UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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) Zip Code
(914) 376-7383
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value
$.00001 per share as of November 14, 2002 was 455,523,990.
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 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..............29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................41
Item 4. Controls and Procedures............................................................................41
PART II. OTHER INFORMATION......................................................................................42
Item 1. Legal Proceedings..................................................................................42
Item 2. Changes in Securities and Use of Proceeds..........................................................42
Item 3. Defaults Upon Senior Securities....................................................................42
Item 4. Submission of Matters to Vote of Security Holders..................................................42
Item 5. Other Information..................................................................................42
Item 6. Exhibits and Reports On Form 8-K...................................................................42
SIGNATURES 43
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.........................................44
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements (unaudited)
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
Statements
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,680,700 $ 1,499,809
Other current assets 119,489 63,162
------------ ------------
Total current assets 2,800,189 1,562,971
Property and Equipment, Net 2,602,980 3,000,583
Other Assets 973,608 885,237
------------ ------------
Total assets $ 6,376,777 $ 5,448,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 921,859 $ 1,843,706
Current portion of capital lease obligation 118,864 64,197
Current portion of note payable 26,516 24,246
------------ ------------
Total current liabilities 1,067,239 1,932,149
------------ ------------
Long-Term Liabilities:
Convertible debentures, net 1,592,043 --
Capital lease obligation, non-current portion 24,586 42,370
Note payable, non-current portion 12,018 32,198
------------ ------------
Total long-term liabilities 1,628,647 74,568
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value authorized,
455,523,990 and 403,296,863 shares issued and outstanding 4,555 4,033
Additional paid-in capital 57,087,433 47,666,141
Deficit accumulated during the development stage (48,762,695) (40,795,470)
Discount on warrants (4,648,402) (3,432,630)
------------ ------------
Total stockholders' equity 3,680,891 3,442,074
------------ ------------
Total liabilities and stockholders' equity $ 6,376,777 $ 5,448,791
============ ============
</Table>
See notes to consolidated condensed financial statements.
-1-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
(February 20,
Three Months Ended Nine Months Ended 1984) to
September 30, September 30, September 30,
------------------------------- ------------------------------- ---------------
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 2,454 $ -- $ 13,937 $ 231,892
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 978,658 1,141,046 3,517,924 3,283,918 17,393,748
General and administrative 745,450 1,212,370 2,172,205 3,052,515 18,241,388
Compensation expense for
options and warrants 30,462 35,000 646,004 392,975 3,449,479
Depreciation 259,082 141,679 728,817 370,771 2,169,696
------------- ------------- ------------- ------------- -------------
2,013,652 2,530,095 7,064,950 7,100,179 41,254,311
------------- ------------- ------------- ------------- -------------
Loss from Operations (2,013,652) (2,527,641) (7,064,950) (7,086,242) (41,022,419)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 6,738 11,765 11,561 108,720 889,736
Other income -- -- -- -- 120,093
Interest expense (390,830) (294,980) (913,836) (774,031) (8,447,605)
Severance expense - former directors -- -- -- -- (302,500)
------------- ------------- ------------- ------------- -------------
(384,092) (283,215) (902,275) (665,311) (7,740,276)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,397,744) $ (2,810,856) $ (7,967,225) $ (7,751,553) $ (48,762,695)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.02) $ (0.02)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 425,952,540 383,664,763 425,952,540 383,664,763
============= ============= ============= =============
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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Comon Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Comon Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock Additional during the Deferred Discount
Per ------------------------ Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
----- ----------- ---------- ------------ ------------- --------- --------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $(13,550,976) $ (14,769) $ --
Issuance of Common Stock,
Securities Purchase Agreement $.16 4,917,276 49 802,451 -- -- --
Issuance of Common Stock,
Securities Purchase Agreement .27 1,851,852 18 499,982 -- -- --
Issuance of Common Stock,
for Services Rendered .22 100,000 1 21,999 -- -- --
Issuance of Common Stock,
for Services Rendered .25 180,000 2 44,998 -- -- --
Beneficial Conversion Feature,
August Debenture -- -- 687,500 -- -- --
Beneficial Conversion Feature,
December Debenture -- -- 357,143 -- -- --
Warrant Costs, Securities
Purchase Agreement -- -- 494,138 -- -- (494,138)
Warrant Costs, Securities
Purchase Agreement -- -- 37,025 -- -- (37,025)
Warrant Costs, August
Debenture -- -- 52,592 -- -- --
Warrant Costs, December
Debenture -- -- 4,285 -- -- --
Amortization of Warrant Costs,
Securities Purchase Agreement -- -- -- -- -- 102,674
Amortization of Deferred
Compensation Cost -- -- -- -- 14,769 --
Compensation Expense Related
to Modification of
Existing Options -- -- 210,144 -- -- --
Net Loss, Year Ended
December 31, 1999 -- -- -- (6,174,262) -- --
------------ -------- ------------ ------------ --------- --------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
------------ -------- ------------ ------------ --------- --------
See notes to consolidated condensed financial statements.
