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 March 31, 2001
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 May 11, 2001 was 380,377,118
2
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION (UNAUDITED).......................................................................1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)....................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................48
PART II. OTHER INFORMATION......................................................................................48
ITEM 1. LEGAL PROCEEDINGS..................................................................................48
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................................49
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................................................49
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS..................................................49
ITEM 5. OTHER INFORMATION..................................................................................49
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................49
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
March 31, December 31,
2001 2000
------------- ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 3,906,424 $ 5,962,633
Inventory 19,729 19,729
Other current assets 116,441 34,804
------------- ------------
Total current assets 4,042,594 6,017,166
Property and Equipment 2,054,514 1,944,199
Other Assets 861,921 847,349
------------- ------------
Total assets $ 6,959,029 $ 8,808,714
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,171,807 $ 902,961
Current portion of capital lease obligation 58,722 58,690
Current portion of note payable 22,170 21,517
------------- ------------
Total current liabilities 1,252,699 983,168
------------- ------------
Long-Term Liabilities:
Capital lease obligation - non-current portion 92,351 106,567
Note payable - non-current portion 50,653 56,446
------------- ------------
Total long-term liabilities 143,004 163,013
------------- ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 380,377,118 and 380,214,618
shares issued and outstanding 3,804 3,802
Additional paid-in capital 41,435,461 39,969,373
Deficit accumulated during the development stage (31,821,649) (29,079,902)
Discount on warrants (4,054,290) (3,230,740)
------------- ------------
Total stockholders' equity 5,563,326 7,662,533
------------- ------------
Total liabilities and stockholders' equity $ 6,959,029 $ 8,808,714
============= ============
See notes to consolidated condensed financial statements.
-1-
4
ADVANCED VIRAL RESEARCH CORP
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended (February 20,
March 31, 1984) to
------------------------------------ March 31,
2001 2000 2001
------------- ------------- ------------
Revenues $ 2,365 $ 3,028 $ 216,656
------------- ------------- ------------
Costs and Expenses:
Research and development 1,239,108 695,075 9,964,063
General and administrative 883,830 755,423 12,651,680
Compensation expense 357,975 -- 2,470,046
Depreciation 125,274 67,760 1,033,889
------------- ------------- ------------
2,606,187 1,518,258 26,119,678
------------- ------------- ------------
Loss from Operations (2,603,822) (1,515,230) (25,903,022)
------------- ------------- ------------
Other Income (Expense):
Interest income 68,631 24,963 832,749
Other income -- -- 120,093
Interest expense (206,556) (564,153) (6,871,469)
------------- ------------- ------------
(137,925) (539,190) (5,918,627)
------------- ------------- ------------
Net Loss $ (2,741,747) $ (2,054,420) $(31,821,649)
============= ============= ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01)
============= ============
Weighted Average Number of
Common Shares Outstanding 370,850,259 313,819,774
============= ============
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 MARCH 31, 2001
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 -- -- 400 --
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 MARCH 31, 2001
Common 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 MARCH 31, 2001
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 MARCH 31, 2001
Common Stock Deficit
---------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ------------ ---------
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 MARCH 31, 2001
Common Stock Deficit
---------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription 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 MARCH 31, 2001
Common Stock Deficit
---------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ------------ ---------
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock, exercise of options $.0 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 -- -- -- -- -- 399,322
Imputed interest on convertible debenture -- -- 4,768 -- -- --
Net loss, year ended December 31, 1997 -- -- -- -- (4,141,729) --
----------- ------ ----------- -------- ----------- ---------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (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 MARCH 31, 2001
Common Stock Deficit
---------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ------------ ---------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $(8,993,266) $ (73,837)
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 -- -- -- -- -- 59,068
Write off of subscription receivable -- -- (19,000) 19,000 -- --
Net loss, year ended December 31, 1998 -- -- -- -- (4,557,710) --
------------ ------ ----------- ------ ------------ --------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (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 MARCH 31, 2001
Common Stock Deficit
------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ------------ ---------
Balance, December 31, 1998 296,422,907 $2,964 $14,325,076 $(13,550,976) $(14,769) $ --
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 -- -- (494,138)
Warrant costs, securities purchase agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August debenture -- -- 52,592 -- -- --
Warrant costs, December debenture -- -- 4,285 -- -- --
Amortization of warrant costs, securities
purchase agreement -- -- -- -- -- 102,674
Amortization of deferred compensation cost -- -- -- -- 14,769 --
Compensation expense related to
modification of existing options -- -- 210,144 -- -- --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262) -- --
----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (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
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2001
Common Stock Deficit
------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ------------ ---------
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,53$ (19,725,238) $ -- $ (428,489)
Issuance of common stock, exercise of options 0.1400 600,000 6 83,994 -- -- --
Issuance of common stock, exercise of options 0.1500 1,600,000 16 239,984 -- -- --
Issuance of common stock, exercise of options 0.1600 650,000 7 103,994 -- -- --
Issuance of common stock, exercise of options 0.1700 100,000 1 16,999 -- -- --
Issuance of common stock, exercise of options 0.2100 792,500 8 166,417 -- -- --
Issuance of common stock, exercise of options 0.2500 1,000,000 10 246,090 -- -- --
Issuance of common stock, exercise of options 0.2700 281,000 3 75,867 -- -- --
Issuance of common stock, exercise of options 0.3600 135,000 1 48,599 -- -- --
Issuance of common stock, exercise of warrants 0.2040 220,589 2 44,998 -- -- --
Issuance of common stock, exercise of warrants 0.2448 220,589 2 53,998 -- -- --
Issuance of common stock, exercise of warrants 0.2750 90,909 1 24,999 -- -- --
Issuance of common stock, exercise of warrants 0.3300 90,909 1 29,999 -- -- --
Issuance of common stock, conversion of debt 0.1400 35,072,571 351 4,907,146 -- -- --
Issuance of common stock, conversion of debt 0.1900 1,431,785 14 275,535 -- -- --
Issuance of common stock, conversion of debt 0.2000 1,887,500 19 377,481 -- -- --
Issuance of common stock, conversion of debt 0.3600 43,960 -- 15,667 -- -- --
Issuance of common stock, cashless
exercise of warrants 563,597 6 326,153 -- -- --
Issuance of common stock, services rendered 0.4650 100,000 1 46,499 -- -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- -- --
Cashless exercise of warrants -- -- (326,159) -- -- --
Beneficial conversion feature, January Debenture -- -- 386,909 -- -- --
Warrant costs, consulting agreement -- -- 200,249 -- -- --
Warrant costs, January Debenture -- -- 13,600 -- -- --
Warrant costs, private placement -- -- 3,346,414 -- -- (3,346,414)
Recovery of subscription receivable
previously written off -- -- 19,000 -- -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- -- 544,163
Compensation expense related to
modification of existing options -- -- 1,901,927 -- -- --
Net loss -- -- -- (9,354,664) -- --
----------- ------- ------------ ----------- ----- -----------
Balance, December 31, 2000 380,214,618 3,802 39,969,373 (29,079,902) -- (3,230,740)
----------- ------- ------------ ----------- ----- -----------
See notes to consolidated condensed financial statements.
