-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IFdPVtFP9oJMqVFxQ80y21f/+M1xFL0BPrxueBujC7GNrz+s7bRO9XHcBl3R5xqU IwUYMj6qcgcyVUSMHV3nog== 0000891092-97-000109.txt : 19970414 0000891092-97-000109.hdr.sgml : 19970414 ACCESSION NUMBER: 0000891092-97-000109 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19970411 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEMISPHERX BIOPHARMA INC CENTRAL INDEX KEY: 0000946644 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-DRUGS PROPRIETARIES & DRUGGISTS' SUNDRIES [5122] IRS NUMBER: 520845822 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-24983 FILM NUMBER: 97578700 BUSINESS ADDRESS: STREET 1: 1617 JFK BLVD STREET 2: ONE PENN CENTER CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2159880080 MAIL ADDRESS: STREET 1: 1617 JFK BLVD STREET 2: ONE PENN CENTER CITY: PHILADELPHIA STATE: PA ZIP: 19103 S-1 1 REGISTRATION STATEMENT ON FORM S-1 As filed with the Securities and Exchange Commission on April 11, 1997 Registration No. _________ ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------- HEMISPHERx BIOPHARMA, INC. (Name of Issuer in its charter) Delaware (State or other jurisdiction of incorporation or organization) _____________ (Primary Standard Industrial Classification Code Number) 52-0845822 (I.R.S. Employee Identification No.) ---------- 1617 JFK Boulevard Philadelphia, Pennsylvania 19103 (215) 988-0080 (Address and telephone number of principal executive offices and principal place of business) ---------- William A. Carter, M.D., Chief Executive Officer Hemispherx Biopharma, Inc. 1617 JFK Boulevard Philadelphia, Pennsylvania 19103 (215) 988-0080 (Name, address and telephone number of agent for service) Copies of all communications to: Michael H. Freedman, Esq. Silverman, Collura, Chernis & Balzano, P.C. 381 Park Avenue South, Suite 1601 New York, New York 10016 (212) 779-8600 Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box: [X] CALCULATION OF REGISTRATION FEE
============================================================================================================= Proposed Proposed Maximum Maximum Title of Each Class of Amount to Offering Price Aggregate Amount of Securities to be Registered Be Registered(1) Per Share(2) Offering Price Registration Fee ============================================================================================================= Warrants and Stock Options(3) 310,544 -- -- -- ============================================================================================================= Common Stock(4) 2,500,000 $2.91 $7,275,000 $2,204.55 ============================================================================================================= Common Stock(5) 640,475 $2.91 $1,863,782 $564.78 ============================================================================================================= TOTAL 3,451,019 $2.91 $9,138,782 $2,769.33 =============================================================================================================
(1) Includes such additional number of shares as may become issuable by reason of anti-dilution provisions pursuant to Rule 416. (2) Common Stock price per share calculated pursuant Rule 457(c) of the Securities Act of 1933, as amended. (3) Warrants and stock options held by Selling Securityholders. (4) Common Stock underlying Series E Preferred Stock held by Selling Securityholders. (5) Common Stock underlying warrants held by Selling Securityholders. Pursuant to Rule 429, this Registration Statement also incorporates securities originally registered on Form S-1, File No. 33-03314, declared effective on November 2, 1995. Pursuant to Rule 429, this Registration Statement withdraws from registration 1,850,748 shares of Common Stock underlying Series D Preferred Stock which were registered on Form S-1, File No. 333-08941, declared effective on September 16, 1996. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ ii HEMISPHERx BIOPHARMA, INC. Cross-Reference Sheet to Prospectus on Form S-1 Furnished Pursuant to Item 501(b) of Regulation S-K Item From S-1 Caption Location in Prospectus - ---- ---------------- ---------------------- 1. Forepart of the Registration Outside Front Cover Page Statement and Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Inside Front Cover Page Pages of Prospectus Outside Front Cover Page 3. Summary Information, Risk Prospectus Summary; Selected Factors and Ratio of Earnings Financial Data; Risk Factors to Fixed Charges 4. Use of Proceeds Use of Proceeds 5. Determination of Offering Price Not Applicable 6. Dilution Not Applicable 7. Selling Securityholders Resales by Selling Securityholders 8. Plan of Distribution Cover Page; Resales by Selling Securityholders 9. Description of Securities Description of Securities; to be Registered Shares Eligible for Future Sale 10. Interest of Named Experts Experts and Legal Matters and Counsel 11. Information with Respect to Business; Description of the Registrant Securities; Financial Statements; Selected Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Transactions; Management; Price Range of Common Stock; Dividends; Principal Shareholders 12. Disclosure of Commission Not Applicable Position on Indemnification for Securities Act Liabilities iii [TO BE INSERTED ALONG LEFTHAND SIDE OF PROSPECTUS COVER PAGE] [RED HERRING LEGEND] Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any State. iv PROSPECTUS DATED APRIL __, 1997 SUBJECT TO COMPLETION HEMISPHERx BIOPHARMA, INC. 310,544 WARRANTS AND STOCK OPTIONS 640,475 SHARES OF COMMON STOCK UNDERLYING WARRANTS 2,500,000 SHARES OF COMMON STOCK UNDERLYING SERIES E PREFERRED STOCK 6,213,000 SHARES OF COMMON STOCK UNDERLYING CLASS A REDEEMABLE WARRANTS 462,000 UNITS UNDERLYING A UNIT PURCHASE OPTION 462,000 SHARES OF COMMON STOCK UNDERLYING UNITS INCLUDED IN THE OPTION 462,000 CLASS A REDEEMABLE WARRANTS UNDERLYING UNITS INCLUDED IN THE OPTION 462,000 SHARES OF COMMON STOCK UNDERLYING CLASS A REDEEMABLE WARRANTS INCLUDED IN THE OPTION This Prospectus relates to the possible resale by certain selling securityholders ("Selling Securityholders") of up to (i) 310,544 warrants and stock options ("C Warrants"); (ii) 179,931 shares of Common Stock underlying warrants ("R Warrants"); (iii) 150,000 shares of Common Stock underlying warrants ("Series E Warrants"); and (iv) 2,500,000 shares of Common Stock, underlying Series E Preferred Stock, $.01 par value ("Series E Preferred") of Hemispherx Biopharma, Inc. ("Company"), and other securities as follows: (i) 310,544 shares of Common Stock underlying C Warrants which were registered in the Company's registration statement declared effective September 16, 1996; (ii) 6,213,000 shares of the Company's Common Stock, underlying the Company's Class A Redeemable Warrants ("Class A Warrants"). One Class A Warrant and one share of Common Stock comprise the Company's Units ("Units") and Bridge Units ("Bridge Units") which were registered in the Company's initial public offering dated November 2, 1995 ("IPO"); (ii) 462,000 Units underlying an Underwriter's Unit Purchase Option ("Option") issued pursuant to the IPO; (iii) 462,000 shares of Common Stock underlying Units included in the Option; (iv) 462,000 Class A Warrants underlying the Units included in the Option; and (v) 462,000 shares of Common Stock underlying Class A Warrants underlying the Units included in the Option. The C Warrants, R Warrants, Series E Warrants, Class A Warrants, Option, Series E Preferred and all Common Stock lying thereunder, respectively, are collectively referred to herein as "Securities". This Prospectus also withdraws from registration 1,850,748 shares of Common Stock underlying the Company's Series D Preferred Stock, $.01 par value, previously registered in the Company's registration statement declared effective September 16, 1996. The Selling Securityholders may sell their Securities from time to time, in market transactions, in negotiated transactions, through the writing of options, or a combination of such methods of sale, at fixed prices which may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. The Selling Securityholders may effect such transactions by selling their Securities to or through broker-dealers, and such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of such Securities for whom such broker-dealer may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions.) The Company has agreed to bear all expenses in connection with the registration of the Securities to which this Prospectus relates. The Company's Common Stock and Class A Warrants are quoted on the Nasdaq SmallCap Market System ("Nasdaq") under the symbols HEMX and HEMXW, respectively. On April 4, 1997 the last sale price of the Common Stock and Class A Warrants as reported on Nasdaq was $2.875 and $.75, respectively. THESE SECURITIES ARE HIGHLY SPECULATIVE. THEY INVOLVE A HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A TOTAL LOSS OF THEIR ENTIRE INVESTMENT (SEE "RISK FACTORS") THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is April__, 1997 2 ADDITIONAL INFORMATION With respect to the securities offered hereby, the Company has filed with the principal office of the Securities and Exchange Commission (the "Commission") in Washington, D.C., a Registration Statement on Form S-1 under the Securities Act of 1933, as amended. For purposes hereof, the term "Registration Statement" means the original Registration Statement and any and all amendments thereto. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits thereto, to which reference hereby is made. Each statement made in this Prospectus concerning a document filed as an exhibit to the Registration Statement is not necessarily complete and is qualified in its entirety by reference to such exhibit for a complete statement of its provisions. The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files reports and other information with the Commission. Any interested party may inspect the Registration Statement and its exhibits and other reports and information filed by the Company with the Commission without charge, or obtain a copy of all or any portion thereof, at prescribed rates, at the public reference facilities of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Registration Statement and exhibits may also be inspected at the Commission's regional offices at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World Trade Center, Suite 1300, New York, New York 10048. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements and Notes thereto appearing elsewhere or incorporated by reference elsewhere in this Prospectus, including information under "Risk Factors". See "Glossary of Terms" for the definition of certain terms used in this Prospectus. THE COMPANY Hemispherx BioPharma, Inc. (the "Company") is a biopharmaceutical company using nucleic acid technologies to develop therapeutic products for the treatment of viral diseases and certain cancers. Nucleic acid compounds represent a new class of pharmaceutical products that are designed to act at the molecular level for the treatment of human disease. The Company's drug technology utilizes specifically-configured ribonucleic acid ("RNA"). One of the Company's double stranded RNA drug products, trademarked Ampligen, a parenteral drug product, is in advanced human clinical development for various therapeutic indications. Based on the results of pre-clinical studies and clinical trials, the Company believes that Ampligen may have broad-spectrum anti-viral and anti-cancer activities. Over 300 patients have received Ampligen in clinical trials authorized by the U.S. Food and Drug Administration ("FDA") at over twenty clinical trial sites across the United States, representing the administration of more than 40,000 doses of this drug. Sales on a pre-approval, cost recovery basis have been initiated in Belgium and are expected to start in Canada during the second Quarter of 1997. The Company is presently exploring additional distributor relationships for Europe and the United States to set the stage for wider market penetration. SAB/Bioclones, the Company's partner in certain countries, is initiating trials of Ampligen in South Africa and Australia. Ampligen is being developed clinically for use in treating three anti-viral indications: chronic hepatitis B virus ("HBV") infection (Phase I/II clinical trial), human immunodeficiency virus ("HIV") associated disorders (Phase II), and myalgic encephalomyelitis, also know as chronic fatigue syndrome ("ME/CFS") (Phase II/III). The Company's business strategy is designed around seeking the required regulatory approvals which will allow the progressive introduction of Ampligen for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and Japan. Ampligen has also received Orphan Drug designation from the FDA for four indications (AIDS, renal cell carcinoma, chronic fatigue syndrome and invasive malignant melanoma). The Company is also developing a second generation RNA drug technology, termed Oragen compounds, which the Company believes offers the potential for broad spectrum antiviral activity by oral administration. The World Health Organization ("WHO") estimates that there are approximately 300 million chronic carriers of HBV worldwide. More than 40% of the persistently infected persons who survive to adulthood will die from cirrhosis, liver cancer, or some other consequence of their infection. In the U.S. alone, there are an estimated 1.25 million carriers. HBV is one of several viruses that cause human hepatitis, or inflammation of the liver. The Company has been conducting a Phase I/II clinical trial of Ampligen in the U.S. for the treatment of chronic HBV infection at Stanford University and the University of Pennsylvania. A significant reduction in viral components and improvement in liver function was noted during the course of the Phase I/II clinical trial to date and the drug has been generally well tolerated. At present, interferon-alpha is the only approved product for the treatment of this disease; however, 60% to 75% of patients with chronic HBV ultimately fail to respond to interferon-alpha. The global sales of interferon are presently estimated at more than $1 billion, largely for its use in liver infections. 4 The Centers for Disease Control ("CDC") has estimated that approximately one million people in the U.S. are infected with HIV, excluding patients who have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40 million people will be infected with HIV worldwide by the year 2000. The Company is currently conducting a Phase II clinical trial of Ampligen in the U.S. for the treatment of HIV infection. The drug technology is designed to enhance the patient's own immune system, thereby fighting the invasive viral agent more effectively and resulting in more durable long term benefits. ME/CFS is a condition recently recognized by the CDC and characterized by unexplained fatigue or chronic illness for six months or longer for which no cause has been identified after a thorough medical work-up. Although the CDC is presently conducting studies to more exactly determine the rate of incidence of ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the U.S. is in excess of 500,000 cases. The Company has entered into an agreement with a Canadian pharmaceutical firm pursuant to which the Canadian company will provide various services in connection with the distribution of Ampligen on a cost recovery basis as authorized under the Canadian emergency drug release program. Presently the Company is receiving revenues from sales of Ampligen to patients in an open label clinical trial being conducted in Belgium. The Company is currently discussing open-label and placebo controlled trials with the FDA. The Company is unaware of any other new drugs which are under development for treatment of ME/CFS. Today, ME/CFS accounts for a significant portion of people entering chronic disability status, especially in the western U.S. Thus, this presently untreatable illness constitutes a significant impact on the overall cost of health care. The Company also has clinical experience with Ampligen in patients with certain cancers, including renal cell carcinoma (kidney cancer) and metastatic malignant melanoma. Based on estimates prepared by the American Cancer Society, the Company anticipates that approximately 25,000 new cases of renal cell carcinoma will be diagnosed in the U.S. in 1996. The Company was authorized by the FDA, in the U.S., and the HPB, in Canada, to initiate a Phase II/III clinical trial of Ampligen in renal cell carcinoma patients. The HPB has authorized the Company to charge patients for the cost of the Ampligen administered to renal cell patients in the context of clinical trials. Based on estimates prepared by the American Cancer Society, the Company anticipates that approximately 34,000 new cases of malignant melanoma will be diagnosed in the U.S. in 1996. Data from the American Cancer Society and the World Health Organization indicate that both the incidence and mortality from malignant melanoma are rising steadily among white populations throughout the world. In the past decade, the incidence of melanoma has increased faster than that of any other cancer except lung cancer in women. In March 1997, the Company sold 5,000 shares of Series E Preferred at $1,000 per share in a private transaction pursuant to Regulation D of the Securities Act of 1933, as amended ("Securities Act") and Rule 506 promulgated thereunder. The proceeds from such offering were used to retire all outstanding shares of the Company's Series D Preferred Stock. In July 1996, the Company sold 6,000 shares of Series D Preferred Stock at $1,000 per share in a private transaction pursuant to Regulation D of the Securities Act and Rule 506 promulgated thereunder. The Company filed a registration statement on Form S-1, which was declared effective by the Commission on September 16, 1996, registering 2,427,275 Shares underlying the Series D Preferred Stock and 890,543 shares of Common Stock underlying certain other warrants and options. 5 In November 1995, the Company sold 5,313,000 Units at $3.50 per Unit in its initial public offering. Each Unit consists of one share of Common Stock and one Class A Warrant. In February 1996, the Company entered into an agreement with Rivex Pharma, Inc., a Canadian-based pharmaceutical company ("Rivex"), pursuant to which Rivex will provide various services in connection with the exclusive distribution of Ampligen in Canada on an emergency drug release basis. Under the terms of this agreement, the Company will supply and Rivex will purchase as much Ampligen as necessary to satisfy Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain the exclusive right to distribute Ampligen in Canada. In October 1994, the Company entered into an agreement with Bioclones Proprietary Limited ("Bioclones"), a biopharmaceutical company which is associated with The South African Breweries Limited ("SAB" and, together with Bioclones, "SAB/Bioclones") with respect to codevelopment of various RNA drugs, including Ampligen, for which the Company has previously obtained international patent protection. The licensing agreement, as amended (the "SAB Agreement") provides that the Company will provide SAB/Bioclones with an exclusive manufacturing and marketing license for certain Southern hemisphere countries (including certain countries in South America) as well as the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand and certain other countries and territories. In exchange for these marketing and distribution rights, the SAB Agreement provides for: (a) a $3 million cash payment to the Company, payable in installments upon the occurrence of certain milestones, including the transfer of certain technical documents which have already been transferred; (b) the formation and issuance to the Company of 24.9% of the capital stock of a company which is developing and operating a new manufacturing facility for RNA drugs constructed by SAB/Bioclones; and (c) royalties on all sales of the Company's product in the licensed territories after the first $50 million of sales. In addition, SAB/Bioclones has agreed to use reasonable efforts to pursue the marketing approval of Ampligen for hepatitis B in Australia, South Africa, Brazil, and the United Kingdom, as well as to perform (at its own expense) a phase III study of Ampligen for chronic HBV infection in South Africa, which clinical study is to be performed pursuant to U.S. FDA good clinical practice and good laboratory practice ("GLP") guidelines and standards. SAB/Bioclones will be granted a right of first refusal to manufacture and supply to the Company the drug product required for not less than one-third of its world-wide sales of Ampligen (after deducting SAB/Bioclones-related sales). To date, the Company has received approximately $3,000,000 pursuant to the SAB Agreement. In September 1994, the Company formed three subsidiaries and granted licenses to the subsidiaries for the purpose of developing its technology for ultimate sale into certain non-pharmaceutical specialty consumer markets, such as the tobacco market, the market for skincare products and the market for diagnostic devices. The Company intends to issue equity in one of such subsidiaries and has granted options to certain of its officers and directors. See "Business--Subsidiary Companies." No assurance can be given that any of these companies will be able to complete testing in these areas, develop any products or successfully produce and market any products in the targeted specialty consumer markets. The Company's corporate headquarters are located at 1617 JFK Boulevard, Philadelphia, Pennsylvania 19103. The Company's telephone number is (215) 988-0080. 6 As of March 19, 1997 Securities Outstanding(1)(2)(3) Common Stock 16,353,086 Class A Warrants 6,313,000 Series E Preferred 5,000 Risk Factors AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS". Nasdaq Symbols for Common Stock HEMX for Class A Warrants HEMXW (1) Excludes: (i) 460,798 shares of Common Stock reserved for issuance pursuant to the Company's 1990 Stock Option Plan under which options to purchase 234,953 shares have been granted; (ii) 92,160 shares of Common Stock reserved for issuance pursuant to the Company's 1992 Stock Option Plan under which no options or other rights to purchase shares have been granted; (iii) 138,240 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Employee Stock Purchase Plan pursuant to which no rights to purchase shares have been granted; (iv) 3,213,797 shares of Common Stock reserved for issuance pursuant to certain outstanding warrants with an average weighted exercise price of $3.53; (v) 2,080,000 warrants to purchase Common Stock of the Company issued to officers, directors and consultants of the Company in reliance upon Rule 701 of the Securities Act, at an exercise price of $3.50 per share ("Rule 701 Warrants"); (vi) 2,750,000 warrants to purchase Common Stock at an exercise price of $1.75 per share issued in accordance with the terms of the 1995 Standby Financing Agreement; (vii) 462,000 Units underlying the Option, 462,000 shares of Common Stock underlying the Units included in the Option, 462,000 Class A Warrants underlying the Option, and 462,000 shares of Common Stock underlying the Class A Warrants underlying the Units included in the Option. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management--1992 Stock Option Plan," "--1990 Stock Option Plan" and "--Employee Stock Purchase Plan," "Description of Securities--Warrants" (2) Does not include 6,313,000 shares of Common Stock issuable upon the exercise of the Class A Warrants at an exercise price of $4.00 per share. (3) Does not include 2,500,000 shares of Common Stock reserved for issuance upon conversion of the Series E Preferred. 7 SUMMARY FINANCIAL INFORMATION (in thousands, except share and per share data) The data set forth below should be read in conjunction with the Consolidated Financial Statements, related Notes and other financial information included or incorporated by reference elsewhere in this Prospectus.
December 31, ------------------------------------------------------------ 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- Consolidated Statements of Operations Data: Revenues Research and Development $ -- $ 48 $ 76 $ 66 $ 32 License fee -- -- 100 2,900 -- ------- ------- ------- ------- ------- Total Revenues -- 48 176 2,966 32 Cost and expenses: Research and development 4,734 2,119 1,638 1,029 1,902 General and administrative 2,825 3,347 2,618 2,880 3,024 ------- ------- ------- ------- ------- Total costs and expenses 7,559 5,466 4,256 3,909 4,926 Debt conversion expenses -- (1,215) (10) (149) -- Net interest income (expense) (322) (1,069) (1,043) (748) 339 ------- ------- ------- ------- ------- Net loss $(7,881) $(7,702) $(5,133) $(1,840) $(4,555) ======= ======= ======= ======= ======= Net loss per share -- -- $ (.44)(1) $ (.13)(1) $ (.29) Weighted average number of shares outstanding used in computing net loss per share -- -- 11,536,276(1) 14,199,701(1) 15,718,316
December 31, 1996 ----------------- Consolidated Balance Sheet Data: Current assets $ 5,385 Current liabilities 1,146 Total assets 6,999 Long-term obligations 0 Accumulated deficit (48,243) Stockholders' equity 5,853 (1) Computed on a proforma basis described in Note 2(e) to the Consolidated Financial Statements. 8 RISK FACTORS AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE PURCHASERS, PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS: Dependence on Ampligen; Non-Exclusive Right to Manufacture of Ampligen; Expiration of Patents. The Company's principal development efforts are currently focused on Ampligen. While most clinical trials of Ampligen have to date produced favorable results, additional trials sponsored by the Company are planned, and no assurance can be given that the drug will ultimately be demonstrated to be safe or efficacious. In addition, while Ampligen has been authorized for use in clinical trials in the United States and other countries, no assurance can be given that additional clinical trials approvals will be authorized in the United States or in other countries in a timely fashion or at all or that such clinical trials will be completed by the Company. The Company has never commercially introduced a product, and no assurance can be given that commercialization of Ampligen in any countries where Ampligen may be approved will prove successful. In addition, the Company does not have exclusive rights to manufacture Ampligen. Competitors of the Company are currently able to manufacture Ampligen. The Company believes, however, that its extensive patent estate may hinder such competitors from testing and developing Ampligen for particular indications since the Company has patented the use of Ampligen for many disease indications. The Company further believes that the available market for non-patented disease indications for Ampligen which might be available to competitors is minimal since the Company believes, based on laboratory tests, that Ampligen may not be effective against such disease indications; however, no assurances can be given. Willful infringement of the Company's patents by a competitor could result in significant monetary damages to the Company in the event that such infringement was not enjoined by a court of law. See "Business - Patent Rights." Nevertheless, in the event that the Company's patent protection is not adequate for all relevant disease indications, competitors might be able to test, develop and commercialize Ampligen. Additionally, as a result of the Company's dependence on Ampligen, the failure to demonstrate the drug's safety and efficacy in planned clinical trials, to conduct the planned clinical trials, to obtain additional approvals for the drug or to successfully commercialize the drug would have a materially adverse effect on the Company. No Assurance of Regulatory Approval; Government Regulation. The Company's research, preclinical development, clinical trials, and the manufacturing and marketing of its products are subject to extensive regulation by numerous governmental authorities in the U.S. and other countries, including, but not limited to, the Food and Drug Administration ("FDA") in the U.S. and the Health Protection Branch of Canada's Department of Health and Welfare ("HPB"), a federal regulatory agency in Canada. None of the Company's products has been approved for commercial sale by the FDA, the HPB or any other foreign regulatory authority and the Company does not expect to achieve profitable operations unless Ampligen receives FDA approval and is commercialized successfully. In order to obtain FDA 9 approval of a new drug product for an indication, the Company must demonstrate to the satisfaction of the FDA that such product is safe and effective for its intended uses and that the Company is capable of manufacturing the product to the applicable regulatory standards. The process of obtaining FDA and other required regulatory approvals (including those of the HPB) is rigorous and lengthy and has required and will continue to require the expenditure of substantial resources. There can be no assurance that the Company will be able to obtain the necessary regulatory approvals. Unsatisfactory clinical trial results, clinical trials not conducted in accordance with applicable protocol requirements and/or delays in obtaining regulatory approvals would prevent the marketing of products developed by the Company, and pending the receipt of such approvals, the Company will not receive product revenues or royalties. Pharmaceutical products and their manufacture are subject to continued review following regulatory approval, and later discovery of previously unknown problems may result in the imposition of restrictions on such products or their manufacture, including withdrawal of the products from the market. Failure to comply with applicable regulatory requirements could, among other things, result in fines, suspension of regulatory approvals, operating restrictions and criminal prosecution. The Company cannot predict the extent to which current or future government regulations might have a materially adverse effect on the production, marketing and sale of the Company's products. Such regulations may delay or prevent clinical trials, regulatory approval, and the manufacture or marketing of the Company's potential products. In addition, such regulation may impose costly procedures upon the Company's activities or furnish a competitive advantage to other companies more experienced in regulatory affairs than the Company and may deplete the Company's liquidity and capital resources. See "Business - Government Regulation." Additional Financing Requirements. The development of the Company's products has required and will continue to require the commitment of substantial resources to conduct the time-consuming research, preclinical development, and clinical trials that are necessary to bring pharmaceutical products to market and to establish commercial-sale production and marketing capabilities. Based on its current operating plan, the Company anticipates that projected cash flow from operations and currently available financing arrangements will be sufficient to meet the Company's capital requirements for approximately 10 months from the date of this Prospectus. It is not expected that the Company's current cash flow will be sufficient to enable the Company to complete the necessary clinical trials or regulatory approval process for Ampligen for any indication or, if any such approval were obtained, to begin manufacturing or marketing Ampligen on a commercial basis. Accordingly, the Company may need to raise substantial additional funds through additional equity or debt financing, collaborative arrangements with corporate partners, off balance sheet financing or from other sources in order to complete the necessary clinical trials and the regulatory approval processes and begin commercializing its products. If adequate funds are not available from operations, as is anticipated, and if the Company is not able to secure additional sources of financing on acceptable terms, the Company's business will be materially adversely affected. Moreover, because of the Company's long-term capital requirements, it may seek to access the public equity market whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. There can be no assurance that any additional funding will be available to the Company on terms acceptable to the Company, if at all. Any 10 additional funding may result in significant dilution and could involve the issuance of securities with rights which are senior to those of existing stockholders. The Company may also need additional funding earlier than anticipated, and the Company's cash requirements in general may vary materially from those now planned, for reasons including, but not limited to, changes in the Company's research and development programs, clinical trials, competitive and technological advances, the regulatory process, and higher than anticipated expenses and lower than anticipated revenues from certain of the Company's clinical trials as to which cost recovery from participants has been approved. Uncertainty Regarding Patents and Proprietary Rights. The Company's success will depend, in large part, on its ability to obtain patent protection for its products and to obtain and preserve proprietary information and trade secrets. The Company does not have exclusive rights to the manufacture of Ampligen. Consequently, the Company's ability to obtain exclusive rights for the commercial sale of Ampligen is subject to the Company's acquisition of enforceable patents covering the use of the drug for a particular indication. The Company has been issued certain patents on the use of Ampligen alone and Ampligen in combination with certain other drugs for the treatment of human immunodeficiency virus ("HIV"). The Company has also been issued a patent on the use of Ampligen in combination with certain other drugs for the treatment of chronic hepatitis B virus ("HBV") and chronic hepatitis C virus ("HCV") and a patent which affords protection on the use of Ampligen in patients with myalgic encephalomyetis, also know as chronic fatigue syndrome ("ME/CFS"). To date, the Company has not been issued any patents in the U.S. for the use of Ampligen as monotherapy for HBV or for any of the cancers which the Company has sought to target. The Company's applications for U.S. patents for the use of Ampligen as monotherapy for HBV and in the treatment of renal cell carcinoma and lung cancer are currently pending, although no assurances can be given that any of such applications will be approved. No assurances can be given that competitors will not seek and obtain patents regarding the use of Ampligen in combination with various other agents (including AZT) for a particular target indication prior to the Company. Although the Company's license to manufacture Ampligen is non-exclusive, the Company believes that the existence of the Company's treatment indication patents precludes a competitor from selling an identical or similar product for the same treatment indication without infringing upon the Company's issued patents. No assurance can be given, however, that the Company's patent protection will be adequate to prevent the entry into the market of competitors for all of the Company's treatment indications. The Company has been unable to secure Orphan Drug designation from the FDA for treatment of HBV in the U.S. In the event that the Company is unable to obtain adequate patent protection for the indication, it would be unable to maintain a competitive advantage over other drug manufacturers which could enter the market immediately. The patent position of biotechnology and pharmaceutical firms is highly uncertain and involves complex legal and factual questions. To date, no consistent policy has emerged regarding the breadth of protection afforded by pharmaceutical and biotechnology patents. Accordingly, there can be no assurance that patent applications relating to the Company's products or technology will result in patents being issued or that, if issued, such patents will afford meaningful protection against competitors with similar technology. It is generally anticipated that there may be significant litigation in the industry regarding patent and other intellectual property rights and that such litigation could consume substantial resources of the 11 Company. No assurance can be given that the Company's patents will provide competitive advantages for its products or will not be successfully challenged or circumvented by its competitors. No assurance can be given that patents do not exist or could not be filed which would have a materially adverse effect on the Company's ability to market its products or to obtain or maintain any competitive position the Company may achieve with respect to its products. The Company's patents also may not prevent others from developing competitive products using related technology. Other companies obtaining patents covering products or processes useful to the Company may bring infringement actions against the Company. There can be no assurance that the Company will have the financial resources necessary to enforce patent rights it may hold. As a result, the Company may be required to obtain licenses from others to develop, manufacture or market its products. There can be no assurance that the Company would be able to obtain any such licenses on commercially reasonable terms, if at all. The Company licenses certain patents and proprietary information from third parties, some of which patents and proprietary information may have been developed with government grants under circumstances where the government maintained certain rights with respect to the patents/information developed. No assurances can be given that such third parties will adequately enforce any rights they may have or that the rights, if any, retained by the government will not adversely affect the value of the Company's license. Certain of the Company's know-how and technology is not patentable, particularly the procedures for the manufacture of the Company's drug product which are carried out according to standard operating procedure manuals. To protect its rights, the Company has since 1991 required employees and consultants to enter into confidentiality agreements with the Company. There can be no assurance that these agreements will not be breached, that the Company would have adequate and enforceable remedies for any breach, or that any trade secrets of the Company will not otherwise become known or be independently developed by competitors. See "Business - Patent Rights." Disputes and Legal Proceedings Related to Patent Rights. The Company's ownership of one of its patents for the use of Ampligen for the treatment of HIV is the subject of a dispute. Vanderbilt University has advised the Company of its position that employees of the University were the inventors of the patent at issue. The Company does not believe the University's position to have merit, and if the University filed a claim against the Company, the Company would vigorously defend against such an action. If such a claim were filed and if such a claim were found to have merit, the loss of the patent at issue would not have a materially adverse effect on the Company's long range business since the University would be able to limit or prevent only the Company's use of Ampligen in combination with AZT in the treatment of HIV. In the event that the University obtained ownership of the disputed patent, the University could license a third entity to sell Ampligen for a specific combinational treatment. However, without the Company's consent, the Company believes that the commercialization process by a third party would require substantial expenditure to repeat clinical trials and establish a new manufacturing protocol acceptable to regulatory agencies and would require a license from the Company for the use of Ampligen as a component of the combinational requirement. Furthermore, the loss of this patent would not affect the Company's ability to market Ampligen as a monotherapy for HIV which treatment the Company has tested and expects to continue to develop. See "Business - Patent Rights" and "Business - Legal Proceedings." 12 History of Losses; Future Profitability Uncertain. The Company began operations in 1966 and has reported net profit only from 1985 through 1987. Since 1987, the Company has incurred substantial operating losses and as of December 31, 1996, the Company's accumulated deficit was approximately $48 million. The Company has not generated significant revenues from its products and could incur substantial and increased losses over the next several years. Such losses may fluctuate significantly from quarter to quarter. There can be no assurance that the Company will ever achieve significant revenues from product sales or become profitable. The Company's ability to achieve profitable operations is dependent, in large part, on successfully developing products, obtaining regulatory approvals on a timely basis, and making the transition from a research and development firm to an organization producing commercial products or entering into joint ventures or other licensing arrangements. No assurance can be given that the Company's product development efforts will be successfully completed, required regulatory approvals will be obtained, any products will be manufactured and marketed successfully, or profitability will be achieved. See "Selected Financial Data," "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." No Assurance of Successful Product Development. The development of new pharmaceutical products is subject to a number of significant risks. Potential products that appear to be promising at an early stage of research or development may not reach the market for a number of reasons. Potential products may be found to be ineffective or to have adverse side effects, fail to receive necessary regulatory clearances, be difficult to manufacture on a commercial scale, be uneconomical to market or be precluded from commercialization by proprietary rights of third parties. The Company's products are in various stages of clinical and pre-clinical development; each will need to progress through further clinical studies and appropriate regulatory approval processes before any such products can be marketed. Ampligen is not expected to be generally available for commercial sale for any indication for at least the next several years, if at all. Generally, only a small percentage of potential therapeutic products are eventually approved by the FDA for commercial sale. The transition from limited production of pre-clinical and clinical research quantities to production of commercial quantities of the Company's products will involve distinct management and technical challenges and will require additional management and technical personnel and capital to the extent such manufacturing is not handled by third parties. There can be no assurance that the Company's efforts will be successful or that any given product will be determined to be safe and effective, capable of being manufactured economically in commercial quantities or successfully marketed. See "Business." Limited Manufacturing Experience and Capacity. Ampligen is currently produced only in limited quantities for use in its clinical trials. To be successful, the Company's products must be manufactured in commercial quantities in compliance with regulatory requirements and at acceptable costs. Although the Company has entered into an agreement with Bioclones Proprietary, Ltd. ("Bioclones"), a biopharmaceutical company which is associated with South African Breweries, Ltd. (together with Bioclones, "SAB")(the "SAB Agreement") which provides for the construction of a new commercial manufacturing facility by a company which is 24.9% owned by the Company, no assurance can be given as to the timing of such construction, and therefore the Company may continue to be 13 dependent on third parties for a considerable portion of the manufacturing and production process. A pilot facility in South Africa is being expanded to provide a limited supply of Ampligen raw material. While the Company believes that construction of the commercial facility will begin in 1997, the construction is dependent upon the regulatory status of Ampligen in various global markets, and no assurance can be given with respect to when, and if, construction will occur. To the extent the Company is involved in the production process, the Company's current facilities are not adequate for the production of its proposed products for large-scale commercialization, and the Company currently does not have adequate personnel to conduct commercial-scale manufacturing. The Company intends to utilize third-party facilities if and when the need arises or, if it is unable to do so, to build or acquire commercial-scale manufacturing facilities. The Company will need to comply with regulatory requirements for such facilities, including those of the FDA and HPB pertaining to Good Manufacturing Practices ("GMP") regulations. There can be no assurance that such facilities can be used, built, or acquired on commercially acceptable terms, that such facilities, if used, built, or acquired, will be adequate for the Company's long-term needs. Moreover, there is no assurance that successful manufacture of a drug on a limited scale basis for investigational use will lead to a successful transition to commercial, large-scale production. Small changes in methods of manufacture may affect the chemical structure of Ampligen and other such RNA drugs, as well as their safety and efficacy. Changes in methods of manufacture, including commercial scale-up, can, among other things, require new clinical studies and affect orphan drug status, particularly, market exclusivity rights, if any, under the Orphan Drug Act. See "Business - Manufacturing" and "Business - Government Regulation." Lack of Marketing Experience and Capacity. The Company currently has limited marketing or sales capability and does not expect to establish a significant direct sales capability for at least the next several years. To the extent that the Company determines not, or is unable, to enter into marketing agreements or third party distribution agreements for its products, significant additional resources will be required to develop a sales force and distribution organization. Pursuant to the SAB Agreement, the corporate partner will be responsible for fielding an adequate sales force in South America, Africa, United Kingdom, Australia and New Zealand. Nevertheless, there can be no assurance that the Company will be able to establish such arrangements, under the SAB Agreement or otherwise, on terms acceptable to the Company, if at all, or that the cost of establishing such arrangements will not exceed any product revenues, or that such arrangements will be successful. To the extent that the Company enters into co-marketing or other licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that such efforts will be successful. See "Business Marketing." Rapid Technological Change and Substantial Competition. The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Most of these entities have significantly greater research and development capabilities than the Company, as well as substantial marketing, financial and managerial resources, and represent significant competition for the Company. Acquisition of, or investments in, competing companies by large pharmaceutical companies could increase such 14 competitors' financial, marketing and other resources. There can be no assurance that developments by others will not render the Company's products or technologies obsolete or noncompetitive or that the Company will be able to keep pace with technological developments. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. Some of these products may have an entirely different approach or means of accomplishing similar therapeutic effects to products being developed by the Company. These competing products may be more effective and less costly than the Company's products. In addition, conventional drug therapy, surgery and other more familiar treatments will offer competition to the Company's products. Furthermore, many of the Company's competitors have significantly greater experience than the Company in pre-clinical testing and human clinical trials of pharmaceutical products and in obtaining FDA, HPB and other regulatory approvals of products. Accordingly, the Company's competitors may succeed in obtaining FDA and HPB product approvals more rapidly than the Company. If any of the Company's products receive regulatory approvals for any indication and the Company commences commercial sales of its products, it will also be competing with respect to manufacturing efficiency and marketing capabilities, areas in which it has no experience. The Company's competitors may possess or obtain patent protection or other intellectual property rights that prevent, limit or otherwise adversely affect the Company's ability to develop or exploit its products. See "Business - Competition." Dependence upon Qualified and Key Personnel. Because of the specialized nature of the Company's business, the Company's success will depend, among other things, on its ability to attract and retain qualified management and scientific personnel. Competition for such personnel is intense. There can be no assurance that the Company will be able to continue to attract or retain such persons. The Company currently depends upon the services of Dr. William A. Carter, its President, Chief Executive Officer and Chairman of the Board, Robert E. Peterson, its Chief Financial Officer and Dr. Carol A. Smith, the Company's Director of Manufacturing and Process Development. Certain key individuals upon whom the Company currently depends, including but not limited to the Company's Medical Director, Dr. David Strayer, are not employees of the Company, but instead are employees of an institution with whom the Company has a collaborative at will arrangement. R. Douglas Hulse, Chief Operating Officer, is an employee of The Sage Group and serves in his position under a written agreement. In addition, Dr. Smith and Mr. Peterson do not have written employment agreements with the Company. The continued availability to the Company of the services of these individuals is subject to the policies of the institution which employs them; any change in such policies may have an adverse effect upon the Company's continued retention of the services of these individuals. While the Company has an employment agreement with Dr. William A. Carter, and has secured key man life insurance in the amount of $2 million on the life of Dr. Carter, the loss of Dr. Carter or other key personnel or of the services of such employees of collaborators or the failure to recruit additional personnel as needed could have a materially adverse effect on the Company's ability to achieve its objectives. See "Business" and "Management." Dependence on Third Parties. The Company's strategy for research, development and commercialization is to rely in part upon collaborative arrangements with third parties in appropriate circumstances. The Company's strategy has led it to enter into various arrangements with universities, research 15 groups, licensors and others. The Company is dependent on a number of important arrangements with third parties. In particular, the Company utilizes the services of employees of and regularly makes use of certain equipment and facilities at Hahnemann University and has obtained certain of its technology for Oragen products through a license with Temple University. There can be no assurance that the Company will be able to negotiate additional third party arrangements or continue any existing arrangements on terms acceptable to the Company, if at all, or that key researchers upon whom the Company is dependent will continue to be associated with such universities and/or to work on the Company's products. The loss of any such existing arrangement or key researcher could have a materially adverse effect on the Company. The Company may seek a significant portion of its future capital requirements from arrangements with pharmaceutical companies or others pursuant to arrangements under which, among other things, the Company would receive payment for certain research and development activities in exchange for future royalty payments. There can be no assurance that any such arrangements will be established on a basis acceptable to the Company, if at all, or if established, will be scientifically or commercially successful. The failure to achieve such arrangements on satisfactory terms could have a materially adverse effect on the Company. The Company is dependent upon certain third party suppliers for key components of its proposed products and for substantially all of the production process. The failure to continue arrangements with such third parties or obtain satisfactory substitute arrangements could have a materially adverse effect on the Company. See "Business - Employees and Consultants" and Management - Employment Agreements." Impact of Potential Nasdaq Delisting on Marketability of Securities; Broker-Dealer Sales of the Company's Securities. The Company's Common Stock and Class A Warrants trade on Nasdaq. The NASD has rules which establish criteria for the initial and continued listing of securities on Nasdaq. Under the rules for initial listing, a company must have at least $4,000,000 in total assets, at least $2,000,000 in total stockholders' equity, and a minimum bid price of $3.00 per share. For continued listing on Nasdaq, a company must maintain at least $2,000,000 in total assets, at least $1,000,000 in shareholders' equity, and a minimum bid price of $1.00 per share. As of December 31, 1996, the Company had approximately $6,999,000 in total assets and approximately $5,853,000 in total shareholders' equity. If the Company were to continue to incur operating losses, it might be unable to maintain the standards for continued listing and the listed securities could be subject to delisting from Nasdaq. If the Company's securities are delisted, trading in the delisted securities could thereafter be conducted on the NASD Bulletin Board or in the over-the-counter market in what is commonly referred to as the "pink sheets." If this were to occur, an investor would find it more difficult to dispose of the Company's securities or to obtain accurate quotations as to the price of the Company's securities and it could have an adverse effect on the coverage of news concerning the Company. In addition, if the Company's securities were delisted, they would be subject to a rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (accredited investors are generally persons having net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with a spouse). For transactions covered by this rule, the broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser's written consent to the transaction prior to sale, as well as disclosing certain information concerning the risks of purchasing low-priced securities on the market for such securities. Consequently, delisting, if it occurred, would adversely affect the ability of 16 broker-dealers to sell the Company's securities and would make subsequent financing more difficult. In order for the Company's securities to be included for trading on Nasdaq, there must exist market makers and specialists, respectively, to support trading in such securities. As of the date of this Prospectus, several brokerage firms, sufficient to satisfy the requirements of Nasdaq are engaged in market making activities with respect to the securities. There is no obligation on the part of the brokerage firm to continue to act as market makers. In the event that the market makers and specialists cease to function as such, public trading in the securities will be adversely affected or may cease entirely. Product Liability Exposure. The Company faces an inherent business risk of exposure to product liability claims in the event that the use of its products results in adverse effects. Such liability might result from claims made directly by patients, hospitals, clinics or other consumers, or by pharmaceutical companies or others manufacturing such products on behalf of the Company. While the Company will continue to attempt to take appropriate precautions, there can be no assurance that it will avoid significant product liability exposure. The Company currently maintain worldwide product liability insurance coverage. See "Business - Ampligen Safety Profile." Uncertainty of Health Care Reimbursement and Potential Legislation. The Company's ability to successfully commercialize its products will depend, in part, on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and from time to time legislation is proposed which, if adopted, could further restrict the prices charged by and/or amounts reimbursable to manufacturers of pharmaceutical products. The Company cannot predict what, if any, legislation will ultimately be adopted or the impact of such legislation on the Company. Reimbursement from government agencies may become more restricted in the future. The Company also understands that there is increasing political pressure in Canada to limit health care costs; no assurances can be given that the legislative or regulatory results, if any, of such pressure will not have an adverse impact on the Company. Furthermore, there can be no assurance that third party insurance companies will allow the Company to charge and receive payments for its products sufficient to realize an appropriate return on its investment in product development. The Company's potential products represent a new mode of therapy, and the Company expects that the costs associated with purchasing and administering its products will be substantial. There can be no assurance that the Company's proposed products, if successfully developed, will be considered cost effective to third-party payors, that reimbursement will be available or, if available, that the timing and amount of such payors' reimbursement will not adversely affect the Company's ability to sell its products on a profitable basis. Legal Proceedings In February 1991, Vanderbilt University advised the Company of its position that University employees were the inventors of an issued U.S. patent regarding the use of Ampligen in combination with various other agents (including AZT) for the treatment of HIV infection. 17 While the Company intends to vigorously prosecute or defend against any potential litigation described above, no assurance can be given as to the ultimate outcome or the Company's costs in bringing or defending the potential litigation. See "Risk Factors - Disputes and Legal Proceedings Related to Patent Rights" and "Business - Legal Proceedings." Hazardous Materials. The Company's business involves the controlled use of hazardous materials, carcinogenic chemicals and various radioactive compounds. Although the Company believes that its safety procedures for handling and disposing of such materials comply in all material respects with the standards prescribed by applicable regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident or the failure to comply with applicable regulations, the Company could be held liable for any damages that result, and any such liability could be significant. The Company does not maintain insurance coverage against such liabilities. The Company is also subject to a variety of laws and regulations relating to occupational health and safety, environmental protection, hazardous substance control, and waste management and disposal. The failure to comply with any of such regulations could subject the Company to, among other things, third party damage claims, civil penalties and criminal liability. Possible Volatility of Stock Price. The stock market in general and biotechnology and pharmaceutical stocks in particular have from time to time experienced significant price and volume fluctuations that may be unrelated to the operating performance of particular companies. The market price of the Securities, like the stock prices of many publicly traded biotechnology and smaller pharmaceutical companies, may be highly volatile. Announcements of technological innovations, regulatory matters or new commercial products by the Company or its competitors, developments or disputes concerning patent or proprietary rights, publicity regarding actual or potential medical results relating to products under development by the Company or its competitors, regulatory developments in both the U.S. and foreign countries, public concern as to the safety of pharmaceutical products, economic and other external factors, and period-to-period fluctuations in financial results, may have a significant impact on the market price of the Securities. Shares Eligible for Future Sale; Registration Rights. Approximately 9,467,968 outstanding shares of the Company's Common Stock are restricted securities, as that term is defined in Rule 144 promulgated under the Securities Act ("Rule 144"). Absent registration under the Securities Act or the availability of an exemption under the Securities Act, the sale of such shares is subject to Rule 144. In general, under Rule 144, subject to the satisfaction of certain other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted shares of Common Stock for at least two years is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, if the Common Stock is quoted on NASDAQ or a stock exchange, the average weekly trading volume during the four calendar weeks preceding the sale. A person who presently is not and who has not been an affiliate of the Company for at least three months immediately preceding the sale and who has beneficially owned the shares of Common Stock for at least three years is entitled to sell such 18 shares under Rule 144(k), without regard to any of the volume limitations described above. There are approximately 5,722,664 Rule 144(k) restricted shares currently outstanding. In addition, the Company has issued warrants to purchase 2,080,000 shares of Common Stock ("Rule 701 Warrants") in reliance upon the provisions of Rule 701 of the Securities Act, pursuant to which, in certain circumstances, such Rule 701 Warrants may be sold. Certain holders of Common Stock have executed lock up agreements with the Company. The sale, or availability for sale, of substantial amounts of the Company's securities in the public market subsequent to this Prospectus, including the securities issued pursuant to Rule 144, Rule 701 or otherwise, could adversely affect the market price of the Common Stock and could impair the Company's ability to raise additional capital through the sale of its equity securities or debt financing. The availability of Rule 144 and Rule 701 to the holders of restricted securities of the Company would be conditioned on, among other factors, the availability of certain public information concerning the Company. See "Description of Securities." Current Prospectus and State Registration Required to Exercise Class A Warrants. The Class A Warrants may not be exercised by the holders thereof unless at the time of exercise a registration statement covering the shares of Common Stock issuable upon exercise of the Class A Warrants is effective and such shares of Common Stock have been registered under the Securities Act and qualified, or deemed to be exempt, under the securities laws of the states of residence of the respective holders of such Class A Warrants. While the Class A Warrants are being registered herewith, there can be no assurance, however, that such registration statement will remain current or that such Class A Warrants will be properly qualified under applicable state securities laws, the failure of which may result in the exercise of the Class A Warrants and the resale or other disposition of Common Stock issued upon such exercise becoming unlawful. See "Description of Securities -- Class A Redeemable Warrants." Potential Adverse Effect of Redemption of Class A Warrants. The Class A Warrants may be redeemed by the Company at any time commencing two years from the date of this Prospectus and ending five years from the date of this Prospectus, at a redemption price of $.05 per Class A Warrant upon 30 days' prior written notice provided the closing bid price of the Common Stock on Nasdaq (or another national securities exchange) for 20 consecutive trading days ending within 10 days of the notice of redemption equals or exceeds $9.00 per share subject to adjustment. Redemption of the Class A Warrants could force the holders to exercise the Class A Warrants and pay the exercise price at a time when it may be disadvantageous for the holders to do so, to sell the Class A Warrants at the then current market price when they might otherwise wish to hold the Class A Warrants, or to accept the redemption price, which is likely to be substantially less than the market value of the Class A Warrants at the time of redemption. See "Description of Securities -- Class A Warrants." Exercise of Class A Warrants and Warrants May Have Dilutive Effect on Market. The Class A Warrants issued in connection with the IPO will provide, during their term, an opportunity for the holder to profit from a rise in the market price, of which there is no assurance, with resulting dilution in the ownership interest in the Company held by the then present stockholders. Holders of the Class A Warrants and Warrants most likely would exercise the Class A Warrants and Warrants and purchase the underlying Common Stock at a time when the Company may be able to obtain capital by a new offering of securities on terms more 19 favorable than those provided by such Class A Warrants and Warrants, in which event the terms on which the Company may be able to obtain additional capital would be affected adversely. Adverse Consequences Associated with Substantial Shares of Common Stock Reserved for Issuance Pursuant to Outstanding Warrants, Options and Conversion of the Series E Preferred. The Company has reserved an aggregate of up to 18,015,750 shares of Common Stock for issuance upon exercise of the Class A Warrants, warrants, stock options and upon conversion of the Series E Preferred. Holders of these Class A Warrants, warrants, options and Series E Preferred are likely to exercise and convert them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided by such convertible securities. Furthermore, while the convertible securities are outstanding, they may adversely affect the terms on which the Company could obtain additional capital. Should a significant portion of such convertible securities be exercised, the resulting increase in the amount of the Common Stock in the public market may have the effect of reducing the market price thereof. Conflicts of Interest. All of the members of the Company's Scientific Advisory Board are employed other than by the Company and may have commitments to or consulting or advisory contracts with other entities (which may include competitors of the Company) that may limit their availability to the Company. While each member of the Company's Scientific Advisory Board does execute a non-disclosure and non-competition agreement with respect to proprietary data that he or she receives from the Company, there can be no assurance that these agreements will absolutely protect the Company from the results of such data being revealed, accidentally or otherwise, by a member of its Scientific Advisory Board. See "Business - Scientific Advisory Board." Absence of Dividends. The Company intends to retain future earnings, if any, to provide funds for the operations of its business and, accordingly, does not anticipate paying any dividends on its Common Stock in the reasonably foreseeable future. See "Dividends." 20 CAPITALIZATION The following table sets forth the capitalization of the Company at December 31, 1996. This table should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this Prospectus. December 31, 1996 ----------------- (in thousands except share data) (unaudited) Notes Payable and Stockholder Loans (including accrued related interest) $ 0 Stockholders' equity (deficit): Preferred Stock, $.01 par value, 5,000,000 shares authorized; 5,000 issued and outstanding ** Common Stock, $.001 par value, 50,000,000 shares authorized; 16,160,205 issued and outstanding 16 Additional paid-in capital 54,080 Accumulated deficit (48,243) Total stockholders' equity 5,853 Total capitalization 5,853 - ---------- ** Less than $100 (1) Excludes: (i) 460,798 shares of Common Stock reserved for issuance pursuant to the Company's 1990 Stock Option Plan under which options to purchase 234,953 shares have been granted; (ii) 92,160 shares of Common Stock reserved for issuance pursuant to the Company's 1992 Stock Option Plan under which no options or other rights to purchase shares have been granted; (iii) 138,240 shares of Common Stock reserved for issuance pursuant to the Company's 1993 Employee Stock Purchase Plan pursuant to which no rights to purchase shares have been granted; (iv) 3,213,797 shares of Common Stock reserved for issuance pursuant to certain outstanding warrants with an average weighted exercise price of $3.53; (v) 2,080,000 warrants to purchase Common Stock of the Company issued to officers, directors and consultants of the Company in reliance upon Rule 701 of the Securities Act, at an exercise price of $3.50 per share ("Rule 701 Warrants"); (vi) 2,750,000 warrants to purchase Common Stock at an exercise price of $1.75 per share issued in accordance with the terms of the 1995 Standby Financing Agreement; (vii) 462,000 Units underlying the Option, 462,000 shares of Common Stock underlying the Units included in the Option, 462,000 Class A Warrants underlying the Option, and 462,000 shares of Common Stock underlying the Class A Warrants underlying the Units included in the Option. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Management--1992 Stock Option Plan," "--1990 Stock Option Plan" and "--Employee Stock Purchase Plan," "Description of Securities--Warrants" 21 SELECTED FINANCIAL DATA (in thousands, except share and per share data) The selected financial data should be read in conjunction with the Consolidated Financial Statements as of December 31, 1995 and 1996 and for each of the years in the three year period ended December 31, 1996, the related notes and the independent auditors' report. The consolidated statements of operations data for the years ended December 31, 1992 and 1993, and the consolidated balance sheet data at December 31, 1992, 1993 and 1994 are derived from audited Consolidated Financial Statements not included in this Prospectus.
December,31 ---------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------ ------------ ------------ Consolidated Statements of Operations Data: Revenues Research and Development $ -- $ 48 $ 76 $ 66 $ 32 License fee -- -- 100 2,900 -- ------------ ------------ ------------ ------------ ------------ Total Revenues -- 48 176 2,966 32 Cost and expenses: Research and development 4,734 2,119 1,638 1,029 1,902 General and administrative 2,825 3,347 2,618 2,880 3,024 ------------ ------------ ------------ ------------ ------------ Total costs and expenses 7,559 5,466 4,256 3,909 4,926 Debt conversion expenses -- (1,215) (10) (149) -- Net interest income (expense) (322) (1,069) (1,043) (748) 339 ------------ ------------ ------------ ------------ ------------ Net loss $ (7,881) $ (7,702) $ (5,133) $ (1,840) $ (4,554) ============ ============ ============ ============ ============ Net loss per share Weighted average -- -- $ (.44)(1) $ (.13)(1) $ (.29) Number of shares outstanding used in computing net loss per share (1) -- -- 11,536,276(1) 14,199,701(1) 15,718,136
(1) Computed on a proforma basis described in Note 2(e) to the Consolidated Financial Statements. 22
December 31, ---------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------ ------------ ------------ ------------ ------------ Consolidated Balance Sheet Data: Current assets $ 2,282 $ 6 $ 64 $ 11,354 $ 5,385 Current liabilities 2,750 10,599 13,043 8,279 1,146 Total assets 4,415 1,916 1,651 12,700 6,999 Long-term obligations 6,950 30 --- --- --- Redeemable preferred stock 2,536 2,866 3,238 --- --- Accumulated deficit (28,869) (36,571) (41,704) (43,544) (48,243) Stockholders' equity (deficit) $ (7,821) $ (11,579) $ (14,630) $ 4,421 $ 5,853
23 PRICE RANGE OF COMMON STOCK The Company's Common Stock and Class A Warrants are traded on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") under the symbols HEMX and HEMXW, respectively. The Company's Units, each Unit consisting of one share of Common Stock and one Class A Warrant (the "Units"), traded on Nasdaq during the period from November 2, 1995 to August 16, 1996, at which time it was delisted. The Company's Common Stock and Class A Warrants were listed for trading on Nasdaq on July 12, 1996. The following table sets forth the high and low bid prices for the Company's Units for the periods indicated as reported by the NASDAQ. On April 4, 1997, the high and low bid price for the Common Stock was $2.90625 and $2.8125, respectively. The high and low bid price for the Class A Warrants on such date was $.71875 and $.71875, respectively. UNITS (HEMXU) High Low ---- --- Time Period: November 2, 1995 through December 31, 1995 $ 8.62 $ 2.00 January 1, 1996 through March 31, 1996 3.68 1.750 April 1, 1996 through June 30, 1996 6.12 2.687 July 1, 1996 through August 15, 1996 (Trading 4.18 2.188 ceased on August 16, 1996) COMMON STOCK (HEMX) High Low ---- --- Time Period: July 15, 1996 through September 30, 1996 $ 5.1 $ 1.625 October 1, 1996 through December 31, 1996 4.81 2.063 24 WARRANTS (HEMXW) High Low ---- --- Time Period: July 15, 1996 through September 30, 1996 $ 1.875 $ 0.500 October 1, 1996 through December 31, 1996 1.813 0.625 On March 19, 1997, there were approximately 355 holders of record of the Company's Common Stock. The number of record holders do not include holders whose securities are held in street name. The Company has never paid any dividends on its Common Stock. It is management's intention not to declare or pay dividends on the Common Stock, but to retain earnings, if any, for the operation and expansion of the Company's business. DIVIDENDS The Company does not currently pay dividends on its Common Stock. It is management's intention not to declare or pay dividends on the Common Stock, but to retain earnings, if any, for the operation and expansion of the Company's business. The holders of its Series E Preferred Shares are entitled to certain dividend payments upon declaration by the Company's Board of Directors. USE OF PROCEEDS The Company intends to utilize the proceeds received from the exercise of the C Warrants, R Warrants and Series E Warrants of $2,608,659 if all such warrants are exercised in full, for general corporate and working capital purposes. There can be no assurance that any of the C Warrants, R Warrants and Series E Warrants will be exercised. The foregoing represents the Company's best estimate of its use of proceeds generated from the possible exercise of C Warrants, R Warrants and Series E Warrants based upon the current state of its business operations, its current plans and current economic and industry conditions. Any changes in the use of proceeds will be made at the sole discretion of the Board of Directors of the Company. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and related notes contained elsewhere in this Prospectus. GENERAL The Company was incorporated in Maryland in 1966 under the name HEM Research, Inc. and originally served as a supplier of research support products. The Company's business was redirected in the early 1980's to the development of nucleic acid pharmaceutical technology and the commercialization of RNA drugs. The Company was reincorporated in Delaware and changed its name to HEM Pharmaceuticals Corp. in 1991 and to Hemispherx BioPharma, Inc. in June 1995. The Company has three subsidiaries-BioPro Corp., BioAegean Corp. and Core BioTech Corp., all of which were incorporated in Delaware in 1994. The Company has reported net profit only from 1985 through 1987. Since 1987, the Company has incurred substantial operating losses. Prior to completing an Initial Public Offering ("IPO") in November 1995, the Company financed operations primarily through the private placement of equity and debt securities, equipment lease financing, interest income and revenues from licensing and royalty agreements. The IPO completed in November 1995 produced net proceeds of approximately $16,000,000. These funds plus the conversion of $3,447,000 in redeemable preferred stock to equity at the time of the IPO improved stockholders equity by some $19,000,000. The cash proceeds from the IPO were used to retire debt and other liabilities and establish a fund for future operations. The development of the Company's products has required and will continue to require the commitment of substantial resources to conduct the time-consuming research, preclinical development, and clinical trials necessary to bring pharmaceutical products to market and establish commercial production and marketing capabilities. Accordingly, the Company will need to raise additional funds through additional equity or debt financing, collaborative arrangements with corporate partners, off balance sheet financing or from other sources in order to complete the necessary clinical trials and the regulatory approval processes and begin commercializing its products. The consolidated financial statements include the financial statements of Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries, BioPro Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in September 1994 for the purpose of developing technology for ultimate sale into certain nonpharmaceutical specially consumer markets. All significant intercompany balances and transactions have been eliminated in consolidation. During fiscal 1994 and 1995, the Company focused on negotiating and executing the SAB Agreement, exploring potential partnerships to pursue additional clinical trials with special emphasis on the HBV disease indication, restructuring certain of its outstanding debt, conducting the 1994 Common Stock Financing and the Bridge Financing and completing its IPO. In 1996, the Company reviewed and restructured the Ampligen manufacturing process. Second sources 26 were established to procure raw materials, lyophilization services and release testing. In the areas of research and clinical efforts, the Company established with the FDA a roadmap of research and clinical studies to be completed. These studies include animal toxicity and clinical studies in HIV and CFS. One HIV clinical study was approved by the FDA and started in late 1996. Certain animal toxicity studies began. In addition, the Company shipped the initial inventory of Ampligen to Canada to use in its cost recovery program there. The Company expects to continue its research and clinical efforts for the next several years with some benefit of certain revenues from cost recovery programs, notably in Canada and Belgium. Beginning in October, 1993, limited revenues were initiated in Belgium from sales under the cost recovery provision for conducting clinical tests in ME/CFS. The Company expects to continue incurring losses over the next several years due to clinical costs which are only partially offset by revenues and potential licensing fees. Such losses may fluctuate from quarter to quarter as a result of differences in the timing of significant expenses incurred and receipt of licensing fees and/or revenues. Results of Operations Years Ended December 31, 1996 v. 1995 The Company reported a net loss of $4,554,489 in 1996 versus a loss of $1,839,840 in 1995. Several factors contributed to the increased loss of $2,714,649. Revenues were down $2,933,866 for 1996 as 1995 included $2,900,000 of licensing fees recorded in connection with SAB/Bioclones agreement. Research and development costs increased $873,665 in 1996 due primarily to increased efforts on the Canadian and Belgium clinical programs. General and administrative expenses of $3,023,590 in 1996 reflect the benefit of a one time gain in the amount of $318,757 resulting from the forgiveness of certain lease obligations in connection with the restructuring of the Company's principal office lease. Excluding this one time gain, general and administrative expenses in 1996 exceeded related expenses in 1995 by $461,904. This increase can mostly be attributed to stock compensation expense of $634,344 and certain consulting fees. Debt conversion costs of $149,384 and interest expense of $843,148 incurred in 1995 did not recur in 1996 due the fact that all the associated debt was converted or repaid in 1995. Interest income increased by $243,497 due to the earnings on the remaining IPO funds and funds from the issuance of preferred stock. Years Ended December 31, 1995 vs. 1994 The Company reported revenues of $2,965,910 in 1995 versus $175,758 in 1994. In 1995, the Company received and recognized $2,900,000 in licensing fees resulting from the SAB/Bioclones agreements as compared to $100,000 in 1994. Revenues from cost recovery clinical trials were $65,910 in 1995 versus $75,758 in 1994. Net losses of $1,839,840 were incurred in 1995 versus losses of $5,133,051 in 1994. The year to year improvement of $3,293,211 consisted of: (1) $2,790,152 in higher revenues primarily due to the licensing fees received from the SAB Agreement; (2) $609,107 or 37% in lower research and development 27 costs as a result of the winddown and completion of certain clinical trials; (3) higher general and administrative costs of $262,681 or 10% basically due to increased legal and professional fees associated with various legal matters and the Company's IPO efforts; (4) $138,884 in higher debt conversion expense relating to certain debt restructuring that took place in April, 1995; and (5) lower net interest expense in the amount of $295,517 or 28% due to the paydown of certain notes from the proceeds of the IPO. Years ended December 31, 1994 versus 1993 In 1994, the Company's net loss was $5,133,051 as compared to a net loss of $7,702,050 in 1993. The $2,568,999 improvement resulted from increased revenues of $127,758, reduced research and development costs of $481,127, reduced general and administrative costs of $729,714, reduced conversion expense of $1,204,000 and reduced net interest expense of $26,400. The Company had revenues of $48,000 in 1993 compared to $175,758 in 1994. In 1994 the Company received $100,000 in licensing fees in accordance with the terms of the SAB Agreement. Additionally, cost recovery revenues from the Belgium clinical trials increased by approximately $29,000. Operating expenses declined 22% in 1994 as compared to 1993, primarily as a result of reduced research costs and efforts to correspondingly downsize the general and administrative costs. Research and development costs declined approximately $481,000 or 23% primarily due to the completion of certain clinical trial efforts. General and administrative expenses declined approximately $730,000 or 22% as a result of restructuring and downsizing the Company's overhead to support the needs of the Company and reduced research and development activity. This restructuring in the fall of 1993 produced lower wages and salaries, telephone expense, travel and other expenses in 1994. In addition, in 1993 the Company incurred debt conversion expenses of $1,214,500 as a result of the conversion of certain debt to equity. Liquidity and Capital Resources As of December 31, 1996 the Company had $5,279,429 in cash and cash equivalents. This cash plus anticipated interest income, licensing fees, and revenues from product sales in Canada and Belgium in 1997 should be sufficient to cover the Company's cash needs in 1997. However, because of the Company's long-term requirements, it may seek to access public equity market whenever conditions are favorable, even if it does not have an immediate need for additional capital at that time. Any additional funding may result in significant dilution and could involve the issuance of securities with rights which are senior to those of existing stockholders. The Company may also need additional funding earlier than anticipated, and the Company's cash requirements in general may vary materially from those now planned, for reasons including, but not limited to, changes in the Company's research and development programs, clinical trials, competitive and technological advances, the regulatory process, and higher than anticipated expenses and lower than anticipated revenues from certain of the Company's clinical trials as to which cost recovery from participants has been approved. 28 At December 31, 1996, the Company had accounts payable and accrued current liabilities of approximately $1,146,390. Net cash used by the Company for operating activities amounted to approximately $1,952,145 in 1994, $1,939,219 in 1995 and $6,097,906 in 1996. In March, 1997, the Company used the services of an investment banking firm to privately place $5 million of Series E Preferred. The proceeds from this placement were used to retire the $5 million balance of Series D Convertible Stock issued in July of 1996. The Company has incurred and will continue to incur substantial research and development costs and manufacturing costs. In addition, if the Company receives regulatory clearance for the commercial sale of its products, the Company will incur substantial expenditures to develop its manufacturing, sales, marketing and distribution capabilities to the extent such functions are not supplied by third parties. The Company will require substantial additional funds for these purposes through additional equity and/or debt financings, collaborative arrangements with corporate partners or from other sources. No assurances can be given that such additional funds will be available for the Company to finance its development on acceptable terms, if at all. If adequate funds are not available from additional sources of financing, the Company's business will be materially adversely affected and the Company may not be able to continue operations. "See Business -- Company Strategy" and "Risk Factors." The Company's future capital requirements will depend on many factors, including scientific progress in its research, drug discovery and development programs, the magnitude of these programs, the length and expense of pre-clinical and clinical trials, the time and costs involved in seeking regulatory approvals, the costs involved in filing, prosecuting and enforcing patent claims, competing technological and market developments, changes in the existing collaborative research relationships, the ability of the Company to establish product development arrangements, the cost of manufacturing scale-up and effective commercialization activities and arrangements. The failure by the Company to obtain regulatory approval for any product will preclude its commercialization. There can be no assurance that necessary regulatory approvals will be obtained. See "Risk Factors" and "Business -- Government Regulation." Pursuant to the terms of the SAB Agreement, the Company has received an aggregate of $3,000,000 through December 31, 1996. New Accounting Pronouncements The Company adopted the provisions of FASB No. 121, "Accounting for the Impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying 29 amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. On January 1, 1996, the Company also adopted FASB No. 123, "Accounting for Stock- Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FASB No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock options grants made in 1995 and future years as if the fair-value-based method defined in FASB No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123. 30 BUSINESS General Hemispherx BioPharma, Inc. ("HEMX" or the "Company") is a biopharmaceutical company using nucleic acid technologies to develop therapeutic products for the treatment of viral diseases and certain cancers. Nucleic acid compounds represent a new class of pharmaceutical products that are designed to act at the molecular level for the treatment of human disease. The Company's drug technology utilizes specifically-configured ribonucleic acid ("RNA"). One of the Company's double stranded RNA drug products, trademarked Ampligen(R), a parenteral drug product, is in advanced human clinical development for various therapeutic indications. Based on the results of pre-clinical studies and clinical trials, the Company believes that Ampligen may have broad-spectrum anti-viral and anti-cancer activities. Over 300 patients have received Ampligen in clinical trials authorized by the U.S. Food and Drug Administration ("FDA") at over twenty clinical trial sites across the United States, representing the administration of more than 40,000 doses of this drug. Sales on a pre-approval, cost recovery basis have been initiated in Belgium and are expected to start in Canada during the second quarter of 1997. HEMX is presently exploring additional distributor relationships for Europe and the United States to set the stage for wider market penetration. SAB/Bioclones, the Company's partner in certain countries, is initiating trials of Ampligen in South Africa and Australia, and is exploring clinical sites in the United Kingdom. Ampligen is being developed clinically for use in treating three anti-viral indications: chronic hepatitis B virus ("HBV") infection (Phase I/II), human immunodeficiency virus ("HIV") associated disorders (Phase II), and myalgic encephalomyelitis, also known as chronic fatigue syndrome ("ME/CFS") (Phase II/III). The Company's business strategy is designed around seeking the required regulatory approvals which will allow the progressive introduction of Ampligen for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and Japan. Ampligen has received Orphan Drug designation from the FDA for four indications (AIDS, renal cell carcinoma, chronic fatigue syndrome and invasive malignant melanoma). The Company is also developing a second generation RNA drug technology, termed Oragen compounds, which the Company believes offers the potential for broad spectrum antiviral activity by oral administration. The World Health Organization ("WHO") estimates that there are approximately 300 million chronic carriers of HBV worldwide. More than 40% of the persistently infected persons who survive to adulthood will die from cirrhosis, liver cancer, or some other consequence of their infection. In the U.S. alone, there are an estimated 1.25 million carriers. HBV is one of several viruses that cause human hepatitis, or inflammation of the liver. The Company conducted a Phase I/II clinical trial of Ampligen in the U.S. for the treatment of chronic HBV infection at Stanford University and the University of Pennsylvania. A significant reduction in viral components and improvement in liver function was noted during the course of the Phase I/II clinical trial and the drug has been generally well tolerated. At present, interferon-alpha is the only approved product for the treatment of this disease; however, 60% to 75% of patients with chronic HBV ultimately fail to respond to interferon-alpha. The global sales of interferon are presently estimated at more than $1 billion, largely for its use in liver infections. 31 The Centers for Disease Control ("CDC") has estimated that approximately one million people in the U.S. are infected with HIV, excluding patients who have progressed to fully symptomatic AIDS. The WHO has estimated that 30 to 40 million people will be infected with HIV worldwide by the year 2000. The Company is currently conducting a Phase II clinical trial of Ampligen in the U.S. for the treatment of HIV infection. The drug is designed to enhance the patient's own immune system, thereby fighting the invasive viral agent more effectively and resulting in more durable long term benefits. ME/CFS is a condition recently recognized by the CDC and characterized by unexplained fatigue or chronic illness for six months or longer for which no cause has been identified after a thorough medical work-up. Although the CDC is presently conducting studies to more exactly determine the rate of incidence of ME/CFS, the CDC's latest estimate of the prevalence rate of this disease in the U.S. is in excess of 500,000 cases. The Company has entered into an agreement with a Canadian pharmaceutical firm pursuant to which the Canadian company will provide various services in connection with the distribution of Ampligen on a cost recovery basis as authorized under the Canadian emergency drug release program. Presently the Company is receiving revenues from sales of Ampligen to patients in an open label clinical trial being conducted in Belgium. The Company is currently discussing open-label and placebo controlled trials with the FDA. The Company is unaware of any other new drugs which are under development for treatment of ME/CFS. Today, ME/CFS accounts for a significant portion of people entering chronic disability status in the U.S. Thus, this presently untreatable illness constitutes a significant impact on the overall cost of health care. Accordingly, the estimate U.S. market for an effective treatment of ME/CFS is in excess of $1 billion annually. The Company also has clinical experience with Ampligen in patients with certain cancers, including renal cell carcinoma (kidney cancer) and metastatic malignant melanoma. Based on estimates prepared by the American Cancer Society, the Company estimates that approximately 25,000 new cases of renal cell carcinoma were diagnosed in the U.S. in 1996. Based on estimates prepared by the American Cancer Society, the Company believes that approximately 34,000 new cases of malignant melanoma were diagnosed in the U.S. in 1996. Data from the American Cancer Society and the World Health Organization indicate that both the incidence and mortality from malignant melanoma are rising steadily among white populations throughout the world. In the past decade, the incidence of melanoma has increased faster than that of any other cancer except lung cancer in women. The Company was incorporated in Maryland in August 1966 under the name HEM Research, Inc. and originally served as a supplier of research support products. The Company was redirected in the early eighties to the development of nucleic acid pharmaceutical technology and the commercialization of RNA drugs. HEM was reincorporated in Delaware and changed its name to HEM Pharmaceuticals Corp. in January 1991. In June, 1995, the Company became Hemispherx BioPharma, Inc. The Company's principal executive offices are located at One Penn Center, 1617 JFK Boulevard, Philadelphia, Pennsylvania 19103. The Company's telephone number is (215) 988-0080, and its WEB site is HTTP// WWW.HEMISPHERX.COM. 32 The Products Nucleic Acid Pharmaceuticals The Company believes that nucleic acid compounds represent a potential new class of pharmaceutical products that are designed to act at the molecular level for the treatment of human disease. There are two forms of nucleic acid: deoxyribonucleic acid ("DNA") and ribonucleic acid ("RNA"). DNA is a group of naturally occurring molecules found in chromosomes, the cell's genetic machinery. RNA is a group of naturally occurring informational molecules which orchestrate a cell's behavior and which regulate the action of groups of cells, including the cells which comprise the body's immune system. RNA directs the production of proteins and regulates certain cell activities including the activation of otherwise dormant cellular defenses against viruses and tumors. To date, the Company has focused its efforts on developing two classes of RNA pharmaceuticals, Ampligen, a high molecular weight double-stranded intravenous drug, and Oragen, low molecular weight single-stranded drugs intended for oral administration. Although there are many competitive approaches to anti-viral and anti-cancer therapies, the Company has taken an approach which it believes appears to hold a great deal of promise. By activating the human body's immune system through naturally occurring immune pathways, the Company's lead drug compound Ampligen is designed to avoid many of the pitfalls of other anti-viral drugs. Moreover, the Company believes that the broad-spectrum action of Ampligen greatly increases the probability of success. HEM has chosen markets which are not only sizeable and growing, but in disease areas for which there are presently no known cures. The Company's business strategy is designed around seeking the required regulatory approvals which will allow the progressive introduction of Ampligen for HIV and ME/CFS followed by HBV in the U.S., Canada, Europe and Japan. There can be no assurance of regulatory approvals for any of such disorders. Ampligen, however, has received Orphan Drug designation (see "Business - Government Regulations") from the FDA for four indications (AIDS, chronic fatigue syndrome, renal cell carcinoma and malignant melanoma). The Company is also developing a second generation RNA drug technology, termed Oragen compounds, which the Company believes offers the potential for broad spectrum antiviral activity by oral administration. In addition the Company has commenced development of certain clinical laboratory diagnostic products known as Diagen products. In December, 1996, the Company announced receipt of Diagen Patents in ten (10) European countries. Ampligen Ampligen is a high molecular weight RNA drug which is administered intravenously. Based on the results of clinical trials to date, the Company believes that Ampligen may have the potential to address significant medical needs where current treatment methods are inadequate or non-existent. 33 The preliminary results of the Company's animal and human tests indicate that Ampligen may have both broad-spectrum anti-viral and anti-cancer activities. To date, Ampligen has been given to over 300 patients in the clinical trials authorized by the U.S. Food and Drug Administration at over 20 clinical trial sites in the United States under effective Investigational New Drug (IND) applications. In addition, clinical trials are currently ongoing in Belgium and Houston, Texas. The following table summarizes the primary indications and the current clinical trial regulatory status of Ampligen in the U.S. FDA-AUTHORIZED INDICATION THERAPEUTIC TARGETS CLINICAL TRIALS* - ---------- ------------------- ---------------- Antiviral Chronic HBV (hepatitis B virus) Phase I/II(1) HIV Phase II(2) ME/CFS (chronic fatigue syndrome) Phase II/III(3) Anti-Cancer Renal Cell Carcinoma Phase II/III(4) Melanoma (skin cancer) Phase II(5) * The foregoing chart is qualified in its entirety by reference to more detailed information included elsewhere in this document. See "Business--Government Regulation" for a description of the FDA regulatory approval process. (1) A Phase I/II study was authorized by the FDA. This study has been partially enrolled with patients, and is currently on hold pending ongoing discussions with a potential corporate partner. (2) A FDA-authorized Phase I and two Phase II clinical trials of Ampligen for HIV infection have been completed; one Phase II trial studied Ampligen as monotherapy and the second used Ampligen in combination with AZT. A Phase II study utilizing Ampligen in a population of largely asymptomatic HIV carriers was recently initiated in Houston, Texas. (3) The Company has completed a Phase I/II study and a second Phase II clinical trial of Ampligen in ME/CFS under FDA authorizations. Recently the Company presented an open label expanded access Phase II study to the FDA for review and approval as well as a new Phase II/III study in ME/CFS. The Company is currently working with the FDA with respect to the design of these studies. In addition, a Phase II study is ongoing in Belgium. (4) A FDA-authorized Phase I/II study of Ampligen in cancer, including patients with renal cell carcinoma, has been completed. The Company has received authorization from the FDA to initiate a Phase II/III study of Ampligen in patients with metastatic renal cell carcinoma. At present, the Company does not anticipate devoting significant Company resources to the funding of this study, and, accordingly, a date for initiating this study has not been determined. 34 (5) Patients with metastatic melanoma have been treated with Ampligen as monotherapy under a FDA-authorized Phase I/II open-label study of Ampligen in cancer. The FDA has authorized the Company to conduct a Phase II trial of Ampligen in melanoma. The Company is seeking a corporate partner to assist in conducting this trial. The Company believes that Ampligen has been generally well tolerated in more than 15,000 patient treatment weeks with a low incidence of clinical toxicity, particularly given the life threatening diseases being treated. Clinical experience with Ampligen now totals 311 patients, of whom 171 patients have received Ampligen for six months or more. Of these patients, 117 have received Ampligen for one year or more; 63 patients have received Ampligen for two years or more; and 22 patients have received Ampligen for periods in excess of three years. A mild flushing reaction has been observed in approximately 15% of patients treated in the Company's various studies. This reaction is occasionally accompanied by erythema, a tightness of the chest, tachycardia, anxiety, shortness of breath, subjective reports of "feeling hot," sweating and nausea. The reaction is usually infusion-rate related and may generally be controlled by slowing the infusion rate. Other adverse side effects include liver enzyme level elevations, diarrhea, itching, urticaria (swelling of the skin), bronchospasm, transient hypotension, photophobia, rash, bradycardia, transient visual disturbances, arrhythmias, decreases in platelets and white blood cells counts, anemia, dizziness, confusion, elevation of kidney function tests, occasional temporary hair loss and various flu-like symptoms, including fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side effects typically subside within several months. Oragen Drugs Oragen drugs are low molecular weight RNA compounds which the Company believes, by virtue of their small size and molecular stability, have the potential for becoming the first oral, broad-spectrum nucleic acid treatments for various viral diseases such as HIV infection and chronic HBV infection. The technology for these nucleicacid products is licensed to the Company for commercial use on an exclusive basis from Temple University, subject to certain limited exceptions. To date, a number of compounds have been developed. Initial studies indicated that these drugs may withstand enzymatic destruction, an important factor in order for compounds to enter the blood stream in an intact form. Results from in vitro studies conducted in collaboration with the National Institute of Allergy and Infectious Diseases indicate that Oragen products may inhibit HBV infection, and in vitro studies conducted in collaboration with the National Cancer Institute and the University of Mainz, Germany, indicate that Oragen products may inhibit HIV infections. One compound, Oragen 0004, has shown inhibition of HBV multiplication in vitro and another, Oragen 0044, has demonstrated activity against HIV in vitro studies performed by Temple University. These two Oragen compounds have been produced in quantities which the Company believes are sufficient to perform animal toxicology testing. Experiments with mice at the University of Toronto indicate that Oragen drugs may protect against mouse hepatitis virus. There has been no human clinical testing of 35 Oragen products to date. There can be no assurance that human clinical testing, if initiated, will yield results consistent with those achieved in vitro or animal testing. The Company believes that Oragen drugs may exert anti-viral activity through two intracellular mechanisms. First, they may activate the intracellular "latent" RNase-L to degrade viral RNA. Second, they inhibit the HIV replication enzyme, reverse transcriptase, by binding to a different site on the enzyme from that bound by conventional anti-HIV compounds such as AZT. The Company's belief in the potential effects of these compounds is based, in part, on the collaborative in vitro experiments performed with the National Cancer Institute referred to above. Certain in vitro experiments performed at Vanderbilt University indicate that certain human immune cells can be protected from cell death caused by HIV infection by treatment with Oragen drugs. Under sponsorship of the National Institutes for Allergy and Infectious Diseases, in vitro studies at Georgetown University also demonstrated that Oragen drugs may inhibit the replication of human HBV. In each of the in vitro studies, no substantial cell toxicity was observed at concentrations which inhibit the applicable virus. The Company believes Oragen drugs work at a different stage of the anti-viral and anti-cancer response chain than Ampligen and therefore may be effective in disorders where the activity of Ampligen is limited. The Company also believes that Oragen drugs can potentially be engineered to trigger specific responses in immune cells based on in vitro tests. Significant additional testing will be required in order to determine whether the Company's beliefs regarding Oragen drugs can be transformed into viable human therapeutic products. The following table shows the Company's past and present pre-clinical studies of Oragen compounds. Except as otherwise noted, the studies have been conducted under collaborative arrangements pursuant to which the Company supplies quantities of the drug to the third party institution for testing, and that institution assigns all of the commercial rights to the studies to the Company and funds the research costs.