-10-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock Additional during the Deferred Discount
Per ------------------------ Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
----- ----------- ---------- ------------ -------------- --------- --------
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,537,333 $ (19,725,238) $ -- $ (428,489)
Issuance of Common Stock,
Exercise of Options 0.140 600,000 6 83,994 -- -- --
Issuance of Common Stock,
Exercise of Options 0.150 1,600,000 16 239,984 -- -- --
Issuance of Common Stock,
Exercise of Options 0.160 650,000 7 103,994 -- -- --
Issuance of Common Stock,
Exercise of Options 0.170 100,000 1 16,999 -- -- --
Issuance of Common Stock,
Exercise of Options 0.210 792,500 8 166,417 -- -- --
Issuance of Common Stock,
Exercise of Options 0.250 1,000,000 10 246,090 -- -- --
Issuance of Common Stock,
Exercise of Options 0.270 281,000 3 75,867 -- -- --
Issuance of Common Stock,
Exercise of Options 0.360 135,000 1 48,599 -- -- --
Issuance of Common Stock,
Exercise of Warrants 0.204 220,589 2 44,998 -- -- --
Issuance of Common Stock,
Exercise of Warrants 0.244 220,589 2 53,998 -- -- --
Issuance of Common Stock,
Exercise of Warrants 0.275 90,909 1 24,999 -- -- --
Issuance of Common Stock,
Exercise of Warrants 0.330 90,909 1 29,999 -- -- --
Issuance of Common Stock,
Conversion of Debt 0.140 35,072,571 351 4,907,146 -- -- --
Issuance of Common Stock,
Conversion of Debt 0.190 1,431,785 14 275,535 -- -- --
Issuance of Common Stock,
Conversion of Debt 0.200 1,887,500 19 377,481 -- -- --
Issuance of Common Stock,
Conversion of Debt 0.360 43,960 -- 15,667 -- -- --
Issuance of Common Stock,
Cashless Exercise of Warrants 563,597 6 326,153 -- -- --
Issuance of Common Stock,
Services Rendered 0.465 100,000 1 46,499 -- -- --
Private Placement of
Common Stock 0.220 13,636,357 136 2,999,864 -- -- --
Private Placement of
Common Stock 0.302 4,960,317 50 1,499,950 -- -- --
Private Placement of
Common Stock 0.400 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock 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 SEPTEMBER 30, 2002
Deficit
Accumulated
Amount Common Stock Additional during the Discount
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 0.1109 17,486,491 175 1,938,813
Sale of Common Stock, for Cash 0.1400 22,532,001 225 2,840,575
Sale of Common Stock, for Cash 0.1500 9,999,999 100 1,499,900
Issuance of Common Stock,
Conversion of Debt 0.1100 909,091 9 99,991
Issuance of Common Stock,
Conversion of Debt 0.1539 1,299,545 13 199,987
Warrant Costs, Termination
Agreement 190,757
Warrant Costs, Issued with
Sale of Common Stock, for Cash 1,974,094 (1,974,094)
Options Granted for
Consulting Services 277,284
Credit Arising from Modification
of Option Terms 177,963
Amortization of Warrant Costs,
Securities Purchase Agreements -- -- -- -- 758,322
Beneficial Conversion feature,
May Debenture 55,413
Beneficial Conversion feature,
July Debentures 166,515
Net Loss, Nine Month Period
Ended September 30, 2002 -- -- - (7,967,225) -
------------ -------- ------------- -------------- ------------
Balance, September 30, 2002 455,523,990 $ 4,555 $ 57,087,433 $ (48,762,695) $(4,648,402)
============ ======== ============= ============== ============
See notes to consolidated condensed financial statements.
-13-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Nine Months Ended (February 20,
September 30, 1984) to
------------------------------ September 30,
2002 2001 2002
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (7,967,225) $ (7,751,553) $(48,762,695)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 728,817 370,771 2,169,606
Amortization of debt issue costs 21,224 11,159 815,783
Amortization of deferred interest cost on beneficial
conversion feature 92,108 -- 3,910,771
Amortization of discount on warrants 758,322 743,897 2,793,720
Amortization of discount on warrants - consulting services -- -- 230,249
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 21,863 -- 98,075
Compensation expense for options and warrants 646,004 392,975 5,035,479
Changes in operating assets and liabilities:
Increase in other current assets (45,452) (50,144) (138,608)
Increase in other assets (112,517) (35,267) (1,660,744)
Increase (decrease) in accounts payable and accrued liabilities (921,847) 453,232 928,059
------------ ------------ ------------
Total adjustments 1,188,522 1,886,623 14,942,890
------------ ------------ ------------
Net cash used by operating activities (6,778,703) (5,864,930) (33,819,805)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Acquisition of property and equipment (192,755) (1,425,272) (4,248,424)
------------ ------------ ------------
Net cash used by investing activities (192,755) (1,425,272) (4,248,424)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 -- 11,500,000
Proceeds from sale of securities, net of issuance costs 6,279,788 2,173,000 29,579,846
Payments under capital lease (109,528) (43,521) (277,130)
Payments on note payable (17,911) (15,896) (72,787)
Recovery of subscription receivable written off -- -- 19,000
------------ ------------ ------------
Net cash provided by financing activities 8,152,349 2,113,583 40,748,929
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,180,891 (5,176,619) 2,680,700
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 2,680,700 $ 786,014 $ 2,680,700
============ ============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during the nine months ended September30, 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 September 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 September
30, 2002 and results of operations for the three months and nine months
ended September 30, 2002 and 2001 and cash flows for the nine months
ended September 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 $49,000,000
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 nine months of 2002, the Company entered
into stock purchase agreements dated February 7, 2002, February 21,
2002, March 22, 2002, April 12, 2002, September 10, 2002 and
convertible Debenture agreements dated May 30, 2002, July 3, 2002,
and July 15, 2002 resulting in cash proceeds of $8,280,000.
