1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 59-2646820
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701
------------------------------------------------------
(Address of principal executive offices)
(914) 376-7383
------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value
$.00001 per share as of November 10, 2000 was 361,989,301.
2
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED).......................................................................1
ITEM 1. FINANCIAL STATEMENTS................................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................44
PART II. OTHER INFORMATION......................................................................................45
ITEM 1. LEGAL PROCEEDINGS..................................................................................45
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................................46
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................................................46
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS..................................................46
ITEM 5. OTHER INFORMATION..................................................................................46
ITEM 6. EXHIBITS AND REPORTS ON FORM 8.....................................................................46
i
3
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
CONDENSED
FROM
AUDITED
FINANCIAL
STATEMENTS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,342,650 $ 836,876
Inventory 19,729 19,729
Other current assets 79,580 59,734
------------ ------------
Total current assets 1,441,959 916,339
Property and Equipment 1,737,185 1,375,923
Other Assets 728,045 569,312
------------ ------------
Total assets $ 3,907,189 $ 2,861,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities $ 966,753 $ 728,872
Current portion of capital lease obligation 49,840 50,315
Current portion of note payable 20,704 19,095
------------ ------------
Total current liabilities 1,037,297 798,282
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 15,000 4,446,629
Capital lease obligation - non-current portion 115,209 152,059
Note payable - non-current portion 62,249 77,964
------------ ------------
Total long-term liabilities 192,458 4,676,652
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 361,895,098 and 303,472,035
shares issued and outstanding 3,619 3,034
Additional paid-in capital 31,094,746 17,537,333
Deficit accumulated during the development stage (26,271,860) (19,725,238)
Discount on warrants (2,149,071) (428,489)
------------ ------------
Total stockholders' equity (deficiency) 2,677,434 (2,613,360)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 3,907,189 $ 2,861,574
============ ============
See notes to consolidated condensed financial statements.
-1-
4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
INCEPTION
(FEBRUARY 20,
THREE MONTHS ENDED NINE MONTHS ENDED 1984) TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------- -------------
Revenues $ 2,324 $ 1,928 $ 7,285 $ 6,517 $ 213,213
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 969,561 426,552 2,252,663 1,192,190 7,582,067
General and administrative 723,108 605,917 2,088,933 1,544,592 11,438,241
Expense related to modification
of existing options 1,175,768 -- 1,175,768 -- 1,385,912
Depreciation 101,587 53,512 245,556 149,208 791,779
------------- ------------- ------------- ------------- -------------
2,970,024 1,085,981 5,762,920 2,885,990 21,197,999
------------- ------------- ------------- ------------- -------------
Loss from Operations (2,967,700) (1,084,053) (5,755,635) (2,879,473) (20,984,786)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 33,323 6,461 107,914 27,951 709,955
Other income -- -- -- -- 120,093
Interest expense (221,397) (935,803) (898,901) (1,247,345) (6,117,122)
------------- ------------- ------------- ------------- -------------
(188,074) (929,342) (790,987) (1,219,394) (5,287,074)
------------- ------------- ------------- ------------- -------------
Net Loss $ (3,155,774) $ (2,013,395) $ (6,546,622) $ (4,098,867) $ (26,271,860)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.02) $ (0.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 343,364,044 300,598,827 343,364,044 300,598,827
============= ============= ============= =============
See notes to consolidated condensed financial statements.
-2-
5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK DEFICIT
------------ ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
----- ------ ------ ------- ------------
Balance, inception (February 20, 1984) as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
----------- ----------- ----------- -----------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- ----------- ----------- -----------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $ .00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
----------- ----------- ----------- -----------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
----------- ----------- ----------- -----------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ----------- ----------- -----------
See notes to consolidated condensed financial statements.
-3-
6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
OMMON STOCK DEFICIT
----------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
----- ------ ------ ------- -------------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, period ended December 31, 1987 -- -- -- (258,663)
------------ ------ ---------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
------------ ------ ---------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
------------ ------ ---------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
------------ ------ ---------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
------------ ------ ---------- -----------
See notes to consolidated condensed financial statements.
-4-
7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK DEFICIT
------------ ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
----- ------ ------ ------------ ----------------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants .08 2,500 -- 200 --
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
------------ ------ ---------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
------------ ------ ---------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 --
Issuance of common stock, for testing .035 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
------------ ------ ---------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------ ---------- -----------
See notes to consolidated condensed financial statements.
-5-
8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK DEFICIT
------------ ACCUMULATED DEFERRED
AMOUNT ADDITIONAL DURING THE COMPEN-
PER PAID-IN SUBSCRIPTION DEVELOPMENT SATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COSTS
----- -------- ------ ------------ ---------- ------------- --------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting services $ .05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of options .08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of options .10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- ------- ----------- ------- ----------- -----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting services .14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- ------- ----------- ------- ----------- -----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------- ----------- ------- ----------- -----
See notes to consolidated condensed financial statements.
-6-
9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK DEFICIT
------------ ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ------ ------ ------- ---------- ----------- -----------
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock, exercise of options $ .05 3,333,334 33 166,634 -- -- --
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 -- -- --
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 -- -- --
Issuance of common stock, exercise of options .11 170,000 2 18,698 -- -- --
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 -- -- --
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 -- -- --
Issuance of common stock, exercise of options .19 500,000 5 94,995 -- -- --
Issuance of common stock, exercise of options .20 473,500 5 94,695 -- -- --
Issuance of common stock, for services rendered .50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended December 31, 1996 -- -- -- -- (1,154,740) --
----------- ------- ---------- ---------- ----------- ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------- ---------- ---------- ----------- ---------
See notes to consolidated condensed financial statements.
-7-
10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK
-----------
AMOUNT ADDITIONAL
PER PAID-IN
SHARE SHARES AMOUNT CAPITAL
----------- ------ ------ -------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351
Issuance of common stock, exercise of options $ .08 3,333,333 33 247,633
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984
Issuance of common stock, conversion of debt .15 894,526 9 133,991
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982
Issuance of common stock, conversion of debt .16 772,201 8 119,992
Issuance of common stock, for services rendered .41 50,000 -- 20,500
Issuance of common stock, for services rendered .24 100,000 1 23,999
Beneficial conversion feature, February debenture -- -- 413,793
Beneficial conversion feature, October debenture -- -- 1,350,000
Warrant costs, February debenture -- -- 37,242
Warrant costs, October debenture -- -- 291,555
Amortization of deferred compensation cost -- -- --
Imputed interest on convertible debenture -- -- 4,768
Net loss, year ended December 31, 1997 -- -- --
----------- ----------- -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767
----------- ----------- -----------
DEFICIT
ACCUMULATED
DURING THE DEFERRED
SUBSCRIPTION DEVELOPMENT COMPENSATION
RECEIVABLE STAGE COST
---------- ----------- ---------------
Balance, December 31, 1996 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, February debenture -- -- --
Beneficial conversion feature, October debenture -- -- --
Warrant costs, February debenture -- -- --
Warrant costs, October debenture -- -- --
Amortization of deferred compensation cost -- -- 399,322
Imputed interest on convertible debenture -- -- --
Net loss, year ended December 31, 1997 -- (4,141,729) --
----------- ----------- -----------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
----------- ----------- -----------
See notes to consolidated condensed financial statements.
-8-
11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK
------------
AMOUNT ADDITIONAL
PER PAID-IN
SHARE SHARES AMOUNT CAPITAL
----- ------ ------ -------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767
Issuance of common stock, exercise of options $ .12 295,000 3 35,397
Issuance of common stock, exercise of options .14 500,000 5 69,995
Issuance of common stock, exercise of options .16 450,000 5 71,995
Issuance of common stock, exercise of options .20 10,000 -- 2,000
Issuance of common stock, exercise of options .26 300,000 3 77,997
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981
Issuance of common stock, for services rendered .21 100,000 1 20,999
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost -- -- --
Write off of subscription receivable -- -- (19,000)
Net loss, year ended December 31, 1998 -- -- --
------------ ------------ ------------
Balance, December 31, 1998 296,422,907 2,964 14,325,076
------------ ------------ ------------
DEFICIT
ACCUMULATED
DURING THE DEFERRED
SUBSCRIPTION DEVELOPMENT COMPENSATION
RECEIVABLE STAGE COST
---------- ------------- -------------
Balance, December 31, 1997 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost -- -- 59,068
Write off of subscription receivable 19,000 -- --
Net loss, year ended December 31, 1998 -- (4,557,710) --
------------ ------------ ------------
Balance, December 31, 1998 -- (13,550,976) (14,769)
------------ ------------ ------------
See notes to consolidated condensed financial statements.
-9-
12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK
------------
AMOUNT ADDITIONAL
PER PAID-IN
SHARE SHARES AMOUNT CAPITAL
----- ------ ------ -------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076
Issuance of common stock, securities purchase agreement $ .16 4,917,276 49 802,451
Issuance of common stock, securities purchase agreement .27 1,851,852 18 499,982
Issuance of common stock, for services rendered .22 100,000 1 21,999
Issuance of common stock, for services rendered .25 180,000 2 44,998
Beneficial conversion feature, August debenture -- -- 687,500
Beneficial conversion feature, December debenture -- -- 357,143
Warrant costs, securities purchase agreement -- -- 494,138
Warrant costs, securities purchase agreement -- -- 37,025
Warrant costs, August debenture -- -- 52,592
Warrant costs, December debenture -- -- 4,285
Amortization of warrant costs, securities purchase agreement -- -- --
Amortization of deferred compensation cost -- -- --
Expense related to modification of existing options -- -- 210,144
Net loss, year ended December 31, 1999 -- -- --
------------ ------------ ------------
Balance, December 31, 1999 303,472,035 3,034 17,537,333
------------ ------------ ------------
DEFICIT
ACCUMULATED
DURING THE DEFERRED DISCOUNT
DEVELOPMENT COMPENSATION ON
STAGE COST WARRANTS
----- ---- --------
Balance, December 31, 1998 $(13,550,976) $ (14,769) $ --
Issuance of common stock, securities purchase agreement -- -- --
Issuance of common stock, securities purchase agreement -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, August debenture -- -- --
Beneficial conversion feature, December debenture -- -- --
Warrant costs, securities purchase agreement -- -- (494,138)
Warrant costs, securities purchase agreement -- -- (37,025)
Warrant costs, August debenture -- -- --
Warrant costs, December debenture -- -- --
Amortization of warrant costs, securities purchase agreement -- -- 102,674
Amortization of deferred compensation cost -- 14,769 --
Expense related to modification of existing options -- -- --
Net loss, year ended December 31, 1999 (6,174,262) -- --
------------ ------------ ------------
Balance, December 31, 1999 (19,725,238) -- (428,489)
------------ ------------ ------------
See notes to consolidated condensed financial statements.
