Filed pursuant to Rule 424(b)(3)
Registration No. 333-100403
PROSPECTUS
93,083,768 SHARES
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK
This prospectus may be used only in connection with the resale of
93,083,768 shares of common stock of Advanced Viral Research Corp. by the
selling shareholders listed on page 53 of this prospectus.
Our common stock is traded on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On October 25, 2002,
the high and low bid prices for the common stock on the Bulletin Board were
$0.091 and $0.088 per share, respectively.
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
---------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined that this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
---------------------
The date of this prospectus is October 30, 2002.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................ 1
SUMMARY FINANCIAL DATA............................................................................................ 4
RISK FACTORS...................................................................................................... 5
ABOUT THIS PROSPECTUS............................................................................................. 10
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE................................................................... 11
WHERE TO FIND MORE INFORMATION.................................................................................... 11
USE OF PROCEEDS................................................................................................... 11
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED SHAREHOLDER MATTERS................................. 12
CAPITALIZATION.................................................................................................... 13
SELECTED CONSOLIDATED FINANCIAL DATA.............................................................................. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................. 16
DESCRIPTION OF BUSINESS........................................................................................... 28
MANAGEMENT........................................................................................................ 44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................................... 54
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................. 54
SELLING SHAREHOLDERS.............................................................................................. 56
PLAN OF DISTRIBUTION.............................................................................................. 58
DESCRIPTION OF COMMON STOCK....................................................................................... 59
LEGAL MATTERS..................................................................................................... 59
EXPERTS........................................................................................................... 60
DISCLOSURE OF SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES....... 60
INDEX TO FINANCIAL STATEMENTS..................................................................................... F-1
PART II ......................................................................................................... II-1
INFORMATION NOT REQUIRED IN THE PROSPECTUS........................................................................ II-1
SIGNATURES........................................................................................................ II-11
You should rely only on the information provided in this prospectus.
We have authorized no one to provide you with different information. The
selling shareholders are not making an offer of these securities in any state
where the offer is not permitted. You should not assume that the information in
this prospectus or any prospectus supplement is accurate as of any date other
than the date on the front of the document.
PROSPECTUS SUMMARY
This summary highlights information about the offering and Advanced
Viral Research Corp. which we believe will be most important to you. However,
you should read the entire prospectus for a complete understanding of the
offering and our business.
THE COMPANY
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). In addition to Reticulose(R), which has been used
exclusively with our original formulation, we have developed a new or current
formulation which has been designated only by its generic name Product R. As
used in this prospectus, the term "Product R" refers to the current formulation
as well as the prior formulation of the pharmaceutical drug known as
Reticulose(R). Product R may be employed in the treatment of certain viral and
autoimmune diseases such as:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers,
leukemias and lymphomas; and
- Rheumatoid arthritis.
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. In September 2001, the FDA cleared the IND
application to begin Phase 1 clinical trials. Our Phase 1 study was performed
in the United States on human volunteers. In March 2002, we completed the Phase
1 trial 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 Phase 2
clinical trials of Product R as a topical treatment for genital warts caused by
the HPV infection.
In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following injectable clinical trials:
- Phase 1/Phase 2/ 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 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, the synergistic activity 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, we
believe that Product R may prove to be an important "enabler"
drug in the treatment of AIDS.
1
- Phase 1 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, who also
manifest symptoms of cachexia, that is, severe weight loss and
body wasting.
- Phase 1 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 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.
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/trials 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.
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, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to begin or complete
the planned topical Phase 2 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 prospectus.
THE OFFERING
Securities offered (1)..............93,083,768 shares of common stock issuable
upon the exercise or conversion of certain
warrants, options and convertible
debentures.
Percentage of our currently
outstanding securities
represented by offering.............17.0% assuming exercise or conversion of all
warrants, options and convertible debentures
for which shares are being registered in
this prospectus.
2
Common stock to be outstanding
after the offering (2)..............546,399,122 shares of common stock assuming
exercise or conversion of all warrants,
options and convertible debentures for
which shares are being registered in this
prospectus.
Use of proceeds.....................We will not receive any proceeds from the
sale of common stock by the selling
shareholders. We will receive the cash
proceeds, if any, from the exercise of
options and warrants held by the selling
shareholders.
Risk factors........................An investment in the shares a high degree
of risk. See "Risk Factors."
OTC Bulletin Board trading
symbol.............................."ADVR"
- ---------
(1) Includes an aggregate of (a) 16,125,000 shares underlying warrants to
purchase shares of our common stock at an exercise price equal to $.25
per share or as may be adjusted from time to time through September 9,
2007; (b) 56,007,632 shares of common stock underlying stock options
issued to certain directors, advisory board members, employees and
others which have exercise prices ranging from $.12 to $.36 per share;
and (c) up to 20,951,136 shares issuable upon the conversion of our 5%
convertible debentures held by certain selling shareholders, assuming
a conversion price of $.10 for the unconverted portion of the
debentures as of the date hereof.
(2) As of the date hereof. Does not include approximately 32.0 million
shares issuable upon exercise of certain outstanding options, warrants
and convertible debentures other than those held by the selling
shareholders in this prospectus.
3
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 has been derived from
our audited financial statements. The financial data as of and for the six
months ended June 30, 2002 is derived from our unaudited consolidated
financials included elsewhere in this prospectus. The selected consolidated
financial data set forth below should be read along with Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31
6 MONTHS ENDED ---------------------------------------------------------------------------------
JUNE 30, 2002 2001 2000 1999 1998 1997
-------------- ------------- ------------- ------------- ------------- -------------
Net revenues -- $ 17,601 $ 8,363 $ 10,953 $ 656 $ 2,278
Net loss $ (5,569,481) $ (11,715,568) $ (9,354,664) $ (6,174,262) $ (4,557,710) $ (4,141,729)
Net loss per common share $ (0.01) $ (0.03) $ (0.03) $ (0.02) $ (0.02) $ (0.02)
Weighted average # of shares 410,479,091 389,435,324 362,549,690 302,361,109 294,809,073 274,534,277
SUMMARY BALANCE SHEET DATA
DECEMBER 31
----------------------------------------------------------------------------
JUNE 30, 2002 2001 2000 1999 1998 1997
------------- ------------ ------------ ------------ ------------ ------------
Total Assets $ 4,124,865 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842
Long-term liabilities $ 420,622 $ 74,568 $ 163,013 $ 4,676,652 $ 1,625,299 $ 2,384,793
Stockholders' equity per share $ 0.01 $ 0.01 $ 0.02 $ 0.00 $ 0.00 $ 0.01
Shares outstanding at period end 431,692,444 403,296,863 380,214,618 303,472,035 296,422,907 277,962,574
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RISK FACTOR
Our securities are highly speculative. You should not purchase them
unless you can afford to lose your entire investment. You should consider very
carefully the following risk factors before you decide to purchase our
securities.
1. BECAUSE OUR SHARES ARE "PENNY STOCKS," YOU MAY BE UNABLE TO RESELL
THEM IN THE SECONDARY MARKET.
A "penny stock" is an equity security with a market price of less than
$5 per share which is not listed on the Nasdaq or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the
purchaser, provide them with a disclosure schedule explaining the penny stock
market and its risks, and receive the purchaser's written agreement to the
transaction prior to the sale. These requirements limit the ability of
broker/dealers to sell penny stocks. In addition, because of the extra
requirements, many broker/dealers are unwilling to sell penny stocks at all. As
a result, you maybe unable to resell the stock you buy in this offering and
could lose your entire investment.
2. THE EXERCISE OF OUR OUTSTANDING CONVERTIBLE SECURITIES OR DRAW DOWNS
UNDER OUR EQUITY LINE OF CREDIT COULD HAVE A SIGNIFICANT NEGATIVE
IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
As of the date hereof, in addition to the 455,523,990 shares of our
common stock currently outstanding:
- we have outstanding stock options to purchase an aggregate of
approximately 56.1 million shares of common stock at exercise
prices ranging from $0.12 to $0.36, of which approximately
52.3 million are currently exercisable;
- we have outstanding warrants to purchase an aggregate of
approximately 50.3 million shares of common stock at prices
ranging from $0.18 to $1.00, subject to adjustment, of which
warrants to purchase approximately 45.3 million shares are
currently exercisable. An adjustment provision in certain of
the outstanding warrants may cause the exercise price of such
warrants to be $.001 depending on the VWAP of the common
stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
- we have outstanding convertible debentures representing
approximately 18.7 million shares of common stock assuming a
conversion price of $0.10; and
- up to 166,666,667 shares may be offered and sold, from time
to time, by Cornell Capital Partners, LP, which may purchase
such shares pursuant to our equity line of credit agreement,
assuming a purchase price equal to $0.30 per share. The
closing bid price of our common stock on October 25, 2002 was
$ 0.088 per share. Under the terms of the equity line of
credit agreement, we can "put" up to an aggregate of $50
million of our common stock to Cornell Capital. The purchase
price per common share will vary based on the closing bid
prices of our common stock as reported on the Bulletin Board
during the valuation periods provided in the equity line of
credit agreement. For a full description of the equity line
of credit agreement, see "Business -- Equity Line of Credit
Agreement."
5
If all the foregoing securities and put rights were fully issued,
exercised and/or converted, as the case may be, there would be outstanding
approximately 747.3 million shares of common stock. The sale or availability
for sale of this number of shares of common stock in the public market could
depress the market price of the common stock. Additionally, the sale or
availability for sale of this number of shares may lessen the likelihood that
additional equity financing will be available to us, on favorable or
unfavorable terms.
3. THE OFFER AND SALE OF SHARES OF COMMON STOCK TO CORNELL CAPITAL UNDER
THE PRIVATE EQUITY LINE ARRANGEMENT MAY BE DEEMED NOT TO BE AN EXEMPT
SALE OF SECURITIES.
In a transaction like our sale of common stock to Cornell Capital, the
issuer of such securities generally may register the resale of securities prior
to their issuance if the issuer has completed a valid exempt sale of the
securities to the investor, and the investor is at market risk at the time of
filing of the registration statement. Because Cornell Capital might not be
deemed to have been at market risk prior to filing of the registration
statement, the transaction might not qualify for an exemption from the
registration requirements of the Securities Act of 1933. Accordingly, Cornell
Capital may have the right, for a period of up to one year from the date of its
purchase of common stock, to recover damages resulting from its purchase if
Cornell Capital is successful in its claim that the transaction was not a valid
private placement. These damages could total up to the amount put by Advanced
Viral and purchased by Cornell Capital under the equity line. If this occurs,
our business, results of operations and financial condition would be harmed. In
particular, such an occurrence would have a material adverse effect on our
liquidity position and our ability to meet short-term obligations and we might
not be able to secure alternative financing on favorable terms or at all.
4. IT IS UNLIKELY THAT WE WILL BE ABLE TO PAY ALL THE COSTS ASSOCIATED
WITH THE FULL RANGE OF TESTING AND CLINICAL TRIALS OF PRODUCT R
REQUIRED BY THE FDA WITHOUT AN IMPROVEMENT IN OUR LIQUIDITY, WHICH HAS
CONSTRAINED OUR ABILITY TO FINANCE NECESSARY RESEARCH, DEVELOPMENT AND
OTHER OPERATING EXPENSES AS NEEDED.
The independent certified public accountants' report on our
consolidated financial statements for the 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. We may not be able to raise
the funds we currently need to begin or continue the planned Phase 2 clinical
trials for our current IND for the topical therapy of genital warts in the
United States. We currently have the funds to begin the Phase 1 clinical trials
in Israel, however, there can be no assurances that we will continue or
complete such clinical trials or 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.
6
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 convertible securities are exercised or additional
securities sold. To reduce operating costs, we are considering, among other
things, reducing the number of 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 convertible
securities are exercised or additional securities sold. Any proceeds received
from the exercise of outstanding convertible securities will contribute to
working capital and increase our budget for research and development and
clinical trials and testing, assuming Product R receives subsequent approvals
and prospects for sales increase to justify such increased levels of operation.
The recent prevailing market price for shares of common stock has from
time to time been below the exercise prices of certain of our outstanding
convertible securities. As such, recent trading levels may not be sustained nor
may any additional convertible securities be exercised. If none of the
outstanding convertible securities 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 further our research and development activities. We are currently
seeking debt financing, licensing agreements, joint ventures and other sources
of financing, but the likelihood of obtaining such financing on favorable terms
is uncertain. Management is not certain whether, at present, debt or equity
financing will be readily obtainable or whether it will be on favorable terms.
Because of the large uncertainties involved in the FDA approval
process for commercial drug use on humans, it is possible that we may never be
able to sell Product R commercially.
5. THE EXERCISE OF OUR EQUITY LINE OF CREDIT MAY MAKE IT DIFFICULT TO
EVALUATE A SHAREHOLDER'S EQUITY POSITION IN ADVANCED VIRAL.
The number of shares of our common stock which is issuable upon
exercise from time to time under our equity line of credit will fluctuate based
on the average of the three lowest reported closing bid prices of our common
stock over a 25 trading day period ending on the advance notice date.
Therefore, the percentage of our common stock held by a shareholder on any
given day may be substantially different from another day depending on our
closing bid prices, as the number of shares of our common stock issuable
pursuant to our equity line of credit may vary significantly from day to day.
We expect to use the net proceeds from any draw downs under the equity
line of credit agreement with Cornell Capital for general corporate purposes.