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 to sell the Company's securities in an attempt
to meet its cash flow
-15-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
LIQUIDITY (Continued)
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 (see Note 5 - Subsequent Events).
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sales 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 nine issued U.S. patents, some covering the
composition of Product R and others covering various uses of
Product R. In addition, the Company has two issued Australian
patents covering the use of Product R. Additionally, the Company
has 14 pending U.S. patent applications and 17 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 $118,000 which has been paid. This research 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
November 2002, an additional payment of $40,000 was made to the
Weizmann Institute of Science and Yeda under its contract.
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. As of September 30, 2002, the Company
advanced $242,000 for such research, which has been accounted for
as research and development expense. In September 2002, the Company
entered into a contract with EnviroGene LLC, a U.S. affiliate of
the Selikoff Center in Israel, to conduct, evaluate and maintain 3
clinical studies. Under the terms of this agreement they will (1)
finalize all Israeli government and hospital approval documents,
(2) complete and organize the 3 clinical trials including
establishing a network of scientists to perform said studies/trials
and initiate recruitment of patients and (3) perform the
studies/trials and evaluate the results. Total costs incurred by
EnviroGene in connection with these clinical trials are expected to
be $1,551,000 through September 2003, of which $128,000 has been
paid during September 2002. Subsequently, the Company made a
payment of $203,000 in October 2002.
Subsequent to September 30, 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve month period.
These services include the monitoring and auditing of the clinical
sites, hospital support and laboratory testing.
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
-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)
5,000,000 shares of the Company's common stock for a period of
three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of September
30, 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 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 for options and
warrants 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 for
options and warrants 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
-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)
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 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 September 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
-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)
GALLANTAR AGREEMENT (Continued)
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 three years in the amount of
$25,000 each year have been charged to expense in the appropriate
years in the accompanying consolidated financial statements.
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 recognized 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
approximately 10 years. The Company will recognize the fair value
of the options as compensation costs on a pro-forma basis over
approximately 10 years (the term of the options).
OPTIONS GRANTED TO ADVISORY BOARD MEMBERS
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
-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 ADVISORY BOARD MEMBERS (Continued)
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.
In September 2002, the Company granted to Sidney Pestka, M.D., a
member of the Scientific Advisory Board, options to purchase
250,000 shares of common stock at an exercise price of $0.14 per
share, which options are exercisable 25% immediately, 25% on
December 18, 2002, 25% on March 18. 2003 and 25% on June 18, 2003
through September 17, 2010. The fair value of the options was
estimated to be $30,462 ($0.1218 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 127%; 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 September
30, 2002.
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 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 10, 2002, 25% on December 10, 2002
and 25% on March 10, 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 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 July 2002, the Company granted to Paul Bishop, a member of the
Board of Directors, options to purchase 238,356 shares of common
stock at an exercise price of $0.17 per share,
-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)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND CERTAIN
COMMITTEES (Continued)
which options 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 fair value of the these options was estimated to
be $38,509 ($0.1616 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 133%; a risk free interest rate of 4.38% 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 September 2002, the Company granted to Richard Kent, a member of
the Board of Directors, and member of various committees of the
Board options to purchase 241,096 shares of common stock at an
exercise price of $0.14 per share, which options are exercisable
25% immediately, 25% on December 24, 2002, 25% on March 24, 2003
and 25% on June 24 2003 through September 23, 2010. The fair value
of the these options was estimated to be $29,377 ($0.1218 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 127%; a risk free interest rate
of 4.38% 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 options granted to 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. Accordingly, the following pro-forma financial
information is presented to reflect amortization of the fair value
of the options.
As Reported for the Nine Months Pro-forma As
Ended September 30, 2002 Adjustment Adjusted
------------------------------ - ------------ ------------
Net loss $(7,967,225) $(1,725,185) $(9,692,410)
----------- ----------- -----------
Net loss per share $ (0.02) $ (0.00) $ (0.02)
----------- ----------- -----------
As Reported for the Nine Months Pro-forma As
Ended September 30, 2001 Adjustment Adjusted
------------------------------ - ------------ ------------
Net loss $(7,751,553) $(1,780,983) $(9,532,536)
----------- ----------- -----------
Net loss per share $ (0.02) $ (0.01) $ (0.03)
----------- ----------- -----------
There were no other options outstanding that would require pro
forma presentation.
-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)
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, 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 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 for options and warrants 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 for options and warrants during the quarter ended June 30,
2002. Through September 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
$5,156,000 for services rendered and reimbursement of expenses by
GloboMax and its subcontractors through September 30, 2002, of
which $49,000 and $935,000 was incurred during the three and nine
month periods, respectively.
