U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 59-2646820
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701
------------------------------------------------------
(Address of principal executive offices)
(914) 376-7383
------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value
$.00001 per share as of August 14, 2002 was 432,991,989.
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED).......................................................................1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)....................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................38
PART II. OTHER INFORMATION......................................................................................39
ITEM 1. LEGAL PROCEEDINGS..................................................................................39
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................................39
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................................................40
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS..................................................40
ITEM 5. OTHER INFORMATION..................................................................................40
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................40
SIGNATURES....................................................................................................41
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
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 310,067 $ 1,499,809
Other current assets 146,803 63,162
------------- -------------
Total current assets 456,870 1,562,971
Property and Equipment, Net 2,718,739 3,000,583
Other Assets 949,256 885,237
------------- -------------
Total assets $ 4,124,865 $ 5,448,791
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 979,143 $ 1,843,706
Current portion of capital lease obligation 132,956 64,197
Current portion of note payable 25,994 24,246
------------- -------------
Total current liabilities 1,138,093 1,932,149
------------- -------------
Long-Term Liabilities:
Convertible debentures, net 361,224 --
Capital lease obligation, non-current portion 42,738 42,370
Note payable, non-current portion 16,660 32,198
------------- -------------
Total long-term liabilities 420,622 74,568
------------- -------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 431,692,444 and 403,296,863
shares issued and outstanding 4,317 4,033
Additional paid-in capital 51,875,800 47,666,141
Deficit accumulated during the development stage (46,364,951) (40,795,470)
Discount on warrants (2,949,016) (3,432,630)
------------- -------------
Total stockholders' equity 2,566,150 3,442,074
------------- -------------
Total liabilities and stockholders' equity $ 4,124,865 $ 5,448,791
============= =============
See notes to consolidated condensed financial statements.
-1-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended Six Months Ended (February 20,
June 30, June 30, 1984) to
------------------------------- ------------------------------- June 30,
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 9,118 $ -- $ 11,483 $ 231,892
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 878,093 903,764 2,539,266 2,142,872 16,415,090
General and administrative 698,460 956,315 1,426,755 1,840,145 15,909,938
Compensation expense for
options and warrants 615,542 -- 615,542 357,975 5,005,017
Depreciation 236,426 103,818 469,735 229,092 1,910,614
------------- ------------- ------------- ------------- -------------
2,428,521 1,963,897 5,051,298 4,570,084 39,240,659
------------- ------------- ------------- ------------- -------------
Loss from Operations (2,428,521) (1,954,779) (5,051,298) (4,558,601) (39,008,767)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 2,752 28,324 4,823 96,955 882,998
Other income -- -- -- -- 120,093
Interest expense (270,204) (272,495) (523,006) (479,051) (8,056,775)
Severance expense - former directors -- -- -- -- (302,500)
------------- ------------- ------------- ------------- -------------
(267,452) (244,171) (518,183) (382,096) (7,356,184)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,695,973) $ (2,198,950) $ (5,569,481) $ (4,940,697) $ (46,364,951)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 410,479,091 375,730,988 410,479,091 375,730,988
============= ============= ============= =============
See notes to consolidated condensed financial statements.
-2-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- ----------- ------- ----------- ------------
Balance, Inception (February 20, 1984) as Previously Reported -- $ 1,000 $ -- $ (1,000)
Adjustment for Pooling of Interests -- (1,000) 1,000 --
----------- ------- --------- ---------
Balance, Inception, as Restated -- -- 1,000 (1,000)
Net Loss, Period Ended December 31, 1984 -- -- -- (17,809)
----------- ------- --------- ---------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of Common Stock for Cash $.00 113,846,154 1,138 170 --
Net Loss, Year Ended December 31, 1985 -- -- -- (25,459)
----------- ------- --------- ---------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of Common Stock - Public Offering .01 40,000,000 400 399,600 --
Issuance of Underwriter's Warrants -- -- 100 --
Expenses of Public Offering -- -- (117,923) --
Issuance of Common Stock, Exercise of "A" Warrants .03 819,860 9 24,587 --
Net Loss, Year Ended December 31, 1986 -- -- -- (159,674)
----------- ------- --------- ---------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ------- --------- ---------
See notes to consolidated condensed financial statements.
-3-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- ----------- ------- ----------- ------------
Balance, December 31, 1986 154,666,014 $1,547 $ 307,534 $ (203,942)
Issuance of Common Stock, Exercise of "A" Warrants $.03 38,622,618 386 1,158,321 --
Expenses of Stock Issuance -- -- (11,357) --
Acquisition of Subsidiary for Cash -- -- (46,000) --
Cancellation of Debt Due to Stockholders -- -- 86,565 --
Net Loss, Period Ended December 31, 1987 -- -- -- (258,663)
----------- ------ ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net Loss, Year Ended December 31, 1988 -- -- -- (199,690)
----------- ------ ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net Loss, Year Ended December 31, 1989 -- -- -- (270,753)
----------- ------ ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of Common Stock, Expiration of Redemption
Offer on "B" Warrants .05 6,729,850 67 336,475 --
Issuance of Common Stock, Exercise of "B" Warrants .05 268,500 3 13,422 --
Issuance of Common Stock, Exercise of "C" Warrants .08 12,900 -- 1,032 --
Net Loss, Year Ended December 31, 1990 -- -- -- (267,867)
----------- ------ ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ------ ----------- -----------
See notes to consolidated condensed financial statements.
-4-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- ----------- ------- ----------- ------------
Balance, December 31, 1990 200,299,882 $2,003 $ 1,845,992 $(1,200,915)
Issuance of Common Stock, Exercise of "B" Warrants $ .05 11,400 -- 420 --
Issuance of Common Stock, Exercise of "C" Warrants .08 2,500 -- 200 --
Issuance of Common Stock, Exercise of Underwriters Warrants .012 3,760,000 38 45,083 --
Net Loss, Year Ended December 31, 1991 -- -- -- (249,871)
----------- ------ ----------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of Common Stock, for Testing .0405 10,000,000 100 404,900 --
Issuance of Common Stock, for Consulting Services .055 500,000 5 27,495 --
Issuance of Common Stock, Exercise of "B" Warrants .05 7,458,989 75 372,875 --
Issuance of Common Stock, Exercise of "C" Warrants .08 5,244,220 52 419,487 --
Expenses of Stock Issuance (7,792)
Net Loss, Year Ended December 31, 1992 -- -- -- (839,981)
----------- ------ ----------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of Common Stock, for Consulting Services .055 500,000 5 27,495 --
Issuance of Common Stock, for Consulting Services .03 3,500,000 35 104,965 --
Issuance of Common Stock, for Testing .035 5,000,000 50 174,950 --
Net Loss, Year Ended December 31, 1993 -- -- -- (563,309)
----------- ------ ----------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ----------- -----------
See notes to consolidated condensed financial statements.
-5-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
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) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------ ---------- ----- ----------- -----
See notes to consolidated condensed financial statements.
-6-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------- ----------- -------------
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ -- $(3,696,797) $ --
Issuance of Common Stock, Exercise
of Options $ .05 3,333,334 33 166,634 -- -- --
Issuance of Common Stock, Exercise
of Options .08 1,158,850 12 92,696 -- -- --
Issuance of Common Stock, Exercise
of Options .10 7,163,600 72 716,288 -- -- --
Issuance of Common Stock, Exercise
of Options .11 170,000 2 18,698 -- -- --
Issuance of Common Stock, Exercise
of Options .12 1,300,000 13 155,987 -- -- --
Issuance of Common Stock, Exercise
of Options .18 1,400,000 14 251,986 -- -- --
Issuance of Common Stock, Exercise
of Options .19 500,000 5 94,995 -- -- --
Issuance of Common Stock, Exercise
of Options .20 473,500 5 94,695 -- -- --
Issuance of Common Stock, for
Services Rendered .50 350,000 3 174,997 -- -- --
Options Granted -- -- 760,500 -- -- (473,159)
Subscription Receivable -- -- -- (19,000) -- --
Net Loss, Year Ended December 31, 1996 -- -- -- -- (1,154,740) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------ ---------- -------- ----------- ---------
See notes to consolidated condensed financial statements.