-10-
13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2000
COMMON STOCK
------------
AMOUNT
PER
SHARE SHARES AMOUNT
------- ------ ------
Balance, December 31, 1999 303,472,035 $ 3,034
Issuance of common stock, exercise of options $ .14 600,000 6
Issuance of common stock, exercise of options .15 1,600,000 16
Issuance of common stock, exercise of options .16 650,000 7
Issuance of common stock, exercise of options .17 100,000 1
Issuance of common stock, exercise of options .21 792,500 8
Issuance of common stock, exercise of options .25 1,000,000 10
Issuance of common stock, exercise of options .27 281,000 3
Issuance of common stock, exercise of options .36 135,000 2
Issuance of common stock, exercise of warrants .20 220,589 2
Issuance of common stock, exercise of warrants .24 220,589 2
Issuance of common stock, exercise of warrants .28 90,909 1
Issuance of common stock, exercise of warrants .33 90,909 1
Issuance of common stock, conversion of debt .14 35,467,682 355
Issuance of common stock, conversion of debt .19 1,036,674 10
Issuance of common stock, conversion of debt .20 1,887,500 19
Issuance of common stock, cashless exercise of warrants 513,354 5
Issuance of common stock, services rendered .47 100,000 1
Private placement shares issued .22 13,636,357 136
Cashless exercise of warrants -- --
Beneficial conversion feature, January debenture -- --
Warrant costs, consulting agreement -- --
Warrant costs, January debenture -- --
Warrant costs, private placement -- --
Warrant costs, private equity line of credit -- --
Recovery of subscription receivable previously written off -- --
Amortization of warrant costs, securities purchase agreements -- --
Expense related to modification of existing options -- --
Net loss -- --
------------ ---------
Balance, September 30, 2000 361,895,098 $ 3,619
============ =========
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE DISCOUNT
PAID-IN DEVELOPMENT ON
CAPITAL STAGE WARRANTS
------- -------------- -------------
Balance, December 31, 1999 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of common stock, exercise of options 83,994 -- --
Issuance of common stock, exercise of options 239,984 -- --
Issuance of common stock, exercise of options 103,994 -- --
Issuance of common stock, exercise of options 16,999 -- --
Issuance of common stock, exercise of options 166,417 -- --
Issuance of common stock, exercise of options 246,090 -- --
Issuance of common stock, exercise of options 75,867 -- --
Issuance of common stock, exercise of options 48,598 -- --
Issuance of common stock, exercise of warrants 44,998 -- --
Issuance of common stock, exercise of warrants 53,998 -- --
Issuance of common stock, exercise of warrants 24,999 -- --
Issuance of common stock, exercise of warrants 29,999 -- --
Issuance of common stock, conversion of debt 4,907,146 -- --
Issuance of common stock, conversion of debt 199,990 -- --
Issuance of common stock, conversion of debt 377,481 -- --
Issuance of common stock, cashless exercise of warrants 305,754 -- --
Issuance of common stock, services rendered 46,499 -- --
Private placement shares issued 2,999,864 -- --
Cashless exercise of warrants (305,759) -- --
Beneficial conversion feature, January debenture 386,909 -- --
Warrant costs, consulting agreement 200,249 -- --
Warrant costs, January debenture 13,600 -- --
Warrant costs, private placement 1,582,734 -- (1,582,734)
Warrant costs, private equity line of credit 512,241 -- (512,241)
Recovery of subscription receivable previously written off 19,000 -- --
Amortization of warrant costs, securities purchase agreement -- -- 374,393
Expense related to modification of existing options 1,175,768 -- --
Net loss -- (6,546,622) --
------------ ------------ ------------
Balance, September 30, 2000 $ 31,094,746 $(26,271,860) $ (2,149,071)
============ ============ ============
See notes to consolidated condensed financial statements.
-11-
14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
INCEPTION
NINE MONTHS ENDED (FEBRUARY 20,
SEPTEMBER 30, 1984) TO
----------------------------- SEPTEMBER 30,
2000 1999 2000
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (6,546,622) $ (4,098,867) $(26,271,860)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 245,556 149,208 791,689
Amortization of debt issue costs 106,030 128,750 779,215
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 386,909 687,500 3,820,270
Amortization of discount on warrants 441,365 113,062 879,924
Amortization of deferred compensation cost -- 14,769 760,500
Issuance of common stock for services 46,500 22,000 1,551,000
Expense related to modification of existing options 1,175,768 -- 1,385,912
Realization of prepaid consulting fees 193,181 -- 193,181
Other -- -- (1,607)
Changes in Operating Assets and Liabilities:
Increase in inventory -- -- (19,729)
Increase in other current assets (12,785) (6,021) (72,520)
Increase in other assets (158,733) (231,680) (1,375,691)
Increase in accounts payable and accrued liabilities 237,881 303,297 972,953
------------ ------------ ------------
Total adjustments 2,661,672 1,180,885 9,665,097
------------ ------------ ------------
Net cash used by operating activities (3,884,950) (2,917,982) (16,606,763)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- 821,047 6,292,979
Expenditures for property and equipment (606,815) (193,163) (2,157,565)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities (606,815) 627,884 (2,156,365)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,000,000 2,000,000 9,500,000
Proceeds from sale of securities, net of issuance costs 4,029,970 702,500 10,711,058
Payments under capital lease (37,325) (28,444) (95,913)
Payments on note payable (14,106) -- (28,367)
Recovery of subscription receivable written off 19,000 -- 19,000
------------ ------------ ------------
Net cash provided by financing activities 4,997,539 2,674,056 20,105,778
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 505,774 383,958 1,342,650
Cash and Cash Equivalents, Beginning 836,876 924,420 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 1,342,650 $ 1,308,378 $ 1,342,650
============ ============ ============
See notes to consolidated condensed financial statements.
-12-
15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
at September 30, 2000 have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
financial position as of September 30, 2000 and results of operations
and cash flows for the three months and the nine months ended September
30, 2000 and 1999. All such adjustments are of a normal recurring
nature. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
Certain amounts in the 1999 financial statements have been reclassified
to conform to 2000 presentation. The statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
NOTE 2. COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The accompanying unaudited consolidated condensed financial statements
at September 30, 2000 have been prepared in conformity with generally
accepted accounting principles, which contemplate the continuance of
the Company as a going concern. The Company has suffered losses from
operations during its operating history. The Company is dependent upon
registration of Product R for sale before it can begin commercial
operations. The Company's cash position may be inadequate to pay all
the costs associated with the full range of testing and clinical trials
required by the FDA. Unless and until Product R is approved for sale in
the United States or another industrially developed country, the
Company may be dependent upon the continued sale of its securities and
debt financing for funds to meet its cash requirements. Management
intends to continue to sell the Company's securities in an attempt to
mitigate the effects of its cash position; however, no assurance can be
given that equity or debt financing, if and when required, will be
available. In the event that such equity or debt financing is not
available, in order to continue operations, management anticipates that
they will have to defer their salaries. During 2000 and 1999, the
Company obtained equity and debt financing and may seek additional
financing as the need arises. No assurance can be given that the
Company will be able to sustain its operations until FDA approval is
granted or that any approval will ever be granted. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The Company expects to submit an application for approval with
the FDA in the near future. The unaudited consolidated condensed
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on the sale of Product R. The Company has not as yet
received any notice of claim from such parties.
-13-
16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
PRODUCT LIABILITY
The Company could be subjected to claims for adverse reactions
resulting from the use of Product R. Although the Company is unaware of
any such claims or threatened claims since Product R was initially
marketed in the 1940's, one study noted adverse reactions from highly
concentrated doses in guinea pigs. In the event any claims for
substantial amounts were successful, they could have a material adverse
effect on the Company's financial condition and on the marketability of
Product R. As of the date hereof, the Company does not have product
liability insurance for Product R. There can be no assurance that the
Company will be able to secure such insurance in adequate amounts, at
reasonable premiums if it determined to do so. Should the Company be
unable to secure such product liability insurance, the risk of loss to
the Company in the event of claims would be greatly increased and could
have a material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has three issued patents and one allowed patent for the use
of Product R. The Company currently has 15 patent applications pending
with the U.S. Patent Office and 17 foreign patent applications. The
Company can give no assurance that other companies, having greater
economic resources, will not be successful in developing a similar
product. There can be no assurance that such patents, if obtained, will
be enforceable.
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata agreed
to perform a demonstration in the Dominican Republic in accordance with
a certain agreed upon protocol (the "Protocol") to assess the efficacy
of a treatment using Product R incorporated in the Protocol against
AIDS (the "Plata Agreement"). Plata covered all costs and expenses
associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an
additional 5,000,000 shares at $.08 per share through July 9, 1994 (the
"Plata Options") and 5,000,000 shares at $.10 per share through July 9,
1994 (the "Additional Plata Options"). Pursuant to several amendments,
the Plata Options and the Additional Plata Options were exercisable
through June 30, 2000 at an exercise price of $.15 and $.17,
respectively. The fair value of these options are estimated to be
$32,925 ($.0348 per option share) based upon a financial analysis of
the terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; risk free interest
rate of 6%. This amount has been charged to expense related to
modification of existing option terms at December 31, 1999 as it
related to services previously provided.
-14-
17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
PLATA PARTNERS LIMITED PARTNERSHIP
Through June 30, 2000, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million shares
in connection with the exercise of the Plata Options and the Additional
Plata Options.
ARGENTINE AGREEMENT
In April 1996, the Company entered into an agreement (the "Argentine
Agreement") with DCT SRL, an Argentine corporation unaffiliated with
the Company ("DCT") pursuant to which DCT was to cause a clinical trial
to be conducted in two separate hospitals located in Buenos Aires,
Argentina (the "Clinical Trials"). Pursuant to the Argentine Agreement,
the Clinical Trials were to be conducted pursuant to a protocol
developed by Juan Carlos Flichman, M.D. and the purpose of the Clinical
Trials was to assess the efficacy of the Company's drug, Product R, on
the Human Papilloma Virus (HPV). The protocol calls for, among other
things, a study to be performed with clinical and laboratory follow-up
on 12 male and female human patients between the ages of 18 and 50.