We will have significant flexibility in applying the net proceeds. You will not
have the opportunity to evaluate the economic, financial or other information
on which we base our decisions on how to use the net proceeds. If we fail to
apply the net proceeds effectively, our business could be negatively affected.
7
6. IF WE DO NOT OBTAIN THE FDA'S APPROVAL TO CONDUCT CLINICAL TESTS OF
PRODUCT R IN THE UNITED STATES, WE WILL NOT BE ABLE TO COMPLETE ITS
DEVELOPMENT AND MAY NOT BE ABLE TO SELL IT ANYWHERE.
Product R is the only product we are developing, We will not be able
to sell it in the United States unless we submit, and the FDA approves, a new
drug application, or NDA. We must conduct clinical trials of Product R in
humans before we submit an NDA. On July 30, 2001, we submitted an IND
application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin
Phase 1 clinical trials. In March 2002, we completed a Phase 1 trial 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. On April
12, 2002, we began the process of recruiting clinical sites to perform Phase 2
clinical trials with Product R in patients in the U.S. with genital warts. We
currently do not have the financial resources to pursue Phase 2 of the IND and
have made no material progress to date. Furthermore, to date we have not
obtained insurance coverage necessary to commence Phase 2 clinical trials.
In June 2002, Product R was approved by the Israeli Ministry of Health
for Phase 1/Phase 2 clinical trials in patients who have failed highly active
anti-retroviral therapy (HAART) and require salvage therapy. Also, the supreme
medical ethics committee (Helsinki Committee) of the Israeli Ministry of Health
approved a Phase 1 clinical trial to study the treatment with injectable
Product R of patients with hematopoietic and lymphoid tumors, including acute
lymphocytic leukemia, Hodgkin's disease and non-Hodgkin's lymphoma, who also
manifest symptoms of cachexia, that is, severe weight loss and body wasting.
Finally, in June 2002, the Israeli Ministry of Health approved Product R for a
Phase 1 clinical study for the treatment of body wasting (cachexia) in patients
with solid tumors. We anticipate that these trials will facilitate the IND
application process for Product R with the FDA in the United States.
7. IT IS POSSIBLE THAT CLINICAL TRIALS WILL NOT PROVE THAT PRODUCT R IS
SAFE OR EFFECTIVE IN TREATING VIRUSES OF ANY KIND, IN WHICH CASE WE
WON'T BE ABLE TO SUBMIT AN NDA AND WE WON'T BE ABLE TO SELL PRODUCT R
IN THE UNITED STATES.
We haven't been able to sell Product R outside the United States
because we don't have a free sales certificate for Product R. A free sales
certificate is a document issued by the country in which a pharmaceutical
product is manufactured, certifying that the country permits the "free sale" of
the product in that country. The Bahamas, where our manufacturing facility is
located, has no procedure in place to issue a free sales certificate for any
therapeutic drug, including Product R. Most countries require that a
pharmaceutical product be at least registered and certified for free sale in
the country in which it is manufactured before allowing the registration of the
product in that country. Because we are unable to obtain a certificate from the
Bahamas, we are not able to meet registration requirements in the countries
that require the certificate, and will be unable to sell Product R in those
countries.
8. THROUGH SEPTEMBER 9, 2003, WE HAVE GRANTED A RIGHT OF FIRST REFUSAL TO
CERTAIN INVESTORS TO PARTICIPATE IN FINANCINGS.
Through September 9, 2003, we must provide to each of the purchasers of
our securities in our September 2002 financing, written notice of and a five-day
right of first refusal to participate in any proposed financing we are
considering after September 10, 2002. This right of first refusal is
inapplicable to our issuance of securities in connection with (i) strategic
business relationships, including joint ventures, license agreements so long as
such issuances are not primarily for the purpose of raising capital; or (ii)
convertible securities outstanding as of September 10, 2002. Our obligations
under the right of first refusal could impair our ability to raise capital.
8
9. WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, HAVE NO PRODUCT REVENUE,
AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE.
Although we were formed in 1985, we are still in the development
stage. From inception through June 30, 2002, we had an accumulated deficit of
$46,364,951. We expect that our deficit will continue to increase. The only
product revenues we have ever had are insignificant amounts related to our
distribution of Product R for testing purposes. We do not currently have any
source of product revenue. At this time, we have no basis to believe that we
will ever generate operating revenues from the sale of Product R.
10. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT. IF WE ARE UNABLE TO
PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED.
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation
or other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and
could result in substantial costs and diversion of our efforts. See "Legal
Proceedings."
We have nine issued U.S. patents, some covering the composition of
Product R and others covering various uses of the Product R. In addition, we
have one issued Australian patent covering a use of Product R. Additionally, we
have 13 pending U.S. patent applications and 21 pending foreign patent
applications. As patent applications in the United States are maintained in
secrecy until patents issue and as publication of discoveries in the scientific
or patent literature often lag behind the actual discoveries, we cannot be
certain that we were the first to make the inventions covered by each of our
pending patent applications or that we were the first to file patent
applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection
with their work with us. We cannot be sure that confidentiality will be
maintained or disclosure prevented by these agreements or that our proprietary
information or intellectual property will be protected thereby or that others
will not independently develop substantially equivalent proprietary information
or intellectual property.
9
The pharmaceutical industry is highly competitive and patents have
been applied for by, and issued to, other parties relating to products
competitive with Product R. Therefore, Product R and any other drug candidates
may give rise to claims that they infringe the patents or proprietary rights of
other parties existing now and in the future. Furthermore, to the extent that
we or our consultants or research collaborators use intellectual property owned
by others in work performed for us, disputes may also arise as to the rights in
such intellectual property or in related or resulting know-how and inventions.
An adverse claim could subject us to significant liabilities to such other
parties and/or require disputed rights to be licensed from such other parties.
We cannot be sure that any license required under any such patents or
proprietary rights would be made available on terms acceptable to us, if at
all. If we do not obtain such licenses, we may encounter delays in product
market introductions, or may find that the development, manufacture or sale of
products requiring such licenses may be precluded. In addition, we could incur
substantial costs in defending ourselves in legal proceedings instituted before
the PTO or in a suit brought against it by a private party based on such
patents or proprietary rights, or in suits by us asserting our patent or
proprietary rights against another party, even if the outcome is not adverse to
us. There are extensions available under the Patent Act if the delay in
prosecution of the patent application results from a delay in the PTO's
handling of any interference or appeal involving the application. We have not
conducted any searches or made any independent investigations of the existence
of any patents or proprietary rights of other parties
11. OUR BUSINESS COULD BE HARMED IF WE LOSE THE SERVICES OF THE KEY
PERSONNEL UPON WHOM WE DEPEND.
Advanced Viral is currently wholly dependent upon the personal efforts
and abilities of Shalom Z. Hirschman, MD, our President, Chief Executive
Officer and member of the Board of Directors. The loss or unavailability to us
of the services of Dr. Hirschman could have a material negative impact on our
business prospects and any potential earning capacity, and, therefore, we have
obtained "key-man" insurance on the life of Dr. Hirschman in the amount of $2
million. If our level of operations significantly increases, the business may
depend upon our abilities to attract and hire additional management and staff
employees. It is possible that we will be unable to secure such additional
management and staff when necessary.
12. THE VOTING CONTROL HELD BY PRESENT MANAGEMENT COULD SIGNIFICANTLY
IMPACT OUR BUSINESS.
As of the date hereof, our current officers and directors beneficially
owned approximately 51.5 million shares of our common stock, or approximately
10.2% of the shares of common stock deemed outstanding on such date for the
purposes of the percentage calculation, including shares underlying our
convertible securities. As there are no cumulative voting rights, current
management, by virtue of their stock ownership, can be expected to influence
substantially the election of our board of directors and thereby continue to
impact substantially our business, affairs and policies.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission (SEC) to register the resale of the
shares issued or issuable to the selling shareholders as provided in this
prospectus. As permitted by the SEC's rules, this prospectus does not contain
all of the information you can find in the registration statement or the
exhibits to the registration statement. This prospectus summarizes some of the
documents that are exhibits to the registration statement, and you should refer
to the exhibits for a more complete description of the matters covered by those
documents.
10
We have not authorized anyone to give any information regarding the
offering of the shares that is different from what is contained in this
prospectus. This prospectus is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer of solicitation. You should not
assume that the information contained in this prospectus is accurate as of any
time after the date of this prospectus, and neither the mailing of this
prospectus to our shareholders nor the issuance of the shares should create any
implication to the contrary.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Words such as "expects," "may," "will," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements. These forward-looking statements are
subject to important factors, disclosed in this prospectus, which could cause
actual results to differ materially from such expectations, including those
factors discussed in "Risk Factors."
We will not publicly update or revise any forward-looking statements,
whether because of new information, future events or otherwise. In light of
these risks, uncertainties, and assumptions, the forward-looking events
discussed in the prospectus might not occur.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and special reports, as well as registration
and proxy statements and other information, with the Securities and Exchange
Commission. These documents may be read and copied at the Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, or at the SEC's regional
offices located at 233 Broadway, New York, New York 10279, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, copies of these reports and other information may be obtained at
prescribed rates from the Public Reference Section of the SEC, 450 Fifth
Street, N.W., Washington, D.C. 20549. Our SEC file number is 33-2262-A. You can
get further information about the SEC's Public Reference Room by calling
1-800-SEC-0330. The SEC also maintains a Web site at http://www.sec.gov that
contains reports, registration statements and other information regarding
registrants like us that file electronically with the SEC.
You can contact us at: Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
(914) 376-7383
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling shareholders. We will receive the cash proceeds, if any, from the
exercise of any of the stock options held by the selling shareholders.
11
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for the quarterly periods listed below. The high and low bid prices
for the periods indicated reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
Low Bid High Bid
------- --------
First Quarter 2000...........................................................$0.185 $1.40
Second Quarter 2000..........................................................$0.33 $0.61
Third Quarter 2000...........................................................$0.445 $0.648
Fourth Quarter 2000..........................................................$0.26 $0.45
First Quarter 2001...........................................................$0.285 $0.41
Second Quarter 2001..........................................................$0.265 $0.495
Third Quarter 2001...........................................................$0.171 $0.395
Fourth Quarter 2001..........................................................$0.179 $0.40
First Quarter 2002...........................................................$0.158 $0.285
Second Quarter 2002..........................................................$0.096 $0.300
Third Quarter 2002...........................................................$0.112 $0.22
Fourth Quarter through October 25, 2002......................................$0.086 $0.119
STOCKHOLDERS
The approximate number of holders of record of our common stock as of
the date hereof is approximately 3,028 inclusive of those brokerage firms
and/or clearing houses holding shares of common stock for their clientele (with
each such brokerage house and/or clearing house being considered as one
holder).
DIVIDEND POLICY
We have not declared or paid any dividends on our shares of common
stock. We intend to retain future earnings, if any, that may be generated from
our operations to finance our future operations and expansion and do not plan
for the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend on our
results of operations and financial position and such other factors as our
board of directors in its discretion deems relevant.
12
CAPITALIZATION
The following table sets forth our capitalization at June 30, 2002: (1)
on a historical basis and (2) as adjusted to give effect to the sale of
93,083,768 shares of common stock which are issuable to certain investors upon
the exercise of certain warrants, options or upon the conversion of certain
convertible debentures. See "Use of Proceeds." This table should be read in
conjunction with our financial statements and related notes, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other financial data appearing elsewhere in this prospectus.
ACTUAL AS OF PRO FORMA
STOCKHOLDERS' EQUITY: JUNE 30, 2002 AS ADJUSTED*
- --------------------- ------------- ------------
Common stock, $0.00001 par value; 1,000,000,000 shares
authorized; 432,991,989 shares outstanding Actual
as of June 30, 2002; 546,399,122 shares
outstanding Pro Forma as Adjusted $ 4,317 $ 5,464
Additional paid-in-capital 51,875,800 74,866,224
Deficit accumulated during the development stage (46,364,951) (46,364,951)
Discount on Warrants (2,949,016) (2,949,016)
Total Stockholders' Equity: $ 2,566,150 $ 25,557,721
============ ============
- ---------
* Does not reflect approximately 32.0 million shares issuable upon the exercise
or conversion of certain options and warrants outstanding as of October 25,
2002.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2001, 2000, 1999, 1998 and 1997 has been derived from
our audited financial statements. The financial data as of and for the six
months ended June 30, 2002 are derived from our unaudited consolidated
financials included elsewhere in this prospectus. The selected consolidated
financial data set forth below should be read along with Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
SELECTED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31
6 MONTHS ENDED ------------------------------------------------------------------------
JUNE 30, 2002 2001 2000 1999 1998 1997
-------------- ------------ ----------- ----------- ----------- -----------
Revenues -- $ 17,601 $ 8,363 $ 10,953 $ 656 $ 2,278
------------ ------------ ----------- ----------- ----------- -----------
Costs and Expenses:
Research and development $ 2,539,266 5,150,869 3,192,551 1,948,937 1,659,456 817,603
General and administrative(1) 1,426,755 4,266,333 2,575,042 1,764,061 1,399,427 1,636,936
Compensation expense for options
and warrants(1) 615,542 726,404 1,948,427 277,144 21,000 44,500
Depreciation 469,735 532,264 362,392 230,785 110,120 26,288
------------ ------------ ----------- ----------- ----------- -----------
5,051,298 10,675,870 8,078,412 4,220,927 3,190,003 2,525,327
------------ ------------ ----------- ----------- ----------- -----------
Loss from Operations (5,051,298) (10,658,269) (8,070,049) (4,209,974) (3,189,347) (2,523,049)
------------ ------------ ----------- ----------- ----------- -----------
Other Income (Expense):
Interest income 4,823 114,057 162,077 42,744 102,043 111,845
Other income -- -- -- -- 293 7,800
Interest expense (523,006) (868,856) (1,446,692) (2,007,032) (1,470,699) (1,738,325)
Severance expense - former directors -- (302,500) -- -- -- --
------------ ------------ ----------- ----------- ----------- -----------
(518,183) (1,057,299) (1,284,615) (1,964,288) (1,368,363) (1,618,680)
------------ ------------ ----------- ----------- ----------- -----------
Net Loss (5,569,481) $(11,715,568) $(9,354,664) $(6,174,262) $(4,557,710) $(4,141,729)
============ ============ =========== =========== =========== ===========
Net Loss Per Share of Common Stock -
Basic and Diluted $ (0.01) $ (0.03) $ (0.03) $ (0.02) $ (0.02) $ (0.02)
============ ============ =========== =========== =========== ===========
Reclassification(1) $ -- $ 35,000 $ 46,500 $ 6,700 $ 21,000 $ 44,500
============ ============ =========== =========== =========== ===========
(1) Represents reclassification of compensation expense from general and
administrative to compensation expense for options and warrants.