-7-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
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 condensed financial statements.
-8-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
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 condensed financial statements.
-9-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
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, 1998 296,422,907 $2,964 $14,325,076 $(13,550,976) $(14,769) $ --
Issuance of Common Stock, Securities
Purchase Agreement $.16 4,917,276 49 802,451 -- -- --
Issuance of Common Stock, Securities
Purchase Agreement .27 1,851,852 18 499,982 -- -- --
Issuance of Common Stock, for
Services Rendered .22 100,000 1 21,999 -- -- --
Issuance of Common Stock, for
Services Rendered .25 180,000 2 44,998 -- -- --
Beneficial Conversion Feature,
August Debenture -- -- 687,500 -- -- --
Beneficial Conversion Feature,
December Debenture -- -- 357,143 -- -- --
Warrant Costs, Securities
Purchase Agreement -- -- 494,138 -- -- (494,138)
Warrant Costs, Securities
Purchase Agreement -- -- 37,025 -- -- (37,025)
Warrant Costs, August Debenture -- -- 52,592 -- -- --
Warrant Costs, December Debenture -- -- 4,285 -- -- --
Amortization of Warrant Costs,
Securities Purchase Agreement -- -- -- -- -- 102,674
Amortization of Deferred
Compensation Cost -- -- -- -- 14,769 --
Compensation Expense Related to
Modification of Existing Options -- -- 210,144 -- -- --
Net Loss, Year Ended
December 31, 1999 -- -- -- (6,174,262) -- --
----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
----------- ------ ----------- ------------ -------- ---------
See notes to consolidated condensed financial statements.
-10-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
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 0.1400 600,000 6 83,994 -- --
Issuance of Common Stock,
Exercise of Options 0.1500 1,600,000 16 239,984 -- --
Issuance of Common Stock,
Exercise of Options 0.1600 650,000 7 103,994 -- --
Issuance of Common Stock,
Exercise of Options 0.1700 100,000 1 16,999 -- --
Issuance of Common Stock,
Exercise of Options 0.2100 792,500 8 166,417 -- --
Issuance of Common Stock,
Exercise of Options 0.2500 1,000,000 10 246,090 -- --
Issuance of Common Stock,
Exercise of Options 0.2700 281,000 3 75,867 -- --
Issuance of Common Stock,
Exercise of Options 0.3600 135,000 1 48,599 -- --
Issuance of Common Stock,
Exercise of Warrants 0.2040 220,589 2 44,998 -- --
Issuance of Common Stock,
Exercise of Warrants 0.2448 220,589 2 53,998 -- --
Issuance of Common Stock,
Exercise of Warrants 0.2750 90,909 1 24,999 -- --
Issuance of Common Stock,
Exercise of Warrants 0.3300 90,909 1 29,999 -- --
Issuance of Common Stock,
Conversion of Debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of Common Stock,
Conversion of Debt 0.1900 1,431,785 14 275,535 -- --
Issuance of Common Stock,
Conversion of Debt 0.2000 1,887,500 19 377,481 -- --
Issuance of Common Stock,
Conversion of Debt 0.3600 43,960 -- 15,667 -- --
Issuance of Common Stock,
Cashless Exercise of
Warrants 563,597 6 326,153 -- --
Issuance of Common Stock,
Services Rendered 0.4650 100,000 1 46,499 -- --
Private Placement of
Common Stock 0.2200 13,636,357 136 2,999,864 -- --
Private Placement of
Common Stock 0.3024 4,960,317 50 1,499,950 -- --
Private Placement of
Common Stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless Exercise of
Warrants -- -- (326,159) -- --
Beneficial Conversion Feature,
January Debenture -- -- 386,909 -- --
Warrant Costs, Consulting
Agreement -- -- 200,249 -- --
Warrant Costs, January
Debenture -- -- 13,600 -- --
Warrant Costs, Private
Placement -- -- 3,346,414 -- (3,346,414)
Recovery of Subscription
Receivable Previously
Written Off -- -- 19,000 -- --
Amortization of Warrant Costs,
Securities Purchase
Agreements -- -- -- -- 544,163
Compensation Expense Related
to Modification of
Existing Options -- -- 1,901,927 -- --
Net Loss -- -- -- (9,354,664) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 3,802 39,969,373 (29,079,902) (3,230,740)
----------- ------ ------------ ------------ -----------
See notes to consolidated condensed financial statements.
-11-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
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 $0.2700 40,000 1 10,799 -- --
Issuance of Common Stock,
Exercise of Options 0.3600 20,000 1 7,199 -- --
Issuance of Common Stock,
Cashless Exercise of Warrants 76,411 1 77,491 -- --
Issuance of Common Stock,
for Services Rendered 0.3500 100,000 1 34,999 -- --
Sale of Common Stock, for Cash 0.1500 6,666,667 66 999,933
Sale of Common Stock, for Cash 0.3000 2,000,000 20 599,980 -- --
Sale of Common Stock, for Cash 0.3200 3,125,000 31 999,969 -- --
Sale of Common Stock, for Cash 0.4000 1,387,500 14 554,986 -- --
Sale of Common Stock, for Cash 0.2700 9,666,667 96 2,609,904
Cashless Exercise of Warrants -- -- (77,491) -- --
Warrant Costs, Private Placement -- -- 168,442 -- (168,442)
Warrant Costs, Private
Equity Line of Credit -- -- 1,019,153 -- (1,019,153)
Amortization of Warrant Costs,
Securities Purchase Agreements -- -- -- -- 985,705
Credit Arising from Modification
of Option Terms -- -- 691,404 -- --
Net Loss, Year Ended
December 31, 2001 -- -- -- (11,715,568) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 4,033 47,666,141 (40,795,470) (3,432,630)
----------- ------ ------------ ------------ -----------
See notes to consolidated condensed financial statements.
-12-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the Discounts
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ----------- ------- ----------- ------------ --------------
Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
Sale of Common Stock, for Cash 0.1500 9,999,999 100 1,499,900
Sale of Common Stock, for Cash 0.1109 17,486,491 175 1,938,8130
Issuance of Common Stock,
Conversion of Debt 0.1100 909,091 9 99,991
Warrant Costs, Termination
Agreement 190,757
Options Granted for Consulting
Services 246,822
Credit Arising from Modification
of Option Terms 177,963
Amortization of Warrant Costs,
Securities Purchase Agreements -- -- -- -- 483,614
Beneficial Conversion feature,
May Debenture 55,413
Net Loss, Six Month Period
Ended June 30, 2002 -- -- -- (5,569,481) --
----------- ------ ------------- ------------ -----------
Balance, June 30, 2002 431,692,444 $4,317 $ 51,875,800 $(46,364,951) $(2,949,016)
=========== ====== ============= ============ ===========
See notes to consolidated condensed financial statements.