Pursuant to the Argentine Agreement, the Company delivered $34,000 to
DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the conclusion
of the Clinical Trials, DCT shall cause Dr. Flichman to prepare and
deliver a written report to the Company regarding the methodology and
results of the Clinical Trials (the "Written Report"). In September
1996, the Written Report was delivered by Dr. Flichman to the Company.
Upon delivery of the Written Report to the Company, the Company
delivered to the principals of DCT options to acquire 2,000,000 shares
of the Company's common stock for a period of one year from the date of
the delivery of the Written Report, at a purchase price of $.20 per
share. Pursuant to several amendments, the DCT options were exercisable
through June 30, 2000 at an exercise price of $.21 per share. The fair
value of these options are estimated to be $1,788 ($.0012 per option
share) based on a financial analysis of the terms of the options using
the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This amount
has been charged to expense related to modification of existing option
terms at December 31, 1999 as it related to services previously
provided. Effective July 1, 2000, these options were extended to
December 31, 2000 at an exercise price of $.22 per share. As a result
of the modification of the option terms, the fair value of these
options is estimated to be $166,860 ($.2273 per option share) based on
a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 50%; risk free interest rate of 6%. This amount has been
charged to expense related to modification of existing option terms
during the three months ended September 30, 2000. As of September 30,
2000, 1,256,000 shares of common stock were issued pursuant to the
exercise of these options for an aggregate exercise price of
approximately $261,425.
-15-
18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to
certain conditions, the exclusive right to market and sell Product R in
Argentina, Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT
Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or its
assignees, up to $600,000 to cover the costs of a double blind placebo
controlled study in approximately 150 patients to assess the efficacy
of Product R for the treatment of persons diagnosed with the HIV virus
(AIDS) and HPV (the "HIV-HPV Study"). Subsequently, the Company has
agreed to advance additional funds towards such study. In connection
with the HIV-HPV Agreement, the Company advanced approximately
$665,000, which is accounted for as research and development expense.
The amounts have been used to cover expenses associated with clinical
activities of the HIV-HPV Study.
The HIV-HPV Agreement provides that (i) in the event the date from the
HIV-HPV Study is used in connection with Product R being approved for
commercial sale anywhere within the territory granted under the DCT
Exclusive Distribution Agreement or (ii) DCT receives financing to
cover the costs of the HIV-HPV Study, then DCT is obligated to
reimburse the Company for all amounts expended in connection with the
HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients, respectively
to assess the efficacy of the topical application of Product R for the
treatment of persons diagnosed with Herpes Labialis/Genital Infections
(the "Herpes Study") and HPV (the "HPV Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced approximately
$58,000 and $132,000, respectively. Such expenses are accounted for as
research and development expense. The amounts expended have been used
to cover expenses associated with pre-clinical activities. Neither the
Herpes Study nor the HPV Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data from
the Studies are used in connection with Product R being approved for
commercial sale anywhere within the territory granted under the DCT
Exclusive Distribution Agreement or (ii), DCT receives financing to
cover the costs of the Studies, then DCT is obligated to reimburse the
Company for all amounts expended in connection with the Studies.
-16-
19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In February 1998, the Company entered into an agreement with DCT (the
"Concurrent Agreement") whereby the Company agreed to provide DCT or
its assignees, up to $413,000 to cover the costs of a study in 65
patients to compare the results of treatment of patients with AIDS
taking a three drug cocktail and Product R with those taking a three
drug cocktail and a placebo. As of September 30, 2000, the Company has
advanced approximately $50,000 for such study, which has been accounted
for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $95,000 to cover the costs of a controlled
study in 30 patients to determine the efficacy of Product R for the
treatment of rheumatoid arthritis in humans. In connection with this
study, the Company has advanced approximately $95,000, which has been
accounted for as research and development expense.
In July 1998, the Company authorized expenditures of up to $90,000 to
study the effects of Product R in inhibiting the mutation of the AIDS
virus. As of September 30, 2000, the Company has advanced approximately
$70,000 for such study, which has been accounted for as research and
development expense.
As of September 30, 2000, the Company advanced approximately $442,000
for expenses in connection with the drug approval process in Argentina.
BARBADOS STUDY
A double blind study assessing the efficacy of the Company's drug
Product R in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados (the
"Barbados Study"). As of September 30, 2000, the Company has expended
approximately $390,000 to cover the costs of the Barbados Study.
In July 1998, the Company authorized expenditures of up to $45,000 to
study the effects of Product R in inhibiting the mutation of the AIDS
virus. As of September 30, 2000, the Company has advanced approximately
$15,000 for such study, which has been accounted for as research and
development expense.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and
-17-
20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
Director of Mt. Sinai's Division of Infectious Diseases, whereby Dr.
Hirschman was to provide consulting services to the Company through May
1997. The consulting services included the development and location of
pharmacological and biotechnology companies and assisting the Company
in seeking joint ventures with and financing of companies in such
industries.
In connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years per the vesting schedule as referred to in the
agreement, at a purchase price of $.18 per share. As of September 30,
2000, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1996
and ending March 23, 2009 at an exercise price of $.19 per share, of
which options to acquire 500,000 shares (exercisable until March 23,
2001) were assigned by Dr. Hirschman to Richard Rubin, consultant to
Dr. Hirschman; (ii) options to purchase 5,000,000 shares exercisable at
any time and from time to time commencing March 24, 1997 and ending
March 23, 2009 at an exercise price of $.27 per share, of which options
to acquire 500,000 shares (exercisable until March 23, 2001) were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares exercisable
at any time and from time to time commencing March 24, 1998 and ending
March 23, 2009 at an exercise price of $.36 per share, of which options
to acquire 500,000 shares (exercisable until March 23, 2001) were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman. In addition, the Company has agreed to cause the shares
underlying these options to be registered so long as there is no cost
to the Company. As of September 30, 2000, 916,000 shares of common
stock were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr. Hirschman.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options and
75,000 of his $0.36 options to Elliot Bauer, an individual who also
received and exercised shares and options as a result of the "Cohen
Agreements".
-18-
21
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27, and 500,000 at $.36), which are
exercisable until March 23, 2001.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1988 Employment Agreement.
Pursuant to this Agreement, Dr. Hirschman is employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002.
The Agreement further provides that Bernard Friedland and William
Bregman will vote all shares owned or voted by them in favor of Dr.
Hirschman as a member of the Board of Directors of the Company.
The Agreement provides for Dr. Hirschman to receive an annual base
salary of $361,000 (effective January 1, 2000), use of an automobile,
major medical, disability, dental and term life insurance benefits for
the term of his employment.
The Agreement also provides for previously issued options to acquire
23,000,000 shares of common stock at $0.27 per option share to be
immediately vested as of the date of this agreement.
The fair value of these options are estimated to be $5,328,441 ($0.2317
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate of
6% and an expected holding period of 32 months (the term of the
employment agreement).
GALLANTAR AGREEMENT
On October 1, 1999, the Company entered into an employment agreement
with Alan Gallantar whereby Mr. Gallantar has agreed to serve as the
Chief Financial Officer of the Company for a period of three years,
subject to earlier termination by either party, either for cause as
defined in and in accordance with the provisions of the agreement,
without cause or upon the occurrence of certain events. Such agreement
provides for Mr. Gallantar to receive a base salary of $175,000,
$200,000 and $225,000 annually for each of the three years of the term
of the agreement as well as various performance based bonuses ranging
from 10% to 50% of the base salary and various other benefits.
Additionally, in connection with such agreement, the Company granted
Mr. Gallantar options to purchase an aggregate of 4,547,880 shares of
the Company's common stock. Such options have a term of ten years and
have an exercise price of $.24255 per share. 1,515,960 options vest on
each of the first, second and third anniversary dates of this
employment agreement.
-19-
22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GALLANTAR AGREEMENT (Continued)
The fair value of these options are estimated to be $376,126 ($.0827
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate of
6% and an expected holding period of three years (the term of the
employment agreement).
Financial reporting of the Hirschman and Gallantar options has been
prepared pursuant to the Company's policy of following APB No. 25, and
related interpretations, in accounting for its employee stock options.
Accordingly, the following pro forma financial information is presented
to reflect amortization of the fair value of the options.
AS REPORTED PRO FORMA AS
SEPTEMBER 30, 2000 ADJUSTMENT ADJUSTED
------------------ ---------- --------
Net loss $ (6,546,622) $ (893,297) $ (7,439,919)
============= ============= =============
Net loss per share $ (0.02) $ (0.00) $ (0.02)
============= ============= =============
There were no other options outstanding that would require pro forma
presentation.
COHEN AGREEMENTS
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen Agreement").
The September 1992 Cohen Agreement required that Mr. Cohen provide
certain consulting services to the Company in exchange for the
Company's issuing to Mr. Cohen 1,000,000 shares of common stock (the
"September 1992 Cohen Shares"), 500,000 of which were issuable upon
execution of the September 1992 Cohen Agreement and the remaining
500,000 shares of which were issuable upon Mr. Cohen completing 50
hours of consulting service to the Company. The Company issued the
first 500,000 shares to Mr. Cohen in October 1992 and the remaining
500,000 shares to Mr. Cohen in February 1993. Further pursuant to the
September 1992 Cohen Agreement, the Company granted to Mr. Cohen the
option to acquire, at any time and from time to time through September
10, 1993 (which date has been extended through June 30, 2000), the
option to acquire 3,000,000 shares of common stock of the Company at an
exercise price of $.09 per share (which exercise price has been
increased to $.16 per share) (the "September 1992 Cohen Options"). The
fair value of these options are estimated to be $59,030 ($.0347 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of 6%.
This amount has been charged to expense related to modification of
existing option terms at December 31, 1999 as it related to services
previously provided.
