U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 13, 2001 was 393,630,196.
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
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....................................35
Item 3. Quantitative and Qualitative Disclosures About Market Risk...46
PART II. OTHER INFORMATION................................................46
Item 1. Legal Proceedings............................................46
Item 2. Changes in Securities and Use of Proceeds....................47
Item 3. Defaults Upon Senior Securities..............................47
Item 4. Submission of Matters to Vote of Security Holders............48
Item 5. Other Information............................................48
Item 6. Exhibits and Reports On Form 8-K.............................48
SIGNATURES .............................................................49
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
Statements
September 30, December 31,
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 786,014 $ 5,962,633
Stock subscription receivable (see Note 3) 1,000,000 --
Inventory 19,729 19,729
Other current assets 84,948 34,804
------------ ------------
Total current assets 1,890,691 6,017,166
Property and Equipment, Net 2,998,700 1,944,199
Other Assets 871,457 847,349
------------ ------------
Total assets $ 5,760,848 $ 8,808,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,356,193 $ 902,961
Current portion of capital lease obligation 62,773 58,690
Current portion of note payable 23,532 21,517
------------ ------------
Total current liabilities 1,442,498 983,168
------------ ------------
Long-Term Liabilities:
Capital lease obligation 58,963 106,567
Note payable 38,535 56,446
------------ ------------
Total long-term liabilities 97,498 163,013
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 393,630,196 and 380,214,618
shares issued and outstanding 3,937 3,802
Additional paid-in capital 44,722,808 39,969,373
Deficit accumulated during the development stage (36,831,455) (29,079,902)
Discount on warrants (3,674,438) (3,230,740)
------------ ------------
Total stockholders' equity 4,220,852 7,662,533
------------ ------------
Total liabilities and stockholders' equity $ 5,760,848 $ 8,808,714
============ ============
See notes to consolidated condensed financial statements.
- 1 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended Nine Months Ended (February 20,
September 30, September 30, 1984 to
--------------------------------- --------------------------------- September 30,
2001 2000 2001 2000 2001
------------- ------------- ------------- ------------- -------------
Revenues $ 2,454 $ 2,324 $ 13,937 $ 7,285 $ 228,228
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 1,141,046 969,561 3,283,918 2,252,663 12,008,873
General and administrative 1,247,370 723,108 3,087,515 2,088,933 14,855,365
Compensation expense -- 1,175,768 357,975 1,175,768 2,470,046
Depreciation 141,679 101,587 370,771 245,556 1,279,386
------------- ------------- ------------- ------------- -------------
2,530,095 2,970,024 7,100,179 5,762,920 30,613,670
------------- ------------- ------------- ------------- -------------
Loss from Operations (2,527,641) (2,967,700) (7,086,242) (5,755,635) (30,385,442)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 11,765 33,323 108,720 107,914 872,838
Other income -- -- -- -- 120,093
Interest expense (294,980) (221,397) (774,031) (898,901) (7,438,944)
------------- ------------- ------------- ------------- -------------
(283,215) (188,074) (665,311) (790,987) (6,446,013)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,810,856) $ (3,155,774) $ (7,751,553) $ (6,546,622) $ (36,831,455)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 383,664,763 343,364,044 383,664,763 343,364,044
============= ============= ============= =============
See notes to consolidated condensed financial statements.