-13-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Six Months Ended (February 20,
June 30, 1984) to
----------------------------- June 30,
2002 2001 2002
----------- ----------- ------------
Cash Flows from Operating Activities:
Net loss $(5,569,481) $(4,940,697) $(46,364,951)
----------- ----------- ------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 469,735 229,092 1,910,524
Amortization of debt issue costs 8,370 6,974 802,929
Amortization of deferred interest cost on beneficial
conversion feature 14,884 -- 3,833,547
Amortization of discount on warrants 483,614 457,423 2,519,012
Amortization of discount on warrants - consulting services -- -- 230,249
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 1,753 -- 77,965
Compensation expense for options and warrants 615,542 357,975 5,005,017
Changes in operating assets and liabilities:
Increase in other current assets (72,766) (83,419) (165,922)
Increase in other assets (72,389) (25,098) (1,620,616)
Increase (decrease) in accounts payable and accrued liabilities (864,563) 169,483 985,343
----------- ----------- ------------
Total adjustments 584,180 1,112,430 14,338,548
----------- ----------- ------------
Net cash used by operating activities (4,985,301) (3,828,267) (33,612,403)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Acquisition of property and equipment (52,354) (903,898) (4,108,023)
----------- ----------- ------------
Net cash used by investing activities (52,354) (903,898) (4,108,023)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 500,000 -- 10,000,000
Proceeds from sale of securities, net of issuance costs 3,438,988 83,000 26,739,046
Payments under capital lease (77,285) (28,688) (244,887)
Payments on note payable (13,790) (10,438) (68,666)
Recovery of subscription receivable written off -- -- 19,000
----------- ----------- ------------
Net cash provided by financing activities 3,847,913 43,874 36,444,493
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,189,742) (4,688,291) 357,975
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 310,067
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 310,067 $ 1,274,342 $ 310,067
=========== =========== ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during the six months ended June 30, 2002 when the Company entered into a
lease for new equipment.
See notes to consolidated condensed financial statements.
-14-
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 June 30, 2002 have been prepared in accordance with accounting
principles generally accepted in the United States 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 June 30,
2002 and results of operations for the three months and six months
ended June 30, 2002 and 2001 and cash flows for the six months ended
June 30, 2002 and 2001. All such adjustments are of a normal recurring
nature. Certain general and administrative expenses from inception
relating to consulting services were reclassified to compensation
expense for options and warrants to be consistent with current
presentation. 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 the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
NOTE 2. COMMITMENTS AND CONTINGENCIES
LIQUIDITY
The Company has accumulated net losses of approximately $46,000,000
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 is currently inadequate to
pay all the costs associated with the full range of testing and
clinical trials including the 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.
In February 2001, the Company entered into a private equity line of
credit agreement to sell up to $50,000,000 of common stock (see Note 4
- Private Equity Line of Credit). The Company received cash proceeds of
$2,610,000 from various stock purchase agreements in December 2001.
During the six months of 2002, the Company entered into stock purchase
agreements dated February 7, 2002, February 21, 2002, March 22, 2002,
April 12, 2002 and a Convertible Debenture agreement dated May 30, 2002
resulting in cash proceeds of $3,939,000. During July 2002, the Company
entered into Convertible Debenture agreements resulting in cash
proceeds of $1,500,000.
Management believes that cash flows from sales of securities and from
current financing arrangements will be sufficient to fund operations
for the next year. These cash flows from securities are dependent upon
the Company's ability to satisfy the conditions precedent to draw on
the equity line of credit and receive the full amount of proceeds or
the company's ability to sell its common stock or convertible
debentures or all of the above. Management intends to continue
-15-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
LIQUIDITY
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. There can be no
assurance that the Company can maintain operations at its current
levels and therefore may need to reduce certain operating costs.
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
Reticulose(R) was initially marketed in the 1940's; however, one study
noted adverse reactions from highly concentrated doses in guinea pigs.
The study was performed utilizing the former formulation and not the
current formulation. 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 six issued U.S. patents, some covering the composition
of Product R and others covering various uses of the Product R. In
addition, the Company has one issued Australian patent covering a use
of Product R. Additionally, the Company has 15 pending U.S. patent
applications and 21 pending 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 issued patents as well as patents that
may result from pending applications will be enforceable.
RESEARCH AGREEMENTS
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
-16-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
RESEARCH AGREEMENTS (Continued)
ISRAEL STUDIES (Continued)
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 $118,000. As of June 30, 2002, the Company advanced $118,000 for
such research, which has been accounted for as research and development
expense. On July 8, 2002 the Company extended the agreement with the
Weizmann Institute of Science and Yeda. Under its provisions the study
period is extended for another 12 months to July 7, 2003. The total
cost to the Company of this additional research is expected to be
$138,000 of which a down payment of $40,000 was paid during July 2002.
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 cost of the first phase of this research is expected
to be $242,000. As of June 30, 2002, the Company advanced $242,000 for
such research, which has been accounted for as research and development
expense. The Company is in negotiations to extend the agreement with
the Selikoff Center.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of June 30, 2002,
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
-17-
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)
commencing March 24, 1996 and ending February 17, 2008 at an exercise
price of $0.19 per share; (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;
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. 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.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
Effective December 31, 2001, the remaining unexercised $0.27 and $0.36
options, which had been extended to December 31, 2001, were further
extended to June 30, 2002 at exercise prices of $0.28 and $0.37,
respectively. As a result of this modification of the option terms, the
fair value of the options was estimated to be $6,158 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 5%. This amount has been charged to
compensation expense related to modification of existing option terms
during the year ended December 31, 2001. Effective June 30, 2002, the
remaining unexercised $0.27 and $0.36 options were extended to December
31, 2002. As a result of this modification of the option terms, the
fair value of the options was estimated to be $3,895 based on a
financial analysis of the terms of the options using the Black-Scholes
pricing model with the following assumptions: expected volatility of
117%; risk free interest rate of 1.7%. This amount has been charged to
compensation expense related to modification of existing option terms
during the quarter ended June 30, 2002.
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,
provided, however, the Agreement is extended automatically by one year,
each year, unless notice of termination has been given by either Dr.
Hirschman or the Company. In July 2002, the Company notified Dr.
Hirschman that the Agreement will not be extended subsequent to
December 31, 2004. 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
-18-
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)
one or more third parties commit to make payments to the Company of at
least $15 million. On September 4, 2001, the Company received an IND
number from the FDA. Therefore, of the $100,000 described above,
$25,000 was paid as of December 31, 2001 with an additional $25,000
paid through June 30, 2002.
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 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). Performance bonuses for Mr.
Gallantar's first two years in the amount of $25,000 each year have
been charged to expense in the appropriate years in the accompanying
consolidated financial statements.
-19-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
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 is recognizing the fair value of
the options as compensation costs on a pro-forma basis over a one year
service period.
In May 2002, the Company granted to certain of its employees options to
purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38%; an expected life of 9.6 years. The Company will recognize the
fair value of the options as compensation costs on a pro-forma basis
over 9.6 years (the term of the options).
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND CERTAIN
COMMITTEES
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to the certain Members of
the Board of Directors and various committees of the Board of
Directors. The exercise price was $0.12 per share exercisable 25%
immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on
December 20, 2002 through May 5, 2010. The fair value of the these
options was estimated to be $455,249 ($0.1097 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 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation costs on a pro-forma basis over an eight year
period (the term of the options).
In June 2002, the Company granted to Roy S. Walzer, a member of the
Board of Directors and member of various committees of the Board,
options to purchase 528,800 shares of common stock at an exercise price
of $0.295 per share, which options are exercisable 25% immediately, 25%
on September 9, 2002, 25% on December 9, 2002 and 25% on March 9, 2003
through June 9, 2010. The fair value of the these options was estimated
to be $140,608 ($0.2659 per option share) based upon a financial
analysis of the terms of the options using
-20-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND CERTAIN
COMMITTEES (Continued)
the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 115%; a risk free interest rate of 4.88% and an
expected life of eight years. The Company will recognize the fair value
of the options as compensation costs on a pro-forma basis over an eight
year period (the term of the options).