-11-
14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2001
Common Stock Deficit
------------------------- Accumulated
Amount Additional Sub- during the Deferred
Per Paid-In scription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ------------ ---------
Balance, December 31, 2000 380,214,618 $3,802 $39,969,373 $(29,079,902) $-- $(3,230,740)
Private placement shares issued 0.4000 162,500 2 64,998 -- -- --
Warrant costs, private placement -- -- 23,962 -- -- (23,962)
Warrant costs, private equity line of credit -- -- 1,019,153 -- -- (1,019,153)
Amortization of warrants costs,
securities purchase agreements -- -- -- -- -- 219,565
Compensation expense related to
modification of existing options -- -- 357,975 -- -- --
Net loss, three months ended March 31, 2001 -- -- -- (2,741,747) -- --
----------- ------ ----------- ------------ --- -----------
Balance, March 31, 2001 (Unaudited) 380,377,118 $3,804 $41,435,461 $(31,821,649) $-- $(4,054,290)
=========== ====== =========== ============ === ===========
See notes to consolidated condensed financial statements.
-12-
15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Inception
Three Months Ended (February 20,
March 31, 1984) to
--------------------------- March 31,
2001 2000 2001
----------- ----------- ------------
Cash Flows from Operating Activities:
Net loss $(2,741,747) $(2,054,420) $(31,821,649)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 125,274 67,760 1,033,799
Amortization of debt issue costs 2,788 106,030 782,003
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture -- 386,909 3,820,270
Amortization of discount on warrants 219,565 119,908 1,269,258
Amortization of discount on warrants - consulting services -- 111,545 230,249
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest -- -- 76,212
Issuance of common stock for services -- -- 1,551,000
Expenses related to modification of existing options 357,975 -- 2,470,046
Other -- -- (1,607)
Changes in operating assets and liabilities:
Increase in inventory -- -- (19,729)
Increase in other current assets (81,637) (18,953) (146,435)
Increase in other assets (17,361) (4,967) (1,512,356)
Increase in accounts payable and accrued liabilities 268,846 117,803 1,178,007
----------- ----------- ------------
Total adjustments 875,450 886,035 11,491,217
----------- ----------- ------------
Net cash used by operating activities (1,866,297) (1,168,385) (20,330,432)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Expenditures for property and equipment (235,588) (365,195) (2,703,809)
Proceeds from sale of property and equipment -- -- 1,200
----------- ----------- ------------
Net cash used by investing activities (235,588) (365,195) (2,702,609)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- 1,000,000 9,500,000
Proceeds from sale of securities, net of issuance costs 65,000 3,787,100 17,582,058
Payments under capital lease (14,184) (12,173) (123,096)
Payments on note payable (5,140) (3,026) (38,497)
Recovery of subscription receivable written off -- 19,000 19,000
----------- ----------- ------------
Net cash provided by financing activities 45,676 4,790,901 26,939,465
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,056,209) 3,257,321 3,906,424
Cash and Cash Equivalents, Beginning 5,962,633 836,876 --
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 3,906,424 $ 4,094,197 $ 3,906,424
=========== =========== ============
See notes to consolidated condensed financial statements.
-13-
16
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 March 31, 2001 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 March 31, 2001 and
results of operations and cash flows for the three months ended
March 31, 2001 and 2000. 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 2000 financial statements have been
reclassified to conform to 2001 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, 2000.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Liquidity
The Company has suffered accumulated net losses of approximately
$31,800,000 during its history. The Company is dependent upon
registration of Product R for sale before it can begin commercial
operations. As used in this report, the term Product R refers to
the current formulation as well as the former formulation which is
known by the trade name Reticulose(R). 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 will be
dependent upon the continued sale of its securities, debt or equity
financing for funds to meet its cash requirements.
During November and December 2000, the Company completed several
private placements of its securities under securities purchase
agreements in which it has received cash proceeds of $6,871,000. In
February 2001, the Company entered into a private equity line of
credit agreement to sell up to $50,000,000 of common stock, which
it anticipates realizing during 2001 (see Note 3 - Private Equity
Line of Credit).