-20-
23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2.COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
Effective July 1, 2000, these options were extended to December 31,
2000 at an exercise price of $.17 per share. As a result of the
modification of the option terms, the fair value of these options is
estimated to be $55,023. ($.2751 per option share) based on a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 50%; risk
free interest rate of 6%. This amount has been charged to expense
related to modification of existing option terms during the three
months ended September 30, 2000. As of September 30, 2000, 2,900,000 of
the September 1992 Cohen Options have been exercised for cash
consideration of $403,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for a
three year term commencing on March 1, 1993. The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing business consulting
services concerning the operations of the business of the Company and
possible strategic transactions in exchange for the Company issuing to
Mr. Cohen 3,500,000 shares of common stock (the "February 1993 Cohen
Shares"), 1,500,000 shares of which Mr. Cohen has informed the Company
he has assigned to certain other persons not affiliated with the
Company or any of its officers or directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement the
Company issued: (i) to Mr. Cohen, an additional 2,500,000 shares (the
"April 1994 Cohen Shares") and (ii) to each of Elliot Bauer and Lee
Rizzuto, 625,000 shares (the "Bauer and Rizzuto Shares") as well as
options to acquire an additional 5,000,000 shares each at $.10 per
share exercisable through May 1, 1996 (the "Bauer and Rizzuto
Options"). Pursuant to several amendments, the remaining Bauer options
are exercisable through June 30, 2000 at an option price of $.14. The
fair value of these options are estimated to be $116,101 ($.0541 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of 6%.
This amount has been charged to expense related to modification of
existing option terms at December 31, 1999 as it related to services
previously provided. Effective July 1, 2000, these options have been
extended to December 31, 2000 at an exercise price of $.16 per share.
As a result of the modification of the option terms, the fair value of
these options is estimated to be $953,885. ($.2848 per option share)
based on a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 50%; risk free interest rate of 6%. This amount has been
charged to expense related to modification of existing option terms
during the three months ended September 30, 2000. Through September 30,
2000, 6,650,500 shares were issued pursuant to the exercise of the
Bauer and Rizzuto Options for an aggregate exercise price of $696,050.
Mr. Rizzuto sold all of his shares and all shares underlying his
options.
-21-
24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with GloboMax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. The contract was extended indefinitely by mutual consent of
both parties. The Company has incurred approximately $950,000 in
services to GloboMax through September 30, 2000.
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000.
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share and
warrants to purchase 1,750,000 shares at an exercise price of $0.26 per
share until February 28, 2005. The fair value of the warrants is
estimated to be $200,249 ($.057 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement).
The Company has determined that $89,045 of the fair value relates to
past services and, accordingly, has expensed this portion in the three
months ended March 31, 2000. The remaining $111,204 is included in
other current assets and is being amortized over the remaining term of
the agreement.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Product R in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause Product R to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Product R to
maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
-22-
25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSTRUCTION COMMITMENT
On October 25, 2000, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $350,000 for research and development purposes at
the Company's Yonkers, New York facilities.
LITIGATION
In June 2000, the Company filed an action and complaint in the Supreme
Court of New York, Westchester County, against Commonwealth
Pharmaceuticals, Ltd., Immune Modulation Maximum Corp. ("IMMC") and
Charles E. Miller (collectively, the "Defendants") alleging a breach by
Commonwealth of an exclusive distribution agreement between the Company
and Commonwealth, misappropriation of trade secrets and confidential
information, conversion and conspiracy to convert the Company's
property interests in Reticulose. The agreement, which the Company
alleges in its complaint is currently in force and effect, provides
that: (i) all laboratory or clinical studies initiated by Commonwealth
for which Reticulose is provided for free must first be approved by the
Company, (ii) the results of all studies, all research data and
documentation and any research publications resulting from studies
initiated by Commonwealth or any of its agents will belong to the
Company and will be made use of at the Company's discretion, and (iii)
such studies are only permitted as part of such agreement. In its
complaint, the Company alleged that Defendant Miller filed and obtained
a U.S. patent entitled "Composition Containing Peptides and Nucleic
Acids and Methods of Making Same" based on a study conducted by a third
party using Reticulose obtained free of charge from the Company, and
that such patent was assigned to Defendant IMMC, a company controlled
by Defendant Miller, in violation of the exclusive distribution
agreement.
In its complaint, the Company seeks relief in the form of (i)
assignment of the patent to the Company, (ii) adjustment that
Defendants breached, misappropriated, converted and conspired to
convert the Company's property rights, (iii) damages, profits realized
and interest thereon; and (9v) attorneys' fees, costs and expenses. In
response, on August 3, 2000, Defendants filed a Motion to Dismiss the
Complaint alleging lack of personal jurisdiction or, in the
alternative, that the agreement underlying the Company's claim is
legally inoperative.
In August 2000, the Defendants other than Miller, filed a suit against
the Company in the United States District Court for the Eastern
District of Michigan which alleges that INMC, and not the Company, is
the owner of the exclusive/broad rights in Reticulose, and seeks, among
other things, (i) a declaratory judgment that Defendant IMMC is the
exclusive owner of the broad/exclusive rights to Reticulose and the
subject patent; (ii) an injunction against the Company from further
attempts to use; market or assert any claims of ownership over any
broad/exclusive rights in Reticulose, or the use, publication or
disclosure of information regarding Reticulose; (iii) return of such
information to the Defendants; (iv) that the Company assign any
Reticulose-related trademarks to IMMC and (v) that the Company pay
Defendants damages, profits, costs and attorneys' fees. The Company was
served with the Complaint on August 8, 2000.
-23-
26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
In September 2000, the Company's case in New York was dismissed. The
Company has asked the New York court to reinstate its claim in the New
York case. That motion is pending. The Company has counterclaimed in
the Michigan action alleging the same causes of action as have been
asserted in the New York action, seeking an injunction, damages,
profits and interest thereon and attorneys fees, costs and expenses.
The Michigan case has not yet entered the discovery phase.
The Company believes that the allegations contained in the Michigan
complaint are without merit and the Company intends to vigorously
defend itself against all allegations contained therein.
NOTE 3. CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively,
principal amount of its ten-year 7% Convertible Debentures (the
"February Debenture" and the "October Debenture", collectively, the
"Debentures") due February 28, 2007 and August 30, 2007, respectively,
to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
pursuant to Regulation S under the Securities Act of 1933, as amended.
Accrued interest under the Debentures was payable semi-annually,
computed at the rate of 7% per annum on the unpaid principal balance
from the date of issuance until the date of interest payment. The
Debentures were convertible, at the option of the holder, into shares
of Common Stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000,
$134,000, $270,000 and $266,000, respectively, of the principal amount
of the February Debenture was converted into 1,648,352, 894,526,
2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
August 20, 1997, the February Debenture was fully converted. On
December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
the October Debenture was fully converted.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase
common stock, each such February Warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise prices of the three February
Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February Warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black-Scholes Pricing Model. This amount has been
reflected in the accompanying financial statements as interest expense
related to the convertible February Debenture. Based on the terms for
conversion associated with the February Debenture, there was an
intrinsic value associated with the beneficial conversion feature of
$413,793. This amount has been fully amortized to interest expense with
a corresponding credit to additional paid-in capital.
-24-
27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October Warrants") to purchase
Common Stock, each such October Warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise prices of the three October
Warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October Warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized over the expected
term of the notes, which at December 31, 1997 was 120 months. In May
1998, the remaining unamortized discount of $276,957 was amortized upon
full conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there was an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount was treated as deferred
interest expense and recorded as a reduction of the convertible
debenture liability with a corresponding credit to additional paid-in
capital and has been amortized to interest expense over the period from
October 8, 1997 (date of debenture) to February 24, 1998 (date the
debenture is fully convertible). The interest expense relative to this
item was $210,951 for 1998 and $1,139,049 for 1997.
In November 1998, in order to finance further research and development,
the Company sold 1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the November
Debenture until the date of interest payment. The November Debenture
may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the
Debenture notice not less than 30 days before the date fixed for
prepayment in that notice. The November Debenture is convertible, at
the option of the holder, into shares of common stock.
On January 19, 2000 and March 7, 2000 pursuant to notice by the holder,
RBB, to the Company under the November Debenture, $1,122,500 and
$377,500, respectively, of the principal amount of the November
Debenture was converted into 8,252,746 and 1,887,500 shares of the
common stock, respectively. As of March 7, 2000, the November Debenture
was fully converted.
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise prices of the two November
Warrants are $.20 and $.24 per warrant share, respectively. The fair
value of the November warrants was estimated to be $48,000 ($.064 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk
-25-
28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
free interest rate of 5.75% and an expected holding period of one year.
This amount has been amortized to interest expense in the accompanying
consolidated condensed financial statements.
Based on the terms for conversion associated with the November
Debenture, there was an intrinsic value associated with the beneficial
conversion feature of $625,000. This amount was recorded as interest
expense in 1998.
In August 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to issue an
aggregate of 20 units, each unit consisting of $100,000 principal
amount of the Company's 7% convertible debenture (the "August
Debenture") due August 3, 2009 to Focus Investors LLC ("Focus").
Accrued interest under the August Debenture is payable semi-annually,
computed at the rate of 7% on the unpaid principal balance from the
date of issuance until the date of the interest payment. No payment of
the principal of the August Debenture may be made prior to the maturity
date without the consent of the holder. The August Debenture is
convertible, at the option of the holder, into shares of common stock.
On January 19, 2000, February 17, 2000 and March 3, 2000 pursuant to
notice by the holder, Focus, to the Company under the August Debenture,
$300,000, $900,000 and $800,000, respectively, of the principal amount
of the August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3, 2000
the November Debenture was fully converted.
In connection with the issuance of the August Debenture, the Company
issued to Focus one warrant (the "August Warrant") to purchase Common
Stock, such August Warrant entitling the holder to purchase 1,000,000
shares of the Common Stock at any time and from time to time through
August 3, 2004. The exercise price of the August Warrant is $.2461 per
warrant share. The fair value of the August Warrants was estimated to
be $52,593 ($.0526 per warrant share) based upon a financial analysis
of the terms of the warrant using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five years.
This amount has been amortized to interest expense in the accompanying
consolidated condensed financial statements.
Based on the terms for conversion associated with the August Debenture,
there was an intrinsic value associated with the beneficial conversion
feature of $687,500. This amount was recorded as interest expense in
1999.
In December 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to sell
$2,000,000 principal amount of the Company's 7% convertible debenture
(the December Debenture) due December 28, 2009 to Endeavour Capital
("Endeavour"). Accrued interest under the December Debenture is payable
semi-annually, computed at the rate of 7% on the unpaid principal
balance from the date of issuance until the date of the interest
payment. No payment of the principal of the December Debenture may be
made prior to the maturity date without the consent of the holder. The
December Debenture is convertible, at the option of the holder, into
shares of common stock.