14
SELECTED BALANCE SHEET DATA
DECEMBER 31
-----------------------------------------------------------------------------
JUNE 30, 2002 2001 2000 1999 1998 1997
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 310,067 $ 1,499,809 $ 5,962,633 $ 836,876 $ 924,420 $ 236,059
Investments -- -- -- -- 821,047 2,984,902
Inventory -- -- 19,729 19,729 19,729 19,729
Other current assets 146,803 63,162 34,804 59,734 29,818 20,240
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 456,870 1,562,971 6,017,166 916,339 1,795,014 3,260,930
Property and Equipment, Net 2,718,739 3,000,583 1,944,199 1,375,923 1,049,593 485,661
Other Assets 949,256 885,237 847,349 569,312 460,346 443,251
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 4,124,865 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842
============= ============= ------------- ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued
liabilities $ 979,143 $ 1,843,706 $ 902,961 $ 728,872 $ 279,024 $ 375,606
Current portion of capital lease
obligation 132,956 64,197 58,690 50,315 $ 38,335 --
Current portion of note payable 25,994 24,246 21,517 19,095 -- --
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 1,138,093 1,932,149 983,168 798,282 317,359 375,606
------------- ------------- ------------- ------------- ------------- -------------
Long-Term Debt:
Convertible debentures, net 361,224 -- -- 4,446,629 1,457,919 2,384,793
Capital lease obligation - long
term portion 42,738 42,370 106,567 152,059 167,380 --
Note payable - long term portion 16,660 32,198 56,446 77,964 -- --
------------- ------------- ------------- ------------- ------------- -------------
Total long-term debt 420,622 74,568 163,013 4,676,652 1,625,299 2,384,793
------------- ------------- ------------- ------------- ------------- -------------
Deposit on Securities Purchase
Agreement -- -- -- -- 600,000 --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000
shares of $.00001 par value
authorized 4,317 4,033 3,802 3,034 2,964 2,779
Additional paid-in capital 51,875,800 47,666,141 39,969,373 17,537,333 14,325,076 10,512,767
Subscription receivable -- -- -- -- -- (19,000)
Deficit accumulated during
development Stage (46,364,951) (40,795,470) (29,079,902) (19,725,238) (13,550,976) (8,993,266)
Deferred compensation cost (14,769) (73,837)
Discount on warrants (2,949,016) (3,432,630) (3,230,740) (428,489) -- --
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders' equity
(deficiency) 2,566,150 3,442,074 7,662,533 (2,613,360) 762,295 1,429,443
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity
(deficiency) $ 4,124,865 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953 $ 4,189,842
============= ============= ============= ============= ============= =============
Shares outstanding at period
end 431,692,444 403,296,863 380,214,618 303,472,035 296,422,907 277,962,574
------------- ------------- ------------- ------------- ------------- -------------
- ---------
See notes to consolidated financial statements.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the results of operations and the
financial condition of Advanced Viral should be read in conjunction with
Advanced Viral's Consolidated Financial Statements and Notes thereto included
elsewhere in this prospectus.
OVERVIEW
Since our inception in July 1985, Advanced Viral has been engaged
primarily in research and development activities. We have not yet generated
significant operating revenues, and as of June 30, 2002 we had incurred a
cumulative net loss of approximately $46,364,951. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Product R. All of our research and
development efforts have been devoted to the development of Product R.
We have commenced clinical trials for regulatory approval of Product R
in 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. We
contracted with GloboMax LLC of Hanover, Maryland to assist us in our
preparation and filing of the IND with the FDA, and to otherwise assist us
through the FDA process with the objective of obtaining full approval for the
manufacture and commercial distribution of Product R in the United States. In
the IND we included, among other things:
- information on chemistry, laboratory and animal controls;
- safety information for the initial study proposed to be
conducted on humans; and
- information assuring the identification, quality and purity
of Product R and a description of the physical, chemical and
microbiological characteristics of Product R.
In September 2001, the FDA cleared the IND application to begin Phase
1 clinical trials. In March 2002, Advanced Viral completed a Phase 1 trial 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 trials. On
April 12, 2002, we began the process of recruiting clinical sites to perform
Phase 2 clinical trials for Product R in patients in the U.S. with genital
warts. We currently do not have sufficient resources to continue or complete
the Phase 2 trials.
In June 2002, Product R was approved by the Israeli Ministry of Health
for Phase 1/Phase 2 clinical trials in cachectic patients who have failed highly
active anti-retroviral therapy (HAART). Also, the supreme medical ethics
committee (Helsinki Committee) of the Israeli Ministry of Health approved a
Phase 1 clinical trial to study 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. Finally, in
June 2002, the Israeli Ministry of Health approved Product R for a Phase 1
clinical study for the treatment of body wasting (cachexia) in patients with
solid tumors. We anticipate that these trials will facilitate the IND
application process for Product R with the FDA in the United States.
16
Conducting the human clinical trials of Product R pursuant to the
approved IND and in Israel will require significant cash expenditures.
Furthermore, Product R may never be approved for commercial distribution by any
country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the
foreseeable future.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
For the three and six months ended June 30, 2002, we incurred losses
of approximately $2,696,000 and approximately $5,569,000 vs. approximately
$2,199,000 and $4,941,000 for the three and six months ended June 30, 2001. Our
increased losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. We had increased research and
development expenses (approximately $ 878,000 and $2,539,000 during the three
and six months ended June 30, 2002 vs. $904,000 and $2,143,000 for the three
and six months ended June 30, 2001). Included in the research and development
expenses are:
- consulting expenses payable to GloboMax LLC, a firm assisting
us with the preparation and filing with the FDA of the IND
for Product R (approximately $ 85,000 and $994,000 for the
three and six months ended June 30, 2002 vs. $355,000 and
$1,079,000 for the three and six months ended June 31, 2001);
- expenditures in connection with laboratory supplies
(approximately $72,000 and $208,000 for the three and six
months ended June 30, 2002 vs. $98,000 and $191,000 for the
three months ended June 30, 2001);
- expenditures in connection with Product R research in Israel
of $87,000 and $127,000 for the three and six months ended
June 30, 2002 vs. $62,000 and $117,000 for the three and six
months ended June 30, 2001. All expenditures in 2002 were to
the Selikoff Center. For the three months ended June 30, 2001
expenditures were $32,000 for the Selikoff Center and $30,000
for the Weizmann Institute of Science. For the six months
ended June 30, 2001 expenditures were $57,000 for the
Selikoff Center and $60,000 for the Weizmann Institute of
Science
- additional expenditures for payroll, occupancy expenses and
related costs for the Yonkers, New York facility of
approximately $577,000, and $1,142,000 for the three and six
months ended June 30, 2002 vs. $388,000 and $756,000 for the
three and six months ended June 30, 2001. Included in such
expenditures are payroll and taxes, which accounted for
approximately $488,000 and $980,000 for the three and six
months ended June 30, 2002 vs. $317,000 and 626,000 for the
three and six months ended June 30, 2001. We have added staff
in the scientific areas, including a Vice President of Drug
Development and a Vice President of Quality Assurance; and
- expenditures in connection with production process validation
by outside consultants of $56,000 and $67,000 for the three
and six months ended June 30, 2002 and $1,000 and $0 for the
three and six months ended June 30, 2001;
17
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was approximately $698,000 and $1,427,000 for the three and six months ended
June 30, 2002 vs. $956,000 and $1,840,000 for the three and six months ended
June 30, 2001. The decrease in general and administrative expenses primarily
resulted from:
- Decrease in professional fees of approximately $152,000 and
$350,000 for the three and six months ended June 30, 2002 vs.
$331,000 and $ 676,000 for the three and six months ended
June 30, 2001 primarily attributable to certain legal fees
for settlement negotiations which concluded in 2001 ($56,000
for the three and six months ended June 30, 2002 vs. $137,000
and $ 314,000 for the three and six months ended June 30,
2001) (See "Legal Proceedings").
COMPENSATION EXPENSE FOR OPTIONS AND WARRANTS. Compensation expense
was approximately $616,000 for the three and six months ended June 30, 2002 vs.
$0 and $358,000 for the three and six months ended June 30, 2001. These amounts
are the results of the calculation of the fair value of options, using the
Black Scholes Pricing Model, resulting from extending the exercise date of a
non-employee's options ($177,000), grant of options to members of our advisory
boards ($247,000) and the issuance of warrants to an outside consultant, Harbor
View Group, Inc. ($191,000).
DEPRECIATION EXPENSE. Our increased losses during the three and six
months ended June 30, 2002 are also due to increased depreciation expense
(approximately $236,000 and $470,000 for the three and six months ended June
30, 2002 vs. $104,000 and $229,000 for the three and six months ended June 30,
2001) due to the purchase of additional research and laboratory equipment and
leasehold improvements.
INTEREST INCOME (EXPENSE). Interest income for the three and six
months ended June 30, 2002 was approximately $3,000 and $5,000 for the three
and six months ended June 30, 2002 vs. $28,000 and $97,000 for the three and
six months ended June 30, 2001. Our losses during the three and six months
ended June 30, 2002 are also due to interest expense (approximately $270;000
and $523,000 for the three and six months ended June 30, 2002 vs. $272,000 and
$479,000 for the three and six months ended June 30, 2001). Included in the
interest expense are:
- amortization of discount on certain warrants (approximately
$257,000 and $498,000 for the three and six months ended June
30, 2002 vs. $263,000 and $461,000 for the three and six
months ended June 30, 2001); and
- amortization of loan costs and other interest expense
(approximately $13,000 and $25,000 for the three and six
months ended June 30, 2002 vs. $9,000 and $18,000 for the
three and six months ended June 30, 2001).
REVENUES. We had no sales for the three and six months ended June 30,
2002 vs. $9,000 and $11,000 for the three and six months ended June 30, 2001.
All sales during these periods were made to distributors purchasing Product R
for testing purposes.
18
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
During the years ended December 31, 2001, 2000 and 1999 we incurred
losses of approximately $11,716,000, $9,355,000 and $6,174,000, respectively.
Our increased losses for the years ended December 31, 2001, 2000 and 1999 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $4,301,000, $2,622,000 and $1,831,000 in 2001, 2000
and 1999, respectively. General and administrative expenses increased by
approximately $1,679,000 in 2001 vs. 2000 and increased by $791,000 in 2000
vs.1999, resulting primarily from:
- increased payroll and related expenses (approximately
$1,171,000 in 2001 vs. $717,000 in 2000 and $614,000 in 1999)
primarily attributable to increased employee and officer
salaries and the addition of two vice presidents for drug
development and quality assurance in 2001;
- increased insurance costs (approximately $421,000 in 2001 vs.
$308,000 in 2000 and $240,000 in 1999) representing increased
premiums for employee medical insurance and additional
corporate liability insurance including directors and
officers liability coverage; and
- increased professional fees from 2001 to 2000 (approximately
$1,431,000 in 2001 vs. $385,000 in 2000), compared to
$425,000 1999. The increase is primarily attributed to
certain legal proceedings the cost of which was approximately
$953,000. See "Legal Proceedings"
COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS.
Compensation expense was approximately $691,000 in 2001, compared to $1,902,000
and $210,000 in 2000 and 1999, respectively. These amounts are the result of
the calculation of the fair value of options, using the Black Scholes Pricing
Model, resulting from extending the exercise date of various non-employee
options outstanding.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $5,151,000 in 2001, compared to $3,193,000 and $1,949,000 in 2000
and 1999, respectively. The increase from 2000 to 2001 resulted primarily from
research expenses (approximately $1,417,000) relating to the GloboMax agreement
in connection with the preparation of our first IND filing and approximately
$233,000 for research expenditures relating to research and testing of Product
R in Israel. The increase from 1999 to 2000 resulted primarily from research
expenses related to the GloboMax agreement of approximately $1,250,000. The
approximate costs of rent, personnel, operating costs and laboratory supplies
associated with the Yonkers laboratory for the years ended 2001, 2000 and 1999
were charged to research and development expense as follows: $2,230,000,
$1,696,000 and $1,325,000.