Management believes that cash flows from sales of securities and
from current financing arrangements will be sufficient to fund
operations for the next year. Management intends to continue to
sell the Company's securities in an attempt to meet its cash flow
requirements; however, no assurance can be given that equity or
debt financing, if and when required, will be available.
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of the Company's product. The Company has not
as yet received any notice of claim from such parties.
-14-
17
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 is unaware of any claims or threatened claims since
Product R was initially marketed in the 1940's; however, one study
noted adverse reactions from highly concentrated doses in guinea
pigs. Therefore, the Company could be subjected to claims for
adverse reactions resulting from the use of Product R. 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 or 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 two allowed patents 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 $0.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$0.10 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 $0.15 and $0.17, respectively. The fair
value of these options was estimated to be $32,925 ($0.0348 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 was charged to compensation expense at December 31,
1999 as it related to services previously provided. Through March
31, 2001, 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.
-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 Agreements
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, Dr. Flichman delivered the Written
Report 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 $0.20 per share. Pursuant to several
amendments, the DCT options were exercisable through June 30, 2000
at an exercise price of $0.21 per share. The fair value of these
options was estimated to be $1,788 ($0.0012 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 was charged to compensation expense 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 $0.22 per share. As a result of the modification of the
option terms, the fair value of these options was estimated to be
$166,860 ($0.2273 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 was charged to expense
related to modification of existing option terms during the year
ended December 31, 2000. Effective December 31, 2000, these options
were extended to December 31, 2001 at an exercise price of $0.24
per share. As a result of the modification of the option terms, the
fair value of these options was estimated to be $108,429 ($0.1457
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 80%; risk free interest rate of
6%. This amount was charged to expense related to modification of
existing option terms during the year ended December 31, 2000. As
of March 31, 2001, 1,256,000 shares of common stock were issued
pursuant to the exercise of these options for an aggregate exercise
price of approximately $261,500.
-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 Agreements (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 was 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
data 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 advanced approximately
$58,000 and $132,000, respectively. Such expenses were 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.
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 March 31, 2001, the
Company advanced approximately $50,000 for such study, which has
been accounted for as research and development expense.
-17-
20
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 Agreements (Continued)
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 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 March 31, 2001, the Company advanced
approximately $70,000 for such study, which has been accounted for
as research and development expense.
As of March 31, 2001, 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 March 31, 2001, the Company 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 March 31, 2001, the Company advanced
approximately $20,000 for such study, which has been accounted for
as research and development expense.
Israel Studies
In January 2001, the Company entered into a 12 month agreement with
the Weizmann Institute of Science, and Yeda, its developmental arm
in Israel, to conduct research on the effects of Product R on the
immune system, especially on T lymphocytes. In addition, scientists
will explore the effects of Product R on adjuvant arthritis. The
total cost to the Company of this research is expected to be
approximately $120,000. As of March 31, 2001, the Company advanced
$30,000 for such research, which has been accounted for as research
and development expense.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel
using Product R. It is anticipated that these trials will support
future FDA application. The Center will begin with clinical trials
using Product R to mitigate the toxic effect of chemotherapy in
patients with advanced stage cancer and develop
-18-
21
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Israel Studies (Continued)
further clinical trials using Product R to treat other diseases as
well. The cost of the first phase of this research is expected to
be approximately $250,000. As of March 31, 2001, the Company
advanced $25,000 for such research, 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 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 as per
the vesting schedule as referred to in the agreement, at a purchase
price of $0.18 per share. As of March 31, 2001, 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 February 17, 2008 at
an exercise price of $0.19 per share, of which options to acquire
500,000 shares 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 February 17, 2008 at an exercise price of
$0.27 per share, of which options to acquire 500,000 shares 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 February 17, 2008 at an exercise price of $0.36 per
share, of which options to acquire 500,000 shares 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.
-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)
Hirschman Agreement (Continued)
As of March 31, 2001, 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".
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $0.19, 500,000 at $0.27, and 500,000 at $0.36).
Effective March 23, 2001, the remaining unexercised $0.19, $0.27
and $0.36 options referred to above which were exercisable until
March 23, 2001, were extended to December 31, 2001 at their same
exercise prices. As a result of the modification of the option
terms, the fair value of the options was estimated to be $357,975
based on a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; risk free interest rate of 6%. This
amount has been charged to compensation expense related to
modification of existing option terms during the three months ended
March 31, 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 was 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 and are exercisable until
February 17, 2008.
The fair value of these options was 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 life of 32 months. The Company
is recognizing the $5,328,441 fair value of the options as
compensation expense on a pro-forma basis over the 32 month service
period (the term of the employment agreement).
-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)
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 $0.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement. The fair value of these options was estimated to be
$376,126 ($0.0827 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 life of ten years. The
Company is recognizing the $376,126 fair value of the options as
compensation expense on a pro-forma basis over the three year
service period (the term of the employment agreement). A
performance bonus for Mr. Gallantar's first year in the amount of
$25,000 was charged to expense for the year ended December 31,
2000.
Other Employees
On January 3 and December 29, 2000, the Company issued to certain
other employees stock options to acquire an aggregate of 430,000
and 716,000 shares of common stock at an exercise price of $0.21
and $0.33 per share, respectively. These options expire on January
2, 2010 and December 29, 2010, respectively, and vest in 20%
increments at the end of each year for five years.
The fair value of the these options was estimated to be $42,342
($0.1721 per option share) and $117,893 ($0.2788 per option share),
respectively, 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%; an expected life of ten years; and a termination rate of
10%. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over a one year service
period (the term of the employment agreements).
Financial reporting of the Hirschman, Gallantar and other employee
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.