Target Programs Potential Market Applications Collaborators Human Immunodeficiency Treatment of HIV National Cancer Institute Temple University(1)(2) Vanderbilt University(1) University of Mainz, Germany(1) Hepatitis B Virus (HBV) Treatment of HBV National Institute of Allergy and Infectious Diseases Georgetown University Mouse Hepatitis Virus Treatment of Hepatitis C University of Toronto(1) Herpes Simplex Virus Treatment of Herpes Infectious Medical College of Type 1 and 2 Pennsylvania(1) Juntendo University
36 Tokyo, Japan Poliovirus/Respiratory Childhood Viral Diseases Howard University Syncytial virus Solid tumors Treatment of various types Temple University(1)(2) of cancer and Allegheny/ Hahnemann University
(1) Funding provided by the Company. In all other cases, funding provided by the institution. (2) The Company was notified in July 1994 that Temple believed the Company was in breach of its licensing agreement and therefore the agreement was being terminated. The Company and Temple University settled this dispute in December 1996 and the licensing agreement was re-instated. Diagnostic Diagen Products The Company is also developing a set of clinical laboratory diagnostic products, trademarked Diagen products, that are designed to assist physicians in identifying patients for the Company's RNA drug therapies and to assist in their clinical management thereafter. The Company believes that the availability of such tests may lead to improved patient care and increased market penetration by the Company's products, if and when such products are available for commercial sale. While these tests are at an early stage of commercial development, the Company believes that they may ultimately provide an opportunity for diversification of the Company's products and revenues and may help to identify patients who could benefit from the Company's drug treatment. The Diagen products would have to go through a regulatory process for diagnostic product clearance prior to commercial sale. Patents and Proprietary Rights The Company has filed more than 380 patent applications involving chemistry, processes, biological insights and specific target-oriented compositions of matter worldwide covering its RNA technology, including 30 filings with the U.S. Patent Trademark Office and more than 350 corresponding foreign patent applications in other countries, such as members of the European Patent Convention, Japan, South Korea, Australia. There can be no assurance that the Company's patent applications will result in the issuance of patents. The Company's policy is to file patent applications on a worldwide basis to protect technology, inventions, and improvements that are considered important to the development of its business. The Company has, as a matter of policy, sought patent protection in each of the three major geographic markets: the United States, Europe, and the Pacific Rim. The Company also relies upon trade secrets, know-how, continuing technological innovation and licensing opportunities to develop and maintain its competitive position. Of the patent applications filed worldwide, over 230 have been issued (including 13 in the United States). Within the 13 patents issued or accepted for issuance in the United States, seven include claims which afford patent protection for RNA treatment in HIV disease; one affords patent 37 protection for RNA treatment of Myalgic Encephalomyelitis/Chronic Fatigue Syndrome, two affords patent protection for RNA treatment/diagnosis of hepatitis infection, and three affords patent protection in other areas. In addition, the Company has filed patent applications for diagnostic applications resulting from insights and discoveries made by its employees and consultants relating to RNA nucleic acid structure and 2-5A biochemistry, which the Company believes may be applicable to the development and commercialization of various drugs that may operate by augmentation of cellular antiviral defenses. The license agreement with Temple University covering the Oragen Compounds presently includes 8 issued U.S. patents and 29 issued foreign patents as well as 24 patent applications in process. The patent positions of biopharmaceutical and biotechnology firms, including the Company, are generally uncertain and involve complex legal and factual questions. Consequently, even though the Company is currently prosecuting many patent applications with the U.S. and foreign patent offices, the Company does not know how many of its applications will result in the issuance of any patents or, of patents which are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated. Since patent applications in the United States are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, The Company cannot be certain that it was the first creator of all inventions covered by pending patent applications or that it was the first to file patent applications for all such inventions. Competitors or potential competitors may have filed applications for, and may obtain, additional patents and proprietary rights relating to, compounds or processes competitive with those of the Company. Accordingly, there can be no assurance that the Company's patent applications will result in patents being issued or that if issued the patents will afford protection against competitors with similar technology; nor can there be any assurance that others will not obtain patents that the Company would need to license or circumvent. The Company is aware of a claim by Vanderbilt University regarding the use of RNA combined with azidothymidine (AZT) in the treatment of a certain human disease (HIV infection). The Company does not believe this claim to have merit. The Company has used RNA with AZT in some of its clinical programs. There can be no assurance that the Company's patents or those of its competitors, if issued, would be upheld by a court of competent jurisdiction. The Company also relies upon unpatented trade secrets, and no assurance can be given that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's trade secrets or disclose such technology, or that the Company can meaningfully protect its right to unpatented trade secrets. 38 The Company requires it employees, consultants, members of the Scientific Advisory Board, outside scientific collaborators and sponsored researchers and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships with the Company. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with the Company be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees, the agreements provide that all inventions conceived by the individual shall be the exclusive property of the Company. There can be no assurance, however, that these agreements will provide meaningful protection or adequate remedies for the Company's trade secrets in the event of unauthorized use or disclosure of such information. Manufacturing Drug intermediates used in the production of Ampligen are currently manufactured from raw materials by Pharmacia Biotech, a division of Pharmacia-Upjohn, a major multinational pharmaceutical company. The intermediates are analyzed by the Company for compliance with specifications and then transferred to another contractor where the Ampligen drug intermediates are mixed under defined conditions to prepare a freeze-dried form of Ampligen. HEM provides a representative to supervise and monitor procedures and is the owner of all proprietary information used to generate its Ampligen intermediates. The Company also plans to phase in the manufacture of raw materials for Ampligen by its corporate partner Bioclones Proprietary Limited ("Bioclones") a biopharmaceutical company associated with The South African Breweries Ltd. ("SAB" and together with Bioclones, "SAB/Bioclones"), from a facility in South Africa. Critical contract relationships are covered by long term non-compete provisions as well as customary non-public disclosure terms. In each case the final product is tested by the Company to determine drug product compliance with a set of technical specifications. Upon meeting these specifications, the product is transferred to HEM and dosage units are then prepared at HEM's Rockville, Maryland, manufacturing facility. Pharmacia has a minor equity interest in the Company. The Company's plan is to source raw materials for its lead products on a worldwide basis. At present, Oragen compounds used for the Company's pre-clinical testing are produced at the University of Konstanz, Germany. Marketing The Company intends to design its marketing strategy to reflect the differing health care systems around the world, and the different marketing and distribution systems that are used to supply pharmaceutical products to those systems. In the United States, the Company expects that, subject to receipt of regulatory approval, Ampligen will be used in three medical arenas: physicians' offices or clinics, the hospital and the home setting. The Company currently plans to use a service provider in the home infusion (non-hospital) segment of the U.S. market to execute direct marketing activities, conduct physical distribution of product and handle billings and collections. Accordingly, the Company is developing marketing plans to facilitate the product distribution and medical support for indications, if and when they are approved, in each 39 arena. The Company believes that this approach will facilitate the generation of revenues without incurring the substantial costs associated with a sales force. Furthermore, management believes that the approach will enable the Company to retain many options for future marketing strategies. In February, 1996, the Company entered into an agreement with Rivex Pharma Inc. (a Canadian-based pharmaceutical company "Rivex"), pursuant to which Rivex will provide various services in connection with the marketing and exclusive distribution of Ampligen in Canada on an emergency drug release basis. Under the terms of this agreement, the Company will supply and Rivex will purchase as much Ampligen as necessary to satisfy Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain the exclusive right to market and distribute Ampligen in Canada. The Company expects Rivex to have patients in this program beginning in the second quarter of 1997. In Europe, the Company plans to adopt a country-by-country and, in certain cases, an indication-by-indication marketing strategy due to the heterogeneity of governmental regulations and alternative distribution systems in these areas. The Company also plans to adopt an indication-by-indication strategy in Japan. Subject to receipt of regulatory approval, the Company plans to seek strategic partnering arrangements with pharmaceutical companies to facilitate product introductions in these areas. No assurances can be given that any such arrangement will be entered into on terms acceptable to the Company. The relative prevalence of people suffering from target indications for Ampligen varies significantly by geographic region, and the Company intends to adjust its clinical and marketing planning to reflect the special needs of each area. The Company does not currently anticipate devoting significant resources to the establishment of an in-house sales force in the near term. In countries in South America, the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries and territories, the Company contemplates marketing its products through its relationship with SAB/Bioclones pursuant to the SAB Agreement. The Company is also developing a set of clinical laboratory diagnostic products, trademarked Diagen products, that are designed to assist physicians in identifying patients for the Company's RNA drug therapies and to assist in their clinical management thereafter. The Company believes that the availability of such tests may lead to improved patient care and increased market penetration by the Company's therapeutic products, if and when such products are available for commercial sale, although the Company does not anticipate deriving significant revenues directly from the commercial sale of Diagen products. These tests are at an early stage of development and the Company has received limited royalties in 1994 from its licensed reference laboratory in Texas. The Diagen products would have to go through a regulatory process for diagnostic product clearance applicable to medical devices prior to commercial sale. In some cases, use in clinical trials may require FDA clearances. See "Business" Government Regulation" below. The Company's objective is to license these potential products to a diagnostic company. The Company has granted rights to certain of the patents related to the Diagen products to one of its subsidiaries. See "Business--Subsidiary Companies." 40 Research and Development/Collaborative Agreements The development of the Company's products has required and will continue to require the commitment of substantial resources to conduct the time-consuming research, preclinical development, and clinical trials that are necessary to bring pharmaceutical products to market and to establish commercial-sale production and marketing capabilities. During the Company's last three fiscal years, the Company has spent approximately $4.5 million for research and development, of which $1.9 million was expended in the year ended December 31, 1996. Based on its current operating plan, the Company anticipates that the net cash and cash equivalents on hand of $5.3 million, together with the anticipated receipt of limited revenues from the sales of Ampligen, will be sufficient to meet the Company's capital requirements through 1997. It is not expected that this will be sufficient to enable the Company to complete the necessary clinical trials or regulatory approval process for Ampligen for any indication or, if any such approval were obtained, to begin manufacturing or marketing Ampligen on a commercial basis. Accordingly, the Company will need to raise substantial additional funds through additional equity or debt financing, collaborative arrangements with corporate partners, off balance sheet financing or from other sources in order to complete the necessary clinical trials and the regulatory approval processes and begin commercializing its products. If adequate funds are not available from operations, as is anticipated, and if the Company is not able to secure additional sources of financing on acceptable terms, the Company's business will be materially adversely affected. As part of its research and development activities, the Company has entered into various collaborative and sponsored research agreements with researchers, universities and government agencies. The Company believes that these agreements provide the Company with access to physicians and scientists with expertise in the fields of clinical medicine, virology, molecular biology, biochemistry, immunology and cellular biology. The Company has entered into the following collaborative agreements regarding its products: In October, 1994, the Company entered into an agreement with Bioclones/SAB (the "SAB Agreement") with respect to co-development of various RNA drugs, including Ampligen, for which the Company has previously obtained international patent protection. The SAB Agreement provides that the Company will provide SAB/Bioclones with an exclusive manufacturing and marketing license for certain Southern hemisphere countries (including all countries in South America) as well as the United Kingdom, Ireland, Africa, Australia, Tasmania, New Zealand, and certain other countries and territories. In exchange for these marketing and distribution rights, the SAB Agreement provides for: (a) a $3 million cash payment to the Company; (b) the formation and issuance to the Company of 24.9 % of the capital stock of a company to develop and operate a new manufacturing facility for RNA drugs to be constructed by SAB/Bioclones, and (c) royalties on all sales of the Company's products in the licensed territories. In addition, SAB/Bioclones agreed to use its best efforts to pursue the marketing approval of Ampligen for HBV in Australia, South Africa, Brazil, and the United Kingdom, as well as to perform (at its 41 own expense) a phase III study of Ampligen in chronic HBV infection in South Africa, which clinical study is to be performed pursuant to U.S. FDA good clinical practice and good laboratory practice guidelines and standards. SAB/Bioclones will be granted a right of first refusal to manufacture and supply to the Company the drug product required for not less than one-third of its world-wide sales of Ampligen (after deducting SAB/Bioclones-related sales) and will also be granted a right of first refusal for the manufacture and marketing of any of the Company's other RNA drugs in the licensed territories. According to its most recent annual report, SAB is a multinational holding company investing in and taking management responsibility for a portfolio of business in beer and beverages retailing, hotels and the manufacture of certain mass market consumer goods, together with strategic investments in businesses which support its mainstream interests. By September 30, 1995, the Company had received $3,000,000 in proceeds from SAB, in accordance with the terms of the SAB Agreement. SAB notified the Company that it had initiated manufacturing of test amounts of the licensed product as a significant step towards the new manufacturing facility and design thereof. SAB is traded on the NYSE as American Depository Receipts (ADRs). In February, 1996, the Company entered into an agreement with Rivex Pharma, Inc., a Canadian-based pharmaceutical company which grants Rivex an exclusive marketing and distribution rights for Ampligen in Canada. In exchange, Rivex is committed to purchase Ampligen from the Company. Rivex is also committed to perform regulatory compliance functions necessary for marketing approvals in Canada. The Company has a clinical pharmacology unit at Hahnemann University Hospital (now part of the Allegheny Health Education and Research Foundation and known as Allegheny University Hospitals - Hahnemann Division) in Philadelphia. This clinical pharmacology unit has performed studies on Ampligen metabolism in the body, and initiates clinical trials at the Phase I/II level. The Company also plans to use this unit for its initial clinical studies of Oragen drugs, subject to receipt of necessary clinical approvals. The Company does not own its own research and development or drug discovery laboratories. Instead, employees of the Company's collaborators conduct those functions at the laboratories of their employers. The Company has a long-standing relationship with the Hahneman Division of Allegheny University Hospitals (Allegheny/Hahnemann), to provide laboratory support in conjunction with licensing arrangements and financial support from the Company. No assurances can be given that such relationship will continue on terms advantageous to the Company or at all. In June 1989, the Company entered into an assignment and research support agreement with Allegheny/Hahnemann and Dr. David Strayer, Dr. Isadore Brodsky and Dr. David Gillespie who is now deceased (the "Scientist Group"). Dr. Strayer is the Company's Medical Director. Prior to the execution of the Allegheny/Hahnemann Agreement, Allegheny/Hahnemann and the Scientist Group had participated in the clinical testing of Ampligen. In an effort to obtain the benefits of the Scientist Group's future contributions to the development of Ampligen and obtain exclusive rights to certain proprietary and regulatory rights relating to Ampligen, the Company, 42 Allegheny/Hahnemann and the Scientist Group entered into the Allegheny/Hahnemann Agreement, which provides (i) for the assignment by Allegheny/Hahnemann and the Scientist Group to the Company of all of their respective rights in certain proprietary information which was then owned or subsequently developed and the exclusive and perpetual right to apply for any patents, trademarks or copyrights relating to the proprietary information; (ii) for the payment by the Company to Allegheny/Hahnemann (and the sharing by Allegheny/Hahnemann and the Scientist Group on such terms as they determine) of a royalty of 2% of net sales proceeds (up to a maximum royalty of $6 million per year) on all Ampligen sold by the Company or any entity licensed by the Company after the date of the grant by the FDA of the first NDA for Ampligen through January 1, 2005; (iii) for the payment by the Company to Allegheny/Hahnemann of $ 162,000 for certain scientific consultative support services to be performed by the Scientist Group during the first year of the Allegheny/Hahnemann Agreement; (iv) for the payment by the Company to Allegheny/Hahnemann of certain incremental amounts for scientific consultative support services to be rendered by the Scientist Group subsequent to the first year of the Allegheny/Hahnemann Agreement; (v) that either party may terminate the scientific consultative support services of the Scientist Group (and the Company's obligations to pay for those services) on 90 days' notice; and (vi) that all rights to discovery and inventions resulting from the Allegheny/Hahnemann Agreement are to be the exclusive property of the Company. The Company has not made any incremental payments to Allegheny/Hahnemann on account of scientific consultative support services rendered by any member of the Scientist Group pursuant to the Allegheny/Hahnemann Agreement for any period subsequent to September 30,1992. The Company has entered into an at-will arrangement with Allegheny/Hahnemann University, and Dr. Strayer, among others, pursuant to which the services of Dr. Strayer, among others, are made available to the Company in return for monthly salary subsidization payments made by the Company to the University. The aggregate amount of these monthly payments is presently $14,896. In August 1988, the Company entered into a pharmaceutical use license agreement with Temple University (the "Temple Agreement"). Under the terms of the Temple Agreement, Temple granted the Company an exclusive world-wide license for the term of the agreement for the commercial sale of Oragen products using patents and related technology held by Temple, which license is exclusive except to the extent Temple is required to grant a license to any governmental agency or non-profit organization as a condition of funding for research and development of the patents and technology licensed to the Company. The rights to such patents and related technology had previously been assigned to Temple by various parties, including Dr. Robert J. Suhadolnik, an employee of Temple. The Temple Agreement provides (i) for the payment by the Company to Temple of 4% of net sales of Oragen products the active ingredients of which consist entirely of products, processes or uses claimed by Temple's patents and 2% of net sales of Oragen products some, but not all, of the active ingredients of which consist of products, processes or uses claimed by Temple's patents; (ii) that the Company must seek all necessary approvals for the commercial sale of Oragen products; (iii) that the Company must file an application for 43 marketing approval for at least one licensed product with the FDA or a foreign counterpart on or before August 3, 1996; (iv) for the funding of specified research payments by the Company; and (v) that the Company shall have an exclusive option to negotiate for a period of six months the terms of an exclusive license for the commercial sale of any future related technology with respect to which Temple shall hold a patent. The Temple Agreement expires upon the expiration of the last licensed patent, unless sooner. terminated by mutual consent, upon the failure by the Company to pay any required royalties or upon any material breach of the agreement. Dr. Suhadolnik, as well as his laboratory, will derive income and financial support from any royalties paid by the Company. The Company was notified by Temple in July 1994 that it believed the Company was in breach of the Temple Agreement and that Temple believed that the Temple Agreement was terminated. The Company filed a lawsuit seeking a declaratory judgement that the Temple Agreement remains in full force and effect and seeking monetary damages. Temple has filed a motion to dismiss this lawsuit and in January 1995, Temple filed a separate litigation against the Company seeking declaratory judgment that the Temple Agreement has been lawfully terminated, together with an award of costs, including attorney fees. The Company and the University entered a settlement agreement in December, 1996 which resolves all issues and reinstates the licensing rights. In May 1992, the Company entered into a letter agreement to provide research payments to Dr. Werner E. Muller at the University of Mainz for various exclusive 20-year licensing arrangements including certain technologies for genetic manipulation of the 2-5A pathway. The Company believes that the research billing conducted by Dr. Muller will provide general knowledge with respect to the manipulation of the cellular mechanism by which Ampligen works. In addition to the arrangements with Temple University and Hahnemann University described above, the Company has two types of collaborative research arrangements. First, the Company has entered into "sponsored research arrangements" with various institutions which provide for the payment by the Company of specified financial support to the institutions which conduct the research . Second, the Company has entered into "collaborative arrangements" pursuant to which the institution conducts studies of the Company's products at the institution's expense and gives the Company exclusive commercial rights to research results. The Company provides its drugs to these institutions free of charge. Collaborative research arrangements provide that the proprietary knowledge is the sole property of the Company but permit the collaborator, after a specified time period, to publish the results of its research in scientific medical journals. The Company has research agreements with the National Institute for Allergy and Infectious Diseases on the use of Ampligen and Oragen products in the treatment of HBV infection and various herpes and respiratory viruses and Hahnemann University on the biochemical and molecular activities of RNA. Other collaborators include the following entities or scientists therefrom: the National Cancer Institute, Harvard University Medical School, Yale University Medical School, Vanderbilt University, University of Pittsburgh, Howard University, Cornell University, Georgetown University, Stanford University, University of Pennsylvania, Medical College of Pennsylvania, University of California at Davis and the Uniformed Services University for the Health Sciences. International collaborations include scientists from Konstanz University 44 (Germany), University of Mainz (Germany), University of Toronto (Canada) and Juntendo University (Japan). The Company intends to continue to engage in such collaborative and sponsored research with selected institutions. There can be no assurance, however, that the Company will be able to maintain its existing collaborative arrangements or enter into new collaborative arrangements. Competition Competition in the development and marketing of therapeutic drugs for human diseases is intensely competitive. Many different approaches are being developed for management of the diseases targeted by the Company. In addition to drug therapy, companies are promoting biological and hormonal therapies, prophylactic and therapeutic vaccines and surgery. These approaches, however, may have limited utility and some are often associated with toxicity, including life-threatening side-effects. Most FDA-approved anti-viral drugs appear to directly inhibit the viruses by interfering with their replication (so-called reverse transcriptase or protease inhibitors). Their mechanisms of action do not seem to stimulate the production of immune cells to attack or scavenge the disease-causing agents. Interferon therapy does act by an immune mechanism and has been approved by the FDA for the treatment of chronic HBV; durable effects, however, are seen in only a minority of treated subjects and the side-effects are substantial. Interferon has thus far not been demonstrated to be efficacious in HIV, ME/CFS and the primary tumors (other than melanoma) and indications targeted by the Company. The newer anti-HIV drugs may reduce the level of HIV in the plasma by approximately 99%; however, the dramatic effects are often transitory. Below is a list of certain compounds which appear directly competitive with the Company's products: HIV Infection. The principal treatments for HIV are AZT, DDI, DDC, D4T and 3TC. A group of newer compounds, termed protease inhibitors, share the problems of rapid viral mutation, multi-drug resistance, etc., but may cause a more dramatic transient drop in amount of HIV present in the blood stream. No immune based drugs have been approved to date, and there is a paucity of clinical developmental research on vaccines due to the problem of rapid viral mutations. HBV. Treatments include interferon-alpha, thymosin and 3TC. Only interferon alpha has proven effective in rigorous clinical tests, and less than 20% of patients have a durable response. Also, interferon's side effects are substantial and may curtail patient use and physician acceptability, particularly in the major Asian markets. ME/CFS. The FDA has not approved any drugs specifically for this disorder. Physicians typically prescribe analgesics psychotropic and anti-inflammatory drugs to combat and palliate 45 the symptoms without addressing the underlying immunologic damage or the herpes virus proliferation. Renal Cell Carcinoma. Interleukin 2 may be an extremely toxic product often requiring immediate access to a critical care unit if used according to manufacturer's recommendations (Chiron/Cetus). Malignant Melanoma. Interferon alpha was recently approved by the FDA; however, the percentage of responses is small, and a significant percentage of relapses are expected. Treatment costs with Interferon often exceed $10,000 per year. There are several publicly held companies that place emphasis on nucleic acid technology. Each is outlined below from publicly available documents filed with the SEC. Gilead Sciences, Inc. (Foster City, California; GILD/Nasdaq). Gilead is developing nucleotide technologies and is pursuing pre-clinical and clinical development of a number of product candidates. ISIS Pharmaceuticals, Inc. (Carlsbad, California; ISIP/Nasdaq). This company, founded in 1989, has devoted substantially all of its resources to research, drug discovery and development programs. In July, 1995, ISIS 2922 was in Phase III clinical trials to treat CMV-induces retinitis in AIDS patients, ISIS 2105 was in Phase II trials to treat genital warts, and Phase II trials were planned for ISIS 2302 for treatment of a variety of inflammatory diseases. The Company anticipates that it will face increased competition in the future as new products enter the market and advanced technologies become available. There can be no assurance that existing products or new products developed by the Company's competitors will not be more effective than any that may be developed by the Company. Competitive products may render the Company's technology and products obsolete or noncompetitive prior to the Company's recovering research, development or commercialization expenses incurred with respect to any such products. Most of the Company's existing or potential competitors have substantially greater financial, technical and human resources than the Company. In addition, many of these competitors have significantly greater experience than the Company in undertaking research, preclinical studies and human clinical trials of new pharmaceutical products, obtaining FDA and other regulatory approvals, and manufacturing and marketing such products. Accordingly, the Company's competitors may succeed in commercializing the products more rapidly or more effectively than the Company. The Company's competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes, and secure sufficient capital resources for the often substantial period between technological conception and commercial sales. 46 Subsidiary Companies In September 1994, the Company incorporated three wholly-owned subsidiaries--BioPro Corp. ("BioPro"), Core BioTech Corp. ("Core BioTech"), and BioAegean Corp. ("BioAegean")--in the State of Delaware. The purpose of BioPro is to commercialize tobacco-related products. BioPro intends to develop methods to utilize RNA technology in conjunction with certain tobacco and cigarette filter products to provide cleaner tobacco products. The technology is based in part on recent unpublished experiments in laboratory animals conducted at the University of California, Davis, which suggest that the Company's RNA drugs may prevent certain aspects of lung fibrosis under certain experimental conditions. In September, 1994, the Company granted an exclusive worldwide license and/or sub-license to certain of its patents and assigned certain other patents to BioPro (the "BioPro License ") for a term of three years, which term will automatically be extended for a term of 15 years in the event that BioPro provides evidence that it has commercialized one or more of the patents. BioPro has agreed that it will not develop any product or technology which may be deemed therapeutic and has granted a right of first refusal to the Company with respect to any technology which it may develop or acquire. BioPro has the right to grant sublicenses subject to the requirement that its sublicensees agree to non-competition arrangements with the Company. The Company has agreed that it will not develop any technology related to the business of BioPro and has granted BioPro a right of first refusal with respect to any technology it may develop with respect to the business of BioPro. The Company is developing a business plan and will continue to seek corporate partners in 1997. The purpose of Core BioTech is to commercialize the Company's diagnostic oriented patents which provide RNA technology to detect certain difficult to diagnose viral diseases such as ME/CFS and other immuno-dysfunctional conditions through strategically located central reference laboratories. In September, 1994, the Company granted an exclusive worldwide license and/or sub-license to certain of its patents and assigned certain other patents to Core BioTech (the "Core BioTech License") for a term of three years, which term will automatically be extended for a term of 15 years in the event that Core BioTech provides evidence that it has commercialized one or more of the patents. Core BioTech has agreed that it will not develop any product or technology which may be deemed therapeutic and has granted a right of first refusal to the Company with respect to any technology which it may develop or acquire. Core BioTech has the right to grant sublicenses subject to the requirement that its sublicensees agree to non-competition arrangements with the Company. The Company has agreed that it will not develop any technology related to the business of Core BioTech and has granted Core BioTech a right of first refusal with respect to any technology it may develop with respect to the business of Core BioTech. In June 1995, the directors of BioAegean approved the private placement of 1,000,000 shares of common stock at $1.00 per share which is expected to occur in 1997. In addition, the directors of BioAegean issued 10-year options to purchase an aggregate of 1,200,000 shares of 47 common stock of BioAegean at an exercise price of $1.00 per share (the "BioAegean Options") to its officers and directors. The BioAegean Options are conditional upon the recipient's agreement to serve BioAegean as needed for at least 24 months unless fully incapacitated. William A. Carter, M.D., Chairman, President and Chief Executive Officer of the Company, serves as Chairman, Chief Executive Officer and a Director of BioAegean and received 300,000 BioAegean Options. R. Douglas Hulse, Chief Operating Officer of the Company, serves as Chief Operating Officer of BioAegean and received 50,000 BioAegean Options. Peter Rodino, III, a director and Secretary of the Company, serves as Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and received 150,000 BioAegean Options. Robert Peterson serves as Chief Financial Officer of both the Company and BioAegean and received 50,000 BioAegean Options. Sharon Will, Vice President of Investor Relations and Corporate Communications for the Company, serves as Vice President of Marketing for BioAegean and received 150,000 BioAegean Options. Harris Freedman serves as Vice President for Strategic Alliances for both the Company and BioAegean and received 150,000 BioAegean Options. Richard Piani, a director of the Company, serves as a director and the Advisor for European Affairs of BioAegean and received 50,000 BioAegean Options. Gerald Kay serves as a director for both the Company and BioAegean and received 50,000 BioAegean Options. BioAegean's remaining director, Jerome Belson, a principal shareholder of the Company, received 50,000 BioAegean Options. The Company is presently exploring strategic alliances with recognized skin care companies which currently market certain products to diminish the effects of photoaging and UV-light on the skin. Government Regulation Overview. Regulation by governmental authorities in the U.S. and foreign countries is and will be a significant factor in the manufacture and marketing of the Company's proposed products and in its ongoing research and product development activities. All of the Company's proposed products and products of its ongoing research and product development activities will require regulatory clearances prior to commercialization. In particular, human new drug products are subject to rigorous preclinical and clinical testing as a condition of clearances by the FDA and by similar authorities in foreign countries. The lengthy process of seeking these approvals, and the ongoing process of compliance with applicable statutes and regulations, has required and will continue to require the expenditure of substantial resources. Any failure by the Company or its collaborators or licensees to obtain, or any delay in obtaining, regulatory approvals could materially adversely affect the marketing of any products developed by the Company and its ability to receive product or royalty revenue. The Company is also subject to various federal, state and local laws, regulations and recommendations relating to such matters as safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use of and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with the Company's research work. The Company believes that its Rockville, Maryland manufacturing and quality assurance/control facility is in substantial compliance with all material regulations applicable to these activities. 48 U.S. Regulatory Process. Before a new drug product may be sold commercially in the U.S. and other countries, clinical trials of the product must be conducted and results submitted to the appropriate regulatory agencies as part of the approval process. The Company's therapeutic and diagnostic products are subject to regulation in the U.S. under the Food, Drug and Cosmetic Act (the "FDC Act"). Ampligen and other RNA drugs will be reviewed as new drugs by the FDA's Center for Drug Evaluation and Research ("CDER"). The process includes: (1) Drug Products. The steps required before a non-biological drug product may be marketed in the U.S. include (a) conducting appropriate pre-clinical laboratory and animal tests, (b) submitting to the FDA an application for an Investigational New Drug ("IND"), which must become effective before human clinical trials may commence, (c) conducting well-controlled human clinical trials which establish the safety and efficacy of the drug product, (d) filing a New Drug Application ("NDA") with the FDA, and (e) obtaining FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each indication to be treated with each product, each domestic drug manufacturing establishment must register with the FDA, list its drug products with the FDA, comply with current Good Manufacturing Practices ("GMP") requirements and be subject to inspections by the FDA. Foreign manufacturing establishments also must comply with GMP requirements, and are subject to periodic inspection by the FDA or by local authorities under agreement with the FDA. Pre-clinical tests include formulation development, laboratory evaluation of product chemistry and animal studies to assess the potential safety and efficacy of the product formulation. Drug products must be manufactured in accordance with GMP requirements and pre-clinical tests must be conducted in accordance with the FDA regulations regarding Good Laboratory Practices. The results of the pre-clinical tests are submitted to the FDA as part of the IND and are reviewed by the FDA prior to authorizing the sponsor to conduct clinical trials in human subjects. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. There is no certainty that submission of an IND will result in FDA authorization to commence clinical trials or that authorization of one phase of a clinical trial will result in authorization of other phases or that clinical trials will result in FDA approval. Clinical trials may be placed on hold by the FDA at any time for a variety of reasons, particularly if safety or design concerns exist. (2) Clinical Testing Requirements. Clinical trials involve the administration of the investigational drug product to human subjects. Clinical trials typically are conducted in three phases and are subject to detailed protocols. Each protocol indicating how the clinical trial will be conducted must usually be submitted for review to the FDA as part of the IND. The FDA's review of a study protocol does not necessarily mean that, if the study is successful, it will constitute proof of efficacy or safety. Further, each clinical study must usually be conducted under the auspices of an independent Institutional Review Board ("IRB") established pursuant to FDA regulations. The IRB considers, among other factors, ethical concerns, informed consent requirements, and the possible liability of the hospital conducting the trials. The FDA or IRB may require changes in a protocol both prior to and after the commencement of a trial. There is no assurance that the IRB or FDA will permit a study to go forward or, once started, to be completed. 49 The three phases of clinical trials are generally conducted sequentially, but they may overlap. In Phase I, the initial introduction of the drug into humans, the drug is tested for safety, side effects, dosage tolerance, metabolism and clinical pharmacology. Phase I testing for an indication typically takes at least one year to complete. Phase II involves controlled tests in a larger but still limited patient population to determine the efficacy of the drug for specific indications, to determine optimal dosage and to identify possible side effects and safety risks. Phase II testing for an indication typically takes at least from one and one-half to two and one-half years to complete. If preliminary evidence suggesting effectiveness has been obtained during Phase II evaluations, expanded Phase III trials are undertaken to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase III studies for an indication generally take at least from two and one-half to five years to complete. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of the Company's products that have not yet completed any such testing. Nor can there be any assurance that completion of clinical testing will result in FDA approval. Furthermore, the FDA may suspend clinical trials at any time if the patients are believed to be exposed to a significant health risk. Phase III or other clinical studies may be conducted after rather than before approval under certain circumstances. For example, the FDA may determine under its accelerated approval regulations that earlier studies, involving the use of surrogate markers rather than clinical outcomes, may establish an adequate basis for drug product approval, providing that the sponsor agrees to conduct an additional study after approval to verify and describe the clinical benefit of the drug. These and other similar regulations, however, are often limited to drug products that are intended to treat serious or life-threatening diseases, especially those diseases for which there are no alternative therapies, or that provide meaningful therapeutic benefit to patients over existing treatments. The Company believes that Ampligen may be eligible for review under the FDA's "accelerated approval" or other similar regulations for certain indications; however, the Company has not decided whether to seek such accelerated or other similar approval and no assurances can be given that such accelerated or other similar approval, if sought, will be granted for any indication pursuant to such regulations. In the case of drugs for life-threatening diseases, the initial human testing is generally done on patients rather than on healthy volunteers. Because these patients are already afflicted with the target disease, it is possible that such studies may provide results traditionally obtained in Phase II trials. These trials are referred to as Phase I/II trials. Reports of results of the pre-clinical studies and clinical trials for non-biological drugs are submitted to the FDA in the form of an NDA for approval of the marketing and commercial shipment. The NDA also includes information pertaining to the preparation of drug substances, analytical methods, drug product formulation, details on the manufacture of finished product as well as proposed product packaging and labeling. Submission of an NDA does not assure FDA approval for marketing. The application review process generally takes two to three years to complete, although reviews of treatments for cancer and other life-threatening diseases may be accelerated or expedited. However, the process may take substantially longer if, among other 50 things, the FDA has questions or concerns about the safety and/or efficacy of a product. In general, the FDA requires at least two properly conducted, adequate and well-controlled clinical studies demonstrating efficacy with sufficient levels of statistical assurance. However, additional information may be required. For example, the FDA also may request long-term toxicity studies or other studies relating to product safety or efficacy. Notwithstanding the submission of such data, the FDA ultimately may decide that the application does not satisfy its regulatory criteria for approval. Finally, the FDA may require additional clinical tests following NDA approval to confirm product safety and efficacy (Phase IV clinical tests). Among the requirements for product approval is the requirement that prospective manufacturers conform to the FDA's GMP standards. In complying with GMP standards, manufacturers must continue to expend time, money and effort in production, recordkeeping and quality control to ensure that the product meets applicable specifications and other requirements. The FDA periodically inspects drug manufacturing facilities in order to ensure compliance with applicable GMP requirements. Failure to so comply subjects the manufacturer to possible FDA action, such as the suspension of manufacturing, seizure of the product, or voluntary recall of a product. The product testing and approval process is likely to take a substantial number of years and involves the expenditure of substantial resources. There can be no assurance that any approval will be granted on a timely basis, or at all. The FDA also may require post-marketing testing and surveillance to monitor the record of the product and continued compliance with regulatory requirements. Upon approval, a drug may only be marketed for the approved indications in the approved dosage forms and at the approved dosages. Adverse experiences with the product must be reported to the FDA. The FDA also may require the submission of any lot of the product for inspection and may restrict the release of any lot that does not comply with FDA standards, or may otherwise order the suspension of manufacture, recall or seizure. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems concerning safety or efficacy of the product occur following approval. In addition to applicable FDA requirements, the Company is subject to foreign regulatory authorities governing clinical trials and drug sales. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The approval process varies from country to country and the time required may be longer or shorter than that required for FDA approval. (3) Orphan Drug Status. Under the Orphan Drug Act, the FDA may designate drug products as orphan drugs if they are intended to treat a rare disease or condition, which is defined as a disease or condition that affects less than 200,000 persons in the U.S., or if there is no reasonable expectation of recovery of the costs of research and development from sales in the U.S. Provided certain conditions are met, orphan drug status confers upon the sponsor certain tax credits for amounts expended on clinical trials prior to May 31, 1997, as well as marketing exclusivity for seven years following FDA approval of the product. Marketing 51 exclusivity means that the FDA cannot approve another version of the same product for the same use for seven years after approval of the first product. However, the FDA can still approve a different drug for the same use or the same drug for a different use. The FDA regulations implementing the Orphan Drug Act define what drugs are the "same" for purposes of the seven year market exclusivity provisions. The Company has been advised that nucleic acids and other complex drugs may present potentially difficult orphan drug issues under these regulations. The Company cannot predict how these provisions will be implemented with respect to its RNA products and competitive drugs. Certain benefits of orphan drug status are only available upon obtaining FDA approval for marketing. For example, orphan drug exclusivity only vests in the same designated product that is first to receive FDA marketing approval. In 1993, Ampligen was designated as an orphan drug by the FDA for the clinical indications of AIDS and renal cell carcinoma. The Company does not believe that the former designation extends to HIV disease which has not progressed to AIDS. In December 1993, the FDA designated Ampligen as an orphan drug for the clinical indications of invasive malignant melanoma and chronic fatigue syndrome. The FDA denied a request by the Company to designate Ampligen as an orphan drug for chronic active HBV infection. There is no assurance that any future products will receive orphan drug designation, or that the benefits currently available from such designations for Ampligen will not hereafter be amended or eliminated. Various legislative proposals have from time to time been introduced in Congress to modify various provisions of the Orphan Drug Act. Currently, Congress has considered legislation that would amend the Orphan Drug Act and may limit the scope of marketing exclusivity. The tax credit provisions expired on December 31, 1994 and were renewed by Congress in 1996. (4) Diagnostic Products. The Company's potential Diagen diagnostic products also must receive FDA clearance prior to any commercial marketing. The FDC Act regulates most in vitro diagnostic products as medical devices, and provides for two clearance mechanisms. Certain products may qualify for a Section 510(k) procedure, under which the manufacturer gives the FDA a premarket notification ("510(k) Notice") of the manufacturer's intent to commence marketing the product. The manufacturer must establish that the product to be marketed is "substantially equivalent" to another legally marketed product which is subject to a 510(k) Notice or was commercially marketed prior to May 28, 1976 and is not subject to premarket application ("PMA") requirements. In some cases, a 510(k) Notice must include data from human clinical studies. Normally, marketing may commence when the FDA issues an order to the manufacturer finding the product to be "substantially equivalent." If the product does not qualify for the 510(k) procedure, the manufacturer must file a PMA which includes results of extensive clinical and nonclinical tests demonstrating that the product is both safe and effective. The PMA process requires more intensive testing than the 510(k) procedure, involves a significantly longer FDA review process, and usually requires review by an FDA scientific advisory committee. Approval of a PMA allowing commercial sale of a product requires that its safety and effectiveness be demonstrated through human clinical studies, usually conducted under an Investigational Device Exemption ("IDE"). Some diagnostic products may be clinically tested without an FDA approved IDE. It is unknown at this time whether an IDE will be required in order to clinically test Diagen products. In responding to a PMA, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not 52 satisfy its regulatory approval criteria. There can be no assurance that investigational or marketing approvals or clearances for Diagen products will be granted to the Company. Canadian Regulatory Process. The regulatory approval process in Canada of pre-clinical and clinical trials, manufacturing and sales of drugs, registration of establishments which manufacture biologics, compliance with GMP requirements and periodic inspection by the Health Protection Bureau ("HPB") of the Canadian Department of Health and Welfare, which serves as the federal drug agency in Canada, is in general similar to that in the United States. (a) Investigational New Drug Application. Before conducting clinical trials of a new drug in Canada, a company must submit an IND application to the HPB containing various information about the drug. In November 1992, the HPB approved the Company's INDs to conduct open-label and controlled clinical trials of Ampligen for ME/CFS. There is no assurance that the HPB will accept data obtained from those clinical trials in any submission of the Company to the HPB to market Ampligen in Canada or that such data, if accepted, will result in the approval of Ampligen for sale in Canada. The HPB may place clinical trials on hold at any time if safety concerns exist. (b) New Drug Submission. Before marketing or selling a new drug in Canada, the Company must submit a New Drug Submission ("NDS") to the HPB and receive a notice of compliance from the HPB to sell the drug. The NDS includes information describing the new drug, including its proper name, the proposed name under which the new drug will be sold, the specifications of the new drug, the methods of manufacturing, processing and packaging the new drug, the controls applicable to these operations, the tests conducted to establish the safety of the new drug, the tests to be applied to control the potency, purity, stability and safety of the new drug, the results of clinical trials and the effectiveness of the new drug when used as intended. Submission of an NDS does not assure HPB approval of a new drug for sale. If it determines the NDS meets the requirements of Canada's Food and Drugs Act and Regulations, the HPB will issue a notice of compliance for the new drug. The HPB may deny approval of an NDS if applicable regulatory criteria are not satisfied or may require additional testing. Product approvals may be withdrawn if compliance with regulatory standards is not maintained or if problems occur after the drug reaches the market. The HPB may require testing and surveillance programs to monitor the new drug once commercialized. Non-compliance with applicable requirements can result in fines and other penalties, including product seizures and criminal prosecutions. Among the requirements for product approval in Canada is the requirement that a prospective manufacturer conform to the HPB's GMP and good laboratory practices ("GLP") standards. Before manufacturing a biologic, a manufacturer must have a license from the HPB that is specific to the site of manufacture. The HPB periodically inspects the drug manufacturing site in order to ensure compliance with Canada's Food and Drugs Act and Regulations and GMP and GLP requirements. If there is a safety concern, the HPB, apart from other sanctions, can suspend the manufacture of the product. 53 Certain provinces in Canada have the ability to determine whether the costs of a drug sold within such province will be reimbursed by a provincial government health plan by listing drugs on formularies. These provincial formularies may affect the prices of drugs and the volume of drugs sold within provinces. The Patented Medicines Prices Review Board has the ability to assess whether the price of a patented medicine is excessive and, if determined to do so, the Board has the ability to require the patent owner to reduce the price of the patented medicine, to reduce the price of another patented medicine or to remit money to the government. Proposals have recently been made that, if implemented, would significantly change Canada's drug approval system. Proposals include establishing a separate agency for drug regulation and modeled on European Community agencies. It is uncertain whether drugs such as the Company's would be evaluated by this separate agency, and the Company is unable to predict the impact, if any, on the transfer of regulatory responsibility from the HPB to the separate agency. The Company is unable to predict whether these proposals will be implemented or, if implemented, the effect thereof on the Company. Employees As of January 31, 1997 the Company had 14 full-time employees. Of these employees 9 were engaged in the Company's research, development, manufacturing, regulatory affairs or pre- clinical testing, and 5 employees performed general administrative functions including financial matters and investor relations. In addition, on an as needed basis 8 individuals employed at academic institutions serve as consultants or independent contractors to the Company. Such persons are paid pursuant to licensing agreements with 2 universities. There are 29 additional individuals who serve or have served as part-time consultants or independent contractors to the Company. In addition, to the individuals throughout the United States from time to time are retained by the Company as independent contractors, either on a per diem or monthly basis. The Company believes that it has been successful in attracting skilled and experienced scientific personnel; however, competition for such personnel is intense and there can be no assurance that the Company will be able to attract and retain necessary qualified employees and/or consultants in the future. None of the Company's employees are covered by collective bargaining agreements. Recent Developments In March, 1997, The Company sold 5,000 shares of Series E Comvertible Preferred Stock at $1,000 per share in a private offering pursuant to Regulation D of the Securities Act and Rule 506 promulgated thereunder. The proceeds of this placement were used to retire the convertible preferred stock (Series D), which was placed under Regulation D filing with the SEC during 1996. As a result of this transaction in 1997, the Company will incur a $1.2 million stock compensation expense, however, this will have no effect on the net equity of the company as it will be offset by an increase in additional paid-in capital. 54 In January 1997, the Company began a Phase II clinical trial in Texas treating HIV infected patients with Ampligen. The trial, approved by the FDA, will study the effect of Ampligen on viral load, or burden, in HIV patients with CD4 levels over 400 cells/mm who are not being treated with any other HIV medications. The principal investigator in the trial, Dr. Patricia Salvato, specializes in the treatment of individuals with HIV infection. Dr. Salvato is a Clinical Associate Professor at the University of Texas Health Science Center, and has participated in prior clinical trials of Ampligen for various chronic viral diseases including HIV and CFS. In December, 1996 the Company and Temple University settled their legal disputes regarding the license agreement between the parties covering the Oragen drugs. The parties signed the documents required to consummate their settlement, which includes a worldwide license for the commercial sale of Oragen products based on patents and related technology held by Temple. This agreement was originally executed in 1988. In 1994, Temple terminated the agreement, which caused the company to file legal action to re-instate the 1988 agreement. In November, 1996, the Company announced that it will significantly expand the enrollment of patients in Ampligen treatment programs in Belgium. This expansion was at the request of the Belgium Investigator. On October 15, 1996, results of a Belgium clinical study were presented at the annual scientific meeting of the American Association for Chronic Fatigue Syndrome (AACFS) evidencing that Ampligen produced significant physical and cognitive improvements among patients suffering from Chronic Fatigue Syndrome. The study was presented by Kenny De Meirleir, M.D., Ph.D. from the University of Brussels, and by David S. Strayer, M.D., Professor of Medicine at Allegheny University, PA, and Medical Director for the Company. In September, 1996, Helix BioPharma Corp. (Helix) informed the Company that it had confirmed the elegibility of Ampligen under Canada's Emergency Drug Release Program to be made available in Canada to sufferers of HIV, Renal Cancer, and Chronic Fatigue Syndrome. The Company thereupon shipped an initial inventory of Ampligen to Helix and is in the process of producing further supplies of Ampligen for Helix. In July 1996, the Company unbundled its public stock unit (consisting of one share of Common Stock and one Warrant to purchase Common stock). The Common shares (HEMX), Warrants (HEMXW) as well as Units (HEMXU) are now separately traded on NASDQ. The unit (HEMXU) ceased trading in August, 1996. On July 3, 1996, the Company issued and sold 6,000 shares of Series D Convertible Preferred Stock ('the Preferred Stock") at $1,000 per share for an aggregate total of $6,000,000. The proceeds, net of issuance costs, realized by the Company were $5,395,885. In addition to the issuance of the Preferred Stock, the Company issued to the buyer Warrants to purchase 100,000 shares of Common Stock at the strike price of $4.00 per share. 55 In June, 1996, R. Douglas Hulse joined the Company as Chief Operating Officer (COO). Mr. Hulse serves as Executive Director of The Sage Group, a healthcare consulting firm specializing in pharmaceutical and biotechnology business development and strategic planning. In his role as COO, Mr. Hulse serves as global coordinator interacting with various distributors and corporate partners while insuring an adequate supply of drug for the Company's expected commercial sales and expanded clinical programs. In April, 1996, SAB/Bioclones reported significant accomplishments in South Africa in fulfillment of their licensing agreement. Pilot production runs of raw materials for use in manufacturing Ampligen were completed and are being tested for conformity to Company specifications. SAB/Bioclones are negotiating with two manufacturers to formulate the drug and to produce 200ml infusion bottles (400mg Ampligen) for use in clinical trials. Discussions also are underway with clinical investigators to identify suitable participants for a controlled study of Ampligen in chronic active hepatitis B. Clinical investigators then will be selected and patients enrolled for studies. SAB/Bioclones has further reported interest among Hepatologists to additionally evaluate Ampligen in the treatment of hepatitis C. The Company resolved a long standing legal suit with a former note holder of the Company. The litigation had been simultaneously pursued by the parties in both the Federal Court of Eastern Pennsylvania as well as in the State Court of Florida in Palm Beach County. The noteholder also filed a motion for a preliminary injunction in the Pennsylvania court to enjoin the Company from disbursing the proceeds of a public offering in the amount of $5.8 million, which motion was granted in November, 1995. On February 15, 1996. the Company reached an agreement to settle this matter. Terms and conditions of the settlement included payment of $6,450,000 to the noteholder to cover the note balance and legal expenses. The noteholder and related parties are to maintain certain Warrants that were granted prior to the lawsuit. Other Warrants granted to the noteholder in the note restructuring in 1994 were relinquished. The funds under this settlement were paid on March 21, 1996. Mutual releases were executed which completed the settlement of the litigation. In February, 1996, the Company entered into an agreement with Helix BioPharma, a Canadian based pharmaceutical and biochemical and biomedical company to jointly develop the Company's lead product for certain viral disorders and diseases of immunological dysregulation. Helix BioPharma is the parent company of Rivex Pharma, Inc. with which the Company has an agreement for marketing and distribution services in Canada. Helix BioPharma, headquartered in Richmond, British Columbia, is developing, licensing, marketing and distributing biomedical and pharmaceutical products and services principally to the Canadian markets. The Company was a defendant in a lawsuit instituted in 1991 by participants in a double-blind placebo-controlled clinical trial of Ampligen therapy for ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised them that they would receive Ampligen after the placebo-controlled study at no cost for periods ranging from "until marketable" or "for life." Plaintiffs sought compensatory and punitive damages. The court granted the Company's motions for summary judgement upon all claims alleged by the plaintiffs in this case. The plaintiffs have 56 appealed from these orders before the United States Court of Appeals for the Ninth Circuit. In January, 1996, the Court of Appeals denied their appeal and sustained the Company's position. On the basis of the Court of Appeals favorable decision, the Company believes the lawsuit is over with no material effect on the Company. Properties The Company leases and occupies a total of approximately 18,850 square feet of laboratory and office space in two states. The corporate headquarters in Philadelphia, Pennsylvania are located in a suite of offices of approximately 15,000 square feet. The pharmacy, packaging, quality assurance and quality control laboratories, as well as additional office space, are located in Rockville, Maryland. These facilities occupy approximately 3,850 square feet, approximately 2,000 of which are dedicated to the packaging and quality control product release functions. The Company believes that its Rockville facilities will meet its production requirements, including sufficient quantities of Ampligen for planned clinical trials, through 1997, at which time it may need to increase its manufacturing capacity either through third parties or by building or acquiring commercial-scale facilities. In addition, the Company has entered into the SAB Agreement, which provides the Company with 24.9 % of the capital stock of a company to develop and operate a new manufacturing facility to be financed by SAB/Bioclones. Manufacturing at the pilot facility commenced in 1996. The Company expects that manufacturing at the commercial facility will commence in 1998, although no assurance can be given that this will occur. Legal Proceedings The Company is subject to claims and legal actions that arise in the ordinary course of their business. Management believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on the financial position or results of operations of the Company. In March 1995, the Company instituted a declaratory judgment action against the February 1992 noteholder of a $5 million convertible note and a second defendant in the United State District Court for the Eastern District of Pennsylvania ("the Pennsylvania action") to declare as void, set aside, and cancel the February 1992 convertible note between the Company and the noteholder ("the Note"). In addition, the noteholder instituted suit against the Company on the Note in the Circuit Court of the 15th Judicial District in and for Palm Beach County, Florida, seeking judgment on the note, plus attorneys fees, costs and expenses; in August 1995, this action was stayed by the Florida Court pending the outcome of the Pennsylvania action. The noteholder also filed a motion for a preliminary injunction in the Pennsylvania court to enjoin the Company from disbursing the proceeds of a public offering in the amount of $5.8 million, which motion was granted in November, 1995. On February 15, 1996, the Company reached an agreement to settle this matter. Terms and conditions of the settlement include payment of $6,450,000 to the noteholder to cover the unpaid note balance and legal expenses. The 57 noteholder and related parties returned approximately 282,000 Common Stock Purchase Warrants that were granted prior to the lawsuit. Other Warrants granted to the noteholder in the note restructuring in 1994 were relinquished. The funds under this settlement were paid on March 21, 1996. Mutual releases were executed which completed the settlement of the litigation. In November 1994, the Company filed suit against Temple University ("Temple") in the Superior Court of the State of Delaware ("Superior Court") seeking a declaratory judgment that the Temple Agreement remains in full force and effect and seeking monetary damages in excess of $10 million for Temple's alleged breach of its obligations of good faith and fair dealing and certain terms of the Temple Agreement. Temple filed a motion to dismiss this lawsuit upon the grounds of lack of personal jurisdiction. In January 1995, Temple filed separate litigation against the Company in the Court of Common Pleas of Philadelphia County seeking declaratory judgment that the Temple Agreement has been lawfully terminated as of July 1, 1994, together with an award of costs including attorney fees, in bringing the action. The Company and Temple settled their dispute in December, 1996, dropping all litigation and reinstating the 1988 license agreement. The Company was a defendant in a lawsuit instituted in 1991 by participants in a double-blind placebo-controlled clinical trial of Ampligen therapy for ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised them that they would receive Ampligen after the placebo-controlled study at no cost for periods ranging from "until marketable" to "for life. " Plaintiffs sought compensatory and punitive damages. The court granted the Company's motions for summary judgment upon all claims alleged by the plaintiffs in this case. The plaintiffs have appealed from these orders before the United States Court of Appeals for the Ninth Circuit. In January 1996, the Court of Appeals denied their appeal and sustained the Company's position. On the basis of the Court of Appeals favorable decision, the Company believes the lawsuit is concluded with no current or future material effect on the Company's financial position. Scientific Advisory Board The Company established its Scientific Advisory Board in March 1991. The Scientific Advisory Board consists of individuals who the Company believes have particular expertise in immunology, virology, pharmacology, cancer therapeutics, biochemistry and related fields. These individuals advise the Company about present and long-term scientific planning, research and development. The Scientific Advisory Board holds annual meetings as required by the clinical studies in progress by the Company. In addition, individual Scientific Advisory Board members sometimes consult with, and meet informally with, employees of the Company on a more frequent basis. All members of the Scientific Advisory Board are employed by employers other than the Company and may have commitments to, or consulting and/or advisory agreements with, other entities, including potential competitors of the Company, that may limit their availability to the Company. The time spent by Scientific Advisory Board members on the Company's affairs varies. Although individual members of the Scientific Advisory Board may devote significant time and energy to the affairs of the Company, no member is expected to devote more than a small portion of his time to the Company. Members of the Scientific 58 Advisory Board are compensated at a rate of $1,500 per meeting attended or day devoted to Company affairs. In addition, Doctors Cheng and Brodsky have been granted options to acquire 4,608 and 5,253 shares of Common Stock, respectively, at exercise prices of $4.34 and $1.06 per share, respectively. As described elsewhere herein, Dr. Brodsky is a party to the Hahnemann Agreement, pursuant to which he is entitled to receive certain royalties from the Company with respect to sales of Ampligen. See "Business - Research and Development, Licensing and Collaboration Agreements." The following information is furnished with respect to members of the Scientific Advisory Board:
NAME POSITIONS INSTITUTION - ---- --------- ----------- Isadore Brodsky, M.D. Professor of Medicine and Head, Medical College of Division of Hematology/Oncology Pennsylvania and Hahnemann University, School of Medicine, Philadelphia, Pennsylvania Yung-Chi Cheng, Ph.D. Director, Developmental Therapeutics/ Yale University School of Chemotherapy Program Medicine, New Haven, Connecticut Professor of Pharmacology and Yale University Center, New Haven Comprehensive Internal Medicine Center, New Haven, Connecticut Clyde Crumpacker, M.D. Professor of Medicine Harvard Medical School, Boston, Massachusetts Physician Harvard Medical School, Brigham & Women's Hospital, Beth Israel Hospital, Boston, Massachusetts Robert A. Good, Ph.D. Distinguished Professor Departments of Pediatrics and M.D., D.Sc. Microbiology, University of South Florida, Tampa, Florida Physician-in-Chief All Children's Hospital, St. Petersburg, Florida James Greene, Ph.D. Associate Professor of Biology Catholic University, Washington, D.C. Anthony L. Komaroff, M.D., Ph.D. Professor of Medicine, Harvard Medical School, Chief, Division of General Medicine Brigham & Women's Hospital, Boston, Massachusetts
59 William Mitchell, M.D., Ph.D Professor of Pathology Vanderbilt School of Medicine, Nashville, Tennessee Phillip Roane, Ph.D. Associate Professor of Howard University, Microbiology Washington, D.C. Kenny DeMeirleir, M.D., Ph.D. Professor of Medicine Vrije Universiteit, Brussels, Belgium
Data Safety Monitoring Board Because the Company periodically conducts placebo-controlled clinical studies in chronic incurable diseases, it has designated a Data Safety Monitoring Board comprised of independent physicians, scientists and patient advocates. During the conduct of a placebo-controlled clinical trial (i.e. involving the use of placebo for certain patients involved in the trial), the Data Safety Monitoring Board meets at pre-determined intervals to evaluate the safety, efficacy and/or ethical implications of a placebo-controlled trial. Members of the Data Safety Monitoring Board are compensated at a rate of $1,500 per meeting attended. Members are not allowed to hold stock in the Company. The following are members of the Data Safety Monitoring Board:
NAME POSITIONS INSTITUTION - ---- --------- ----------- Robert A. Good, M.D., Distinguished Professor Departments of Pediatrics and Ph.D., D.Sc. Microbiology, University of South Florida, Tampa, Florida Physician-in-Chief All Children's Hospital, St. Petersburg, Florida Lewis Marshall, M.D. Associate Professor of Medicine Howard University College of Medicine, Washington, D.C. Chief, Infectious Diseases Providence Hospital, Washington, D.C. Chief, Infectious Diseases Columbia Hospital for Women, Washington, D.C. The Rev. Daniel Paul Matthews D.D. Rector Parish of Trinity Church, Wall Street, New York Kenny DeMeirleir, M.D., Ph.D. Professor of Medicine Vrije Universiteit, Brussels, Belgium
60 MANAGEMENT Directors, Executive Officers and Key Employees The directors, executive officers, key employees and advisors of the Company are as follows: Name Age Position ---- --- -------- William A. Carter, M.D. 59 Chairman, Chief Executive Officer, President R. Douglas Hulse 53 Chief Operating Officer Robert E. Peterson 60 Chief Financial Officer Harris Freedman 63 Vice President, Corporate Communications Sharon D. Will 38 Vice President, Investor Relations Peter W. Rodino III 43 Director, Secretary Cedric C. Philipp 74 Director, Associate Secretary, Special Advisor to the Board/International Richard C. Piani 70 Director David R. Strayer, M.D. 51 Medical Director, Director of Regulatory Affairs Carol A. Smith, Ph.D. 45 Director of Manufacturing and Process Development Josephine M. Dolhancryk 34 Treasurer, Assistant Secretary Executive Officers William A. Carter, M.D., the co-inventor of Ampligen, joined the Company in 1978, and has served as (a) the Company's Chief Scientific Officer since May 1989, (b) the Chairman of the Company's Board of Directors since January 1992 (c) the Company's Chief Executive Officer since July 1993, (d) the Company's President since April, 1995, and (e) a director since 1987. From 1987 to 1988, Dr. Carter served as the Company's Chairman. Dr. Carter was a leading 61 innovator in the development of human interferon for a variety of treatment indications including various viral diseases and cancer. In this context, he received the first FDA approval to initiate clinical trials on a beta interferon product manufactured in the U.S. under his supervision. From 1985 to October 1988, Dr. Carter served as the Company's Chief Executive Officer and Chief Scientist. He received his M.D. degree from Duke University and underwent his post-doctoral training at the National Institutes of Health and Johns Hopkins University. Dr. Carter also serves as Professor of Neoplastic Diseases at Hahnemann University, a position he has held since 1980. He is also Director of Clinical Research for Hahnemann University's Institute for Cancer and Blood Diseases. Dr. Carter has served as a professor at Johns Hopkins School of Medicine, Hahnemann University and the State University of New York at Buffalo. R. Douglas Hulse was named Chief Operating Officer on June 1, 1996. Since July 1995, he had been Special Advisor for Licensing and New Product Development to the Company's Board of Directors. Since 1995 he has served as Executive Director of The Sage Group, a health care consulting firm specializing in pharmaceutical and biotechnology business development and strategic planning. Between 1991 and 1994, Mr. Hulse was Vice President of Business Development for Enzon, Inc., a biopharmaceutical company with proprietary drug delivery technologies, and from 1986 to 1991, Mr. Hulse served as an independent financial and business development consultant to various biotechnology companies. He was President and CEO of i-STAT Corporation, a manufacturer of medical biosensors, from 1984 to 1986 and Vice President of Strategic Planning for Engelhard Corporation from 1982 to 1984. Mr. Hulse held several executive positions with Halcon International, Inc., a leading chemical company, from 1968 to 1982. Mr. Hulse received Masters degrees in Industrial Management and Chemical Engineering Practice from M.I.T. and a Bachelors degree in Chemistry from Princeton University. Robert E. Peterson has served as Chief Financial Officer of the Company since April 1993 and served as an independent financial advisor to the Company from 1989 to April 1993. Mr. Peterson has also served since 1990 as Vice President of the Omni Group, Inc., a business consulting group based in Tulsa, Oklahoma. During the period 1983 through 1992, Mr. Peterson was self-employed as a financial consultant to businesses in various industries. Mr. Peterson was Vice President and Chief Financial Officer of Pepsico Foods International from 1979 to 1983 and responsible for financial management of this multinational operating unit with approximately $500 million in annual revenues. Mr. Peterson is a graduate of Eastern New Mexico University. Harris Freedman has served as Vice President for Strategic Alliances since August 1994 and has been a private venture capitalist and business consultant for more than the past five years. He is the Secretary of Bridge Ventures, Inc. ("Bridge Ventures") and SMACS Holding Corp., both of which are private venture capital companies, positions he has held for more than five years. His business experience has encompassed developing significant business contacts and acting as an officer or director of several companies in the pharmaceutical, health care and entertainment fields. Mr. Freedman was Vice President of U.S. Alcohol Testing of America, Inc., from August 1990 to February 1991. Additionally, he was Vice President--East Coast Marketing for 62 MusicSource U.S.A., Inc. from October 1992 to January 1994. Mr. Freedman attended New York University from 1951 to 1954. Sharon D. Will has been Vice President for Corporate Communications and Investor Relations since November 1994. Prior to that time, she was a registered sales representative and Senior Vice President for Institutional Sales at Westfield Financial Corporation from September 1994 to October 1994. She was a registered sales representative with Marsh Block Corporation from July 1994 to September 1994. From October 1993 to July 1994 she served as a registered sales representative at Seaboard Securities Corp. From October 1991 to present, Ms. Will has been President of Worldwide Marketing Inc. a manufacturers' representative of various companies selling to the retail trade markets. Ms. Will was the National Sales Manager of Innovo, Inc., a domestic manufacturer of textiles, from October 1989 to November 1991. She attended Baylor College as an undergraduate for two years with a primary focus on chemistry. Peter W. Rodino III has served as a director of the Company since July 1994 and Secretary of the Company since November 1994. He had previously served on the Company's Board of Directors from 1987 to 1989. From 1988 through the present he has served as Managing Partner of the law firm Rodino and Rodino, which primarily deals in corporate, commercial, insurance, real estate, environmental, bankruptcy and immigration law. He was a partner in the law firm of Rodino and Scalera, Inc. from 1988 to 1991. He has served as Chairman of the Board of Directors of the Foundation Health Plan of New Jersey, an IPA/HMO providing health care services, from 1983 to 1988 and as a Director of Columbus Hospital from 1986 to 1990. Mr. Rodino earned a B.S. in Business Administration from Georgetown University in 1973 and a J.D. from Seton Hall University School of Law in 1976. Cedric C. Philipp has served as a director of the Company since July 1994 and as Special Advisor for International Marketing since 1993. He is President of Philipp Pharmaceutical Marketing, a consulting firm which he founded in 1987. From 1957 to 1987, he was with Wyeth International, a division of American Home Products, during which time he served in various capacities in international marketing and sales, most recently as Executive Assistant to the President. Mr. Philipp received his A.B. degree from Columbia College and later attended Columbia Law School and the Graduate School of Princeton University. Richard C. Piani has served as a director of the Company since May 1995. Mr. Piani has been employed as a principal delegate for Industry to the City of Science and Industry, Paris, France, a billion dollar scientific and educational complex since 1995. Mr. Piani provided consulting to the Company in 1993, with respect to general business strategies for the Company's European operations and markets. He served as Chairman of Industrielle du Batiment-Morin, a building materials corporation, from 1986 to 1993. Previously he was Professor of International Strategy at Paris Dauphine University from 1984 to 1993. From 1979 to 1985 Mr. Piani served as Group Director in Charge of International and Commercial Affairs for Rhone-Poulenc and from 1973 to 1979 was Chairman and Chief Executive Officer of Societe "La Cellophane", the French company which invented cellophane and several other worldwide products. Mr. Piani has a Law 63 degree from Faculte de Droit, Paris Sorbonne and a Business Administration degree from Ecole des Hautes Etudes Commerciales, Paris. David R. Strayer, M.D., who serves as Professor of Medicine at Medical College of Pennsylvania and Hahnemann University, has acted as the Medical Director of the Company since 1986. He is Board Certified in Medical Oncology and Internal Medicine with research interests in the fields of cancer and immune system disorders. Dr. Strayer has served as principal investigator in studies funded by the Leukemia Society of America, the American Cancer Society, and the National Institutes of Health. Dr. Strayer attended the School of Medicine at the University of California at Los Angeles where he received his M.D. in 1972. Key Employees Carol A. Smith, Ph.D. has served as the Company's Director of Manufacturing and Process Development since April 1995, as Director of Operations since 1993 and as the Manager of Quality Control from 1991 to 1993, with responsibility for the manufacture, control and chemistry of Ampligen. Dr. Smith has also been Scientist/Quality Assurance Officer for Virotech International, Inc. from 1989 to 1991 and Director of the Reverse Transcriptase and Interferon Laboratories and a Clinical Monitor for Life Sciences, Inc. from 1983 to 1989. She received her Ph.D. from the University of South Florida College of Medicine in 1980 and was an NIH post-doctoral fellow at the Pennsylvania State University College of Medicine. Josephine M. Dolhancryk joined the Company in 1990 as Office Manager, was promoted to Executive Assistant to the Chairman of the Board and Chief Executive Officer in 1991 and Assistant Secretary, Treasurer and Executive Administrator in 1995. From 1989 to 1990 Ms. Dolhancryk was President of Medical/Business Enterprises. Ms. Dolhancryk was employed by Children's Hospital of Philadelphia from 1984 to 1989, where she also served as research coordinator on a drug study from 1986 to 1988. Ms. Dolhancryk attended Saint Joseph's University and Delaware County College. Board Committees The Board of Directors maintains an Executive Committee consisting of William A. Carter and Peter W. Rodino III, which makes recommendations to management regarding general business matters of the Company; a Compensation Committee consisting of Peter W. Rodino III and Richard C. Piani, which makes recommendations concerning salaries and compensation for employees of and consultants to the Company; an Audit Committee consisting of Cedric C. Philipp, which reviews the results and scope of the audit and other services provided by independent auditors; and a Strategic Planning Committee consisting of William A. Carter, Peter W. Rodino III and Cedric C. Philipp, which makes recommendations to the Board of priorities in the application of the Company's financial assets and human resources in the fields of research, marketing and manufacturing. 64 Compensation of Directors During the fourth quarter of fiscal 1995, each non-employee directors received $3,750 as compensation for serving on the Board of Directors or any committee thereof. Certain non-employee directors receive compensation as consultants to the Company and have been granted options to purchase Common Stock under the Company's 1990 Stock Option Plan and Rule 701 Warrants to purchase Common Stock of the Company. All of the directors are reimbursed for their expenses incurred in attending meetings of the Board of Directors and its committees. Currently, non-management directors receive an annual retainer of $15,000 and receive $600 for each Board or committee meeting they attend and will be reimbursed for out of pocket expenses incurred in attending meetings. The Company believes such payments are necessary in order for the Company to attract and retain qualified outside directors. In addition, in October 1994, the Board of Directors granted to Cedric C. Philipp, a director of the Company and Special Advisor to the Board for International Marketing, the right to receive 3% of the gross proceeds of any licensing fees and prepaid royalties received by the Company pursuant to the SAB Agreement and a fee of .75% of gross proceeds in the event that SAB/Bioclones makes a tender offer for all or substantially all of the Company's assets, including a merger, acquisition or related transaction, and 1% of all products manufactured by SAB/Bioclones. The Company may prepay in full the obligation to provide commissions up to $1,050,000 within a ten year period. These rights were granted to Mr. Philipp in exchange for his services in the negotiation of the SAB Agreement and his services in connection with various marketing and licensing opportunities for the Company. In addition, the Company further agreed to provide a monthly retainer of $2,000 to Mr. Philipp in exchange for consulting services related to general pharmaceutical and international marketing services and remuneration for corporate alliances which are principally introduced by Mr. Philipp. Mr. Philipp has been paid $128,000 pursuant to these arrangements through December 31, 1996. In June 1995, the Board of Directors of BioAegean, a subsidiary of the Company, issued an aggregate of 550,000 BioAegean Options at an exercise price of $1.00 per share to Dr. William A. Carter, Cedric C. Philipp and Peter Rodino, III, directors of the Company. In October and November 1994, the Company granted an aggregate of 1,480,000 Rule 701 Warrants to purchase shares of Common Stock at $3.50 per share to Dr. Carter, Mr. Philipp and Mr. Rodino, directors of the Company, and Maryann Charlap Azzato a former director of the Company. See "Certain Transactions." In 1994 and 1993 the Company issued shares of Series C Preferred Stock at $5.00 per share to certain directors in various transactions including certain sales of Series C Preferred Stock and conversion of certain debt. See "Certain Transactions." 65 Executive Compensation Summary Compensation Table. The following table sets forth certain information with respect to the compensation of the Company's Chief Executive Officer and the other most highly compensated executive officers of the Company for the fiscal year ended December 31, 1996. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
Name and Other Annual Restricted Stock Option All other Principal Position Year Salary Compensation($)(1) Awards($) Awards Compensation($)(2) - ------------------ ---- ------ ------------------ --------- ------ ------------------ William A. Carter 1996 $ 400,522(3) -- -- -- 7,778 Chairman of the Board 1995 363,420(3) -- -- 300,000(5) 7,778 Chief Executive Officer 1994 363,420(3) -- -- 1,400,000(6) 7,778 Robert E. Peterson 1996 128,000 -- -- 50,000(7) -- Chief Financial Officer(4) 1995 120,000 -- -- 50,000(8) -- 1994 110,000 -- -- -- -- Sharon Will 1996 126,000 -- -- -- -- Vice President 1995 125,000 -- -- 50,000(8) -- 1994 -- -- -- 200,000(9) -- David R. Strayer, M.D 1996 130,427(11) -- -- -- -- Medical Director 1995 115,083 -- -- -- -- 1994 -- -- -- -- Harris Freedman 1996 126,000 -- -- -- -- Vice President 1995 112,500 -- -- 150,000(8) -- 1994 -- -- -- 400,000(10) --
