As filed with the Securities and Exchange Commission on November 26, 2001.
Registration No. 333-70523
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ADVANCED VIRAL RESEARCH CORP.
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(Exact name of Registrant as specified in its charter)
Delaware 5129 59-2646820
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(State or other jurisdiction of (Primary Standard Industrial IRS Employer
incorporation or organization) Classification Code Number) Identification Number
200 Corporate Boulevard South, Yonkers, New York 10701 (914) 376-7383
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(Address and telephone number of Registrant's principal executive offices)
Shalom Z. Hirschman, M.D., President and Chief Executive Officer
200 Corporate Boulevard South, Yonkers, New York 10701 (914) 376-7383
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(Name, address and telephone number of agent for service)
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Copies to:
CHARLES J. RENNERT
Berman Wolfe Rennert Vogel & Mandler, P.A.
Bank of America Tower, Suite 3500, 100 Southeast Second Street
Miami, Florida 33131-2130
Phone: (305) 577-4177 Fax: (305) 373-6036
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Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after the effectiveness of this registration
statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
===============================================================================
Subject to completion, dated November 26, 2001
26,865,380 SHARES
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK
This prospectus may be used only in connection with the resale of
26,865,380 shares of common stock of Advanced Viral Research Corp. by the
selling shareholders listed on page 54 of this prospectus.
Our common stock is traded on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On November 19,
2001, the high and low bid prices for the common stock on the Bulletin Board
were $0.31 and $0.30 per share, respectively.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 4.
---------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
---------
The date of this prospectus is _________ __, 2001.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................1
SUMMARY FINANCIAL DATA............................................................................................3
RISK FACTORS......................................................................................................4
ABOUT THIS PROSPECTUS............................................................................................10
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE..................................................................10
WHERE TO FIND MORE INFORMATION...................................................................................11
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS................................11
CAPITALIZATION...................................................................................................13
SELECTED CONSOLIDATED FINANCIAL DATA.............................................................................14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................16
BUSINESS.........................................................................................................31
MANAGEMENT.......................................................................................................46
PRINCIPAL SHAREHOLDERS...........................................................................................52
SELLING SHAREHOLDERS.............................................................................................54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................55
DESCRIPTION OF COMMON STOCK......................................................................................55
USE OF PROCEEDS..................................................................................................55
PLAN OF DISTRIBUTION.............................................................................................56
LEGAL MATTERS....................................................................................................57
EXPERTS..........................................................................................................57
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..............................57
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
SIGNATURES....................................................................................................II-11
PROSPECTUS SUMMARY
This summary highlights information about the offering and Advanced
Viral Research Corp. which we believe will be most important to you. However,
you should read the entire prospectus for a complete understanding of the
offering and our business.
THE COMPANY
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 prospectus, 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:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Hepatitis B and hepatitis C, both liver diseases;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer; and
- 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. 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 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.
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.
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 prospectus.
THE OFFERING
Securities offered............................................ 26,865,380 shares of common stock issuable upon the
exercise of certain stock options.
Percentage of Advanced Viral's currently outstanding
securities represented by offering............................ 7%
Common stock to be outstanding
after the offering(1)......................................... 420,495,576 shares of common stock, assuming exercise of
all stock options for which shares are being registered in
this prospectus
Use of proceeds............................................... We will not receive any proceeds from the sale of common stock
by the selling shareholders. We will receive the cash proceeds,
if any, from the exercise of the stock options held by selling
shareholders.
Risk factors.................................................. An investment in the shares involves a high degree of risk. See
"Risk Factors."
OTC Bulletin Board trading symbol............................. "ADVR"
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(1) As of November 20, 2001. Does not include approximately 57,788,172
shares issuable upon exercise of certain outstanding options and
warrants other than those being offered by the selling shareholders in
this prospectus.
2
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus. The statement of
operations data for the nine months ended September 30, 2001 and the balance
sheet data as of September 30, 2001 are derived from our unaudited consolidated
financials included elsewhere in this prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA
9 MONTHS ENDED YEAR ENDED DECEMBER 31
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SEPTEMBER 30, 2001 2000 1999 1998 1997 1996
------------------ ------------- ------------- ------------- ------------- -------------
Net revenues $ 13,937 $ 8,363 $ 10,953 $ 656 $ 2,278 $ 24,111
Net loss $ (7,751,553) $ (9,354,664) $ (6,174,262) $ (4,557,710) $ (4,141,729) $ (1,154,740)
Net loss per common share $ (0.02) $ (0.03) $ (0.02) $ (0.02) $ (0.02) $ (0.00)
Weighted average # of shares 383,664,763 362,549,690 302,361,109 294,809,073 274,534,277 257,645,815
SUMMARY BALANCE SHEET DATA
DECEMBER 31
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SEPTEMBER 30, 2001 2000 1999 1998 1997 1996
------------------ ----------- ----------- ----------- ----------- -----------
Total Assets $ 5,760,848 $ 8,808,714 $ 4,189,842 $ 1,716,800
$ 2,861,574 $ 3,304,953
$ 97,498 $ 163,013 $ 4,676,652 $ 1,625,299 $ 2,384,793 --
Long-term liabilities
Stockholders' equity per $ 0.01 $ 0.02 $ 0.00 $ 0.00 $ 0.01 $ 0.01
share
Shares outstanding at 393,630,196 380,214,618 303,472,035 296,422,907 277,962,574 267,031,058
period end
3
RISK FACTORS
[TO BE UPDATED]
Our securities are highly speculative. You should not purchase them
unless you can afford to lose your entire investment. You should consider very
carefully the following risk factors before you decide to purchase our
securities.
1. BECAUSE OUR SHARES ARE `PENNY STOCKS,' YOU MAY BE UNABLE TO RESELL
THEM IN THE SECONDARY MARKET.
A "penny stock" is an equity security with a market price of less than
$5 per share which is not listed on the Nasdaq or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the
purchaser, provide them with a disclosure schedule explaining the penny stock
market and its risks, and receive the purchaser's written agreement to the
transaction prior to the sale. These requirements limit the ability of
broker/dealers to sell penny stocks. In addition, because of the extra
requirements, many broker/dealers are unwilling to sell penny stocks at all. As
a result, you maybe unable to resell the stock you buy in this offering and
could lose your entire investment.
2. THE EXERCISE OF OUR OUTSTANDING WARRANTS OR OPTIONS OR DRAW DOWNS
UNDER OUR EQUITY LINE OF CREDIT COULD HAVE A SIGNIFICANT NEGATIVE
IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
As of the date hereof, in addition to the 393,630,196 shares of our
common stock currently outstanding:
- we have outstanding stock options to purchase an aggregate of
51,056,380 shares of common stock at exercise prices ranging
from $0.15 to $0.36, of which 48,518,420 are currently
exercisable;
- we have outstanding warrants to purchase an aggregate of
33,597,172 shares of common stock at prices ranging from
$0.199 to $1.00, of which warrants to purchase 28,597,172
shares are currently exercisable; and
- up to 166,666,667 shares may be offered and sold, from time
to time, by Cornell Capital Partners, LP, which may purchase
such shares pursuant to our equity line of credit agreement,
assuming a purchase price equal to $0.30. Under the terms of
the equity line of credit agreement, we can "put" up to an
aggregate of $50,000,000 of our common stock to Cornell
Capital. The purchase price per common share will vary based
on the closing bid prices of our common stock as reported on
the Bulletin Board during the valuation periods provided in
the equity line of credit agreement.
4
For a full description of the equity line of credit
agreement, see "Business -- Equity Line of Credit Agreement."
If all the foregoing securities and put rights were fully issued,
exercised and/or converted, as the case may be, there would be outstanding
approximately 645 MILLION shares of common stock. The sale or availability for
sale of this number of shares of common stock in the public market could
depress the market price of the common stock. Additionally, the sale or
availability for sale of this number of shares may lessen the likelihood that
additional equity financing will be available to us, on favorable or
unfavorable terms.
3. THE OFFER AND SALE OF SHARES OF COMMON STOCK TO CORNELL CAPITAL UNDER
THE PRIVATE EQUITY LINE ARRANGEMENT MAY BE DEEMED NOT TO BE AN EXEMPT
SALE OF SECURITIES.
In a transaction like our sale of common stock to Cornell Capital, the
issuer of such securities generally may register the resale of securities prior
to their issuance if the issuer has completed a valid exempt sale of the
securities to the investor, and the investor is at market risk at the time of
filing of the registration statement. Because Cornell Capital might not be
deemed to have been at market risk prior to filing of the registration
statement, the transaction might not qualify for an exemption from the
registration requirements of the Securities Act of 1933. Accordingly, Cornell
Capital may have the right, for a period of up to one year from the date of its
purchase of common stock, to recover damages resulting from its purchase if
Cornell Capital is successful in its claim that the transaction was not a valid
private placement. These damages could total up to the amount put by Advanced
Viral and purchased by Cornell Capital under the equity line. If this occurs,
our business, results of operations and financial condition would be harmed. In
particular, such an occurrence would have a material adverse effect on our
liquidity position and our ability to meet short-term obligations and we might
not be able to secure alternative financing on favorable terms or at all.
4. IT IS UNLIKELY THAT WE WILL BE ABLE TO PAY ALL THE COSTS ASSOCIATED
WITH THE FULL RANGE OF TESTING AND CLINICAL TRIALS OF PRODUCT R
REQUIRED BY THE FDA WITHOUT AN IMPROVEMENT IN OUR LIQUIDITY, WHICH HAS
CONSTRAINED OUR ABILITY TO FINANCE NECESSARY RESEARCH, DEVELOPMENT AND
OTHER OPERATING EXPENSES AS NEEDED.
The independent certified public accountants' report on our
consolidated financial statements for the year ended December 31, 2000 includes
an explanatory paragraph regarding certain liquidity concerns. Note 2 to the
Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of Product R required by the FDA, and, unless and until Product
R is approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of its securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund operations for the next year. Although we may not be
successful in doing so, we intend to continue to sell our securities in an
attempt to mitigate the effects of our cash position. No assurance can be given
that equity or debt financing, if and when required, will be available.
5
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 as described
below. (See "Business-Equity Line of Credit"). We currently are unable to
calculate the amount we will require in additional funding to complete the FDA
approval process, including conducting clinical trials and filing the NDA
application. Our ability to continue operations is dependent upon our continued
sale of our securities for funds to meet our cash requirements, and as a
result, our ability to continue as a going concern is doubtful.
Unless we are able to generate sufficient revenue or raise additional
funds when needed, it is likely that we will be unable to continue our planned
activities, even if we are making progress with our research and development
projects. The longer the duration of the regulatory approval process, the more
unlikely it is that we will be able to raise such funds on favorable terms or
at all, or that any funds raised will be sufficient to complete the FDA
approval process to achieve our goal of commercial distribution in the United
States and elsewhere. Furthermore, there is no guarantee that approval of
Product R by the FDA or any other regulatory authority, or additional financing
from the sale of our securities, will translate into any material change in our
financial condition. The extensive delays and costs of complying with the FDA
regulations makes it unlikely that we will have adequate funds to finance the
necessary clinical studies and related costs.
Subject to certain volume restrictions and the requirement that there
be an effective registration statement covering the resale of the shares of
common stock to be sold, we have the ability to sell up to $50,000,000 worth of
common stock under the private equity line of credit agreement, but the timing
and amount of capital raised can vary significantly depending upon various
factors, including the market price of our common stock. We cannot be certain
that Cornell Capital will have the ability to purchase any of the shares of
common stock put to it pursuant to the equity line of credit agreement.
Accordingly, we may not be able to raise necessary capital in the manner we
expect pursuant to the equity line of credit agreement.
Because the maximum amount of any draw down request under the equity
line of credit agreement is subject to a formula based on the average of the
three lowest closing bid prices of our common stock reported on the Bulletin
Board for the 25 consecutive trading days prior to the request multiplied by
the total trading volume for the same period, a decline in the trading volume
or price of our common stock may reduce the amount we can draw down under the
private equity line of credit agreement. In addition, business and economic
conditions may not make it feasible to draw down under the private equity line
of credit agreement at every opportunity, and draw downs are available only
every 13 trading days. We may need to raise additional capital to fund our
research and development activities. Cornell Capital may also decline to
purchase shares under a draw request under the private equity line of credit
agreement if the conditions set forth in such agreement are not met.
6
We may not be able to obtain additional financing on terms favorable
to us, if at all. If adequate funds are not available or are not available on
terms favorable to us, we may not be able to effectively to continue or
complete the research and development of Product R.
5. THE EXERCISE OF OUR EQUITY LINE OF CREDIT MAY MAKE IT DIFFICULT TO
EVALUATE A SHAREHOLDER'S EQUITY POSITION IN ADVANCED VIRAL.
The number of shares of our common stock which is issuable upon
exercise from time to time under our equity line of credit will fluctuate based
on 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.
Therefore, the percentage of our common stock held by a shareholder on any
given day may be substantially different from another day depending on our
closing bid prices, as the number of shares of our common stock issuable
pursuant to our equity line of credit may vary significantly from day to day.
We expect to use the net proceeds from the draw downs under the equity
line of credit agreement with Cornell Capital for general corporate purposes.
We will have significant flexibility in applying the net proceeds. You will not
have the opportunity to evaluate the economic, financial or other information
on which we base our decisions on how to use the net proceeds. If we fail to
apply the net proceeds effectively, our business could be negatively affected.
6. IF WE DO NOT OBTAIN THE FDA'S APPROVAL TO CONDUCT CLINICAL TESTS OF
PRODUCT R IN THE UNITED STATES, WE WILL NOT BE ABLE TO COMPLETE ITS
DEVELOPMENT AND MAY NOT BE ABLE TO SELL IT ANYWHERE.
Product R is the only product we are developing, We will not be able
to sell it in the United States unless we submit, and the FDA approves, a new
drug application, or NDA. We must conduct clinical trials of Product R in
humans before we submit an NDA. 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. On September 4, 2001, Advanced Viral's IND was cleared to begin
Phase I clinical trials. We are currently in Phase I trials in the United
States.
It is possible that clinical trials will not prove that Product R is
safe or effective in treating viruses of any kind, in which case we won't be
able to submit an NDA and we won't be able to sell Product R in the United
States.
We haven't been able to sell Product R outside the United States
because we don't have a free sales certificate for Product R. A free sales
certificate is a document issued by the country in which a pharmaceutical
product is manufactured, certifying that the country permits the "free sale" of
the product in that country. The Bahamas, where our manufacturing facility is
located, has no procedure in place to issue a free sales certificate for any
therapeutic drug, including Product R. Most countries require that a
pharmaceutical product be at least registered and
7
certified for free sale in the country in which it is manufactured before
allowing the registration of the product in that country. Because we are unable
to obtain a certificate from the Bahamas, we are not able to meet registration
requirements in the countries that require the certificate, and will be unable
to sell Product R in those countries.
7. WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, HAVE NO PRODUCT REVENUE,
AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE.
Although we were formed in 1985, we are still in the development
stage. From inception through September 30, 2001, we had an accumulated deficit
of approximately $36,831,455. We expect that our deficit will continue to
increase. The only product revenues we have ever had are insignificant amounts
related to our distribution of Product R for testing purposes. We do not
currently have any source of product revenue. At this time, we have no basis to
believe that we will ever generate operating revenues from the sale of Product
R.
8. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT. IF WE ARE UNABLE TO
PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation
or other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and
could result in substantial costs and diversion of our efforts. In June 2000,
Advanced Viral filed an action and complaint in the New York Supreme Court,
Westchester County, against Commonwealth Pharmaceuticals, et al alleging a
breach of an exclusive distribution agreement, misappropriation of trade
secrets and confidential information, conversion and conspiracy to convert
Advanced Viral's property interests in Reticulose. In August 2000, Commonwealth
Pharmaceuticals and certain affiliates filed a counterclaim suit against
Advanced Viral in the United States District Court for the Eastern District of
Michigan alleging ownership of the exclusive/broad rights in Reticulose, and
seeking, among other things: (i) a declaratory judgment of the claimants'
exclusive ownership of the broad/exclusive rights to Reticulose and the subject
patent; (ii) an injunction against Advanced Viral from further attempts to use,
market or assert any claims of ownership over any broad/exclusive rights in
Reticulose, or the use, publication or disclosure of information regarding
Reticulose; (iii) return of such information to the claimants; (iv) that
Advanced Viral assign any Reticulose-related trademarks to the claimants and
(v) that Advanced Viral pay damages, profits, costs and attorneys' fees. See
"Business - Legal Proceedings."
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.
8
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.
We currently have nine patent applications pending with the United
States Patent and Trademark Office (the "PTO") and 18 patent applications
pending in other countries relating to Product R. In the United States, we have
one allowed patent and five issued patents from the PTO. We also have one
issued patent in Australia. We also rely on trade secrets, know-how and
continuing technological advancements to protect our proprietary technology. We
require all of our employees, consultants, advisors and collaborators to enter
into confidentiality agreements that prohibit the use or disclosure of
information that is deemed confidential. The agreements also oblige our
employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection
with their work with us. However, these parties may not honor these agreements
and we may not be able to successfully protect our rights to unpatented trade
secrets and know-how. Others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets and know-how.
To facilitate development of our proprietary technology base, we may
need to obtain licenses to patents or other proprietary rights from other
parties. If we are unable to obtain such licenses, our product development
efforts may be delayed.
We may collaborate with universities and governmental research
organizations which, as a result, may acquire certain rights to any inventions
or technical information derived from such collaboration.
We are uncertain as to whether the outcome of the aforementioned
litigation will have a material adverse impact on our business. We may incur
substantial costs in asserting any patent rights and in defending such suit and
other suits against us related to intellectual property rights. Such disputes
could substantially delay our product development or commercialization
activities. The United States Patent and Trademark Office or a private party
could institute an interference proceeding relating to our patents or patent
applications. An opposition or revocation proceeding could be instituted in the
patent offices of foreign jurisdictions. An adverse decision in any such
proceeding could result in the loss of our rights to a patent or invention.
9. OUR BUSINESS COULD BE HARMED IF WE LOSE THE SERVICES OF THE KEY
PERSONNEL UPON WHOM WE DEPEND.
Advanced Viral is currently wholly dependent upon the personal efforts
and abilities of our three full-time executive officers and directors, only one
of whom, Bernard Friedland, Chairman of the Board of Directors, has any
experience in the pharmaceutical industry. The loss
9
or unavailability to us of the services of Bernard Friedland or Dr. Hirschman,
President and Chief Executive Officer, could have a material negative impact on
our business prospects and any potential earning capacity, and, therefore, we
have obtained "key-man" insurance on the lives of Mr. Friedland and Dr.
Hirschman in the amounts of $400,000 and $2,000,000, respectively. If our level
of operations significantly increases, the business may depend upon our
abilities to attract and hire additional management and staff employees. It is
possible that we will be unable to secure such additional management and staff
when necessary.