-26-
29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
During 1999, $1,000,000 of these debentures was sold. The remaining
$1,000,000 was not available until the shares underlying the first
$1,000,000 were registered. Such registration statement was declared
effective in January 2000 and the remaining $1,000,000 transaction was
consummated.
On January 27, 2000, February 22, 2000, February 23, 2000, February 24,
2000 and February 29, 2000 pursuant to notice by the holder, Endeavour,
to the Company under the December Debenture, $150,000, $135,000,
$715,000, $785,000 and $200,000, respectively, of the principal amount
of the December Debenture was converted into 1,105,435, 988,913,
5,149,035, 5,622,696 and 1,036,674 shares of the common stock,
respectively. As of September 30, 2000, $15,000 of the December
Debenture remained outstanding.
In connection with the issuance of the first $1,000,000 of the December
Debenture, the Company issued to Endeavour warrants (the December
Warrants) to purchase Common Stock, such December Warrant entitling the
holder to purchase 100,000 shares of the Common Stock at any time and
from time to time through December 31, 2002. The exercise price of the
December Warrant is $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant share)
based upon a financial analysis of the terms of the warrant using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 20%; a risk free interest rate of 6% and an expected
holding period of three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the first $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrant
entitling the holder to purchase 100,000 shares of the Common Stock at
any time and from time to time through December 31, 2002. The exercise
price of the December Warrant is $.20 per warrant share. The fair value
of the December Warrants was estimated to be $13,600 ($.136 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of three years. This amount has been amortized
to interest expense in the accompanying consolidated financial
statements.
Based on the terms for conversion associated with the second $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $386,909. This amount has been
recorded as interest expense in 2000.
-27-
30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
A summary of the outstanding convertible debentures is as follows:
September 30, December 31,
2000 1999
---------- ----------
Unpaid principal balance of November debenture $ -- $1,500,000
Unpaid principal balance of August debenture -- 2,000,000
Unpaid principal balance of December debenture 15,000 1,000,000
---------- ----------
15,000 4,500,000
Less unamortized discount -- 53,371
---------- ----------
Convertible debentures, net $ 15,000 $4,446,629
========== ==========
NOTE 4. SECURITIES PURCHASE AGREEMENTS
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an aggregate
purchase price of $802,500. Such agreement also provided for the
issuance of four warrants to purchase a total of 2,366,788 shares of
common
stock at prices ranging from $.204 to $.2448 per share at any time
until December 31, 2003. The fair value of these warrants was estimated
to be $494,138 ($.209 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of five years. This
amount is being amortized to interest expense in the accompanying
consolidated financial statements. As of September 30, 2000, 441,178
shares of common stock were issued pursuant to the exercise of these
warrants for an aggregate exercise price of approximately $99,000.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase price of
$500,000. These proceeds were received in July 1999. Such agreement
also provides for the issuance of warrants to purchase an aggregate of
925,926 shares of common stock at any time until June 30, 2004. The
fair value of these warrants was estimated to be $37,000 ($.04 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements.
Pursuant to a securities purchase agreement with Harbor View Group and
other various purchasers, dated February 16, 2000, the Company received
$3,000,000 on March 9, 2000 in exchange for 13,636,357 shares of common
stock.
-28-
31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%) of
the warrants are exercisable at $0.275 per share and fifty percent
(50%) of the warrants are exercisable at $0.33 per share, until
February 28, 2005. The fair value of these warrants was estimated to be
$1,582,734 ($0.295 and $0.285 per warrant share) based upon a financial
analysis of the terms of the warrant using the Black-Scholes Pricing
Model with the following assumptions; expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated condensed financial statements. As of
September 30, 2000, 181,818 shares of common stock were issued pursuant
to the exercise of these warrants for an aggregate exercise price of
approximately $55,000.
On November 8, 2000, pursuant to a securities purchase agreement among
the Company, Harbor View Group and various other purchasers, the
Company authorized the issuance and sale of up to 50,000,000 shares of
common stock, and warrants to purchase an aggregate of 30,000,000
shares of common stock in a private offering transaction for a purchase
price of $0.40 per share. As of November 14, 2000, the Company had
closed on the sale of 5,555,000 shares and warrants to purchase
3,333,000 shares for an aggregate purchase price of $2,222,000. Half of
the warrants are exercisable at $0.48 per share, and half of the
warrants are exercisable at $0.56 per share, until November 2005.
NOTE 5. EQUITY LINE OF CREDIT
In September 2000, the Company entered into an agreement with Spinneret
Financial Systems, Inc., an institutional investor, to sell up to
$20,000,000 of the Company's common stock. The shares of common stock
will be sold pursuant to the private equity line of credit, under which
the Company may exercise "put options" to sell shares for a price equal
to the average of the three lowest reported closing bid prices of the
Company's common stock over a 25 trading day period ending on the
advance notice date (the "Average Bid Price"). The agreement provides
that the closing bid price of the common stock on the put option notice
date shall not be less that the Average Bid Price. The shares may be
sold periodically in maximum increments of $100,000 to $300,000 over a
period of up to 30 months. Upon signing the agreement, the Company
issued to its placement agent, May Davis Group, Inc., a Class A Warrant
to purchase 5,000,000 shares of common stock at an exercise price per
share equal to $1.00, exercisable in part or in whole at any time until
September 18, 2005, and a Class B Warrant to purchase 5,000,000 shares
of common stock at an exercise price equal to the greater of $1.00 or
110% of the bid price of the common stock on the applicable advance
date. The Class B Warrant is exercisable pro rata on or after each
advance date with respect to that number of warrant shares equal to the
product obtained by multiplying 5,000,000 by a fraction, the numerator
of which is the amount of the advance payable on the applicable advance
date and denominator of which is 20,000,000, until 60 months from the
date of issuance.
-29-
32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 5. EQUITY LINE OF CREDIT (Continued)
The fair value of the Class A Warrants is estimated to be $512,241
($.1024 per warrant share) based upon a financial analysis of the terms
of the warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 50%; risk free interest
rate of 6%. This amount will be amortized to interest expense over the
term of the warrants.
The Company has incurred approximately $60,000 in fees in connection
with the Equity Line of Credit. Such fees have been included in other
assets and will be amortized over the life of the line of credit.
-30-
33
ITEM 2. 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 Condensed Financial Statements and the related Notes to
Consolidated Condensed Financial Statements of Advanced Viral Research Corp.
included in Item 1 of this Quarterly Report on Form 10-Q. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full year. The statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 1999.
OVERVIEW
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not yet generated material
operating revenues, and as of September 30, 2000 we had incurred a cumulative
net loss of approximately $26,272,000. Our ability to generate substantial
operating revenue depends upon our success in gaining the Food & Drug
Administration (FDA) approval for the commercial use and distribution of Product
R (the prior formulation of which was known as "Reticulose"). All of our
research and development efforts have been devoted to the development of Product
R.
In order to commence clinical trials for regulatory approval of Product
R in the United States, we must submit an Investigational New Drug application
(IND) with the FDA. Filings with foreign regulatory agencies are required to
continue or begin new clinical trials outside the United States. We have
contracted with GloboMax LLC of Hanover, Maryland to assist us in our
preparation and filing of the IND with the FDA, and to otherwise assist us
through the FDA process with the objective of obtaining full approval for the
manufacture and commercial distribution of Product R in the United States. The
IND will seek approval to conduct a study testing the effectiveness of Product R
on human subjects with AIDS and other diseases. In the IND we intend to include,
among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be conducted on
humans; and
o information assuring the identification, quality and purity of
Product R and a description of the physical, chemical and
microbiological characteristics of Product R.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Product R as a treatment of AIDS and other
diseases, however, it is impossible to determine if or how much of the data from
any ongoing studies will be considered useful by the FDA in considering the IND
application, once it is filed. FDA approval to begin human clinical trials of
Product R pursuant to an approved IND will require significant cash
expenditures. Furthermore, Product R may never be approved for commercial
distribution by any country.
-31-
34
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that will be conducted at those
institutions will depend upon our financial status. Because our research and
development expenses and clinical trial expenses will be charged against
earnings for financial reporting purposes, we expect that losses from operations
will continue to be incurred for the foreseeable future.
RECENT DEVELOPMENTS
EQUITY LINE OF CREDIT AGREEMENT. On September 18, 2000, we signed a
private equity line of credit agreement with Spinneret Financial Systems, Inc.
for the future issuance and purchase of shares of our common stock. The private
equity line of credit agreement establishes what is sometimes termed an equity
line of credit or an equity drawdown facility. Spinneret has committed up to
$20,000,000 to purchase shares of our common stock. Beginning on the date that a
registration statement covering the resale of the shares issuable pursuant to
the equity line of credit is declared effective by the Commission, and
continuing for thirty (30) months thereafter, we may, from time to time, in our
sole discretion, sell or "put" shares of our common stock to Spinneret at a
price equal to the market price of the common stock. Spinneret's obligation to
purchase the shares of our common stock is subject to the satisfaction of
certain conditions as described below. Once every 15 trading days, we may
request an advance the maximum amount of which is dependent, among other things,
on the trading volume of our common stock. The number of shares that we will
issue to Spinneret in return for the advance will be determined by dividing the
amount of the advance by the average of the three lowest reported closing bid
prices of our common stock over a 25 trading day period ending on the advance
notice date, as set forth in private equity line of credit agreement.
Our ability to put shares of common stock to Spinneret Financial
Systems is subject to certain conditions and limitations, including, among
others, the following:
o the closing bid price of the common stock on the advance notice date
shall not be less than the average of the three lowest closing bid
prices of our common stock for the 25 trading day period ending on
the date we request an advance.
o the registration statement covering the resale of the shares must
have previously become effective and shall remain effective and
available for making resales of the put shares;
o at least 15 trading days must have elapsed since the last date we
put shares to Spinneret Financial Systems
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We will receive the amount of the advance less any escrow agent fees
and a five percent (5%) cash placement fee payable to the placement agent, May
Davis Group, Inc., which introduced Spinneret to us. May Davis is not obligated
to purchase any of our shares, but as an additional placement fee, we issued to
May Davis a Class A Warrant to purchase 5,000,000 shares of our common stock at
an exercise price per share equal to $1.00, exercisable at any time by May Davis
until September 18, 2005, and a Class B Warrant to purchase 5,000,000 shares of
our common stock at an exercise price equal to the greater of $1.00 or 110% of
the bid price of the common stock on the applicable advance date under the
private equity line of credit agreement. The Class B Warrant is exercisable pro
rata on or after each advance date with respect to that number of warrant shares
equal to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty months
from the date of issuance. We may redeem the warrants at a redemption price of
$.01 per share provided that the bid price for our common stock equals at least
$4.00 per share for a period of 10 consecutive trading days, as described
therein. May Davis is also entitled to certain "piggyback" registration rights
with respect to the shares of common stock issuable upon exercise of the
warrants pursuant to a registration rights agreement.