(1) The Company makes available certain non-monetary benefits to its officers with a view to attracting and retaining qualified personnel and facilitating job performance. The Company considers such benefits to be ordinary and incidental business costs and expenses. The aggregate value of such benefits, which cannot be precisely ascertained but which is less than 10% of the cash compensation of each of the above-named executive officers, is not included in the table. (2) Consists of insurance premiums paid by the Company with respect to term life insurance for the benefit of the named executive officer. (3) Includes $63,000 paid to Dr. Carter by Hahnemann University where he serves as a professor. 66 (4) Mr. Peterson joined the Company in April 1993 and is paid on a fee basis. (5) BioAegean Options to purchase 300,000 shares of common stock of BioAegean Corp., a subsidiary of the Company, at $1.00 per share, which were granted in May 1995 (the "BioAegean Options"). (6) Rule 701 Warrants to purchase Common Stock at $3.50 per share granted in October 1994. These Rule 701 Warrants vest in 1/3 increments over a 36 month period. Rule 701 Warrants are warrants which were issued to officers, directors and consultants of the Company in reliance upon Rule 701 of the Securities Act. (7) Warrants to purchase Common Stock at $3.50 purchase granted in March 1996. (8) BioAegean Options. (9) Rule 701 Warrants to purchase common stock at $3.50 per share granted in November 1994. (10) Rule 701 Warrants to purchase common stock at $3.50 per share granted in August 1994. (11) Includes $80,427 paid to Dr. Strayer by Hahneman University. 67 Year End Option Table. The following table sets forth certain information regarding the stock options held as of December 31, 1996 by the individuals named in the above Summary Compensation Table. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
Securities Underlying Value of Unexercised Unexercised Options at In-the-Money-Options Fiscal Year End(#) at Fiscal Year End (9) Shares Acquired Value ----------------------------- --------------------------- Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ------ --------------- ------------ ----------- ------------- ----------- ------------- William A. Carter --- --- 1,473,021(1) 766,667(2) 245,000 --- Robert E. Peterson ___ ___ 10,368(3) 103,456(4) --- --- Sharon Will ___ ___ 513,333(5) 216,667(6) 190,000 --- Harris Freedman ___ ___ 989,827(7) 283,333(8) 182,500 ---
- ---------- (1) Includes (i) 933,333 currently exercisable Rule 701 Warrants to purchase Common Stock at $3.50 per share; (ii) 73,728 stock options to purchase Common Stock at $3.50 per share; (iii) 960 warrants to purchase Common Stock at $3.50 per share; and (iv) warrants to purchase 465,500 shares of Common Stock at $1.75 per share. (2) Includes 300,000 BioAegean Options, for which there is no public market, and 466,667 Rule 701 Warrants. (3) Stock options to purchase Common Stock at $4.34 per share. (4) Includes 50,000 BioAegean Options, 50,000 warrants to purchase Common Stock at $3.50 per share and 3,456 stock options exercisable at $4.34 per share. (5) Includes 133,333 currently exercisable Rule 701 Warrants and 380,000 warrants to purchase Common Stock at $1.75 per share. (6) Includes 150,000 BioAegean Options and 66,667 Rule 701 Warrants. (7) Includes (i) 266,667 Rule 701 Warrants currently exercisable; (ii) 292,161 warrants to purchase common stock at $3.50 per share; (iii) 365,000 warrants to purchase Common Stock at $1.75 per share; and (iv) 66,000 Class A Warrants to purchase Common Stock at $4.00 per share. (8) Includes 133,333 Rule 701 Warrants and 150,000 BioAegean Options. (9) Computation based on $2.25, the December 31, 1996 closing price for the Common Stock. 68 Option Grant Table. The following table sets forth certain information regarding options granted during the fiscal year ended December 31, 1996 by the Company to the individuals named in the above Summary Compensation Table: OPTION GRANTS IN LAST FISCAL YEAR % of Total Options Options Granted to Granted Employees in Exercise Price Expiration Name (#) Fiscal Year $/Share Date - ---- -------- ----------- ------------- ---------- Robert E. Peterson 50,000 17% $3.50 3/1/06 69 Employment Agreements The Company entered into an employment agreement with Sharon Will providing for her employment as Vice President for Corporate Communications and Investor Relations on November 1, 1994. The agreement provides for Ms. Will to be employed for a one-year term (which was extended to three years in July 1995) at a base salary of $120,000 and provides for termination of the agreement upon certain circumstances including termination by the Company or Ms. Will on 14 days written notice or the sale of Ms. Will's stock in the Company. Pursuant to the agreement, Ms. Will was granted Rule 701 Warrants to purchase 200,000 shares of Common Stock of the Company at $3.50 per share. Ms. Will's agreement provides that she shall devote 60% of her business time, attention and energies to the Company during regular business hours. In the event that Ms. Will's employment is terminated for any reason other than breach of contract, she shall be entitled to receive accrued and unpaid compensation plus an additional three months' compensation. The Company entered into an employment agreement with Harris Freedman providing for Mr. Freedman's employment as Vice President for Strategic Alliances on August 1, 1994. The agreement provides for Mr. Freedman to be employed for a one year term (which was extended to three years in July 1995) at a base salary of $120,000 and provides for termination of the agreement upon certain circumstances including termination by the Company or Mr. Freedman on 14 days written notice or the sale of Mr. Freedman's stock in the Company. Pursuant to the agreement, Mr. Freedman was granted Rule 701 Warrants to purchase 400,000 shares of Common Stock of the Company at $3.50 per share. Mr. Freedman's agreement provides that he shall devote 30% of his business time, attention and energies to the Company during regular business hours. In the event that Mr. Freedman's employment is terminated for any reason other than breach of contract, he shall be entitled to receive accrued and unpaid compensation plus an additional three months' compensation. The Company entered into an amended and restated employment agreement with Dr. William A. Carter, dated as of July 1, 1993 and as amended in July 1995, which provides for his employment until May 8, 2001 at an initial base annual salary of $295,832, subject to annual cost of living increases. In addition, Dr. Carter may receive an annual performance bonus of up to 25% of his base salary, in the sole discretion of the Board of Directors. Dr. Carter will not participate in any discussions concerning the determination of his annual bonus. Dr. Carter is also entitled to an incentive bonus of 0.5% of the gross proceeds received by the Company from any joint venture or corporate partnering arrangement, up to an aggregate maximum incentive bonus of $250,000 for all such transactions. It is contemplated that Dr. Carter will be entitled to this incentive bonus upon receipt of the gross proceeds from the SAB Agreement (as defined in "Certain Transactions"). Dr. Carter's agreement also provides that he shall be paid his base salary and benefits through May 8, 1996 if he is terminated without "cause," as that term is defined in the agreement. Pursuant to his original agreement, as amended on August 8, 1991, Dr. Carter was granted options to purchase 73,728 shares of the Company's Common Stock at an exercise price of $2.71 per share. 1992 Stock Option Plan The Company's 1992 Stock Option Plan (the "1992 Plan"), provides for the grant of options for the purchase of up to an aggregate of 92,160 shares of Common Stock to the Company's employees, directors, consultants and others whose efforts are important to the success of the Company. The 1992 Plan is administered by the Compensation Committee of the Board of Directors, which has complete discretion to select the eligible individuals to receive and to establish the terms of option grants. The 1992 Plan provides for the issuance of either non-qualified options or incentive stock options, provided that incentive stock options must be granted with an exercise price of not less than fair market value at the time of grant and that non-qualified 70 stock options may not be granted with an exercise price of less than 50% of the fair market value at the time of grant. The number of shares of Common Stock available for grant under the 1992 Plan is subject to adjustment for changes in capitalization. To date, no options have been granted under the 1992 Plan. 1990 Stock Option Plan The Company's 1990 Stock Option Plan, as amended (the "1990 Plan"), provides for the grant of options to employees, directors, officers, consultants and advisors of the Company for the purchase of up to an aggregate of 460,798 shares of Common Stock. The plan is administered by the Compensation Committee of the Board of Directors, which has complete discretion to select eligible individuals to receive and to establish the terms of option grants. The number of shares of Common Stock available for grant under the 1990 Plan is subject to adjustment for changes in capitalization. As of December 31, 1996, options to acquire an aggregate of 234,953 shares of the Common Stock were outstanding under the 1990 Plan. 401(K) Plan In December 1995, the Company established a defined contribution plan, effective January 1, 1995, the Hemispherx Biopharma employees 401(K) Plan and Trust Agreement (the "401(K) Plan"). All full time employees of the company are eligible to participate in the 401(K) Plan following one year of employment. Subject to certain limitations imposed by federal tax laws, participants are eligible to contribute up to 15% of their salary (including bonuses and/or commissions per annum. Participants' contributions to the 401(K) Plan may be matched by the Company at a rate determined annually by the Board of Directors. Each participant immediately vests in his or her deferred salary contributions, while Company contributions will vest over one year. In 1996 the Company provided matching contributions to each employee for up to 6% of annual pay or $31,580. Compensation Committee Interlocks and Insider Participation During the fiscal year ended December 31, 1996, the members of the Company's Compensation Committee were William A. Carter, Peter W. Rodino III, and E. Gerald Kay. Dr. Carter is an officer of the Company. The Company's Compensation Committee currently consists of Peter W. Rodino III and Richard C. Piani. The following transactions describe certain relationships between the Company and present and former members of the Compensation Committee: In May 1995, Dr. Carter and certain other individuals and entities entered into a 1995 Standby Financing Agreement with the Company pursuant to which they were collectively obligated to invest during 1995 an aggregate of $5,500,000 in the Company in the event the Company was unable to secure alternative financing and the Board of Directors determined that the sale of securities to such persons was advisable (the "1995 Standby Financing Agreement"). In exchange for entering into the 1995 Standby Financing Agreement, the Company issued to each of the parties ten-year warrants to purchase 50,000 shares of the Company's Common Stock at an exercise price of $1.75 per share for each $100,000 of standby financing obligation assumed by the party, resulting in warrants to purchase an aggregate of 2,750,000 shares of Common Stock. In September 1995, the parties to the 1995 Standby Financing Agreement, including Dr. Carter, agreed to extend their obligations through December 31, 1996. In June 1995, the directors of BioAegean Corp., a subsidiary of the Company, issued 10-year options to purchase an aggregate of 1,000,000 shares of common stock of BioAegean at an exercise price of $1.00 per 71 share (the "BioAegean Options") to its officers and directors. The BioAegean Options are conditional upon the recipient's agreement to serve BioAegean as needed for at least 24 months unless fully incapacitated. William A. Carter, M.D., serves as Chairman, Chief Executive Officer and a Director of BioAegean and received 300,000 BioAegean Options. Peter W. Rodino III serves as Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and received 150,000 BioAegean Options. R. Douglas Hulse serves as Chief Operating Officer of BioAegean and received 50,000 BioAegean Options. Richard C. Piani serves as a director and the Advisor for European Affairs of BioAegean and received 50,000 BioAegean Options. In March 1995, the Company received an interest-free loan from William A. Carter in the amount of $35,000. In March 1995, the Company repaid the loan from Dr. Carter. In February 1995, the Company issued notes in the aggregate principal amount of $600,000 in connection with the Tisch/Tsai Restructuring (as defined below). The notes were secured by a pledge by Dr. Carter of 112,925 shares of Series C Preferred Stock and 240,756 shares of Common Stock. The notes have been paid off and the shares are being returned. Limitation of Liability and Indemnification Matters As permitted by the Delaware General Corporation Law ("DGCL"), the Company has adopted provisions in its Amended and Restated Certificate of Incorporation which eliminate the personal liability of its directors to the Company and its stockholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances and which require the Company to indemnify its directors, officers and other agents, by Bylaw, agreement, vote of directors or stockholders or otherwise, to the fullest extent permitted by law. The Company has entered into separate indemnification agreements with its directors and its officers. These agreements require, among other things, the Company to indemnify directors and officers against certain liabilities that may arise by reason of their status or service as directors and officers and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that these provisions in its Amended and Restated Certificate of Incorporation and the indemnification agreements are necessary to attract and retain qualified persons as directors and officers. See "Business--Legal Proceedings". 72 Security Ownership of Certain Beneficial Owners and Management --------------------- The following table sets forth, as of March 19, 1997, the record and beneficial ownership of Common Stock of the Company by each officer and director, all officers and directors as a group, and each person known to the Company to own beneficially or of record five percent or more of the outstanding shares of the Company: Shares Officers, Directors and Beneficially Percent of Shares Principal Stockholders Owned Beneficially Owned (1) - ---------------------- ----- ---------------------- William A. Carter 3,733,255(2) 21.0% R. Douglas Hulse 172,500(3) 1.0% Robert E. Peterson 110,368(4) * Harris Freedman 1,285,328(5) 7.4% Sharon D. Will 613,333(6) 3.6% Peter W. Rodino III 31,765(7) * Cedric C. Philipp 36,333(8) * Richard C. Piani 18,063(9) * David R. Strayer, M.D. 18,745 * Josephine Dolhancryk 50,820(10) * Jerome Belson 1,684,600(11) 9.7% Belson Enterprises, Inc. 495 Broadway New York, NY 10012 All directors, 6,051,765 30.6% executive officers as a group (9 persons) *Less than 1% (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares of Common Stock which such person has the right to acquire such shares within 60 days of March 19, 1997. For purposes of computing the percentage of outstanding shares of Common Stock held by each person or group of persons named above, any security which such person or persons has or have the right to acquire within such date is deemed to be outstanding but is not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the Company believes based on information supplied by such persons, that the persons named in this table have sole voting and investment power with respect to all shares of Common Stock which they beneficially own. (2) Includes irrevocable proxies to vote 1,205,000 shares of Common Stock on all matters that come before the stockholders of the Company until such time as (i) the Company shall have achieved a market capitalization of $300,000,000 or greater for at least 20 consecutive days of trading in the public markets or (ii) the Company shall have received a bona fide offer for acquisition or merger, the net 73 effect of which, if consummated, would be to establish a market capitalization of the Company of not less than $300,000,000. This proxy shall be terminated upon the sale of such shares in an arm's length public sale. Also includes (i) an option to purchase 73,728 shares of Common Stock from the Company at an exercise price of $2.71 per, (ii) warrants to purchase 960 shares of Common Stock at an exercise price of $3.50 per share, (iii) Rule 701 Warrants to purchase 933,333 shares of Common Stock at a price of $3.50 per share (does not include 466,667 which are non-exercisable); and (iv) warrants to purchase 465,000 shares of Common Stock at $1.75 per share issued in connection with the 1995 Standby Financing Agreement. Dr. Carter has pledged 112,925 shares of Series C Preferred and 240,756 shares of Common Stock to the Tisch/Tsai Entities as security for the repayment of the $660,000 note executed in March 1995. The note has been paid off and the shares are being returned. (3) Includes 172,500 warrants to purchase Common Stock exercisable at $3.50 per share held by The Sage Group, of which Mr. Hulse is an Executive Director. Does not include 100,000 warrant to purchase Common Stock at $1.75 per share and 217,500 options to purchase Common Stock at $3.50 per share. (4) Consists of 10,368 options to purchase Common Stock at an exercise price of $4.34 per share and 100,000 warrants to purchase Common Stock at an exercise price of $3.50 per share. (5) Includes (i) 80,000 shares of Common Stock held by SMACS Holding Corp. of which Mr. Freedman is an officer; (ii) 58,000 shares of Common Stock held by Bridge Ventures,Inc. of which Mr. Freedman is an officer, (iii) 50,000 shares of Common Stock held by Bridge Ventures Defined Benefit Plan, of which Mr. Freedman is Trustee; (iv) warrants to purchase 292,161 shares of Common Stock at an exercise price of $3.50 per share owned of record by Bridge Ventures, Inc.; (v) warrants to purchase 365,000 shares of Common Stock which are exercisable at $1.75 per share issued in connection with the 1995 Standby Financing Agreement owned of record by Bridge Ventures, Inc.; (vi) 266,667 Rule 701 Warrants to purchase Common Stock of the Company at an exercise price of $3.50 (does not include 133,333 which are non-exercisable); (vii) 86,000 Class A Warrants, 40,000 of which are owned by SMACS Holding Corp. and 46,000 of which are owned by Bridge Ventures, Inc; and (viii) 37,500 shares of Common Stock underlying Series E Preferred. Bridge Ventures, Inc. has given an irrevocable proxy to vote its 58,000 shares to William A. Carter on the same terms as the proxy described in Note 2. (6) Includes Rule 701 Warrants to purchase 133,333 shares of Common Stock at an exercise price of $3.50 per share (does not include 66,667 which are non-exercisable). Also includes 100,000 shares of Common Stock owned of record by Worldwide Marketing, a company for which Ms. Will serves as President. Also includes 380,000 warrants to purchase Common Stock of the Company at an exercise price of $1.75. Worldwide Marketing has given an irrevocable proxy to vote its shares to William A. Carter on the same terms as the proxy described in Note 2. (7) Includes Rule 701 Warrants to purchase 13,333 shares of Common Stock at $3.50 per share (does not include 6,667 which are non-exercisable). (8) Includes (i) Rule 701 Warrants to purchase 13,333 shares of Common Stock at $3.50 per share (does not include 6,667 which are non-exercisable); (ii) options to purchase 20,000 shares of Common Stock 74 at $3.50 per share; and (iii) 2,000 shares of Common Stock and 1,000 Class A Warrants owned by the Cedric C. Philipp and Sue Jones Philipp Trust, of which Mr. Philipp and his wife are Trustees. (9) Includes options to purchase 4,608 shares of Common Stock at an exercise price of $4.34 and 4,608 shares of Common Stock owned of record by Mr. Piani's wife. (10) Consists of options to purchase 820 shares of Common Stock at an exercise price of $3.80 and 50,000 Warrants to purchase Common Stock at an exercise price of $3.50 per share. (11) Includes 392,000 Class A Warrants, of which (i) 25,000 are owned of record by Mr. Belson's wife; and (ii) 27,000 are owned of record by The Jerome Belson Foundation, of which Mr. Belson is Trustee. Also includes (i) 45,000 shares of Common Stock owned of record by The Jerome Belson Foundation; (ii) 125,000 shares of Common Stock underlying Series E Preferred; and (iii) warrants to purchase 550,000 shares of Common Stock at $1.75 per share owned of record by Belson Enterprises, Inc. of which Mr. Belson is an officer. 75 RESALES BY SELLING SECURITYHOLDERS This Prospectus relates to the proposed resale by the Selling Securityholders of the Securities. The following table sets forth as of March 19, 1997 certain information with respect to the persons for whom the Company is registering the Securities for sale to the public except as footnoted below. None of such persons has had a material relationship with or has held any position or office with the Company or any of its affiliates within three years, other than as footnoted below (see "Certain Transactions"). The Company will not receive any of the proceeds from the sale of the Securities. If the C Warrants, R Warrants and Series E Warrants are exercised, the Company would receive $2,608,659. Names of Selling Securities Beneficially Securities Offered Security Holders Owned Prior to March, 1997 By Beneficial Owner - ---------------- -------------------------- ------------------- Seymour Cohn(1) 239,616 239,616 Myron Cherry(2) 20,000 20,000 Charles Moore(3) 84,608 84,608 Maurice Schlang(4) 276,864 276,864 Julian & Eunice Cohen Investments LP(5) 1,536 1,536 Sidney Stoneman(5) 1,536 1,536 Michael C. Burrows(5) 3,072 3,072 Frank B. Carr(5) 1,536 1,536 Michael J. Dubilier(5) 6,145 6,145 Keys Foundation(5) 6,145 6,145 Maryann Charlap(5) 10,554 10,554 Lloyd DeVos(5) 1,536 1,536 William A. Carter(5)(6) 960 960 Maryann Charlap & Abraham E Ostrovsky & Paul E. Charlap, Trust(5) 1,275 1,275 Myron Cherry(5) 1,636 1,636 FLF Associates(7) 72,000 72,000 Gerald Tsai(7) 43,200 43,200 Lincoln Trust(7) 28,800 28,800 Joseph C. Roselle(8) 25,000 25,000 Joseph Giamanco(8) 137,500 137,500 Bost & Co. FBO Fairfax County Public Schools(8) 250,000 250,000 Topworks & Co. FBO Montgomery County Employee Retirement System(8) 250,000 250,000 Ell & Co. FBO AT&T Investment Management Corp.(8) 750,000 750,000 Lindemann Capital Partners, LP(8) 150,000 150,000 Jerome Belson(8) 125,000 125,000 Bridge Ventures, Inc.(8)(9) 37,500 37,500 Alan Howard(8) 25,000 25,000 Michael Lauer(8) 30,000 30,000 76 Lancer Offshore, Inc.(8) 345,000 345,000 Lancer Partners, LP(8) 325,000 325,000 Lancer Voyage Fund(8) 50,000 50,000 John Bendall(10) 50,000 50,000 Hermitage Capital(10) 150,000 150,000 (1) Represents (i) a C Warrant to purchase 119,808 shares of Common Stock exercisable during the four year period commencing November 2, 1995, at an exercise price of $10.85 per share; and (ii) the Common Stock underlying said C Warrant. (2) Represents (i) a C Warrant to purchase 5,000 shares of Common Stock exercisable at any time commencing November 1, 1994 and expiring December 31, 1998, at an exercise price of $3.50 per share; (ii) a C Warrant to purchase 5,000 shares of Common Stock exercisable at any time commencing March 20, 1995 and expiring March 31, 1999, at an exercise price of $3.50 per share; and (iii) the Common Stock underlying said C Warrants. (3) Represents (i) two C Warrants to purchase 20,000 shares of Common Stock each, exercisable during the five year period commencing November 2, 1995, at an exercise price of $2.00 per share; (ii) a stock option to purchase 2,304 shares of Common Stock exercisable during the ten year period commencing April 16, 1996, at an exercise price of $4.34 per share; and (iii) the Common Stock underlying said C Warrants. (4) Represents (i) a C warrant to purchase 120,000 shares of Common Stock exercisable during the five year period commencing November 2, 1995, at an exercise price of $2.00 per share; (ii) a stock option to purchase 18,432 shares of Common Stock exercisable during the ten year period commencing January 25, 1995, at an exercise price of $4.34 per share; and (iii) the Common Stock underlying said C Warrants. (5) Represents shares of Common Stock underlying R Warrants exercisable during the four year period commencing December 31, 1993, at an exercise price of $3.50 per share. (6) Dr. Carter is the President and Chief Executive Officer of the Company. (7) Represents shares of Common Stock underlying R Warrants exercisable during the five year period commencing December 30, 1992, at an exercise price of $2.00 per share. (8) Represents shares of Common Stock underlying Series E Preferred. (9) Harris Freedman, a Company Vice President, is an officer of Bridge Ventures, Inc. (10) Represents Series E Warrants to purchase shares of Common Stock at an exercise price of $3.00 per share during the three year period commencing March 1, 1997. The Selling Securityholders may effect the sale of their Securities from time to time in transactions (which may include block transactions) in the over-the-counter market, in negotiated transactions, through the writing of options on the Securities, or a combination of such methods of sale, at fixed prices which may be changed, at market prices prevailing at the time of sale, or at negotiated prices. The Company is not aware of any agreements, undertakings or arrangements with any Underwriters or broker-dealers regarding the sale of their securities in the United States, nor to the Company's knowledge is 77 the sale of Securities on behalf of the Selling Securityholders in the United States. The Selling Securityholders may effect such transactions by selling the Securities, as applicable, directly to purchasers or to or through broker-dealers which may act as agents or principals. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders, and/or the purchasers of their Securities, as applicable, for which such broker-dealers may act as agents or to whom they sell as principal, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Securityholders and any broker-dealers that act in connection with the sale of their Securities might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act. The Company has notified the Selling Securityholders of the prospectus delivery requirements for sales made pursuant to this Prospectus and that, if there are material changes to the stated plan of distribution, a post-effective amendment with current information would need to be filed before offers are made and no sales could occur until such amendment is declared effective. The Company has agreed with one Selling Securityholder to promptly prepare, file with the Commission and obtain effectiveness of any such post-effective amendment. 78 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In March 1997, Bridge Ventures, Inc. purchased 75 shares of Series E Preferred at $1,000 per share in a private offering pursuant to Rule 506 the Securities Act and Regulation D promulgated thereunder. Harris Freedman, the Company's Vice President, is an officer of Bridge Ventures, Inc. In May 1996, the Company entered into two agreements with The Sage Group. Under the first agreement, R. Douglas Hulse will serve as Chief Operating Officer of the Company. In exchange, The Sage Group will receive from the Company; (i) a monthly retainer of $10,000 starting June 1, 1996, replacing the $5,000 monthly retainer provided in the June 1995 agreement; and (ii) options to purchase 250,000 shares of the Company's Common Stock at an exercise price of $3.50 per share. Under the second agreement, The Sage Group agreed to introduce the Company to and assist the Company in negotiations with certain foreign distribution partners. In exchange, The Sage Group will receive from the Company; (i) a bonus payment of $500,000 if total sales of Ampligen in Canada and Europe exceed $10 million for 1996 and 1997 combined; and (ii) options to purchase 140,000 shares of the Company's Common Stock at an exercise price $3.50 per share. R. Douglas Hulse, Chief Operating Officer of the Company, is an Executive Director of the Sage Group. In March and October 1996, William A. Carter assigned and transferred an aggregate of 60,000 warrants to purchase Common Stock, at $1.75 per share, to three outside parties that had loaned the Company money in 1995. These loans were repaid in 1995. The assigned warrants are subject to a lockup agreement. In March 1996, Harris Freedman assigned and transferred 160,000 warrants to purchase Common Stock at $1.75 per share to Sharon Will, an officer of the Company and one other shareholder. These warrants are subject to a lockup agreement. In March 1996, the Compensation Committee of the Board of Directors approved a grant of 250,000 warrants to purchase common stock at an exercise price of $3.50 per share to Michael C. Burrows. This grant was made in accordance with a Letter Agreement dated January 15, 1996, in which Mr. Burrows agreed to provide consulting services to the Company for twenty four months. Mr. Burrows served as Director of the Company in past years. In March 1996 the Compensation Committee of the Board of Directors approved grants of 50,000 warrants to purchase common stock at an exercise price of $3.50 per share to each of Robert E. Peterson, CFO and Josephine Dolhancryk, Assistant Secretary of the Company. Such warrants are not exercisable for a period of one year from issuance. In March 1995, the Company instituted a declaratory judgment action against a February noteholder, Seymour Cohn, of a $5,000,000 convertible note and a secured defendant in United States District Court for the Eastern District of Pennsylvania to declare as void, set aside, and cancel the February 1992 convertible note between the Company and Mr. Cohn (the "Note"). In addition, Mr. Cohn instituted suit against the Company on the Note in the Circuit Court of the 15th Judicial District in and for Palm Beach County, Florida, seeking judgment on the Note, plus attorney fees, costs and expenses; in August 1995, this action was stayed by the Florida Court pending the outcome of the Pennsylvania action. Mr. Cohn also filed a motion for a preliminary 79 injunction in the Pennsylvania court to enjoin the Company from disbursing the proceeds of a public offering in the amount of $5.8 million, which motion was granted November, 1995. On February 15, 1996, the Company reached an agreement to settle this matter. Terms and conditions of the settlement include payment of $6,450,000 to Mr. Cohn to cover the unpaid balance Note balance, legal expenses and the retention of certain warrants granted prior to the lawsuit. The funds under this settlement were paid on March 21, 1996. Mutual releases were executed which completed the settlement of the litigation. In January 1996, the Company engaged the Research Works, Inc. to produce four research reports with respect to the securities of the Company over a 13 month period. In exchange for this service, the Company granted 60,000 warrants to the Research Works, Inc. exercisable at $4.00 per share. In January 1996, the Company entered into a one year consulting agreement with Millenium International Communications, Ltd. ("Millenium"). The consideration for such services is $120,000, to be paid by the Company in either monthly payments or balloon payments, in the Company's discretion. Millenium shall consult with and render advice to the Company specifically concerning strategic planning, public relations and other related matters. The President of Millenium, David C. Drescher is related to Steve Drescher, a former director of the Company. In December 1995, the Company retained the law firm of Akin, Gump, Strauss, Hauer & Feld, LLP (the "Akin Group") to provide general legal counsel, advice and representation. Initially, the Akin Group will represent the Company in matters pertaining to the Food and Drug Administration ("FDA"). The agreement includes incentive payments for obtaining FDA approval of Ampligen for HIV Disease treatment. In November 1995, the Company sold 5,313,000 Units of securities through an initial public offering. Each Unit consists of one share of Common Stock and one Class A Warrant. In August 1995, in connection with the settlement of a lawsuit brought by a former employee of the Company against the Company and David Fries, a former director of the Company, the Company, Dr. Fries, the Canaan Entities and Dr. William A. Carter, President, Chairman and CEO of the Company, entered into an agreement pursuant to which the Company has agreed to reimburse Dr. Fries for expenses in the amount of $50,000 incurred in connection with such litigation. As part of such agreement, the parties agreed to mutual releases of certain claims for expenses and damages arising out of the litigation or arising in connection with Dr. Fries' service as a director of the Company. The payment of $50,000 to Dr. Fries is evidenced by an interest-free promissory note pursuant to which the final payment is due on or before November 15, 1995. The note was assigned to the Canaan Entities. In June 1995, the Company entered into an agreement with The Sage Group pursuant to which The Sage Group has agreed to introduce the Company to and assist the Company in negotiations with certain prospective distribution partners listed in the agreement. In exchange, The Sage Group will receive from the Company: (i) a monthly retainer of $5,000 which began accruing July 1, 1995 and (ii) at The Sage Group's option, a percentage of the proceeds, up to an aggregate of $150,000, from the Company's first distribution agreement with a partner listed in the agreement or the sum of $125,000 from such agreement. In connection with this agreement, the Company will also issue to The Sage Group options to purchase 100,000 shares of the 80 Company's Common Stock at an exercise price of $1.75 per share. R. Douglas Hulse, Chief Operating Officer of the Company, is an Executive Director of The Sage Group. In May 1995, William A. Carter, M.D., President, Chairman and CEO of the Company, Bridge Ventures, Sharon Will, a Vice President of the Company, Associated Funding Services, Inc., Jerome Belson, a director of one of the Company's subsidiaries and a principal shareholder and E. Gerald Kay, a former director of the Company, entered into a 1995 Standby Financing Agreement with the Company pursuant to which they are collectively obligated to invest during 1995 an aggregate of $5,500,000 in the Company in the event the Company is unable to secure alternative financing and the Board of Directors determines that the sale of securities to such persons is advisable. In exchange for entering into the 1995 Standby Financing Agreement, the Company issued to each of the parties ten-year warrants to purchase 50,000 shares of the Company's Common Stock at an exercise price of $1.75 per share for each $100,000 of standby financing obligation assumed by the party, resulting in warrants to purchase an aggregate of 2,750,000 shares of Common Stock. In September 1995, the parties agreed to extend their obligations under the 1995 Standby Financing Agreement through December 31, 1996. Harris Freedman, a Vice President of the Company, and his wife are officers of Bridge Ventures. Gerald Brauser is President of Associated Funding Services, Inc. In June 1995, the Board of Directors of BioAegean Corp, a subsidiary of the Company, issued an aggregate of 1,200,000 BioAegean Options at an exercise price of $1.00 per share to its officers and directors, including certain officers and directors of the Company. In consideration for the BioAegean Options, the recipients agreed to serve BioAegean's needs for at least 24 months unless fully incapacitated. William A. Carter, M.D., Chairman, President and Chief Executive Officer of the Company, serves as Chairman, Chief Executive Officer and a Director of BioAegean and received 300,000 BioAegean Options. Peter W. Rodino III, a director and Secretary of the Company, serves as Vice-Chairman, Secretary, Corporate Counsel and a director of BioAegean and received 150,000 BioAegean Options. R. Douglas Hulse serves as Chief Operating Officer of the Company and BioAegean and received 50,000 BioAegean Options. Robert Peterson serves as Chief Financial Officer of both the Company and BioAegean and received 50,000 BioAegean Options. Sharon Will, Vice President of Investor Relations and Corporate Communications for the Company, serves as Vice President of Marketing for BioAegean and received 150,000 BioAegean Options. Harris Freedman serves as Vice President for Strategic Alliances for both the Company and BioAegean and received 150,000 BioAegean Options. Richard C. Piani, a director of the Company, serves as a director and the Advisor for European Affairs of BioAegean and received 50,000 BioAegean Options. E. Gerald Kay served as a director for both the Company and BioAegean and received 50,000 BioAegean Options. BioAegean's remaining director, Jerome Belson, a principal stockholder of the Company, received 50,000 BioAegean Options. In March 1995, the Company issued the Original Brauser Note, to Gerald A. Brauser in the principal amount of $200,000. The Original Brauser Note also provided for the issuance of warrants to purchase 50,000 shares of the Company's Common Stock at $1.75 per share. In May 1995, the Company restructured the Original Brauser Note and issued the New Brauser Note to Mr. Brauser in the amount of $100,000 along with warrants to purchase 25,000 shares of the Company's Common Stock at $1.75 per share. As part of the restructuring, Mr. Brauser agreed to (i) purchase 100,000 shares of Common Stock with $50,000 of the Original Brauser Note and (ii) apply $50,000 of the Original Brauser Note towards a Bridge Loan in connection with the Bridge Financing. The New Brauser Note of $100,000 and the $50,000 Bridge Loan have been paid off. In connection with both the Original Brauser Note and the New Brauser Note, Bridge Ventures agreed 81 to permit the Company to collateralize these notes with the Company's patent estate, which collateral had previously been granted to Bridge Ventures. Bridge Ventures further guaranteed the Original Brauser Note with certain publicly traded common stock, which guarantee was released by Mr. Brauser in connection with the restructuring. Harris Freedman, a Vice President of the Company, and his wife are both officers of Bridge Ventures. In March and April 1995, in connection with the Bridge Financing, the Company issued Bridge Notes to certain lenders in the aggregate principal amount of $1,500,000, including a Bridge Note in the amount of $250,000 to Stephen Drescher and a Bridge Note in the amount of $150,000 to Jerome Belson. Additionally, in connection with the Bridge Loans, the Company has issued options to purchase 166,665 Bridge Units at $.50 per Bridge Unit to Mr. Drescher and options to purchase 100,000 Bridge Units at $.50 per Bridge Unit to Jerome Belson. In July 1995, Mr. Drescher assigned the $250,000 Bridge Note and his options to purchase 166,665 Bridge Units to certain other investors. Mr. Drescher is a former director of the Company and presently serves as the Director of Corporate Finance at Monroe Parker, one of the Underwriters. Jerome Belson is a principal shareholder and director of BioAegean, a subsidiary of the Company. In March 1995, the Company received interest-free loans from William A. Carter and Harris Freedman in the amounts of $35,000 and $12,000, respectively. In March 1995, the Company repaid the loan from Dr. Carter. In April 1995, the Company repaid the loan from Mr. Freedman. In December 1992 and February 1993, the Company issued to the Tisch/Tsai Entities, in a private placement, promissory notes in the aggregate principal amount of $2,400,000 due on April 30, 1994, and warrants to purchase an aggregate of 36,864 shares of the Company's Common Stock or 40,000 shares of Series C Preferred Stock at an exercise price of the (i) $13.02 or $12.00 per share, respectively or (ii) the per share price of Common Stock in the initial public offering. The warrants expire on December 31, 1997. One-half of the principal amount of the notes and one-half of the warrants were purchased by FLF Associates. James S. Tisch, a former director of the Company, is a principal of FLF Associates. The remaining half of the principal amount of the note and one-half of the warrants were purchased by Gerald Tsai, Jr. and Lincoln Trust Company, Custodian FBO Gerald Tsai, Jr. Mr. Tsai is a former director of the Company. Interest on the notes is payable quarterly at an annual rate of 12% (6% prior to May 1, 1993). In February 1995, the Company entered into a settlement agreement with the Tisch/Tsai Entities to restructure the December 1992 and February 1993 promissory notes in the aggregate principal amount of $2,400,000 and settle certain threatened claims made by the Tisch/Tsai Entities against the Company (the "Tisch/Tsai Restructuring"). This debt restructuring consisted of (i) the repayment by the Company of $1,200,000 in principal, (ii) the issuance of replacement notes in the aggregate principal amount of $600,000 to the Tisch/Tsai Entities which notes are due on the earlier of the closing of a public offering or May 28, 1996 and bear interest at the rate of 8% per annum, which interest is payable in quarterly installments from an interest reserve established by the Company, (iii) the conversion of $600,000 of principal into 172,414 shares of Series C Preferred Stock at the rate of $3.48 per share, (iv) the amendment and restatement of certain warrants issued in connection with the original notes in order to increase the number of shares of stock issuable thereunder by 64,000 shares to provide for warrants to purchase a total of 144,000 shares of Common Stock at an exercise price of $2.00 per share, which warrants are exercisable until December 31, 1997, and (v) the 82 release by all parties of any claims. The replacement notes were secured by a pledge by Dr. William A. Carter, President, Chief Executive Officer and Chairman of the Company, of 112,925 shares of Series C Preferred Stock and 240,756 shares of Common Stock. In March, 1996 the notes were repaid and the shares of stock are being returned. In November 1994, the Company restructured a $100,000 note issued in June 1993 to Myron Cherry (the "Cherry Note"), a stockholder, pursuant to which the repayment date of the principal amount of the Cherry Note was extended to the closing date of the Company's initial public offering and the accrued but unpaid interest subsequent to September 30, 1993 was converted into Common Stock of the Company at a price of $5.43 per share. Pursuant to the restructuring, in the event that the Company's initial public offering was not completed by February 28, 1995, the principal amount would be repaid by the Company or Bridge Ventures Inc. by March 6, 1995. In addition, the Company issued to Mr. Cherry 5,000 immediately exercisable warrants with an exercise price of $3.50 per share and Bridge Ventures agreed that the unpaid principal on the Cherry Note would be collateralized by the Company's patents on the same terms as the Bridge Financing arranged by Bridge Ventures. In March 1995, the Company and Mr. Cherry agreed to extend the maturity of the promissory note from March 1, 1995 to March 31, 1995. During this extended period, the Company agreed to pay 8% interest and grant Mr. Cherry a warrant to purchase 5,000 shares of Common Stock exercisable at $3.50. The Company further agreed to either register all of Mr. Cherry's 2,770 shares of Common Stock and 10,000 warrants to purchase Common Stock in connection with this Public Offering or reduce the exercise price of Mr. Cherry's warrants to $1.75 per share. Because Mr. Cherry has not advised the Company of his election, the Company has reduced the exercise price of his warrants to $1.75 per share. As of July, 1995, the Company has repaid the entire principal amount of the Note, including accrued interest. Harris Freedman, a Vice President of the Company, and his wife are officers of Bridge Ventures. In October and November 1994, the Company granted Rule 701 Warrants to purchase 20,000 shares of Common Stock at $3.50 per share to Cedric C. Philipp and Peter Rodino III, directors of the Company and Maryann Charlap Azzato and E. Gerald Kay, former directors of the Company. In addition, the Company granted the following Rule 701 Warrants to purchase shares of Common Stock at $3.50 per share: 1,400,000 warrants to William A. Carter; 200,000 warrants to Sharon Will, Vice President of Investor Relations and Corporate Communications; and 400,000 warrants to Harris Freedman, Vice President for Strategic Alliances. From July 1994 to November 1994, the Company completed a private placement in which it sold 2,050,000 shares of Common Stock to certain accredited investors for an aggregate consideration of $1,025,000 (the "1994 Common Stock Financing"). In connection with the private placement, Bridge Ventures introduced a number of investors and lenders to the Company. Harris Freedman, Vice President of the Company, and his wife are officers of Bridge Ventures. In conjunction with the 1994 Common Stock Financing, the Company agreed to collateralize certain of its patents until the earlier of the effectiveness of the initial public offering or the consummation of corporate alliances or licensing arrangement which provide sufficient operating capital and clinical development support to the Company. Pursuant to the agreement with Bridge Ventures in connection with the 1994 Common Stock Financing, Messrs. Philipp, Rodino and Kay were elected to the Board of Directors. Purchasers of 1,950,000 of the shares of Common Stock issued pursuant to the 1994 Common Stock Financing executed irrevocable proxies naming William A. Carter, the Company's President, 83 Chief Executive Officer and Chairman, as proxy, with full power to vote their shares on all matters to be voted on by the stockholders of the Company until the achievement by the Company of a market capitalization of $300,000,000 or greater under certain circumstances or the receipt by the Company of a bona fide offer for acquisition or merger, the net effect of which, if consummated, would be to establish a market capitalization of at least $300,000,000. In