10. THE VOTING CONTROL HELD BY PRESENT MANAGEMENT COULD SIGNIFICANTLY
IMPACT OUR BUSINESS.
As of the date hereof, our current officers and directors beneficially
owned 117,787,638 shares of our common stock, or approximately 27% of the
shares of common stock deemed outstanding on such date for the purposes of the
percentage calculation, including certain shares underlying options held by Dr.
Hirschman and Alan Gallantar, our Chief Financial Officer. As there are no
cumulative voting rights, current management, by virtue of their stock
ownership, can be expected to influence substantially the election of our board
of directors and thereby continue to impact substantially our business, affairs
and policies.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission to register the resale of the shares
issued or issuable to the selling shareholders as provided in this prospectus.
As permitted by the Commission's rules, this prospectus does not contain all of
the information you can find in the registration statement or the exhibits to
the registration statement. This prospectus summarizes some of the documents
that are exhibits to the registration statement, and you should refer to the
exhibits for a more complete description of the matters covered by those
documents.
We have not authorized anyone to give any information regarding the
offering of the shares that is different from what is contained in this
prospectus. This prospectus is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer of solicitation. You should not
assume that the information contained in this prospectus is accurate as of any
time after the date of this prospectus, and neither the mailing of this
prospectus to our shareholders nor the issuance of the shares should create any
implication to the contrary.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Words such as "expects," "may," "will," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements. These forward-looking statements
10
are subject to important factors, disclosed in this prospectus, which could
cause actual results to differ materially from such expectations, including
those factors discussed in "Risk Factors."
We will not publicly update or revise any forward-looking statements,
whether because of new information, future events or otherwise. In light of
these risks, uncertainties, and assumptions, the forward-looking events
discussed in the prospectus might not occur.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and special reports with the Commission. The
annual reports contain financial information about Advanced Viral that has been
audited and reported on, with an opinion expressed by an independent auditor.
These filings are available on the Commission's website: http://www.sec.gov.
Hard copies are available at the Commission's public reference facilities at
the following addresses:
- 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549;
- Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois, 60661; and
- 7 World Trade Center, 13th Floor, New York, New York, 10007.
Call the Commission at 1-800-SEC-0330 with questions about its public
reference facilities. To contact us, use the following information:
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
(914) 376-7383
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 1999 and 2000, and for the first, second and third quarters of
2001. The high and low bid prices for the periods indicated reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not represent actual transactions.
LOW BID HIGH BID
First Quarter 1999................................................... 0.175 0.35
Second Quarter 1999.................................................. 0.202 0.322
Third Quarter 1999................................................... 0.1875 0.2344
Fourth Quarter 1999.................................................. 0.19 0.27
11
First Quarter 2000................................................... 0.185 1.40
Second Quarter 2000.................................................. 0.33 0.61
Third Quarter 2000................................................... 0.445 0.648
Fourth Quarter 2000.................................................. 0.26 0.45
First Quarter 2001................................................... 0.285 0.41
Second Quarter 2001.................................................. 0.265 0.495
Third Quarter 2001................................................... 0.171 0.395
STOCKHOLDERS
The approximate number of holders of record of our common stock as of
the date hereof is 2,879 inclusive of those brokerage firms and/or clearing
houses holding shares of common stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
DIVIDEND POLICY
We have not declared or paid any dividends on our shares of common stock. We
intend to retain future earnings, if any, that may be generated from our
operations to finance our future operations and expansion and do not plan for
the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend on our
results of operations and financial position and such other factors as our
board of directors in its discretion deems relevant.
12
CAPITALIZATION
The following table sets forth our capitalization at September 30,
2001: (1) on a historical basis and (2) as adjusted to give effect to the sale
of 26,865,380 shares of common stock which are issuable or may be issuable to
certain investors upon the exercise of certain stock options. See "Use of
Proceeds." This table should be read in conjunction with our financial
statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial data
appearing elsewhere in this prospectus.
PRO FORMA
ACTUAL AS ADJUSTED*
----------- -----------
Stockholders' Equity:
Common stock, $0.00001 par value; 1,000,000,000 shares authorized; 3,937 4,206
393,630,196 shares outstanding Actual; 420,495,576 shares outstanding
Pro Forma as Adjusted
Additional paid-in-capital 44,722,808 51,226,628
Deficit accumulated during the development stage (36,831,455) (36,831,455)
Discount on Warrants (3,674,438) (3,674,438)
Total Stockholders' Equity: 4,220,852 10,724,940
- ---------
* Does not reflect approximately 57,788,172 shares subject to
outstanding options and warrants as of November 20, 2001.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2000, 1999, 1998, 1997 and 1996 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus. The statement of
operations data for the nine months ended September 30, 2001 and the balance
sheet data as of September 30, 2001 are derived from our unaudited consolidated
financials included elsewhere in this prospectus.
SELECTED STATEMENT OF OPERATIONS DATA
9 MONTHS ENDED YEAR ENDED DECEMBER 31
-------------- -------------------------------------------------------------------------------
SEP 30, 2001 2000 1999 1998 1997 1996
-------------- ----------- ----------- ----------- ----------- -----------
Revenues $ 13,937 $ 8,363 $ 10,953 $ 656 $ 2,278 $ 24,111
----------- ----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Research and development 3,283,918 3,192,551 1,948,937 1,659,456 817,603 255,660
General and administrative 3,087,515 2,621,542 1,831,061 1,420,427 1,681,436 983,256
Compensation expense 357,975 1,901,927 210,144 -- -- --
Depreciation 370,771 362,392 230,785 110,120 26,288 18,731
----------- ----------- ----------- ----------- ----------- -----------
7,100,179 8,078,412 4,220,927 3,190,003 2,525,327 1,257,647
----------- ----------- ----------- ----------- ----------- -----------
Loss from Operations (7,086,242) (8,070,049) (4,209,974) (3,189,347) (2,523,049) (1,233,536)
----------- ----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 108,720 162,077 42,744 102,043 111,845 46,796
Other income -- -- 293 7,800 32,000
Interest expense (774,031) (1,446,692) (2,007,032) (1,470,699) (1,738,325) --
----------- ----------- ----------- ----------- ----------- -----------
(665,311) (1,284,615) (1,964,288) (1,368,363) (1,618,680) 78,796
----------- ----------- ----------- ----------- ----------- -----------
Net Loss $(7,751,553) $(9,354,664) $(6,174,262) $(4,557,710) $(4,141,729) $(1,154,740)
=========== =========== =========== =========== =========== ===========
Net Loss Per Share of
Common
Stock - Basic and Diluted $ (0.02) $ (0.03) $ (0.02) $ (0.02) $ (0.02) $ (0.00)
----------- ----------- ----------- ----------- ----------- -----------
14
SELECTED BALANCE SHEET DATA
AT DECEMBER 31
------------------------------------------------------------------------
AT SEP 30, 2001 2000 1999 1998 1997 1996
--------------- ------------ ------------ ------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 786,014 $ 5,962,633 $ 836,876 $ 924,420 $ 236,059 $ 61,396
Investments 1,000,000 -- -- 821,047 2,984,902 1,378,841
Inventory 19,729 19,729 19,729 19,729 19,729 19,729
Other current assets 84,948 34,804 59,734 29,818 20,240 16,081
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 1,890,691 6,017,166 916,339 1,795,014 3,260,930 1,476,047
Property and Equipment, Net 2,998,700 1,944,199 1,375,923 1,049,593 485,661 207,209
Other Assets 871,457 847,349 569,312 460,346 443,251 33,544
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 5,760,848 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842 $ 1,716,800
============ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued
liabilities $ 1,356,193 $ 902,961 $ 728,872 $ 279,024 $ 375,606 $ 54,474
Current portion of capital lease
obligation 62,773 58,690 50,315 $ 38,335 -- --
Current portion of note payable 23,532 21,517 19,095 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 1,442,498 983,168 798,282 317,359 375,606 54,474
------------ ------------ ------------ ------------ ------------ ------------
Long-Term Debt:
Convertible debentures, net -- -- 4,446,629 1,457,919 2,384,793 --
Capital lease obligation - long term
portion 58,963 106,567 152,059 167,380 -- --
Note payable - long term portion 38,535 56,446 77,964 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total long-term debt 97,498 163,013 4,676,652 1,625,299 2,384,793 --
------------ ------------ ------------ ------------ ------------ ------------
Deposit on Securities
Purchase Agreement -- -- -- 600,000 -- --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000
shares of $.00001 par value
authorized 3,937 3,802 3,034 2,964 2,779 2,671
Additional paid-in capital 44,722,808 39,969,373 17,537,333 14,325,076 10,512,767 7,003,351
Subscription receivable -- -- -- -- (19,000) (19,000)
Deficit accumulated during
Development stage (36,831,455) (29,079,902) (19,725,238) (13,550,976) (8,993,266) (4,851,537)
Deferred compensation cost -- -- -- (14,769) (73,837) (473,159)
Discount on warrants (3,674,438) (3,230,740) (428,489) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity
(deficiency) 4,220,852 7,662,533 (2,613,360) 762,295 1,429,443 1,662,326
------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity (deficiency) $ 5,760,848 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842 $ 1,716,800
============ ------------ ------------ ------------ ------------ ------------
Shares outstanding at period end 393,630,196 380,214,618 303,472,035 296,422,907 277,962,574 267,031,058
------------ ------------ ------------ ------------ ------------ ------------
- ---------
See notes to consolidated financial statements.
15
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 included in this prospectus. 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 Advanced Viral's Annual Report on Form 10-K for the year ended
December 31, 2000 and its Quarterly Report on Form 10-Q for the three and nine
months ended September 30, 2001.
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 prospectus, 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:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Hepatitis B and hepatitis C, both liver diseases;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer; and
- 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
16
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.
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 prospectus.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
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
17
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:
- 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);
- 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);
- 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);
- 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
- 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:
- 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";
- 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
18
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.
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:
- beneficial conversion feature on certain convertible
debentures of approximately $387,000 for the nine months
ended September 30, 2000;
- 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
- 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.
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
During the years ended December 31, 2000, 1999, and 1998 we incurred
losses of approximately $9,355,000, $6,174,000 and $4,558,000, respectively.Our
increased losses for the years ended December 31, 2000, 1999 and 1998 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were $2,622,000, $1,831,000 and $1,420,000 in 2000, 1999 and 1998,
respectively. General and
19
administrative expenses increased by $791,000 in 2000 vs. 1999, and increased
by $411,000 in 1999 vs. 1998 resulting primarily from:
- increased computer expenses(approximately $319,000 in 2000
compared to $159,000 in 1999) primarily resulting from the
implementation of new computer systems at our headquarters in
Yonkers;
- increased consulting fees (approximately $200,000 in 2000 vs.
$0 in 1999 and 1998) primarily attributable to consulting
services provided by Harbor View Group;
- increased investor relations expenses (approximately $153,000
in 2000 vs. $0 in 1999 and 1998 primarily attributed to
retaining a public relations firm during 2000;
- increased payroll and related expenses ($688,000 in 2000 vs.
$578,000 in 1999 and $450,000 in 1998) primarily attributable
to increased employee and officer salaries and the addition
of a Chief Financial Officer position during October 1999;
- increased printing and filing fees (approximately $102,000 in
2000 vs. $16,000 in 1999 and $33,000 in 1998) primarily
associated with our various registration statements and press
releases;
- increased insurance costs (approximately $308,000 in 2000 vs.
$240,000 in 1999 and $80,000 in 1998) representing increased
premiums for employee medical insurance and additional
corporate liability insurance including directors and
officers liability coverage; and
- increased professional fees from 1998 to 1999 (approximately
$425,000 in 1999 vs. $335,000 in 1998), which then decreased
to $345,000 during 2000.
COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS. Our
increased losses during the year ended December 31, 2000 are also due to
compensation expense (approximately $1,902,000 in 2000 vs. $210,000 in 1999 and
$0 in 1998).These amounts are the result of the calculation of the fair value
of options, using the Black Scholes Pricing Model, for the extension of the
exercise date of various outstanding options.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased from approximately $3,193,000 in 2000, $1,949,000 in 1999 to
$1,659,000 in 1998. The increase from 1999 to 2000 resulted primarily from
research expenses ($1,250,000) related to the GloboMax agreement in connection
with the preparation of our first IND filing. The increase from 1998 to 1999
resulted primarily from research expenses related to the GloboMax agreement of
approximately $203,000. The approximate costs of rent, personnel, operating
costs and
20
laboratory supplies associated with the Yonkers laboratory for the years ended
2000, 1999 and 1998 were charged to research and development expense as
follows: $1,696,000, $1,325,000 and $950,000.
DEPRECIATION EXPENSE. Depreciation expense increased from
approximately $362,000 in 2000 to $231,000 in 1999 and $110,000 in 1998 as a
result of the acquisition of furniture, fixtures and equipment for the Yonkers
office and laboratory, along with the additional leasehold improvements for
laboratory space leased during 2000, 1999 and 1998.
INTEREST EXPENSE. Interest expense for the years ended 2000,1999 and
1998 was approximately $1,447,000, $2,007,000 and $1,471,000, respectively.
Included in interest expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $387,000, $1,045,000, and
$836,000 for the years ended 2000, 1999 and 1998,
respectively;
- interest expense associated with certain convertible
debentures of approximately $76,000, $163,000 and $95,000 for
the years ended 2000, 1999 and 1998, respectively;
- amortization of discount on certain warrants of approximately
$611,000, $148,000 and $291,000 for the years ended 2000,
1999 and 1998, respectively;
- amortization of loan costs of approximately $106,000,
$331,000 and $230,000 for the years ended 2000, 1999 and
1998, respectively;
- fees of approximately $265,000 in connection with the
November 2000 securities purchase agreement with Harbor View;
and
- additional financing costs related to effective date of
certain registration statements of $286,000 in 1999.
REVENUES. There were $8,363 and $10,953 in sales revenue in 2000 and
1999, respectively, compared to $656 in sales revenues for 1998. All sales
revenue resulted from distributors purchasing Product R for testing purposes.
Interest income was approximately $162,000 and $43,000 in 2000 and 1999,
respectively, compared to approximately $102,000 in 1998.
21
LIQUIDITY
SEPTEMBER 30, 2001 VS. DECEMBER 31, 2000
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:
- approximately $1,914,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $1,528,000 in consulting fees to GloboMax and
its subcontractors;
- approximately $264,000 for rent and utilities for our Yonkers
facility;
- approximately $277,000 for laboratory supplies;
- approximately $250,000 in expenditures on Product R research
in Israel;
- approximately $294,000 for insurance costs; and
- 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.
YEARS ENDED DECEMBER 31, 2000 AND 1999
As of December 31, 2000, we had current assets of approximately
$6,017,000, compared to approximately $916,000 at December 31, 1999. We had
total assets of approximately $8,809,000 and $2,862,000 at December 31, 2000
and 1999, respectively. The increase in current
22
and total assets was primarily attributable to obtaining investment capital in
2000 of approximately $11.8 million to fund future operating expenditures.
During 2000, we used cash of approximately $5,742,000 for operating
activities, as compared to approximately $4,148,000 in 1999. During 2000, we
incurred expenses of:
- approximately $926,000 for payroll and related costs
primarily for administrative staff and executive officers;
- approximately $1,250,000 in consulting fees to GloboMax;
- non-cash expenses of approximately $387,000 relating to
amortization of deferred interest associated with the
beneficial conversion feature of the second tranche of the
December 1999 convertible debentures;
- approximately $206,000 in connection with Phase I of the drug
approval process in Argentina;
- approximately $1,098,000 for payroll and related costs
primarily for scientific personnel and approximately $263,000
for occupancy expenses for our Yonkers facility;
- approximately $328,000 for laboratory supplies;
- approximately $734,000 for other professional and consulting
fees;
- non-cash expenses relating to amortization of loan costs and
discount on warrants of approximately $106,000 and $611,000,
respectively, relating to convertible debentures issued in
1998, 1999 and 2000;
- approximately $319,000 in computer expenses; and
- non-cash expenses of approximately $230,000 relating to the
issuance of warrants for consulting services.
During the year ended December 31, 2000, cash flows provided by
financing activities was primarily due to the proceeds from the sale of
convertible debentures, sale of common stock and exercise of options and
warrants in 1999 and 2000 of approximately $11,836,000. During the year ended
December 31, 2000, cash flow provided by financing activities were used for
expenditures of approximately $917,000 for leasehold improvements and research
and laboratory equipment at our Yonkers, New York office.
Under the terms of an agreement with RBB Bank, A.G. entered in
November 1998 pursuant to which RBB purchased a 7% convertible debenture and
related warrants, we were
23
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 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.
24
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.
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
25
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.
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
26
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 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
27
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.
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
28
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 Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This amount will be
amortized to interest expense over the term of the warrants.
As of September 30, 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
29
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 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
30
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.
BUSINESS
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). Under the Federal Food, Drug, and Cosmetic Act, as
amended in 1962, the Food and Drug Administration, or FDA, classified
Reticulose as a "new drug" requiring FDA approval prior to any sale in the
United States. 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 prospectus, 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 has not been approved for sale or use by the
FDA or any foreign government body, and thus we have not as yet commenced any
commercial operations. We are dependent on registration and/or approval by
applicable regulatory authorities of Product R in order to commence commercial
operations.
Our operations over the last five years have been limited principally
to engaging in research, in vitro testing and analysis of Product R in the
United States, and engaging others to perform testing and analysis of Product R
on human patients overseas. 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. 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.
31
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Product R, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market Product
R, or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or in vitro testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a
sponsor must prepare and submit to the FDA a comprehensive IND. The focal point
of the IND is a description of the overall plan for investigating the drug
product and a comprehensive protocol for each planned study. The plan is
carried out in three phases: phase I clinical trials, which involve the
administration of the drug to a small number of healthy subjects to determine
safety, tolerance, absorption and metabolism characteristics; phase II clinical
trials, which involve the administration of the drug to a limited number of
patients for a specific disease to determine dose response, efficacy and
safety; and phase III clinical trials, which involve the study of the drug to
gain confirmatory evidence of efficacy and safety from a wide base of
investigators and patients.
An investigator's brochure must be included in the IND and the IND
must commit the sponsor to obtain initial and continual review and approval of
the clinical investigation. A section describing the composition, manufacture
and control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general
method of preparation of the drug substance must be included. A list of all
components including inactive ingredients must also be submitted. There must be
adequate information about pharmacological and toxicological studies of the
drug involving laboratory animals or in vitro tests on the basis of which the
sponsor has concluded that it is reasonably safe to conduct the proposed
clinical investigation. Where there has been widespread use of the drug outside
of the United States or otherwise, it is possible in some limited circumstances
to use well documented clinical experience as a substitute for other
pre-clinical work.
32
After the FDA approves the IND, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.