- 2 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 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 $ 0.00 113,846,154 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 0.01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants 0.03 819,860 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 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 $ 0.03 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
offer on "B" warrants 0.05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 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 $ 0.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants 0.08 2,500 -- 200 --
Issuance of common stock, exercise of
underwriters warrants 0.01 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 0.04 10,000,000 100 404,900 --
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants 0.08 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 0.06 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.04 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
-------------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
------ ----------- ----------- ----------- -----------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $(2,854,076)
Issuance of common stock, for consulting services $ 0.05 4,750,000 47 237,453 --
Issuance of common stock, exercise of options 0.08 400,000 4 31,996 --
Issuance of common stock, exercise of options 0.10 190,000 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 0.05 3,333,333 33 166,633 --
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407 --
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833 --
Issuance of common stock, for consulting services 0.11 1,150,000 12 126,488 --
Issuance of common stock, for consulting services 0.14 300,000 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
-------- ----------- ----------- ------- ---------- ----------- ------------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $(3,696,797) $ $ --
Issuance of common stock,
exercise of options $ 0.05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options 0.08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options 0.10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options 0.11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options 0.12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options 0.18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options 0.19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options 0.20 473,500 5 94,695 -- -- --
Issuance of common stock,
for services rendered 0.50 350,000 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
-------- ----------- ----------- ------- ---------- ----------- ------------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $ (4,851,537) $ (473,159)
Issuance of common stock,
exercise of options $0.0 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt 0.2 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt 0.1 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt 0.1 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt 0.1 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt 0.1 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered 0.4 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered 0.2 100,000 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 -
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
-------- ----------- ----------- ------- ---------- ----------- ------------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock,
exercise of options $ 0.1 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options 0.1 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options 0.1 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options 0.2 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options 0.2 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt 0.1 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt 0.1 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt 0.1 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt 0.1 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt 0.1 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt 0.2 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt 0.2 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered 0.2 100,000 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
------ ------ ----------- ------- ---------- ----------- ------------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $(13,550,976) $ (14,769) $ --
Issuance of common stock,
securities purchase
agreement $0.16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase
agreement 0.27 1,851,852 18 499,982 -- -- --
Issuance of common stock,
for services rendered 0.22 100,000 1 21,999 -- -- --
Issuance of common stock,
for services rendered 0.25 180,000 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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------ ------ ----------- ------- ---------- -----------
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of common stock,
exercise of options 0.14 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options 0.15 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options 0.16 650,000 7 103,994 -- --
Issuance of common stock,
exercise of options 0.17 100,000 1 16,999 -- --
Issuance of common stock,
exercise of options 0.21 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options 0.25 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options 0.27 281,000 3 75,867 -- --
Issuance of common stock,
exercise of options 0.36 135,000 1 48,599 -- --
Issuance of common stock,
exercise of warrants 0.20 220,589 2 44,998 -- --
Issuance of common stock,
exercise of warrants 0.24 220,589 2 53,998 -- --
Issuance of common stock,
exercise of warrants 0.28 90,909 1 24,999 -- --
Issuance of common stock,
exercise of warrants 0.33 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.14 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.19 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.20 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.36 43,960 -- 15,667 -- --
Issuance of common stock,
cashless exercise of
warrants 563,597 6 326,153 -- --
Issuance of common stock,
services rendered 0.47 100,000 1 46,499 -- --
Private placement of
common stock 0.22 13,636,357 136 2,999,864 -- --
Private placement of
common stock 0.30 4,960,317 50 1,499,950 -- --
Private placement of
common stock 0.40 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, year ended
December 31, 2000 -- -- -- (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 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2001
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------ ------ ----------- ------- ---------- -----------
Balance, December 31, 2000 380,214,618 $ 3,802 $ 39,969,373 $(29,079,902) $(3,230,740)
Issuance of common stock,
exercise of options $ 0.27 40,000 1 10,799 -- --
Issuance of common stock,
exercise of options 0.36 20,000 1 7,199 -- --
Issuance of common stock, cashless
exercise of warrants 76,411 1 77,490 -- --
Issuance of common stock, services
rendered 0.35 100,000 1 34,999 -- --
Private placement shares issued 0.15 6,666,667 67 999,933
Private placement shares issued 0.30 2,000,000 20 599,980 -- --
Private placement shares issued 0.32 3,125,000 30 999,969 -- --
Private placement shares issued 0.40 1,387,500 14 554,986 -- --
Cashless exercise of warrants -- -- (77,490) -- --
Warrant costs, private placement -- -- 168,442 -- (168,442)
Warrant costs, private equity
line of credit -- -- 1,019,153 -- (1,019,153)
Amortization of warrants costs,
securities purchase agreements -- -- -- -- 743,897
Compensation expense related to
modification of existing options -- -- 357,975 -- --
Net loss, nine months ended
September 30, 2001 -- -- -- (7,751,553) --
------------ ------------ ------------ ------------ -----------
Balance, September 30, 2001 (Unaudited) 393,630,196 $ 3,937 $ 44,722,808 $(36,831,455) $(3,674,438)
============ ============ ============ ============ ===========
See notes to consolidated condensed financial statements.