October 1994, in connection with the 1994 Common Stock Financing, the Company sold 50,000 shares of Common Stock at a price of $.50 per share to Stephen J. Drescher, a former director of the Company, 80,000 shares of Common Stock to the Belfort Family Trust, of which Mr. Drescher serves as Trustee, at a price of $.50 per share and 50,000 shares of Common Stock at a price of $.50 per share to Jerome Belson, a director of BioAegean. Mr. Drescher also received 300,000 warrants in connection with general consulting services. In addition, in October 1994, the Company received a certain loan in the aggregate principal amount of $150,000 from the Belfort Family Trust. In March 1995, the loan was repaid without interest from the proceeds from the Bridge Loans. In October 1995, the Belfort Family Trust sold 80,000 shares of Common Stock to Carol Schiller at a price of $2.00 per share. In October 1994, the Company entered into an agreement with Bioclones Proprietary Limited ("Bioclones"), a biopharmaceutical company which is associated with The South African Breweries Limited ("SAB"). In connection with the execution of SAB Agreement, the Company granted Cedric C. Philipp, a Director of the Company, an option to purchase 20,000 shares of Common Stock at $3.50 per share. In addition, in October 1994, the Board of Directors granted to Mr. Philipp, a director of the Company and Special Advisor to the Board for International Marketing, the right to receive 3% of the gross proceeds of any licensing fees and prepaid royalties received by the Company pursuant to the SAB Agreement and a fee of .75% of gross proceeds in the event that SAB/Bioclones makes a tender offer for all or substantially all of the Company's assets, including a merger, acquisition or related transaction. In addition, the Company further agreed to provide a monthly retainer of $2,000 to Mr. Philip in exchange for consulting services and remuneration for corporate alliances which are principally introduced by Mr. Philipp. Mr. Philipp has been paid $90,000 to date in connection with these arrangements. In September 1994, Maryann Charlap Azzato, formerly Vice President of Investor Relations and Corporate Communications and the former Vice Chairman and director of the Company, entered into an agreement with Lloyd DeVos, a stockholder, former director and holder of a note in the principal amount of $100,000 (the "DeVos Note") in order to settle a lawsuit filed against the Company and William A. Carter by Mr. DeVos in the United States District Court for the Southern District of New York alleging breach of contract, conversion and certain violations of the federal securities laws in connection with the issuance of the DeVos Note. Pursuant to the settlement agreement, principal and interest on the DeVos Note were repaid by Ms. Azzato as well as certain expenses incurred by Mr. DeVos in the approximate amount of $2,600 and 1,536 shares of Common Stock of the Company were transferred to Mr. DeVos by Ms. Azzato in exchange for the assignment to Ms. Azzato by Mr. DeVos of the right to repayment by the Company of the DeVos Note and warrants to purchase 1,667 share of Series C Preferred Stock. In addition, certain options to purchase 6,912 shares of Common Stock of the Company previously issued to Mr. DeVos were delivered to Mr. DeVos. In 84 exchange for the above agreement, Mr. DeVos, the Company and William A. Carter executed mutual releases of all claims and Mr. DeVos dismissed the suit. In September 1994, the Company incorporated three wholly-owned subsidiaries - - BioPro Corp. ("BioPro"), Core BioTech, Corp. ("Core BioTech") and BioAegean Corp. - in Delaware. In September 1994, the Company granted exclusive worldwide licenses and/or sublicenses to certain of its patents and assigned certain other patents to BioPro (the "BioPro License"), Core BioTech (the "CoreBiotech License") and BioAegean (the "BioAegean License"). Bridge Ventures, which has rights in the Company's patents pursuant to the collateralization of such patents in connection with the 1994 Common Stock Financing, agreed to release its rights in the licensed or assigned patents. Harris Freedman, the Vice President for Strategic Alliances for the Company and BioAegean, and his wife are officers of Bridge Ventures. In May 1994, the Company entered into an agreement to borrow $100,000 from Bridge Ventures for 60 days in exchange for warrants to purchase 92,160 shares of Common Stock at $3.50 per share. In August 1994, the $100,000 loan was converted to 200,000 shares of Common Stock and warrants to purchase 200,000 shares of Common Stock at an exercise price of $3.50 per share. Bridge Ventures transferred 150,000 of its shares of Common Stock to Gerald Kay, a former director of the Company. In addition, Bridge Ventures received a $50,000 consulting fee for general business and financial consulting services rendered from January 1994 to July 1994, which it converted into 100,000 shares of Common Stock as part of the 1994 Common Stock Financing. Harris Freedman, the Company's Vice President, and his wife are officers of Bridge Ventures. Pursuant to the agreement with Bridge Ventures, Messrs. Kay, Philipp and Rodino were elected to the Board of Directors. In November 1994, each of Bridge Ventures and Gerald Kay sold 50,000 shares of Common Stock at a price of $.50 per share to Worldwide Marketing. Sharon Will, an officer of the Company, is President of Worldwide Marketing. In April 1994, William A. Carter, the Company's Chairman and Chief Executive Officer, purchased 20,000 shares of Series C Preferred Stock at $5.00 per share. Also Maryann Charlap Azzato purchased 30,000 shares of Series C Preferred Stock at $5.00 per share and agreed to purchase an additional 10,000 shares at $5.00 per share. In May 1994, Maryann Charlap Azzato guaranteed payment of two promissory notes in the aggregate amount of $76,000 payable by the Company representing payments due in connection with the Temple Agreement (the "Temple Notes"). In return for the guarantee, the Company assigned all rights, patents and related technology in the Company's Oragen and Diagen products to Ms. Azzato, which rights will revert to the Company upon repayment of the principal on the Temple Notes, 12% interest, and Ms. Azzato's fees and expenses which are expected to be paid from the proceeds of this Public Offering. The Company also received a right of first refusal with respect to the sale or assignment by Ms. Azzato of this technology. In January 1994, William A. Carter, the Company's Chairman and Chief Executive Officer, sold an aggregate of 122,880 shares of Common Stock at $3.26 per share for an aggregate price of $400,000 to Michael Dubilier, Keys Foundation, Canaan Venture Limited Partnership ("Canaan Venture"), Canaan Venture Offshore Limited Partnership, C.V. ("Canaan Offshore"), James Tisch and an unaffiliated individual. Using the proceeds of this sale, Dr. Carter purchased 80,000 shares of Series C Preferred Stock at $5.00 per share from the Company. In addition, Maryann Charlap Azzato purchased 3,600 shares of Series C Preferred Stock 85 at $5.00 for an aggregate price of $18,000, representing her remaining commitment under the 1993 Standby Financing Agreement. 86 DESCRIPTION OF SECURITIES The Company is authorized to issue up to 50,000,000 shares of Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). Common Stock As of March 19, 1997, there were 16,353,086 shares of Common Stock outstanding and held of record by approximately 355 stockholders, not including shares of Common Stock held in street name. These outstanding common shares include 30,550 shares of Common Stock contained in outstanding Units. The holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders, and stockholders have no rights to cumulative votes in the election of directors. Subject to prior dividend rights and preferences of holders of shares of Preferred Stock, if any, holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors from funds legally available therefor. Upon liquidation or dissolution of the Company, subject to prior liquidation rights of holders of Preferred Stock, if any, the assets of the Company available for distribution to stockholders will be distributed ratably among the holders of Common Stock. The holders of Common Stock have no preemptive or other subscription rights and there are no conversion or redemption or sinking fund provisions with respect to such shares. All of the outstanding shares of Common Stock are fully paid and nonassessable and the shares of Common Stock sold by the Company in this offering will be fully paid and nonassessable. Preferred Stock As of March 19, 1997, there were 5,000 shares of Series E Preferred issued and outstanding. These preferred shares are convertible into Common Stock. The Board of Directors are authorized, without further action or vote of the stockholders, to issue up to 4,500,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions, including the dividend rights, conversion rights, voting rights, rights and terms of redemption, redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series. The Company has no present plans to issue any shares of Preferred Stock. Issuance of Preferred Stock, which may be accomplished through a public offering, a private placement or otherwise may dilute the voting power of holders of Common Stock, may render more difficult the removal of current management, even if such removal may be in the stockholders' best interest, and may have the effect of delaying, deferring or preventing a change in control of the Company. Warrants In connection with various debt financings and other agreements, the Company has issued warrants to acquire an aggregate of up to 6,425,297 (exclusive of Class A Warrants) shares of Common Stock at a weighted average exercise price of $2.93 per share. In addition, the Company issued Rule 701 Warrants to the Company's directors and certain officers in October and November 1994, to purchase an aggregate of 87 2,080,000 shares of Common Stock at $3.50 per share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." All of these warrants, except for (i) the Rule 701 Warrants which vest in 1/3 increments over 36 months and (ii) the 100,000 warrants which may be issued to The Sage Group which vest upon the occurrence of certain conditions, are currently exercisable by the holders. Class A Redeemable Warrants As of March 19, 1997, there were 6,313,000 Class A Redeemable Warrants (the "Class A Warrants") outstanding. The Class A Warrants (including the Class A Warrants included in 30,550 outstanding Units and 1,000,000 Bridge Units) were issued pursuant to an agreement, dated November 2, 1995 (the "Warrant Agreement"), between the Company and Continental Stock Transfer and Trust Company (the "Warrant Agent"). The following discussion of certain terms and provisions of the Class A Warrants is qualified in its entirety by reference to the detailed provisions of the Warrant Agreement. Each Class A Warrant represents the right of the registered holder to purchase one share of Common Stock at an exercise price equal to $4.00, subject to adjustment (the "Purchase Price"). The Class A Warrants will be entitled to the benefit of adjustments in the Purchase Price and in the number of shares of Common Stock and/or other securities deliverable upon the exercise thereof in the event of a stock dividend, stock split, reclassification, reorganization, consolidation, merger or the issuance of Common Stock or options to purchase Common Stock at a price below the Purchase Price then in effect. The Company has the right to reduce the Purchase Price or increase the number of shares of Common Stock issuable upon the exercise of the Class A Warrants. Unless previously redeemed, the Class A Warrants may be exercised at any time commencing November 2, 1996 and prior to the close of business on November 2, 2000 (the "Expiration Date"). On and after the Expiration Date, the Class A Warrants become wholly void and of no value. The Company may, upon 30 days written notice to all holders of the Class A Warrants, reduce the exercise price or extend the Expiration Date of all outstanding Class A Warrants for such increased period of time as it may determine. The Class A Warrants may be exercised at the office of the Warrant Agent. The Company has the right at any time after November 2, 1997 to redeem the Class A Warrants at a price of $.05 each, by written notice mailed 30 days prior to the redemption date to each Class A Warrant holder at his address as it appears on the books of the Warrant Agent. Such notice shall only be given within 10 days following any period of 20 consecutive trading days during which the high closing bid price of the shares of Common Stock (if then traded on the Nasdaq or on a national securities exchange) exceeds $9.00, subject to adjustments for stock dividends, stock splits and the like. If the Class A Warrants are called for redemption, they must be exercised prior to the close of business on the date prior to the date of any such redemption or the right to purchase the applicable shares of Common Stock will lapse. No holder, as such, of Class A Warrants shall be entitled to vote or receive dividends or be deemed the holder of shares of Common Stock for any purpose whatsoever until such Class A Warrants have been duly exercised and the Purchase Price has been paid in full. 88 If required, the Company will file a new registration statement with the Commission with respect to the securities underlying the Class A Warrants prior to the exercise of the Class A Warrants and deliver a prospectus with respect to such securities to all Class A Warrant holders as required by Section 10(a)(3) of the Securities Act. See "Risk Factors--Current Prospectus and State `Blue Sky' Registration Required to Exercise the Redeemable Warrants." Units Pursuant to the IPO in November 1995, the Company registered and issued 5,313,000 Units. Each Unit consists of one share of Common Stock and one Class A Warrant. On July 12, 1996, the Units were de- coupled into their component parts. On August 16, 1996, the Company voluntarily delisted the Units. As of March 19, 1997 there were 30,550 Units outstanding. Bridge Units In connection with the Bridge Loans, the Company issued to the holders of the Bridge Loans Bridgeholders Options to purchase 1,000,000 Bridge Units at an exercise price of $.50 per Bridge Unit. Each Bridge Unit originally contained one share of Common Stock, one Class A Warrant and one Class B Redeemable Purchase Warrant (collectively, the "Class B Warrants"). The Company and the purchasers amended the Bridge Units to eliminate the Class B Warrants such that each Bridge Unit contains one share of Common Stock and one Class A Warrant. The Company registered the Bridgeholder Options and the securities underlying them in the IPO. The Class A Warrants included in the Bridge Units are identical to the Class A Warrants offered by the Company in the IPO. All holders of Bridgeholder Options have exercised the options at an exercise price of $.50 per Bridge Unit. The Bridge Units and the securities contained therein are not transferable until the earlier of 13 months from November 2, 1995 or at such earlier date as may be permitted by the Company. The Bridge Units were de-coupled into their component parts on July 12, 1996, along with the Units. Rule 701 Warrants In October 1994, the Company issued 2,080,000 warrants to purchase Common Stock at $3.50 per share pursuant to Rule 701 under the Securities Act ("Rule 701 Warrants") to certain officers and employees of the Company. These Rule 701 Warrants vest in 1/3 increments over a thirty six month period and are exercisable until September 30, 1999. In the event that the number of Rule 701 Warrants issued by the Company exceeds the aggregate monetary limits set forth under Rule 701, the number of Rule 701 Warrants issued to the holders will be reduced pro rata and the remaining warrants will not be subject to the provisions of Rule 701. See "Shares Eligible for Future Sales and Registration Rights." Delaware Law and Certain Charter and By-Law Provisions The Company will be subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless, among other exceptions, the business combination is approved by (i) the Board of Directors prior to the date the interested stockholder obtained such status or 89 (ii) the holders of two-thirds of the outstanding shares of each class or series of stock entitled to vote generally in the election of directors, not including those shares owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's By-Laws contain a provision whereby a stockholder of the Company may nominate an individual or individuals for election to the Board of Directors only if such nomination is made in writing (i) at least ninety days in advance of the Company's annual meeting of stockholders or (ii) within seven days following notice of a special meeting of stockholders for the election of directors. Accordingly, it will be more difficult for stockholders, including those holding a majority of the outstanding shares, to force an immediate change in the composition of the Board of Directors. The Company's Certificate of Incorporation contains certain provisions permitted under the General Corporation Law of Delaware relating to the liability of directors. The provisions eliminate a director's liability for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. The Company's Certificate of Incorporation also contains provisions to indemnify its directors and officers to the fullest extent permitted by the General Corporation Law of Delaware. The Company has entered into indemnification agreements with its current directors and certain of its executive officers. These agreements have the practical effect in certain cases of eliminating the ability of stockholders to collect monetary damages from such individuals. The Company believes that these provisions and agreements have assisted the Company in attracting and retaining qualified individuals to serve as directors and officers. Transfer Agent and Registrar The transfer agent and registrar for the Company's Common Stock, Class A Warrants and Units is Continental Stock Transfer and Trust Company, 2 Broadway, New York, New York 10004. Nasdaq Quotation The Company's Common Stock and Warrants trade on Nasdaq under the trading symbols HEMX and HEMXW, respectively. Shares Eligible for Future Sale and Registration Rights The Company has 16,353,086 shares of Common Stock outstanding as of March 19, 1997. In addition, the Company has 234,953 stock options and 15,280,797 warrants outstanding. Other than 5,313,000 shares of Common Stock and 5,313,000 Class A Warrants contained in the IPO Units, all of the Company's shares of Common Stock, options and warrants were issued in private transactions not involving a public offering and, therefore, are treated as "restricted securities" subject to the restrictions of Rule 144 under the Securities Act. Approximately 9,467,968 shares of the Company's Common Stock are restricted securities as that term is defined in Rule 144 promulgated under the Securities Act. Approximately 3,594,720 of such shares have 90 been beneficially owned for at least two years and therefore can be sold pursuant to Rule 144. In general, under Rule 144, subject to the satisfaction of other conditions, a person, including an affiliate of the Company, who has beneficially owned restricted shares of Common Stock for at least two years is entitled to sell, within any three month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class or if the Common Stock is quoted on a stock exchange, the average monthly trading volume during the four calendar weeks preceding the sale. There are approximately 5,722,664 shares subject to Rule 144(k) restrictions. Generally, under Rule 144(k), subject to the satisfaction of certain other conditions, a person who is presently not and who has not been an affiliate of the Company for at least three months immediately preceding the sale and who has beneficially owned the shares of Common Stock for at least three years is entitled to sell such shares without regard to any volume limitations. Prior to the IPO, the Company entered into lock up agreements with certain shareholders. These lock up agreements ranged from eighteen (18) months to thirty six (36) months. As of March 19, 1997, approximately 3,167,809 shares of Common Stock remained locked up. The lock-up agreements expire as follows: (i) 265,421 shares on May 2, 1997; (ii) 1,941,225 shares on November 2, 1997; and (iii) 961,163 shares on November 2, 1998. LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Silverman, Collura, Chernis & Balzano P.C., New York, New York. EXPERTS The consolidated financial statements of Hemispherx Biopharma, Inc. and subsidiaries as of December 31, 1995 and 1996, and for each of the years in the three year period ended December 31, 1996, have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company is subject to the reporting requirements of the Exchange Act. The Company has filed with the Commission a post-effective amendment to the Registration Statement on Form S-1 (including any amendments thereto, the "Registration Statement") under the Securities Act. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement. The Registration Statement and the exhibits and the schedules thereto filed with the Commission may be inspected, without charge, at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 91 Fifth Street, N.W. Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may also be obtained upon written request from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 92 GLOSSARY OF TERMS 25A: 2", 5" oligoadenylate; a short polymer of ribonucleic acid containing the base adenine. 25A Synthetase: A set of specific enzymes that join together certain building blocks, termed nucleotides, to form 2-5A; 2-5A synthetase must be activated by a double-stranded RNA molecule. AIDS: Acquired Immunodeficiency Syndrome; a disease caused by HIV infection due to the progressive decline in the body's immune system leading to fatal infections or malignancies. Analogue: A chemical compound with a structure similar to that of another compound, but differing from it in respect to a certain component. Antiviral: Destroying viruses or suppressing their replication. CD4: A certain type of immune cell which protects the body against foreign organisms such as bacteria and viruses. Controlled Study: A clinical trial in which patients are divided into two groups, one of which receives the drug being tested, and the second of which receives either a saline solution (see definition of "Placebo") or another drug purported to be clinically beneficial in the treatment of the indication in question. In trials where the second group receives saline solution, the study is referred to as "placebo-controlled". In trials where the second group receives a drug purported to be beneficial, the study is referred to as "active-controlled". Cytokine: Proteins released by a cell population on contact with a stimulus, which act as intracellular mediators. Double-Blind: Refers to a study where neither the patient nor the treating physician knows whether the patient is being administered with drug or placebo. Enzyme: A protein that accelerates a chemical reaction of other substances in the body. FDA: Food and Drug Administration; the United States governmental agency with authority for drug approval. Good Laboratory Practice (GLP): Federal regulations which govern the generation of laboratory data in a manner that is acceptable to the FDA in its review of ongoing studies and New Drug Applications (NDA) for marketing approval. HIV: Human-immunodeficiency virus; the virus which causes AIDS. Interferon: IFN; A family of proteins that exert anti-viral activity; interferons also have immune regulatory and anti-tumor activities. IFN can be classified into three distinct classes termed alpha, beta or gamma. 93 Interleukin: A group of protein factors, produced by immune cells. In vitro: Refers to studies taking place within an artificial environment such as a test tube. In vivo: Refers to studies taking place within a living body. Lymphokine: Antiviral and anticancer products, such as interferon, produced by certain types of blood cells. Macrophage: A blood cell which ingests foreign substances. Multicenter: Refers to a trial conducted at more than one clinical site. Oncogene: Refers to genes with the capacity to cause production or growth of a tumor. Open-Label: Refers to a study where both the patient and the treating physician know the identity of the drug which is being administered. Placebo: A dummy treatment administered to the control group in a controlled clinical trial in order to distinguish the specific and nonspecific effects of the experimental treatments. Placebo-Controlled: Refers to a trial in which a portion of the patients receive a drug and a portion of the patients receive a placebo, and the activity of the drug is compared to the activity of the placebo. Protein Kinase: Refers to an enzyme which can modify other protein factors leading to inhibition of viral replication or tumor cell growth. Randomized: Refers to a procedure where the treatment that a patient will receive (i.e. the active drug or a placebo) is determined by chance. Ribonuclease: Any enzyme that decomposes ribonucleic acids, such as viral RNA. Ribonuclease L: A specific ribonuclease that is present in human cells, but dormant (inactive) until activated by 2-5A or Oragen drugs. Transitory Response: A tumor response which is characterized by the subsequent recurrence of disease (notwithstanding the continuation of treatment) after a limited period of time. 94 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements Page ---- Independent Auditors' Report ............................................. F-2 Consolidated Balance Sheets at December 31, 1995 and 1996 ................ F-3 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1996 ............................... F-4 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1996 ........................... F-5 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996 ............................... F-6 Notes to Consolidated Financial Statements ............................... F-8 F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Hemispherx BioPharma, Inc.: We have audited the accompanying consolidated balance sheets of Hemispherx BioPharma, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material re- spects, the financial position of Hemispherx BioPharma, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. February 14, 1997 Philadelphia, Pennsylvania F-2 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1995 and 1996 December 31, ---------------------------- 1995 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ..................... $ 11,291,167 $ 5,279,429 Prepaid expenses and other current assets (Note 11) .............. 62,742 105,341 ------------ ------------ Total current assets ....................... 11,353,909 5,384,770 Property and equipment, net .................... 53,953 83,475 Patent and trademarks rights, net .............. 1,245,092 1,502,816 Security deposits .............................. 46,564 28,323 ------------ ------------ Total assets ............................... $ 12,699,518 $ 6,999,384 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .............................. $ 1,095,637 $ 598,078 Accrued expenses (Note 5) ..................... 2,263,096 548,312 Notes payable (Note 3) ........................ 4,920,000 -- ------------ ------------ Total current liabilities .................. 8,278,733 1,146,390 Commitments and contingencies (Notes 3, 6, 8, 9, 10, 11, 12 and 14) Stockholders' equity (Notes 6 and 7): Preferred stock .............................. -- 50 Common stock ................................. 15,581 16,160 Additional paid-in capital ................... 47,949,530 54,080,171 Accumulated deficit .......................... (43,544,326) (48,243,387) ------------ ------------ Total stockholders' equity ................. 4,420,785 5,852,994 ------------ ------------ Total liabilities and stockholders' equity . $ 12,699,518 $ 6,999,384 ============ ============ See accompanying notes to consolidated financial statements. F-3 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES Consolidated Statements of Operations For each of the years in the three-year period ended December 31, 1996
December 31, -------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Revenues: Research and development ............... $ 75,758 $ 65,910 $ 32,044 License fees ........................... 100,000 2,900,000 -- ------------ ------------ ------------ Total revenues ...................... 175,758 2,965,910 32,044 ------------ ------------ ------------ Costs and expenses: Research and development ............... 1,637,769 1,028,662 1,902,327 General and administrative (Notes 10 ) . 2,617,762 2,880,443 3,023,590 ------------ ------------ ------------ Total cost and expenses ............. 4,255,531 3,909,105 4,925,917 Debt conversion expense ................. (10,500) (149,384) -- Interest income ......................... 25,091 95,887 339,384 Interest expense (Note 14) .............. (1,067,869) (843,148) -- ------------ ------------ ------------ Net loss ............................ $ (5,133,051) $ (1,839,840) $ (4,554,489) ============ ============ ============ Pro forma net loss per share (Note 2(e)): Pro forma weighted average shares outstanding .......................... 11,536,276 14,199,701 15,718,136 ============ ============ ============ Pro forma net loss per share ........ $ (.44) $ (.13) $ (.29) ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity(Deficit) For each of the years in the three-year period ended December 31, 1996
Preferred Common stock stock Preferred Common Preferred Common subscribed subscribed stock stock stock stock shares shares shares shares subscribed subscribed ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1993 .. 517,512 28,026 810,029 5,133,986 $ 4,093,733 $ 30,227 Preferred stock subscribed .... 130,000 -- -- -- 650,000 -- Debt to preferred/common stock conversion ............. 3,600 300,000 -- 2,770 28,500 150,000 Redeemable preferred stock dividend ..................... -- -- -- -- -- -- Warrants issued in connection with imputed and forgiven in- terest charges ............... -- -- -- -- -- -- Issuance of stock purchase war- rants, net ................... -- -- -- -- -- -- Common stock subscribed ........ -- 1,750,000 -- -- -- 875,000 Stock options exercised ....... -- 4,926 -- -- -- 6,104 Net loss ...................... -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1994 .. 651,112 2,082,952 810,029 5,136,756 4,772,233 1,061,331 Redeemable preferred stock dividend ..................... -- -- -- -- -- -- Debt to preferred stock dividend ..................... -- -- 172,414 -- -- -- Warrants issued in connection with imputed and forgiven interest charges ............. -- -- -- -- -- -- Preferred stock subscribed ..... 10,000 -- -- -- 50,000 -- Debt to common stock conversion ................... -- 100,000 -- -- -- 50,000 Issuance of common stock certificates ................. -- (2,182,952) -- 2,182,952 -- (1,111,331) Issuance of Preferred Stock certificates ................. (626,112) -- 626,112 -- -- Convert Redeemable to Common ... -- -- -- 343,879 -- -- Convert Preferred to Common .... (35,000) -- (1,608,555) 1,807,088 (350,000) -- Issuance of Common Stock, net of issuance cost ......... -- -- -- 5,313,000 -- -- Warrants Exercised ............. -- -- -- 797,917 -- -- Net Loss ....................... -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 .. -- -- -- 15,581,592 -- -- Warrants Exercised ............. -- -- -- 202,083 -- -- Preferred Stock Issued ......... -- -- -- 6,000 -- -- Preferred Stock Converted ...... -- -- (1,000) 376,530 -- -- Stock Option Compensation ...... -- -- -- -- -- -- Net loss ....................... -- -- -- -- -- -- Preferred Dividends ............ -- -- -- -- -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 .. -- -- 5,000 16,160,205 -- -- ============ ============ ============ ============ ============ ============ "C" Common stock --------------------------- Common .001 Additional stock Total Preferred Par paid-in Accumulated subscriptions stockholders' stock value capital deficit receivable equity(deficit) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1993 .. $ 7,200,017 $ 5,133 $ 13,663,169 $(36,571,435) $ -- $(11,579,156) Preferred stock subscribed .... -- -- -- -- -- 650,000 Debt to preferred/common stock conversion ............. -- 3 1,382 -- -- 179,885 Redeemable preferred stock dividend ..................... -- -- (372,552) -- -- (372,552) Warrants issued in connection with imputed and forgiven in- terest charges ............... -- -- 631,583 -- -- 631,583 Issuance of stock purchase war- rants, net ................... -- -- 112,500 -- -- 112,500 Common stock subscribed ........ -- -- -- -- -- 875,000 Stock options exercised ....... -- -- -- -- -- 6,104 Net loss ...................... -- -- -- (5,133,051) -- (5,133,051) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1994 .. 7,200,017 5,136 14,036,082 (41,704,486) -- (14,629,687) Redeemable preferred stock dividend ..................... -- -- (314,873) -- -- (314,873) Debt to preferred stock dividend ..................... 749,383 -- -- -- -- 749,383 Warrants issued in connection with imputed and forgiven interest charges ............. -- -- 572,681 -- -- 572,681 Preferred stock subscribed ..... -- -- -- -- -- 50,000 Debt to common stock conversion ................... -- -- -- -- -- 50,000 Issuance of common stock certificates ................. -- 2,183 1,109,148 -- -- -- Issuance of Preferred Stock certificates ................. 4,472,233 -- -- -- -- -- Convert Redeemable to Common ... -- 344 3,552,863 -- -- 3,553,207 Convert Preferred to Common .... (12,421,633) 1,807 12,769,826 -- -- -- Issuance of Common Stock, net of issuance cost ......... -- 5,313 15,825,644 -- -- 15,830,957 Warrants Exercised ............. -- 798 398,159 -- -- 398,957 Net Loss ....................... -- -- -- (1,839,840) -- (1,839,840) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 .. -- 15,581 47,949,530 (43,544,326) -- 4,420,785 Warrants Exercised ............. -- 202 100,839 -- -- 101,041 Preferred Stock Issued ......... 60 -- 5,395,825 -- -- 5,395,885 Preferred Stock Converted ...... (10) 377 (367) -- -- -- Stock Option Compensation ...... -- -- 634,344 -- -- 634,344 Net loss ....................... -- -- -- (4,554,489) -- (4,554,489) Preferred Dividends ............ -- -- -- (144,572) -- (144,572) ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 .. $ 50 $ 16,160 $ 54,080,171 $(48,243,387) $ -- $ 5,852,994 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. F-5 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996 Increase (Decrease) in Cash and Cash Equivalents
December 31, ----------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Cash flows from operating activities: Net loss ............................................. $(5,133,051) $(1,839,840) $(4,554,489) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation of property and equipment ...................................... 115,061 54,000 56,958 Amortization of patent rights ....................... 256,341 222,000 90,935 Issuance of stock purchase warrants ................. 112,500 -- -- Imputed interest charges ............................ 150,000 41,360 -- Debt conversion expense ............................. 10,500 149,384 -- Write-off of patent rights .......................... 285,190 100,017 41,156 Stock option compensation expense ................... -- -- 634,344 Gain on disposal of property and equipment .......... 17,197 -- -- Changes in assets and liabilities: Prepaid expenses and other current assets .......... (1,506) (59,985) (42,599) Accounts payable ................................... 661,732 (1,156,084) (497,559) Accrued expenses ................................... 1,565,450 547,561 (1,844,893) Security deposits .................................. 8,441 2,368 18,241 ----------- ----------- ----------- Net cash used in operating activities ............................ (1,952,145) (1,939,219) (6,097,906) ----------- ----------- ----------- Cash flows from investing activities: Purchase of property and equipment ................... (40,000) (3,625) (86,480) Proceeds from disposal of property and equipment ..... 11,000 -- -- Additions to patent rights ........................... (351,470) (132,689) (389,815) ----------- ----------- ----------- Net cash used in investing activities ............ $ (380,470) $ (136,314) (476,295) ----------- ----------- -----------
(CONTINUED) See accompanying notes to consolidated financial statements. F-6 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Continued)
December 31, ----------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from issuance of preferred stock ............ $ -- $ -- $ 5,395,885 Proceeds from shareholder loans ...................... 925,910 35,000 -- Proceeds from notes payable .......................... 35,000 1,762,000 -- Payments on notes payable ............................ (80,000) (1,837,000) -- Payments on stockholder notes ........................ (10,000) (2,860,911) (4,920,000) Principal payments under capital lease obligation .... (6,923) (23,308) -- Proceeds from exercise of stock options .............. -- -- -- Common stock subscription proceeds ................... 875,000 -- -- Preferred stock subscription proceeds ................ 650,000 -- -- Proceeds from issuance of common stock ............... -- 18,595,000 -- Stock issuance costs ................................. -- (2,764,043) -- Proceeds from exercise of stock warrants ............. -- 398,957 101,040 Dividends paid on preferred stock .................... -- -- (14,463) ----------- ----------- ----------- Net cash provided by financing activities ............................ 2,388,987 13,305,695 562,463 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents ................................ 56,372 11,230,162 (6,011,738) Cash and cash equivalents at beginning of period ...... 4,633 61,005 11,291,167 ----------- ----------- ----------- Cash and cash equivalents at end of period ............ $ 61,005 $11,291,167 $ 5,279,429 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for interest ............... $ -- $ 186,503 $ 3,999 =========== =========== =========== Supplemental disclosure of noncash investing activities: Debt to equity conversion ............................ $ 100,000 $ 799,383 $ -- Accounts payable and accrued expenses to equity conversion ................................... 74,104 50,000 -- Forgiveness of interest .............................. 458,333 572,681 -- Preferred stock to equity conversion ................. $ -- $ 3,238,334 $ 899,314
See accompanying notes to consolidated financial statements. F-7 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 and 1996 (1) Business Hemispherx BioPharma, Inc. and subsidiaries (the Company), formerly known as HEM Pharmaceuticals Corp., is a pharmaceutical company using nucleic acid technologies to develop therapeutic products for the treatment of viral diseases and certain cancers. The Company's drug technology uses specially-configured ribonucleic acid (RNA). The Company's double-stranded RNA drug product, trademarked Ampligen, is in human clinical development for various therapeutic indications. The efficacy and safety of Ampligen is being developed clinically for three anti-viral indications: myalgic encephalomyelitis, also known as chronic fatigue syndrome (ME/CFS) (Phase II clinical trial completed and Phase II/III clinical trial authorized); human immunodeficiency virus associated disorders (Phase II clinical trial); and chronic hepatitis B virus infection (Phase I/II clinical trial in process). The Company also has clinical experience with Ampligen in patients with certain cancers including renal cell carcinoma (kidney cancer) and metastatic malignant melanoma. The consolidated financial statements include the financial statements of Hemispherx BioPharma, Inc. and its three wholly-owned subsidiaries BioPro Corp., BioAegean Corp. and Core BioTech Corp. which were incorporated in September 1994 for the purpose of developing technology for ultimate sale into certain non-pharmaceutical specialty consumer markets. All significant intercompany balances and transactions have been eliminated in consolidation. In November, 1995, the Company completed an initial public offering (IPO) of 5,313,000 units of Hemispherx BioPharma, Inc. resulting in net proceeds of approximately $15.8 million. Each unit consists of one share of the Company's Common Stock and one Class A Redeemable Warrant, exercisable for one share of Common Stock at $4.00 per share. These Class A Redeemable Warrants are subject to redemption two years from November 2, 1995 at $.05 per warrant in the event that the closing bid price of the Company's Common Stock exceeds $9.00 for a specified time period. In connection with the IPO, the underwriter was granted an option to purchase 462,000 units at $5.775 per unit. The accompanying consolidated financial statments have been prepared on a going concern basis which assumes the continuity of operations and the realization of assets and liabilities in the ordinary course of business. Since 1987, the Company has incurred substantial operating losses and could incur losses over the next several years. The Company's cash requirements have exceeded its resources due to its expenditures for research and development, obtaining regulatory approvals, fees and expenses to prosecute and maintain its patent estate, fees and expenses related to the initial public offering ("IPO") and various general and administrative expenses. The Company's ability to achieve profitable operations is dependent on successfully developing products, obtaining regulatory approvals on a timely basis and making the transition from a research and development firm to an organization producing commercial products or entering into agreements for product commercializations. The Company will need to produce income from cost recovery clinical trials in Canada and Belgium and raise funds through equity or debt financings, collaborative arrangements with corporate partners, off-balance sheet financing or from other sources. The Company's ability to raise additional capital or increase income from cost recovery programs will be a factor in the Company's successful development of it's products. In the event that the proceeds from the cost recovery clinical trials are delayed or that additional financing is not available in 1997, the Company believes that it can restructure operations to minimize F-8 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 cash expenditures, locate a partner to share development costs and maintain the operation and protect the value of its various patent rights. (2) Summary of Significant Accounting Policies (a) Cash and Cash Equivalents Cash equivalents consist of money market, bank certificates of deposit, and overnight repurchase agreements collateralized by money market securities with original maturities of less than three months, with both a cost and fair value of $11,291,167 and $5,279,429 at December 31, 1995 and 1996, respectively. (b) Property and Equipment Property and equipment consist of furniture, fixtures, office equipment, leasehold improvements and vehicles recorded at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the respective assets, ranging from five to seven years. Property and equipment held under capital leases are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Accumulated depreciation and amortization as of December 31, 1995 and 1996 is $545,956 and $602,914, respectively. (c) Patent and Trademark Rights Patents and trademarks are stated at cost (primarily legal fees) and are amortized using the straight-line method over ten years. The Company reviews its patents and trademarks periodically to determine whether they have continuing value. Such review includes an analysis of the patent and trademark's ultimate revenue and profitability potential on an undiscounted cash flow basis to support the realizability of its respective capitalized cost. In addition, management's review addresses whether the patent and trademark continues to fit into the Company's strategic business plans. During the years ended December 31, 1995 and 1996, the Company decided not to renew patents in certain countries and has recorded $100,017 and $41,156 respectively, relating to the expense of writing off these patents as a charge to research and development. Accumulated amortization as of December 31, 1995 and 1996 is $903,769 and $795,117, respectively. In addition the Company wroteoff $240,743 of fully amortized patents and trademarks during 1996. F-9 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 (d) Revenue Revenue is recognized immediately for nonrefundable license fees when agreement terms require no additional performance on the part of the Company. Revenue from research and development is recognized when earned. (e) Proforma Net Loss Per Share Upon the closing of the IPO of common stock, all shares of Series A, B and C Preferred Stock (Preferred Stock) converted into Common Stock. Proforma net loss per share for the years ended December 31, 1994 and 1995 are calculated by dividing net loss by the weighted average number of common shares outstanding during the period after giving effect for Common Stock equivalents arising from stock options and warrants and Preferred Stock assumed converted to Common Stock. Pursuant to the requirements of the Securities and Exchange Commission, Common Stock and Common Stock equivalents issued by the Company during the twelve months immediately preceding the IPO have been included in the calculation of the shares used in the calculation of pro forma net loss per share (using the treasury stock method and the public offering price). The following table sets forth the calculation of the total number of shares used in the computation of pro forma net loss per share.