In addition, pursuant to the equity line of credit agreement, each of
our officers, directors and affiliates has agreed that he, she or it will not,
directly or indirectly, without the prior written consent of Spinneret, issue,
offer, agree or offer to sell, sell, grant an option for the purchase or sale
of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of (whether pursuant to Rule 144 promulgated under the Securities Act of
1933, as amended, or otherwise) any shares of our common stock, including
options, rights, warrants or other securities underlying, convertible into,
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for any shares of our common stock (whether or not beneficially owned by the
undersigned), or any beneficial interest therein for a period of 10 trading days
following the receipt of an advance notice by us pursuant to the agreement.
SECURITIES PURCHASE AGREEMENT. On November 8, 2000, pursuant to a
securities purchase agreement with Harbor View Group and various other
purchasers, we authorized the issuance and sale of up to 50,000,000 shares of
our common stock and warrants to purchase an aggregate of 30,000,000 shares of
common stock in a private offering transaction pursuant to Section 4(2) of the
Securities Act for a purchase price of $0.40 per share. As of November 14, 2000,
we had closed on the sale of 5,555,000 shares and warrants to purchase 3,333,000
shares for an aggregate purchase price of $2,222,000. Half of the warrants are
exercisable at $0.48 per share, and half of the warrants are exercisable at
$0.56 per share, until November 8, 2005. Each warrant contains anti-dilution
provisions which provide for the adjustment of warrant price and warrant shares.
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RESULTS OF OPERATIONS
For the three and nine month periods ended September 30, 2000, we
incurred losses of approximately $3,156,000 and $6,547,000, respectively, vs.
approximately $2,013,000 and $4,099,000 for the three and nine month periods
ended September 30, 1999. Our increased losses were attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSE. Our increased losses during the
three and nine months ended September 30, 2000 are principally due to increased
general and administrative expense (approximately $723,000 and $2,089,000 for
the three and nine months ended September 30, 2000 vs. $606,000 and $1,545,000
for the three and nine months ended September 30, 1999, respectively). Included
in the general and administrative expenses are:
o increases and decreases in consulting and professional fees
(approximately $168,000 and $636,000 for the three and nine months
ended September 30, 2000 vs. $176,000 and $448,000 for the three and
nine months ended September 30, 1999, respectively) primarily
attributable to the engagement of an investor relations firm and a
consulting agreement with Harbor View Group;
o an increase in payroll and related expenses (approximately $295,000
and $783,000 for the three and nine months ended September 30, 2000
vs. $212,000 and $545,000 for the three and nine months ended
September 30, 1999, respectively) attributable to increased employee
and officer salaries and the addition of a Chief Financial Officer
position.
EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS. Our increased
losses during the three and nine months ended September 30, 2000 are also due to
expense relating to the modification of the term and option price of certain
options previously issued in connection with various product testing and
corporate consulting services (approximately $1,176,000 for the three and nine
months ended September 30, 2000 vs. $0 for the three and nine months ended
September 30, 1999).
DEPRECIATION EXPENSE. Our increased losses during the three and nine
months ended September 30, 2000 are also due to increased depreciation expense
(approximately $102,000 and $246,000 for the three and nine months ended
September 30, 2000 vs. $54,000 and $149,000 for the three months ended September
30, 1999, respectively) due to the purchase of additional research and
laboratory equipment and leasehold improvements.
INTEREST INCOME (EXPENSE). Our losses during the three and nine months
ended September 30, 2000 are also due to interest expense (approximately
$221,000 and $899,000 for the three and nine months ended September 30, 2000 vs.
$936,000 and $1,247,000 for the three and nine months ended September 30, 1999,
respectively). Interest income for the three and nine months ended September 30,
2000 was approximately $33,000 and $108,000 vs. $6,000 and $28,000 for the three
and nine months ended September 30, 1999, respectively. Included in the interest
expense are:
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o amortization of loan costs and other interest expense (as reduced by
other items previously accrued at year end) of approximately $6,000
and $73,000 for the three and nine months ended September 30, 2000
vs. $131,000 and $248,000 for the three and nine months ended
September 30, 1999, respectively;
o beneficial conversion feature on certain convertible debentures of
approximately $0 and $387,000 for the three and nine months ended
September 30, 2000 vs. $687,500 for the three and nine months ended
September 30, 1999;
o amortization of discount on certain warrants of approximately
$216,000 and $439,000 for the three and nine months ended September
30, 2000 vs. $40,000 and $113,000 for the three and nine months
ended September 30, 1999, respectively; and
o additional financing costs related to the effective date of certain
registration statements of $78,000 and $198,000 for the three and
nine months ended September 30, 1999.
RESEARCH AND DEVELOPMENT EXPENSE. Our increased losses during the three
months ended September 30, 2000 are also due to increased research and
development expenses (approximately $970,000 and $2,253,000 for the three and
nine months ended September 30, 2000 vs. $427,000 and $1,192,000 for the three
and nine months ended September 30, 1999, respectively). Included in the
research and development expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting us
with the preparation and filing of the IND for Product R, of
approximately $373,000 and $747,000 for the three and nine months
ended September 30, 2000 vs. $65,000 and $175,000 for the three and
nine months ended September 30, 1999, respectively;
o expenditures in connection with Phase I of the drug approval process
in Argentina of approximately $90,000 and $206,000 for the three and
nine months ended September 30, 2000 vs. $50,000 and $98,000 for the
three and nine months ended September 30, 1999, respectively; and
o additional expenditures for payroll and related costs and occupancy
expenses for the Yonkers, New York facility (approximately $316,000
and $913,000 for the three and nine months ended September 30, 2000
vs. $273,000 and $717,000 for the three and nine months ended
September 30, 1999, respectively).
REVENUES. We had sales of approximately $2,000 and $7,000 for the three
and nine months ended September 30, 2000 vs. $2,000 and $7,000 for the three and
nine months ended September 30, 1999, respectively. All sales during these
periods were to distributors purchasing Product R for testing purposes.
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LIQUIDITY
As of September 30, 2000, we had current assets of approximately
$1,442,000, compared to approximately $916,000 at December 31, 1999. We had
total assets of approximately $3,907,000 and $2,862,000 at September 30, 2000
and December 31, 1999, respectively. The increase in current and total assets
was primarily attributable to additions to property and equipment and proceeds
received from the sale of securities and the exercise of outstanding options
(please refer to Statement of Stockholders Equity contained in the Consolidated
Condensed Financial Statements and the related Notes to Consolidated Condensed
Financial Statements included herein).
During the nine months ended September 30, 2000, we used cash of
approximately $3,885,000 for operating activities, as compared to approximately
$2,918,000 for the nine months ended September 30, 1999. During the nine months
ended September 30, 2000, our expenditures included:
o approximately $783,000 for payroll and related costs;
o approximately $560,000 in consulting fees to GloboMax;
o non-cash expenses of approximately $387,000 relating to amortization
of deferred interest associated with the beneficial conversion
feature of the second tranche of the December 1999 convertible
debentures;
o approximately $206,000 in connection with Phase I of the drug
approval process in Argentina;
o approximately $913,000 for payroll and related costs and occupancy
expenses for our Yonkers facility;
o approximately $304,000 for laboratory supplies;
o approximately $584,000 for other professional and consulting fees;
o non-cash expenses relating to amortization of loan costs and
discount on warrants of approximately $106,000 and $441,000,
respectively, relating to convertible debentures issued in 1998,
1999 and 2000; and
o non-cash expenses of approximately $193,000 relating to the issuance
of warrants for consulting services.
During the nine months ended September 30, 2000, cash flows provided by
financing activities was primarily due to the proceeds from the sale of
convertible debentures, sale of common stock and exercise of options in 1999 and
2000 of approximately $5,030,000. During the nine months ended September 30,
2000, cash flow used for investing activities were for expenditures of
approximately $607,000 for leasehold improvements and research and laboratory
equipment at our Yonkers, New York office.
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Under the terms of an agreement with RBB Bank, A.G. entered in November
1998 pursuant to which RBB purchased a 7% convertible debenture and related
warrants, we were required to file with the Commission a registration statement
to register shares of the common stock issuable upon conversion of the
convertible debenture and upon exercise of the related warrants to allow the
investors to resell such common stock to the public. Because the registration
statement was not declared effective by the Commission on or before April 13,
1999, the RBB agreement provides that we pay RBB a penalty equal to the sum of
(x) $30,000 and (y) $1,500 for each day lapsed after such date, until the
registration statement is declared effective by the Commission, provided,
however, that total penalties shall not exceed $100,000 in the aggregate. As of
the date hereof, RBB has not requested payment of the penalty, and we are
negotiating with RBB to have the penalty waived.
On September 18, 2000 we entered into a private equity line of credit
agreement where we have the right to put shares of our common stock to Spinneret
from time to time to raise up to $20,000,000, subject to certain conditions and
restrictions. Under the terms of a registration rights agreement entered in
connection with the equity line of credit, we are required to file with the
Commission a registration statement to register the resale of shares of common
stock purchased by Spinneret upon the exercise of each put option. Such
registration statement must be declared effective by the Commission prior to the
first sale to the investor of the common stock sold pursuant to the agreement.
In addition, May Davis, our placement agent, is entitled to certain "piggyback"
registration rights with respect to the resale of shares of common stock
issuable upon exercise of certain warrants received in consideration of its
services. The registration statement was filed with the Commission on October
31, 2000.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1999,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements states that our ability
to continue operations is dependent upon the continued sale of our securities
for funds to meet our cash requirements, which raise substantial doubt about our
ability to continue as a going concern. Further, the accountant's report does
not include any adjustments that might result from the outcome of this
uncertainty. Although we may not be successful in doing so, we plan to eliminate
or remedy the deficiencies in our financial condition through the issuance of
additional securities for cash.