- 12 -
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Inception
Nine Months Ended (February 20,
September 30, 1984) to
--------------------------------- September 30,
2001 2000 2001
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (7,751,553) $ (6,546,622) $(36,831,455)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 370,771 245,556 1,279,386
Amortization of debt issue costs 11,159 106,030 790,374
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture -- 386,909 3,820,270
Amortization of discount on warrants 743,897 441,365 1,793,590
Amortization of discount on warrants - consulting services -- 193,181 230,249
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest -- -- 76,212
Issuance of common stock for services 35,000 46,500 1,586,000
Expenses related to modification of existing options 357,975 1,175,768 2,470,046
Other -- -- (1,697)
Changes in operating assets and liabilities:
Increase in inventory -- -- (19,729)
Increase in other current assets (50,144) (12,785) (114,942)
Increase in other assets (35,267) (158,733) (1,530,262)
Increase in accounts payable
and accrued liabilities 453,232 237,881 1,362,393
------------ ------------ ------------
Total adjustments 1,886,623 2,661,672 12,502,390
------------ ------------ ------------
Net cash used by operating activities (5,864,930) (3,884,950) (24,329,065)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Expenditures for property and equipment (1,425,272) (606,815) (3,893,493)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash used by investing activities (1,425,272) (606,815) (3,892,293)
------------ ------------ ------------
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 2,173,000 4,029,970 19,690,058
Payments under capital lease (43,521) (37,325) (152,433)
Payments on note payable (15,896) (14,106) (49,253)
Recovery of subscription receivable written off -- 19,000 19,000
------------ ------------ ------------
Net cash provided by financing activities 2,113,583 4,997,539 29,007,372
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (5,176,619) 505,774 786,014
Cash and Cash Equivalents, Beginning 5,962,633 836,876 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 786,014 $ 1,342,650 $ 786,014
============ ============ ============
See notes to consolidated condensed financial statements.
- 13 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
at September 30, 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 September 30, 2001 and results of operations
for the three and nine months ended September 30, 2001 and 2000 and
cash flows for the nine months ended September 30, 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
$37,000,000 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 drawing upon during 2001 (see Note 3 - Private
Equity Line of Credit). During July and August 2001, the Company
completed additional private placements of securities in which it
received cash proceeds of $2,090,000. Additionally, on October 1,
2001, the Company received cash proceeds of $1,000,000 in
connection with a private placement of securities pursuant to an
agreement dated September 28, 2001 (see Note 4).
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.
- 14 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
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.
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 four issued U.S. patents, one allowed U.S. patent
and one issued Australian patent for the use and composition of
Product R. The Company currently has 9 patent applications pending
with the U.S. Patent Office and 18 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.
In addition to the patents described above, the Company was awarded
a U.S. patent entitled "Preparation of a Therapeutic Composition"
in October 2001. This issued patent protects the preparation and
composition of Product R.
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.
- 15 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
PLATA PARTNERS LIMITED PARTNERSHIP (Continued)
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
September 30, 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.
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%.
- 16 -
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)
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-Sholes 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 September 30, 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.
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
- 17 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENTS (Continued)
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 June 30, 2001, the Company
advanced approximately $50,000 for such study, which has been
accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company advanced approximately
$95,000, which has been accounted for as research and development
expense.
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of September 30, 2001, the Company advanced
approximately $70,000 for such study, which has been accounted for
as research and development expense.
As of September 30, 2001, the Company advanced approximately
$442,000 for expenses in connection with the drug approval process
in Argentina. The Company may not receive regulatory approval in
Argentina and therefore may not generate sales in Argentina in the
near future.
- 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)
BARBADOS STUDY
A double blind study assessing the efficacy of the Company's drug
Product R in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of September 30, 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 September 30, 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 in animal models. The total
cost to the Company of this research is expected to be
approximately $120,000. As of September 30, 2001, the Company
advanced $90,000 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 applications. The Center will begin with clinical trials
using Product R to mitigate the toxic effect of chemotherapy in
patients with advanced stage cancer, on AIDS patients being treated
with other drugs as part of Highly Active Anti-Retroviral Therapy
(HAART) and develop further clinical trials using Product R to
treat other diseases. The cost of the first phase of this research
is expected to be approximately $250,000. As of September 30, 2001,
the Company advanced $115,000 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
- 19 -
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)
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 September 30, 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.
As of September 30, 2001, 976,000 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).