When all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a
description of each uncontrolled clinical study including a summary of the
results and a brief statement explaining why the study is classified as
uncontrolled; and a description and analysis of any other data or information
relevant to an evaluation of the safety and effectiveness of the drug product
obtained or otherwise received by the applicant from any source foreign or
domestic. The NDA also includes an integrated summary of all available
information about the safety of the drug product including pertinent animal and
other laboratory data, demonstrated or potential adverse effects of the drug,
including clinically significant potential adverse effects of administration of
the drug contemporaneously with the administration of other drugs and other
related drugs. A section is included describing the statistical controlled
clinical study and the documentation and supporting statistical analysis used
in evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent
of drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture
and packaging; and such specifications and analytical methods as are necessary
to assure the identity, strength, quality and purity of the drug substance as
well as the availability of the drug products made from the substance. NDA's
contain lists of all components used in the manufacture of the drug product and
a statement of the specifications and analytical methods for each component.
Also included are studies of the toxicological actions of the drug as they
relate to the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
33
On September 20, 1984, Bernard Friedland, our former President and
current Chairman of the Board of Directors, as sponsor, submitted to the FDA an
IND to conduct a study testing the effectiveness of Product R on human subjects
with AIDS, as well as certain other viruses. The FDA has issued four letters of
deficiency with regard to the IND. In a letter dated November 29, 1984, the FDA
indicated, among other deficiencies noted, that the publications submitted with
the IND and relating to the effectiveness of Product R on virus related
diseases will not be accepted in support of the safety of Product R unless we
could establish that the proposed formulation of Product R is the same as the
formulation of Product R referenced in those publications. In addition, the FDA
required, among other things, that an IND application include relevant
information on the chemistry, laboratory and animal controls to assure the
integrity of the dosage form and that safety information be provided for the
initial study proposed to be conducted on humans. The FDA also required that
the information assure the proper identification, quality, purity and strength
of Product R and a description of the physical, chemical and microbiological
characteristics of Product R. On September 11, 1987, we received a further
deficiency letter from the FDA, stating that no data had been submitted
supporting in vitro anti-HIV activity or any criterion for a biological
response modifier.
On March 6, 1992, we submitted an amendment to the IND which attempted
to address the FDA's concerns. In response to the March 1992 submission, we
received a third deficiency letter from the FDA dated July 27, 1992, which
provided detailed comments with respect to chemistry, toxicology, microbiology
and clinical areas requiring further studies and action on our part. In June
1995, we received further correspondence from the FDA which stated, among other
things, that our prior submissions to the FDA did not provide an adequate
response to the FDA's earlier request for preclinical information and
accordingly our IND was "inactivated."
We have not formally responded to the 1992 deficiency letters or the
1995 deficiency letter, nor have any of the studies cited in those letters been
undertaken. In February 1998, we contracted with GloboMax LLC of Hanover,
Maryland to advise and assist us in our preparation of a new IND to be filed
with the FDA, and to otherwise guide us through the FDA process with the
objective of obtaining full approval for Product R in the United States. During
2000 and 2001, GloboMax continued its project management services for the
pre-clinical development and IND submission of Product R to the FDA, the
development of standard operating procedures and validation protocol for the
preparation and manufacture of Product R. Expenses paid during 2000 and 2001
relating to the GloboMax agreement were approximately $2,456,000. Pursuant to
the agreement with GloboMax, we are obligated to pay for services on an hourly
basis, at prescribed rates. 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. On
September 4, 2001, the IND was cleared by the FDA to begin Phase I trials.
We currently do not have the resources necessary to complete the FDA
approval process. We have allocated certain proceeds from the exercise of
currently outstanding options and warrants for the purpose of filing the and
pursuing the new IND with the FDA, however, such proceeds, if any, will not be
sufficient to improve our financial condition to any great degree. It is
possible that the new IND for clinical tests of Product R on humans will not be
approved by
34
the FDA for human clinical trials on HPV or other diseases, and that any tests
previously conducted or to be conducted will not satisfy FDA requirements. It
is also possible that the results of such human clinical trials, if performed,
will not prove that Product R is safe or effective in the treatment of HPV or
other diseases, or that the FDA will not approve the sale of Product R in the
United States if we submitted a proper NDA. It is not known at this time how
extensive the phase II and phase III clinical trials will be, if they are
conducted. The data generated may not show that the drug Product R is safe and
effective, and even if the data shows that Product R is safe and effective,
obtaining approval of the NDA could take years and require financing of amounts
not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government
regulation in certain countries may delay marketing of Product R for a
considerable period of time and impose costly procedures upon our activities.
The extent of potentially adverse government regulations which might arise from
future legislation or administrative action cannot be predicted. Whether or not
FDA approval has been obtained for a product, approval of the product by
comparable regulatory authorities of foreign countries must be obtained prior
to marketing the product in those countries. The approval process may be more
or less rigorous from country to country, and the time required for approval
may be longer or shorter than that required in the United States. Clinical
studies conducted outside of any country may not be accepted by such country,
and the approval of any pharmaceutical or diagnostic product in one country
does not assure that such product will be approved in another country.
Accordingly, until registration is granted, if ever, in the United States or
another developed or developing country, we do not expect that we will be able
to generate material sales revenue. We received a grant of authority from the
Bahamian Port Authority, an authorized division of the Bahamian Government, on
October 15, 1992 confirming the right of our subsidiary, Advance Viral
Research, Ltd., a Bahamian corporation, to carry on the manufacture and export
sale of ethical pharmaceutical products.
See "--Marketing And Sales."
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through September
30, 2001 we expended approximately $12,008,873 on testing and research and
development activities either in our laboratories or pursuant to various
testing agreements with both domestic and foreign companies. In 1996, we
retained Shalom Z. Hirschman, M.D. as our Chief Executive Officer and
President. Dr. Hirschman established our research facility in Yonkers, New
York, planned and monitored the testing of Product R and recently performed
analyses of Product R with our scientific personnel, which analyses we believe
may be used in connection with the FDA approval process. We currently are
funding research and testing to:
- determine the safety of the topical use of Product R on
animals and cultured human cells;
35
- assess the effectiveness of the topical application of
Product R on HPV and certain cancer causing proteins of HPV;
- study the effects of Product R in inhibiting the mutation of
the AIDS virus in humans;
- assess the effectiveness of the topical application of
Product R for the treatment of persons diagnosed with herpes
labialis/genital infections;
- compare the results of treatment of persons diagnosed with
AIDS taking a multi-drug cocktail (highly active
anti-retroviral therapy, HAART) and Product R with those
taking a multi-drug cocktail and a placebo;
- determine the effectiveness of Product R for the treatment of
rheumatoid arthritis in humans;
- study the effects of Product R in inhibiting the production
of key cellular receptors for HIV (CCR5 and CXCR4 receptors).
The CCR5 and CXCR4 receptors are two of the cell receptors
used by the AIDS virus, HIV, to attach to its target cell and
initiate infection;
- assess the effectiveness in inhibiting the replication of
adenovirus in cell culture;
- study the effects of Product R in mitigating the toxic
effects of other drugs used to treat HIV infections, such as
nucleoside analogues, protease inhibitors and non-nucleoside
reverse transcriptase inhibitors;
- study the effects of Product R in mitigating the toxic
effects of drugs used in the chemotherapy of cancers; and
- assess the direct inhibitory and therapeutic effects of
Product R on neoplasias, including lymphomas and lymphocytic
leukemia.
On January 29, 2001, we 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. Experiments will include the impact of Product R on T cell
proliferation, migration, adhesion and cytokine secretion. In addition,
scientists will explore the effects of Product R on adjuvant arthritis. The
cost of this research is approximately $120,000 which will be funded from our
current cash position.
On April 2, 2001, we entered into a 12-month agreement with The
Selikoff Center in Israel to develop clinical trials in Israel using Product R.
It is anticipated that these trials will support the United States FDA
application under the aegis of GloboMax LLC. The Center will begin with
clinical trials using Product R to mitigate the toxic effects of chemotherapy
in patients
36
with advanced stage cancer and develop further clinical trials using Product R
to treat other diseases as well. These trials will be conducted at
world-renowned hospitals throughout Israel. The cost of the first phase of this
research is approximately $250,000 which will be funded from our current cash
position.
Our studies detailing the results of the above research and testing
may not positively impact the FDA's decision to approve a new IND for Product R
or approve the marketing, sales or distribution of Product R within the United
States, and as a result may not improve our chances of gaining approval for the
marketing, sales or distribution of Product R anywhere in the world.
PATENTS
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We currently have nine patent applications pending with the PTO and 18
patent applications pending in other countries relating to Product R. In the
United States, we have one allowed patent and five issued patents from the PTO.
We also have one issued patent in Australia. As patent applications in the
United States are maintained in secrecy until patents issue and as publication
of discoveries in the scientific or patent literature often lag behind the
actual discoveries, we cannot be certain that we were the first to make the
inventions covered by each of our pending patent applications or that we were
the first to file patent applications for such inventions. Furthermore, the
patent positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions, and, therefore, the
breadth of claims allowed in biotechnology and pharmaceutical patents or their
enforceability cannot be predicted. We cannot be sure that any additional
patents will issue from any of our patent applications or, should any patents
issue, that we will be provided with adequate protection against potentially
competitive products. Furthermore, we cannot be sure that should patents issue,
they will be of commercial value to us, or that private parties, including
competitors, will not successfully challenge our patents or circumvent our
patent position in the United States or abroad. See "Business - Legal
Proceedings."
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or
products. Moreover, pursuant to the terms of the Uruguay Round Agreements Act,
patents filed on or after June 8, 1995 have a term of twenty years from the
date of such filing, irrespective of the period of time it may take for such
patent to ultimately issue. This may shorten the period of patent protection
afforded to our products as patent applications in the biopharmaceutical sector
often take considerable time to issue. Under the Drug Price Competition and
Patent Term Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain
marketing exclusivity for a period of time following FDA approval of certain
drug applications, regardless of patent status, if the drug is a new chemical
entity or if new clinical studies were used to support the marketing
application for the drug. Pursuant to the FDA Modernization Act of 1997, the
period of exclusivity can be extended if the applicant performs certain studies
in pediatric patients. This marketing exclusivity prevents a third party from
37
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms
for a period equal to one-half the period of time elapsed between the filing of
an IND and the filing of the corresponding NDA plus the period of time between
the filing of the NDA and FDA approval, with a five year maximum patent
extension. We cannot be sure that we will be able to take advantage of either
the patent term extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection
with their work with us. We cannot be sure that confidentiality will be
maintained or disclosure prevented by these agreements or that our proprietary
information or intellectual property will be protected thereby or that others
will not independently develop substantially equivalent proprietary information
or intellectual property.
The pharmaceutical industry is highly competitive and patents have
been applied for by, and issued to, other parties relating to products
competitive with Product R. Therefore, Product R and any other drug candidates
may give rise to claims that they infringe the patents or proprietary rights of
other parties existing now and in the future. Furthermore, to the extent that
we or our consultants or research collaborators use intellectual property owned
by others in work performed for us, disputes may also arise as to the rights in
such intellectual property or in related or resulting know-how and inventions.
An adverse claim could subject us to significant liabilities to such other
parties and/or require disputed rights to be licensed from such other parties.
We cannot be sure that any license required under any such patents or
proprietary rights would be made available on terms acceptable to us, if at
all. If we do not obtain such licenses, we may encounter delays in product
market introductions, or may find that the development, manufacture or sale of
products requiring such licenses may be precluded. In addition, we could incur
substantial costs in defending ourselves in legal proceedings instituted before
the PTO or in a suit brought against it by a private party based on such
patents or proprietary rights, or in suits by us asserting our patent or
proprietary rights against another party, even if the outcome is not adverse to
us. There are extensions available under the Patent Act if the delay in
prosecution of the patent application results from a delay in the PTO's
handling of any interference or appeal involving the application. We have not
conducted any searches or made any independent investigations of the existence
of any patents or proprietary rights of other parties.
EQUITY LINE OF CREDIT AGREEMENT
On February 9, 2001, we signed a private equity line of credit
agreement with Cornell Capital Partners, LP. Pursuant to this equity line of
credit agreement and subject to the satisfaction of certain conditions,
Advanced Viral may sell and issue to Cornell Capital, from time to time, up to
an aggregate of $50,000,000 of our common stock. Beginning on February
38
14, 2001, the date that the registration statement covering the resale of the
shares issuable pursuant to the equity line of credit was declared effective by
the Commission, and continuing for thirty (30) months thereafter, we may, from
time to time, in our sole discretion, sell or "put" shares of our common stock
to Cornell Capital at a price equal to the 95% of the market price of the
common stock. Under the equity line of credit agreement, the market price of
Advanced Viral common stock, for purposes of determining the purchase price, is
the average of the three lowest closing bid prices, as reported by Bloomberg,
L.P., of our common stock for the 25 trading day period ending on the date we
notify Cornell Capital of our intention to put common stock to it, or, in other
words, request an advance.
The maximum advance amount on any advance notice date is equal to the
product of 150% times the 40 day average daily volume traded for the 40 trading
days preceding the advance notice date. The 40 day average volume traded is
equal to the bid price multiplied by the volume for each of the 40 trading days
preceding the advance notice date as reported by Bloomberg, L.P.
Our ability to put shares of common stock to Cornell Capital is
subject to certain conditions and limitations, including, but not limited to,
the following:
- the closing bid price of the common stock on the advance
notice date shall not be less than the average of the three
lowest closing bid prices of our common stock for the 25
trading day period ending on the date we request an advance.
- the registration statement covering the resale of the shares
must have previously become effective and shall remain
effective and available for making resales of the put shares;
- our representations and warranties contained in the equity
line of credit agreement must be accurate as of the date of
each put;
- we must have performed, satisfied and complied in all
respects with all covenants, agreements and conditions
required to be performed, satisfied or complied with at or
prior to the date of each put;
- we must have obtained all permits and qualifications required
by any applicable state in accordance with the registration
rights agreement for the offer and sale of the put shares, or
shall have the availability of exemptions therefrom. The sale
and issuance of the put shares must be legally permitted by
all laws and regulations to which we are subject;
- no statute, rule, regulation, executive order, decree,
ruling, or injunction may be in effect which prohibits or
directly and adversely affects any of the transactions
contemplated by the equity line of credit agreement;
39
- at the time of an advance, there must not have been any
material adverse change in our business, operations,
properties, prospects, or financial condition since the date
of filing of our most recent report with the SEC;
- our common stock must not have been delisted from the
Bulletin Board or suspended from trading by the SEC or the
Bulletin Board; and we must not have received any notice
threatening the continued listing of our common stock on the
Bulletin Board;
- at least 13 trading days must have elapsed since the last
date we put shares to Cornell Capital; and
- no advance date shall be less than 12 trading days after an
advance notice date.
We cannot assure you that we will satisfy all of the conditions
required under the equity line of credit agreement or that Cornell Capital will
have the ability to purchase all or any of the shares of common stock put to it
thereunder.
Under the equity line of credit agreement, we agreed to register the
common stock for resale by Cornell Capital, which will permit Cornell Capital
to resell the common stock from time to time in the open market or in
privately-negotiated transactions. We prepared the registration statement and
will file amendments and supplements thereto as may be necessary in order to
keep it effective as long as the equity line of credit agreement remains in
effect or Cornell Capital owns any of our common stock. We have agreed to bear
certain expenses, other than broker discounts and commissions, if any, in
connection with the preparation and filing of the registration statement and
any amendments to it.
In addition, pursuant to the equity line of credit agreement, each
officer, director and affiliate of Advanced Viral has agreed that he, she or it
will not, directly or indirectly, without the prior written consent of Cornell
Capital, issue, offer, agree or offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
otherwise encumber or dispose of any shares of common stock, including options,
rights, warrants or other securities underlying, convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for any
common stock (whether or not beneficially owned by the undersigned), or any
beneficial interest therein for a period of 10 trading days following the
receipt of an advance notice by Advanced Viral pursuant to the agreement.
In conjunction with the equity line of credit agreement, we entered
into an agreement with May Davis Group, Inc., our placement agent. May Davis
assisted Advanced Viral in negotiating the equity line of credit agreement. As
a placement fee, we issued to May Davis and certain other investors Class A
Warrants to purchase 5,000,000 shares of our common stock at an exercise price
per share equal to $1.00, exercisable in part or in whole at any time until
February 9, 2006, and Class B Warrants to purchase in the aggregate 5,000,000
shares of our common stock at an exercise price equal to the greater of $1.00
or 110% of the bid price of the common
40
stock on the applicable advance date under the private equity line of credit
agreement. Each Class B Warrant is exercisable pro rata on or after each
advance date with respect to that number of warrant shares equal to the product
obtained by multiplying 5,000,000 by a fraction, the numerator of which is the
amount of the advance payable on the applicable advance date and the
denominator of which is $20,000,000, until sixty months from the date of
issuance.
We may redeem the warrants at a redemption price of $0.01 per share
provided that the bid price for our common stock equals at least $4.00 per
share for a period of ten (10) consecutive trading days, as described therein.
The warrants contain provisions that adjust the purchase price and number of
shares issuable upon the occurrence of certain events, such as a stock split,
reverse stock split, stock dividend, merger, or recapitalization. Assuming the
registration statement covering the shares underlying the warrants and the
equity line of credit is not suspended, the holder may effect a cashless
exercise of the warrant commencing with the first advance date. There are also
entitled to certain "piggyback" registration rights with respect to the shares
of common stock issuable upon exercise of the warrants pursuant to a
registration rights agreement.
MARKETING AND SALES
Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. As of the date
hereof, our efforts or the efforts of our representatives have produced no
material benefits to us regarding our ability to have Product R sold
commercially anywhere in the world. We have entered into exclusive distribution
agreements with four separate entities granting exclusive rights to distribute
Product R in the countries of Canada, China, Japan, Hong Kong, Macao, Taiwan,
Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant to
these agreements, the distributors are obligated to cause Product R to be
approved for commercial sale in such countries and upon such approval, to
purchase from us certain minimum quantities of Product R to maintain the
exclusive distribution rights. Our marketing plans for Product R are still
dependent upon registration of Product R for sale in various jurisdictions
where our distributors are seeking approvals.
To date we have received no information that would lead us to believe
that we will be positioned to sell Product R commercially anywhere in the world
in the immediate future, and it is possible that none of our distributors will
ever secure registration of Product R. 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. On September 4, 2001, Advanced Viral's IND was cleared to begin
Phase I clinical trials. We are currently in Phase I trials.
An application for registration of Product R was filed in March 1998
requesting that Product R be permitted to be sold in Argentina. In this March
1998 filing, DCT, S.R.L., our distribution agent in Argentina, received an
investigational new drug identification number from the National Administration
for Drug, Food and Medical Technology in Argentina, or ANMAT. This allowed DCT
to begin pre-clinical studies on our behalf with Product R which have since
been concluded. In February 2000, DCT received approval from the ANMAT to
proceed with
41
Phase I clinical trials in Argentina for Product R. We are currently evaluating
the costs and time necessary to complete Phase I clinical trials in Argentina.