CAPITAL RESOURCES
We have been dependent upon the proceeds from the continued sale of
securities for the funds required to continue operations at present levels and
to fund further research and development activities. In April 2000, the
Commission declared effective our shelf registration statement relating to the
offering of up to 200,000,000 shares of our common stock to be used in
connection with financings and resales of the shares issued thereunder by the
recipients of such shares. All such shares remain available for issuance.
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The following table summarizes sales of our securities since November
1998.
GROSS CONVERTIBLE/ CONVERSION PRICE/ MATURITY DATE/
DATE ISSUED PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
- ----------- -------- --------------- ---------------- -------------- ---------------
November 1998 $1,500,000 Debenture 10,130,246 shares $0.1363-$.2011 per share Fully converted
Warrants 375,000 shares $0.20 per share October 31, 2008
375,000 shares $0.24 per share
January 1999 $802,500 Common Stock 4,917,276 shares n/a n/a
Warrants 1,183,394 shares $0.2040 per share December 31, 2003
1,183,394 shares $0.2448 per share
July 1999 $500,000 Common Stock 1,851,852 shares n/a n/a
Warrants 463,264 shares $0.324 per share June 30, 2004
463,264 shares $0.378 per share
August 1999 $2,000,000 Debentures 14,348,847 shares $0.1396-$.1438 per share Fully converted
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
December 1999 and $2,000,000 Debentures 13,884,841 shares $0.1363-.3564 per share Fully converted
January 2000
Warrants 210,000 shares $0.19916667 per share December 31, 2002
February 2000 $3,000,000 Common Stock 13,636,957 shares n/a n/a
Warrants 2,727,272 shares $0.275 per share February 28, 2005
2,727,272 shares $0.33 per share
September 2000 (1) Warrants 10,000,000 shares $1.00 per share (1) September 18, 2005
November 2000 $2,222,000 Common Stock 5,555,000 shares $0.40 per share n/a
Warrants 1,666,500 shares $0.48 per share November 8, 2005
1,666,500 shares $0.56 per share November 8, 2005
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(1) Represents warrants issued to May Davis Group, Inc. as consideration for
its services as placement agent in connection with the equity line of
credit, including a Class A Warrant to purchase 5,000,000 shares of our
common stock at an exercise price per share equal to $1.00, exercisable at
any time by May Davis until September 18, 2005, and a Class B Warrant to
purchase 5,000,000 shares of our common stock at an exercise price equal to
the greater of $1.00 or 110% of the bid price of the common stock on the
applicable advance date.
SECURITIES ISSUED IN 1998
RBB BANK, A.G.: In November 1998 we sold $1,500,000 principal amount of
our ten-year 7% convertible debenture due October 31, 2008 to RBB, as agent for
the accounts of certain persons, in an offshore transaction pursuant to
Regulation S under the Securities Act. Accrued interest under the convertible
debenture is payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The convertible debenture is convertible, at the option of the holder,
into shares of common stock pursuant to a specified formula. The actual number
of shares of common stock issued or issuable upon conversion of the convertible
debenture is subject to adjustment and could be materially less or more than the
above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion can occur immediately upon issuance of the
convertible debenture, this amount was recognized as interest expense in 1998.
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On January 19 and March 7, 2000, pursuant to notice by RBB, $1,122,500
and $377,500 principal amount of the November 1998 debenture was converted into
8,252,746 and 1,877,500 shares of common stock, respectively. As of March 7,
2000, the November 1998 debenture was fully converted.
In connection with the issuance of the convertible debenture, we issued
to RBB two warrants to purchase common stock, each warrant entitling the holder
to purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of September 30, 2000, none of these
warrants had been exercised.
The fair value of the warrants issued in connection with the
convertible debenture was estimated to be $48,000 ($0.064 per warrant) based
upon a financial analysis of the terms of such warrants using the Black-Scholes
pricing model with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one year. This
amount has been amortized in the accompanying consolidated financial statements
as interest expense related to the convertible debenture.
HARBOR VIEW GROUP, INC., ET AL.: In December 1998 pursuant to a
securities purchase agreement, we sold to Harbor View Group, Inc. and various
other purchasers 4,917,276 shares of common stock, and warrants to purchase an
aggregate of 2,366,788 shares of common stock, including (x) warrants to
purchase an aggregate of 1,966,788 shares of common stock and (y) a finder's fee
paid to Harbor View Group consisting of two warrants to purchase an aggregate
400,000 shares of common stock, in a private offering transaction pursuant to
Section 4(2) of the Securities Act, for an aggregate purchase price of $802,500.
Of the $802,500 purchase price, $600,000 was received on December 31, 1998, and
$202,500 was received in January 1999. The warrants entitle the holders to
purchase an aggregate of 1,183,394 shares of common stock at an exercise price
of $0.2040 per share, and 1,183,394 shares at an exercise price of $0.2448 per
share. The warrants are exercisable at any time and from time to time until
December 31, 2003. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of September 30, 2000, warrants to purchase
441,178 shares of common stock had been exercised.
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The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares in connection with the securities purchase agreement,
was estimated to be $494,000 ($0.0208 per warrant) based upon a financial
analysis of the terms of such warrants using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 20%, and a risk free
interest rate of 6% through the December 31, 2003 expiration date. This amount
is amortized to interest expense in the accompanying consolidated financial
statements.
SECURITIES ISSUED IN 1999
BERMAN, ET AL.: In July 1999 pursuant to a securities purchase
agreement, we sold 1,851,852 shares of common stock, and warrants to purchase an
aggregate of 925,926 shares of common stock to Michael Berman, Pak-Lin Law and
Kwong Wai Au in a private offering transaction pursuant to Section 4(2) of the
Securities Act, for an aggregate purchase price of $500,000, received in July
1999. The warrants entitle the holders to purchase 463,264 and 463,264 shares of
common stock at exercise prices of $0.324 and $0.378 per share, respectively.
The warrants are exercisable at any time and from time to time until June 28,
2004. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears to that market value. Each warrant
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of September 30, 2000, none of the warrants had
been exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 per warrant) based upon a financial analysis of
the terms of such warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%, and a risk free interest rate
of 5.75% through the June 30, 2004 expiration date. This amount is amortized to
interest expense in the accompanying consolidated financial statements.
FOCUS INVESTORS LLC: Pursuant to a securities purchase agreement dated
August 3,1999 in a private offering transaction under Section 4(2) of the
Securities Act, we sold to Focus Investors LLC an aggregate of 20 units for an
aggregate gross purchase price of $2 million, each unit consisting of $100,000
principal amount of our ten-year 7% convertible debentures due August 3, 2009,
and series W warrants to purchase 50,000 shares of our common stock exercisable
until August 3, 2004. Accrued interest under the convertible debentures is
payable semiannually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of issuance until the date of interest payment.
The convertible debentures are convertible, at the option of the holder, into
shares of common stock pursuant to a specified formula. The actual number of
shares of common stock issued or issuable upon conversion of the convertible
debentures is subject to adjustment and could be materially less or more than
the above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock. On January 19, February 17, and March 3, 2000, pursuant to notice by
Focus Investors, $300,000, $900,000, and $800,000 principal amount of the Focus
debentures was converted into 2,178,155, 6,440,725 and 5,729,967 shares of
common stock, respectively. As of March 3, 2000, the debenture was fully
converted.
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The exercise price of the series W warrants is $0.2461 per warrant
share. The warrants provide that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; The series
W warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of March 17, 2000, all of the warrants
had been exercised.
The fair value of the warrants issued as of August 3, 1999 in
connection with the securities purchase agreement was estimated to be $52,953
($0.0526 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 5.75% through the
June 30, 2004 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
ENDEAVOUR CAPITAL FUND S.A.: Pursuant to a securities purchase
agreement dated December 28, 1999 in a private offering transaction under
Section 4(2) of the Securities Act, we issued the first $1,000,000 tranche of
$2,000,000 in aggregate principal amount of our 7% convertible debentures due
December 31, 2004 to Endeavour Capital Fund S.A. (the "Endeavour Transaction").
In connection with the sale of the first tranche of debentures, we issued
warrants to purchase 100,000 shares of our common stock to Endeavour, and two
warrants to purchase 5,000 shares of common stock to Endeavour's legal counsel.
Accrued interest under the convertible debentures was computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment and was payable on conversion of the debenture or on
maturity in common stock using the same conversion formula. The convertible
debentures were convertible, at the option of the holder, into shares of common
stock pursuant to a specified formula.
These warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per share. The warrants provide that the holder may elect to receive
a reduced number of shares of common stock on the basis of a cashless exercise.
The warrants contain anti-dilution provisions which provide for the adjustment
of the warrant price and warrant shares. As of the date of this prospectus, none
of these warrants had been exercised.
The fair value of the warrants issued as of December 28, 1999 in
connection with the securities purchase agreement was estimated to be $4,285
($0.0429 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On January 27, February 22 and 23, 2000 pursuant to notice by Endeavour
Capital Fund, $150,000, $135,000, and $715,000 principal amount of the first
tranche of the Endeavour debentures was converted into 1,105,435, 988,913, and
5,149,035 shares of common stock, respectively. As of February 23, 2000, the
first tranche of the debentures was fully converted. The second tranche of the
debentures issued to Endeavour in 2000, as more fully described below, were
fully converted as of October 23, 2000.
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SECURITIES ISSUED IN 2000
ENDEAVOUR CAPITAL FUND S.A.: In January 2000, in connection with the
Endeavour Transaction, we issued the second $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004, along with warrants to purchase 100,000 shares of our common stock to
Endeavour Capital Fund, S.A. The terms of the second tranche of debentures and
warrants are the identical to the terms of the debentures and warrants issued in
first tranche of the Endeavour Transaction.
The fair value of the second tranche of warrants issued in January 2000
in connection with the securities purchase agreement was estimated to be $13,600
($0.0136 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On February 24 and 29, and October 23, 2000 pursuant to notice by
Endeavour Capital Fund,$785,000, $200,000 and $15,000 principal amount of the
second tranche of the Endeavour debentures was converted into 5,622,696,
1,036,674 and 42,088 shares of common stock, respectively. As of October 23,
2000, the second tranche of the debentures were fully converted.
HARBOR VIEW GROUP, INC. On February 7, 2000 pursuant to a consulting
agreement with Harbor View Group, we issued to Harbor View warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share, and warrants to
purchase 1,750,000 shares at an exercise price of $0.26 per share, until
February 28, 2005, in exchange for consulting services provided or to be
provided to us. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of September 30, 2000
none of these warrants had been exercised.