- 20 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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 1998 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 and for the
payment of $100,000 to Dr. Hirschman on the earlier to occur of (i)
the date an IND number is obtained from and approved by the FDA so
that human research may be conducted using Product R; or (ii) the
execution of an agreement relating to co-marketing pursuant to
which one or more third parties commit to make payments to us of at
least $15 million. On September 4, 2001, the Company received an
IND number from the FDA. Therefore, the $100,000 described above
has been accrued as of September 30, 2001.
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).
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
- 21 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GALLANTAR AGREEMENT (Continued)
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 $0.328 per share, respectively. These options expire on January
2, 2010 and December 28, 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.
- 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)
OTHER EMPLOYEES (Continued)
Accordingly, the following pro forma financial information is
presented to reflect amortization of the fair value of the options.
As Reported for the Nine Months Pro forma As
Ended September 30, 2001 Adjustment Adjusted
------------------------------- ----------- -----------
Net loss $(7,751,553) $(1,780,983) $(9,532,536)
========== ========== ==========
Net loss per share $(0.02) $(0.01) $(0.03)
===== ===== =====
As Reported for the Nine Months Pro forma As
Ended September 30, 2000 Adjustment Adjusted
------------------------------- ----------- -----------
Net loss $(6,546,622) $(893,297) $(7,439,919)
========== ======== ==========
Net loss per share $(0.02) $(0.00) $(0.02)
===== ===== =====
There were no other options outstanding that would require pro
forma presentation.
COHEN AGREEMENTS
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through June 30, 2000), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $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 modification
of the option terms, the fair value of these options was estimated
to be $55,023
- 23 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
($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 September 30, 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 June 30, 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
- 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)
COHEN AGREEMENTS (Continued)
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 $0.18 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 September 30, 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. In addition, GloboMax and its
subcontractors are assisting the Company in conducting Phase I
clinical trials for Product R. The contract was extended by mutual
consent of both parties. The Company has paid approximately
$2,980,000 for services rendered and reimbursement of expenses by
GloboMax and its subcontractors through September 30, 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.
- 25 -
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, which has been completed as
of June 30, 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 the entire amount has been incurred as of September 30, 2001.
SOFTWARE ACQUISITION
During the third quarter of 2001, the Company contracted with a
software vendor at a cost of approximately $500,000 to acquire and
install an SAP system for accounting, administrative and production
control. As of September 30, 2001, the entire cost has been incurred
and capitalized as a component of property and equipment.
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(R).
- 26 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
The Company further alleged that Defendant Miller filed and obtained a
U.S. patent entitled "Composition Containing Peptides and Nucleic
Acids and Methods of Making Same" (the "1996 Patent") based on a study
conducted by a third party using Reticulose(R) obtained free of charge
from the Company, and that such patent was assigned to Defendant IMMC,
a company controlled by Defendant Miller, in violation of the
exclusive distribution agreement.
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(R), and seeks, among other
things, (i) a declaratory judgment that Defendant IMMC is the exclusive
owner of the broad/exclusive rights to Reticulose(R) 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(R), or the use, publication or disclosure of
information regarding Reticulose(R); (iii) return of such information
to IMMC; (iv) that the Company assign any Reticulose(R)-related
trademarks to IMMC; and (v) that the Company pay Plaintiffs of 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.
In July 2001, the Company filed a Motion for Summary Judgment seeking
dismissal of Commonwealth and IMMC's claim of exclusive ownership to
Reticulose(R) and grant of such exclusive ownership to the Company.
On November 8, 2001, the U.S. District Court for the Eastern District
of Michigan dismissed with prejudice all of the claims of Commonwealth
and IMMC. In connection with its dismissal orders, the U.S. District
Court further held that the Company is the exclusive owner of all
Reticulose(R) technology. The only matter remaining in this case
is the Company's claims against Commonwealth, IMMC and Miller, which
have not yet been heard by the U.S. District Court. The Company is
continuing these legal proceedings to enforce its rights.
- 27 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. The Company
has commenced these clinical trials. The Phase I initial trials are
placebo controlled, open label, dose escalation safety studies in
healthy volunteers. These studies are being conducted in the United
States under the supervision of GloboMax, LLC. Upon successful
completion of Phase I studies, the Company expects to initiate Phase II
trials to investigate the efficacy and dosages of Product R in the
topical treatment of genital warts. Phase III trials are pivotal
clinical investigations designed to establish the efficacy and safety
of Product R.