DCT must apply for approval from the ANMAT to proceed with Phases II and III
clinical trials before Product R is approved for sale in Argentina. The costs
and time necessary to complete such trials cannot be predicted at this time.
GloboMax Americas has been retained to review the application and status of
Product R in Argentina. Based upon recommendations received from GloboMax
Americas, we will decide how to proceed further in Argentina. We may not
receive regulatory approval in Argentina and therefore may not generate sales
of Product R in Argentina in the near future.
We initially targeted our sales and marketing efforts to those
countries where Product R was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes
simplex and herpes zoster. Those countries included Singapore, Hong Kong,
Malaysia, Taiwan, the Philippines and Malta. Registration of Product R will be
required in such countries as well as in the other countries comprising the
distributors' territories before any significant sales may begin. The
registration of Product R for sale in these countries has been frustrated due
to our inability to obtain the registration and approval to sell Product R in
the Bahamas, the country of origin, and a general lack of published data on the
effectiveness of Product R. Until Product R is registered and approved for sale
in the United States, in another developed country or in the other countries
included in the distributors' territories, we will not generate any material
sales of Product R. For the years ended December 31, 2000, 1999 and 1998, we
reported no commercial sales except limited sales for testing purposes. Product
R is not legally available for commercial sale anywhere in the world, except
for testing purposes. See "--Research, Development and Testing."
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council
of the Bahamas had refused our subsidiary's request for a "free sales
certificate" for Product R. A free sales certificate is a document typically
issued by a country in which a pharmaceutical product is manufactured which
certifies that such country permits the "free sale" of such product in such
country. Most countries require that, before allowing the registration of a
pharmaceutical product for use in that country, it must at least be registered
and certified for free sale in the country in which it is manufactured.
However, the Bahamas has no procedures currently in place to issue a free sales
certificate for any therapeutic drug, including Product R. If we do not obtain
a free sales certificate or other equivalent document from the Bahamas or
another country, or if we do not receive FDA approval, it is possible that we
will not be able to meet registration requirements in the countries which
require that a pharmaceutical product be at least registered and certified for
free sale in the country in which it is manufactured.
We are currently reconfiguring our Yonkers, New York research
facilities to produce clinical trial batches and manufacture Product R under
current Good Manufacturing Procedures (cGMP) as set forth by the United States
Food & Drug Administration if and when the FDA approves Product R for
distribution and sale in the United States.
42
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Product R, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Product R. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, hepatitis and
other viruses. We anticipate that we will face intense and increasing
competition as new products enter the market and advanced technologies become
available. Our competitors' products may be more effective, or more effectively
marketed and sold, than Product R. Competitive products may render Product R
obsolete or noncompetitive before we can recover the expenses of developing and
commercializing Product R. Furthermore, the development of a cure or new
treatment methods for the diseases we are targeting could render Product R
noncompetitive, obsolete or uneconomical. Many of our competitors:
- have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products;
- have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products; and
- have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Product R should be added to such cocktails in order
to enhance their effectiveness and mitigate the toxic effects of other drugs
used to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma. In
addition, Glaxo SmithKline, in collaboration with Biochem Pharma, is pursuing
development of Lamivudine, a nucleoside analogue to treat hepatitis B
infection. This compound was recently approved for marketing in the United
States, China and several other countries and represents significant potential
competition for Product R as a treatment for hepatitis B.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Product R, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating
43
HPV. Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Product R.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed phase III trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade
for rheumatoid arthritis in January 1999. These products represent significant
competition for Product R as a treatment for rheumatoid arthritis.
Three antiviral products are presently sold in the United States for
the treatment of recurrent genital herpes: Zovirax(R) (manufactured by Glaxo
SmithKline) which contains acyclovir and is administered orally, topically, or
intravenously, Famvir(R) (manufactured by SmithKline Beecham Pharmaceuticals)
which contains famcyclovir and is administered orally, and Valtrex(R)
(manufactured by Glaxo SmithKline) which contains valacyclovir and is also
administered orally. These products represent significant competition for
Product R as a treatment for genital herpes.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for Product R, we will
face competition based on the safety and effectiveness of Product R, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Product R, we
expect to compete primarily on the basis of product performance and price with
a number of pharmaceutical companies, both in the United States and abroad.
EMPLOYEES
We have 38 full-time employees, consisting of our 4 executive
officers, 23 employees involved in research, and 11 administrative employees.
Dr. Hirschman, our President and Chief Executive Officer and a director,
Bernard Friedland, Chairman of the Board, William Bregman, our Secretary,
Treasurer and a director, and Alan V. Gallantar, our Chief Financial Officer,
each devote all of their business time to our day-to-day business operations.
Additionally, we may hire, as and when needed, and as available, such sales and
technical support staff and consultants
44
for specific projects on a contract basis. See "Management --Employment
Contracts, Termination of Employment and Change-in-Control Arrangements."
PROPERTY
We lease approximately 16,650 square feet for executive offices,
including research laboratory space, at 200 Corporate Boulevard South, Yonkers,
New York from an unaffiliated third party (the "Yonkers Lease"). The term of
the Yonkers Lease is five years through April 2005 and our annual rental
obligation under the Yonkers Lease is approximately $260,000.
We currently maintain corporate offices at 1250 East Hallandale Beach
Boulevard, Hallandale, Florida 33009, pursuant to a three-year lease agreement
with three one-year extentions, at approximately $18,000 annually. The Bahamian
manufacturing facility, which was acquired on December 16, 1987, is located in
Freeport, Bahamas and consists of a 29,242 square foot site containing a
one-story concrete building of approximately 7,300 square feet and is equipped
for all phases of the testing, production, and packaging of Product R. The
Bahamian facility is currently being used to store and produce inventory for
testing purposes.
LEGAL PROCEEDINGS
In June 2000, we filed an action and complaint in the Supreme Court of
New York, Westchester County, against Commonwealth Pharmaceuticals, Ltd.,
Immune Modulation Maximum Corp. ("IMMC") and Charles E. Miller (collectively,
the "Defendants") alleging a breach by Commonwealth of an exclusive
distribution agreement between Advanced Viral and Commonwealth,
misappropriation of trade secrets and confidential information, conversion and
conspiracy to convert our property interests in Reticulose(R). We further
alleged that Defendant Miller filed and obtained a U.S. patent entitled
"Composition Containing Peptides and Nucleic Acids and Methods of Making Same"
based on a study conducted by a third party using Reticulose(R), and that such
patent was assigned to Defendant IMMC, a company controlled by Defendant
Miller, in violation of the exclusive distribution agreement.
In our complaint, we seek relief in the form of (i) assignment of the
patent to Advanced Viral, (ii) adjudgment that Defendants breached,
misappropriated, converted and conspired to convert our property rights, (iii)
damages, profits realized and interest thereon; and (iv) attorneys' fees, costs
and expenses. In response, on August 3, 2000, Defendants filed a Motion to
Dismiss the Complaint alleging lack of personal jurisdiction or, in the
alternative, that the agreement underlying our claim is legally inoperative.
In August 2000, Commonwealth and IMMC filed a suit against Advanced
Viral in the United States District Court for the Eastern District of Michigan
which alleges that IMMC, and not Advanced Viral, is the owner of the
exclusive/broad rights in Reticulose(R), and seeks, among other things: (i) a
declaratory judgment that IMMC is the exclusive owner of the broad/exclusive
rights to Reticulose(R) and the subject patent; (ii) an injunction against
Advanced Viral from further attempts to use, market or assert any claims of
ownership over any broad/exclusive rights in Reticulose(R), or the use,
publication or disclosure of information regarding Reticulose(R); (iii)
45
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.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information
concerning them are as follows:
NAME AGE POSITION
Shalom Z. Hirschman, M.D. 65 President, Chief Executive Officer,
Chief Scientific Officer, Director
Bernard Friedland 75 Chairman of the Board
William Bregman 80 Vice President, Secretary, Treasurer,
Director
Louis J. Silver 72 Director
Alan V. Gallantar 43 Chief Financial Officer
SHALOM Z. HIRSCHMAN, M.D., President, Chief Executive Officer and a
director since October 1996, was Director of the Division of Infectious Diseases
and Professor of Medicine at Mount Sinai School of Medicine, New York, New York,
from May 1969 until October 1996.
46
BERNARD FRIEDLAND, Director since July 1985, Chairman of the Board
since May 1987, and President and Chief Executive Officer from September 1985
until October 1996, was employed by Key, Inc. for 30 years, until March 1,
1986, in the Research and Development and Quality Assurance Departments in
Pharmaceuticals, Pharmacology, and Cancer antimetabolites, and has been the
President and CEO of our subsidiary, Advance Viral Research, Ltd. since 1984.
WILLIAM BREGMAN, director since July 1985 and Vice President,
Secretary-Treasurer since September 1985, and Vice President and Treasurer of
our subsidiary, Advance Viral Research, Ltd., from August 1984 until the
present.
LOUIS J. SILVER, director since May 1992, has been self-employed as a
free-lance accountant and auditor since 1985. Mr. Silver previously served as a
member of the board of directors during the periods from May 1987 to July 1987.
ALAN V. GALLANTAR, Chief Financial Officer since October 1999, was
treasurer and controller from March 1998 to September 1999 of AMBI Inc., a
nutraceutical company, senior vice president and chief financial officer from
1992 to 1997 of Bradley Pharmaceuticals, Inc., a pharmaceutical manufacturer,
and vice president and divisional controller from 1989 to 1991 for PaineWebber
Incorporated. From 1985 to 1989, Mr. Gallantar was second vice president at The
Chase Manhattan Bank, N.A., and from 1983 to 1985, was a senior accountant at
Philip Morris, Incorporated. From 1979 to 1983, Mr. Gallantar was a senior
accountant in the audit department of Deloitte & Touche.
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" as those terms as defined in the rules and regulations promulgated
under the Securities Act. Directors are elected to serve until the next annual
meeting of stockholders and until their successors have been elected and have
qualified.
DIRECTOR COMPENSATION
The arrangement for director compensation is $150 for each meeting of
the board of directors attended, which has not in fact been paid within at
least the last three years.
EXECUTIVE OFFICER COMPENSATION
Other than Dr. Hirschman, our President and Chief Executive Officer,
and Mr. Gallantar, our Chief Financial Officer, none of our directors, officers
or employees received salary and bonus exceeding in the aggregate $100,000 in
the years ended December 31, 2000, 1999 or 1998.
The following table provides certain summary information concerning
compensation paid or accrued by Advanced Viral, to or on behalf of the named
executive officer for the years ended December 31, 2000, 1999 and 1998.
47
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------ ---------------------------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY(1) BONUS COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4)
- ------------------ ---- --------- ------- --------------- --------------- ---------------
Shalom Z. Hirschman, M.D.,
President, Chief Executive 2000 $361,000 $ 0 $30,775 -- $4,540
Officer and Chief Scientific
Officer since October 1996 1999 $325,000 $ 0 $34,738 -- $4,316
and consultant from May 24,
1995 until October 1996 1998 $325,000 $ 0 $12,288 23,000,000 $4,316
Alan V. Gallantar, Chief 2000 $200,000 $25,000 $21,000 -- --
Financial Officer since 1999 $ 43,750 $ 0 $ 1,500 4,547,880 --
October 1999 1998 -- -- -- -- --
- ---------
(1) Dr. Hirschman's salary increased for the year 2000 to $361,000. Mr.
Gallantar's salary increased in October 2000 to $200,000. Mr. Gallantar was
hired in October 1999 and therefore his salary in 1999 reflects only three
months of his $175,000 annual salary.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate incremental cost
to Advanced Viral of Dr. Hirschman's automobile lease, gas, oil, repairs and
maintenance. Other Annual Compensation for Mr. Gallantar includes an automobile
allowance of $500 per month and allowance for moving expenses of approximately
$15,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) The dollar value of insurance premiums paid by, or on behalf
of, us with respect to term life insurance for the benefit of Dr. Hirschman.
In February 1998, we granted Dr. Hirschman options to acquire
23,000,000 shares of common stock, which are currently exercisable at $0.27 per
share through February 17, 2008. In October 1999, we granted Mr. Gallantar
options to acquire 4,547,880 shares of common stock, exercisable at $0.24255
per share in one third increments on October 1, 2000, 2001, and 2002, until
October 1, 2009. In May 2000, we granted Louis Silver options to acquire
100,000 shares of common stock at $0.25. No other stock options were granted to
the named executive officers during 2000. Other than stock options beneficially
owned by our officers and directors of Advanced Viral, there are options to
acquire 7,308,500 shares of the common stock at exercise prices ranging from
$0.14 to $0.36 per option share outstanding.
48
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2000 held by the named executive officers. No options were exercised during
the year ended December 31, 2000 by the named executive officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE (#) REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ----------- ------------------------- -------------------------
Shalom Z. Hirschman, M.D 0 N/A 39,100,000 / 39,100,000 $2,707,250 / $0(2)(3)
Alan V. Gallantar 0 N/A 1,515,960 / 4,547,880 $128,781 / $257,562(2)(4)
- ---------
(1) Based on the difference between the average of the high and low bid
prices per share of the common stock as reported by the Bulletin Board
on the date of exercise, and the exercise or base price.
(2) Based on the difference between the average of the high and low bid
prices per share of the common stock as reported by the Bulletin Board
on December 31, 2000, $0.3275, and the exercise or base price of
in-the-money stock options.
(3) As of December 31, 2000, Dr. Hirschman held options to purchase
4,100,000 shares of common stock at $0.18 per share; 4,000,000 shares
of common stock at $0.19 per share; 4,000,000 shares of common stock
at $0.27 per share; 4,000,000 shares of common stock at $0.36 per
share, and 23,000,000 shares of common stock at $0.27, all of which
are currently exercisable.
(4) As of December 31, 2000, Mr. Gallantar held options to purchase
4,547,880 shares of common stock at $0.24255 per share, of which
1,515,960 were exercisable as of such date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf. The agreement includes an agreement
that Dr. Hirschman will be nominated as a director for the duration of Dr.
Hirschman's employment with us under the agreement, and voting agreements
regarding the election of Messrs. Friedland, Bregman and Dr. Hirschman as
directors. See "Principal Stockholders."
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least
two years in advance that such one year automatic
49
extension shall be vitiated. If the agreement is terminated by us for cause, we
may cancel all unvested stock options, benefits under stock bonus plans and
stock appreciation rights ("SARs") granted to Dr. Hirschman. If the agreement is
terminated by Dr. Hirschman for cause, we are required to pay to Dr. Hirschman
his annual salary and employee benefits through the remainder of the then
current term.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
- take such action as may be necessary to permit Dr. Hirschman
to be entitled to participate in stock option, stock bonus or
similar plans (including plans for SARs) as are established
by us;
- lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list
price not in excess of $40,000, and pay for all gas, oil,
repairs and maintenance, as well as the lease or purchase
payments, as applicable, in connection with the automobile;
- reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses, his license fees, membership dues in professional
organizations, subscriptions to professional journals,
necessary travel, hotel and entertainment expenses incurred
in connection with overnight, out-of-town trips that
contribute to the benefit of us in the reasonable
determination of Dr. Hirschman, and all other expenses that
may be pre-approved by our board of directors; and
- provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.
The agreement also provides 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 further provides that Dr. Hirschman is not authorized,
without the express written consent of the board of directors and other than in
the ordinary course of business, to pledge the credit of Advanced Viral or any
of our other employees, to bind us, to release or
50
discharge any debt due us unless we have received payment in full, or to
dispose (as collateral or otherwise) of all or substantially all of our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998
grant to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.
GALLANTAR EMPLOYMENT AGREEMENT
Advanced Viral entered into an Employment Agreement dated as of
October 1, 1999 with Alan V. Gallantar, pursuant to which Mr. Gallantar is
employed as our Chief Financial Officer on a full business time basis. Under
the agreement, the term of Mr. Gallantar's employment continues until October
1, 2002. If the agreement is terminated by us for cause, Mr. Gallantar will
have no accrued right to receive any bonus for the year in which his employment
is terminated, all unvested stock options will be cancelled, and any vested
stock options will terminate 90 days after the effective date of termination.
If the agreement is terminated by Advanced Viral not for cause, we are required
to pay to Mr. Gallantar all accrued and unpaid compensation, and all stock
options granted as of the date of the agreement shall become 100% vested. Upon
such termination not for cause, all options which became vested as a result of
this provision may be exercised by Mr. Gallantar until 90 days after the
effective date of termination. If Mr. Gallantar elects to terminate this
agreement as a result of a change in control, he will be paid his base salary
for the remaining term of the agreement, and all stock options granted on the
date of the agreement will become 100% vested and exercisable until 90 days
after the effective date of termination. If Mr. Gallantar elects to terminate
this agreement for any other reason, he will be paid all unaccrued and unpaid
base salary, and he will have the right to exercise any vested stock until 90
days after the effective date of termination. All payments made to Mr.
Gallantar in connection with the termination of the agreement are subject to
reduction to the extent they exceed 2.99 times the "base amount" as determined
under Section 280G of the Internal Revenue Code of 1986.
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year
of the agreement; and $225,000 for the third year of the agreement. For each
year of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10%
and 50% of his base salary, based on certain targets and the discretion of
51
the board of directors. As of the date of the agreement, Mr. Gallantar received
options to purchase an aggregate of 4,547,880 shares of our common stock. The
options expire on October 1, 2009, and are exercisable in three increments of
1,515,960 on the October 1, 2000, 2001 and 2002, respectively. The agreement
further provides that:
- Mr. Gallantar and his family are entitled to receive the same
benefits generally given to other senior executives of
Advanced Viral.
- Mr. Gallantar is entitled to 15 working days of vacation
during the first year and 20 days of vacation during each
year thereafter, subject to certain exceptions.
- Mr. Gallantar will receive a non-accountable automobile
allowance of $500 per month, provided however, that he is be
responsible for all costs of acquiring and maintaining the
automobile.
- We will reimburse Mr. Gallantar for certain professional
license and membership fees up to a maximum of $5,000 per
year in the aggregate, and all other expenses incurred in the
performance of his duties with the prior approval of the
Chief Executive Officer.
The agreement provides that Mr. Gallantar is not authorized, without
the express written consent of the board of directors and other than in the
ordinary course of business, to pledge the credit of Advanced Viral, to bind us
under any note, mortgage or other monetary obligation, to release or discharge
any debt due us unless we have received payment in full, or to dispose (as
collateral or otherwise) of a substantial amount of our assets. Furthermore,
Mr. Gallantar agreed that he will assign to us all intellectual property rights
developed by him which result from the knowledge he acquired while performing
his duties under the agreement. Finally, he has agreed that he will not,
directly or indirectly, compete with us for five years after termination of his
employment or solicit our employees to leave our employ for one year after
termination.
ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(K))
In December 1999, we adopted a 401(k) plan that allows eligible
employees to contribute up to 20% of their salary, subject to annual limits,
which were $10,500 in 2000. We match 50% of the first 6% of the employee
contributions in our stock and may, at our discretion, make additional
contributions based upon earnings. In March 2001, we funded the 401(k) plan
with $23,757 to enable the 401(k) plan to purchase shares of our common stock
on the open market to contribute to the 401(k) plan for the employer match for
the year ended December 31, 2000.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the date hereof for (i) each
shareholder who is known by us to own beneficially more than 5% of our common
stock, (ii) each director and executive officer, and (iii)
52
all of our directors and named executive officers as a group. Except as
otherwise indicated, we believe, based on information furnished by the persons
named in this table that such persons have voting and investment power with
respect to all shares of common stock beneficially owned by them, subject to
community property laws, where applicable.
SHARES OF COMMON STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OWNED
- ------------------------------------ ---------------------- -------------
Shalom Z. Hirschman, M.D. 39,101,000(2)(3) 9.0%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Bernard Friedland 39,146,730(3)(4) 10.0%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, Florida 33009
William Bregman 36,156,988(3)(5) 9.2%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, Florida 33009
Louis J. Silver 351,000(2)(6) *
5110 S.W. 127th Place
Miami, Florida 33175
Alan V. Gallantar 3,031,320(2)(7) *
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
ALL OFFICERS & DIRECTORS (5 PERSONS) 117,787,638(2) 27.0%
- ---------
* Less than 1%
(1) The persons named in this table have sole voting power with respect to
all shares shown as beneficially owned by them, except as indicated in other
footnotes to this table. In computing the number of shares beneficially owned
by a person and the percentage ownership of that person, shares of common stock
subject to options or warrants held by that person that are currently
exercisable or exercisable within 60 days from the date hereof, are deemed
outstanding. According to American Stock Transfer & Trust Company, the transfer
agent for the common stock, 393,630,196 shares of the common stock were
outstanding as of November 20, 2001.
(2) Includes 39,100,000 shares that may be acquired pursuant to options to
purchase common stock exercisable within 60 days from the date hereof.
(3) The Hirschman employment agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that agreement,
shall vote all shares of the common stock owned or voted by them in favor of
Dr. Hirschman as a director of Advanced Viral. That agreement, however, does
not restrict or otherwise limit their right to sell their shares to third
parties without restriction. The Hirschman employment agreement also provides
that Dr. Hirschman, during that term, shall take no action which shall preclude
Messrs. Friedland and Bregman from being nominees as directors of Advanced
Viral and that Dr. Hirschman shall vote all shares of the common stock owned or
voted by him in favor of Messrs. Friedland and Bregman as directors of Advanced
Viral. See "Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
(4) Includes 1,000,000 shares of the common stock owned by Mr. Friedland
and Beth Friedland, his daughter, as joint tenants;) 20,000,000 shares owned by
Mr. Friedland and Shirley Friedland, his spouse, as joint tenants; and 400,000
shares owned the B&SD Friedland Foundation, a not-for-profit foundation
controlled by Mr. Friedland. Does not include 15,000 shares owned by Shirley
Friedland as to which Mr. Friedland disclaims beneficial ownership.
(5) Includes 22,443,614 shares held in a trust for which Mr. Bregman is
the sole trustee and sole beneficiary; 165,000 shares owned by Carol Bregman,
his daughter; 165,000 shares owned by Janet Berlin, his daughter; 165,000
shares owned by Forest Berlin, his grandson; 165,000 shares owned by Jessica
Berlin, his granddaughter; and 55,000 shares owned by David Berlin, his
son-in-law.
53
(6) Includes options granted in May 2000 to acquire 100,000 shares of
common stock at $0.25 per share.
(7) Represents currently exercisable options to purchase 3,031,920 shares
of common stock at $0.24255 per share.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date hereof by each of the
selling shareholders assuming the full exercise of certain warrants and stock
options. Unless otherwise indicated below, to our knowledge all persons listed
below have sole voting and investment power with respect to the shares of
common stock, except to the extent authority is shared by spouses under
applicable law. The information included below is based upon information
provided by the selling shareholders. Because the selling shareholders may
offer all, some or none of their shares, no definitive estimate as to the
number of shares that will be held by the selling shareholders after such
offering can be provided and the following table has been prepared on the
assumption that all shares offered under this prospectus will be sold.
SELLING SHAREHOLDER TABLE
SHARES OWNED SHARES OWNED
BEFORE OFFERING(1) SHARES BEING AFTER OFFERING(3)
POSITION WITH OR RELATIONSHIP -------------------- SOLD IN ------------------
SELLING SHAREHOLDER TO ADVANCED VIRAL NUMBER PERCENT OFFERING(2) NUMBER PERCENT
- ------------------- ----------------------------- ------- ------- ------------ ------ -------
Elliott Bauer Affiliate of AVIX 4,213,875 1% 3,499,500 2a 714,375 *
Cesar Blumtritt, MD Affiliate of DCT 236,667 * 236,667 2b 0 0%
Leonard Cohen Consultant and Affiliate of AVIX 4,065,000 1% 100,000 2c 3,965,000 1%
Matt Gattegno Counsel to Blumtritt and Velez 66,666 * 66,666 2d 0 0%
Henry Kamioner Consultant 1,500,000 * 1,500,000 2e 0 0%
Shalom Z. Hirschman, MD CEO, Director 39,101,000 9% 16,100,000 2f 23,001,000 6%
Richard Rubin Former legal counsel 374,000 * 374,000 2g 0 0%
Freddie Velez Affiliate of DCT 440,667 * 440,667 2h 0 0%
Alan Gallantar Chief Financial Officer 4,547,880 1% 4,547,880 2i 0 0%
TOTAL SHARES (1) 54,545,755 11% 26,865,380 27,680,375 7%
420,495,576
SHARES OUTSTANDING AFTER OFFERING (2)
- ---------
* Less than 1%
(1) Includes an aggregate of 50,810,380 shares of common stock issuable to
the selling shareholders pursuant to the exercise of certain warrants and stock
options, of which an aggregate of 26,865,380 shares underlying stock options
are being offered hereby.
(2) Represents shares of common stock underlying stock options which are
exercisable for the following number of shares and the following per share
exercise prices: (a) 3,349,000 shares at $0.18, 75,000 shares at $0.27, and
75,000 shares at $0.36; (b) 236,667 shares at $0.24; (c) 100,000 shares at
$0.19; (e) 66,666 shares at $0.24; (f) 500,000 shares at $0.19, 500,000 shares
at $0.27, and 500,000 shares at $0.36; (g) 4,100,000 shares at $0.18; 4,000,000
shares at $0.19; 4,000,000 shares at $0.27; 4,000,000 shares at $0.36; (h)
104,000 shares at $0.27 and 270,000 shares at $0.36; (i) 440,000 shares at
$0.24; and (j) 4,547,880 shares at $0.24255.
(3) Assumes the full exercise of stock options held by selling
shareholders and no additional shares of common stock are acquired.
54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the past three fiscal years, there were no material transactions
between Advanced Viral and any of our officers or directors which involved
$60,000 or more.
DESCRIPTION OF COMMON STOCK
Our Certificate of Incorporation authorizes us to issue 1,000,000,000
shares of common stock, par value $0.00001 per share. As of November 20, 2001,
there were outstanding 393,630,196 shares of common stock, all of which are
fully paid for and non-assessable. The holders of common stock:
- have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
- entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
- do not have preemptive, subscription, or conversion rights
and there are no redemption or sinking fund provisions
applicable thereto; and
- are entitled to one noncumulative vote per share on all
matters which shareholders may vote on at all meetings of
shareholders.
American Stock Transfer & Trust Company is our transfer agent and
registrar, and is located in Brooklyn, New York.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling shareholders. We will receive the cash proceeds, if any, from the
exercise of any of the stock options held by the selling shareholders.
55
PLAN OF DISTRIBUTION
We are registering the proposed resale by the selling shareholders of
26,865,380 shares of our common stock issuable upon the exercise of certain
stock options. The selling shareholders may offer the shares at various times
in one or more of the following transactions:
- in the over-the-counter market;
- in transactions other than market transactions;
- in connection with short sales of our shares;
- by pledge to secure debts or other obligations;
- in connection with the writing of non-traded and
exchange-traded call options, in hedge transactions and in
settlement of other transactions in standardized or
over-the-counter options;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
- in a combination of any of the above.
The selling shareholders may sell shares at market prices then
prevailing, at prices related to prevailing market prices, at negotiated prices
or at fixed prices.
The selling shareholders may use broker-dealers to sell shares. If
this happens, broker-dealers will either receive discounts or commissions from
the selling shareholders, or they will receive commissions from purchasers of
shares for whom they have acted as agents. Selling shareholders may be deemed
to be underwriters with respect to the shares sold by them. Broker-dealers who
act in connection with the sale of the common stock may also be deemed to be
underwriters. Profits on any resale of the common stock as a principal by these
broker-dealers, and any commissions received by the broker-dealers, may be
deemed underwriting discounts and commissions under the Securities Act of 1933.
No underwriting commissions or finder's fees have been or will be paid
to us. The selling shareholders will pay all broker-dealer commissions and
related selling expenses associated with the sale of the common stock. The
common stock offered hereby is being registered pursuant to our contractual
obligations, and we have agreed to pay the costs of registering the shares,
including the fees outlined above.
In connection with the offering, persons participating in the offering
may purchase and sell shares of common stock on the open market. These
transactions may include short sales, stabilizing transactions in accordance
with Rule 104 of Regulation M under the Exchange Act and purchases to cover
positions created by short sales. Short sales involve the sale by an
underwriter of a greater number of shares than they are required to purchase in
the offering which creates a short position. Stabilizing transactions consist
of certain bids or purchases made for the purpose of preventing or limiting a
decline in the market price of the common stock.
56
These activities, if taken by the underwriters, may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected in the over-the-counter market or otherwise.
LEGAL MATTERS
The validity of the shares offered in this prospectus will be passed
upon for Advanced Viral by Berman Wolfe Rennert Vogel & Mandler, P.A., Bank of
America Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida 33131.
EXPERTS
The Consolidated Financial Statements of Advanced Viral Research Corp.
included in this prospectus and in the registration statement except as they
pertain to periods unaudited, have been audited by Rachlin Cohen & Holtz LLP,
independent certified public accountants, for the periods indicated in their
report appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon the report of such firm given upon the authority of
such firm as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that none of our directors
shall be liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of our
shareholders (through shareholders' derivative suits on behalf of Advanced
Viral) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our shareholders to seek non-monetary remedies, such as an injunction
or rescission, against a director for breach of his or her fiduciary duty.
57
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers, or persons controlling Advanced Viral pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making the offer is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
58
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants..........................................................F-2
Consolidated Financial Statements Years Ended 2000, 1999 and 1998
Balance Sheets, December 31, 2000 and 1999.........................................................F-3
Statements of Operations for the Years Ended December 31, 2000, 1999
and 1998 and from Inception (February 20, 1984) to December 31, 2000......................F-4
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 2000.........................................................................F-5
Statements of Cash Flows for the Years Ended December 31, 2000, 1999
and 1998 and from Inception (February 20, 1984) to December 31, 2000......................F-14
Notes to Consolidated Financial Statements.........................................................F-15
Consolidated Financial Statements for the Three and Nine Months Ended
September 30, 2001 and 2000
Balance Sheets, September 30, 2001 and December 31, 2000...........................................F-41
Statements of Operations for the Three and Nine Months Ended
September 30, 2001 and 2000 and from Inception (February 20, 1984)
to September 30, 2001.....................................................................F-42
Statements of Stockholders' Equity from Inception (February 20, 1984) to
September 30, 2001.................................................................................F-43
Statements of Cash Flows for the Nine Months Ended September 30, 2001
and 2000 and from Inception (February 20, 1984) to September 30, 2001.....................F-53
Notes to Consolidated Financial Statements.........................................................F-54
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the years in the three year period ended
December 31, 2000 and for the period from inception (February 20, 1984) to
December 31, 2000. These consolidated financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2000 and 1999
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2000 and for the period from
inception (February 20, 1984) to December 31, 2000 in conformity with generally
accepted accounting principles.
As more fully described in Note 2, the Company is subject to certain liquidity
considerations. The Company's plans with respect to this matter are also
described in Note 2.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 9, 2001
F-2
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,962,633 $ 836,876
Inventory 19,729 19,729
Other current assets 34,804 59,734
------------ ------------
Total current assets 6,017,166 916,339
Property and Equipment, Net 1,944,199 1,375,923
Other Assets 847,349 569,312
------------ ------------
Total assets $ 8,808,714 $ 2,861,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities $ 902,961 $ 728,872
Current portion of capital lease obligation 58,690 50,315
Current portion of note payable 21,517 19,095
------------ ------------
Total current liabilities 983,168 798,282
------------ ------------
Long-Term Debt:
Convertible debentures, net -- 4,446,629
Capital lease obligation - long term portion 106,567 152,059
Note payable - long term portion 56,446 77,964
------------ ------------
Total long-term debt 163,013 4,676,652
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 380,214,618 and 303,472,035
shares issued and outstanding 3,802 3,034
Additional paid-in capital 39,969,373 17,537,333
Deficit accumulated during the development stage (29,079,902) (19,725,238)
Discount on warrants (3,230,740) (428,489)
------------ ------------
Total stockholders' equity (deficiency) 7,662,533 (2,613,360)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 8,808,714 $ 2,861,574
============ ============
See notes to consolidated financial statements.
F-3
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Inception
(February 20,
1984) to
Year Ended December 31, December 31,
----------------------------------------------------- -------------
2000 1999 1998 2000
------------- ------------- ------------- -------------
Revenues $ 8,363 $ 10,953 $ 656 $ 214,291
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 3,192,551 1,948,937 1,659,456 8,724,955
General and administrative 2,621,542 1,831,061 1,420,427 11,767,850
Compensation expense 1,901,927 210,144 -- 2,112,071
Depreciation 362,392 230,785 110,120 908,615
------------- ------------- ------------- -------------
8,078,412 4,220,927 3,190,003 23,513,491
------------- ------------- ------------- -------------
Loss from Operations (8,070,049) (4,209,974) (3,189,347) (23,299,200)
------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 162,077 42,744 102,043 764,118
Other income -- -- 293 120,093
Interest expense (1,446,692) (2,007,032) (1,470,699) (6,664,913)
------------- ------------- ------------- -------------
(1,284,615) (1,964,288) (1,368,363) (5,780,702)
Net Loss $ (9,354,664) $ (6,174,262) $ (4,557,710) $ (29,079,902)
============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.03) $ (0.02) $ (0.02)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 362,549,690 302,361,109 294,809,073
============= ============= =============
See notes to consolidated financial statements.
F-4
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
-------------------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- --------------- --------------- --------------- ------------
Balance, inception (February 20, 1984)
as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
--------------- --------------- --------------- ------------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
--------------- --------------- --------------- ------------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $ .00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
--------------- --------------- --------------- ------------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A"
warrants .03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
--------------- --------------- --------------- ------------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
--------------- --------------- --------------- ------------
See notes to consolidated financial statements.
F-5
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
------ ------ ------ ---------- -------------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $ .03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, year ended December 31, 1987 -- -- -- (258,663)
----------- ----------- ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
----------- ----------- ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
----------- ----------- ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ----------- ----------- -----------
200,299,882 2,003 1,845,992 (1,200,915)
----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-6
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
------------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
--------- ----------- ----------- ----------- -----------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $(1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants .08 2,500 -- 200 --
Issuance of common stock, exercise of underwriter warrants .012 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
----------- ----------- ----------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
----------- ----------- ----------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 --
Issuance of common stock, for testing .035 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
----------- ----------- ----------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-7
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
----------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ----------- ----------- ----------- ------------ ----------- -----------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for
consulting services $ .05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise
of options .08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise
of options .10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
Issuance of common stock, exercise
of options .05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise
of options .08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise
of options .10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting
services .11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting
services .14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- ----------- ----------- ----------- ----------- -----------
Ralance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-8
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock,
exercise of options .05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options .08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options .10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options .11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options .12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options .18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options .19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options .20 473,500 5 94,695 -- -- --
Issuance of common stock,
for services rendered .50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended
December 31, 1996 -- -- -- -- (1,154,740) --
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----- --------- ------- ---------- --------
See notes to consolidated financial statements.
F-9
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock,
exercise of options .08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt .20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt .15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt .12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt .15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt .16 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered .41 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered .24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- 1,350,000 -- -- --
Warrant costs, February debenture -- -- 37,242 -- -- --
Warrant costs, October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 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 financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
Common Stock Deficit
------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- -------- ------------ ------------ ------------ ------------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock,
exercise of options .12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options .14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options .16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options .20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options .26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt .13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt .14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt .15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt .18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt .19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt .22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt .23 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered .21 100,000 1 20,999 -- -- --
Beneficial conversion feature,
November debenture -- -- 625,000 -- -- --
Warrant costs, November
debenture -- -- 48,094 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 59,068
Write off of subscription
receivable -- -- (19,000) 19,000 -- --
Net loss, year ended
December 31, 1998 -- -- -- -- (4,557,710) --
----------- -------- ------------ --------- ------------ ------------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
----------- -------- ------------ --------- ------------ ------------
See notes to consolidated financial statements.
F-11
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
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 .16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase agreement .27 1,851,852 18 499,982 -- -- --
Issuance of common stock,
for services rendered .22 100,000 1 21,999 -- -- --
Issuance of common stock,
for services rendered .25 180,000 2 44,998 -- -- --
Beneficial conversion feature,
August debenture -- -- 687,500 -- -- --
Beneficial conversion feature,
December debenture -- -- 357,143 -- -- --
Warrant costs, securities
purchase agreement -- -- 494,138 -- -- (494,138)
Warrant costs, securities
purchase agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August debenture -- -- 52,592 -- -- --
Warrant costs, December debenture -- -- 4,285 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- 102,674
Amortization of deferred
compensation cost -- -- -- -- 14,769 --
Compensation expense related to
modification of existing
options -- -- 210,144 -- -- --
Net loss, year ended
December 31, 1999 -- -- -- (6,174,262) -- --
----------- ---------- ----------- ------------ --------- ----------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
----------- ---------- ----------- ------------ --------- ----------
See notes to consolidated financial statements.