DEPRECIATION EXPENSE. Depreciation expense was approximately $532,000
in 2001 compared to $362,000 and $231,000 in 2000 and 1999, respectively. The
increase from 2000 to 2001 resulted primarily from the acquisition of
furniture, fixtures and equipment for the Yonkers office, laboratory and
production facility. In addition, leasehold improvements were made to the
laboratory and production areas during 2001, 2000 and 1999.
19
INTEREST EXPENSE. Interest expense for the years ended 2001, 2000 and
1999 was approximately $869,000, $1,447,000 and $2,007,000, respectively.
Included in interest expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $0, $387,000, and $1,045,000 for
the years ended 2001, 2000 and 1999, respectively;
- interest expense associated with certain convertible
debentures of approximately $0, $76,000 and $163,000 for the
years ended 2001, 2000 and 1999, respectively;
- amortization of discount on certain warrants of approximately
$989,000, $611,000 and $148,000 for the years ended 2001,
2000 and 1999, respectively;
- amortization of loan costs of approximately $15,000, $106,000
and $331,000 for the years ended 2001, 2000 and 1999,
respectively;
- fees of approximately $265,000 in connection with the
November 2000 securities purchase agreement with Harbor View;
- Additional financing costs related to effective date of
certain registration statements of approximately $286,000 in
1999 (of which approximately $156,000 was reversed in 2001).
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and the Company.
REVENUES. There were approximately $18,000 and $8,000 in sales revenue
in 2001 and 2000, respectively, compared to $11,000 in sales revenues for 1999.
All sales revenue resulted from distributors purchasing Product R for testing
purposes. Interest income was approximately $114,000 and $162,000 in 2001 and
2000, respectively, compared to approximately $43,000 in 1999.
LIQUIDITY
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
As of June 30, 2002, we had current assets of approximately $457,000
compared to approximately $ 1,563,000 at December 31, 2001. We had total assets
of approximately $4,125,000 and $5,449,000 at June 30, 2002 and December 31,
2001, respectively. The decrease in current and total assets was primarily
attributable to the use of cash on hand to fund operating expenditures and
property and equipment.
During the six months ended June 30, 2002, we used cash of
approximately $4,985,000 for operating activities, as compared to approximately
$3,828,000 during the six months ended June 30, 2001. During the six months
ended June 30, 2002, our expenses included:
- approximately $1,483,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $994,000 in consulting fees to GloboMax and its
subcontractors
- approximately $378,000 for other professional and consulting
fees, including $56,000 for legal fees relating to the
settlement agreement (See "Legal Proceedings");
20
- approximately $208,000 for laboratory supplies;
- approximately $285,000 for insurance costs;
- approximately $210,000 for rent and utilities for our Yonkers
facility; and
- approximately $127,000 for expenditures for Product R
research in Israel.
During the six months ended June 30, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $3,439,000, the issuance of a convertible debenture of
$500,000 and principal payments of $91,000 on equipment obligations. During the
six months ended June 30, 2002, cash flow used by investing activities were
used for expenditures of approximately $52,000 for research and laboratory
equipment at our Yonkers, New York facility.
YEARS ENDED DECEMBER 31, 2001 AND 2000
As of December 31, 2001, we had current assets of approximately
$1,563,000, compared to approximately $6,017,000 at December 31, 2000. We had
total assets of approximately $5,449,000 and $8,809,000 at December 31, 2001
and 2000, respectively. The decrease in current and total assets was primarily
attributable to unfavorable market conditions relating to the ability to obtain
investment capital (approximately $5.8 million in 2001 compared to
approximately $11.8 million in 2000) to fund future operating expenditures. The
unfavorable conditions reflected the general economic environment magnified by
the tragic events of September 11, 2001.
During 2001, we used cash of approximately $8,577,000 for operating
activities, as compared to approximately $5,742,000 in 2000. During 2001, we
incurred expenses of:
- approximately $2,703,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $2,667,000 in consulting fees to GloboMax and
its subcontractors;
- approximately $362,000 for rent and utilities for our Yonkers
facility;
- approximately $407,000 for laboratory supplies;
- approximately $233,000 in expenditures on Product R research
in Israel;
- approximately $303,000 paid under severance agreements
entered into between the retiring directors and the Company;
and
- approximately $421,000 for insurance costs and approximately
$1,431,000 for other professional fees including
approximately $953,000 for certain litigation proceedings,
see "Legal Proceedings'.
During the year ended December 31, 2001, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $5,783,000 offset by
21
principal payments of approximately $80,000 on equipment obligations. This
compares to the year ended December 31, 2000 where funds of approximately
$11,836,000 were provided by sale of convertible debentures, the sale of common
stock and exercise of options and warrants offset by principal payments of
approximately $69,000 on equipment obligations.
During the year ended December 31, 2001, cash flow used by investing
activities were used for expenditures of approximately $1,589,000 for leasehold
improvements, research and laboratory equipment, and software for accounting,
administrative and production control at our Yonkers, New York facility.
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. We currently have the funds to begin the
injectable clinical trials in Israel for Product R, however, there can be no
assurances that we will be able to continue or complete such clinical trials or
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.
22
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
DATE GROSS CONVERTIBLE / CONVERSION PRICE / MATURITY DATE /
ISSUED PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
- ---------- ---------- ---------------------------------------- ------------------ ------------------- ---------------
Nov-2000 - $5,371,000 common stock 13,427,500 shares $0.40 per share n/a
Mar 2001 warrants 4,028,250 shares $0.48 per share 11/7/2005
4,028,250 shares $0.56 per share
Nov-2000 $1,500,000 common stock 4,960,317 shares $0.3024 per share n/a
Feb-2001 equity line warrants 10,000,000 shares $1.00 per share (1) 2/9/2006
Jul-2001 $1,000,000 common stock 3,125,000 shares $0.32 per share n/a
Jul-2001 $ 490,000 common stock 1,225,000 shares $0.40 per share n/a
warrants 367,500 shares $0.48 per share 7/27/2006
367,500 shares $0.56 per share
Aug-2001 $ 600,000 common stock 2,000,000 shares $0.30 per share n/a
Sep-2001 $1,000,000 common stock 6,666,667 shares $0.15 per share n/a
Dec-2001 $2,000,000 common stock 7,407,407 shares $0.27 per share n/a
Dec-2001 $ 410,000 common stock 1,518,519 shares $0.27 per share n/a
Dec-2001 $ 200,000 common stock 740,741 shares $0.27 per share n/a
Feb-2002 $ 500,000 common stock 3,333,333 shares $0.15 per share n/a
Feb-2002 $ 500,000 common stock 3,333,333 shares $0.15 per share n/a
Mar-2002 $ 500,000 common stock 3,333,333 shares $0.15 per share n/a
Apr-2002 $1,939,000 common stock 17,486,491 shares $0.11089 per share n/a
May-2002 $ 500,000 convertible debenture $100,000 converted (2) 5/30/2004
(909,091 shares)
May-2002 Consulting warrants 1,000,000 shares $0.18 per share 5/30/2008
Services
Jul-2002 $1,000,000 convertible debenture $200,000 converted (3) 7/3/2004
(1,299,545 shares)
Jul-2002 $ 500,000 convertible debenture Not yet converted (4) 7/15/2004
Sep-2002 $3,010,000 common stock 21,500,000 $0.14 per share n/a
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
million 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 million 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 million 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 million,
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.
23
(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.
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 June 30, 2002, we had incurred approximately $83,700 in fees in
connection with the equity line of credit. Such fees have been deferred and are
being amortized over the life of the line of credit.
VARIOUS PURCHASERS. On July 27, 2001, pursuant to a securities
purchase agreement with various purchasers, we authorized the issuance of and
sold 1,225,000 shares of our common stock and warrants to purchase an aggregate
of 735,000 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act for a purchase price of $0.40 per share, for
an aggregate purchase price of $490,000. Half of the warrants are exercisable
at $0.48 per share, and half of the
24
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:
- On November 16, 2000, we entered into a securities purchase
agreement with Roseworth Group Limited, a British Virgin
Islands corporation and wholly-owned subsidiary of Creon
Management, S.A., a British Virgin Islands corporation,
whereby we agreed to sell 4,960,317 shares of our common
stock at a price of $.3024 per share for an aggregate
purchase price of $1,500,000.
- 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.
- 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.
- 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.
- 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.
- - 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.
- 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.
- 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.
25
- 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.
- 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.
- On April 12, 2002, we issued and sold an aggregate of
17,486,491 shares of our common stock pursuant to
subscription agreements with each of Alpha Capital AG
(3,497,298 shares), Ellis Enterprises (1,311,487 shares),
Kazi Management, Inc. (3,060,136 shares), Palisades Equity
Fund L.P. (4,808,785 shares) and Stonestreet L.P. (4,808,785
shares), for net proceeds of approximately $1,939,000, or
$0.11089 per share.
- 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
26
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:
- 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, the holder
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.
- On July 3, 2002, we sold to James F. Dicke II, a member
of our Board of Directors, $1,000,000 principal amount
of our 5% convertible debenture. On July 3, 2002, Mr. Dicke
converted the first 20% of the debenture ($200,000) for
1,299,545 shares of common stock at a conversion price of
$0.1539 per share.
- 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 the date hereof, 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 56.1 million shares of common stock at exercise prices
ranging from $0.12 to $0.36, of which 52.3 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.
27
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, we are considering, among other
things, reducing the number of 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 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.
DESCRIPTION OF BUSINESS
OVERVIEW
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). In addition to Reticulose(R), which has been used
exclusively with our original formulation, we have developed a new or current
formulation which has been designated only by its generic name Product R. As
used in this prospectus, the term "Product R" refers to the current formulation
as well as the prior formulation of the pharmaceutical drug known as
Reticulose(R). Product R may be employed in the treatment of certain viral and
autoimmune diseases such as:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers,
leukemias and lymphomas; and
- Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R)
to be marketed in the United States. A forfeiture action was instituted in 1962
by the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA
28
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. In September 2001, the FDA cleared the IND application to
begin Phase 1 clinical trials. Our Phase 1 study was performed in the United
States on human volunteers. In March 2002, we completed a Phase 1 trial 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 to pursue the Phase 2 clinical trials
of Product R as a topical treatment for genital warts caused by the HPV
infection.
In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following injectable clinical trials:
- Phase 1/Phase 2 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 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, the synergistic activity 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, we
believe that Product R may prove to be an important "enabler"
drug in the treatment of AIDS.
- Phase 1 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, who also
manifest symptoms of cachexia, that is, severe weight loss and
body wasting.
- Phase 1 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,
29
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.
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/trials 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.
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, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to begin the planned
topical Phase 2 or complete the injectable clinical trials in Israel for
Product R. Additional financing to fund subsequent clinical trials may not be
available to us, which may force us to reduce our clinical trials and
operations. While we continue to attempt to secure funds through the sale of
our securities, there is no assurance that such funds will be raised on
favorable terms, if at all.
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Product R, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market Product
R, or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or IN VITRO testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a
sponsor must prepare and submit to the FDA a comprehensive IND. The focal point
of the IND is a description of the overall plan for investigating the drug
product and a comprehensive protocol for each planned study. The plan is
carried out in three phases: Phase 1 clinical trials, which involve the
administration of the drug to a small number of healthy subjects to determine
safety, tolerance, absorption and metabolism characteristics; Phase 2 clinical
trials, which involve the administration of the drug to a limited number of
patients for a specific disease to determine dose response, efficacy and
safety; and Phase 3 clinical trials, which involve the study of the drug to
gain confirmatory evidence of efficacy and safety from a wide base of
investigators and patients.
An investigator's brochure must be included in the IND and the IND
must commit the sponsor to obtain initial and continual review and approval of
the clinical investigation. A section describing the composition, manufacture
and control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general
method of preparation of the drug substance must be included. A list of all
components including inactive ingredients must also be submitted. There must be
adequate information about pharmacological and toxicological studies of the
30
drug involving laboratory animals or IN VITRO tests on the basis of which the
sponsor has concluded that it is reasonably safe to conduct the proposed
clinical investigation. Where there has been widespread use of the drug outside
of the United States or otherwise, it is possible in some limited circumstances
to use well documented clinical experience as a substitute for other
pre-clinical work.
After the FDA approves the IND, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.
When all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a
description of each uncontrolled clinical study including a summary of the
results and a brief statement explaining why the study is classified as
uncontrolled; and a description and analysis of any other data or information
relevant to an evaluation of the safety and effectiveness of the drug product
obtained or otherwise received by the applicant from any source foreign or
domestic. The NDA also includes an integrated summary of all available
information about the safety of the drug product including pertinent animal and
other laboratory data, demonstrated or potential adverse effects of the drug,
including clinically significant potential adverse effects of administration of
the drug contemporaneously with the administration of other drugs and other
related drugs. A section is included describing the statistical controlled
clinical study and the documentation and supporting statistical analysis used
in evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent
of drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture
and packaging; and such specifications and analytical methods as are necessary
to assure the identity, strength, quality and purity of the drug substance as
well as the availability of the drug products made from the substance. NDA's
contain lists of all components used in the manufacture of the drug product and
a statement of the specifications and analytical methods for each component.