NOTE 4. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000,
respectively, principal amount of its ten-year 7% Convertible
Debentures (the "February Debenture" and the "October Debenture",
collectively, the "Debentures") due February 28, 2007 and August
30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities
Act of 1933, as amended. Accrued interest under the Debentures was
payable semi-annually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date
of interest payment. The Debentures were convertible, at the option
of the holder, into shares of Common Stock pursuant to specified
formulas. 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
- 30 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
($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.
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.
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. 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.
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 principal balance from the date of issuance until the
date of the interest payment. No
- 31 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
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. 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 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.
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. 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. 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.
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
- 32 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
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.
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.
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.
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 $494,000 ($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 September 30, 2001, 482,830 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $126,000.
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
- 33 -
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
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 September 30, 2001, 216,577 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $105,000.
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 September
30, 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 September 30, 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.
- 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.
On July 19, 2001, the Company entered into a securities purchase
agreement with BNC Bach International, Ltd., whereby the Company
sold to BNC Bach International 3,125,000 shares of its common stock
at a price of $0.32 per share for an aggregate purchase price of
$1,000,000.
On July 27, 2001, pursuant to a securities purchase agreement with
various purchasers, the Company issued 1,225,000 shares of its
common stock for an aggregate purchase price of $490,000. Such
agreement also provided for the issuance of 735,000 warrants to
purchase common stock, half of such warrants are exercisable at
$0.48 per share and half of such are exercisable at $0.56 per share
until July 27, 2006. The fair value of these warrants was estimated
to be $144,500 ($0.20 per warrant for $0.48 warrants) and ($0.19
per warrant for $0.56 warrants) 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 5.5% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
On August 20, 2001, the Company entered into an additional
securities purchase agreement with BNC Bach International, Ltd.
whereby the Company sold to BNC Bach International 2,000,000 shares
of its common sock at a price of $0.30 per share for an aggregate
purchase price of $600,000.
On September 28, 2001, the Company entered into a securities
purchase agreement with Cambois Finance, Ltd. whereby the Company
agreed to sell 6,666,667 shares of its common stock to Cambois
Finance, Ltd. for an aggregate purchase price of $1,000,000. The
Company received such proceeds and issued such shares of common
stock on October 1, 2001.
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
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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
PRIVATE EQUITY LINE OF CREDIT (Continued)
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.
- 36 -
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 an
investigational new drug application, or IND. On July 30, 2001, we submitted an
IND application to the FDA to begin Phase I clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
I clinical trials, which are currently underway.
- 37 -
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. We will bear all the
expenses of the first phase of human clinical trials, and we do not know what
the actual cost of such trials would be. If we need additional financing to fund
subsequent clinical trials, it may not be available to us, which may force us to
reduce our operations. We may not receive regulatory approval in Argentina
and therefore may not generate sales of Product R in Argentina in the near
future.
Shalom Z. Hirschman, M.D., our Chief Executive Officer and President,
has monitored the testing of Product R and has 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 contracted with GloboMax LLC of Hanover,
Maryland to advise us in our preparation and filing of the IND with the FDA, and
to assist us during the Phase I trials and the balance of the FDA process, with
the objective of obtaining full approval for the manufacture and commercial
distribution of Product R in the United States. On July 30, 2001, we submitted
an IND application to the FDA to begin Phase I clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
I clinical trials, which are currently underway. In October 2001, we were
awarded a U.S. patent entitled "Preparation of a Therapeutic Composition." This
issued patent protects the preparation and composition of Product R.
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.
RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2001, we incurred
losses of approximately $2,811,000 and $7,752,000 vs. approximately $3,156,000
and $6,547,000 for the three and nine months ended September 30, 2000
respectively. Our increased losses were attributable primarily to:
Research and Development Expense. Our increased losses during the three
and nine months ended September 30, 2001 are due to increased research and
development expenses (approximately $1,141,000 and $3,284,000 for the three and
nine months ended September 30, 2001 vs. $970,000 and $2,253,000 for the three
and nine months ended September 30, 2000, respectively). Included in the
research and development expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting
us with the preparation and filing with the FDA of the IND for
Product R (approximately $450,000 and $1,528,000 for the three
and nine months ended September 30, 2001 vs. $374,000 and
$710,000 for the three and nine months ended September 30,
2000, respectively);
- 38 -
o expenditures in connection with laboratory supplies
(approximately $86,000 and $277,000 for the three and nine
months ended September 30, 2001 vs. $190,000 and $338,000 for
the three and nine months ended September 30, 2000,
respectively);
o expenditures in connection with Product R research in Israel
$88,000 and $205,000 for the three and nine months ended
September 30, 2001 at The Weizmann Institute of Science
($30,000 and $90,000 respectively) and The Selikoff Center
($58,000 and $115,000, respectively);
o expenditures in connection with the drug approval process in
Argentina of approximately $90,000 and $270,000 for the three
and nine months ended September 30, 2000, respectively); and
o additional expenditures for payroll, occupancy expenses and
related costs for the Yonkers, New York facility
(approximately $517,000 and $1,273,000, for the three and nine
months ended September 30, 2001 vs. $316,000 and $914,000 for
the three and nine months ended September 30, 2000,
respectively);
General and Administrative Expense. General and administrative expense
was approximately $1,247,000 and $3,088,000 for the three and nine months ended
September 30, 2001 vs. $723,000 and $2,089,000 for the three and nine months
ended September 30, 2000, respectively); . Included in the general and
administrative expenses are:
o an increase in professional fees (approximately $443,000 and
$1,120,000 for the three and nine months ended September 30,
2001 vs. $117,000 and $412,000 for the three and nine months
ended September 30, 2000, respectively) primarily attributable
to certain legal proceedings ($270,000 and $642,000,
respectively). See "Legal Proceedings";
o an increase in payroll and related expenses (approximately
$351,000 and $854,000 for the three and nine months ended
September 30, 2001 vs. $242,000 and $637,000 for the three and
nine months ended September 30, 2000, respectively)
attributable to increased employee and officer salaries and
the addition of scientific and administrative staff.
Depreciation Expense. Our increased losses during the three and nine
months ended September 30, 2001 are also due to increased depreciation expense
(approximately $142,000 and $371,000 for the three and nine months ended
September 30, 2001 vs. $102,000 and $246,000 for the three and, nine months
ended September 30, 2000, respectively) due to the purchase of additional
research and laboratory equipment and leasehold improvements.
- 39 -
Interest Income (Expense). Our losses during the three and nine months
ended September 30, 2001 are also due to interest expense (approximately
$295,000 and $774,000 for the three and nine months ended September 30, 2001 vs.
$221,000 and $899,000 for the three and nine months ended September 30, 2000,
respectively). Interest income for the three and nine months ended September 30,
2001 was approximately $12,000 and $109,000 for the three and nine months ended
September 30, 2001 vs. $33,000 and $108,000 for the three and nine months ended
September 30, 2000, respectively. Included in the interest expense are:
o beneficial conversion feature on certain convertible
debentures of approximately $387,000 for the nine months ended
September 30, 2000;
o amortization of loan costs and other interest expense (as
reduced by other items previously accrued at year end) of
approximately $9,000 and $27,000 for the three and nine months
ended September 30, 2001 vs. $6,000 and $73,000 for the three
and nine months ended September 30, 2000, respectively); and
o amortization of discount on certain warrants (approximately
$286,000 and $747,000 for the three and nine months ended
September 30, 2001 vs. $216,000 and $439,000 for the three and
nine months ended September 30, 2000, respectively).
Revenues. We had sales of approximately $2,000 and $14,000 for the
three and nine months ended September 30, 2001 vs. $2,000 and $7,000 for the
three and nine months ended September 30, 2000, respectively. All sales during
these periods were made to distributors purchasing Product R for testing
purposes.
LIQUIDITY
As of September 30, 2001, we had current assets of approximately
$1,891,000, compared to approximately $6,017,000 at December 31, 2000,
respectively. We had total assets of approximately $5,761,000 and $8,809,000 at
September 30, 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 and property and equipment.
During the nine months ended September 30, 2001, we used cash of
approximately $5,865,000 for operating activities, as compared to
approximately $3,885,000 during the nine months ended September 30, 2000,
respectively. During the nine months ended September 30, 2001, we incurred
expenses of:
o approximately $1,914,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
o approximately $1,528,000 in consulting fees to GloboMax and
its subcontractors;
o approximately $264,000 for rent and utilities for our Yonkers
facility;
- 40 -
o approximately $277,000 for laboratory supplies;
o approximately $205,000 in expenditures on product R research
in Israel;
o approximately $294,000 for insurance costs; and
o approximately $1,298,000 for other professional and consulting
fees, including $642,000 for certain litigation proceedings,
see "Legal Proceedings".