-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)
Other Employees (Continued)
Accordingly, the following pro forma financial information is
presented to reflect amortization of the fair value of the options.
As Reported Pro forma As
March 31, 2001 Adjustment Adjusted
-------------- ---------- --------
Net loss $(2,741,747) $(604,246) $(3,345,993)
Net loss per share $(0.01) $(0.00) $(0.01)
As Reported Pro forma As
March 31, 2000 Adjustment Adjusted
-------------- ---------- --------
Net loss $(2,054,420) $(31,344) $(2,085,764)
Net loss per share $(0.01) $(0.00) $(0.01)
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 $0.09
per share (which exercise price has been increased to $0.16 per
share) (the "September 1992 Cohen Options"). The fair value of
these options was estimated to be $59,030 ($0.0347 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 was charged to compensation expense 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 $0.17 per share. As a result of the
-22-
25
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)
modification of the option terms, the fair value of these options
was estimated to be $55,023 ($0.2751 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 compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. Effective December 31, 2000, these options were
extended to December 31, 2001 at an exercise price of $0.19 per
share. As a result of the modification of the option terms, the
fair value of these options was estimated to be $17,311 ($0.1731
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 80%; risk free interest rate of
6%. This amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. As of March 31, 2001, 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 business consulting
services concerning the operations 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 informed the Company
that he 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 $0.10 per share exercisable through May 1,
1996 (the "Bauer and Rizzuto Options"). Through March 31, 2001,
2,855,000 shares were issued pursuant to the exercise of the Bauer
and Rizzuto Options for an aggregate exercise price of $285,500.
Mr. Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options were exercisable through June 30, 2000 at an option price
of $0.14. The fair value of these options was estimated to be
$116,101 ($0.0541 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 was charged to compensation
expense 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 $0.16 per share. As a
result of the modification of the option terms, the fair value of
these options was estimated to be $953,885 ($0.2848 per option
share) based on a financial analysis of the terms of the options
using the
-23-
26
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)
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This
amount was charged to expense related to modification of existing
option terms during the year ended December 31, 2000. Effective
December 31, 2000, these options were extended to December 31, 2001
at an exercise price of $0.18 per share. As a result of the
modification of the option terms, the fair value of these options
was estimated to be $600,419 ($0.1793 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 80%; risk free interest rate of 6%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. Through March 31, 2001, 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.
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 by
mutual consent of both parties. The Company has paid approximately
$2,175,000 for services rendered by GloboMax through March 31,
2001.
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 structure, financial
transactions, 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 was estimated to be $200,249 ($0.057 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). This amount has been amortized to consulting
expense during the year ended December 31, 2000.
-24-
27
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. 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.
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities, of which $300,000 has been
incurred as of March 31, 2001. In October 2000, the Company entered
into another agreement with the unaffiliated third party to construct
additional leasehold improvements at an approximate cost of $325,000
for research and development purposes at the Company's Yonkers, New
York facilities, of which $217,000 has been incurred as of March 31,
2001.
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 (Product R). The agreement 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 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.
-25-
28
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
In its complaint, the Company seeks relief in the form of (i)
assignment of the patent to the Company; (ii) adjudgment that
Defendants breached, misappropriated, converted and conspired to
convert the Company's 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 the Company's claim is
legally inoperative.
In August 2000, Commonwealth and IMMC filed a suit against the Company
in the United States District Court for the Eastern District of
Michigan which alleges that IMMC, and not the Company, is the owner of
the exclusive/broad rights in Reticulose, and seeks, among other
things, (i) a declaratory judgment that 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 IMMC; (iv)
that the Company assign any Reticulose-related trademarks to IMMC; and
(v) that the Company pay the plaintiffs in this case damages, profits,
costs and attorneys' fees. The Company was served with the complaint on
August 8, 2000.
In January 2001, the Company and Commonwealth, et al., stipulated to
dismiss the case in New York without prejudice. All disputes between
the parties are now handled by the District Court of Michigan. The
Company has answered the complaint in the Federal Court and have
entered a number of counterclaims which are in substance the same as
the claims in the New York case.
The Company believes that the allegations contained in the
Commonwealth/IMMC complaint are without merit and the Company intends
to vigorously defend itself against all allegations contained therein.
NOTE 3. SECURITIES PURCHASE AGREEMENTS
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
-26-
29
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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 price of the
three February Warrants was $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants were
estimated to be $37,242 ($0.209 per warrant), $19,196 ($0.108 per
warrant), and $9,946 ($0.056 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 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 was fully amortized to interest expense
with a corresponding credit to additional paid-in capital.
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 price of the three
October Warrants was $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 ($0.178 per warrant), $97,912 ($0.163
per warrant) and $87,472 ($0.146 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
-27-
30
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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 was 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 was 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 price
of the two November Warrants was $0.20 and $0.24 per warrant share,
respectively. The fair value of the November warrants was estimated
to be $48,000 ($0.064 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
free interest rate of 5.75% and an expected holding period of one
year. This amount is being amortized to interest expense in the
accompanying consolidated 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 was payable semi-annually, computed at the rate of 7% on
the unpaid
-28-
31
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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 was 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 was $0.2461 per warrant share. The fair value of the
August Warrants was estimated to be $52,592 ($0.0526 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
is being amortized to interest expense in the accompanying
consolidated 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 was 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 was
convertible, at the option of the holder, into shares of common
stock. 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, February 29, 2000 and October 25, 2000 pursuant to notice
by the holder, Endeavour, to the Company under the December
Debenture, $150,000, $135,000, $715,000, $785,000, $200,000 and
$15,000, respectively, of the principal amount of the December
Debenture was converted into 1,105,435, 988,913, 5,149,035,
5,622,696, 1,036,674 and 43,960 shares of the common stock,
respectively.
