. Annual Report on Form 10-K, File No. Perry, Trustee 1-15070 (filed 3/26/93) (Sunnyvale, California lease) 10.7 Lease Agreement Amendment Number 1, dated Exhibit 10.24 to the September 1, 1993, and Amendment Number 2, Company's Annual Report on Form 10-K, dated December 27, 1993 (Sunnyvale, File No. California lease) 1-15070 (filed 3/28/94) 10.8 Lease Agreement Amendment Number 3, dated Exhibit 10.28 to the April 19, 1994 (Sunnyvale, California Lease) Company's Annual Report on Form 10-K, File No. 1-15070 (filed 3/31/95) 10.9 Assignment of Lease, dated March 22, 1995 Exhibit 10.24 to the from the Company to Scios Nova, Inc. Company's Annual Report on (Sunnyvale, California Lease) Form 10-K, File No. 1-15070 (filed 3/31/95) 10.11 Unit Purchase Agreement dated March 12, 1997 Exhibit 10.25 to the Company's Annual Report on Form 10-K, File No. 1-15070 (filed 3/31/97) 10.12 Registration Rights Agreement, dated March 12, 1997 Exhibit 10.26 to the Company's Annual Report on Form 10-K, File No. 1-15070 (filed 3/31/97)
38
23 Consent of Reznick Fedder & Silverman, P.C. Filed herewith 99 Information Regarding Forward-Looking Statements Filed herewith
----------------- * Except where noted, the exhibits referred to in this column have heretofore been filed with the Securities and Exchange Commission as exhibits to the documents indicated and are hereby incorporated by reference thereto. The Registration Statements referred to are Registration Statements of the Company. ** Portions of this document have been omitted pursuant to a request for confidential treatment (b) Reports on Form 8-K None 39 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGENERX BIOPHARMACEUTICALS, INC. (Registrant) April 1, 2002 By: /s/ J.J. Finkelstein --------------------- J.J. Finkelstein President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date /s/ Allan L. Goldstein Chairman of the Board, Chief Scientific April 1, 2002 --------------------------- Advisor, and Director Allan L. Goldstein /s/ J.J. Finkelstein President, Chief Executive Officer, and April 1, 2002 ------------------------------------ Director J.J. Finkelstein /s/ Joseph McNay Director April 1, 2002 --------------------------- Joseph C. McNay /s/ Albert Rosenfeld Director, Secretary and Treasurer April 1, 2002 --------------------------- Albert Rosenfeld
40 INDEX TO EXHIBITS Exhibit No. Description of Exhibit 23 Consent of Reznick Fedder & Silverman, P.C. 99 Information Regarding Forward-Looking Statements 41