During the nine months ended September 30, 2001, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $2,173,000 offset by principal payments of $59,000 on
equipment obligations. During the nine months ended September 30, 2001, cash
flow used by investing activities were used for expenditures of approximately
$1,425,000 for leasehold improvements, research and laboratory equipment, and
software for accounting, administrative and production control at our Yonkers,
New York facility.
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 February 9, 2001 we entered into a private equity line of credit
agreement with 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
- 41 -
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 the date hereof, 189,914,683 of such shares remain available for
issuance.
The following table summarizes sales of our securities since August
1999.
Security Convertible/ Conversion Price/ Maturity Date /
Date Issued Gross Proceeds Issued Exercisable Into Exercise Price Expiration Date
- ----------- -------------- ------ ---------------- -------------- ---------------
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
thru March 2001
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 Equity Line Warrants 10,000,000 shares $1.00 per share (1) February 9, 2006
July 2001 $1,000,000 Common Stock 3,125,000 shares $0.32 per share n/a
July 2001 $490,000 Common Stock 1,225,000 shares $0.40 per share n/a
Warrants 367,500 shares $0.48 per share July 27, 2006
367,500 shares $0.56 per share
August 2001 $600,000 Common Stock 2,000,000 shares $0.30 per share n/a
September 2001 $1,000,000 Common Stock 6,666,667 shares $0.15 per share n/a
- -------------
(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.
- 42 -
Securities Issued in 1999
BERMAN, ET AL.: In July 1999 pursuant to a securities purchase
agreement, we sold 1,851,852 shares of common stock, and warrants to purchase an
aggregate of 925,926 shares of common stock to Michael Berman, Pak-Lin Law and
Kwong Wai Au in a private offering transaction pursuant to Section 4(2) of the
Securities Act, for an aggregate purchase price of $500,000, received in July
1999. The warrants entitle the holders to purchase 463,264 and 463,264 shares of
common stock at exercise prices of $0.324 and $0.378 per share, respectively.
The warrants are exercisable at any time and from time to time until June 28,
2004. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears to that market value. Each warrant
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of the date hereof, 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 on the basis of a cashless exercise; The series
W warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of March 17, 2000, all of the warrants
had been exercised.
- 43 -
The fair value of the warrants issued as of August 3, 1999 in
connection with the securities purchase agreement was estimated to be $52,953
($0.0526 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 5.75% through the
June 30, 2004 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
ENDEAVOUR CAPITAL FUND S.A.: Pursuant to a securities purchase
agreement dated December 28, 1999 in a private offering transaction under
Section 4(2) of the Securities Act, we issued the first $1,000,000 tranche of
$2,000,000 in aggregate principal amount of our 7% convertible debentures due
December 31, 2004 to Endeavour Capital Fund S.A. (the "Endeavour Transaction").
In connection with the sale of the first tranche of debentures, we issued
warrants to purchase 100,000 shares of our common stock to Endeavour, and two
warrants to purchase 5,000 shares of common stock to Endeavour's legal counsel.
Accrued interest under the convertible debentures was computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment and was payable on conversion of the debenture or on
maturity in common stock using the same conversion formula. The convertible
debentures were convertible, at the option of the holder, into shares of common
stock pursuant to a specified formula.
These warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per share. The warrants provide that the holder may elect to receive
a reduced number of shares of common stock on the basis of a cashless exercise.
The warrants contain anti-dilution provisions which provide for the adjustment
of the warrant price and warrant shares. As of the date hereof, 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.
Securities Issued in 2000
ENDEAVOUR CAPITAL FUND S.A.: In January 2000, in connection with the
Endeavour Transaction, we issued the second $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004, along with
- 44 -
warrants to purchase 100,000 shares of our common stock to Endeavour Capital
Fund, S.A. The terms of the second tranche of debentures and warrants are the
identical to the terms of the debentures and warrants issued in first tranche of
the Endeavour Transaction.
The fair value of the second tranche of warrants issued in January 2000
in connection with the securities purchase agreement was estimated to be $13,600
($0.0136 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On February 24 and 29, and October 23, 2000 pursuant to notice by
Endeavour Capital Fund, $785,000, $200,000 and $15,000 principal amount of the
second tranche of the Endeavour debentures was converted into 5,622,696,
1,036,674 and 42,088 shares of common stock, respectively. As of October 23,
2000, the second tranche of the debentures were fully converted.