Also included are studies of the toxicological actions of the drug as they
relate to the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
In February 1998, we contracted with GloboMax LLC of Hanover, Maryland
to advise and assist us in our preparation of a new IND to be filed with the
FDA, and to otherwise guide us through the FDA process with the objective of
obtaining full approval for Product R in the United States. During 2000 and
2001, GloboMax continued its project management services for the pre-clinical
development and IND submission of Product R to the FDA, the development of
standard operating procedures and validation
31
protocol for the preparation and manufacture of Product R. Expenses paid during
2000 and 2001 relating to the GloboMax agreement were approximately $3,917,000.
Pursuant to the agreement with GloboMax, we are obligated to pay for services
on an hourly basis, at prescribed rates. On July 30, 2001, we submitted an IND
application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. On September 4, 2001, the IND was cleared by the FDA to begin Phase
1 trials. In March 2002, Advanced Viral completed a Phase 1 trial 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. On April 12,
2002, we began the process of recruiting clinical sites to perform Phase 2
clinical trials of Product R in patients in the U.S. with genital warts. Such
IND is our only IND on file with the FDA.
We currently do not have the resources necessary to complete the FDA
approval process. It is possible that the clinical tests of Product R on humans
will not be approved by the FDA for human clinical trials on HPV or other
diseases, and that any tests previously conducted or to be conducted will not
satisfy FDA requirements. It is also possible that the results of such human
clinical trials, if performed, will not prove that Product R is safe or
effective in the treatment of HPV or other diseases, or that the FDA will not
approve the sale of Product R in the United States if we submitted a proper
NDA. It is not known at this time how extensive the Phase 2 and Phase 3
clinical trials will be, if they are conducted. The data generated may not show
that the drug Product R is safe and effective, and even if the data shows that
Product R is safe and effective, obtaining approval of the NDA could take years
and require financing of amounts not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government
regulation in certain countries may delay marketing of Product R for a
considerable period of time and impose costly procedures upon our activities.
The extent of potentially adverse government regulations which might arise from
future legislation or administrative action cannot be predicted. Whether or not
FDA approval has been obtained for a product, approval of the product by
comparable regulatory authorities of foreign countries must be obtained prior
to marketing the product in those countries. The approval process may be more
or less rigorous from country to country, and the time required for approval
may be longer or shorter than that required in the United States. Clinical
studies conducted outside of any country may not be accepted by such country,
and the approval of any pharmaceutical or diagnostic product in one country
does not assure that such product will be approved in another country.
Accordingly, until registration is granted, if ever, in the United States or
another developed or developing country, we do not expect that we will be able
to generate material sales revenue.
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through June 30,
2002 we expended approximately $16,400,000 on testing and research and
development activities either in our laboratories or pursuant to various
testing agreements with both domestic and foreign companies. In 1996, we
retained Shalom Z. Hirschman, MD as our Chief Executive Officer and President.
Dr. Hirschman, who is also a member of our Board of Directors, established our
research facility in Yonkers, New York, planned and monitored the testing of
Product R and recently performed analyses of Product R with our scientific
personnel, which analyses will be used in connection with the FDA approval
process. We currently are funding research and testing to:
- determine the safety and efficacy of the topical use of
Product R on animals and cultured human cells;
32
- assess the safety and effectiveness of the topical
application of Product R on HPV;
- determine the safety and effectiveness of Product R in the
treatment of cachexia (body wasting) in patients with AIDS;
- determine the safety and effectiveness of Product R in the
treatment of cachexia (body wasting) in patients with solid
cancers;
- determine the safety and effectiveness of Product R in the
treatment of cachexia (body wasting) in patients with
leukemias and lymphomas;
- determine the effectiveness of Product R for the treatment of
rheumatoid arthritis;
- study the effects of Product R in inhibiting the production
of key cellular receptors for HIV (CCR5 and CXCR4 receptors).
The CCR5 and CXCR4 receptors are two of the cell receptors
used by the AIDS virus, HIV, to attach to its target cell and
initiate infection;
- assess the effectiveness in inhibiting the replication of
adenovirus in cell culture; and
- assess the direct inhibitory and therapeutic effects of
Product R on neoplasias, including lymphomas and lymphocytic
leukemia.
On January 29, 2001, we entered into a 12-month agreement with The
Weizmann Institute of Science and Yeda, its developmental arm, in Israel to
conduct research on the effects of Product R on the immune system, especially on
T lymphocytes. Experiments included the impact of Product R on T cell
proliferation, migration, adhesion and cytokine secretion. In addition,
scientists explored the effects of Product R in animal models on adjuvant
arthritis and experimental allergic encephalitis. The cost of this research is
approximately $118,000 which has been funded from our current cash position. On
July 8, 2002, we extended the agreement with the Weizmann Institute for another
twelve months to July 7, 2003. Total costs incurred in connection with this
research is expected to be $138,000, of which a payment of $40,000 was made in
July 2002. Subsequently, we made a payment of $40,000 in November 2002.
We believe that the research at The Weizmann Institute has
demonstrated that Product R inhibits the development of arthritis and
encephalitis in rat models of adjuvant arthritis and experimental allergic
encephalitis, respectively, when Product R is administered at the same time as
the inflammatory stimulus. These models of the dampening effects of Product R
on autoimmune reactions are being fine-tuned and studies of possible molecular
mechanisms of the actions of Product R are to follow.
These animal models serve as experimental prototypes for the study of
autoimmune disorders, such as rheumatoid arthritis. Institute researchers also
propose to investigate other animal models, including a graft rejection model
and tumor growth and tumor metastasis models, for the immunomodulatory effects
of Product R.
On April 2, 2001, we entered into a 12-month agreement with The
Selikoff Center in Israel to develop clinical trials in Israel using Product R.
These trials would support our planned IND of injectable Product R. The Center
began designing clinical trials using Product R to mitigate the toxic effects
of chemotherapy in patients with advanced stage cancer to be conducted at
hospitals throughout Israel. The cost of the first phase of this research was
$242,000, of which $115,000 has been advanced to date.
33
During the planning of these clinical trials, we redesigned the
research program to investigate the effect of Product R on cachexia (body
wasting) in patients with solid cancers, leukemias and lymphomas. In addition,
the redesigned program will investigate Product R as salvage therapy in
patients with AIDS who have failed highly active anti-retroviral therapy
(HAART). In this trial, Product R will be used in combination with HAART.
During March 2002, the Selikoff Center advised us that it received
approvals from Israel's Helsinki Committees (the equivalent of a hospital's
Institutional Review Board in the U.S.) for these clinical trails at academic
medical centers in Israel. We have received approval from Israel's Ministry of
Health for these clinical trials to begin. We anticipate that these clinical
trials will yield data which will assist us in our design of future protocols
for Phase 1 and Phase 2 studies of injectable Product R in the U.S. and Israel.
In September 2002, we entered into a contract with Enviro Gene 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/trials and
evaluate the results. Total costs incurred by Enviro Gene 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.
The studies being conducted in Israel are subject to risks associated
with the political, economic and military conditions affecting Israel and the
Middle East, and recently a public announcement from Israel declaring a war
against terrorism has made it difficult to predict whether or in what manner
these problems will be resolved.
Our studies detailing the results of the above research and testing
may not positively impact the FDA's decision to approve a new IND for Product R
or approve the marketing, sales or distribution of Product R within the United
States, and as a result may not improve our chances of gaining approval for the
marketing, sales or distribution of Product R anywhere in the world. We
currently do not have the resources to engage in further testing, and we cannot
provide assurances that we will acquire such financial resources to continue or
complete the studies, or, if we acquire such resources, that we will do so on
favorable terms.
SCIENTIFIC ADVISORY BOARD
In January 2002, we formed a Scientific Advisory Board currently
consisting of seven people with experience in molecular genetics, microbiology,
immunology, oncology, hematology, women's health and related fields for the
purpose of having access to additional expertise and counsel to support the
development of Product R in connection with the rigorous clinical trials
required by the FDA's regulatory approval process. The current members of the
Scientific Advisory Board are:
SIDNEY PESTKA, M.D., a recipient of the National Medal of Technology
for 2001, is currently Professor and Chairman of the Department of Molecular
Genetics, Microbiology and Immunology at New Jersey's Robert Wood Johnson
Medical School of the University of Medicine and Dentistry. Previously he was
Associate Director of the Roche Institute of Molecular Biology. His work in the
development of interferons, which are used clinically for treating a range of
diseases, including hepatitis B, multiple sclerosis and hairy cell leukemia, is
the basis of several U.S. and more than 100 foreign patents. Dr. Pestka was
inducted into the New Jersey Inventor's Hall of Fame in 1993. He has also
received the Selman Waksman Award in Microbiology and the Milstein Award from
the International Society for Interferon and Cytokine Research. He has served
on the National Cancer Institute's Breast Cancer Task Force, the Basic
Pharmacology Advisory Committee of the Pharmaceutical Manufacturers Association
Foundation and is secretary, and former President, of the International Society
of Interferon Research. Dr. Pestka received his undergraduate degree in
chemistry from Princeton University in 1957 and his medical degree from the
University of Pennsylvania School of Medicine in 1961. Over the past 30
34
years, he has published several books and written more than 400 research
articles for prestigious peer-reviewed scientific journals.
MARK H. KAPLAN, M.D., an expert in AIDS treatment and research,
including the study of new therapeutic agents, is the Jane and Dayton Brown
Professor of Clinical Medicine at The New York University School of Medicine
and has been Director of The Center for AIDS Research and Treatment at The
North Shore University Hospital since 1994. Dr. Kaplan, a prominent specialist
in infectious diseases who now devotes his attention to the problems of AIDS,
was previously Chief of Infectious Diseases at The North Shore University
Hospital from 1980 through 1994. He also had served on the adjunct staff and
was guest investigator at Rockefeller University from 1978 through 1984.
GEORGE P. CANELLOS, M.D. is the William Rosenberg Professor of
Medicine at Harvard Medical School where he served as Chief of the Division of
Medical Oncology for 20 years at the Dana-Farber Cancer Institute, and was
Acting Clinical Director of the National Cancer Institute (NCI) and a member of
the FDA's Oncologic Drugs Advisory Committee. Dr. Canellos was also a past
president of the American Society for Clinical Oncology and a former
Editor-in-Chief of the Journal of Clinical Oncology. Dr. Canellos currently
serves as Medical Director for Network Development, Dana-Farber/Partners
CancerCare and is on the senior staff at the Brigham and Women's Hospital,
Dana-Farber Cancer Institute and Massachusetts General Hospital.
MICHAEL HARRIS, M.D. is Director of the Tomorrows Children's Institute
for Cancer and Blood Disorders, Chief of Pediatric Hematology-Oncology at the
Hackensack University Medical Center and Professor of Pediatrics at the
UMDNJ-New Jersey Medical School. Additionally, Dr. Harris is a member of the
National Cancer Institute's Special Review Committee where he is responsible
for the review of Community Clinical Oncology Programs, and Associate Editor
for Pediatric Oncology for the scientific journal Cancer Investigation. Dr.
Harris previously served as Chief of Pediatric Hematology-Oncology at The Mt.
Sinai Medical Center in New York City.
JAMES D'OLIMPIO, M.D. is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also
Associate Professor of Medical Oncology at New York University's School of
Medicine. His research has focused on improving the quality of life of cancer
patients, especially by reversing the wasting process (cachexia) associated
with cancer, and in cancer treatment related fatigue syndrome.
CAROL ARMENTI is the founder and Executive Director of the Center for
Cervical Health, a patient advocacy organization primarily devoted to cervical
health issues in the U.S. Ms. Armenti serves on the FDA advisory board and other
governmental consulting boards, and is a lecturer on women's health issues.
HOWARD YOUNG, M.D. currently serves on the staff of a cancer research
institute. He has been elected to serve as the Vice President of the
International Society for Interferon and Cytokine Research in 2002 and 2003 and
as President in 2004 and 2005. During 2001, Dr. Young was elected a fellow to
the American Academy of Microbiology. Dr. Young served as Chair of the
Immunology Division of the American Society for Microbiology from 1996-1997.
Dr. Young has authored/co-authored over 200 research papers in the field of
cellular and molecular immunology. Dr. Young is a member of the editorial
boards of the "Journal of Interferon and Cytokine Research," "The Journal of
Biological Chemistry, "Genes and Immunity," and served on the editorial board
of "The Journal of Immunology" from 1997-2001. Dr. Young is Editor-in-Chief of
the "Newsletter of the International Society of Interferon and Cytokine
Research."
35
BUSINESS ADVISORY BOARD
In December 2001, we established a Business Advisory Board currently
consisting of three people. Members of the Business Advisory Board provide us
with access to expertise in international finance, strategic management and
business opportunities. The current members of the Business Advisory Board are:
ALBERT REICHMANN is the co-founder of Olympia and York Developments
Limited, an international commercial property developer. Mr. Reichmann is also
an international philanthropist whose efforts have supported the establishment
of schools and other institutions around the world.
PETER LUNDER is the former Co-Chairman and Treasurer of the Dexter
Shoe Company (now owned by Berkshire-Hathaway). Mr. Lunder serves as a Regent
of the Smithsonian Museum and is the Governing Board Chairman of Colby
College's Museum of Art, and a member of the Dana-Farber Cancer Institute's
Visiting Committee.