Year ended December 31, ------------------------------------ 1994 1995 1996 ---------- ---------- ---------- Weighted average common shares outstanding ....... 9,475,642 10,341,163 15,718,136 Incremental shares assumed to be outstanding related to common stock, stock options and warrants granted and convertible preferred stock based on the treasury stock method ......................... 2,060,634 3,858,538 -- ---------- ---------- ---------- Weighted average common and common stock quiva lent shares used in computation of proforma net loss per common share ......................... 11,536,276 14,199,701 15,718,136 ========== ========== ==========
(f) Accounting for Income taxes Deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The measurement of deferred income tax asets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. F-10 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 (g) Sales of Subsidiary Stock The Company intends to account for any sales of its subsidiaries' stock as capital transactions. However, as of December 31, 1995 and 1996, the Company owned 100% of each subsidiaries stock. (h) New Accounting Pronouncements The Company adopted the provisions of FASB No. 121, "Accounting for the impairment of Long-Term Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circunstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. On January 1, 1996, the Company also adopted FASB No. 123, "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FASB No. 123 also allows entities to continue to apply the provisions of APB No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock options grants made in 1995 and future years as if the fair-value-based method defined in FASB No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123. (i) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. (3) Notes Payable Notes payable at December 31, 1995 consisted of a February, 1992 convertible note with detachable warrants due February 26, 1995, interest payable quarterly at 12% per annum, as amended, in the amount of $4,920,000. This note was paid in 1996 (Note 14). F-11 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 (4) Stock-Based Compensation In 1996, the Company granted 350,000 stock purchase warrants to certain key employees in recognition of services performed and services to be performed. The per share weighted average fair value of the stock purchase warrants granted during 1996 was determined using the Black-Scholes option pricing model with the following weighted average assumptions: expected dividend yield of zero, risk free interest rate of 6.02%, volitility 39.71%, and an expected life of two years. The Company applies APB Opinion No. 25 in accounting for stock-based cpmpensation of its employees and, accordingly, no compensation cost has been recognized for stock purchase warrants issued to employees in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock-based compensation of its employees the Company's net loss would have been increased to the pro forma amount indicated below: 1996 ----------- Net loss As reported $(4,554,489) Pro forma (4,782,722) There was no stock-based compensation for employees in 1994 and 1995. (5) Accrued Expenses Accrued expenses at December 31, 1995 and 1996 consists of the following: December 31, ---------------------------- 1995 1996 ---------- ---------- Deferred rent ........................... $ 228,189 $ -- Accrued payroll and benefits ............ 144,047 126,296 Accrued interest (Note 14) .............. 898,733 -- Accrued professional fees (Note 14) ..... 727,996 162,719 Accrued taxes, dividends, and other .... 264,131 259,297 ---------- ---------- $2,263,096 $ 548,312 ========== ========== (6) Stockholders' Equity (a) Common Stock The Company is authorized to issue 50,000,000 shares of $.001 par value Common Stock. The Company declared a 1:2.17015 reverse stock split and change in par value from the original $.01 par value to $.001 on shares of the Company's Common Stock effective June 29, 1994. On November 30, 1994, the Company effected a 2:1 forward stock split. On June 5, 1995 the Company changed its name to Hemispherx BioPharma, Inc. F-12 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 The accompanying consolidated financial statements reflect for all periods presented the effect of the 1:2.17015 reverse stock split, 2:1 forward stock split, and a change in par value to $.001 per common share. (b) Common Stock Options and Warrants (i) Stock Options The 1990 Stock Option Plan provides for the grant of options to purchase up to 460,798 shares of the Company's Common Stock to employees, directors, and officers of the Company and to consultants, advisors, and other persons whose contributions are important to the success of the Company. The recipients of options granted under the 1990 Stock Option Plan, the number of shares to be converted by each option, and the exercise price, vesting terms, if any, duration and other terms of each option shall be determined by the Company's board of directors or, if delegated by the board, its Compensa- tion Committee. No option is exercisable more than 10 years and one month from the date as of which an option agreement is executed. These shares become vested through various periods not to exceed four years from the date of grant. Certain shares become vested upon the underwritten public offering concluded by the Company in November, 1995. The option price represents the fair market value of each underlying share of Common Stock at the date of grant, as determined by the Company's board of directors. Information regarding the options approved by the Board of Directors under the 1990 Stock Option Plan is summarized below: December 31 ------------------- Option price 1995 1996 ---------- ------- ------- Outstanding, beginning of year....... $ .11-4.34 285,620 232,830 Granted.............................. 3.50-4.34 0 2,123 Canceled............................. .11-4.34 (52,790) 0 ---------- ------- ------- Outstanding, end of year............. $1.07-4.34 232,830 234,953 ========== ======= ======= Exercisable.......................... 165,244 215,161 ======= ======= Exercised in prior years............. (10,576) (10,576) ======= ======= Available for future grants.......... 217,392 215,269 ======= ======= The outstanding options include the right to purchase 45,344 shares of the Company's Common Stock at $3.50 per share. In December 1992, the Board of Directors approved the 1992 Stock Option Plan (the 1992 Stock Option Plan) which provides for the grant of options to purchase up to 92,160 shares of the Company's Common Stock to employees, directors, and officers of the Company and to consultants, advisers, and other persons whose contributions are important to the success of the Company. The recipients of the options granted under the 1992 Stock Option Plan, the number of shares to be covered by each option, and the exercise price, vesting terms, if any, duration and other terms of each option shall be determined by the Company's board of directors. No option is exercisable more than 10 years and one month from the date as of which an option agreement is executed. To date, no options have been granted under the 1992 Stock Option Plan. F-13 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 The Company's 1993 Employee Stock Purchase Plan (the 1993 Purchase Plan) was approved by the board of directors in July 1993. The outline of the 1993 Purchase Plan provides for the issuance, subject to adjustment for capital changes, of an aggregate of 138,240 shares of Common Stock to employees. The 1993 Purchase Plan will be administered by the Compensation Committee of the board of directors. Under the 1993 Purchase Plan, Company employees will be eligible to participate in semi-annual plan offerings in which payroll deductions may be used to purchase shares of Common Stock. The purchase price for such shares will be equal to the lower of 85% of the fair market value of such shares on the date of grant or 85% of its fair market value of such shares on the date such right is exercised. There have been no offerings under the 1993 Purchase Plan to date and no shares of Common Stock have been issued thereunder. (ii) Warrants The warrants outstanding at December 31, 1996, related to the issuance of former notes payable and shareholder notes payable (Note 3) which were exercisable in either Common Stock, Series B or Series C Preferred Stock and subject to certain antidilution adjustments. Upon completion of the IPO, these warrants became exercisable only in Common Stock. Common Stock --------------------- Exercise Number of Price Shares Expiration ------- -------- ---------- Notes payable: February 1992 5 years convertible note (see Note 14) ..... $10.85 119,807 from " " " ..... $2.00 160,000 IPO date Stockholders notes: Stockholders...................... $3.50 292,160 Oct. 1999 Stockholder....................... $3.50 300,000 Oct. 1999 Stockholders...................... $3.50 35,830 Dec. 1997 Stockholders...................... $2.00 144,000 Dec. 1997 Stockholder....................... $1.75 75,000 Mar. 2000 Stockholder....................... $3.50 10,000 Mar. 1999 --------- Subtotal: 1,136,797 ========= (iii) Other Warrants In addition, the Company has issued other warrants outstanding - totalling 14,184,000 which consists of the following: In November, 1994, the Company granted Rule 701 Warrants to purchase an aggregate of 2,080,000 shares of Common Stock to certain officers and directors. These Warrants are exercisable at $3.50 per share and, if not exercised, expire in September, 1999. From February through April 1995, the Company executed Bridge Loan Agreements and promissory notes with 17 accredited lenders totaling $1,500,000. These notes required interest at 8% per annum F-14 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 and were paid on the closing date of the IPO. Interest has been imputed at 12% and is recognized as interest expense and additional paid in capital in 1995 to reflect the issuance of additional warrants to reflect the reduction in interest. Such agreements also included various affirmative and negative covenants. As additional consideration, the lenders had options to purchase 1,000,000 bridge units issuable upon the effective date of the IPO at an exercise price of $.50 for a period of five years. Management believes these sales are a good measure of fair value because they represent the only notable third-party sales of Common Stock in 1994 and 1995, prior to the IPO. Such exercise price is estimated to be at fair market value at the date of issuance based on the then recent sales of securities to third-parties. Each bridge unit consists of one share of Common Stock and one Class A Redeemable Common Stock Purchase Warrant exercisable at $4.00 per share. 797,917 units were exercised in 1995 and 202,083 were exercised in 1996 at $.50 per Warrant. in May, 1995, the Company and certain officers, directors and shareholders entered into a standby finance agreement pursuant to which the parties agreed to provide an aggregate of $5,500,000 in financing to the Company during 1995 in the event that existing and additional financing was insufficient to cover the cash needs of the Company through December 31, 1995. In exchange, the Company issued warrants to purchase an aggregate of 2,750,000 shares of Common Stock at $1.75 per share to the parties. In September, 1995, the parties to this standby agreement agreed to extend their obligations through December 31, 1996. In June 1995, the Company entered into an agreement with The Sage Group whereby, in return for identifying certain distribution partners, The Sage Group will receive certain percentages of the proceeds from the first distribution agreement arising from such identification. In addition, the Company will pay to The Sage Group a monthly retainer and has given warrants to purchase 100,000 shares of Common Stock at an exercise price of $1.75 share. In May, 1996, additional warrants to purchase 140,000 shares of Common Stock were issued at an exercise price of $3.50. In connection with the IPO completed on November 7, 1995, the Company sold 5,313,000 units. Each unit consisted of one share of common stock and one Class A Redeemable Warrant exercisable at $4.00 per share. Also, as part of the underwriting agreement, the underwriter received warrants to purchase 462,000 shares of common stock at $5.775 per share as well as 462,000 Class A Redeemable Warrants to purchase common stock at $6.60 per share. These warrants expire five years from the date of the IPO. 1,877,000 warrants have been granted to other parties, stockholders and employees for services performed. These warrants are exercisable at rates of $2.50 to $4.00 per warrant. (iv) Subsidiary Warrants In May 1995, the officers and directors of BioAegean Corp. were elected and approved. The board of directors approved the issuance of 6,000,000 shares of Common Stock, of which 1,000,000 shares are to be offered for sale to certain investors at $1.00 per share. In addition, the directors approved options for directors and officers totaling 1,200,000 shares at an exercise price of $1.00. In consideration for licensing certain patents, the board authorized 1,000,000 shares of common stock to be issued to Hemispherx BioPharma, Inc., options for an additional 1,000,000 shares of common stock at the lesser F-15 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 of the initial public offering price of BioAgean Corp. or $5.00 per share and 10,000 shares of Preferred stock to Hemispherx BioPharma, Inc. Only the common stock shares of Hemispherx BioPharma, Inc have been issued as of December 31, 1995 and 1996. The Company has granted certain rights to the debtholders to have their securities registered under the Act. The Company believes the warrants have a value which is not material for purposes of the financial statements and accordingly, no value has been attributed to these warrants in the accompa- nying consolidated financial statements. (7) Series D Convertible Preferred Stock On July 3, 1996 the Company issued and sold 6,000 shares of Series D Convertible Preferred Stock ("the Preferred Stock") at $1,000 per share for an aggregate total of $6,000,000. The proceeds, net of issuance costs, realized by the Company were $5,395,885. In addition to the issuance of the Preferred Stock, the Company issued to the buyer Warrants ("the Warrants") to purchase 100,000 shares of Common Stock at the strike price of $4.00 per share. The Preferred Stock earns dividends at the rate of $50 per annum per share as declared by the Board of Directors of the Corporation. The dividends are cumulative and payable quarterly commencing October 1, 1996 in cash or common stock at the election of the Company. In October, 1996, the Preferred Shareholder converted 1,000 shares of Series D Convertible Preferred stock into 376,530 shares of common stock. On September 16, 1996 the Company's registration statement registering the common stock underlying the Preferred Stock and the Warrants was declared effective by the SEC. (8) Research, Consulting and Supply Agreements The Company has entered into various clinical research agreements for the purpose of undertaking clinical evaluations of the safety and efficacy of Ampligen. The Company's obligation under these agreements is primarily dependent on the number of actual patients enrolled in the study. During the years ending December 31, 1994, 1995 and 1996, the Company incurred approximately $247,000, $179,000 and $179,000 respectively, of research fees under these agreements. In August, 1988, the Company entered into a pharmaceutical use license agreement with Temple University (the Temple Agreement). In July, 1994, Temple terminated the Temple Agreement. In November, 1994, the Company filed suit against Temple in the Superior Court of the State of Delaware seeking a declaratory judgement that the agreement was unlawfully terminated by Temple and therefore remained in full force and effect. Temple filed a separate suit against the Company seeking a declaratory judgement that its agreement with the Company was properly terminated. These legal actions have now been settled. Under the settlement, the parties have entered into a new pharmaceuti- cal use license agreement (New Temple Agreement) that is equivalent in duration and scope to the previous license. Under the terms of the New Temple Agreement, Temple granted the Company an exclusive world-wide license for the term of the agreement for the commercial sale of Oragen products using patents and related technology held by Temple, which license is exclusive except to the extent F-16 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 Temple is required to grant a license to any govrenmental agency or non-profit organization as a condition of funding for research and development of the patents and technology licensed to the Company. (Note 14). The Company has entered into agreements for consulting services which are performed at certain institutions and by certain individuals. The Company's obligation to fund these agreements can generally be terminated after the initial funding period, which generally ranges from one to three years or on an as-needed monthly basis. During the years ending December 31, 1994, 1995 and 1996, the Company incurred approximately $130,000, $87,000, and $188,000 respectively, of consulting fees under these agreements. In 1987, the Company entered into an agreement (the "Supply Agreement") to purchase $2.7 million of compounds used in the manufacture of Ampligen which expired in December 1992. Pursuant to the terms of the Supply Agreement, the Company agreed to pay royalties of .5% of net sales, subject to certain minimum and maximum requirements, for 5 years to the supplier of raw materials for the manufacture of Ampligen. In September 1995, the Company entered into an agreement with Rivex Pharma Inc., ("Rivex"), pursuant to which Rivex will provide various services in connection with the marketing and exclusive distribution of Ampligen in Canada on an emergency drug release basis. Under the terms of this agreement, the Company will supply and Rivex will purchase as much Ampligen as necessary to satisfy Rivex's customers at a mutually agreed upon cost. In return, Rivex will retain the exclusive right to market and distribute Ampligen in Canada. (9) 401(K) Plan In December 1995, the Company established a defined contribution plan, effective January 1, 1995, the Hemispherx BioPharma Employees 401(K) Plan and Trust Agreement (the 401(K) Plan). All full time employees of the Company are eligible to participate in the 401(K) Plan following one year of employment. Subject to certain limitations imposed by federal tax laws, participants are eligible to contribute up to 15% of their salary (including bonuses and/or commissions) per annum. Participants' contributions to the 401(K) Plan may be matched by the Company at a rate determined annually by the Board of Directors. Each participant immediately vests in his or her deferred salary contributions, while Company contributions will vest over one year. In 1995 the Company provided matching contributions to each employee for up to 6% of annual pay or $25,500. The Company also absorbed the cost of employee contributions of $25,500. In 1996 the Company provided matching contributions to each employee for up to 6% of annual pay or $31,580. (10) Vendor Agreements On February 20, 1996, the Company entered into an agreement to amend the lease for its principal office. For a payment of $85,000 all outstanding rent and charges accrued through December 31, 1995 were forgiven by the landlord. The term of the lease was extended through April 30, 2000 with an average rent of $14,507 per month, plus applicable taxes and charges. Note 12, leases, reflects these new terms. As result of this settlement and the amended lease the Company recorded a $318,757 F-17 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 credit adjustment in earnings due to the reduction in accrued and deferred rent liabilities. The credit is reflected as a reduction of general and administrative expenses. (11) Royalties, License, and Employment Agreements The Company also has entered into a licensing agreement with a group of individuals and Hahnemann University relating to their contributions to the development of certain compounds, including Ampligen, and to obtain exclusive information and regulatory rights relating to these compounds. Under this agreement, the Company will pay 2% of net sales proceeds of Ampligen not to exceed an aggregate amount of $6 million per year through 2005. As described in Note 8, the Company has agreed to pay royalties under the Temple Agreement and to its supplier of raw materials. The Company has contractual agreements with four of its officers. The aggregate annual base compensation under these contractual agreements for 1994, 1995, 1996 is $576,000, $540,000 and $589,552 respectively. In addition, certain of these officers are entitled to receive performance bonuses of up to 25% of the annual base salary (in addition to the bonuses described below). Pursuant to the employment agreements, certain officers were granted options under the 1990 Stock Option Plan to purchase an aggregate of 82,942 shares of the Company's Common Stock at exercise prices ranging from $2.72-$4.34 and Rule 701 Warrants to purchase 2,000,000 shares of Common Stock at $3.50 per share. One of the employment agreements provides for bonuses based on gross proceeds received by the Company from any joint venture or corporate partnering agreement. In October 1994, the Company entered into a licensing agreement with Bioclones (Propriety) Limited (SAB/Bioclones) with respect to codevelopment of various RNA drugs, including Ampligen, for a period ending three years from the expiration of the last licensed patents. The licensing agreement provides SAB/Bioclones with an exclusive manufacturing and marketing license for certain southern hemisphere countries (including certain countries in South America, Africa and Australia) as well as the United Kingdom and Ireland (the licensed territory). In exchange for these marketing and manufacturing rights, the licensing agreement provides for: (a) a $3 million cash payment to the Company, all of which was recorded during the year ended December 31, 1995; (b) the formation and issuance to the Company of 24.9% of the capital stock of Ribotech, a company which developes and operates a new manufactur- ing facility by SAB/Bioclones, and (c) royalties of 6% to 8% of net sales of the licensed products in the licensed territories as defined, after the first $50 million of sales. SAB/Bioclones will be granted a right of first refusal to manufacture and supply to the Company licensed products for not less than one-third of its world-wide sales of Ampligen, excluding SAB/Bioclones-related sales. In addition, SAB/Bioclones will have the right of first refusal for oral vaccines in the licensed territory. Prepaid expenses and other current assets, as of December 31, 1996, includes a $47,370 receivable from Ribotech. In October 1994, the Board of Directors granted a director of the Company the right to receive 3% of gross proceeds of any licensing fees received by the Company pursuant to the SAB licensing agreement, a fee of .75% of gross proceeds in the event that SAB makes a tender offer for all or sub- stantially all of the Company's assets, including a merger, acquisition or related transaction, and a fee F-18 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 of 1% on all products manufactured by SAB. The Company may prepay in full its obligation to provide commissions within a ten year period. On December 5, 1995, the Company retained the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (Akin, Gump) to provide general legal counsel, advise and representation with respect to various United States regulatory agencies. Initially, Akin, Gump will provide representation before the Food and Drug Administration (FDA). In addition, the agreement allows for incentive payments for obtaining a letter from the FDA evidencing Ampligen's approvability for HIV disease treatment. (12) Leases The Company has several noncancelable operating leases for the space in which its principal offices are located and certain office equipment. See Note 10 above. Future minimum lease payments under noncancelable operating leases are as follows: Year ending Operating December 31, leases ------------ ------ 1997................................................... $ 271,793 1998................................................... 280,413 1999................................................... 292,146 2000................................................... 91,517 ---------- Total minimum lease payments........................ $ 935,869 ========== Rent expense charged to operations for the years ended December 31, 1994, 1995 and 1996 amounted to approximately $173,000, $289,000 and $286,000 respectively. The Company recognized rent expense on a straight-line basis over the lease term, and the difference between rent expense on a straight-line basis and the base rental was deferred and included in accrued expenses at December 31, 1995. (13) Income Taxes At December 31, 1996, the Company had available net operating loss carryforwards of approximately $44,600,000 for Federal and state income tax which expire over various years through 2011. In addition, for Federal income tax purposes, the Company has approximately $6,900 of unused investment and job tax credits available to offset future taxes, if any, expiring 1998 through 1999. The expiration dates of the net operating loss carryforwards are as follows: Expiration Tax loss date carryforwards ---- ------------- 1999....................................................... $ 130,974 2003....................................................... 1,773,967 2004....................................................... 5,402,521 2005....................................................... 3,534,484 F-19 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 2006........................................................ 8,749,039 Thereafter.................................................. 24,982,813 ----------- $44,573,798 =========== If certain substantial changes in ownership should occur there would be an annual limitation on the amount of tax attribute carryforwards which can be utilized in the future. The Company has provided a valuation allowance against all of its deferred tax assets. (14) Contingencies The Company was a defendant in a lawsuit instituted in 1991 by participants in a double-blind placebo-controlled clinical trial of Ampligen therapy for ME/CFS. The plaintiffs alleged that the Company or its alleged agents promised them that they would receive Ampligen after the placebo-controlled study at no cost for periods ranging from "until marketable" to "for life." Plaintiffs sought compensatory and punitive damages. The court granted the Company's motions for summary judgment upon all claims alleged by the plaintiffs in this case. The plaintiffs have appealed from these orders before the United States Court of Appeals for the Ninth Circuit. In January 1996, the Court of Appeals denied their appeal and sustained the Company's position. On the basis of the Court of Appeals favorable decision, the Company believes the lawsuit will not have a material effect on the Company. In February 1991, a university advised the Company of its position that employees of the university were the inventors of an issued U.S. patent regarding the use of Ampligen in combination with various other agents (including AZT) for the treatment of HIV infection. As issued, this patent names the Company's Chief Executive Officer as sole inventor and the Company as sole assignee. The university has demanded that the patent be reissued naming the university's employees as inventors and the university as assignee. The Company has refused to take such action. No formal claim has been filed by the university. If such claim were filed and if such claim were found to have merit, the loss of the patent at issue would not have a materially adverse effect on the Company's long-range business since the university would only be able to limit and/or prevent the Company's use of Ampligen in combina- tions with AZT in the treatment of HIV. In August 1988, the Company entered into a pharmaceutical use license agreement with Temple Universuty. Under the terms of the agreement, Temple granted the Company an exclisive world-wide license for the commercial sale of Oragen products using patents and related technology held by Temple until the last to expire of any releted petents then or thereafter issued. In July 1994, Temple treminated the agreement. In November,1998, the Company filed suit against Temple in the Superior Court of the state of Delaware seeking a declaratory judgement that the agreement was unlawfully terminated by temple and therefore remained in full force and effect. Temple filed a separate suit against the Company seeking a declaratory judgement that its agreement with the Company was properly terminated. In December, 1996, these legal actions were terminated. Under the settlement, the parties have entered into a new pharmaceutical use license agreement that is equivalent to the original agreement in duration and scope. F-20 HEMISPHERx BIOPHARMA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1995 and 1996 In March 1995, the Company instituted a declaratory judgment action against the February 1992 noteholder of a $5 million convertible note and a second defendant in the United State District Court for the Eastern District of Pennsylvania ("the Pennsylvania action") to declare as void, set aside, and cancel the February 1992 convertible note between the Company and the noteholder ("the Note"). In addition, the noteholder instituted suit against the Company on the Note in the Circuit Court of the 15th Judicial District in and for Palm Beach County, Florida, seeking judgment on the note, plus attorneys fees, costs and expenses; in August 1995, this action was stayed by the Florida Court pending the outcome of the Pennsylvania action. The noteholder also filed a motion for a preliminary injunction in the Pennsylvania court to enjoin the Company from disbursing the proceeds of a public offering in the amount of $5.8 million, which motion was granted in November, 1995. On February 15, 1996, the Company reached an agreement to settle this matter. Terms and conditions of the settlement include payment of $6,450,000 to the noteholder to cover the note balance and legal expenses. The noteholder and related parties are to maintain certain Warrants that were granted prior to the lawsuit. Other Warrants granted to the noteholder in the note restructuring in 1994 were relinquished. The funds under this settlement were paid on March 21, 1996 and charged to the note payable, accrued interest and accrued professional fees. Mutual releases were executed which completed the settlement of the litigation. The Company is subject to claims and legal actions that arise in the ordinary course of their business. Management believes that the ultimate liability, if any, with respect to these claims and legal actions will not have a material effect on the financial position or results of operations of the Company. F-21 ================================================================================ No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or the Representative. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof. This Prospectus does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. TABLE OF CONTENTS Page ---- Additional Information...................................................3, 91 Prospectus Summary...........................................................4 Risk Factors.................................................................9 Selected Financial Data.....................................................22 Dividends...................................................................25 Management's Discussion and Analysis of Financial Condition........................................................26 Business....................................................................31 Management..................................................................60 Principal Shareholders......................................................73 Resales by Selling Securityholders..........................................76 Certain Transactions........................................................79 Description of Securities...................................................89 Shares Eligible for Future Sale.............................................90 Legal Matters...............................................................91 Experts.....................................................................91 Financial Statements.......................................................F-1 -------------------- Until , 1997 all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ HEMISPHERx BIOPHARMA, INC. 310,544 WARRANTS AND STOCK OPTIONS 640,475 SHARES OF COMMON STOCK UNDERLYING WARRANTS 2,500,000 SHARES OF COMMON STOCK UNDERLYING SERIES E PREFERRED STOCK 6,213,000 SHARES OF COMMON STOCK UNDERLYING CLASS A WARRANTS 462,000 UNITS UNDERLYING A UNIT PURCHASE OPTION ("OPTION") 462,000 SHARES OF COMMON STOCK UNDERLYING UNITS INCLUDED IN THE OPTION 462,000 CLASS A WARRANTS UNDERLYING UNITS INCLUDED IN OPTION 462,000 SHARES OF COMMON STOCK UNDERLYING CLASS A WARRANTS INCLUDED IN THE OPTION --------------- PROSPECTUS --------------- April __, 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. SEC Registration Fee $ 2,769 Printing $ 3,000* Legal Fees and Expenses $ 15,000 Accounting Fees and Expenses $ 5,000* Miscellaneous Expenses (including travel and promotional expenses) $ 1,000* -------- TOTAL $ 26,769* ======== *Estimated The Selling Security Holders will not pay any portion of the foregoing expenses of issuance and distribution. Item 14 Indemnification of Directors and Officers. The Restated Certificate of Incorporation of the Company provides as follows: No person who is or was a director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for the breach of any fiduciary duty as a director, unless, and only to the extent that, such director is liable (i) for any breach of the director's duty of loyalty to the Corporation or its stockholder, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction form which the director derived an improper personal benefit. Section 145 of the Delaware General Corporation Law gives Delaware corporations the power to indemnify each of the Company's present and former officers and directors under certain circumstances, if such person acted in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the corporation. The Company's Restated Certificate of Incorporation generally requires the Company to indemnify directors and officers to the fullest extent permissible under Delaware law. The Company has entered into indemnification agreements with its current directors and certain of its executive officers. These agreements have the practical effect in certain cases of eliminating the ability of stockholders to collect monetary damages from such individuals. Item 15. Recent Sales of Unregistered Securities. (a) The following information sets forth certain information with respect to the sale of securities by the Company since December 31, 1992. All references to numbers of II-1 shares in the following discussion have been adjusted to give effect to the Pre-Public Offering Transactions. (1) From January 1, 1990 through the filing date of this Registration Statement, the Company granted options under the 1990 Stock Option Plan to purchase an aggregate of 360,232 shares of Common Stock at a weighted average price of $3.39 per share and issued 8,028 shares of Common Stock upon the exercise of options granted under the 1990 Stock Option Plan for an aggregate purchase price of $11,479 in cash. (2) In February 1993, the Company issued and sold a convertible promissory note in the aggregate principal amount of $480,000, and warrants to purchase an aggregate of 7,372 shares of Common Stock or 8,000 shares of Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per share, respectively, or (ii) the per share price of Common Stock in the initial public offering to Lincoln Trust Company, custodian FBO Gerald Tsai, Jr. (3) In March through May 1993, the Company issued and sold demand promissory notes in the aggregate principal amount of $830,000 for an aggregate of $830,000 to Maryann Charlap Azzato, William A. Carter, Charles L. Moore, Michael C. Burrows, and Michael Dubilier. In April, William A. Carter was repaid $97,566 of his $100,000 Demand Note. (4) In May, June and July 1993, the Company issued and sold convertible notes in the aggregate principal amount of $600,000, and warrants to purchase an aggregate of 9,216 shares of Common Stock or 10,000 shares of Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per share, respectively, of (ii) the per share price of Common Stock in the initial public offering to Julian and Eunice Cohen Investments Limited Partnership, Sidney Stoneman, Frank B. Carr, Keys foundation, Myron Cherry and Lloyd DeVos. (5) In June 1993, the Company issued convertible promissory notes in the aggregate principal amount of 632,434, and warrants to purchase an aggregate of 9,216 shares of Common Stock or 10,000 shares of Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per share, respectively, or (ii) the per share price of Common Stock in the initial public offering to Maryann Charlap Azzato, William A. Carter, Michael C. Burrows and Michael Dubilier in exchange for and forgiveness of $632,434 of the March through May 1993 demand promissory notes. (6) In June 1993, the Company issued and sold an aggregate of 16,667 shares of Series C Preferred Stock at $12,00 per share, for an aggregate of $200,004, to Canaan Venture and Canaan Offshore. (7) In August through December 1993, the Company issued and sold convertible promissory notes in the aggregate principal amount of $1,000,000 and warrants to purchase an aggregate of 16,900 shares of Common Stock or 18,337 shares of Series C Preferred Stock at the lower of (i) $13.02 or $12.00 per share, respectively, or (ii) the per share price of Common Stock in the initial public offering, for an aggregate of II-2 $1,100,000 to Maryann Charlap Azzato, Michael Dubilier, Keys Foundation and William A. Carter. (8) In October 1993, the Company issued and sold an aggregate of 25,000 shares of Series C Preferred Stock at $12.00 per share, for an aggregate of $300,000 to Canaan Venture and Canaan Offshore. (9) In December 1993, the Company issued an aggregate of 433,343 shares of Series C Preferred Stock at $5.00 per share for an aggregate of $2,166,719 in settlement of $632,434 in principal plus unpaid interest of the June 1993, convertible promissory notes held by Maryann Charlap Azzato, William A. Carter, Michael C. Burrows and Michael Dubilier, $400,000 in principal plus unpaid interest of the May, June and July 1993 convertible promissory notes held by Julian and Eunice Cohen Investments Limited Partnership, Sidney Stoneman, Frank B. Carr and Keys Foundation, $1,082,000 in principal plus unpaid interests on the August, September, October, November and December 1993 convertible promissory notes held by Maryann Charlap Azzato, Michael Dubilier, Keys Foundation and William A. Carter. The above conversion includes 10,457 shares of Series C Preferred Stock in satisfaction of $52,285 of accrued unpaid interest. (10) In December 1993, the Company agreed to issue 42,502 shares of Series C Preferred Stock issued at $5.00 per share for an aggregate amount of $212,510 to certain vendors and suppliers in payment of some or all indebtedness due them. These suppliers include Broadgate and Associates, Richard Piani, Austin Darragh and Paul Actor. (11) In January 1994, William A. Carter sold 122,880 shares of Common Stock at $3.26 per share to Canaan Ventures and Canaan Offshore Ventures, Keys Foundation, FLF Associates, Michael Dubilier and Coughlin. (12) In January 1994, the Company executed an agreement to issue and sell 100,000 shares of Series C Preferred Stock at $5.00 per share to William A. Carter and Maryann Charlap Azzato purchased 3,600 shares of Series C Preferred Stock at $5.00 per share pursuant to a standby financing commitment. (13) As of March 31, 1994, the Company entered into an agreement with certain convertible promissory note holders to convert upon the effectiveness of the initial public offering an aggregate of $2,400,000 debt principal plus accrued but unpaid interest into Series C Preferred Stock at $5.00 per share for an aggregate total of 519,224 shares. This debt consisted of (i) $1,920,000 in principal plus unpaid interest on the December 1992 convertible promissory notes held by FLF Associates and Gerald Tsai, Jr.; and (ii) $480,000 in principal plus unpaid interest on the February 1993 convertible promissory note held by Lincoln Trust company, Custodian FBO Gerald Tsai. In February 1995, the terms of this transaction were restructured, and a settlement agreement was entered into by the parties. See "Risk Factors - Legal Proceedings," "Risk Factors - No Assurance of Certain Debt Conversions" and "Certain Transactions." II-3 (14) On February 26, 1994, the Company was in default with respect to the principal payment and quarterly interest payments in arrears under the February 26, 1992, $5 million convertible note. An amendment to the terms of the note has been executed to waive the events of default as follows: (1) convert $2 million in principal into 1,131,290 shares of Series B Preferred stock upon the consummation of the contemplated initial public offering on or before February 26, 1995 and full repayment of the remaining principal balance of the note, together with any accrued unpaid interest thereon (ii) unpaid interest after June 30, 1994 shall be paid in the form of 60,284 shares of Series B Preferred stock on a quarterly basis if the contemplated initial public offering has not closed and the Company receives at least $1,000,000 under the Bridge Financing (iii) the due date of the remaining principal balance and accrued unpaid interest is to be extended to February 26, 1995 or the completion of an initial public offering, whichever is earlier (iv) increase the warrants to the warrant holders to 325,523 shares of the Company's Series B Preferred Stock or 300,000 under the Bridge Financing (iii) the due date of the remaining principal balance and accrued unpaid interest is to be extended to February 26, 1995 or the completion shares of the Company's Series B Preferred Stock or 300,000 shares of the Company's Common Stock at an exercise price of $1.84 and $2.00, respectively, with an expiration date of vie years following the effective date of an initial public offering (v) require that 20 percent of certain gross proceeds, other than Bridge Financing and sale of Series C Preferred Stock be used to repay the note (vi) issue additional warrants to purchase in aggregate 130,210 shares of the Company's Series B Preferred Stock or 120,000 shares of the Company's Common Stock at an exercise price of $1.84 and $2.00, respectively with an expiration date of five years following the effective date of an initial public offering (vii) required the Company to register 20 percent of the original conversion shares in a registration statement with gross proceeds to the Company of at least $10,000,000 at the Company's expense, limited to 111,250 shares per quarter during the six month period following the lock-up period as defined. (15) In April 1994, the Company executed an agreement to issue and sell 40,000 shares of Series C Preferred Stock at a price of $5.00 per share to Maryann Charlap Azzato pursuant to a private placement of the Company's securities. As of March 31, 1995, Ms. Azzato has purchased 30,000 shares of Series C Preferred Stock at a price of $5.00 per share. (16) In April 1994 Maryann Charlap Azzato sold 46,080 shares of Common Stock at $3.26 per share to Four Partners Associates, Gerald Tsai and Keys Foundation. (17) In April 1994, Maryann Charlap Azzato, guaranteed payment of two promissory notes in the aggregate amount of $76,000 payable by the Company representing payments due in connection with the Temple Agreement (the "Temple Notes"). In return for the guarantee, HEM assigned its rights, patents and related technology in its Oragen and Diagen products to Ms. Charlap Azzato, which rights will revert to the Company upon repayment of the principal on the Temple Notes, 12% interest, and Ms. Charlap Azzati's fees and expenses. The Company also received a right of first refusal with respect to the sales or assignment by Ms. Charlap Azzato of this technology. In May and June 1994, Temple Agreement and nonpayment of certain II-4 invoices in the approximate amount of $1,500. In July 1994, Temple notified the Company that it considered the Temple Agreement terminated. (18) In May 1994, the Company executed a loan agreement with Bridge Ventures, Inc. ("Bridge Ventures") in the amount of $100,000. In consideration for this unsecured loan, the Company issued two-year options to purchase 92,160 shares of the Company's Common Stock at $2.72 per share. The loan term is 60 days or repayment from the proceeds of the next financing in excess of $500,000. The Company has granted certain rights to the Company optionholder to have the options registered under the Securities Act. In August 1994, Bridge Ventures converted its note into 200,000 shares of Common Stock and received a warrant to purchase 200,000 shares of Common Stock of the Company at $3.50 per share. In addition, the Company converted a $50,000 consulting fee payable to Bridge Ventures into 100,000 shares of Common Stock. (19) From July to