-29-
32
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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 was $0.19 per warrant share.
The fair value of the December Warrants was estimated to be $4,285
($0.0429 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 was amortized to interest expense.
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 Warrants
entitling the holder to purchase 110,000 shares of the Common Stock
at any time and from time to time through December 31, 2002. The
exercise price of the December Warrant was $0.20 per warrant share.
The fair value of the December Warrants was estimated to be $13,600
($0.136 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 was amortized to interest expense.
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 was recorded as interest expense in 2000.
Other
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 $0.204 to $0.2448 per
share at any time until December 31, 2003. The fair value of these
warrants was estimated to be $494,138 ($0.209 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 March 31, 2001, 441,178 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $99,000.
-30-
33
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other (Continued)
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company issued
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 provided 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 ($0.04 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.
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
financial statements. As of March 31, 2001, 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, the Company entered into a securities purchase
agreement with Harbor View Group, Inc. and various other
purchasers, whereby the Company authorized the issuance and sale of
up to 50,000,000 shares of common stock in a private offering
transaction at a purchase price of $0.40 per share. As of March 31,
2001, 13,427,500 shares were issued for a purchase price of
$5,371,000.
Such agreement also provided for the issuance of warrants to
purchase an aggregate of 30,000,000 shares of common stock, half at
an exercise price of $0.48 and half at an exercise price of $0.56.
As of March 31, 2001, 8,056,500 warrants had been issued (4,028,250
at $0.48 and 4,028,250 at $0.56) exercisable at any time until
November 8, 2005. The fair value of these warrants was estimated to
be $1,787,642 ($0.222 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 80%; 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. The Company paid a
fee of $265,300 relative to this agreement, which has been charged
to interest expense.
-31-
34
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other (Continued)
On November 16, 2000, the Company entered into a securities
purchase agreement with Roseworth Group, Ltd., whereby the Company
agreed to sell 4,960,317 shares of its common stock at a price of
$0.3024 per share for an aggregate purchase price of $1,500,000.
The Company received such proceeds in November 2000.
Private Equity Line of Credit
On February 9, 2001, the Company entered into an equity line of
credit agreement with Cornell Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 of the Company's
common stock. Under such agreement, the Company may exercise "put
options" to sell shares for certain prices based on certain average
trading prices. Upon signing this agreement, the Company issued to
its placement agent, May Davis Group, Inc., and certain investors,
Class A warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price of $1.00 per share, exercisable
in part or whole until February 9, 2006, and Class B warrants to
purchase an aggregate of 5,000,000 shares of common stock at an
exercise price equal to the greater of $1.00 or 110% of the bid
price on the applicable advance date. Such Class B warrants are
exercisable pro rata with respect to the number of warrant shares
as determined by the fraction of the advance payable on that date
as the numerator and $20,000,000 as the denominator multiplied by
5,000,000 until sixty months from the date of issuance.
The fair value of the Class A warrants was estimated to be
$1,019,153 ($0.204 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 80%; 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.
-32-
35
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, 2000.
OVERVIEW
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). In addition to Reticulose(R), which has been used
exclusively with Advanced Viral's original formulation, Advanced Viral is
developing a new or current formulation which to date, has been designated only
by its generic name Product R. As used in this report, the term "Product R"
refers to the current formulation as well as the prior formulation of the
pharmaceutical drug known as Reticulose(R). Product R may be employed in the
treatment of certain viral and autoimmune diseases such as:
o Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
o Hepatitis B and hepatitis C, both liver diseases;
o Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer; and
o Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial preapproval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to a notice of
claimed investigational exemption for a new drug, or IND.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either IN
VITRO (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients outside the United States. The FDA has not approved
human clinical trials for Product R in the United States. We may be required, in
the absence of grants or other subsidies, to bear the expenses of the first
phase of human clinical trials to the extent the FDA permits human clinical
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trials to occur. We do not know what the actual cost of such trials would be. If
we need additional financing to fund such human clinical trials, it may not be
available to us, which may force us to reduce our operations.
Shalom Z. Hirschman, M.D., our Chief Executive Officer and President,
has monitored the testing of Product R and has recently performed analyses of
Product R with our scientific staff, which we believe may be used in connection
with the FDA approval process. In addition, we have contracted with GloboMax LLC
of Hanover, Maryland to advise us in our preparation and filing of an 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. During the first quarter of 2001, we, along with
Globomax, met with the FDA to discuss the content and format of our first IND
application for Product R, and as a result of this meeting we are preparing
additional data for the IND submission.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701 and 1250 East Hallandale Beach Boulevard, Suite 501, Hallandale,
Florida 33009. Our telephone number in Yonkers, New York is (914) 376-7383 and
our telephone number in Hallandale, Florida is (954) 458-7636. We have also
established a website: WWW.ADVIRAL.COM. Information contained on our website is
not a part of this report.
RECENT DEVELOPMENTS
EQUITY LINE OF CREDIT AGREEMENT. On February 9, 2001, we signed a
private equity line of credit agreement with Cornell Capital Partners, LP.
Pursuant to this equity line of credit agreement and subject to the satisfaction
of certain conditions, we may sell and issue to Cornell Capital, from time to
time, up to an aggregate of $50,000,000 of our common stock. Beginning on
February 14, 2001, the date that the registration statement covering the resale
of the shares issuable pursuant to the equity line of credit was 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 Cornell Capital at a price equal to the 95% of the market price
of the common stock. Under the equity line of credit agreement, the market price
of our common stock, for purposes of determining the purchase price, is the
average of the three lowest closing bid prices, as reported by Bloomberg, L.P.,
of our common stock for the 25 trading day period ending on the date we notify
Cornell Capital of our intention to put common stock to it, or, in other words,
request an advance.