Financial reporting of the Hirschman, Gallantar, other employees and
Members of the Board of Directors and committees of the Board of
Directors 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 for the Six Months Pro forma As
Ended June 30, 2002 Adjustment Adjusted
------------------------------- ---------- --------
Net loss $(5,569,481) $(1,140,420) $(6,709,901)
========== =========== ===========
Net loss per share $ (0.01) $ (0.01) $ (0.02)
========== =========== ===========
As Reported for the Three Months Pro forma As
Ended June 30, 2001 Adjustment Adjusted
------------------------------- ---------- --------
Net loss $(4,940,697) $ (1,187,322) $(6,128,019)
========== =========== ===========
Net loss per share $ (0.01) $ (0.01) $ (0.02)
========== =========== ===========
There were no other options outstanding that would require pro forma
presentation.
COHEN AGREEMENTS
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"). 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
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, 2002 at an option price
of $0.19. As a result
-21-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS
of this modification of the option terms, the fair value of the options
was estimated to be $318,359 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 5%.
This amount was charged to compensation expense related to the
modification of existing option terms during the year ended December
31, 2001. Effective June 30, 2002, the remaining unexercised $0.19
options were extended to December 31, 2002. As a result of this
modification of the option terms, the fair value of the options was
estimated to be $174,068 based on a financial analysis of the terms of
the options using the Black-Scholes pricing model with the following
assumptions: expected volatility of 117%; risk free interest rate of
1.7%. This amount has been charged to compensation expense related to
modification of existing option terms during the quarter ended June 30,
2002. Through June 30, 2002, 6,650,500 shares were issued pursuant to
the exercise of the Bauer and Rizzuto Options for an aggregate exercise
price of $696,050.
GLOBOMAX AGREEMENT
In January 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 1 and planned Phase 2 clinical trials
for Product R. The contract was extended by mutual consent of both
parties. The Company has incurred approximately $5,114,000 for services
rendered and reimbursement of expenses by GloboMax and its
subcontractors through June 30, 2002, of which $681,000 and $84,000 was
incurred during the three and six month periods, respectively.
HARBOR VIEW AGREEMENT
In February 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 was
amortized to consulting expense during the year ended December 31,
2000.
-22-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT (Continued)
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 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 117%; a risk free interest rate of 4.38% and an
expected holding period of eight years. This amount was charged to
compensation expense for options and warrants during the quarter ended
June 30, 2002.
In May 2002, the Company granted to members of its of the Scientific
Advisory Board and Business Advisory Board options to purchase an
aggregate of 2,250,000 shares of common stock at an exercise price of
$0.12 per share, which options are exercisable 25% immediately, 25% on
June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002
through May 5, 2010. The fair value of the options was estimated to be
$246,822 ($0.1097 per option) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 115%; a risk free
interest rate of 4.88% and an expected holding period of eight years.
This amount was charged to compensation expense for options and
warrants during the quarter ended June 30, 2002.
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.
-23-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. STATUS OF FDA FILINGS AND CLINICAL TRIALS
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 1 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 1 clinical trials. The Company
has commenced these clinical trials. The Phase 1 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. On April 12, 2002, the
Company successfully completed Phase 1 studies and has begun to recruit
clinical sites to perform clinical Phase 2 trials to investigate the
efficacy and dosages of Product R in the topical treatment of genital
warts. Phase 2 trials are pivotal clinical investigations designed to
establish the efficacy and safety of Product R.
In June 2002, the Israeli Ministry of Health approved the testing of
Product R in the following injectable studies:
o Phase I/II study in patients needing Salvage Therapy for AIDS. The
Israeli Ministry of Health has approved these clinical trials for
patients who have failed highly active anti-retroviral therapy
(HAART) and require salvage therapy. The Company believes that
Product R may have three major beneficial effects in patients with
AIDS. First its therapeutic effects on the body wasting (cachexia)
seen in patients with AIDS. Second, the mitigation of the toxicity
of drugs included in HAART regimens for the treatment of AIDS.
Third, Product R appears to act synergistically with drugs used in
HAART regimens to suppress the replication of HIV and increase the
CD4 and CD8 cell counts in patients with AIDS. Thus Product R may
prove to be an important "enabler" drug in the treatment of AIDS.
o Phase I study in Leukemia and Lymphoma Patients. The supreme medical
ethics committee (Helsinki Committee) of the Israeli Ministry of
Health has approved this clinical trial for the study of the
treatment with injectable Product R of patients with hematopoietic
and lymphoid tumors, including acute lymphocytic leukemia, Hodgkin's
disease and non-Hodgkin's lymphoma, who also manifest symptoms of
cachexia, that is, severe weight loss and body wasting.
o Phase I study in patients with Solid Tumors. The Israeli Ministry of
Health has approved these clinical trials for the study of the
treatment with injectable Product R of body wasting (cachexia) in
patients with solid tumors such as colonic, lung breast, stomach and
kidney cancers.
The Company anticipates that these clinical trials will help facilitate
the planned injectable investigational new drug (IND) application
process for Product R in the U.S. with the U.S. Food and Drug
Administration (FDA).
The Company may not be able to raise the funds it currently needs to
begin or complete the planned topical Phase 2 clinical trials or the
injectable clinical trials in Israel. While the Company continues to
attempt to secure funds through the sale of its securities, there is no
assurance that such funds will be raised on terms beneficial to the
Company, if at all.
-24-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
In connection with the issuance of several convertible debentures sold
during the years 1997 to 2000, which have all been fully converted to
shares of the Company's common stock, the Company issued warrants to
purchase common stock. As of June 30, 2002, approximately 4.3 million
warrants are outstanding with expiration dates through 2009.
During the second quarter of 2002, the Company issued to certain
investors, the 5% convertible debentures at par in private placements.
Under the terms of each 5% convertible debenture, 20% of the original
issue is convertible on the original date of issue at a price equal to
the closing bid price quoted on the OTC Bulletin Board on the preceding
trading day (except for the Rushing/Simoni issuance which had an
initial conversion price of $0.11 per share). Thereafter, 20% of the
principal balance may be converted at six month intervals at a
conversion price equal to the higher of (i) 90% of the average closing
bid price for the five trading days prior to the conversion date (the
"Market Price"); or (ii) ten cents ($0.10) which amount is subject to
certain adjustments. The convertible debentures, including interest
accrued thereon, are payable by Advanced Viral in shares of common
stock and mature two years from the date of issuance. The shares issued
upon conversion of the debentures cannot be sold or transferred for a
period of one year from the applicable vesting date of the convertible
portion of the debentures. Based on the terms for conversion associated
with this Debenture, there was an intrinsic value associated with the
beneficial conversion feature of approximately $55,000 which was
recorded as deferred interest expense and is presented as a discount on
the convertible debenture. This amount will be amortized over an
expected holding period of two years. Of this amount, $15,000 has been
amortized to interest expense at June 30. 2002.
o In May 2002, the Company sold to O. Frank Rushing and Justine Simoni
$500,000 principal amount of the Company's 5% convertible debenture.
On June 3, 2002, the holder converted the first 20% ($100,000) into
909,091 shares of common stock at a conversion price of $0.11 per
share.