JOZEF STRAUS, PH.D., D.SC. (HON.) is Co-Chairman, President and Chief
Executive Officer of JDS Uniphase Corporation, a leading fiberoptic
communications firm and has numerous publications, presentations and other
honors to his credit.
PATENTS
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We have nine issued U.S. patents, some covering the composition of
Product R and others covering various uses of the Product R. In addition, we
have two issued Australian patents covering a use of Product R. Additionally,
we have 14 pending U.S. patent applications and 17 pending foreign patent
applications. During April 2002, under the terms of a settlement agreement
entered as part of a final judgment on March 25, 2002, all rights, title and
interest in two issued U.S. patents pertaining to Reticulose(R) technology were
assigned to Advanced Viral.
As patent applications in the United States are maintained in secrecy
until patents issue and as publication of discoveries in the scientific or
patent literature often lag behind the actual discoveries, we cannot be certain
that we were the first to make the inventions covered by each of our pending
patent applications or that we were the first to file patent applications for
such inventions. Furthermore, the patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions, and, therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be
predicted. We cannot be sure that any additional patents will issue from any of
our patent applications or, should any patents issue, that we will be provided
with adequate protection against potentially competitive products. Furthermore,
we cannot be sure that should patents issue, they will be of commercial value
to us, or that private parties, including competitors, will not successfully
challenge our patents or circumvent our patent position in the United States or
abroad.
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or
products. Moreover, pursuant to the terms of the Uruguay Round Agreements Act,
patents filed on or after June 8, 1995 have a term of twenty years from the
date of such filing, irrespective of the period of time it may take for such
patent to ultimately issue. This may shorten the period of patent protection
afforded to our products as patent applications in the
36
biopharmaceutical sector often take considerable time to issue. Under the Drug
Price Competition and Patent Term Restoration Act of 1984 (the "Patent Act"), a
sponsor may obtain marketing exclusivity for a period of time following FDA
approval of certain drug applications, regardless of patent status, if the drug
is a new chemical entity or if new clinical studies were used to support the
marketing application for the drug. Pursuant to the FDA Modernization Act of
1997, the period of exclusivity can be extended if the applicant performs
certain studies in pediatric patients. This marketing exclusivity prevents a
third party from obtaining FDA approval for a similar or identical drug under
an Abbreviated New Drug Application ("ANDA") or a "505(b)(2)" New Drug
Application. The statute also allows a patent owner to obtain an extension of
applicable patent terms for a period equal to one-half the period of time
elapsed between the filing of an IND and the filing of the corresponding NDA
plus the period of time between the filing of the NDA and FDA approval, with a
five year maximum patent extension. We cannot be sure that we will be able to
take advantage of either the patent term extension or marketing exclusivity
provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection
with their work with us. We cannot be sure that confidentiality will be
maintained or disclosure prevented by these agreements or that our proprietary
information or intellectual property will be protected thereby or that others
will not independently develop substantially equivalent proprietary information
or intellectual property.
The pharmaceutical industry is highly competitive and patents have
been applied for by, and issued to, other parties relating to products
competitive with Product R. Therefore, Product R and any other drug candidates
may give rise to claims that they infringe the patents or proprietary rights of
other parties existing now and in the future. Furthermore, to the extent that
we or our consultants or research collaborators use intellectual property owned
by others in work performed for us, disputes may also arise as to the rights in
such intellectual property or in related or resulting know-how and inventions.
An adverse claim could subject us to significant liabilities to such other
parties and/or require disputed rights to be licensed from such other parties.
We cannot be sure that any license required under any such patents or
proprietary rights would be made available on terms acceptable to us, if at
all. If we do not obtain such licenses, we may encounter delays in product
market introductions, or may find that the development, manufacture or sale of
products requiring such licenses may be precluded. In addition, we could incur
substantial costs in defending ourselves in legal proceedings instituted before
the PTO or in a suit brought against it by a private party based on such
patents or proprietary rights, or in suits by us asserting our patent or
proprietary rights against another party, even if the outcome is not adverse to
us. There are extensions available under the Patent Act if the delay in
prosecution of the patent application results from a delay in the PTO's
handling of any interference or appeal involving the application. We have not
conducted any searches or made any independent investigations of the existence
of any patents or proprietary rights of other parties.
EQUITY LINE OF CREDIT AGREEMENT
On February 9, 2001, we signed a private equity line of credit
agreement with Cornell Capital Partners, LP. Pursuant to this equity line of
credit agreement and subject to the satisfaction of certain conditions,
including those discussed below, Advanced Viral may sell and issue to Cornell
Capital, from time to time, up to an aggregate of $50,000,000 of our common
stock. Until August 14, 2003, assuming the registration statement covering the
resale of the shares issuable pursuant to the equity line of credit is
effective, we may, from time to time, in our sole discretion, sell or "put"
shares of our common stock to
37
Cornell Capital at a price equal to 95% of the market price of the common
stock. Under the equity line of credit agreement, the market price of Advanced
Viral common stock, for purposes of determining the purchase price, is the
average of the three lowest closing bid prices, as reported by Bloomberg, L.P.,
of our common stock for the 25 trading day period ending on the date we notify
Cornell Capital of our intention to put common stock to it, or, in other words,
request an advance. To date, we have not drawn down on the line of credit.
The maximum advance amount on any advance notice date is equal to the
product of 150% times the 40 day average daily volume traded for the 40 trading
days preceding the advance notice date. The 40 day average volume traded is
equal to the bid price multiplied by the volume for each of the 40 trading days
preceding the advance notice date as reported by Bloomberg, L.P.
Our ability to put shares of common stock to Cornell Capital is
subject to certain conditions and limitations, including, but not limited to,
the following:
- the closing bid price of the common stock on the advance
notice date shall not be less than the average of the three
lowest closing bid prices of our common stock for the 25
trading day period ending on the date we request an advance.
- the registration statement covering the resale of the shares
must have previously become effective and shall remain
effective and available for making resales of the put shares;
- our representations and warranties contained in the equity
line of credit agreement must be accurate as of the date of
each put;
- we must have performed, satisfied and complied in all
respects with all covenants, agreements and conditions
required to be performed, satisfied or complied with at or
prior to the date of each put;
- we must have obtained all permits and qualifications required
by any applicable state in accordance with the registration
rights agreement for the offer and sale of the put shares, or
shall have the availability of exemptions therefrom. The sale
and issuance of the put shares must be legally permitted by
all laws and regulations to which we are subject;
- no statute, rule, regulation, executive order, decree,
ruling, or injunction may be in effect which prohibits or
directly and adversely affects any of the transactions
contemplated by the equity line of credit agreement;
- at the time of an advance, there must not have been any
material adverse change in our business, operations,
properties, prospects, or financial condition since the date
of filing of our most recent report with the SEC;
- our common stock must not have been delisted from the
Bulletin Board or suspended from trading by the SEC or the
Bulletin Board; and we must not have received any notice
threatening the continued listing of our common stock on the
Bulletin Board;
- at least 13 trading days must have elapsed since the last
date we put shares to Cornell Capital; and
- no advance date shall be less than 12 trading days after an
advance notice date.
38
Under the equity line of credit agreement, we agreed to register the
common stock for resale by Cornell Capital, which will permit Cornell Capital
to resell the common stock from time to time in the open market or in
privately-negotiated transactions. We have agreed to bear certain expenses,
other than broker discounts and commissions, if any, in connection with the
preparation and filing of the registration statement and any amendments to it.
We intend to file amendments and supplements to the registration statement as
may be necessary in order to keep it effective as long as the equity line of
credit agreement remains in effect or Cornell Capital owns any of our common
stock. We cannot assure you that we will satisfy all of the conditions required
under the equity line of credit agreement or that Cornell Capital will have the
ability to purchase all or any of the shares of common stock put to it
thereunder.
In addition, pursuant to the equity line of credit agreement, each
officer, director and affiliate of Advanced Viral has agreed that he, she or it
will not, directly or indirectly, without the prior written consent of Cornell
Capital, issue, offer, agree or offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
otherwise encumber or dispose of any shares of common stock, including options,
rights, warrants or other securities underlying, convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for any
common stock (whether or not beneficially owned by the undersigned), or any
beneficial interest therein for a period of 10 trading days following the
receipt of an advance notice by Advanced Viral pursuant to the agreement.
In conjunction with the equity line of credit agreement, we entered
into an agreement with May Davis Group, Inc., our placement agent. May Davis
assisted Advanced Viral in negotiating the equity line of credit agreement. As
a placement fee, we issued to May Davis and certain other investors Class A
Warrants to purchase 5,000,000 shares of our common stock at an exercise price
per share equal to $1.00, exercisable in part or in whole at any time until
February 9, 2006, and Class B Warrants to purchase in the aggregate 5,000,000
shares of our common stock at an exercise price equal to the greater of $1.00
or 110% of the bid price of the common stock on the applicable advance date
under the private equity line of credit agreement. Each Class B Warrant is
exercisable pro rata on or after each advance date with respect to that number
of warrant shares equal to the product obtained by multiplying 5,000,000 by a
fraction, the numerator of which is the amount of the advance payable on the
applicable advance date and the denominator of which is $20,000,000, until
sixty months from the date of issuance.
We may redeem the warrants at a redemption price of $0.01 per share
provided that the bid price for our common stock equals at least $4.00 per
share for a period of ten (10) consecutive trading days, as described therein.
The warrants contain provisions that adjust the purchase price and number of
shares issuable upon the occurrence of certain events, such as a stock split,
reverse stock split, stock dividend, merger, or recapitalization. Assuming the
registration statement covering the shares underlying the warrants and the
equity line of credit is not suspended, the holder may effect a cashless
exercise of the warrant commencing with the first advance date. There are also
certain "piggyback" registration rights with respect to the shares of common
stock issuable upon exercise of the warrants pursuant to a registration rights
agreement.
MARKETING AND SALES
Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. As of the date
hereof, our efforts or the efforts of our representatives have produced no
material benefits to us regarding our ability to have Product R sold
commercially anywhere in the world. We have entered into exclusive distribution
agreements with four separate entities granting exclusive rights to distribute
Product R in the countries of Canada, China, Japan, Hong Kong, Macao, Taiwan,
Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile. Pursuant
39
to these agreements, the distributors are obligated to cause Product R to be
approved for commercial sale in such countries and upon such approval, to
purchase from us certain minimum quantities of Product R to maintain the
exclusive distribution rights. Our marketing plans for Product R are still
dependent upon registration of Product R for sale in various jurisdictions
where our distributors are seeking approvals. We have made no sales under the
distribution agreements other than for testing purposes.
To date we have received no information that would lead us to believe
that we will be positioned to sell Product R commercially anywhere in the world
in the immediate future, and it is possible that none of our distributors will
ever secure registration of Product R. On July 30, 2001, we submitted an IND
application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin
Phase 1 clinical trials. In March 2002, Advanced Viral completed a Phase 1
trial 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.
On April 12, 2002, we began the process of recruiting clinical sites to perform
Phase 2 clinical trials of Product R in patients in the U.S. with genital
warts. During the course of Phase 2, the efficiency of Product R for the
topical treatment of genital warts will be investigated in various doses. Due
to limited financial resources, we have not yet secured clinical sites nor have
we made any material progress on the Phase 2 clinical trials.
An application for registration of Product R was filed in March 1998
requesting that Product R be permitted to be sold in Argentina. In this March
1998 filing, DCT, S.R.L., our distribution agent in Argentina, received an
investigational new drug identification number from the National Administration
for Drug, Food and Medical Technology in Argentina, or ANMAT. This allowed DCT
to begin pre-clinical studies on our behalf with Product R which have since
been concluded. In February 2000, DCT received approval from the ANMAT to
proceed with Phase 1 clinical trials in Argentina for Product R. We are
currently evaluating the costs and time necessary to complete Phase 1 clinical
trials in Argentina. DCT must apply for approval from the ANMAT to proceed with
Phases II and III clinical trials before Product R is approved for sale in
Argentina. The costs and time necessary to complete such trials cannot be
predicted at this time, especially given the current faltering political and
economic climate in Argentina. GloboMax Americas has been retained to review
the application and status of Product R in Argentina. Based upon
recommendations received from GloboMax Americas, we will decide how to proceed
further in Argentina. We may not receive regulatory approval in Argentina and
therefore may not generate sales of Product R in Argentina in the near future.
Initially we targeted our sales and marketing efforts to those
countries where Reticulose was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes
simplex and herpes zoster. Those countries included Singapore, Hong Kong,
Malaysia, Taiwan, the Philippines and Malta. Registration of Product R will be
required in such countries as well as in the other countries comprising the
distributors' territories before any significant sales may begin. The
registration of Product R for sale in these countries has been frustrated due
to our inability to obtain the registration and approval to sell Product R in
the Bahamas, the country of origin, and a general lack of published data on the
effectiveness of Product R. Until Product R is registered and approved for sale
in the United States, in another developed country or in the other countries
included in the distributors' territories, we will not generate any material
sales of Product R. For the years ended December 31, 2001, 2000 and 1999, we
reported no commercial sales except limited sales for testing purposes. Product
R is not legally available for commercial sale anywhere in the world, except
for testing purposes. See "--Research, Development and Testing."
40
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council
of the Bahamas had refused our subsidiary's request for a "free sales
certificate" for Product R. A free sales certificate is a document typically
issued by a country in which a pharmaceutical product is manufactured which
certifies that such country permits the "free sale" of such product in such
country. Most countries require that, before allowing the registration of a
pharmaceutical product for use in that country, it must at least be registered
and certified for free sale in the country in which it is manufactured.