F-12
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2000
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, 1999 303,472,035 $ 3,034 $ 17,537,333 $(19,725,238) $ -- $ (428,489)
Issuance of common stock,
exercise of options 0.1400 600,000 6 83,994 -- -- --
Issuance of common stock,
exercise of options 0.1500 1,600,000 16 239,984 -- -- --
Issuance of common stock,
exercise of options 0.1600 650,000 7 103,994 -- -- --
Issuance of common stock,
exercise of options 0.1700 100,000 1 16,999 -- -- --
Issuance of common stock,
exercise of options 0.2100 792,500 8 166,417 -- -- --
Issuance of common stock,
exercise of options 0.2500 1,000,000 10 246,090 -- -- --
Issuance of common stock,
exercise of options 0.2700 281,000 3 75,867 -- -- --
Issuance of common stock,
exercise of options 0.3600 135,000 1 48,599 -- -- --
Issuance of common stock,
exercise of warrants 0.2040 220,589 2 44,998 -- -- --
Issuance of common stock,
exercise of warrants 0.2448 220,589 2 53,998 -- -- --
Issuance of common stock,
exercise of warrants 0.2750 90,909 1 24,999 -- -- --
Issuance of common stock,
exercise of warrants 0.3300 90,909 1 29,999 -- -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- -- --
Issuance of common stock,
cashless exercise of warrants 563,597 6 326,153 -- -- --
Issuance of common stock,
services rendered 0.4650 100,000 1 46,499 -- -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- -- --
Cashless exercise of warrants -- -- (326,159) -- -- --
Beneficial conversion feature,
January Debenture -- -- 386,909 -- -- --
Warrant costs, consulting agreement -- -- 200,249 -- -- --
Warrant costs, January Debenture -- -- 13,600 -- -- --
Warrant costs, private placement -- -- 3,346,414 -- -- (3,346,414)
Recovery of subscription receivable
previously written off -- -- 19,000 -- -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- -- 544,163
Compensation expense related to
modification of existing options -- -- 1,901,927 -- -- --
Net loss -- -- -- (9,354,664) -- --
----------- -------- ------------ ------------ ----------- ------------
Balance, December 31, 2000 0 380,214,618 $ 3,802 $ 39,969,373 $(29,079,902) $ -- $ (3,230,740)
=========== ======== ============ ============ =========== ============
See notes to consolidated financial statements.
F-13
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
(February 20,
Year Ended December 31, 1984) to
-------------------------------------------- December 31,
2000 1999 1998 2000
------------ ------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (9,354,664) $ (6,174,262) $ (4,557,710) $(29,079,902)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 362,392 230,785 110,120 908,525
Amortization of debt issue costs 106,030 331,250 229,978 779,215
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 386,909 1,044,643 835,951 3,820,270
Amortization of discount on warrants 611,134 148,262 290,297 1,049,693
Amortization of discount on warrants - consulting services 230,249 -- -- 230,249
Amortization of deferred compensation cost -- 14,769 59,068 760,500
Issuance of common stock for debenture interest 76,212 -- -- 76,212
Issuance of common stock for services 46,500 67,000 21,000 1,551,000
Expenses related to modification of existing options 1,901,927 210,144 -- 2,112,071
Other -- -- -- (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (5,063) (29,917) (9,608) (64,798)
Increase in inventory -- -- -- (19,729)
Increase in other assets (278,037) (440,216) (247,072) (1,494,995)
Increase (decrease) in accounts payable and
accrued liabilities 174,089 449,848 (96,582) 909,161
------------ ------------ ------------ ------------
Total adjustments 3,612,342 2,026,568 1,193,152 10,615,767
------------ ------------ ------------ ------------
Net cash used by operating activities (5,742,322) (4,147,694) (3,364,558) (18,464,135)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (915,047) (6,292,979)
Proceeds from sale of investments -- 821,047 3,078,902 6,292,979
Acquisition of property and equipment (917,471) (407,150) (451,734) (2,468,221)
Proceeds from sale of property and equipment -- -- -- 1,200
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (917,471) 413,897 1,712,121 (2,467,021)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,000,000 3,000,000 1,500,000 9,500,000
Proceeds from deposit on securities purchase agreement -- -- 600,000 600,000
Proceeds from sale of securities, net of issuance costs 10,835,970 702,500 257,400 16,917,058
Payments under capital lease (50,324) (41,986) (16,602) (108,912)
Payments on note payable (19,096) (14,261) -- (33,357)
Recovery of subscription receivable written off 19,000 -- -- 19,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 11,785,550 3,646,253 2,340,798 26,893,789
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 5,125,757 (87,544) 688,361 5,962,633
Cash and Cash Equivalents, Beginning 836,876 924,420 236,059 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 5,962,633 $ 836,876 $ 924,420 $ 5,962,633
============ ============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 36,681 $ 118,870 $ 6,042
============ ============ ============
During 2000, the Company purchased equipment
under a capital lease totaling $13,197
F-14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the purpose of
manufacturing and marketing a pharmaceutical product named Reticulose
(the current formulation of which is now known as and hereinafter
referred to as "Product R"). While the Company has had limited sales of
this product, primarily for research purposes, the success of the
Company will be dependent upon obtaining certain regulatory approval
for its pharmaceutical product, Product R, to commence commercial
operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research, Ltd.
(LTD), a Bahamian Corporation. All significant intercompany accounts
have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
As described above, the Company was incorporated on July 31, 1985, and,
since that time, has been primarily involved in organizational
activities, research and development activities, and raising capital.
Planned operations, as described above, have not commenced to any
significant extent. Accordingly, the Company is considered to be in the
development stage, and the accompanying consolidated financial
statements represent those of a development stage enterprise.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments (money fund),
with original maturities of three months or less.
INVESTMENTS
At December 31, 2000 and 1999, investments consist of a money fund,
which is reported at fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized currently.
Maintenance and repairs are charged to expense as incurred. Major
replacements and betterments are capitalized and depreciated over the
remaining useful lives of the assets.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the Company.
INCOME TAXES
The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, which
requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated
fair value of the Company's financial instruments presented in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 2000 and 1999. Since the
reported fair values of financial instruments are based upon a variety
of factors, they may not represent actual values that could have been
realized as of December 31, 2000 and 1999 or that will be realized in
the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, a money fund, accounts payable and the convertible
debentures. Fair values were assumed to approximate carrying values for
these financial instruments since they are short-term in nature and
their carrying amounts approximate fair values or they are receivable
or payable on demand.
CONCENTRATIONS OF CREDIT RISk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At various
times during the year, the Company had cash balances in excess of
federally insured limits. The Company maintains its cash, which
consists primarily of demand deposits, with high quality financial
institutions, which the Company believes limits this risk.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
F-16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (Continued)
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123.
The Company follows SFAS No. 123 in accounting for stock options issued
to non-employees.
NET LOSS PER COMMON SHARE
The Company computes loss per share in accordance with SFAS No. 128,
EARNINGS PER SHARE. This standard requires dual presentation of basic
and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted earnings
per share computation.
Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding
during the year. The Company's potentially issuable shares of common
stock pursuant to outstanding stock options are excluded from the
Company's diluted computation, as their effect would be anti-dilutive.
REVENUE RECOGNITION
The limited sales generated by the Company have consisted of sales of
Product R for testing and other purposes. The Company records sales
when the product is shipped to customers.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1999 financial statements have been
reclassified to conform to 2000 presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Although these estimates are based
on management's knowledge of current events and actions it may
undertake in the future, they may ultimately differ from actual
results.
F-17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
No. 133 requires companies to recognize all derivatives contracts as
either assets or liabilities in the balance sheet and to measure them
at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge, the objective of which is to match
the timing of the gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized
in income in the period of change. On June 30, 1999, the FASB issued
SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133.
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities and Amendment of
SFAS No. 133. SFAS No. 133 as amended by SFAS No. 137 and SFAS No. 138
is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives contracts to
hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standards to affect its
financial statements.
NOTE 2. LIQUIDITY
The Company has suffered accumulated net losses of approximately
$29,000,000 during its history. The Company is dependent upon
registration of Product R for sale before it can begin commercial
operations. The Company's cash position may be inadequate to pay all
the costs associated with the full range of testing and clinical trials
required by the FDA. Unless and until Product R is approved for sale in
the United States or another industrially developed country, the
Company 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 received cash proceeds of $6,806,000. In
February 2001, the Company entered into a private equity line of credit
agreement to sell up to $50,000,000 of common stock, which it
anticipates realizing during 2001 (see Note 6).
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.
F-18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a
Bahamian Corporation with pharmaceutical manufacturing and warehousing
facilities, on February 20, 1984. The acquisition is a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market Reticulose
(currently referred to as Product R) worldwide, except within the
Bahamas, for $50,000. The Company also purchased inventory of Product R
from LTD for $45,000 and was obligated to pay $3 per ampule of Product
R for the initial 100,000 ampules purchased and $2 per ampule for
purchases exceeding 100,000 ampules. On December 16, 1987, the Company
acquired the controlling beneficial interest in 99.6% of the common
stock of LTD through an appropriate trust agreement to satisfy the
rules of the Bahamian Government, from two of the principal
stockholders of the Company. Both stockholders concurrently canceled
$86,565 of indebtedness due them from LTD.
NOTE 4. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL
LIVES (YEARS) 2000 1999
---------------- ---- ----
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 896,720 483,865
Machinery and equipment 5 1,918,693 1,400,880
---------- ----------
2,849,963 1,919,295
Less accumulated depreciation 905,764 543,372
---------- ----------
$1,944,199 $1,375,923
========== ==========
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $402,694 as of
December 31, 2000 and $385,087 as of December 31, 1999 including
$17,623 expended in 1987 to purchase a land lease expiring in 2068.
Included with machinery and equipment is $13,197 and $38,645 of
equipment purchased under capital leases during 2000 and 1999,
respectively. Depreciation expense for equipment under the capital
leases was approximately $7,729 and $47,040 in 2000 and 1999,
respectively. These amounts are included above.
NOTE 5. OTHER ASSETS
2000 1999
-------- --------
Patent development costs $715,655 $517,816
Loan costs, net of accumulated amortization of $779,215 80,198 --
Other 51,496 51,496
-------- --------
$847,349 $569,312
======== ========
F-19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. OTHER ASSETS (Continued)
Patent development costs are capitalized as incurred. Loan costs
include fees paid in connection with the February 2001 private equity
line of credit agreement and will be amortized over the life of the
agreement (see Note 6).
NOTE 6. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively,
principal amount of its ten-year 7% Convertible Debentures (the
"February Debenture" and the "October Debenture", collectively, the
"Debentures") due February 28, 2007 and August 30, 2007, respectively,
to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
pursuant to Regulation S under the Securities Act of 1933, as amended.
Accrued interest under the Debentures was payable semi-annually,
computed at the rate of 7% per annum on the unpaid principal balance
from the date of issuance until the date of interest payment. The
Debentures were convertible, at the option of the holder, into shares
of Common Stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000,
$134,000, $270,000 and $266,000, respectively, of the principal amount
of the February Debenture was converted into 1,648,352, 894,526,
2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
August 20, 1997, the February Debenture was fully converted. On
December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
the October Debenture was fully converted.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase
common stock, each such February Warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
Warrants was $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February Warrants were estimated to be $37,242
($.209 per warrant), $19,196 ($.108 per warrant), and $9,946 ($.056 per
warrant), respectively, based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model. This amount has
been reflected in the accompanying financial statements as interest
expense related to the convertible February Debenture. Based on the
terms for conversion associated with the February Debenture, there was
an intrinsic value associated with the beneficial conversion feature of
$413,793. This amount has been fully amortized to interest expense with
a corresponding credit to additional paid-in capital.
F-20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October Warrants") to purchase
Common Stock, each such October Warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise 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
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized over the expected
term of the notes, which at December 31, 1997 was 120 months. In May
1998, the remaining unamortized discount of $276,957 was amortized upon
full conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there was an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture liability with a corresponding credit to
additional paid-in capital and has been amortized to interest expense
over the period from October 8, 1997 (date of debenture) to February
24, 1998 (date the debenture was fully convertible). The interest
expense relative to this item was $210,951 for 1998 and $1,139,049 for
1997.
In November 1998, in order to finance further research and development,
the Company sold $1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the November
Debenture until the date of interest payment. The November Debenture
may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the
Debenture notice not less than 30 days before the date fixed for
prepayment in that notice. The November Debenture was convertible, at
the option of the holder, into shares of common stock.
On January 19, 2000 and March 7, 2000 pursuant to notice by the holder,
RBB, to the Company under the November Debenture, $1,122,500 and
$377,500, respectively, of the principal amount of the November
Debenture was converted into 8,252,746 and 1,887,500 shares of the
common stock, respectively. As of March 7, 2000, the November Debenture
was fully converted.
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise price of the two November
Warrants was $.20 and $.24 per warrant share, respectively. The fair
value of the November
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
warrants was estimated to be $48,000 ($.064 per warrant) based upon a
financial analysis of the terms of the warrants using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
20%; a risk free interest rate of 5.75% and an expected holding period
of one year. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
Based on the terms for conversion associated with the November
Debenture, there was an intrinsic value associated with the beneficial
conversion feature of $625,000. This amount has been recorded as
interest expense in 1998.
In August 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to issue an
aggregate of 20 units, each unit consisting of $100,000 principal
amount of the Company's 7% convertible debenture (the "August
Debenture") due August 3, 2009 to Focus Investors LLC ("Focus").
Accrued interest under the August Debenture is payable semi-annually,
computed at the rate of 7% on the unpaid principal balance from the
date of issuance until the date of the interest payment. No payment of
the principal of the August Debenture may be made prior to the maturity
date without the consent of the holder. The August Debenture was
convertible, at the option of the holder, into shares of common stock.
On January 19, 2000, February 17, 2000 and March 3, 2000 pursuant to
notice by the holder, Focus, to the Company under the August Debenture,
$300,000, $900,000 and $800,000, respectively, of the principal amount
of the August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3, 2000
the November Debenture was fully converted.
In connection with the issuance of the August Debenture, the Company
issued to Focus one warrant (the "August Warrant") to purchase Common
Stock, such August Warrant entitling the holder to purchase 1,000,000
shares of the Common Stock at any time and from time to time through
August 3, 2004. The exercise price of the August Warrant was $.2461 per
warrant share. The fair value of the August Warrants was estimated to
be $52,592 ($.0526 per warrant share) based upon a financial analysis
of the terms of the warrant using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five years.
This amount is being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the August Debenture,
there was an intrinsic value associated with the beneficial conversion
feature of $687,500. This amount has been recorded as interest expense
in 1999.
In December 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to sell
$2,000,000 principal amount of the Company's 7% convertible debenture
(the December Debenture) due December 28, 2009 to Endeavour Capital
("Endeavour"). Accrued interest under the December Debenture was
F-22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
payable semi-annually, computed at the rate of 7% on the unpaid
principal balance from the date of issuance until the date of the
interest payment. No payment of the principal of the December Debenture
may be made prior to the maturity date without the consent of the
holder. The December Debenture was convertible, at the option of the
holder, into shares of common stock. During 1999, $1,000,000 of these
debentures was sold. The remaining $1,000,000 was not available until
the shares underlying the first $1,000,000 were registered. Such
registration statement was declared effective in January 2000 and the
remaining $1,000,000 transaction was consummated.
On January 27, 2000, February 22, 2000, February 23, 2000, February 24,
2000, February 29, 2000 and October 25, 2000 pursuant to notice by the
holder, Endeavour, to the Company under the December Debenture,
$150,000, $135,000, $715,000, $785,000, $200,000 and $15,000,
respectively, of the principal amount of the December Debenture was
converted into 1,105,435, 988,913, 5,149,035, 5,622,696, 1,036,674 and
43,960 shares of the common stock, respectively.
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 $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant share)
based upon a financial analysis of the terms of the warrant using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 20%; a risk free interest rate of 6% and an expected
holding period of three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the first $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December 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 $.20 per warrant share. The fair
value of the December Warrants was estimated to be $13,600 ($.136 per
warrant share) based upon a financial analysis of the terms of the
warrant using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 90%; a risk free interest rate of
6% and an expected holding period of three years. This amount has been
amortized to interest expense in the accompanying consolidated
financial statements.
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the second $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $386,909. This amount has been
recorded as interest expense in 2000.
A summary of the outstanding convertible debentures is as follows:
December 31, December 31,
2000 1999
------------- ----------
Unpaid principal balance of November debenture $ -- $1,500,000
Unpaid principal balance of August debenture -- 2,000,000
Unpaid principal balance of December debenture -- 1,000,000
------------- ----------
-- 4,500,000
Less unamortized discount -- 53,371
------------- ----------
Convertible debentures, net $ -- $4,446,629
============= ==========
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 $.204 to $.2448 per share at any
time until December 31, 2003. The fair value of these warrants was
estimated to be $494,138 ($.209 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 20%; a
risk free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements. As of September 30,
2000, 441,178 shares of common stock were issued pursuant to the
exercise of these warrants for an aggregate exercise price of
approximately $99,000.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company issued 1,851,852
shares of its common stock for an aggregate purchase price of $500,000.
These proceeds were received in July 1999. Such agreement also provided
for the issuance of warrants to purchase an aggregate of 925,926 shares
of common stock at any time until June 30, 2004. The fair value of
these warrants was estimated to be $37,000 ($.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.
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%) of
the warrants are exercisable at $0.275 per share and fifty percent
(50%) of the warrants are exercisable at $0.33 per share, until
February 28, 2005. The fair value of these warrants was estimated to be
$1,582,734 ($0.295 and $0.285 per warrant share) based upon a financial
analysis of the terms of the warrant using the Black-Scholes Pricing
Model with the following assumptions; expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements. As of December 31,
2000, 181,818 shares of common stock were issued pursuant to the
exercise of these warrants for an aggregate exercise price of
approximately $55,000.
On November 8, 2000, 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 $.40 per share. As of December 31, 2000, 13,265,000
shares were issued for a purchase price of $5,306,000.
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 $.48 and half at an exercise price of $.56. As of December 31,
2000, 7,959,000 warrants had been issued (3,979,500 at $.48 and
3,979,500 at $.56) exercisable at any time until November 8, 2005. The
fair value of these warrants was estimated to be $1,763,680 ($.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 in the
accompanying consolidated financial statements.
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 $.3024 per
share for an aggregate purchase price of $1,500,000. The Company
received such proceeds in November 2000.
PRIVATE EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell Capital Partners, LP, an institutional investor,
to sell up to $50,000,000 of the Company's common stock. Under such
agreement, the Company may exercise "put options" to sell shares for
certain prices based on certain average trading prices. Upon signing
this agreement, the Company issued to its placement agent, May Davis
Group, Inc., and certain
F-25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
EQUITY LINE OF CREDIT (Continued)
investors, Class A warrants to purchase an aggregate of 5,000,000
shares of common stock at an exercise price of $1.00 per share,
exercisable in part or whole until February 9, 2006, and Class B
warrants to purchase an aggregate of 5,000,000 shares of common stock
at an exercise price equal to the greater of $1.00 or 110% of the bid
price on the applicable advance date. Such Class B warrants are
exercisable pro rata with respect to the number of warrant shares as
determined by the fraction of the advance payable on that date as the
numerator and $20,000,000 as the denominator multiplied by 5,000,000
until sixty months from the date of issuance.