November 1994, the Company sold 2,050,000 shares of Common Stock for an aggregate consideration of $1,025,000 to 26 accredited investors. In conjunction with the financing, the Company agreed to collateralize various patents until the earlier of an executed initial public stock offering or the consummation of corporate alliances, or licensing arrangements which provide significant operating capital or clinical development funding to the Company. In connection with the financing, the Company issued warrants to purchase 300,000 shares of Common Stock at an exercise price of $3.50 per share to Stephen J. Drescher in November 1994 in exchange for general consulting services. (20) In September 1994, Maryann Charlap Azzato, entered into an agreement with Lloyd DeVos, a stockholder, former director and holder of a note in the principal amount of $100,000 (the "DeVos Note") in order to settle a lawsuit filed against the Company and Dr. Carter by Mr. DeVos in the United States District Court for the Southern District of New York alleging breach of contract, conversion and certain violations of the federal securities laws in connection with issuance of Mr. DeVos' note. Pursuant to the settlement agreement, principal and interest on the DeVos Note were repaid by Ms. Azzato as well as certain expenses incurred by Mr. DeVos in the approximate amount of $2,600 and 1,536 shares of Common Stock of the Company were transferred to Mr. DeVos in exchange for the assignment to Ms. Azzato by Mr. DeVos of his right to repayment by the Company of the DeVos Note and warrant to purchase 1,667 shares of Series C Preferred Stock. In addition, certain options to purchase 6,912 shares of Common Stock of the Company previously issued to Mr. DeVos were delivered to Mr. DeVos. In exchange for the above agreement, Mr. DeVos, the Company and Dr. Carter executed mutual releases of all claims and Mr. DeVos dismissed the suit. (21) In October 1994 in connection with the execution of the SAB Agreement, the Company granted Cedric C. Philipp, a Director of the Company, an option to purchase 20,000 shares of Common Stock at a price of $3.50 per share. (22) In October 1994, the Company received loans in the aggregate amount of $750,000 from Jordan Belfort and the Belfort Family Trust. The loans were repaid by the Company without interest from the proceeds of the Bridge Loans. II-5 (23) In October and November 1994, the Company granted Rule 701 Warrants to purchase 20,000 shares of Common Stock at $3.50 per share to Maryann Charlap Azzato, E. Gerald Kay, Cedric C. Philipp and Peter Rodino III. IN addition, the Company granted the following Rule 701 Warrants to William A Carter, 200,000 Rule 701 Warrants to Sharon Will; and 400,000 Rule 701 Warrants to Harris Freedman. (24) In November 1994, the Company restructured a $100,000 note issued to Myron Cherry (the "Cherry Note"), a stockholder and former director of the Company pursuant to which the repayment date of the principal amount of the Cherry Note was extended to the closing date of this Public Offering and the accrued but unpaid interest subsequent to September 30, 1993 shall be converted into Common Stock of the Company at a price of $5.43 per share. In the event that this Public Offering is not completed by February 28, 1995, the principal amount will be repaid by the Company of Bridge Ventures Inc. by March 6, 1995. In addition, the Company issued to Mr. Cherry 5,000 immediately exercisable warrants with an exercise price of $3.50 per share and Bridge Ventures agreed that the unpaid principal on the Cherry Note would be collateralized by the Company's patents on the same terms as the Bridge Financing arranged by Bridge Ventures. Harris Freedman, a Vice President of the Company, is an officer of Bridge Ventures. In March 1995, the Company and Myron Cherry agreed to extend until March 31, 1995 the maturity date of the $100,000 note issued to him. In exchange for the extension of the maturity date, the Company issued warrants to purchase 5,000 shares of Common Stock at $3.50 per share to Mr. Cherry. In June 1995, the Company repaid the principal amount due on the Cherry Note; in July 1995, the Company repaid the accrued interest due on the Cherry Note. (25) Between February and April 1995, the Company issued Bridge Notes in the aggregate principal amount of $1,500,000 to 17 accredited investors. The Bridge Notes bear interest at 8% per year and are due the earlier of the closing of this Public Offering August 1, 1996. In consideration for making the loans, the Company granted to the holders of the Bridge Notes Bridgeholder Options to purchase an aggregate of 1,000,000 Bridge Units. Each Bridge Unit contains one share of Common Stock, on Class A Redeemable Warrant and one Class B Redeemable Warrant. The Bridgeholder Options are immediately exercisable upon the effectiveness of this Public Offering and remain exercisable for five years thereafter. (26) In February 1995, the Company entered a settlement agreement with FLF Associates, Gerald Tsai and Lincoln Trust (the "Tisch/Tsai Entities") to restructure the December 1992 and February 1993 promissory notes in the aggregate principal amount of $2,400,000 and settle certain threatened claims made by the Tisch/Tsai Entities against the Company. This debt restructuring consisted of (i) the repayment by the Company of $1,200,000 in principal, (ii) the issuance of replacement notes in the aggregate principal amount of $600,000 to the Tisch/Tsai Entities which notes are due on the earlier of the closing of this Public Offering or May 28, 1996 and bear interest at the rate of 8% per annum, which interest is payable in quarterly installments from an interest reserve established by the Company, (iii) the conversion of $600,000 of principal into 344,828 shares of Series C Preferred Stock at the rate of $1.74 per share, (iv) the amendment and restatement of certain warrants issued in connection with the original II-6 notes in order to increase the number of shares of stock issuable thereunder by 32,000 shares to provide for warrants to purchase a total of 144,000 shares of Common Stock at an exercise price of $4.00 and $2.00 per share, respectively, which warrants are exercisable until December 31, 1997, and (v) the release by all parties of any claims. The replacement notes were secured by a pledge by Dr. William A. Carter of 112,925 shares of Series C Preferred Stock and 240,756 shares of Common Stock. The Company may have been in default of these notes. See "Risk Factors--Possible Default on Certain Debt." (27) In March 1995, the Company issued a note in the Principal amount of $200,000 bearing interest at the rate of 12% per year to Gerald A. Brauser, (the "Original Brauser Note"). The Original Brauser Note also provided for the issuance of warrants to purchase 50,000 shares of the Company's Common Stock at $1.75 per share. In May 1995, the Company restructured the Original Brauser Note in exchange for the Company issuing to MR. Brauser (i) a promissory note (the "New Brauser Note"), collateralized by the Company's patent estate, in the principal amount of $100,000 bearing interest at a rate of 12% per year, (ii) a warrant to purchase 25,000 shares of Common Stock at a price of $1.75 per share, (iii) 100,000 shares of Common Stock at $.50 per share, and (iv) a Bridge Loan in the amount of $50,000 as well as a Bridgeholder Option to purchase 33,340 Bridge Units. The New Brauser Note was originally due on the earlier of June 30, 1995 or the Company's receipt of a certain payment from SAB/Bioclones but has been amended to extend the date on which repayment is due to the earlier of November 2, 1995 or the closing of this Public Offering. (28) In May 1995, the Company and certain officers, directors and shareholders entered into a Standby Financing Agreement pursuant to which the parties agreed to provide an aggregate of $5,500,000 in financing to the Company during 1995 in the event that existing and additional financing is insufficient to cover the cash needs of the Company through December 31, 1995. In exchange for entering into the Standby Financing Agreement, the Company issued warrants to purchase an aggregate of 2,750,000 shares of Common Stock at $1.75 per share to the parties. In September 1995, the parties to the 1995 Standby Financing Agreement, including Dr. Carter and Mr. Kay, agreed to extend their obligations through December 31, 1996. (29) In June 1995, the Company entered into an agreement with the Sage Group pursuant to which the Sage Group agreed to identify distribution partners for the Company. In connection with this agreement, the Company agreed to issue warrants to purchase 100,000 shares of Common Stock exercisable at $1.75 per share under certain conditions. (30) In January 1996, the Company entered into an agreement with The Research Works ("RW"), a market research firm, in which RW agreed to perform certain analytical services and provide four market reports. In exchange, the Company granted 60,000 warrants exercisable at $4.00 per share. II-7 (31) In January 1996, the Company entered into an agreement with Michael Burrows pursuant to which Burrows agreed to certain consulting duties. In exchange, the Company granted 250,000 warrants to purchase Common Stock exercisable at $3.50 per share. (32) In March 1996, the Company granted certain employees an aggregate of 100,000 warrants to purchase Common Stock at $3.50 per share. (33) In May 1996, the Company entered into two agreements with the Sage Group, Inc. One agreement stipulates that the Sage Group will identify distribution partners in foreign countries. The second agreement provides for the services of Douglas Hulse as interim Chief Operating Officer for a period of 18 months. The Company granted 140,000 warrants and 250,000 warrants, respectively, at an exercise price of $3.50 per share. (34) In July 1996, the Company issued 6,000 shares of its Series D Preferred Stock to GFL Advantage Fund Limited, a foreign investment fund, at a price of $1,000 per share. The Preferred Stock is convertible into Common Stock. (35) In June 1996, the Company issued 480,000 warrants to purchase Common Stock at an exercise price of $4.00 per share, to The Olmstead Group, Fred Craves and Francis F. Bodkin, Jr. for their efforts in placing the Series D Preferred Stock. (36) In August 1996, the Company issued to Shamrock Partners, Ltd., as compensation for financial consulting services, an option to purchase 600,000 of Common Stock during the five year period commencing August 15, 1996 at an exercise price of $2.50 per share. (37) In March 1997, the Company issued 5,000 shares of its Series E Preferred at a purchase price of $1,000 per share. The proceeds from the sale were used to retire the Company's outstanding Series D Preferred Stock. (b) No underwriters were engaged in connection with the sales of securities described in Item 15(a). The issuances of securities set forth in Item 15(a) were deemed exempt from registration under the Securities Act in reliance upon Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder as transactions by an issuer not involving a public offering. The purchasers of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with the Company or otherwise, to information about the Registrant. II-8 Item 16. Exhibits and Financial Statement Schedule (a) The following exhibits are filed herewith: Exhibit No. Description ----------- ----------- (1)1.1 Form of Underwriting Agreement (1)1.2 Form of Selected Dealer Agreement (1)1.3 Form of Agreement Among Underwriters (1)3.1 Amended and Restated Certificate of Incorporation of Registrant, as amended, along with Certificates of Designations, Rights and Preferences of Series A1, A2, B and C Preferred Stock, as amended (1)3.2 By-laws of Registrant, as amended (2)3.3 Certificate of Designations of Series D Preferred Stock (2)3.4 Certificate of Correction to Certificate of Designations of Series D Preferred Stock 3.5 Certificate of Designations of Series E Preferred Stock (1)4.1 Specimen certificate representing Registrant's Common Stock (1)4.2 Form of Class A Redeemable Warrant Certificate (1)4.3 Form of Underwriter's Unit Option Purchase Agreement (1)4.4 Form of Class A Redeemable Warrant Agreement with Continental Stock Transfer and Trust Company 5.1 Opinion of Silverman, Collura & Chernis, P.C. with respect to legality of the securities of the Registrant being registered (1)10.1 Registration Rights Agreement, dated as of May 9, 1989 (1)10.2 Subordination Agreement, dated as of September 18, 1992 (1)10.3 Series A1 and Series A2 Preferred Stock Purchase Agreement, dated as of January 22, 1991 II-9 (1)10.4 Sixth Amendment Agreement, dates as of March 31, 1994, amending the Series A1 and Series A2 Preferred Stock Purchase Agreement (1)10.5 Seventh Amendment Agreement, dated as of January 1, 1995, amending the Series A1 and Series A2 Preferred Stock Purchase Agreement (1)10.6 Form of Series C Preferred Stock Subscription Agreement, dated as of June 22, 1993 (1)10.7 Form of Series C Debt Subscription Agreement, dates as of June 30, 1993 (1)10.8 Form of Note issued with respect to Series C Debt Subscription Agreement, dated as of June 30, 1993 (1)10.9 Form of Warrant issued with respect to Series C Debt Subscription Agreement, dated as of June 30, 1993 (1)10.10 Cohn Restructuring Agreement, dated as of March 31, 1994 (1)10.11 Form of Warrant issued with respect to Cohn Restructuring Agreement, dated as of March 31, 1994 (1)10.12 Note issued with respect to Cohn Restructuring Agreement, dated as of March 31, 1994 (1)10.13 Letter Agreement, dated April 14, 1994 between the Registrant and Maryann Charlap and Promissory Notes (1)10.14 Letter Agreement, dated July 13, 1994 between Bridge Ventures, Inc. and the Registrant (1)10.15 Letter Agreement dated September 20, 1994 between Maryann Charlap and Lloyd DeVos (1)10.16 Letter Agreement, dated November 1, 1994 among the Registrant, Bridge Ventures, Inc. and Myron Cherry (1)10.17 Form of Bridge Loan Agreement and Promissory Note (1)10.18 [Intentionally left blank] (1)10.19 Form of Registration Rights Agreement issued pursuant to 1994 Common Stock Financing Subscription Agreement (1)10.20 Form of Proxy issued pursuant to 1994 Common Stock Financing Subscription Agreement II-10 (1)10.21 Standby Financing Agreement, dated June 2, 1995, as amended September 20, 1995 (1)10.22 Tisch/Tsai Entities Stock Pledge Agreement, dated February 28, 1995 (1)10.23 Tisch/Tsai Entities Settlement Agreement, dated February 28, 1995 (1)10.24 Form of Promissory Note with Tisch/Tsai Entities (1)10.25 Form of Warrant with Tisch/Tsai Entities (1)10.26 Letter Agreement, dated May 4, 12995 between the Registrant and Gerald Brauser (1)10.27 Brauser Note, dated May 2, 1995 (1)10.28 1990 Stock Option Plan (1)10.29 1992 Stock Option Plan (1)10.30 1993 Employee Stock Purchase Plan (1)10.31 Form of Confidentiality, Invention and Non-Compete Agreement (1)10.32 Form of Clinical Research Agreement (1)10.33 Form of Collaboration Agreement (1)10.34 Employment Agreement by and between the Registrant and John R. Rapoza, dated May 18, 1992 (1)10.35 Employment Agreement by and between the Registrant and James R. Owen, dated September 21, 1992 (1)10.36 Amended and Restated Employment Agreement by and between the Registrant and Dr. William A. Cater, dated as of July 1, 1993 (1)10.37 Employment Agreement by and between Registrant and Harris Freedman, dated August 1, 1994 (1)10.38 Employment Agreement by and between the Registrant and Sharon Will, dated August 1 1994 (1)10.39 License Agreement by and between the Registrant and the Johns Hopkins University, dated December 31, 1980 II-11 (1)10.40 Technology Transfer, Paten License and Supply Agreement by and between the Registrant, Pharmacia LKB Biotechnology Inc., Pharmacio P-L Biochemicals Inc. and E.I. du Pont de Nemours and Company, dated November 24, 1987 (1)10.41 Pharmaceutical Use Agreement, by and between the Registrant and Temple University, dated August 3, 1988 (1)10.42 Assignment and Research Support Agreement by and between the Registrant, Hahnemann University and Dr. David Strayer, Dr. Isadore Brodsky and Dr. David Gillespie, dated June 30, 1989 (1)10.43 Lease Agreement between the Registrant and Red Gate III Limited Partnership, dated November 1, 1989, relating to the Registrant's Rockville, Maryland facility (1)10.44 Fee Agreement between the Registrant and Choate, Hall & Stewart, dated January 27, 1993 (1)10.45 Settlement and Release Agreement between the Registrant and Lloyd DeVos, dated August 18, 1994 (1)10.46 Agreement between the Registrant and Bioclones (Proprietary) Limited (1)10.47 Licensing Agreement with Core BioTech Corp. (1)10.48 Licensing Agreement with BioPro Corp. (1)10.49 Licensing Agreement with BioAegean Corp. (1)10.50 Letter Agreement, dated may 12, 1992, between the Registrant and Dr. Werner E.G. Muller (1)10.51 Amendment, dated August 3, 1995, to Agreement between the Registrant and Bioclones (Proprietary) Limited (contained in Exhibit 10.46) (1)10.52 Agreement, dated July 16, 1995, between the Registrant, Vernacular Communications, Inc. Gerald Souham, Mitchell L. Reisman, Craig S. O'Keefe and Robert C. Conaboy (1)10.53 Agreement, dated June 27, 1995, between the Registrant and The Sage Group (1)10.54 Form of Indemnification Agreement (1)10.55 Agreement, dated September 13, 1995, between the Registrant and River Pharma Inc. II-12 (2)10.56 Series D Preferred Stock Subscription Agreement, dated June 28, 1996 (2)10.57 Series D Preferred Stock Registration Rights Agreement, dated June 28, 1996 (2)10.58 GFL Advantage Fund Limited Common Stock Purchase Warrant, dated June 28, 1996 10.59 Form of Series E Preferred Stock Registration Rights Agreement (1)11 Calculation of Earnings Per Share (1)14.1 Material Foreign Patents (1)21 Subsidiaries of the Registrant 23.1 Consent of Silverman, Collura & Chernis, P.C. (included in Exhibit 5.1) 23.2 Consent of KMPG Peat Marwick LLP (1) Incorporated by reference from Registration Statement on Form S-1 (Registration No. 33-93314) filed by the Company with the Securities and Exchange Commission. (2) Incorporated by reference from Registration Statement on Form S-1 (Registration No. 333-8941) filed by the Company with the Securities and Exchange Commission. b. Financial Statement Schedules. All schedules are omitted from this Registration Statement because they are not required or the required information is included in the Consolidated Financial Statement or the Notes thereto. Item 17. Undertakings. (a) Rule 415 Offerings. The undersigned issuer hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; II-13 (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Includes any additional or changed material information on the plan of distribution. provided, however, the paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the Registration Statement is on Form S-3 or Form S-8, and the information required in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Registration Statement. (2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (b) Request for acceleration of effective date. (1) Insofar as indemnification for liabilities arising under the Securities Act, may be permitted to directors, officers and controlling persons of the small business issuer pursuant to the foregoing provisions, or otherwise, the issuer has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the issuer of expenses incurred or paid by a director, officer or controlling person of the issuer in the successful defense of any action, suit or proceedings) is asserted by such director, officer or controlling person in connection with the securities being registered, the issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such court. (2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-14 SIGNATURES In accordance with the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorized this registration statement to be signed on its behalf by the undersigned, in the City of Philadelphia, State of Pennsylvania, on April 10, 1997. HEMISPHERx BIOPHARMA, INC. By: /s/ William A. Carter -------------------------------- William A. Carter, M.D., CEO In accordance with the requirements of the Securities Act, this Registration statement was signed by the following persons in the capacities and on the dates stated. Signature Title Date --------- ----- ---- /s/ William A. Carter Principal Executive Officer April 10, 1997 - ------------------------------ and Chairman of the Board William A. Carter, M.D. and as Power of Attorney for Members of the Board /s/ Robert E. Peterson - ------------------------------ Principal Financial Officer April 10, 1997 Robert E. Peterson and Principal Accounting Officer /s/ Cedric C. Philipp - ------------------------------ Special Advisor to the Board April 11, 1997 Cedric C. Philipp Associate Secretary and Director II-15 /s/ Peter W. Rodino III - ------------------------------ Secretary and Director April 11, 1997 Peter W. Rodino III - ------------------------------ Director Richard C. Piani II-16 EX-3.5 2 CERTIFICATE OF POWERS CERTIFICATE OF POWERS, DESIGNATIONS, PREFERENCES AND RIGHTS OF THE SERIES OF THE PREFERRED STOCK OF HEMISPHERx BIOPHARMA, INC. To Be Designated Series E Preferred Stock Hemispherx Biopharma, Inc., a Delaware corporation (the "Company"), in accordance Section 103 of the General Corporation Law of the State of Delaware ("DGCL"), by its President, does hereby certify that on January 31, 1997, the Board of Directors of the Company by unanimous written consent pursuant to Section 141(f) of the DGCL, duly adopted the following resolutions providing for the issuance of a series of Preferred Stock to be designated the Series E Convertible Preferred Stock, par value $.01, and to consist of 5,000 shares: RESOLVED, that the Company is authorized to issue a series of Preferred Stock to be designated the Series E Convertible Preferred Stock, $.01 par value ("Series E Preferred"), to consist of 5,000 shares; and it is further RESOLVED, that the rights, privileges and limitations of each share of Series E Preferred shall be as follows: 1. Issuance. The Series of Preferred designated as the Series E Preferred shall consist of 5,000 shares. 2. Dividends. The holders of shares of Series E Preferred stock shall receive dividends, when and if declared by the board of directors, out of funds legally available for the payment of dividends, at the rate of $60 per share in cash (or at the option of the Company in freely tradable shares of the Company's Common Stock, $.01 par value ("Common Stock") based on market value at the time the dividend is declared), payable in preference to all other common shareholders and on a parity basis with respect to any other series of preferred shares. Such dividends shall be cumulative, and no dividend shall be paid on the shares of any other class ranking junior to the Series E Preferred unless the current annual dividend, and all arrears of dividends if any, on the shares of Series E Preferred shall have been paid, or provision shall have been made for the payment thereof. The holders of shares of Series E Preferred shall at no time have any other right to further dividends of any kind. 3. Voting Rights Except as required by law, shares of Series E Preferred shall not be entitled to vote on any matter upon which the vote, or the consent in lieu of voting, of the shareholders is required including, without limitation, the election of directors. 4. Rank. All Series E Preferred shall rank (i) senior to the Common Stock, now or hereafter issued, as to payment of dividends and distribution of assets upon liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, and (ii) on a parity with any additional series of preferred stock of any class which the Board of Directors or the stockholders may from time to time authorize, both as to payment of dividends and as to distributions of assets upon liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary. 5. Liquidation. In the event of the dissolution, liquidation, or winding up of the Company, or a sale of all its assets, whether voluntary or involuntary, or in the event of its insolvency, there shall be paid to the holders of the shares of Series E Preferred the sum of $1,000 per share, plus accrued and unpaid dividends, before any sums shall be paid or any assets distributed among the holders of the Company's Common Stock. If the assets of the Company shall be insufficient to permit the payment in full to the holders of the shares of Series E Preferred and other series of preferred stock of the amount thus distributable, then the entire assets of the Company shall be distributed ratably among the holders of Series E Preferred and the holders of other series of preferred stock. After the foregoing payments to the holders of shares of Series E Preferred and holders of other series of preferred stock, the remaining assets and funds of the Company shall be distributed among and paid to the holders of the Common Stock, share and share alike, in proportion to their shareholdings. The foregoing provisions of this paragraph shall not, however, be deemed to require the distribution of assets among the holders of the Series E Preferred and the holders of the Common Stock in the event of a consolidation, merger, lease, or sale, which does not in fact result in the liquidation or winding up of the enterprise. 6. Conversion of Series E Preferred for Common Stock. The holders of Series E Preferred, subject to the conditions set forth below, upon surrender of the certificates therefor, shall have the right to convert the Series E Preferred into fully paid and non-assessable shares of Common Stock determined by dividing (x) the sum of (i) $1,000 and (ii) accrued but unpaid dividends by (y) $2.00 (the "Exchange Rate"); Shares of Series E Preferred shall be exchanged only upon such conditions and at such times as follows: (A) As promptly as practicable after the conversion, and in any event within 15 calendar days thereafter, the Company, at its expense (including the payment by it of any applicable issue taxes) will issue and deliver to the holder of record, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of shares of Common Stock issuable upon such conversion, including fractional shares. 2 (B) In the event that sufficient authorized and unissued shares of Common Stock are not available in order to convert specific Series E Preferred into shares of Common Stock, such conversion shall take place upon obtaining shareholder approval of an amendment to the Company's Certificate of Incorporation authorizing additional Common Stock. (C) If, prior to the exercise of the conversion, the Company shall issue any shares of its Common Stock as a stock dividend or subdivide the number of outstanding shares of Common Stock into a greater number of shares, then, in either case, the Exchange Rate per share of the Common Stock shall be proportionately reduced, and, conversely, in the event that the Company shall contract the number of outstanding shares of Common Stock by combining such shares into a smaller number of shares, then, in such case, the Exchange Rate per share of the Common Stock shall be proportionately increased and the number of shares of Common Stock at that time into which a share of Series E Preferred may be converted shall be proportionately decreased. If the Company shall at any time prior to the exercise of the exchange declare a dividend payable in cash on its Common Stock and at substantially the same time offer its holders of Common Stock a right to purchase Common Stock from the proceeds of such dividend or for an amount substantially equal to such dividend, then, in such cases, all Common Stock so issued shall be deemed to have been issued as a stock dividend. Any dividend paid or distributed upon the Common Stock in stock of any other class of securities convertible into shares of Common Stock shall be treated as a dividend paid in Common Stock to the extent that shares of Common Stock are issuable upon the exchange thereof. Issuance of shares of a subsidiary of the Company as a dividend to the Company's shareholders shall have no effect on the Exchange Rate. 7. Redemption. The Company shall have the right, exercisable on not less than 5 days written notice to the holders of record of Series E Preferred, to redeem any or all of the Series E Preferred Shares, at any time 12 months after the effective date of a registration statement registering the shares of Common Stock underlying the Series E Preferred under the Securities Act of 1933, as amended (the "Registration Statement"), at a price per share of Series E Preferred equal to the sum of (i) $1,250 and (ii) accrued and unpaid dividends. 8. Mandatory Conversion. So long as the Registration Statement shall be effective, on the date which is 730 days after the date of delivery and issuance of the Certificate representing the Series E Preferred Shares to the holders, all of the shares of Series E Preferred then outstanding shall be converted into shares of Common Stock in accordance with the provisions of Section 5. 3 9. Future Offerings. During the period that the Series E Preferred is outstanding, the Company shall not proceed with any Regulation S offerings or similarly structured Regulation D offerings which have a conversion price with a floating discount to the market price of the Common Stock. IN WITNESS WHEREOF, we, the undersigned, have executed and subscribed this certificate on March 4, 1997. /s/ William A. Carter ----------------------------------- William A. Carter, President ATTEST: /s/ Josephine Dolhancryk - ---------------------------------------- Josephine Dolhancryk, Asst. Secretary 4 EX-5.1 3 LETTER OF SILVERMAN [LETTERHEAD OF SILVERMAN, COLLURA & CHERNIS, P.C.] April 9, 1997 Hemispherx Biopharma, Inc. 1617 JFK Boulevard Philadelphia, Pennsylvania 19103 Re: Post-Effective Amendment No. 1 to Registration Statement on Form S-1 Gentlemen: We have acted as counsel to Hemispherx Biopharma, Inc. (the "Company"), a Delaware corporation, pursuant to Post-Effective Amendment No. 1 to the Registration Statement on Form S-1, as filed with the Securities and Exchange Commission on April 9, 1997 (the "Registration Statement"), covering (i) 310,544 warrants and stock options; (ii) 179,931 shares of Common Stock underlying warrants; (iii) 150,000 shares of Common Stock underlying warrants; and (iv) 2,500,000 shares of Common Stock, underlying Series E Preferred Stock, $.01 par value. The Common Stock, warrants, stock options and Series E Preferred Stock are hereinafter collectively referred to as the "Securities". In acting as counsel for the Company and arriving at the opinions as expressed below, we have examined and relied upon originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company, agreements and other instruments, certificates of officers and representatives of the Company, certificates of public officials and other documents as we have deemed necessary or appropriate as a basis for the opinions expressed herein. In connection with our examination we have assumed the genuineness of all signatures, the authenticity of all documents tendered to us as originals, the legal capacity of natural persons and the conformity to original documents of all documents submitted to us as certified or photostated copies. Based on the foregoing, and subject to the qualifications and limitations set forth herein, it is our opinion that: 1. The Company has authority to issue the Securities in the manner and under the terms set forth in the Registration Statement. Hemispherx Biopharma, Inc. April 9, 1997 Page 2 2. The Securities have been duly authorized and when issued, delivered and paid for in accordance with their respective terms, will be validly issued, fully paid and non-assessable. We express no opinion with respect to the laws other than those of the State of New York and Federal Laws of the United States of America, and we assume on responsibility as to the applicability thereto, the effect thereon, of the laws of any other jurisdiction. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and its use as part of the Registration Statement. We are furnishing this opinion to the Company solely for its benefit in connection with the Registration Statement. It is not to be used, circulated, quoted or otherwise referred to for any other purpose. Other than the Company no one is entitled to reply on this opinion. Very truly yours, /s/ SILVERMAN, COLLURA & CHERNIS, P.C. ----------------------------------------------- SILVERMAN, COLLURA & CHERNIS, P.C. EX-10.59 4 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of January , 1997 by and between Hemispherx Biopharma, Inc., a Delaware corporation (the Company"), and the person whose name appears on the signature page attached hereto (individually a "Holder" and collectively, with the holders of other securities issued in the Offering, the "Holders"). WHEREAS, pursuant to a Subscription Agreement (the "Subscription Agreement"), the Holder has offered to purchase shares of the Company's Series E Convertible Preferred Stock ("Series E Preferred Shares") from the Company; WHEREAS, in order to induce the Holders to enter into the Subscription Agreement and to purchase the Series E Preferred Shares, the Company and the Holders have agreed to enter into this Agreement; WHEREAS, it is intended by the Company and the Holders that his Agreement shall become effective immediately upon the acquisition by the Holders of the Series E Preferred Shares; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company hereby agrees as follows: A. REGISTRATION RIGHTS 1. Registration Rights (a) Option to Include Securities in Registration Statement. The Company will use its best efforts to file a registration statement (subject to the availability of the Company's annual Financial Statements), seeking to register all shares of Common Stock underlying the Series E Preferred Shares ("Underlying Shares"), on Form S-1 or other comparable form, with the Securities and Exchange Commission no later than 30 days from the closing of the Offering (as defined in the accompanying Agreement between the Company and the Holder)("Registration Statement"). The Company agrees to use its best efforts to have the Registration Statement declared effective. The Holders agree to execute and/or deliver such documents in connection with such registration as the Company may request. If the Holders' Underlying Shares are so registered, the Company's obligations under Article 1 herein will be deemed satisfied in full. (b) Cooperation with Company. The Holders will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Underlying Shares. 2. Registration Procedures. If and whenever the Company is required by any of the provisions of this Agreement to use its best efforts to effect the registration of any of the Underlying Shares under the Securities Act of 1933, as amended ("Act"), the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the Commission a Registration Statement and shall use its best efforts to cause such Registration Statement to become effective and remain effective until all the Underlying Shares are sold or become capable of being publicly sold without registration under the Act. (b) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such Registration Statement whenever the Holder or Holders of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities or the exercise of the Underlying Shares from time to time in connection with a Registration Statement pursuant to Rule 415 of the Commission); (c) notify each Holder of Series E Preferred Shares covered by such Registration Statement, at any time when a prospectus relating thereto covered by such Registration Statement is required to be delivered under the Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such Registration Statement, as then in effect, includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; and (d) take such other actions as shall be reasonably requested by any Holder to facilitate the registration and sale of the Underlying Shares; provided, however, that the Company shall not be obligated to take any actions not specifically required elsewhere herein which in the aggregate would cost in excess of $5,000. 3. Expenses. All expenses incurred in any registration of the Holders' Underlying Shares under this Agreement shall be paid by the Company, including, without limitation, printing expenses, fees and disbursements of counsel for the Company and each participating Holder, expenses of any audits to which the Company shall agree or which shall be necessary to comply with governmental requirements in connection with any such registration, all registration and filing fees for the Holders' Underlying Shares under federal and state securities laws; provided, however, the Company shall not be liable for (a) any discounts or commissions to any underwriter or broker/dealer; (b) any stock transfer taxes incurred with respect to Underlying Shares sold in the Offering; or (c) the fees and expenses of counsel for any Holder, provided that the Company will pay the costs and expenses of Company counsel when the Company's counsel is representing any or all selling Holders. 4. Indemnification. In the event any Underlying Shares are included in a Registration Statement pursuant to this Agreement: 2 (a) Company Indemnity. Without limitation of any other indemnity provided to any Holder, either in connection with the Offering or otherwise, to the extent permitted by law, the Company shall indemnify and hold harmless each Holder, the affiliates, officers, directors and partners of each Holder, any underwriter (as defined in the Act) for such Holder, and each person, if any, who controls such Holder or underwriter (within the meaning of the Act or the Securities Exchange Act of 1934 ("Exchange Act"), against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statements, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, (iii) any violation or alleged violation by the Company of the Act or the Exchange Act, or (iv) any state securities law or any rule or regulation promulgated under the Act, the Exchange Act or any state securities law. The Company shall reimburse each such Holder, affiliate, officer or director or partner, underwriter or controlling person for any legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable to any Holder in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by any such Holder or any other officer, director or controlling person thereof. (b) Holder Indemnity. Each Holder shall indemnify and hold harmless the Company, its affiliates, its counsel, officers, directors, shareholders and representatives, any underwriter (as defined in the Act), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under any federal or state securities law, and the Holder shall reimburse the Company, its affiliates, counsel, officers, directors, shareholders, representatives, underwriters or controlling persons for any legal or other expenses incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any statements or information provided by such Holder to the Company in connection with the offer or sale of Underlying Shares. (c) Notice; Right to Defend. Promptly after receipt by an indemnified party under this ss.4, of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this ss.4, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party agrees that it will be responsible for any costs, expenses, judgments, damages and losses incurred by the indemnified party with respect to such claim, jointly with any other indemnifying party similarly noticed, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party 3 shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if the indemnified party reasonably believes that representation of the indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Agreement only if and to the extent that such failure is prejudicial to its ability to defend such action, and the omission to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Agreement. (d) Contribution. If the indemnification provided for in this Agreement is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other hand in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relevant fault of the indemnifying party and the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, the amount any Holder shall be obligated to contribute pursuant to the Agreement shall be limited to an amount equal to the proceeds to such Holder of the Underlying Shares sold pursuant to the Registration Statement which gives rise to such obligation to contribute (less the aggregate amount of any damages which the Holder has otherwise been required to pay in respect of such loss, claim, damage, liability or action or any substantially similar loss, claim, damage, liability or action arising from the sale of such Underlying Shares). (e) Survival of Indemnity. The indemnification provided by this Agreement shall be a continuing right to indemnification and shall survive the registration and sale of any registrable securities by any person entitled to indemnification hereunder and the expiration or termination of this Agreement. 5. Assignment of Registration Rights. The rights of the Holders under this Agreement, including the rights to cause the Company to register Underlying Shares may not be assigned without the written prior consent of the Company. 4 6. Remedies. (a) Time is of Essence. The Company agrees that time is of the essence for each of the covenants contained herein and that, in the event of a dispute hereunder, this Agreement is to be interpreted and construed in a manner that will enable the Holders to sell their Underlying Shares as quickly as possible after such Holders have indicated to the Company that they desire their Underlying Shares to be registered. Any delay on the part of the Company not expressly permitted under this Agreement, whether material or not, shall be deemed a material breach of this Agreement. (b) Remedies Upon Default or Delay. The Company acknowledges that the breach of any part of this Agreement may cause irreparable harm to a Holder and that monetary damages alone may be inadequate. The Company therefore agrees that the Holder shall be entitled to injunctive relief or such other applicable remedy as a court of competent jurisdiction may provide. Nothing contained herein will be construed to limit a Holder's right to any remedies at law, including recovery of damages for breach of any part of this Agreement. 7. Notices. (a) All communications under this Agreement shall be in writing and shall be mailed by first class mail, postage prepaid, or telegraphed or telexed with confirmation of receipt or delivered by hand or by overnight delivery service, (i). If to the Company, at: Hemispherx Biopharma, Inc. 1617 JFK Boulevard Philadelphia, Pennsylvania 19103 Attn: Dr. William A. Carter or at such other address as it may have furnished in writing to the Holders of Series E Preferred Shares at the time outstanding, or (ii) if to any Holder of any Series E Preferred Shares, to the address of such Holder as it appears in the stock or warrant ledger of the Company. (b) Any notice so addressed, when mailed by registered or certified mail shall be deemed to be given three days after so mailed, when telegraphed or telexed shall be deemed to be given when transmitted, or when delivered by hand or overnight shall be deemed to be given when delivered. 8. Successors and Assigns. Except as otherwise expressly provided herein, this Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and each of the Holders. 5 9. Amendment and Waiver. This Agreement may be amended, and the observance of any term of this Agreement may be waived, but only with the written consent of the Company and the Holders of securities representing a majority of the Series E Preferred Shares; provided, however, that no such amendment or waiver shall take away any registration right of any Holder of Series E Preferred Shares or reduce the amount of reimbursable costs to any Holder of Series E Preferred Shares in connection with any registration hereunder without the consent of such Holder; further provided, however, that without the consent of any other Holder of Series E Preferred Shares, any Holder may from time to time enter into one or more agreements amending, modifying or waiving the provisions of this Agreement if such action does not adversely affect the rights or interest of any other Holder of Series E Preferred Shares. No delay on the part of any party in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any party of any right, power or remedy preclude any other or further exercise thereof, or the exercise of any other right, power or remedy. 10. Counterparts. One or more counterparts of this Agreement may be signed by the parties, each of which shall be an original but all of which together shall constitute one and same instrument. 11. Governing Law. This Agreement shall be construed in accordance with and governed by the internal laws of the State of New York, without giving effect to conflicts of law principles. 12. Invalidity of Provisions. If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity and enforceability of the remaining provisions contained herein shall not be affected thereby. 6 13. Headings. The headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. IN WITNESS WHEREOF, undersigned have executed this Agreement as of the , day of January, 1997 _______________________________ Signature of Holder HEMISPHERx BIOPHARMA, INC. By: ___________________________ _______________________________ Dr. William A. Carter, Print Name of Holder President _______________________________ _______________________________ Print Address of Holder 7 EX-23 5 EXHIBIT 23.2 Consent of Independent Auditors The Board of Directors Hemispherx Biopharma, Inc.: We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Philadelphia, Pennsylvania April 8, 1997 -----END PRIVACY-ENHANCED MESSAGE-----