The maximum advance amount on any advance notice date is equal to the
product of 150% times the 40 day average daily volume traded for the 40 trading
days preceding the advance notice date. The 40 day average volume traded is
equal to the bid price multiplied by the volume for each of the 40 trading days
preceding the advance notice date as reported by Bloomberg, L.P.
Our ability to put shares of common stock to Cornell Capital is subject
to certain conditions and limitations, including, but not limited to, 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.
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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 Our representations and warranties contained in the equity line of
credit agreement must be accurate as of the date of each put;
o We must have performed, satisfied and complied in all respects with
all covenants, agreements and conditions required to be performed,
satisfied or complied with at or prior to the date of each put;
o We must have obtained all permits and qualifications required by any
applicable state in accordance with the registration rights
agreement for the offer and sale of the put shares, or shall have
the availability of exemptions therefrom. The sale and issuance of
the put shares must be legally permitted by all laws and regulations
to which we are subject;
o No statute, rule, regulation, executive order, decree, ruling, or
injunction may be in effect which prohibits or directly and
adversely affects any of the transactions contemplated by the equity
line of credit agreement;
o At the time of an advance, there must not have been any material
adverse change in our business, operations, properties, prospects,
or financial condition since the date of filing of our most recent
report with the SEC;
o Our common stock must not have been delisted from the Bulletin Board
or suspended from trading by the SEC or the Bulletin Board; and we
must not have received any notice threatening the continued listing
of our common stock on the Bulletin Board;
o At least 13 trading days must have elapsed since the last date we
put shares to Cornell Capital; and
o No advance date shall be less than 12 trading days after an advance
notice date.
We cannot assure you that we will satisfy all of the conditions
required under the equity line of credit agreement or that Cornell Capital will
have the ability to purchase all or any of the shares of common stock put to it
thereunder.
Under the equity line of credit agreement, we agreed to register the
common stock for resale by Cornell Capital, which will permit Cornell Capital to
resell the common stock from time to time in the open market or in
privately-negotiated transactions. We will prepare the registration statement
and file amendments and supplements thereto as may be necessary in order to keep
it effective as long as the equity line of credit agreement remains in effect or
Cornell Capital owns any of our common stock. We have agreed to bear certain
expenses, other than broker discounts and commissions, if any, in connection
with the preparation and filing of the registration statement and any amendments
to it.
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In addition, pursuant to the equity line of credit agreement, each
officer, director and affiliate of Advanced Viral have agreed that he, she or it
will not, directly or indirectly, without the prior written consent of Cornell
Capital, 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 any shares of 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
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 Advanced Viral pursuant to the agreement.
In conjunction with the equity line of credit agreement, we entered
into an agreement with May Davis Group, Inc., our placement agent. May Davis
assisted us in negotiating the equity line of credit agreement. As a placement
fee, we issued to May Davis and certain other investors Class A Warrants to
purchase in the aggregate 5,000,000 shares of our common stock at an exercise
price per share equal to $1.00, exercisable in part or in whole at any time
until February 9, 2006, and Class B Warrants to purchase in the aggregate
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. Each 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 $0.01 per share
provided that the bid price for our common stock equals at least $4.00 per share
for a period of ten (10) consecutive trading days, as described therein. The
warrants contain provisions that adjust the purchase price and number of shares
issuable upon the occurrence of certain events, such as a stock split, reverse
stock split, stock dividend, merger, or recapitalization. Assuming the
registration statement covering the shares underlying the warrants and the
equity line of credit is not suspended, the holder may effect a cashless
exercise of the warrant commencing with the first advance date. There are 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.
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 March 31, 2001, we
had closed on the sale of 13,427,500 shares and warrants to purchase 8,056,500
shares for an aggregate purchase price of $5,371,000. 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. As of March 31, 2001 none of the warrants had been exercised.
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RESULTS OF OPERATIONS
For the three months ended March 31, 2001, we incurred losses of
approximately $2,742,000 vs. approximately $2,054,000 for the three months ended
March 31, 2000. Our increased losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Our increased losses during the three
months ended March 31, 2001 are due to increased research and development
expenses (approximately $1,239,000 for the three months ended March 31, 2001 vs.
$695,000 for the three months ended March 31, 2000). 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
(approximately $723,000 for the three months ended March 31, 2001
vs. $268,000 for the three months ended March 31, 2000);
o Expenditures in connection with laboratory supplies (approximately
$92,000 for the three months ended March 31, 2001 vs. $69,000 for
the three months ended March 31, 2000); and
o Additional expenditures for payroll and related costs and occupancy
expenses for the Yonkers, New York facility (approximately $368,000
for the three months ended March 31, 2001 vs. $312,000 for the three
months ended March 31, 2000).
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was approximately $884,000 for the three months ended March 31, 2001 vs.
$755,000 for the three months ended March 31, 2000). Included in the general and
administrative expenses are:
o Decreased consulting fees (approximately $42,000 for the three
months ended March 31, 2001 vs. $131,000 for the three months ended
March 31, 2000) primarily attributable to a consulting agreement
with Harbor View Group in 2000;
o Decreased filing fees and printing costs (approximately $15,800 for
the three months ended March 31, 2001 vs. $56,000 for the three
months ended March 31, 2000) attributable to registration statements
filed in 2000.
o An increase in legal and professional expenses (approximately
$317,000 for the three months ended March 31, 2001 vs. $142,000 for
the three months ended March 31, 2000) attributable to certain legal
proceedings. (See "Legal Proceedings").
o An increase in payroll and related expenses (approximately $252,000
for the three months ended March 31, 2001 vs. $201,000 for the three
months ended March 31, 2000) attributable to additional employees
and salaries.
o Employee recruiting costs of approximately $36,000 for the three
months ended March 31, 2001 vs. $0 for the three months ended March
31, 2000.