SUBSEQUENT FINANCINGS
Subsequent to June 30, 2002, the Company issued 5% convertible
debentures as follows:
o In July 2002, the Company sold to James F. Dicke II, a member of our
Board of Directors, $1,000,000 principal amount of the Company's 5%
convertible debenture. On July 3, 2002, Mr. Dicke converted the
first 20% ($200,000) for 1,299,545 shares of common stock at a
conversion price of $0.1539 per share.
o In July 2002, the Company sold to Peter Lunder, a member of our
Business Advisory Board $500,000 principal amount of the Company's
5% convertible debenture. No conversion has taken place to date.
-25-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS
Pursuant to several securities purchase agreements issued during 1999
through 2001, the Company issued warrants to purchase the Company's
common stock. Through December 31, 2001, the Company issued an
aggregate of 44,724,652 shares of its common stock for cash
consideration of $12,773,500 under these securities purchase
agreements. As of June 30, 2002, under these securities purchase
agreements, approximately 30 million warrants are outstanding with
expiration dates through 2006.
During the first quarter of 2002, under several stock purchase
agreements, the Company sold an aggregate of 9,999,999 shares of its
common stock at $0.15 per share, for cash consideration of $1,500,000.
On April 12, 2002, pursuant to stock purchase agreements with various
institutional investors, the Company issued 17,486,491 shares of its
common stock at a market price of $0.11089 per share and received net
proceeds of $1,938,987.
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. The line of
credit expires August 14, 2003. Under such agreement, the Company may
exercise "put options" to sell shares for certain prices based on
certain average trading prices. Upon signing this agreement, the
Company issued to its placement agent, May Davis Group, Inc., and
certain investors, Class A warrants to purchase an aggregate of
5,000,000 shares of common stock at an exercise price of $1.00 per
share, exercisable in part or whole until February 9, 2006, and Class B
warrants to purchase an aggregate of 5,000,000 shares of common stock
at an exercise price equal to the greater of $1.00 or 110% of the bid
price on the applicable advance date. Such Class B warrants are
exercisable pro rata with respect to the number of warrant shares as
determined by the fraction of the advance payable on that date as the
numerator and $20,000,000 as the denominator multiplied by 5,000,000
until sixty (60) 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.
-26-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Condensed Financial Statements and the related Notes to
Consolidated Condensed Financial Statements of Advanced Viral Research Corp.
included in Item 1 of this Quarterly Report on Form 10-Q. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for a full year. The statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 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 report, the term "Product R"
refers to the current formulation as well as the prior formulation of the
pharmaceutical drug known as Reticulose(R). Product R may be employed in the
treatment of certain viral and autoimmune diseases such as:
o Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
o Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer;
o Cachexia (body wasting) in patients with solid cancers, leukemias
and lymphomas; and
o Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either IN
VITRO (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients outside the United States. On July 30, 2001, we
submitted an IND application to the FDA to begin Phase 1 clinical trials of
Product R as a topical treatment for genital warts caused by the human papilloma
virus (HPV) infection. Our Phase 1 studies were performed in the United States
on human patients. In September 2001, the FDA cleared the IND application to
begin Phase 1 clinical trials. In March 2002, we completed the Phase 1 trials
and submitted to the FDA the results, which indicated that Product R was safe
and well tolerated dermatologically in all the doses applied in the study. In
April 2002 we began to recruit clinical sites to perform Phase 2 clinical trials
-27-
with Product R in patients with genital warts in the United States. During the
course of Phase 2, the efficacy of Product for the topical therapy of genital
warts will be investigated in various doses.
In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following injectable clinical trials:
o PHASE I/II STUDY IN PATIENTS NEEDING SALVAGE THERAPY FOR AIDS. The
Israeli Ministry of Health has approved these clinical trials for
patients who have failed highly active anti-retroviral therapy
(HAART) and require salvage therapy. We believe that Product R may
have three major beneficial effects in patients with AIDS: First,
its therapeutic effects on the body wasting (cachexia) seen in
patients with AIDS. Second, the mitigation of the toxicity of drugs
included in HAART regimens for the treatment of AIDS. Third, Product
R appears to act synergistically with drugs used in HAART regimens
to suppress the replication of HIV and increase the CDJ and CD8 cell
counts in patients with AIDS. Thus, we believe that Product R may
prove to be an important "enabler" drug in the treatment of AIDS.
o PHASE I STUDY IN LEUKEMIA AND LYMPHOMA PATIENTS. The supreme medical
ethics committee (Helsinki Committee) of the Israeli Ministry of
Health has approved this clinical trial for the study of the
treatment with injectable Product R of patients with hematopoietic
and lymphoid tumors, including acute lymphocytic leukemia, Hodgkin's
disease and non-Hodgkin's lymphoma, who also manifest symptoms of
cachexia, that is, severe weight loss and body wasting.
o PHASE I STUDY IN PATIENTS WITH SOLID TUMORS. The Israeli Ministry of
Health has approved these clinical trials for the study of the
treatment with injectable Product R of body wasting (cachexia) in
patients with solid tumors such as colonic, lung breast, stomach and
kidney cancers.
We anticipate that the clinical trials in Israel will help facilitate
the planned investigational new drug (IND) application process for injectable
Product R with the FDA.
On July 8, 2002, we extended an 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.
Under its provisions the study period is extended for another twelve months to
July 7, 2003. Total costs incurred in connection with this research is expected
to be $138,000, of which a down payment of $40,000 was paid in July 2002.
Whether we will be able to proceed with Phase 2 clinical trials of
Product R for topical therapy of genital warts and clinical trials in Israel for
injectable Product R is dependent upon our ability to secure sufficient funds.
If sufficient funds do not become available, we will have to curtail our
operations by, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to begin or complete the
planned topical Phase 2 or the injectable clinical trials in Israel for Product
R. Additional financing to fund subsequent clinical trials may not be available
to us, which may force us to reduce our clinical trials and operations. While we
continue to attempt to secure funds through the sale of our securities, there is
no assurance that such funds will be raised on favorable terms, if at all.
-28-
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number is (914) 376-7383. We have also established a
website: www.adviral.com. Information contained on our website is not a part of
this report.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2002, we incurred losses of
approximately $2,696,000 and approximately $5,569,000 vs. approximately
$2,199,000 and $4,941,000 for the three and six months ended June 30, 2001. Our
increased losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. We had increased research and
development expenses (approximately $ 878,000 and $2,539,000 during the three
and six months ended June 30, 2002 vs. $904,000 and $2,143,000 for the three and
six months ended June 30, 2001). Included in the research and development
expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting us
with the preparation and filing with the FDA of the IND for Product
R (approximately $ 85,000 and $994,000 for the three and six months
ended June 30, 2002 vs. $355,000 and $1,079,000 for the three and
six months ended June 31, 2001);
o expenditures in connection with laboratory supplies (approximately
$72,000 and $208,000 for the three and six months ended June 30,
2002 vs. $98,000 and $191,000 for the three months ended June 30,
2001);
o expenditures in connection with Product R research in Israel of
$87,000 and $127,000 for the three and six months ended June 30,
2002 vs. $62,000 and $117,000 for the three and six months ended
June 30, 2001. All expenditures in 2002 were to the Selikoff Center.
For the three months ended June 30, 2001 expenditures were $32,000
for the Selikoff Center and $30,000 for the Weizmann Institute of
Science. For the six months ended June 30, 2001 expenditures were
$57,000 for the Selikoff Center and $60,000 for the Weizmann
Institute of Science
o additional expenditures for payroll, occupancy expenses and related
costs for the Yonkers, New York facility of approximately $577,000,
and $1,142,000 for the three and six months ended June 30, 2002 vs.