HARBOR VIEW GROUP, INC. On February 7, 2000 pursuant to a consulting
agreement with Harbor View Group, we issued to Harbor View warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share, and warrants to
purchase 1,750,000 shares at an exercise price of $0.26 per share, until
February 28, 2005, in exchange for consulting services provided or to be
provided to us. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of 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). We determined that $89,045 of the
fair value relates to past services and, accordingly, we expensed this portion
in the three months ended March 31, 2000. The remaining $111,204 is included in
other current assets and was amortized during the year ended December 31, 2001.
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
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of the date hereof, warrants to purchase 181,818
shares of common stock had been exercised.
- 45 -
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 the date hereof, 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.
Securities Issued in 2001
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
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Model with the following assumptions: expected volatility of 50%; risk free
interest rate of 6%. This amount will be amortized to interest expense over the
term of the warrants.
As of June 30, 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.
BNC BACH INTERNATIONAL. On July 19, 2001, we entered into a stock
purchase agreement with BNC Bach International, Ltd., a British Virgin Islands
corporation, pursuant to which we issued and sold to BNC Bach International
3,125,000 shares of our common stock at $0.32 per share for an aggregate
purchase price of $1,000,000.
VARIOUS PURCHASERS. On July 27, 2001, pursuant to a securities purchase
agreement with various purchasers, we authorized the issuance of and sold
1,225,000 shares of our common stock and warrants to purchase an aggregate of
735,000 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, for
an aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of the date
hereof, none of the warrants had been exercised.
BNC BACH INTERNATIONAL. On August 20, 2001, we entered into a stock
purchase agreement with BNC Bach International, Ltd., pursuant to which we
issued and sold to BNC Bach International 2,000,000 shares of our common stock
at $0.30 per share for an aggregate purchase price of $600,000.
CAMBOIS FINANCE, LTD. On September 28, 2001, we entered into a stock
purchase agreement with Cambois Finance, Ltd., pursuant to which we issued and
sold to Cambois Finance, Ltd. 6,666,667 shares of our common stock at $0.15 per
share for an aggregate purchase price of $1,000,000.
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 November 2001
with our current liquid assets, if no stock options or warrants are exercised
or additional securities sold. We are currently seeking additional financing.
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
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credit, we can continue operations for at least an additional 12 months, if no
stock options or warrants are exercised or additional securities sold. If all of
the outstanding stock options and warrants are exercised, we will receive net
proceeds of approximately $31.8 million. 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 subsequent 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 is not certain whether, at present,
debt or equity financing will be readily obtainable on favorable terms. Because
of the large uncertainties involved in the FDA approval process for commercial
drug use on humans, it is possible that we may never be able to sell Product R
commercially.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
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" (the "1996 Patent") 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'
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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. In July 2001, Advanced Viral
filed a Motion for Summary Judgment seeking dismissal of Commonwealth and IMMC's
claim of exclusive ownership to Reticulose and grant of such exclusive ownership
to Advanced Viral.
On November 8, 2001, the U.S. District Court for the Eastern District
of Michigan dismissed with prejudice all of the claims of Commonwealth and
IMMC. In connection with its dismissal order, the U.S. District Court further
held that Advanced Viral is the exclusive owner of all Reticulose(R)
technology. The only matter remaining in this case is Advanced Viral's claims
against Commonwealth, IMMC and Miller, which have not yet been heard by the
U.S. District Court. Advanced Viral is continuing these legal proceedings to
enforce its rights.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 30, 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 issued 24,501 shares pursuant to the exercise of warrants
at $0.204 per share.
o We issued 17,151 shares pursuant to the exercise of warrants
at $0.2448 per share.
o We issued 34,759 shares pursuant to the exercise of warrants
at $0.275 per share.
Item 3. Defaults upon Senior Securities
None.
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Item 4. Submission of Matters to Vote of Security Holders
During the quarter ended September 30, 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.
See Financial Statements
(2) Reports on Form 8-K.
During the three-month period ending September 30, 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: November 14, 2001 By: /s/ Alan V. Gallantar
-------------------------------------
Alan V. Gallantar,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
By: /s/ Shalom Z. Hirschman
-------------------------------------
Shalom Z. Hirschman, President and
Chief Executive Officer
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