However, the Bahamas has no procedures currently in place to issue a free sales
certificate for any therapeutic drug, including Product R. If we do not obtain
a free sales certificate or other equivalent document from the Bahamas or
another country, or if we do not receive FDA approval, it is possible that we
will not be able to meet registration requirements in the countries which
require that a pharmaceutical product be at least registered and certified for
free sale in the country in which it is manufactured.
The Company currently produces bulk clinical trial batches for topical
Product R in its facility in Freeport, Bahamas. The Company has reconfigured
its Yonkers, New York research facility to produce clinical trial batches for
its planned injectable Product R. The Company operates these two facilities to
produce clinical trial batches under current Good Manufacturing Procedures
(cGMP) as set forth by the United States Food and Drug Administration (FDA).
The FDA has not approved Product R for distribution or sale in the United
States.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Product R, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Product R. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, other viruses,
cachexia (body wasting) and rheumatoid arthritis. We anticipate that we will
face intense and increasing competition as new products enter the market and
advanced technologies become available. Our competitors' products may be more
effective, or more effectively marketed and sold, than Product R. Competitive
products may render Product R obsolete or noncompetitive before we can recover
the expenses of developing and commercializing Product R. Furthermore, the
development of a cure or new treatment methods for the diseases we are
targeting could render Product R noncompetitive, obsolete or uneconomical. Many
of our competitors:
- have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products;
- have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products; and
- have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Product R should be added to such cocktails in order
to enhance their effectiveness and mitigate the toxic effects of other drugs
used to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
41
Several products are currently marketed for the treatment of cachexia
(body wasting) included Megace(R) oral suspension manufactured by Bristol-Myers
Squibb and Serostim(R) (injectable human growth hormone) marketed by Serono
Laboratories Inc.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Product R, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Product R.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed Phase 3 trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade
for rheumatoid arthritis in January 1999. These products represent significant
competition for Product R as a treatment for rheumatoid arthritis.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for Product R, we will
face competition based on the safety and effectiveness of Product R, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Product R, we
expect to compete primarily on the basis of product performance and price with
a number of pharmaceutical companies, both in the United States and abroad.
EMPLOYEES
We have 33 full-time employees, consisting of our two executive
officers, two vice-presidents, 17 employees involved in research, four employees
responsible for quality assurance and quality control, an assistant controller,
a chief information officer and seven administrative employees. Dr. Hirschman,
our President, Chief Executive Officer and a member of our Board of Directors,
and Alan V. Gallantar, our Chief Financial Officer and Treasurer, each devote
all of their business time to our day-to-day business operations. Eli Wilner,
our Secretary and Chairman of our Board of Directors, devotes as much time to
his duties as is reasonably necessary. To reduce operating costs, we are
considering among other things, reducing the number of employees. See
"Management --Employment Contracts, Termination of Employment and
Change-in-Control Arrangements."
42
PROPERTY
We lease approximately 16,650 square feet for executive offices,
including research laboratory space and production area at 200 Corporate
Boulevard South, Yonkers, New York from an unaffiliated third party (the
"Yonkers Lease"). The term of the Yonkers Lease is five years through April
2005 and our annual rental obligation under the Yonkers Lease is approximately
$290,000.
The Bahamian manufacturing facility, which was acquired on December
16, 1987, is located in Freeport, Bahamas and consists of an approximate 29,000
square foot site containing a one-story concrete building of approximately
7,300 square feet and is equipped for all topical phases of the testing,
production, and packaging of bulk Product R. The Bahamian facility is currently
being used to store and produce bulk inventory of Product R for testing
purposes.
LEGAL PROCEEDINGS
Advanced Viral is not currently a party to any material litigation,
nor, to the knowledge of management, is any such litigation currently
threatened.
43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information
concerning them are as follows:
NAME AGE POSITION
Shalom Z. Hirschman, MD(1) 65 President, Chief Executive Officer, Chief Scientific Officer
Eli Wilner (1, 2) 46 Secretary, Chairman of the Board
Alan V. Gallantar 44 Chief Financial Officer, Treasurer
David Seligman (1, 2) 63 Director
Nancy J. Van Sant 52 Director
Roy S. Walzer (2, 3) 54 Director
Richard S. Kent, MD (3, 4) 53 Director
James F. Dicke II (2) 56 Director
Paul R. Bishop 59 Director
- ---------
(1) Member of the Executive Management Committee.
(2) Member of the Audit and Compensation Committee.
(3) Member of the Investment Analysis Committee.
(4) Member of the Pharmaceutical Liaison Committee.
SHALOM Z. HIRSCHMAN, MD has been President, Chief Executive Officer
and a director since October 1996, and was Chairman of the Board from December
2001 until May 2002. Dr. Hirschman was Director of the Division of Infectious
Diseases and Professor of Medicine at Mount Sinai School of Medicine, New York,
New York, from May 1969 until October 1996.
ELI WILNER, our Secretary and Chairman of the Board of Directors, has
been a director since December 2001 and Chairman of the Board since May 2002.
He is the founder and CEO of Eli Wilner & Company, a New York City art gallery
established in 1983, and is also a leading frame dealer, restorer, collector
and published author. Mr. Wilner was a Bryant Fellows Member of the
Metropolitan Museum of Art in New York City from 1990 to 2000 and since 1990
has been a member of the Forum and Director's Circle of the National Museum of
American Art in Washington, D.C. Mr. Wilner is a graduate of Brandeis
University, where he received his B.A. in Fine Arts in 1976, and Hunter
College, where he received his M.A. in 1978.
ALAN V. GALLANTAR has been Chief Financial Officer since October 1999
and Treasurer since December 2001. Mr. Gallantar was treasurer and controller
from March 1998 to September 1999 of AMBI Inc., a nutraceutical company, senior
vice president and chief financial officer from 1992 to 1997 of Bradley
Pharmaceuticals, Inc., a pharmaceutical manufacturer, and vice president and
divisional controller from 1989 to 1991 for PaineWebber Incorporated. From 1985
to 1989, Mr. Gallantar was second vice president at The Chase Manhattan Bank,
N.A., and from 1983 to 1985, was a senior
44
accountant at Philip Morris Incorporated. From 1979 to 1983, Mr. Gallantar was
a senior accountant in the audit department of Deloitte & Touche.
DAVID SELIGMAN, a director since December 2001, is a partner and
founder of the Law Office of David Seligman, established in 1995. Since 1997,
Mr. Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan,
Griffinger and Vecchione, a New Jersey based law firm. Mr. Seligman has over
thirty years of legal experience in the pharmaceutical industry, twenty-five of
which were spent supervising the activities of law department attorneys and
outside counsel. From 1989 to 1995, Mr. Seligman was Associate Vice President
and responsible for the general legal activities of various divisions of
Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York State Bar and
the American Bar Association, and sits on the boards of Oxford Pharmaceutical
Services, Inc., NitrOSystems, Inc. and Greenbrook Pharmaceuticals, LLC. Mr.
Seligman graduated from Columbia University, College of Pharmacy (B.S.) in
1959, Fordham University School of Law (J.D.) in 1962, and New York University
School of Law (L.L.M.) in 1966.
NANCY J. VAN SANT, ESQ., a director since May 2002, has been a director
of the Miami, Florida law firm of Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A. and/or its predecessors since 1992. From 1977
through 1990, Ms. Van Sant was an attorney with the U.S. Securities and Exchange
Commission serving as Regional Trial Counsel and Chief of the Branch of
Investigations and Enforcement.
ROY S. WALZER was appointed to the Board of Directors in June 2002.
Since 1987, Mr. Walzer has been the President of the private investment firms
Litchfield Partners, Ltd. and the Managing Partner of Litchfield Partners I
since 1999, which firms invest in pharmaceuticals, biotech and technology
companies. Prior to founding Litchfield Partners, Mr. Walzer served as Executive
Vice President and General Counsel with Sealy Connecticut from 1976 to 1986.
RICHARD S. KENT, MD was appointed to the Board of Directors in
September 2002. From 2001 through September 2002, Dr. Kent was President and CEO
of Ardent Pharmaceuticals, Inc. of Durham, NC. From 2000 to 2001 Dr. Kent was
the Senior VP of Global Medical Affairs and Chief Medical Officer for
GlaxoSmithKline (formerly GlaxoWellcome, Inc.). At GlaxoWellcome, Dr. Kent was
Vice President, U.S. Medical Operations and Group Medical Director from 1998 to
2001. He served as Director of Worldwide Clinical Research from 1995 to 1997. In
addition he served on the Board of Directors of GlaxoWellcome and other senior
level operating committees responsible for directing the development and
commercialization of the company's products. At its predecessor, Burroughs
Wellcome,
45
Dr. Kent held numerous clinical research positions and was named Medical
Director in 1991, Vice President of Medical Affairs in 1992, and was named
International Director of Medical Research for an affiliate Wellcome plc in
1994. He has supervised dozens of INDs and over 20 NDAs (and equivalent
submissions in Europe and the rest of the world) in a wide range of therapeutic
areas including CNS, Antivirals, HIV, Respiratory, Gastrointestinal,
Anesthesia/Critical Care, Cardiovascular and Oncology. Dr. Kent received his
undergraduate degree from the University of California -- Berkley and his
medical degree from the University of California -- San Diego. He completed his
medical training at Harvard, Stanford and Duke and is board certified in both
internal medicine and cardiology. His research has been published in numerous
journals and scientific publications.
JAMES F. DICKE II, director since December 2001, has been the
President and CEO of Crown Equipment Corporation, a global manufacturer and
distributor of electric forklift trucks, material handling products and
television antenna rotators since 1980. Mr. Dicke sits on the board of the
Culver Educational Foundation (since 1977), Trinity University (since 1979),
Dayton Power and Light Company (since 1990), Dayton Art Institute (since 1996),
and Anderson-Cook Corporation (since 1997).
PAUL R. BISHOP was appointed to the Board of Directors in July 2002.
Since 1976, Mr. Bishop has been the Chairman and CEO of H-P Products, Inc., a
leading manufacturer of household central vacuum systems, fabricated tubing
systems and metal components for various major industries, including the
automotive industry. In addition, since 1993, Mr. Bishop has been a member of
the Board of Directors of the Hawk Group of Companies, a publicly traded
manufacturer of specialized components used in industrial, commercial and
aerospace applications. Mr. Bishop was a past member of the Young Presidents'
Organization, and is a current member of the Chief Executives' Organization and
the World Presidents' Organization, as well as the Ohio Bar Association and
American Bar Association.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2001, none of our current or former officers served on the
Audit and Compensation Committee, which was established in late December 2001.
No interlocking relationships exist between any member of our board of
directors and any other company's board of directors or compensation committee.
No interlocking relationship existed between any member of our board of
directors and any member of any other company's board of directors or
compensation committee in 2001.
EXECUTIVE MANAGEMENT COMMITTEE. On May 1, 2002, we established an
Executive Management Committee, which has been delegated the authority to
oversee the strategic management of Advanced Viral. Messrs. Wilner and Seligman
and Dr. Hirschman serve as members of the Executive Management Committee.
AUDIT AND COMPENSATION COMMITTEE. In late December 2001, we established
our Audit and Compensation Committee. The Committee recommends to the board of
directors the independent certified public accountants to be selected to audit
our annual financial statements and will approve any special assignments given
to those accountants. The Committee also will review the planned scope of the
annual audit, the independent accountants' letter of comments and management's
response thereto regarding any major accounting changes made or contemplated and
the effectiveness and efficiency of our internal accounting staff. The Committee
also will make recommendations to the board of directors regarding the
compensation payable to our executive officers, reviews general policies
relating to the compensation and benefits of our employees. For 2002, the
members of this Committee were James F. Dicke II, David Seligman, Roy Walzer and
Eli Wilner.
INVESTMENT ANALYSIS COMMITTEE. In July 2002, we established an
Investment Analysis Committee, which has been delegated the authority to
analyze financing and investment alternatives for Advanced Viral. Mr. Walzer
and Dr. Kent serve as members of this committee.
PHARMACEUTICAL LIAISON COMMITTEE. In September 2002, we established a
Pharmaceutical Liaison Committee, which has been delegated the authority to
advise the Board on strategic alternatives which may become available in the
pharmaceutical industry for Advanced Viral. Dr. Kent is the sole member of this
committee.
46
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
We currently do not pay directors fees for their attendance at
meetings of the board of directors.