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COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS. Our
increased losses during the three months ended March 31, 2001 are also due to
compensation expense (approximately $358,000 for the three months ended March
31, 2001 vs. $0 for the three months ended March 31, 2000) relating to the
modification of the term of certain options previously issued in connection with
various product testing and corporate consulting services.
DEPRECIATION EXPENSE. Our increased losses during the three months
ended March 31, 2001 are also due to increased depreciation expense
(approximately $125,000 for the three months ended March 31, 2001 vs. $68,000
for the three months ended March 31, 2000) due to the purchase of additional
research and laboratory equipment and leasehold improvements.
INTEREST INCOME (EXPENSE). Our losses during the three months ended
March 31, 2001 are also due to interest expense (approximately $207,000 for the
three months ended March 31, 2001 vs. $564,000 for the three months ended March
31, 2000). Interest income for the three months ended March 31, 2001 was
approximately $69,000 vs. $25,000 for the three months ended March 31, 2000.
Included in the interest expense are:
o Beneficial conversion feature on certain convertible debentures ($0
for the three months ended March 31, 2001 vs. approximately $387,000
for the three months ended March 31, 2000);
o Amortization of loan costs (approximately $3,000 for the three
months ended March 31, 2001 vs. $106,000 for the three months ended
March 31, 2000);
o Amortization of discount on certain warrants (approximately $198,000
for the three months ended March 31, 2001 vs. $118,000 for the three
months ended March 31, 2000); and
o Reduction of interest income on debentures ($0 for the three months
ended March 31, 2001 vs. approximately $53,000 for the three months
ended March 31, 2000).
REVENUES. We had sales of approximately $2,400 for the three months
ended March 31, 2001 vs. $3,000 for the three months ended March 31, 2000,
respectively. All sales during these periods were to distributors purchasing
Product R for testing purposes.
LIQUIDITY
As of March 31, 2001, we had current assets of approximately
$4,043,000, compared to approximately $6,017,000 at December 31, 2000. We had
total assets of approximately $6,959,000 and $8,809,000 at March 31, 2001 and
December 31, 2000, respectively. The decrease in current and total assets was
primarily attributable to the use of cash on hand to fund operating
expenditures.
During the three months ended March 31, 2001, we used cash of
approximately $1,866,000 for operating activities, as compared to approximately
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$1,168,000 in during the three months ended March 31, 2000. During the three
months ended March 31, 2001, we incurred expenses of:
o Approximately $252,000 for payroll and related costs primarily for
administrative staff and executive officers;
o Approximately $723,000 in consulting fees to GloboMax;
o Approximately $310,000 for payroll and related costs primarily for
scientific and support personnel and approximately $59,000 for
occupancy expenses for our Yonkers facility;
o Approximately $92,000 for laboratory supplies; and
o Approximately $387,000 for other professional and consulting fees.
During the three months ended March 31, 2001, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $65,000, offset by principal payments on equipment
obligations. During the three months ended March 31, 2001, cash flow used by
investing activities were used for expenditures of approximately $236,000 for
leasehold improvements and research and laboratory equipment at our Yonkers, New
York office.
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.
On September 18, 2000 we entered into a private equity line of credit
agreement with Spinneret Financial Systems, Inc., who assigned their rights to
GMF Holdings, Inc., for the right to put shares of our common stock to the
investor from time to time to raise up to $20,000,000, subject to certain
conditions and restrictions. This agreement and all agreements contemplated in
connection with such agreement were terminated by mutual agreement of the
parties on January 22, 2001. The registration statement on Form S-1 that was
filed in connection with the agreement was withdrawn.
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On February 9, 2001 we entered into a private equity line of credit
agreement Cornell Capital Partners, LP. Under the equity line of credit
agreement, we have the right to put shares of our common stock to Cornell
Capital from time to time to raise up to $50,000,000, 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 Cornell Capital upon the exercise of each put option.
Such registration statement must be declared effective by the Commission before
the first sale to the investor of the common stock sold pursuant to the
agreement. In addition, the investors are 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 declared effective by the Commission on
February 14, 2001.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2000,
includes an explanatory paragraph regarding certain liquidity concerns. Note 2
to the Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of Product R required by the FDA, and, unless and until Product
R is approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of its securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund operations for the next year. Although we may not be
successful in doing so, we intend to continue to sell our securities in an
attempt to mitigate the effects of our cash position. No assurance can be given
that equity or debt financing, if and when required, will be available.
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. On March 31, 2000, we filed
a shelf registration statement with the Commission 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. As of March 31, 2001, 195,039,683 of such shares remain available for
issuance.
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The following table summarizes sales of our securities since November
1998.
SECURITY CONVERTIBLE / CONVERSION PRICE / MATURITY DATE /
DATE ISSUED GROSS PROCEEDS ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
- ----------- -------------- ------ ---------------- -------------- ---------------
November 1998 $1,500,000 Debenture 10,130,246 shares $0.1363-$0.2011 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 30, 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 29, 2004
463,264 shares $0.378 per share
....................................................................................................................
August 1999 $2,000,000 Debentures 14,348,847 shares $0.1396-$0.1438 per share Fully converted
Warrants 1,000,000 shares $0.2461 per share August 2, 2004
....................................................................................................................