-23-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT
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 six 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.
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 trials are being conducted in the United
States under the supervision of GloboMax, LLC. On April 12, 2002, the
Company successfully completed Phase 1 trials. Phase 2 trials are
pivotal clinical investigations designed to establish the efficacy and
safety of Product R. Currently, we do not have sufficient funds
available to pursue the Phase 2 clinical trials of Product R as a
topical treatment for genital warts caused by HPV infection.
-24-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. STATUS OF FDA FILINGS AND CLINICAL TRIALS (Continued)
In June 2002, the Israeli Ministry of Health approved the testing of
Product R in the following injectable studies, which began during
November 2002:
o Phase I/II study in patients needing salvage therapy for
AIDS. The Israeli Ministry of Health has approved clinical
trials for cachetic 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 cachetic patients with leukemia and
lymphoma. 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 on cachetic patients with hematopoietic
and lymphoid tumors, including acute lymphocytic leukemia,
Hodgkin's disease and non-Hodgkin's lymphoma.
o Phase I study in cachetic 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.
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 are expected to be $138,000,
of which a payment of $40,000 was made during July 2002.
NOTE 4. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection
with the issuance of several convertible debentures sold during the
years 1997 to 2000, which debentures have all been fully converted.
As of September 30, 2002, approximately 4.3 million warrants are
outstanding with expiration dates through 2009.
On May 30, 2002, the Company issued to certain investors, a 5%
convertible debenture at par in a private placement. Under the
terms of the 5% convertible debenture, 20% of the original issue is
convertible on the original date of issue at a price
-25-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
equal to $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 debenture, including interest
accrued thereon, is payable by the Company in shares of common
stock and mature two years from the date of issuance. The shares
issued upon conversion of the debenture cannot be sold or
transferred for a period of one year from the applicable vesting
date of the convertible portion of the debenture. 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, $11,000 has been amortized to
interest expense at September 30, 2002. On June 3, 2002, these
investors converted the first 20% ($100,000) into 909,091 shares of
common stock at a conversion price of $0.11 per share.
In July 2002, we sold to James F. Dicke II, a member of our Board
of Directors, and Peter Lunder, a member of our Business Advisory
Board, $1,000,000, and $500,000, respectively, principal amount of
our 5% convertible debentures at par in a private placement. The
principal balance of the debentures is convertible into shares of
common stock as follows: 20% on the original issue date of the
debentures and an additional 20% every six months thereafter. The
conversion price for each share of common stock will be equal to:
(i) for the first 20% of the principal balance of the debentures,
90% of the closing bid price quoted on the OTC Bulletin Board on
the trading day immediately preceding the original issue date; and
(ii) for the remaining principal balance of the debentures, the
higher of 90% of the average closing bid prices quoted on the OTC
Bulletin Board during the five trading days immediately preceding
the applicable conversion date, or $0.10. 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. The debentures are due in
July 2004 and are payable by the Company in shares of common stock.
Based on the terms for conversion associated with these debentures,
there was an intrinsic value associated with the beneficial
conversion feature of approximately $167,000 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, $66,000 has
been amortized to interest expense at September 30, 2002. On July
3, 2002, Mr. Dicke converted the first 20% of his convertible
debenture ($200,000) into 1,299,545 shares of common stock at a
conversion price of $0.1539 per share.
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 September 30,
-26-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS (Continued)
2002, under these securities purchase agreements, approximately 30
million warrants are outstanding with expiration dates through
2006.
During the quarter ended March 31, 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.
On September 10, 2002, we issued and sold an aggregate of
21,500,000 shares of our common stock pursuant to a Securities
Purchase Agreement with certain investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants
to purchase 16,125,000 shares of our common stock at an exercise
price of $0.25 per share, subject to adjustment, as described
below. In addition, pursuant to a placement agent agreement with H.
C. Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of
$150,500 cash and issued to HCW 1,032,000 shares of our common
stock. An adjustment provision in the warrants provides that 60
trading days following the original issue date of the warrants (the
"First Determination Date"), a certain number of warrants shall
become exercisable at $0.001. The number of shares for which the
warrants are exercisable at $0.001 per share is equal to the
positive difference, if any, between (i) $3,010,000 divided by the
volume weighted average price ("VWAP") of our common stock for the
60 trading days preceding the First Determination Date and (ii)
21,500,000. Upon 120 trading days following the original issue date
of the warrants (the "Second Determination Date"), a certain number
of remaining warrants shall become exercisable at $0.001. The
number of shares for which the Warrants are exercisable at $.001
per share is equal to the positive difference, if any, between (i)
$3,010,000 divided by the VWAP of our common stock for the 60
trading days preceding the Second Determination Date and (ii)
21,500,000. No adjustment will be made in the event that the VWAP
for the 60 trading day period preceding the applicable
determination date is $0.14 or greater.
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
-27-
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
PRIVATE EQUITY LINE OF CREDIT (Continued)
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. As of September 30,
2002, the Company has not drawn on the equity line of credit.
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.