The fair value of the warrants is estimated to be $200,249 ($.057 per
warrant) based upon a financial analysis of the terms of the warrant using the
Black-Scholes Pricing Model with the following assumptions: expected volatility
of 90%; a risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). We have determined that $89,045
of the fair value relates to past services and, accordingly, we have expensed
this portion in the three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and is amortized over the remaining term of the
agreement.
HARBOR VIEW GROUP, INC., ET AL. In February 2000 pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,636,357 shares of common stock, and warrants to purchase an
aggregate of 5,454,544 shares of common stock in a private offering transaction
pursuant to Section 4(2) of the Securities Act, for an aggregate purchase price
of $3,000,000. Half of the warrants are exercisable at $0.275 per share, and
half of the warrants are exercisable at $0.33 per share, until February 28,
2005. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
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under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears to that market value. Each warrant
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of September 30, 2000 warrants to purchase 181,818
shares of common stock had been exercised.
The fair value of the warrants issued as of February 16, 2000 in
connection with the securities purchase agreement was estimated to be $1,582,734
($0.290 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
February 28, 2005 expiration date. This amount is amortized to interest expense
in the accompanying consolidated financial statements.
SPINNERET FINANCIAL SYSTEMS/MAY DAVIS GROUP. In September 2000, we
entered into an equity line of credit agreement with Spinneret Financial
Systems, Inc., an institutional investor, to sell up to $20.0 million of our
common stock. Under the private equity line of credit, under which we may
exercise "put options" to sell shares for a price equal to the average of the
three lowest reported closing bid prices of our common stock over a 25 trading
day period ending on the advance notice date (the "Average Bid Price"). The
agreement provides that the closing bid price of the common stock on the put
option notice date shall not be less than the Average Bid Price. The shares may
be sold periodically in maximum increments of $100,000 to $300,000 over a period
of up to thirty months. Upon signing the agreement, we issued to our placement
agent, May Davis Group, Inc., a Class A Warrant to purchase 5,000,000 shares of
common stock at an exercise price per share equal to $1.00, exercisable in part
or in whole at any time until September 18, 2005, and a Class B Warrant to
purchase 5,000,000 shares of common stock at an exercise price equal to the
greater of $1.00 or 110% of the bid price of the common stock on the applicable
advance date. The Class B Warrant is exercisable pro rata on or after each
advance date with respect to that number of warrant shares equal to the product
obtained by multiplying 5,000,000 by a fraction, the numerator of which is the
amount of the advance payable on the applicable advance date and the denominator
of which is $20,000,000, until sixty months from the date of issuance.
The fair value of the Class A Warrants is estimated to be $512,241
($.1024 per warrant share) based in a financial analysis of the terms of the
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This amount will be
amortized to interest expense over the term of the warrants.
As of September 30, 2000, we have incurred approximately $60,000 in
fees in connection with the equity line of credit. Such fees have been included
in other assets and will be amortized over the life of the line of credit.
SECURITIES PURCHASE AGREEMENT. On November 8, 2000, pursuant to a
securities purchase agreement with Harbor View Group and various other
purchasers, we authorized the issuance and sale of up to 50,000,000 shares of
our common stock and warrants to purchase an aggregate of 30,000,000 shares of
common stock in a private offering transaction pursuant to Section 4(2) of the
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Securities Act for a purchase price of $0.40 per share. As of November 14, 2000,
we had closed on the sale of 5,555,000 shares and warrants to purchase 3,333,000
shares for an aggregate purchase price of $2,222,000. Half of the warrants are
exercisable at $0.48 per share, and half of the warrants are exercisable at
$0.56 per share, until November 8, 2005. Each warrant contains anti-dilution
provisions which provide for the adjustment of warrant price and warrant shares.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses, expenses relating to the IND for Product R,
capital expenditures for leasehold improvements and equipment at our Yonkers,
New York office, and expenses relating to additional personnel. We currently do
not have cash availability to meet our anticipated expenditures for the next 12
months.
We anticipate that we can continue operations through January 2001 with
our current liquid assets, including the recent sale of convertible debentures
and other securities if no stock options or warrants are exercised nor
additional securities sold. Assuming we have satisfied the conditions precedent
to draw on the equity line of credit, of which there can be no assurance, if we
receive the full amount of proceeds available from the equity line of credit, we
can continue operations through December 2001, if no stock options or warrants
are exercised nor additional securities sold. If all of the outstanding stock
options and warrants are exercised, we will receive net proceeds of
approximately $15.9 million, including all of the warrants issued in connection
with the equity line of credit. Those proceeds will contribute to general and
administrative and working capital and will permit us to substantially increase
our budget for research and development and clinical trials and testing and to
operate at significantly increased levels of operation, assuming Product R
receives approvals and prospects for sales increase to justify such increased
levels of operation. The recent prevailing market price for shares of common
stock has from time to time been above the exercise prices of certain of the
outstanding options and warrants. As such, recent trading levels may not be
sustained nor may any additional options or warrants be exercised. If none of
the outstanding options and warrants are exercised, we do not draw down on the
equity line of credit, and we obtain no other additional financing, in order for
us to achieve the level of operations contemplated by management, management
anticipates that we will have to limit intentions to expand operations beyond
current levels.
We anticipate that we will be required to sell additional securities to
obtain the funds necessary to further our research and development activities.
We are currently seeking debt financing, licensing agreements, joint ventures
and other sources of financing, but the likelihood of obtaining such financing
on favorable terms is uncertain. Management anticipates that they will have to
defer their salaries if financing is not available in order to continue
operations,. Management does not believe that, at present, debt or equity
financing will be readily obtainable on favorable terms unless and until FDA
approval for phase I clinical testing is granted. Because of the large
uncertainties involved in the FDA approval process for commercial drug use on
humans, it is possible that we may never be able to sell Product R commercially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2000, we filed an action in the Supreme Court of New York,
Westchester County, against Commonwealth Pharmaceuticals, Ltd., Immune
Modulation Maximum Corp. ("IMMC") and Charles E. Miller (collectively, the
"Defendants") alleging a breach by Commonwealth of an exclusive distribution
agreement between us and Commonwealth, misappropriation of trade secrets and
confidential information, conversion and conspiracy to convert our property
interests in Reticulose. We further alleged that Defendant Miller filed and
obtained a U.S. patent entitled "Composition Containing Peptides and Nucliec
Acids and Methods of Making Same" based on a study conducted by a third party
using Reticulose, and that such patent was assigned to Defendant IMMC, a company
controlled by Defendant Miller, in violation of the exclusive distribution
agreement.
In our complaint, we sought relief in the form of (i) assignment of the
patent to us, (ii) adjudication that Defendants breached, misappropriated,
converted and conspired to convert our property rights, (iii) damages, profits
realized and interest thereon; and (iv) attorneys' fees, costs and expenses. In
response, on August 3, 2000, Defendants filed a Motion to Dismiss the Complaint
alleging lack of personal jurisdiction or, in the alternative, that the
agreement underlying our claim is legally inoperative.
In August 2000, the Defendants other than Miller, filed a suit against
Advanced Viral in the United States District Court for the Eastern District of
Michigan which alleges that IMMC, and not Advanced Viral, is the owner of the
exclusive/broad rights in Reticulose, and seeks, among other things: (i) a
declaratory judgment that Defendant IMMC is the exclusive owner of the
broad/exclusive rights to Reticulose and the subject patent; (ii) an injunction
against Advanced Viral from further attempts to use, market or assert any claims
of ownership over any broad/exclusive rights in Reticulose, or the use,
publication or disclosure of information regarding Reticulose; (iii) return of
such information to the Defendants; (iv) that Advanced Viral assign any
Reticulose-related trademarks to IMMC and (v) that Advanced Viral pay Defendants
damages, profits, costs and attorneys' fees. We were served with a copy of the
Complaint on August 8, 2000.
In September 2000, our case in New York was dismissed. We have asked
the New York court to reinstate our claim in the New York case. That motion is
pending. The case in the Federal Court continues. At this point, we have
answered the complaint against us in the Federal Court and have entered a number
of counterclaims in the Michigan action which are in substance the same as our
claims in the New York case. The Michigan case has not yet entered the discovery
phase.
We believe that the allegations contained in the Defendants' complaint
are without merit and we intend to vigorously defend the company against all
allegations contained therein.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2000, we issued shares of
common stock in private transactions exempt from registration under Section 4(2)
of the Securities Act of 1933 as follows:
o 100,000 shares of common stock valued at $0.465 per share as
compensation to for services rendered by an employee;
o a Class A Warrant to purchase 5,000,000 shares of our common stock
at an exercise price of $1.00, exercisable at any time until
September 18, 2005, and a Class B Warrant to purchase 5,000,000
shares of common stock at an exercise price equal to the greater of
$1.00 or 110% of the bid price of the common stock on the applicable
advance date under the private equity line of credit agreement. The
Class B Warrant is exercisable pro rata on or after each advance
date with respect to that number of warrant shares equal to the
product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the
applicable advance date and the denominator of which is $20,000,000,
until sixty months from the date of issuance;
o 150,000, 100,000, 178,000 and 75,000 shares of common stock pursuant
to the exercise of outstanding stock options at exercise prices of
$0.16, $0.17, $0.27, and $0.36, respectively; and
o 98,040, 98,040, 90,909, and 90,909 shares of common stock pursuant
to the exercise of outstanding warrants at exercise prices of
$0.204, $0.2448, $0.275 and $0.33 per share, respectively.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2000, no matters were submitted
to a vote of security holders of the Registrant, through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits.
NUMBER DESCRIPTION
------ -----------
4.30 Form of Warrant dated November 8, 2000 to
purchase shares of common stock at $0.48 per
share.
4.31 Form of Warrant dated November 8, 2000 to
purchase shares of common stock at $0.56 per
share.
10.43 Securities Purchase Agreement dated November 8,
2000 among Advanced Viral Research Corp. and
various purchasers listed on Exhibit B.
27.1 Financial Data Schedule (for SEC use only)
(2) Reports on Form 8-K.
During the three-month period ending September 30, 2000, no
Current Reports on Form 8-K were filed.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: November 14, 2000 By: /s/ ALAN V. GALLANTAR
------------------------------------------
Alan V. Gallantar, Chief Financial
Officer
By: /s/ SHALOM Z. HIRSCHMAN
------------------------------------------
Shalom Z. Hirschman, President and
Chief Executive Officer
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