$388,000 and $756,000 for the three and six months ended June 30,
2001. Included in such expenditures are payroll and taxes, which
accounted for approximately $488,000 and $980,000 for the three and
six months ended June 30, 2002 vs. $317,000 and 626,000 for the
three and six months ended June 30, 2001. We have added staff in the
scientific areas, including a Vice President of Drug Development and
a Vice President of Quality Assurance; and
o expenditures in connection with production process validation by
outside consultants of $56,000 and $67,000 for the three and six
months ended June 30, 2002 and $1,000 and $0 for the three and six
months ended June 30, 2001;
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was approximately $698,000 and $1,427,000 for the three and six months ended
June 30, 2002 vs. $956,000 and $1,840,000 for the three and six months ended
June 30, 2001. The decrease in general and administrative expenses primarily
resulted from:
-29-
o Decrease in professional fees of approximately $152,000 and $350,000
for the three and six months ended June 30, 2002 vs. $331,000 and $
676,000 for the three and six months ended June 30, 2001 primarily
attributable to certain legal fees for settlement negotiations which
concluded in 2001 ($56,000 for the three and six months ended June
30, 2002 vs. $137,000 and $ 314,000 for the three and six months
ended June 30, 2001) (See "Legal Proceedings").
COMPENSATION EXPENSE FOR OPTIONS AND WARRANTS. Compensation expense was
approximately $616,000 for the three and six months ended June 30, 2002 vs. $0
and $358,000 for the three and six months ended June 30, 2001. These amounts are
the results of the calculation of the fair value of options, using the Black
Scholes Pricing Model, resulting from extending the exercise date of a
non-employee's options ($177,000), grant of options to members of our advisory
boards ($247,000) and the issuance of warrants to an outside consultant, Harbor
View Group, Inc. ($191,000).
DEPRECIATION EXPENSE. Our increased losses during the three and six
months ended June 30, 2002 are also due to increased depreciation expense
(approximately $236,000 and $470,000 for the three and six months ended June 30,
2002 vs. $104,000 and $229,000 for the three and six months ended June 30, 2001)
due to the purchase of additional research and laboratory equipment and
leasehold improvements.
INTEREST INCOME (EXPENSE). Interest income for the three and six months
ended June 30, 2002 was approximately $3,000 and $5,000 for the three and six
months ended June 30, 2002 vs. $28,000 and $97,000 for the three and six months
ended June 30, 2001. Our losses during the three and six months ended June 30,
2002 are also due to interest expense (approximately $270;000 and $523,000 for
the three and six months ended June 30, 2002 vs. $272,000 and $479,000 for the
three and six months ended June 30, 2001). Included in the interest expense are:
o amortization of discount on certain warrants (approximately $257,000
and $498,000 for the three and six months ended June 30, 2002 vs.
$263,000 and $461,000 for the three and six months ended June 30,
2001); and
o amortization of loan costs and other interest expense (approximately
$13,000 and $25,000 for the three and six months ended June 30, 2002
vs. $9,000 and $18,000 for the three and six months ended June 30,
2001).
REVENUES. We had no sales for the three and six months ended June 30,
2002 vs. $9,000 and $11,000 for the three and six months ended June 30, 2001.
All sales during these periods were made to distributors purchasing Product R
for testing purposes.
LIQUIDITY
As of June 30, 2002, we had current assets of approximately $457,000
and compared to approximately $ 1,563,000 at December 31, 2001. We had total
assets of approximately $4,125,000 and $5,449,000 at June 30, 2002 and December
31, 2001, 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 six months ended June 30, 2002, we used cash of
approximately $4,985,000 for operating activities, as compared to approximately
$3,828,000 during the six months ended June 30, 2001. During the six months
ended June 30, 2002, our expenses included:
-30-
o approximately $1,483,000 for payroll and related costs primarily for
administrative staff, scientific personnel and executive officers;
o approximately $994,000 in consulting fees to GloboMax and its
subcontractors
o approximately $378,000 for other professional and consulting fees,
including $56,000 for legal fees relating to the settlement
agreement (See "Legal Proceedings");
o approximately $208,000 for laboratory supplies;
o approximately $285,000 for insurance costs;
o approximately $210,000 for rent and utilities for our Yonkers
facility; and
o approximately $127,000 for expenditures for Product R research in
Israel.
During the six months ended June 30, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $3,439,000, the issuance of a convertible debenture of
$500,000 and principal payments of $91,000 on equipment obligations. During the
six months ended June 30, 2002, cash flow used by investing activities were used
for expenditures of approximately $52,000 for research and laboratory equipment
at our Yonkers, New York facility.
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, in February 2001 we filed
with the Securities and Exchange Commission a registration statement to register
the resale of shares of common stock purchased by Cornell Capital upon the
exercise of each put option and related warrants, which registration statement
was declared effective by the Commission..
Advanced Viral has 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 2001. We match 50% of the first 6% of the employee contributions with
our common stock and may from time to time, at our discretion, make additional
contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions.
-31-
RECENT OPTION GRANTS
At its May 1, 2002 Board of Directors meeting, the Board resolved to
authorize the grant to members of the Board of Directors and members of our
advisory boards of options to acquire up to 33,390,000 shares of our common
stock (approximately 7% of our outstanding shares and currently exercisable
options and warrants) over an 8-year period at such times and upon such terms
and conditions as the Board determines from time to time in the future.
Specifically, on May 6, 2002, we granted stock options to the following
executive officers, directors and advisory board members. Except as noted below,
all such stock options have anti-dilution rights and generally are exercisable
25% immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on
December 20, 2002 through May 5, 2010.
SHARES
UNDERLYING EXERCISE TERM OF
OPTION HOLDER POSITION OPTIONS PRICE OPTION
------------- -------- ------- ----- ------
Eli Wilner Secretary, Chairman of the Board, Member of 1,400,000 $0.12 8 years
Executive Management Committee and Audit
and Compensation Committee
..........................................................................................................................
James F. Dicke II Director, Member of Audit and Compensation 800,000 $0.12 8 years
Committee
..........................................................................................................................
David Seligman Director, Member of Executive Management 1,200,000 $0.12 8 years
Committee, Chairman of Audit and
Compensation Committee
..........................................................................................................................
Nancy J. Van Sant (1) Director 600,000 $0.12 8 years
..........................................................................................................................
Christopher Forbes Former Director (resigned 5/1/02) 150,000 $0.12 8 years
..........................................................................................................................
George P. Canellos, M.D. Member of Scientific Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Michael Harris, M.D. Member of Scientific Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
James D'Olimpio, M.D. Member of Scientific Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Ms. Carol Armenti Member of Scientific Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Howard Young, M.D. Member of Scientific Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Mark H. Kaplan, M.D. (2) Member of Scientific Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Albert Reichmann Member of Business Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Jozef Straus, Ph.D., D.Sc. (Hon.) Member of Business Advisory Board 250,000 $0.12 8 years
..........................................................................................................................
Peter Lunder Member of Business Advisory Board 250,000 $0.12 8 years
-------
..........................................................................................................................
TOTAL 6,400,000
..........................................................................................................................
- -------------------------
(1) Ms. Van Sant's options are exercisable 25% immediately and 25% each quarter
thereafter commencing on August 6, 2002.
(2) Dr. Kaplan became a member of our Scientific Advisory Board on May 15,
2002, and his stock options were granted on such date.
In June 2002 the Company granted to Roy S. Walzer, a new member of the
Board of Directors and member of various committees of the Board, options to
purchase 528,800 shares of common stock at an exercise price of $0.295 per
share. Such stock options have anti-dilution rights and are exercisable 25%
immediately, 25% on September 9, 2002, 25% on December 9, 2002 and 25% on March
9, 2003 through June 9, 2010.