NOTE 5. SUBSEQUENT EVENTS
RESIGNATION OF DIRECTORS
On November 4, 2002, Paul Bishop resigned from the Company's Board
of Directors. Under terms of his option agreement he is entitled to
exercise 119,178 of the original 238,356 shares granted to him
until November 3, 2005.
On November 4, 2002, James F. Dicke II resigned from the Company's
Board of Directors. Under terms of his option agreement, he is
entitled to exercise 600,000 of the original 800,000 shares granted
until November 3, 2005.
RESIGNATION OF ADVISORY COMMITTEE MEMBERS
On November 6, 2002, Jozef Straus resigned from the Company's
Business Advisory Board. Under terms of his option agreement he is
entitled to exercise 187,500 of the original 250,000 shares granted
until November 5, 2005.
REDUCTION IN PERSONNEL
To reduce operating costs the Company in November 2002 reduced its
personnel from 33 to 10 employees. This will allow the Company to
focus on the completion of clinical studies and to maintain the
critical functions and scientific personnel to manage the clinical
trials as well as to continue operations. The severance cost for
these employees is approximately $54,000 which will be expensed
during the fourth quarter of 2002.
-28-
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; and
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.
Currently, we do not have sufficient funds available to pursue the Phase 2
clinical trials of Product R as a topical treatment for genital warts caused by
the HPV infection.
-29-
In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following injectable clinical trials, which began during
November 2002:
o PHASE I/II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. The Israeli Ministry of Health has approved
these clinical trials for cachectic patients who have failed
highly active anti-retroviral therapy (HAART) and require
salvage therapy. We believe that injectable 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 CD4and 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 CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. 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 cachectic patients with hematopoietic
and lymphoid tumors, including acute lymphocytic leukemia,
Hodgkin's disease and non-Hodgkin's lymphoma.
o PHASE I STUDY IN CACHECTIC 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.
Although there can be no assurances, 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 twelve months to July 7,
2003. Total costs incurred in connection with this research are expected to be
$138,000, of which a payment of $40,000 was made during July 2002. Subsequently,
we made a payment of $40,000 in November 2002.
In September 2002, we entered into a contract with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the 3 clinical studies listed above. Under the terms of
this agreement, EnviroGene will (1) finalize all Israeli government and hospital
approval documents, (2) complete and organize the 3 clinical trials including
establishing a network of scientists to perform said study/trial and initiate
recruitment of patients and (3) perform the studies/trails and evaluate the
results. Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $128,000 has been paid
through September 30, 2002. Subsequently, we made a payment of $203,000 in
October 2002.
Subsequent to September 30, 2002, we entered into various agreements
supporting the clinical trials in Israel aggregating approximately $1,000,000 to
be paid over a twelve month period. These services include the monitoring and
auditing of the clinical sites, hospital support and laboratory testing.
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,
-30-
among other things, limiting our clinical trials for Product R. We currently
have the funds to begin the injectable clinical trials in Israel for Product R,
however, additional financing to continue or complete such clinical trials or
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.
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 nine months ended September 30, 2002, we incurred
losses of approximately $2,398,000 and approximately $7,967,000 vs.
approximately $2,811,000 and $7,752,000 for the three and nine months ended
September 30, 2001. Our current losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
decreased in the comparative three months but increased for the comparative nine
months amounting to approximately $979,000 and $3,518,000 during the three and
nine months ended September 30, 2002 vs. $1,141,000 and $3,284,000 for the three
and nine months ended September 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 $ 42,000 and $1,036,000 for the three
and nine months ended September 30, 2002 vs. $450,000 and
$1,528,000 for the three and nine months ended September 30,
2001);
o expenditures in connection with laboratory supplies
(approximately $67,000 and $275,000 for the three and nine
months ended September 30, 2002 vs. $86,000 and $277,000 for
the three months and nine months ended September 30, 2001);
o expenditures in connection with Product R research in Israel
of $259,000 and $386,000 for the three and nine months ended
September 30, 2002 vs. $88,000 and $205,000 for the three and
nine months ended September 30, 2001. For the three months
ended September 30, 2002 expenditures were $128,000 for the
Selikoff Center, $40,000 for the Weizmann Institute of Science
and $91,000 for Formatech, Inc. (contract sterile fill
services). For the nine months ended September 30, 2002
expenditures were $255,000 for the Selikoff Center, $40,000
for the Weizmann Institute of Science and $91,000 for
Formatech, Inc. For the three months ended September 30, 2001
expenditures were $58,000 for the Selikoff Center and $30,000
for the Weizmann Institute of Science. For the nine months
ended September 30, 2001 expenditures were $115,000 for the
Selikoff Center and $90,000 for the Weizmann Institute of
Science;
o additional expenditures for payroll, occupancy expenses and
related costs for the Yonkers, New York facility of
approximately $570,000, and $1,712,000 for the three and nine
months ended September 30, 2002 vs. $517,000 and $1,273,000
for the three and the nine months ended September 30, 2001.