NOTE 7. NOTE PAYABLE
During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
equipment and calls for monthly installments of $2,476 at 12% per annum
for 60 months, commencing in March 1999 and expiring in February 2004.
The aggregate maturities of the installment purchase agreement are as
follows:
Year ending December 31:
2001 $21,517
2002 24,246
2003 27,521
2004 4,679
-------
77,963
Less current portion 21,517
-------
Note payable - long-term portion $56,446
=======
NOTE 8. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of Product R. 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
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
PRODUCT LIABILITY (Continued)
were successful, they could have a material adverse effect on the
Company's financial condition and on the marketability of Product R. As
of the date hereof, the Company does not have product liability
insurance for Product R. There can be no assurance that the Company
will be able to secure such insurance in adequate amounts or at
reasonable premiums if it determined to do so. Should the Company be
unable to secure such product liability insurance, the risk of loss to
the Company in the event of claims would be greatly increased and could
have a material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has three issued patents and two allowed patents for the
use of Product R. The Company currently has 15 patent applications
pending with the U.S. Patent Office and 17 foreign patent applications.
The Company can give no assurance that other companies, having greater
economic resources, will not be successful in developing a similar
product. There can be no assurance that such patents, if obtained, will
be enforceable.
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata agreed
to perform a demonstration in the Dominican Republic in accordance with
a certain agreed upon protocol (the "Protocol") to assess the efficacy
of a treatment using Product R incorporated in the Protocol against
AIDS (the "Plata Agreement"). Plata covered all costs and expenses
associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an
additional 5,000,000 shares at $.08 per share through July 9, 1994 (the
"Plata Options") and 5,000,000 shares at $.10 per share through July 9,
1994 (the "Additional Plata Options"). Pursuant to several amendments,
the Plata Options and the Additional Plata Options were exercisable
through June 30, 2000 at an exercise price of $.15 and $.17,
respectively. The fair value of these options was estimated to be
$32,925 ($.0348 per option share) based upon a financial analysis of
the terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; risk free interest
rate of 6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Through December 31, 2000, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million shares
in connection with the exercise of the Plata Options and the Additional
Plata Options.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT
In April 1996, the Company entered into an agreement (the "Argentine
Agreement") with DCT SRL, an Argentine corporation unaffiliated with
the Company ("DCT") pursuant to which DCT was to cause a clinical trial
to be conducted in two separate hospitals located in Buenos Aires,
Argentina (the "Clinical Trials"). Pursuant to the Argentine Agreement,
the Clinical Trials were to be conducted pursuant to a protocol
developed by Juan Carlos Flichman, M.D. and the purpose of the Clinical
Trials was to assess the efficacy of the Company's drug Product R on
the Human Papilloma Virus (HPV). The protocol calls for, among other
things, a study to be performed with clinical and laboratory follow-up
on 12 male and female human patients between the ages of 18 and 50.
Pursuant to the Argentine Agreement, the Company delivered $34,000 to
DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the conclusion
of the Clinical Trials, DCT shall cause Dr. Flichman to prepare and
deliver a written report to the Company regarding the methodology and
results of the Clinical Trials (the "Written Report"). In September
1996, 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 $.20 per share.
Pursuant to several amendments, the DCT options were exercisable
through June 30, 2000 at an exercise price of $.21 per share. The fair
value of these options was estimated to be $1,788 ($.0012 per option
share) based upon a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This amount
has been 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 $.22
per share. As a result of the modification of the option terms, the
fair value of these options was estimated to be $166,860 ($.2273 per
option share) based on a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This amount
has been charged to expense related to modification of existing option
terms during the year ended December 31, 2000. Effective December 31,
2000, these options were extended to December 31, 2001 at an exercise
price of $.24 per share. As a result of the modification of the option
terms, the fair value of these options was estimated to be $108,429
($.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 has been charged to expense related to modification of
existing option terms during the year ended December 31, 2000. As of
December 31, 2000, 1,256,000 shares of common stock were issued
pursuant to the exercise of these options for an aggregate exercise
price of approximately $261,500.
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to
certain conditions, the exclusive right to market and sell Product R in
Argentina, Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT
Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or its
assignees, up to $600,000 to cover the costs of a double blind placebo
controlled study in approximately 150 patients to assess the efficacy
of Product R for the treatment of persons diagnosed with the HIV virus
(AIDS) and HPV (the "HIV-HPV Study"). Subsequently, the Company has
agreed to advance additional funds towards such study. In connection
with the HIV-HPV Agreement, the Company advanced approximately
$665,000, which was accounted for as research and development expense.
The amounts have been used to cover expenses associated with clinical
activities of the HIV-HPV Study. The HIV-HPV Agreement provides that
(i) in the event the data from the HIV-HPV Study is used in connection
with Product R being approved for commercial sale anywhere within the
territory granted under the DCT Exclusive Distribution Agreement or
(ii) DCT receives financing to cover the costs of the HIV-HPV Study,
then DCT is obligated to reimburse the Company for all amounts expended
in connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients, respectively,
to assess the efficacy of the topical application of Product R for the
treatment of persons diagnosed with Herpes Labialis/Genital Infections
(the "Herpes Study") and HPV (the "HPV Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company advanced approximately
$58,000 and $132,000, respectively. Such expenses were accounted for as
research and development expense. The amounts expended have been used
to cover expenses associated with pre-clinical activities. Neither the
Herpes Study nor the HPV Topical Study has commenced. Both Agreements
with DCT provide that (i) in the event the data from the Studies are
used in connection with Product R being approved for commercial sale
anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii), DCT receives financing to cover the
costs of the Studies, then DCT is obligated to reimburse the Company
for all amounts expended in connection with the Studies.
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In February 1998, the Company entered into an agreement with DCT (the
"Concurrent Agreement") whereby the Company agreed to provide DCT or
its assignees, up to $413,000 to cover the costs of a study in 65
patients to compare the results of treatment of patients with AIDS
taking a three drug cocktail and Product R with those taking a three
drug cocktail and a placebo. As of December 31, 2000, 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 December 31, 2000, the Company advanced approximately
$70,000 for such study, which has been accounted for as research and
development expense.
As of December 31, 2000, the Company advanced approximately $442,000
for expenses in connection with the drug approval process in Argentina.
BARBADOS STUDY
A double blind study assessing the efficacy of the Company's drug
Product R in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados (the
"Barbados Study"). As of December 31, 2000, 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 December 31, 2000, the Company advanced approximately
$15,000 for such study, which has been accounted for as research and
development expense.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to
F-30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the Company
in seeking joint ventures with and financing of companies in such
industries. In connection with the consulting agreement, the Company
issued to Dr. Hirschman 1,000,000 shares of the Company's common stock
and the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per share. As
of December 31, 2000, 900,000 shares have been issued upon exercise of
these options for cash consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1996
and ending February 17, 2008 at an exercise price of $.19 per share, of
which options to acquire 500,000 shares (exercisable until March 23,
2001) were assigned by Dr. Hirschman to Richard Rubin, consultant to
Dr. Hirschman; (ii) options to purchase 5,000,000 shares exercisable at
any time and from time to time commencing March 24, 1997 and ending
February 17, 2008 at an exercise price of $.27 per share, of which
options to acquire 500,000 shares (exercisable until March 23, 2001)
were assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares exercisable
at any time and from time to time commencing March 24, 1998 and ending
February 17, 2008 at an exercise price of $.36 per share, of which
options to acquire 500,000 shares (exercisable until March 23, 2001)
were assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman. In addition, the Company has agreed to cause the shares
underlying these options to be registered so long as there is no cost
to the Company. As of December 31, 2000, 916,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard Rubin.
Mr. Rubin has, from time to time in the past, advised the Company on
matters unrelated to his consultation with Dr. Hirschman.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options and
75,000 of his $0.36 options to Elliot Bauer, an individual who also
received and exercised shares and options as a result of the "Cohen
Agreements".
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27, and 500,000 at $.36), which are
exercisable until March 23, 2001.
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1988 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002.
The Agreement further provides that Bernard Friedland and William
Bregman will vote all shares owned or voted by them in favor of Dr.
Hirschman as a member of the Board of Directors of the Company. The
Agreement provides for Dr. Hirschman to receive an annual base salary
of $361,000 (effective January 1, 2000), use of an automobile, major
medical, disability, dental and term life insurance benefits for the
term of his employment. The Agreement also provides for previously
issued options to acquire 23,000,000 shares of common stock at $0.27
per option share to be immediately vested as of the date of this
agreement and are exercisable until February 17, 2008.
The fair value of these options was estimated to be $5,328,441 ($0.2317
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate of
6% and an expected life of 32 months. The Company is recognizing the
$5,328,441 fair value of the options as compensation costs 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 Company for a period of three years,
subject to earlier termination by either party, either for cause as
defined in and in accordance with the provisions of the agreement,
without cause or upon the occurrence of certain events. Such agreement
provides for Mr. Gallantar to receive a base salary of $175,000,
$200,000 and $225,000 annually for each of the three years of the term
of the agreement as well as various performance based bonuses ranging
from 10% to 50% of the base salary and various other benefits.
Additionally, in connection with such agreement, the Company granted
Mr. Gallantar options to purchase an aggregate of 4,547,880 shares of
the Company's common stock. Such options have a term of ten years and
have an exercise price of $.24255 per share. 1,515,960 options vest on
each of the first, second and third anniversary dates of this
employment agreement. The fair value of these options was estimated to
be $376,126 ($.0827 per option share) based upon a financial analysis
of the terms of the options using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected life of ten years. The Company is
recognizing the $376,126 fair value of the options as compensation
costs 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 has been charged to expense in the
accompanying consolidated financial statements.
F-32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
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 $.21 and $.33 per share,
respectively. These options expire on January 2, 2010 and December 29,
2010, respectively, and vest in 20% increments at the end of each year
for five years.
The fair value of the these options was estimated to be $42,342 ($.1721
per option share) and $117,893 ($.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 costs 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. Accordingly, the following pro forma financial
information is presented to reflect amortization of the fair value of
the options.
AS REPORTED PRO FORMA AS
DECEMBER 31, 2000 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (9,354,664) $ (1,799,827) $ (11,154,491)
============== ============== ==============
Net loss per share $ (0.03) $ (0.00) $ (0.03)
============== ============== ==============
AS REPORTED PRO FORMA AS
DECEMBER 31, 1999 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (6,174,262) $ (31,344) $ (6,205,606)
============== ============== ==============
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
F-33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
1992 Cohen Shares"), 500,000 of which were issuable upon execution of
the September 1992 Cohen Agreement and the remaining 500,000 shares of
which were issuable upon Mr. Cohen completing 50 hours of consulting
service to the Company. The Company issued the first 500,000 shares to
Mr. Cohen in October 1992 and the remaining 500,000 shares to Mr. Cohen
in February 1993. Further pursuant to the September 1992 Cohen
Agreement, the Company granted to Mr. Cohen the option to acquire, at
any time and from time to time through September 10, 1993 (which date
has been extended through June 30, 2000), the option to acquire
3,000,000 shares of common stock of the Company at an exercise price of
$.09 per share (which exercise price has been increased to $.16 per
share) (the "September 1992 Cohen Options"). The fair value of these
options was estimated to be $59,030 ($.0347 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 20%; risk free interest rate of 6%. This amount has been
charged to 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 $.17 per
share. As a result of the modification of the option terms, the fair
value of these options was estimated to be $55,023 ($.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 $.19 per share. As a result of the
modification of the option terms, the fair value of these options was
estimated to be $17,311 ($.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 December 31, 2000, 2,900,000 of the
September 1992 Cohen Options have been exercised for cash consideration
of $403,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for a
three year term commencing on March 1, 1993. The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing business consulting
services concerning the operations of the business of the Company and
possible strategic transactions in exchange for the Company issuing to
Mr. Cohen 3,500,000 shares of common stock (the "February 1993 Cohen
Shares"), 1,500,000 shares of which Mr. Cohen has informed the Company
he has assigned to certain other persons not affiliated with the
Company or any of its officers or directors.
F-34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement,
the Company issued: (i) to Mr. Cohen, an additional 2,500,000 shares
(the "April 1994 Cohen Shares") and (ii) to each of Elliot Bauer and
Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto Shares") as well as
options to acquire an additional 5,000,000 shares each at $.10 per
share exercisable through May 1, 1996 (the "Bauer and Rizzuto
Options"). Through December 31, 1999, 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 $.14. The fair value of these options
was estimated to be $116,101 ($.0541 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
20%; risk free interest rate of 6%. This amount has been charged to
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 $.16 per share.
As a result of the modification of the option terms, the fair value of
these options was estimated to be $953,885 ($.2848 per option share)
based on a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 50%; risk free interest rate of 6%. This amount has been
charged to expense related to modification of existing option terms
during the year ended December 31, 2000. Effective December 31, 2000,
these options were extended to December 31, 2001 at an exercise price
of $.18 per share. As a result of the modification of the option terms,
the fair value of these options was estimated to be $600,419 ($.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 December 31, 2000, 6,650,500 shares were issued
pursuant to the exercise of the Bauer and Rizzuto Options for an
aggregate exercise price of $696,050. Mr. Rizzuto sold all of his
shares and all shares underlying his options.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with Globomax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. The contract was extended by mutual consent of both parties.
The Company has incurred approximately $1,450,000 in services to
GloboMax through December 31, 2000.
F-35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000.
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share and
warrants to purchase 1,750,000 shares at an exercise price of $0.26 per
share until February 28, 2005. The fair value of the warrants was
estimated to be $200,249 ($.057 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). This amount has been
amortized to consulting expense during the year ended December 31,
2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Product R in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause Product R to be
approved for commercial sale in such countries and, upon such approval,
to purchase from the Company certain minimum quantities of Product R to
maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. The Company has made no sales under
the distribution agreements other than for testing purposes.
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities, of which $300,000 has been
incurred as of December 31, 2000. In October 2000, the Company entered
into an 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 $114,000 has been incurred as of
December 31, 2000.
F-36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION
In June 2000, the Company filed an action and complaint in the Supreme
Court of New York, Westchester County, against Commonwealth
Pharmaceuticals, Ltd., Immune Modulation Maximum Corp. ("IMMC") and
Charles E. Miller (collectively, the "Defendants") alleging a breach by
Commonwealth of an exclusive distribution agreement between the Company
and Commonwealth, misappropriation of trade secrets and confidential
information, conversion and conspiracy to convert the Company's
property interests in Reticulose (Product R). The agreement, which the
Company alleges in its complaint is currently in force and effect,
provides that: (i) all laboratory or clinical studies initiated by
Commonwealth for which Reticulose is provided for free must first be
approved by the Company; (ii) the results of all studies, all research
data and documentation and any research publications resulting from
studies initiated by Commonwealth or any of its agents will belong to
the Company and will be made use of at the Company's discretion; and
(iii) such studies are only permitted as part of such agreement. In its
complaint, the Company alleged that Defendant Miller filed and obtained
a U.S. patent entitled "Composition Containing Peptides and Nucleic
Acids and Methods of Making Same" based on a study conducted by a third
party using Reticulose obtained free of charge from the Company, and
that such patent was assigned to Defendant IMMC, a company controlled
by Defendant Miller, in violation of the exclusive distribution
agreement.
In its complaint, the Company seeks relief in the form of (i)
assignment of the patent to the Company; (ii) 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, the Defendants other than Miller, filed a suit against
the Company in the United States District Court for the Eastern
District of Michigan which alleges that IMMC, and not the Company, is
the owner of the exclusive/broad rights in Reticulose, and seeks, among
other things, (i) a declaratory judgment that Defendant IMMC is the
exclusive owner of the broad/exclusive rights to Reticulose and the
subject patent; (ii) an injunction against the Company from further
attempts to use, market or assert any claims of ownership over any
broad/exclusive rights in Reticulose, or the use, publication or
disclosure of information regarding Reticulose; (iii) return of such
information to the Defendants; (iv) that the Company assign any
Reticulose-related trademarks to IMMC; and (v) that the Company pay
Defendants damages, profits, costs and attorneys' fees. The Company was
served with the Complaint on August 8, 2000.
In January 2001, the Company and Commonwealth, et al., agreed to
dismiss the case in New York without prejudice. All disputes between
the parties are now handled by the District Court of Michigan. At this
point, we have answered the complaint against us in the Federal Court
and have entered a number of counterclaims which are in substance the
same as our claims in the New York case.
F-37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
The Company believes that the allegations contained in the Defendant's
complaint are without merit and the Company intends to vigorously
defend itself against all allegations contained therein.
GENERAL
CAPITAL LEASES
During 1998, the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments of
$4,529 for 60 months commencing on September 1998 and expiring on July
2003. During 1999, the Company entered into a purchase lease agreement
for equipment totaling $38,645. The lease calls for monthly payments of
$965 for 48 months commencing in August 1999 and expiring in July 2003.
Additionally, during 2000, the Company entered into a purchase lease
agreement for equipment totaling $13,197. The lease calls for monthly
payments of $447 for 36 months commencing in January 2001 and expiring
in December 2003.
Future minimum capital lease payments and the net present value of the
future minimum lease payments at December 31, 2000 are as follows:
Year ending December 31:
2001 $ 71,292
2002 71,292
2003 43,822
--------
Total minimum lease payments 186,406
Less amount representing interest 21,150
--------
Net present value of future minimum lease payments 165,256
Less current maturities 58,689
--------
$106,567
========
OPERATING LEASES
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $17,000 annually. The Company has three options to renew
for an additional one year per option. Management has exercised its
second option for the year 2001.
On December 30, 1998, the Company executed an amendment to its existing
lease dated April 1997 for the laboratory facilities in Yonkers, New
York. The lease on the additional space is effective May 1, 1999. The
new lease adds 10,550 square feet (for a total of 16,650 square feet)
and extends its term until April 2005. Annual rent on the original
lease is approximately $85,000. Rent for the additional facilities is
approximately $175,000. Total rental commitment for the laboratory
facilities will be $260,000 until May 1, 2002 at which time it will
increase to approximately $290,000.
F-38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
OPERATING LEASES (Continued)
The Company leased an automobile in November 1999 for 36 months at $711
per month expiring in November 2002.
Total lease expense for the years ended December 31, 2000, 1999 and
1998 amounted to $296,064, $191,974 and $121,477, respectively.
Future minimum lease commitments as of December 31, 2000 are as
follows:
Year ending December 31:
2001 $ 269,000
2002 288,000
2003 290,000
2004 290,000
2005 290,000
----------
Total $1,427,000
==========
NOTE 9. STOCKHOLDERS' EQUITY
During 1999, the Company issued 7,049,128 shares of common stock for an
aggregate consideration of $1,369,500. The amounts were comprised of
the issuance of 6,769,128 shares of common stock for cash of $1,302,500
and issuance of 280,000 shares of common stock in exchange for
consulting services for consideration of $67,000.