In July 2002 the Company granted to Paul Bishop, a new member of the
Board of Directors, options to purchase 238,356 shares of common stock at an
exercise price of $0.17 per share. Such stock options have anti-dilution rights
and are exercisable 25% immediately, 25% on October 29, 2002, 25% on January 29,
2003 and 25% on April 29, 2003 through July 28, 2010.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2001,
-32-
includes an emphasis paragraph regarding certain liquidity considerations. 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 our 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. These cash flows from
securities are dependent upon our ability to satisfy the conditions precedent
to draw on the equity line of credit and receive the full amount of proceeds or
our ability to sell our common stock or convertible debentures or all
of the above. We may not be able to raise the funds we currently need to begin
or conclude the planned Phase 2 clinical trials for our current IND for the
topical therapy of genital warts or the injectable clinical trials in Israel.
There can be no assurances that we will maintain operations at current levels,
and we may be required to curtail certain of our operations, including the
testing and clinical trials of Product R. 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 on
satisfactory terms, if at all.
-33-
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. The following table
summarizes sales of our securities over the last two years.
PURCHASE PRICE
CONVERTIBLE/ CONVERSION PRICE/ MATURITY DATE/
DATE ISSUED GROSS PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
----------- -------------- --------------- ---------------- -------------- ---------------
Nov-2000 - $5,371,000 common stock 13,427,500 shares $0.40 per share n/a
Mar 2001 warrants 4,028,250 shares $0.48 per share 11/7/2005
4,028,250 shares $0.56 per share
....................................................................................................................
Nov-2000 $1,500,000 common stock 4,960,317 shares $0.3024 per share n/a
....................................................................................................................
Feb-2001 equity line warrants 10,000,000 shares $1.00 per share (1) 2/9/2006
....................................................................................................................
Jul-2001 $1,000,000 common stock 3,125,000 shares $0.32 per share n/a
....................................................................................................................
Jul-2001 $490,000 common stock 1,225,000 shares $0.40 per share n/a
warrants 367,500 shares $0.48 per share 7/27/2006
367,500 shares $0.56 per share
....................................................................................................................
Aug-2001 $600,000 common stock 2,000,000 shares $0.30 per share n/a
....................................................................................................................
Sep-2001 $1,000,000 common stock 6,666,667 shares $0.15 per share n/a
....................................................................................................................
Dec-2001 $2,000,000 common stock 7,407,407 shares $0.27 per share n/a
....................................................................................................................
Dec-2001 $410,000 common stock 1,518,519 shares $0.27 per share n/a
....................................................................................................................
Dec-2001 $200,000 common stock 740,741 shares $0.27 per share n/a
....................................................................................................................
Feb-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
....................................................................................................................
Feb-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
....................................................................................................................
Mar-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
....................................................................................................................
Apr-2002 $1,939,000 common stock 17,486,491 shares $0.11089 per share n/a
....................................................................................................................
May-2002 $500,000 convertible debenture $100,000 converted (2) 5/30/2004
(909,091 shares)
....................................................................................................................
May-2002 Consulting Warrants 1,000,000 shares $0.18 per share 5/30/2008
Services
....................................................................................................................
Jul-2002 $1,000,000 convertible debenture $200,000 converted (3) 7/3/2004
(1,299,545 shares)
....................................................................................................................
Jul-2002 $500,000 convertible debenture Not yet converted (4) 7/15/2004
....................................................................................................................
- -------------------------
(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.
(2) $0.11 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the average closing bid price for the five trading days prior to the
conversion date (the "Market Price"); or (ii) ten cents ($0.10) which
amount is subject to certain adjustments.
(3) $0.1539 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(4) $0.1818 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
HARBOR VIEW GROUP, INC., ET AL. On November 8, 2000, pursuant to a
securities purchase agreement with Harbor View Group and various other
purchasers, we authorized the issuance and sale of up to 50,000,000 shares of
our common stock and warrants to purchase an aggregate of 30,000,000 shares of
common stock in a private offering transaction pursuant to Section 4(2) of the
Securities Act for a purchase price of $0.40 per share. As of March 31, 2001, we
had closed on the sale of 13,427,500 shares and warrants to purchase 8,056,500
shares for an aggregate purchase price of $5,371,000. Half of the warrants are
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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.
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 is being
amortized to interest expense over the term of the warrants.
As of June 30, 2002, we had incurred approximately $83,700 in fees in
connection with the equity line of credit. Such fees have been deferred and are
being amortized over the life of the line of credit.
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.
SHELF OFFERINGS. On March 31, 2000, we filed a shelf registration
statement with the SEC relating to the offering of 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 of this prospectus,
we have issued and sold approximately 53.9 million shares of our common stock
and received proceeds of approximately $10.15 million under the shelf
registration statement, as follows:
o ROSEWORTH GROUP. On November 16, 2000, we entered into a securities
purchase agreement with Roseworth Group Limited, a British Virgin
Islands corporation and wholly-owned subsidiary of Creon Management,
S.A., a British Virgin Islands corporation, 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.
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o On July 19, 2001, we entered into a stock purchase agreement with
BNC Bach International, Ltd., a British Virgin Islands corporation,
pursuant to which we issued and sold to BNC Bach 3,125,000 shares of
our common stock at $0.32 per share for an aggregate purchase price
of $1,000,000.
o On August 20, 2001, we entered into a stock purchase agreement with
BNC Bach pursuant to which we issued and sold to BNC Bach 2,000,000
shares of our common stock at $0.30 per share for an aggregate
purchase price of $600,000.
o On September 28, 2001, we entered into a stock purchase agreement
with Cambois Finance, Ltd., a British Virgin Islands corporation and
wholly-owned subsidiary of Creon Management, S.A., a British Virgin
Islands corporation, discussed above, pursuant to which we issued
and sold to Cambois 6,666,667 shares of our common stock at $0.15
per share for an aggregate purchase price of $1,000,000.
o On December 18, 2001, we entered into a Stock purchase agreement
with BNC Bach pursuant to which we issued and sold to BNC Bach
7,407,407 shares of our common stock at a negotiated price of $0.27
per share, for a total purchase price of $2,000,000.
o On December 17, 2001, we entered into a Stock purchase agreement
with Harbor View Group, Inc. pursuant to which we issued and sold to
Harbor View 1,518,519 shares of our common stock at a negotiated
price of $0.27 per share, for a total purchase price of $410,000.
o On December 17, 2001, we entered into a Stock purchase agreement
with Russel Kuhn pursuant to which we issued and sold to Mr. Kuhn
740,741 shares of our common stock at a negotiated price of $0.27
per share, for a total purchase price of $200,000.
o On February 7, 2002, we entered into a stock purchase agreement with
Roseworth Group Limited, a British Virgin Islands corporation and
wholly-owned subsidiary of Creon Management, S.A., a British Virgin
Islands corporation whose wholly-owned subsidiary, Cambois Finance,
Ltd., is discussed above. Pursuant to the agreement we issued and
sold to Roseworth Group 3,333,333 shares of our common stock at a
negotiated price of $0.15 per share, for a total purchase price of
$500,000.
o On February 21, 2002, we entered into a stock purchase agreement
with Roseworth Group pursuant to which we issued and sold to
Roseworth Group 3,333,333 shares of our common stock at a negotiated
price of $0.15 per share, for a total purchase price of $500,000.
o On March 22, 2002, we entered into a stock purchase agreement with
Roseworth Group pursuant to which we issued and sold to Roseworth
Group 3,333,333 shares of our common stock at a negotiated price of
$0.15 per share, for a total purchase price of $500,000.
o On April 12, 2002, we issued and sold an aggregate of 17,486,491
shares of our common stock pursuant to subscription agreements with
each of Alpha Capital AG (3,497,298 shares), Ellis Enterprises
(1,311,487 shares), Kazi Management, Inc. (3,060,136 shares),
Palisades Equity Fund L.P. (4,808,785 shares) and Stonestreet L.P.