Included in such expenditures are payroll and taxes, which
accounted for approximately $479,000 and $1,459,000 for the
three and nine months ended September 30, 2002 vs. $434,000
and $1,060,000 for the three and nine months ended September
30, 2001. The additional payroll was for additional employees
in the scientific areas, including a Vice President of Drug
Development and a Vice President of Quality Assurance; and
-31-
o expenditures in connection with production process validation
by outside consultants of $6,000 and $73,000 for the three and
nine months ended September 30, 2002 and $1,000 and $0 for the
three and nine months ended September 30, 2001.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was approximately $745,000 and $2,172,000 for the three and nine months ended
September 30, 2002 vs. $1,212,000 and $3,053,000 for the three and nine months
ended September 30, 2001. The decrease in general and administrative expenses
primarily resulted from:
o Decrease in professional fees of approximately $151,000 and
$501,000 for the three and nine months ended September 30,
2002 vs. $443,000 and $1,120,000 for the three and nine months
ended September 30, 2001. This decrease was primarily
attributable to certain legal fees for litigation settled in
2001 ($56,000 for the three and nine months ended September
30, 2002 vs. $338,000 and $642,000 for the three and nine
months ended September 30, 2001) (See "Legal Proceedings");
o Decrease in consulting fees of approximately $6,000 and
$34,000 for the three and nine months ended September 30, 2002
vs. $57,000 and $178,000 for the three and nine months ended
September 30, 2001 attributed to hiring a full time person for
Drug Development which was previously performed by a
consultant;
o Decrease in payroll and related expenses of approximately
$265,000 and $769,000 for the three and nine months ended
September 30, 2002 vs. $316,000 and $819,000 for the three and
nine months ended September 30, 2001. The decrease is
attributable to the accrual in September 2001 of a $100,000
bonus to Dr. Hirschman in accordance with his contract of
which $50,000 has been paid through September 30, 2002; and
o Decrease in recruiting expenses of approximately $0 and $7,000
for the three and nine months ended September 30, 2002 vs.
$71,000 and $122,000 for the three and nine months ended
September 30, 2001 for new employees placed during these
periods.
COMPENSATION EXPENSE FOR OPTIONS AND WARRANTS. Compensation expense was
approximately $30,000 and $646,000 for the three and nine months ended September
30, 2002 vs. $35,000 and $393,000 for the three and nine months ended September
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
expiration date of a non-employee's options ($177,000), grant of options to
members of our advisory boards ($278,000) and the issuance of warrants to an
outside consultant, Harbor View Group, Inc. ($191,000).
DEPRECIATION EXPENSE. Our increased losses during the three and nine
months ended September 30, 2002 are also due to increased depreciation expense
(approximately $259,000 and $729,000 for the three and nine months ended
September 30, 2002 vs. $142,000 and $371,000 for the three and nine months ended
September 30, 2001) due to the purchase of additional research and laboratory
equipment and leasehold improvements.
INTEREST INCOME (EXPENSE). Interest income for the three and nine
months ended September 30, 2002 was approximately $7,000 and $12,000 vs. $12,000
and $109,000 for the three and nine months ended September 30, 2001.
Our losses during the three and nine months ended September 30, 2002 are also
due to interest expense (approximately $391,000 and $914,000 for the three and
nine months ended September 30, 2002 vs.
-32-
$295,000 and $774,000 for the three and nine months ended September 30, 2001).
Included in the interest expense are:
o amortization of discount on certain warrants (approximately
$352,000 and $850,000 for the three and nine months ended
September 30, 2002 vs. $286,000 and $747,000 for the three and
nine months ended September 30, 2001); and
o amortization of loan costs and other interest expense
(approximately $38,000 and $63,000 for the three and nine
months ended September 30, 2002 vs. $9,000 and $27,000 for the
three and nine months ended September 30, 2001).
REVENUES. We had no revenues for the three and nine months ended
September 30, 2002 vs. $2,000 and $14,000 for the three and nine months ended
September 30, 2001. All sales during these periods were made to distributors
purchasing Product R for testing purposes.
LIQUIDITY
As September 30, 2002, we had current assets of approximately
$2,800,000 compared to approximately $ 1,563,000 at December 31, 2001. We had
total assets of approximately $6,377,000 and $5,449,000 at September 30, 2002
and December 31, 2001, respectively. The increase in current and total assets
was primarily attributable to cash on hand from financing activities used to
fund operating expenditures and property and equipment.
During the nine months ended September 30, 2002, we used cash of
approximately $6,779,000 for operating activities, as compared to approximately
$5,865,000 during the nine months ended September 30, 2001. During the nine
months ended September 30, 2002, our expenses included:
o approximately $2,228,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
o approximately $1,036,000 in consulting fees to GloboMax and
its subcontractors;
o approximately $510,000 for other professional and consulting
fees, including $56,000 for legal fees relating to the
settlement agreement (See "Legal Proceedings");
o approximately $425,000 for insurance costs;
o approximately $330,000 for rent and utilities for our Yonkers
facility;
o approximately $387,000 for expenditures for Product R research
in Israel; and
o approximately $275,000 for laboratory supplies.
During the nine months ended September 30, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $6,280,000, the issuance of a convertible debenture of
$2,000,000 and principal payments of $127,000 on equipment obligations. During
the nine months ended September 30, 2002, cash flow used by investing activities
was used for expenditures of approximately $193,000 for research and laboratory
equipment and facility improvements at our Yonkers, New York facility.