During 2000, the Company issued 76,742,583 shares of common stock for
an aggregate consideration of $16,564,500. The amounts were comprised
of the issuance of 31,861,674 shares of common stock for cash of
$9,806,000, issuance of 5,158,500 shares common stock pursuant to the
exercise of options for $982,000, issuance of 1,186,593 shares of
common stock pursuant to the exercise of warrants for $154,000,
issuance of common stock upon conversion of debt of 38,435,816 shares
for $5,576,000 and issuance of 100,000 shares of common stock in
exchange for services for $46,500.
NOTE 10. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME
TAXES. SFAS No. 109 is an asset and liability approach for computing
deferred income taxes.
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. INCOME TAXES (Continued)
As of December 31, 2000 and 1999, the Company had net operating loss
carryforwards for Federal income tax reporting purposes amounting to
approximately $21,100,000 and $14,600,000, which expire in varying
amounts to 2020.
The Company presently has temporary differences between financial
reporting and income tax reporting relating to interest expense on the
beneficial conversion feature of the convertible debt, depreciation and
patent costs.
The components of the deferred tax asset as of December 31, 2000 and
1999 were as follows:
2000 1999
---------- ----------
Benefit of net operating loss carryforwards $7,174,000 $4,850,000
Less valuation allowance 7,174,000 4,850,000
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
As of December 31, 2000 and 1999, sufficient uncertainty exists
regarding the realizability of these operating loss carryforwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.
F-40
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.
F-41
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.
F-42
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.
F-43
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.
F-44
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.
F-45
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.
F-46
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.
F-47
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.
F-48
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.
F-49
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.
F-50
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.
F-51
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.
F-52
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.
F-53
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.
F-54
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.
F-55
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%.
F-56
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
F-57
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.
F-58
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
F-59
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).
F-60
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
F-61
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.
F-62
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
F-63
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
F-64
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.
F-65
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).
F-66
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.
F-67
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
F-68
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
F-69
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
F-70
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
F-71
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.
F-72
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
F-73
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.
F-74
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
26,865,380 SHARES
OF
COMMON STOCK
November __, 2001
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, which will be
paid solely by Advanced Viral Research Corp. (the "Registrant"). All amounts
shown are estimates, except the Commission registration fee:
Commission registration fee.................................. $ 0
Printing and mailing expenses................................ $10,000
Legal fees and expenses...................................... $15,000
Accounting fees and expenses................................. $ 5,000
TOTAL............................................... $30,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Ninth of our Certificate of Incorporation contains the
following provision with respect to indemnification of directors and officers:
Ninth: The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of the State of Delaware,
as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from
and against any and all of the expenses, liabilities or other matters
referred to in or covered by said section, and the indemnification
provided for herein shall not be deemed exclusive of any other rights
to which those indemnified may be entitled under any By-law,
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as
to a person, who has ceased to be director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of
officers and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact
that the person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines
II-1
and amounts paid in settlement actually and reasonably incurred by the
person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe the person's conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which the person reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that the person's conduct was
unlawful.
(b) A corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in the right
of the corporation to procure a judgment in its favor by reason of the
fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall
be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or
officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of this section, or in defense of any claim,
issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of
this section (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a
determination that indemnification of the present or former director,
officer, employee or agent is proper in the circumstances because the
person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be
made, with respect to a person who is a director or officer at the
time of such determination, (1) by a majority vote of the directors
who are not parties to such action, suit or proceeding, even
II-2
though less than a quorum, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a
quorum, or (3) if there are no such directors, or if such directors so
direct, by independent legal counsel in a written opinion, or (4) by
the stockholders.
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit.
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to our securities issued or sold
within the past three years which were not registered under the Securities Act.
No underwriters were employed with respect to the sale of any of the securities
listed below. Except as noted below, each of these transactions was completed
without registration of the respective securities under the Securities Act in
reliance upon the exemptions provided by Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder on the basis that such
transactions did not involve a public offering. The purchasers were
sophisticated with access to the kind of information registration would provide
and such purchasers acquired such securities without a view toward the
distribution thereof.
1. On October 1997, we sold to RBB Bank, A.G. $3,000,000
principal amount of our ten-year 7% convertible debentures in an offshore
transaction. In connection with the issuance of the debentures, we also issued
to RBB three warrants to purchase 600,000 shares each of common stock from
August 30, 1997 through August 30, 2007 at exercise prices of $0.20, $0.23 and
$0.27 per share, respectively. This transaction was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Regulation
S.
2. In February 1998 we granted to Dr. Shalom Z. Hirschman, our
President and Chief Executive Officer, options to acquire 23,000,000 shares of
our common stock at $0.27 per
II-3
share. Such options are 100% vested as of the date of grant and expire (to the
extent not previously exercised) on February 17, 2008. Dr. Hirschman is an
"accredited investor" as defined in Rule 501(a) under the Securities Act.
3. In November 1998 pursuant to a securities purchase agreement,
we sold $1,500,000 principal amount of our ten-year 7% convertible debenture
due October 31, 2008 to RBB, as agent for the accounts of certain persons, in
an offshore transaction. In connection with the issuance of the debenture, we
also issued to RBB two warrants to purchase common stock , each warrant
entitling the holder to purchase, until October 31, 2008, 375,000 shares of the
common stock at exercise prices of$0.20 and $0.24 per warrant share,
respectively. This transaction was exempt from the registration requirements of
the Securities Act of 1933 pursuant to Regulation S.
4. In December 1998, pursuant to a securities purchase
agreement, we sold to Harbor View Group, Inc. and various other purchasers
4,917,276 shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee paid to
Harbor View Group consisting of two warrants to purchase an aggregate 400,000
shares of common stock, for an aggregate purchase price of $802,500. Half of
the warrants are exercisable at $0.204 per share, and half of the warrants are
exercisable at $0.2448 per share, until December 31, 2003.
5. During our fiscal year ended December 31, 1998, we issued
approximately 16.8 million shares in connection with the conversion of
debentures; 100,000 shares for consulting services; and 1,555,000 shares issued
upon exercise of options.
6. In July 1999 pursuant to a securities purchase agreement, we
sold to Michael Berman, Pak-Lin Law and Kwong Wai Au 1,851,852 shares of common
stock and warrants to purchase an aggregate of 925,926 shares of common stock,
for an aggregate purchase price of $500,000. 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, and are exercisable at any time and
from time to time until June 28, 2004.
7. In August 1999 pursuant to a securities purchase agreement
with Focus Investors LLC and various other purchasers, we sold $2,000,000
principal amount of our ten-year 7% convertible debentures due August 3, 2009,
and series W warrants to purchase an aggregate of 1,000,000 shares of our
common stock at an exercise price of $0.2461 per warrant share until August 3,
2004.
8. In October 1999, we granted Alan Gallantar, our Chief
Financial Officer, stock options to acquire 4,547,880 shares of common stock,
exercisable at $0.24255 per share in one third increments on October 1, 2000,
2001, and 2002, until October 1, 2009. Mr. Gallantar is an "accredited
investor" as defined in Rule 501(a) under the Securities Act.
9. In December 1999, pursuant to a securities purchase
agreement, we issued the first $1,000,000 tranche of $2,000,000 in aggregate
principal amount of our 7% convertible
II-4
debentures due December 31, 2004 to Endeavour Capital Fund, S.A. 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. The
warrants expire on December 31, 2002 and are exercisable at $0.19916667 per
share.
10. During our fiscal year ended December 31, 1999, we issued
280,000 shares for consulting services.
11. In January 2000, pursuant to the securities purchase
agreement with Endeavour Capital Fund, S.A. discussed above, 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 to Endeavour Capital Fund, S.A.
12. In February 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.
13. 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 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.
14. In May 2000, we granted Louis Silver, a director stock
options to acquire 100,000 shares of common stock, exercisable at $0.25 per
share, until May 31, 2002. Mr. Silver is an "accredited investor" as defined in
Rule 501(a) under the Securities Act.
15. On September 18, 2000 we entered into a private equity line
of credit agreement with Spinneret Financial Systems, Inc., who assigned their
rights to GMF Holdings, Inc., for the right to put shares of our common stock
to the investor from time to time to raise up to $20,000,000, subject to
certain conditions and restrictions. This agreement and all agreements
contemplated in connection with such agreement was terminated by mutual
agreement of the parties on January 22, 2001.
16. From November 2000 through March 2001, pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,427,500 shares of common stock, and warrants to purchase an
aggregate of 8,056,500 shares of common stock 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.
17. 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.
II-5
18. During the year 2000, we issued approximately 38.4 million
shares in connection with the conversion of debentures; approximately 1.2
million shares upon the exercise of warrants; and approximately 5.2 million
shares upon exercise of options.
19. We entered into an equity line of credit agreement dated
February 9, 2001 with Cornell Capital Partners, LP. Pursuant to the equity line
of credit agreement, subject to the satisfaction of certain conditions, Cornell
Capital, an "accredited investor" as defined in Rule 501(a) under the
Securities Act, may sell and issue, from time to time, up to an aggregate of
$50,000,000 of its common stock. In connection with the equity line of credit,
we issued to the placement agent, May Davis Group, Inc., which introduced
Cornell Capital to us, and certain other investors Class A Warrants to purchase
in the aggregate 5,000,000 shares of our common stock at an exercise price per
share equal to $1.00, exercisable in part or in whole at any time until
February 9, 2006, and Class B Warrants to purchase in the aggregate 5,000,000
shares of our common stock at an exercise price equal to the greater of $1.00
or 110% of the bid price of the common stock on the applicable advance date
under the private equity line of credit agreement. The Class B Warrant is
exercisable pro rata on or after each advance date with respect to that number
of warrant shares equal to the product obtained by multiplying 5,000,000 by a
fraction, the numerator of which is the amount of the advance payable on the
applicable advance date and the denominator of which is $50,000,000, until
sixty months from the date of issuance.
20. In June 2001 we issued 60,000 shares of our common stock
pursuant to the exercise of certain options.
21. On July 27, 2001, pursuant to a securities purchase agreement
with various purchasers, we authorized the issuance and sale of up to 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.
II-6
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1 Articles of Incorporation of Advanced Viral Research Corp. ("ADVR") (2)
3.2 Bylaws of ADVR, as amended(1)
3.3 Amendment to Articles of Incorporation of ADVR(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between ADVR and American Stock Transfer and Trust Company(1)
4.4 Forms of Common Stock Options and Agreements granted by ADVR to TRM Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by ADVR to Plata Partners Limited Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common Stock granted by ADVR to Leonard
Cohen(6)
4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman, M.D. dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and between ADVR and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and between ADVR and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common stock of ADVR at $0.2040 per
share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common stock of ADVR at $0.2448 per
share. (15)
4.15 Securities Purchase Agreement dated June 23, 1999 by and between ADVR and various purchasers. (15)
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common stock of ADVR at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common stock of ADVR at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and between ADVR and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of common stock at $0.2461 per share. (15)
4.21 Securities Purchase Agreement dated December 28, 1999 between ADVR and Endeavour Capital Fund S.A. (16)
4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common stock at $0.19916667 per share. (16)
4.24 Form of Warrant dated February 7, 2000 to purchase shares of common stock at $0.21 per share. (17)
4.25 Form of Warrant dated February 7, 2000 to purchase shares of common stock at $0.26 per share. (17)
4.26 Form of Warrant dated February 16, 2000 to purchase shares of common stock at $0.275 per share. (17)
4.27 Form of Warrant dated February 16, 2000 to purchase shares of common stock at $0.33 per share. (17)
4.28 Form of Class A Warrant dated September 18, 2000 to purchase 5,000,000 shares of common stock. (19)
4.29 Form of Class B Warrant dated September 18, 2000 to purchase 5,000,000 shares of common stock. (19)
4.30 Form of Class A Warrant dated February 9, 2001 to purchase 5,000,000 shares of common stock. (21)
4.31 Form of Class B Warrant dated February 9, 2001 to purchase 5,000,000 shares of common stock. (21)
5.1 Opinion and Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A. (23)
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor of ADVR dated November 16,
1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique Medical Actuel and ADVR. (3)
10.3 Letter, dated March 15, 1991 to ADVR from Health Protection Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and ADVR. (11)(a)
II-7
EXHIBIT
NUMBER DESCRIPTION
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and ADVR. (4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell Inc. and ADVR. (7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and ADVR. (8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between Lionel Resnick, M.D. and ADVR.
(11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and ADVR. (12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and ADVR.
(11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and ADVR. (11)(d)
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and ADVR, as
amended(11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel Islands and
ADVR. (11)(f)
10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver(9)
10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z. Hirschman, M.D.(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International Pharmaceutical
Corp. and ADVR. (12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth
Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp., Beijing Unistone Pharmaceutical Co., Ltd. and ADVR. (11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical Corp. and
ADVR. (11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and ADVR. (11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between ADVR and Shalom Z. Hirschman,
M.D.(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International Pharmaceutical Corp. and ADVR.
(11)(i)
10.23 Employment Agreement, dated October 17, 1996, between ADVR and Shalom Z. Hirschman, M.D.(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and ADVR. (12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between ADVR and Interfi Capital
Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development Agreement, dated March 13, 1997,
between National Institute of Health, Food and Drug Administration and the Centers for Disease Control
and Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between ADVR and RBB Bank AG. (11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative Research and Development Agreement, dated
March 4, 1998, between National Institute of Health, Food and Drug Administration and the Centers for
Disease Control and Prevention. (13)
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between ADVR and Shalom Z. Hirschman,
M.D.(11)(n)
10.30 Agreement between ADVR and Angelo Chinnici, M.D. dated July 1, 1999. (14)
10.31 Consulting Agreement between ADVR and GloboMax LLC dated January 18, 1999. (15)
10.32 Registration Rights Agreement dated August 3, 1999 between ADVR Research and Focus Investors LLC. (15)
10.33 Employment Agreement dated October 1, 1999 between ADVR and Alan V. Gallantar (15)
10.34 Registration Rights Agreement dated December 28, 1999 between ADVR and Endeavour Capital Fund, S.A. (16)
10.35 Consulting Agreement dated February 7, 2000 between ADVR and Harbor View Group, Inc.(17)
10.36 Securities Purchase Agreement dated February 16, 2000 between ADVR and Harbor View Group, Inc. (17)
10.37 Letter Agreement dated November 16, 1999 between ADVR and Bratskeir & Company. (18)
10.38 Amended and Restated Employment Agreement dated May 12, 2000 between ADVR and Shalom Z. Hirschman, M.D.
(18)
10.39 Equity Line of Credit Agreement dated as of September 18, 2000 between ADVR and Spinneret Financial
Systems, Inc.(19)
10.40 Registration Rights Agreement dated as of September 18, 2000 between ADVR and Spinneret Financial
Systems, Inc. (19)
10.41 Registration Rights Agreement dated as of September 18, 2000 between ADVR and May Davis Group, Inc.(19)
10.42 Placement Agent Agreement dated September 18, 2000 between ADVR and May Davis Group, Inc.(19)
10.43 Assignment and Assumption Agreement dated December 12, 2000 between Spinneret Financial Systems, Inc.
and GMF Holdings Inc. (20)
II-8
EXHIBIT
NUMBER DESCRIPTION
10.44 Agreement to Waive Assignment Rights dated December 12, 2000 by GMF Holdings Inc. (20)
10.45 Termination Agreement dated January 22, 2001 between GMF Holdings, Inc., May Davis Group, Inc. and
ADVR. (21)
10.46 Equity Line of Credit Agreement dated as of February 9, 2001 between ADVR and Cornell Capital Partners,
LP. (21)
10.47 Registration Rights Agreement dated as of February 9, 2001 between ADVR and Cornell Capital Partners,
LP.(21)
10.48 Registration Rights Agreement dated as of February 9, 2001 between ADVR and May Davis Group, Inc. (21)
10.49 Placement Agent Agreement dated February 9, 2001 between ADVR and May Davis Group, Inc. (21)
10.50 Agreement dated as of April 2, 2001 between ADVR and Selikoff Center of Ra'Anana, Israel. (22)
10.51 Agreement dated as of January 29, 2001 between ADVR and The Weizmann Institute of Science and Yeda. (22)
10.52 Securities Purchase Agreement dated November 8, 2000 by and between ADVR and various investors. (23)
10.53 Securities Purchase Agreement dated July 27, 2001 by and between ADVR and various investors. (23)
21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a Bahamian corporation.
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public Accountants.*
23.2 Consent of the law firm of Berman Wolfe Rennert Vogel & Mandler, P.A. (See Exhibit 5.1).
- ---------
* Filed herewith.
1. Documents incorporated by reference herein to certain exhibits our
registration statement on Form S-1, as amended, File No. 33-33895,
filed with the Securities and Exchange Commission on March 19, 1990.
2. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-18, File No. 33-2262-A, filed with
the Securities and Exchange Commission on February 12, 1989.
3. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31,
1990.
4. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31,
1991.
6. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1992.
8. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1996.
11. Incorporated by reference herein to our Current Reports on Form 8-K
and exhibits thereto as follows:
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997.
II-9
14. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
15. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 33-70523,
filed with the Securities and Exchange Commission on January 13, 1999,
and Amendment No. 5 thereto, declared effective on December 15, 1999.
16. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-94529,
filed with the Securities and Exchange Commission on January 12, 2000.
17. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
18. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-37974,
filed with the Securities and Exchange Commission on June 6, 2000.
19. Documents incorporated by reference herein to certain exhibits to
Post-effective Amendment No. 1 to our Registration Statement on Form
S-1, as amended, File No. 333-70523, filed with the Securities and
Exchange Commission on September 25, 2000.
20. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-49038, filed with the
Securities and Exchange Commission on October 31, 2000 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
December 15, 2000.
21. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-55430, filed with the
Securities and Exchange Commission on February 12, 2001 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
February 13, 2000.
22. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31,
2000.
23. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-62788, filed with the
Securities and Exchange Commission on June 13, 2001 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
August 23, 2001.
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in
II-10
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provision described under Item 20 or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. If
a claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Post-Effective Amendment No. 2 to
the Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Yonkers, State of New
York, on November 26, 2001.
ADVANCED VIRAL RESEARCH CORP.
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
----------------------------------------
Shalom Z. Hirschman, M.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Post-Effective Amendment No. 2 to the Registration Statement on Form S-1
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
/s/ Shalom Z. Hirschman, M.D. President and Chief November 26, 2001
- ------------------------------------ Executive Officer and Director
Shalom Z. Hirschman, M.D.
/s/ Bernard Friedland Chairman of the Board November 26, 2001
- ------------------------------------
Bernard Friedland
/s/ Alan Gallantar Chief Financial Officer November 26, 2001
- ------------------------------------
Alan Gallantar
/s/ William Bregman Secretary-Treasurer, November 26, 2001
- ------------------------------------ Director
William Bregman
/s/ Louis J. Silver Director November 26, 2001
- ------------------------------------
Louis J. Silver
II-12
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public Accountants
II-13