(4,808,785 shares), for net proceeds of approximately $1,939,000, or
$0.11089 per share.
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HARBOR VIEW GROUP, INC. On May 30, 2002 we entered into an agreement
with Harbor View Group, Inc to terminate a consulting agreement effective as of
December 31, 2001. The consultant continued to perform services after the
termination date and as full compensation we granted warrants to purchase
1,000,000 shares of our common stock at an exercise price of $0.18 per share.
The warrants are exercisable in whole or in part at any time and from time to
time prior to May 30, 2008.
CONVERTIBLE DEBENTURES. During the second quarter of 2002, we issued to
certain investors an aggregate of $2,000,000 principal amount of our 5%
convertible debentures at par in several private placements. Under the terms of
each 5% convertible debenture, 20% of the original issue is convertible on the
original date of issue at a price equal to the closing bid price quoted on the
OTC Bulletin Board on the preceding trading day (except for the Rushing/Simoni
issuance which had an initial conversion price of $0.11 per share). Thereafter,
20% of the principal balance may be converted at six-month intervals at a
conversion price equal to the higher of (i) 90% of the average closing bid price
for the five trading days prior to the conversion date (the "Market Price"); or
(ii) ten cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable by
Advanced Viral in shares of common stock and mature two years from the date of
issuance. The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date of the
convertible portion of the debentures. We issued our 5% convertible debentures
as follows:
o On May 30, 2002, we sold to O. Frank Rushing and Justine Simoni
$500,000 principal amount of our 5% convertible debenture. On June
3, 2002, the holder converted the first 20% ($100,000) into 909,091
shares of common stock at a conversion price of $0.11 per share.
o On July 3, 2002, we sold to James F. Dicke II, a member of our Board
of Directors, $1,000,000 principal amount of our 5% convertible
debenture. On July 3, 2002, Mr. Dicke converted the first 20%
($200,000) for 1,299,545 shares of common stock at a conversion
price of $0.1539 per share.
o On July 15, 2002, we sold to Peter Lunder, a member of our Business
Advisory Board $500,000 principal amount of our 5% convertible
debenture. No conversion has taken place to date.
OUTSTANDING SECURITIES
As of August 14, 2002, in addition to the 432,991,989 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of 55,8729,536 shares of common stock at exercise prices
ranging from $0.12 to $0.36, of which 49,5429,109 are currently exercisable;
(ii) outstanding warrants to purchase an aggregate of 34,106,572 shares of
common stock at prices ranging from $0.18 to $1.00, of which warrants to
purchase 29,106,572 shares are currently exercisable; and (iii) up to
166,666,667 shares issuable under the equity line of credit, assuming a purchase
price equal to $0.30.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $81.6 million,
and we would have approximately 689 million shares of common stock
outstanding. 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
-37-
may lessen the likelihood that additional equity financing will be available to
us, on favorable or unfavorable terms. Furthermore, the sale or availability for
sale of this number of shares could limit the annual amount of net operating
loss carryforwards that could be utilized.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for Product R. We currently do not have cash availability to
meet our anticipated expenditures.
We are currently seeking additional financing. We anticipate that we
can continue operations through September 2002 with our current liquid assets,
if none of our outstanding options or warrants are exercised or additional
securities sold. Assuming we have satisfied the conditions precedent to draw on
the equity line of credit, and 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 options or warrants are exercised or
additional securities sold. Any proceeds received from the exercise of
outstanding options or warrants will contribute to working capital and increase
our budget for research and development and clinical trials and testing,
assuming Product R receives subsequent approvals to justify such increased
levels of operation. The recent prevailing market price for shares of common
stock has from time to time been below the exercise prices of certain of our
outstanding options or 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 or 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 operations. We anticipate that we will be
required to sell additional securities to obtain the funds necessary to continue
operations and 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 or whether it will be on favorable terms.
Because of the large uncertainties involved in the FDA approval process for
commercial drug use on humans, it is possible that we may never be able to sell
Product R commercially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 20, 2002, we entered into a Settlement Agreement with
Commonwealth Pharmaceuticals, Ltd., Immune Modulation Maximum Corp. and Charles
E. Miller (collectively, the "Defendants") in settlement of our claims against
the Defendants regarding breach by Commonwealth of an exclusive distribution
agreement, misappropriation of trade secrets and confidential information,
conversion and conspiracy to convert our property interests in Reticulose(R).
The Settlement Agreement was entered as part of the final judgment of the United
States District Court for the Eastern District of Michigan on March 25, 2002,
and all remaining claims among Advanced Viral and the Defendants were dismissed.
The Settlement Agreement provided, among other things, that:
(i) the Defendants acknowledged that Advanced Viral is the sole and
rightful owner of all rights, title and interests for the United States and
throughout the world in and to the Reticulose(R) trademark and all Reticulose(R)
technology;
(ii) the Defendants sold, assigned and transferred, jointly and
severally, to Advanced Viral, its successors and assigns, all their claims,
rights, title and interests for the United States and throughout the world in
and to Reticulose(R), the Reticulose(R) trademark, the Reticulose(R) technology,
any modifications, improvements or derivations thereto, and all related patents,
inventions, discoveries, currently pending patent applications and any patents,
discoveries and inventions resulting therefrom or described therein, free and
clear from any encumbrance whatsoever;
(iii) Advanced Viral granted to IMMC a non-exclusive, non-transferable,
royalty-free license to make, use and sell products coming within the scope of
the patents transferred by defendants to Advanced Viral, but only to the extent
such products are in the form of orally administered dietary supplements which
were already being sold on IMMC's then current website;
(iv) Defendants agreed to indemnify, hold harmless and reimburse
Advanced Viral from and for any and all liabilities arising from the
manufacture, distribution, marketing, sale or use of any of IMMC's products; and
(v) the Defendants agreed not to advertise or publicize that there is
any connection between any of Defendants' products and Advanced Viral, its
predecessors or Reticulose(R), nor will it copy, distribute or publicize, orally
or otherwise, any data obtained by or produced on behalf of Advanced Viral or
any of its predecessors relating to Reticulose(R) or any other product of
Advanced Viral as if the data were developed by or for Defendants or was derived
from product of any of the Defendants, and such data shall be returned to
Advanced Viral to the extent it is in the possession of the Defendants.
Advanced Viral is not currently a party to any material litigation,
nor, to the knowledge of management, is any such litigation currently
threatened.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended June 30, 2002, no matters were
submitted to a vote of security holders of the Registrant, through the
solicitation of proxies or otherwise.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits.
(a) See Financial Statements
(b) 10.1 Termination Agreement dated May 30, 2002 between ADVR
and Harbor View Group, Inc.
10.2 Securities Purchase Agreement dated May 30, 2002
between ADVR and O. Frank Rushing and Justine Simoni,
as joint tenants.
10.3 Securities Purchase Agreement dated July 3, 2002
between ADVR and James F. Dicke III.
10.4 Securities Purchase Agreement dated July 15, 2002
between ADVR and Peter Lunder.
99.1 Certification by Chief Executive Officer.
99.2 Certification by Chief Financial Officer.
(2) Reports on Form 8-K.
In May 2002 we filed a Current Report on Form 8-K dated May 2,
2002 relating to the appointment and resignation of certain
members of the Board of Directors.
-40-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: August 14, 2002 By: /s/ ALAN V. GALLANTAR
--------------------------------------------
Alan V. Gallantar, Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
--------------------------------------------
Shalom Z. Hirschman, President and Chief
Executive Officer
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