-33-
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. As of September 30, 2002, we have not
drawn down on the equity line of credit.
Advanced Viral has adopted a 401(k) plan that allows eligible employees
to contribute up to 20% of their salary, subject to annual limits. 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. This match was calculated to be 50% of the first 6% of
employee contributions.
To reduce operating costs, in November 2002 we reduced our personnel
from 33 to 10 employees. This will allow us to focus on the completion of our
clinical studies and maintain the critical functions and scientific personnel to
manage the clinical trials and continue operations. The severance cost for these
employees is approximately $54,000, which will be expensed during the fourth
quarter of 2002. As a result of the reduction in personnel, we reduced our
salary obligations to employees by approximately $1.4 million annually, which
amount was approximately 50% of our total annual salary obligations to
employees.
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 the earlier to occur of May 5, 2010 or three years
from date of termination of the optionee's service to the Company.
Shares Underlying
Option Holder Position Options Exercise Price
------------- -------- ----------------- --------------
Eli Wilner Secretary, Chairman of the Board, Member of Executive 1,400,000 $0.12
Management Committee and Audit and Compensation
Committee
James F. Dicke II Former Director (resigned 11/4//02) 800,000 $0.12 (3a)
David Seligman Director, Member of Executive Management Committee, 1,200,000 $0.12
Chairman of Audit and Compensation Committee
Nancy J. Van Sant (1) Director 600,000 $0.12
Roy S. Walzer Director, Member of Audit and Compensation Committee, 528,800 $0.295 (2a)
Investment Analysis Committee
Paul R. Bishop Former Director (resigned 11/4//02) 238,356 $0.17 (2b) (3b)
Richard S. Kent, Director, Member of Investment Analysis Committee and 241,096 $0.14 (2c)
MD Pharmaceutical Liaison Committee
Christopher Forbes Former Director (resigned 5/1/02) 150,000 $0.12
George P. Canellos, M.D. Member of Scientific Advisory Board 250,000 $0.12
Michael Harris, M.D. Member of Scientific Advisory Board 250,000 $0.12
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James D'Olimpio, M.D. Member of Scientific Advisory Board 250,000 $0.12
Ms. Carol Armenti Member of Scientific Advisory Board 250,000 $0.12
Howard Young, M.D. Member of Scientific Advisory Board 250,000 $0.12
Mark H. Kaplan, M.D Member of Scientific Advisory Board 250,000 $0.12 (2d)
Albert Reichmann Member of Business Advisory Board 250,000 $0.12
Jozef Straus, Ph.D., D.Sc. Former Member of Business Advisory Board (resigned 250,000 $0.12 (3c)
(Hon.) 11/6//02)
Peter Lunder Member of Business Advisory Board 250,000 $0.12
Sidney Pestka, MD Member of Scientific Advisory Board 250,000 $0.14 (2e)
-------
TOTAL 7,658,252
</Table>
- -------------------------
(1) Except as noted, all such stock options have anti-dilution rights and
generally are exercisable in 25% increments on a quarterly basis commencing
on May 6, 2002 through May 5, 2010.
(2) Such options are exercisable in 25% increments on a quarterly basis
commencing on: (a) June 10, 2002 through June 9, 2010; (b) July 29, 2002
through July 28, 2010; (c) September 24, 2002 through September 23, 2010;
(d) May 15, 2002; and (e) September 18, 2002 through September 17, 2010.
(3) (a) On November 4, 2002, James F. Dicke II resigned from the Board of
Directors. Under terms of his option agreement he is entitled to exercise
600,000 of the original 800,000 shares granted through November 3, 2005;
(b) On November 4, 2002, Paul Bishop resigned from the Board of Directors.
Under terms of his option agreement he is entitled to exercise 119,178 of
the original 238,356 shares granted through November 3, 2005; (c) On
November 6, 2002, Jozef Straus, PhD., DSc Hon. resigned from the Business
Advisory Board. Under terms of his option agreement he is entitled to
exercise 187,500 of the original 250,000 shares granted through November 5,
2005.
During May 2002, we granted to certain employees stock options to
acquire up to an aggregate of 274,000 shares of our common stock at an exercise
price of $0.17 per share. Such options shall expire upon the earlier to occur of
January 1, 2012 or 90 days after the option holder is no longer an employee of
Advanced Viral. All such stock options are exercisable in increments of 20% on
January 2 of each year of employment through the expiration date.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2001,
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 conclude 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.
-35-
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
----------- -------------- --------------- ---------------- ---------------- ---------------
>C>
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
Sep-2002 $3,010,000 common 21,500,000 shares $0.14 per share n/a
stock
Warrants 16,125,000 $0.25 per share (5) 9/9/07
- -------------------------
(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.