December 1999 - $2,000,000 Debentures 13,946,713 shares $0.1363-.3564 per share Fully converted
January 2000 Warrants 210,000 shares $0.19916667 per share December 30, 2002
....................................................................................................................
February 2000 $3,000,000 Common Stock 13,636,357 shares n/a n/a
Warrants 2,727,272 shares $0.275 per share February 27, 2005
2,727,272 shares $0.33 per share
....................................................................................................................
November 2000 $5,371,000 Common Stock 13,427,500 shares $0.40 per share n/a
Warrants 4,028,250 shares $0.48 per share November 7, 2005
4,028,250 shares $0.56 per share
....................................................................................................................
November 2000 $1,500,000 Common Stock 4,960,317 shares $0.3024 per share n/a
February 2001 (1) Warrants 10,000,000 shares $1.00 per share February 9, 2006
....................................................................................................................
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(1) Represents warrants issued in connection with the equity line of credit,
including Class A Warrants to purchase in the aggregate 5,000,000 shares of
our common stock at an exercise price per share equal to $1.00, exercisable
at any time until February 9, 2006, and Class B Warrants to purchase in the
aggregate 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. Each 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.
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.
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
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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 that provide for the adjustment of
warrant price and warrant shares. As of March 31, 2001, 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 that provide for the adjustment of
warrant price and warrant shares. As of March 31, 2001, warrants to purchase
541,178 shares of common stock had been exercised.
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 ($0.209 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.
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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 that provide for the adjustment of warrant
price and warrant shares. As of March 31, 2001, 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.
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 based on a cashless exercise. The series W
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warrants contain anti-dilution provisions that 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 that provide for the adjustment of
the warrant price and warrant shares. As of March 31, 2001, 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 AND 2001
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 that provide for
the adjustment of warrant price and warrant shares. As of the date hereof, none
of these warrants had been exercised.
The fair value of the warrants is estimated to be $200,249 ($0.057 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). This amount has been expensed
during the year ended December 31, 2000.
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
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
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contains anti-dilution provisions that provide for the adjustment of warrant
price and warrant shares. As of March 31, 2001, 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.
HARBOR VIEW GROUP, INC., ET AL. 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 March 31, 2001, we
had closed on the sale of 13,427,500 shares and warrants to purchase 8,056,500
shares for an aggregate purchase price of $5,371,000. 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 that provide for the adjustment of warrant price and warrant shares.
As of March 31, 2001, none of the warrants had been exercised.
ROSEWORTH GROUP. On November 16, 2000, we entered into a securities
purchase agreement with Roseworth Group, Ltd., whereby we agreed to sell
4,960,317 shares of our common stock at a price of $.3024 per share for an
aggregate purchase price of $1,500,000. We received such proceeds in November
2000.
EQUITY LINE OF CREDIT AGREEMENT. On February 9, 2001, we entered into
an equity line of credit agreement with Cornell Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 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 95% of 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 closing bid price for the previous 25 trading days.
Upon signing the agreement, we issued to our placement agent, May Davis Group,
Inc., and certain investors Class A Warrants to purchase in the aggregate
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 February 9, 2006, and Class B
Warrants to purchase in the aggregate 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. Each 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 $1,019,153
($0.024 per warrant share) based in a financial analysis of the terms of the
warrants using the Black-Scholes Pricing Model with the following assumptions:
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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 March 31, 2001, we had incurred approximately $83,700 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.
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, computer systems, 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, however, up to $50 million is available to us under the
equity line of credit subject to certain conditions.(See "Business--Equity Line
of Credit").
We anticipate that we can continue operations through July 2001 with
our current liquid assets, if no stock options or warrants are exercised or
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 for at least an additional 12 months, 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 $21,499,611 million, excluding the warrants issuable
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2000, we 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 Advanced Viral and Commonwealth, misappropriation of trade
secrets and confidential information, conversion and conspiracy to convert our
property interests in Reticulose(R). We further 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(R), 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 seek relief in the form of (i) assignment of the
patent to Advanced Viral, (ii) adjudgment 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, Commonwealth and IMMC 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(R), and seeks, among other things: (i) a
declaratory judgment that IMMC is the exclusive owner of the broad/exclusive
rights to Reticulose(R) 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(R), or the use,
publication or disclosure of information regarding Reticulose(R); (iii) return
of such information to IMMC; (iv) that Advanced Viral assign any
Reticulose(R)-related trademarks to IMMC and (v) that Advanced Viral pay the
plaintiffs in this case damages, profits, costs and attorneys' fees. Advanced
Viral was served with a copy of the complaint on August 8, 2000.
In January 2001, Advanced Viral and Commonwealth, et al. stipulated to
dismiss the case in New York without prejudice. All disputes between the parties
are now handled by the District Court of Michigan. At this point, we have
answered the complaint against us in the Federal Court and have entered a number
of counterclaims that are in substance the same as our claims in the New York
case.
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Advanced Viral believes that the allegations contained in the
Commonwealth/IMMC complaint are without merit and intends to vigorously defend
itself against all allegations contained therein.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2001, 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 We sold 162,500 shares of common stock valued for $65,000 at $0.40
per share;
o As a placement fee, we issued to May Davis Group, Inc. and certain
other investors Class A Warrants to purchase in the aggregate
5,000,000 shares of our common stock at an exercise price per share
equal to $1.00, exercisable in part or in whole at any time until
February 9, 2006, and Class B Warrants to purchase in the aggregate
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2001, 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.
None
(2) Reports on Form 8-K.
During the three-month period ending March 31, 2001, 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: May 15, 2001 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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