(5) An adjustment provision in the warrants provides that 60 trading days
following the original issue date of such warrants (the "FIRST
DETERMINATION DATE"), a certain number of warrants shall become exercisable
at $.001. The number of shares for which the warrants are exercisable at
$.001 per share is equal to the positive difference, if any, between (i)
$3,010,000 divided by the volume weighted average price ("VWAP") of our
common stock for the 60 trading days preceding the First Determination Date
and (ii) 21,500,000. Upon 120 trading days following the original issue
date of the warrants (the "SECOND DETERMINATION DATE"), a certain number of
remaining warrants shall become exercisable at $.001. The number of shares
for which the warrants are exercisable at $.001 per share is equal to the
positive difference, if any, between (i) $3,010,000 divided by the VWAP of
our common stock for the 60 trading days preceding the Second Determination
Date and (ii) 21,500,000. No adjustment will be made in the event that the
VWAP for the 60 trading day period preceding the applicable determination
date is $.14 or greater.
-36-
HARBOR VIEW GROUP, INC., ET AL. On November 8, 2000, pursuant to a
securities purchase agreement with Harbor View Group and various other
purchasers, we authorized the issuance and sale of up to 50,000,000 shares of
our common stock and warrants to purchase an aggregate of 30,000,000 shares of
common stock in a private offering transaction pursuant to Section 4(2) of the
Securities Act for a purchase price of $0.40 per share. As of March 31, 2001, we
had closed on the sale of 13,427,500 shares and warrants to purchase 8,056,500
shares for an aggregate purchase price of $5,371,000. Half of the warrants are
exercisable at $0.48 per share, and half of the warrants are exercisable at
$0.56 per share, until November 8, 2005. Each warrant contains anti-dilution
provisions that provide for the adjustment of warrant price and warrant shares.
As of the date hereof, none of the warrants had been exercised.
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 September 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 59 million shares of our common stock and
received proceeds of approximately $11.2 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
-37-
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.
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),
-38-
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.
o On September 10, 2002, we issued and sold an aggregate of
21,500,000 shares of our common stock pursuant to a Securities
Purchase Agreement with certain investors for total proceeds
of approximately $3,010,000, or $0.14 per share, along with
warrants to purchase 16,125,000 shares of our common stock at
an exercise price of $0.25 per share, subject to adjustment,
as described below. In addition, pursuant to a placement agent
agreement with H. C. Wainwright & Co., Inc. ("HCW"), we paid
HCW a placement fee of $150,500 cash and issued to HCW
1,032,000 shares of our common stock. An adjustment provision
in the Warrants provides that 60 trading days following the
original issue date of the Warrants (the "First Determination
Date"), a certain number of Warrants shall become exercisable
at $.001. The number of shares for which the Warrants are
exercisable at $.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the
volume weighted average price ("VWAP") of our common stock for
the 60 trading days preceding the First Determination Date and
(ii) 21,500,000. Upon 120 trading days following the original
issue date of the Warrants (the "Second Determination Date"),
a certain number of remaining Warrants shall become
exercisable at $.001. The number of shares for which the
Warrants are exercisable at $.001 per share is equal to the
positive difference, if any, between (i) $3,010,000 divided by
the VWAP of our common stock for the 60 trading days preceding
the Second Determination Date and (ii) 21,500,000. No
adjustment will be made in the event that the VWAP for the 60
trading day period preceding the applicable determination date
is $.14 or greater.
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 trading day immediately preceding the original issue
date (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, as joint tenants, $500,000 principal amount of our 5%
convertible debenture. On June 3, 2002, they converted the
first 20% of the debenture ($100,000) into 909,091 shares of
common stock at a conversion price of $0.11 per share.
-39-
o On July 3, 2002, we sold to James F. Dicke II, who was then 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% of the debenture ($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 November 14, 2002, in addition to the 455,523,990 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of 55.6 million shares of common stock at exercise prices
ranging from $0.12 to $0.36, of which 52.8 million are currently exercisable;
(ii) outstanding warrants to purchase an aggregate of 50.3 million shares of
common stock at prices ranging from $0.18 to $1.00, of which warrants to
purchase 45.3 million shares are currently exercisable; (iii) outstanding
convertible debentures representing approximately 18.7 million shares of common
stock assuming a conversion price of $0.10; and (iv) 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 $85.8 million,
and we would have approximately 747.3 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
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 December 2002 with our current liquid assets, if
none of our outstanding options or warrants are exercised or additional
securities sold. To reduce operating costs, in November 2002 we reduced our
personnel from 33 to 10 employees. 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
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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.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.
Our management, including the Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 15d-14. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion.
There have been no significant changes in internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the quarter ended September 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 Agreement dated May 1, 2002 (effective
September 2002) between Advanced Viral
Research Corp. and EnviroGene LLC.
10.2 Agreement dated October 8, 2002 between
Advanced Viral Research Corp. and Quintiles
Israel Ltd.
99.1 Certification by Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(2) Reports on Form 8-K.
In September 2002 we filed a Current Report on Form 8-K dated
September 10, 2002 relating to the completion of a $3 million
financing transaction.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: November 14, 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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CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alan Gallantar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanced Viral Research
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Alan Gallantar
- ----------------------------------------
Alan Gallantar, Chief Financial Officer
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CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Shalom Z. Hirschman, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanced Viral Research
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Shalom Z. Hirschman, M.d.
- --------------------------------------------------
Shalom Z. Hirschman, M.D., Chief Executive Officer
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