The following table summarizes all compensation awarded to, earned by
or paid to (a) our Chief Executive Officer and (b) our other executive officers
whose total salary and bonus exceeded $100,000 (together, the "Named Executive
Officers") for services rendered in all capacities to us during the years
indicated.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ---------------------------------
-------------------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION (3) OPTIONS/SARS (4) COMPENSATION (5)
- ---------------------------------- ---- ---------- ------- ---------------- ---------------- ----------------
Shalom Z. Hirschman, MD, 2001 $361,000 $25,000 (2) $30,192 -- $21,270 (5)
Chairman from December 2001, until
May 2002 2000 $361,000 $ 0 $30,775 -- $4,540 (5)
President, Chief Executive Officer 1999 $325,000 $ 0 $34,738 -- $4,316 (5)
and Chief Scientific Officer since
October 1996 and consultant from
May 24, 1995 until October 1996
Alan V. Gallantar, 2001 $225,000 $25,000 $ 6,000 -- --
Chief Financial Officer since 2000 $200,000 $25,000 $21,000 -- --
October 1999 1999 $ 43,750 $ 0 $ 1,500 4,547,880 --
William Bregman, 2001 $ 70,000 -- -- -- $150,000 (6)
Secretary and director from 1985 2000 $ 60,000 -- -- -- $2,500 (5)
until December 2001, treasurer 1999 $ 35,000 -- -- -- $2,500 (5)
from 1985 to 1999
Bernard Friedland, 2001 $ 70,000 -- -- -- $150,000 (6)
President of subsidiary Advance 2000 $ 60,000 -- -- -- $1,800 (5)
Viral Ltd. from 1984 until 1999 $ 35,000 -- -- -- $1,800 (5)
December 2001; Director of
Advanced Viral from 1985 to
December 2001, Chairman from 1985
to December 2001
- ---------
(1) Dr. Hirschman's salary increased for the year 2000 to $361,000. Mr.
Gallantar's salary increased in October 2000 to $200,000 and in
October 2001 to $225,000. Mr. Gallantar was hired in October 1999 and
therefore his salary in 1999 reflects only three months of his
$175,000 annual salary.
(2) Represents portion of bonus paid to Dr. Hirschman pursuant to the
terms of his employment agreement in connection with the IND number
granted by the FDA. The remaining $75,000 due has been accrued as of
September 30, 2001.
(3) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate
incremental cost to Advanced Viral of Dr. Hirschman's automobile
lease, gas, oil, repairs and maintenance. Other
47
Annual Compensation for Mr. Gallantar includes an automobile allowance
of $500 per month and allowance for moving expenses of approximately
$15,000.
(4) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(5) Represents the dollar value of insurance premiums paid by or on behalf
of Advanced Viral with respect to term life insurance for the benefit
of the Named Executive Officers.
(6) Represents payments made to Messrs. Bregman and Friedland pursuant to
the terms of the severance agreements discussed below.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2001 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2001 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE (#) REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ------------------------- --------------------------
Shalom Z. Hirschman, MD 0 N/A 39,100,000 / 0 $628,250 / $0 (2)(3)
Alan V. Gallantar 0 N/A 3,031,320 / 1,515,960 $60,487 / $30,243 (2)(4)
William Bregman 0 N/A 0 / 0 $0 / $0
Bernard Friedland 0 N/A 0 / 0 $0 / $0
- ---------
(1) Based on the difference between the average of the high and low bid
prices per share of the common stock as reported by the Bulletin Board
on the date of exercise, and the exercise or base price.
(2) Based on the difference between the average of the closing bid and ask
prices per share of the common stock as reported by the Bulletin Board
on December 31, 2001, $0.2625, and the exercise or base price of
in-the-money stock options.
(3) As of December 31, 2001, Dr. Hirschman held options to purchase
4,100,000 shares of common stock at $0.18 per share; 4,000,000 shares
of common stock at $0.19 per share; 4,000,000 shares of common stock
at $0.28 per share; 4,000,000 shares of common stock at $0.37 per
share, and 23,000,000 shares of common stock at $0.27, all of which
are currently exercisable.
(4) As of December 31, 2001, Mr. Gallantar held options to purchase
4,547,880 shares of common stock at $0.24255 per share, of which
3,031,320 were exercisable as of such date.
48
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf.
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least
two years in advance that such one year automatic extension shall be vitiated.
If the agreement is terminated by us for cause, we may cancel all unvested
stock options, benefits under stock bonus plans and stock appreciation rights
("SARs") granted to Dr. Hirschman. If the agreement is terminated by Dr.
Hirschman for cause, we are required to pay to Dr. Hirschman his annual salary
and employee benefits through the remainder of the then current term. In July
2002, we gave Dr. Hirschman notice that the agreement would not be extended
after December 2004.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
- take such action as may be necessary to permit Dr. Hirschman
to be entitled to participate in stock option, stock bonus or
similar plans (including plans for SARs) as are established
by us;
- lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list
price not in excess of $40,000, and pay for all gas, oil,
repairs and maintenance, as well as the lease or purchase
payments, as applicable, in connection with the automobile;
- reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses, his license fees, membership dues in professional
organizations, subscriptions to professional journals,
necessary travel, hotel and entertainment expenses incurred
in connection with overnight, out-of-town trips that
contribute to the benefit of us in the reasonable
determination of Dr. Hirschman, and all other expenses that
may be pre-approved by our board of directors; and
- provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.
The agreement also provides for the payment of $100,000 to Dr.
Hirschman on the earlier to occur of (i) the date an IND number is obtained
from and approved by the FDA so that human research may be conducted using
Product R; or (ii) the execution of an agreement relating to co-marketing
49
pursuant to which one or more third parties commit to make payments to us of at
least $15 million. On September 4, 2001, the Company received an IND number
from the FDA. To date, approximately $25,000 of the $100,000 bonus described
above has been paid to Dr. Hirschman, and $75,000 has been accrued.
The agreement further provides that Dr. Hirschman is not authorized,
without the express written consent of the board of directors and other than in
the ordinary course of business, to pledge the credit of Advanced Viral, to
bind us, to release or discharge any debt due us unless we have received
payment in full, or to dispose (as collateral or otherwise) of all or
substantially all of our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998
grant to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.
GALLANTAR EMPLOYMENT AGREEMENT
Advanced Viral entered into an Employment Agreement dated as of
October 1, 1999 with Alan V. Gallantar, pursuant to which Mr. Gallantar is
employed as our Chief Financial Officer on a full business time basis. Under
the agreement, the term of Mr. Gallantar's employment continues until October
1, 2002, which in September 2002 was extended through November 2002. If the
agreement is terminated by us for cause, Mr. Gallantar will have no accrued
right to receive any bonus for the year in which his employment is terminated,
all unvested stock options will be cancelled, and any vested stock options will
terminate 90 days after the effective date of termination. If the agreement is
terminated by Advanced Viral not for cause, we are required to pay to Mr.
Gallantar all accrued and unpaid compensation, and all stock options granted as
of the date of the agreement shall become 100% vested. Upon such termination
not for cause, all options which became vested as a result of this provision
may be exercised by Mr. Gallantar until 90 days after the effective date of
termination. If Mr. Gallantar elects to terminate this agreement as a result of
a change in control, he will be paid his base salary for the remaining term of
the agreement, and all stock options granted on the date of the agreement will
become 100% vested and exercisable until 90 days after the effective date of
termination. If Mr. Gallantar elects to terminate this agreement for any other
reason, he will be paid all unaccrued and unpaid base salary, and he will have
the right to exercise any vested stock until 90 days after the effective date
of termination. All payments made to Mr. Gallantar in connection with the
termination of the agreement are subject to reduction to the extent they exceed
2.99 times the "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986.
Pursuant to the agreement, Mr. Gallantar received an annual salary of
$175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement and thereafter.
For each year of the agreement, Mr. Gallantar received a cash bonus of between
10% and 50% of his base salary, based on certain targets and the discretion of
the board of directors. As
50
of the date of the agreement, Mr. Gallantar received options to purchase an
aggregate of 4,547,880 shares of our common stock. The options expire on
October 1, 2009, and are exercisable in three increments of 1,515,960 on the
October 1, 2000, 2001 and 2002, respectively. The agreement further provides
that:
- Mr. Gallantar and his family are entitled to receive the same
employee benefits generally given to other senior executives
of Advanced Viral.
- Mr. Gallantar is entitled to 15 working days of vacation
during the first year and 20 days of vacation during each
year thereafter, subject to certain exceptions.
- Mr. Gallantar will receive a non-accountable automobile
allowance of $500 per month, provided however, that he is be
responsible for all costs of acquiring and maintaining the
automobile.
- We will reimburse Mr. Gallantar for certain professional
license and membership fees up to a maximum of $5,000 per
year in the aggregate, and all other expenses incurred in the
performance of his duties with the prior approval of the
Chief Executive Officer.
The agreement provides that Mr. Gallantar is not authorized, without
the express written consent of the board of directors and other than in the
ordinary course of business, to pledge the credit of Advanced Viral, to bind us
under any note, mortgage or other monetary obligation, to release or discharge
any debt due us unless we have received payment in full, or to dispose (as
collateral or otherwise) of a substantial amount of our assets. Furthermore,
Mr. Gallantar agreed that he will assign to us all intellectual property rights
developed by him which result from the knowledge he acquired while performing
his duties under the agreement. Finally, he has agreed that he will not,
directly or indirectly, compete with us for five years after termination of his
employment or solicit our employees to leave our employ for one year after
termination.
SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and
James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.
In connection with their resignation, we paid $150,000 in one lump sum
to each of Messrs. Bregman and Friedland, and $2,500 to Mr. Silver. In
addition, the Severance Agreements provide as follows:
- That Messrs. Bregman and Friedland shall have the combined
right until November 29, 2003 to appoint one additional
member to the Board of Directors of Advanced Viral reasonably
acceptable to Advanced Viral, so long as both Messrs. Bregman
and Friedland own shares of Advanced Viral. The
Bregman/Friedland designee, if appointed, shall serve on
Advanced Viral's Board of Directors until his successor is
duly elected and qualified, and may be removed as a member of
the Board of Directors of Advanced Viral, with or without
cause, by the affirmative vote of the members of Advanced
Viral's then Board of Directors at any time following the
date which is the earlier to occur of: (i) November 29, 2003
or (ii) the complete divestiture of both Messrs. Bregman's
and Friedland's ownership in Advanced Viral.
51
- All agreements regarding the voting or disposition of shares
of common stock of Advanced Viral held by each of Messrs.
Bregman and Friedland are terminated.
- Advanced Viral shall have a right of first refusal to
purchase shares of common stock owned by Messrs. Bregman and
Friedland upon the receipt by Messrs. Bregman or Friedland,
as the case may be, of a bona fide offer from an unrelated
third party to purchase such shares in an "on-the-market" or
"off-the-market" transaction, upon the terms set forth in the
Severance Agreements.
- With respect to the election of directors and compensation
packages for directors of Advanced Viral, each of Messrs.
Bregman and Friedland agreed to grant Advanced Viral an
irrevocable proxy to vote all the shares of its common stock
they beneficially own at any annual, special or adjourned
meeting of the stockholders of Advanced Viral until the
earlier to occur of November 29, 2003 or, as to those shares
sold, the date of the sale of such shares by Messrs. Bregman
or Friedland, as the case may be, to one or more unrelated
third parties in a bona fide sale after Messrs. Bregman or
Friedland, as the case may be, shall have first complied with
Advanced Viral's right of first refusal described in the
Severance Agreements.
- Advanced Viral agreed, to the fullest extent permitted by
Delaware law and its charter documents, to indemnify each of
Messrs. Bregman, Friedland and Silver for all amounts
(including reasonable attorneys' fees) incurred or paid in
connection with any action, proceeding, suit or investigation
arising out of or relating to their performance of services
for Advanced Viral.
- Advanced Viral agreed to continue the directors' and
officers' liability insurance for each of Messrs. Bregman,
Friedland and Silver until November 29, 2007.
In connection with satisfying our financial obligations to our
retiring directors under the Severance Agreements, we obtained a loan in the
amount of $200,000 from our Chief Financial Officer, Alan V. Gallantar, as
evidenced by a Demand Promissory Note dated December 14, 2001 (the "Note"). We
were obligated to repay the Note upon our receipt of proceeds upon the
consummation of new financing. The Note was repaid in full on December 17,
2001.
ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(K))
Advanced Viral has adopted a 401(k) plan that allows eligible
employees to contribute up to 20% of their salary, subject to annual limits,
which were $10,500 in 2001. We match 50% of the first 6% of the employee
contributions with our common stock and may from time to time, at our
discretion, make additional contributions based upon earnings. In May 2002 we
funded our matching contribution of approximately $33,000 for the year ended
December 31, 2001 by purchasing our common stock in open market transactions.
52
RECENT OPTION GRANTS
BOARD OF DIRECTORS. In May 2002, the Board of Directors 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) at such times and upon such terms and conditions as the
Board determines from time to time in the future. Except as noted below, the
term of the stock options expire upon the earlier to occur of: (i) 8 years from
the grant date, or (ii) 3 years from the date of termination of the option
holder's service to Advanced Viral. As of the date hereof, the following stock
options had been granted:
OPTION EXERCISE
OPTION HOLDER POSITION SHARES (1) PRICE
- ----------------------------- ---------------------------------------------------- ---------- -----------
Eli Wilner Secretary, Chairman of the Board, Member of 1,400,000 $0.12
Executive Management Committee and Audit and
Compensation Committee
James F. Dicke II Director 800,000 $0.12
David Seligman Director, Member of Executive Management Committee, 1,200,000 $0.12
Chairman of Audit and Compensation Committee
Nancy J. Van Sant Director 600,000 $0.12
Roy S. Walzer Director, Member of Audit and Compensation 528,800 $0.295 (2a)
Committee, Investment Analysis Committee
Paul R. Bishop Director 238,356 $0.17 (2b)
Richard S. Kent, MD Director, Member of Investment Analysis Committee 241,096 $0.14 (2c)
and Pharmaceutical Liaison Committee
Christopher Forbes Former Director (resigned 5/1/02) 150,000 $0.12
George P. Canellos, MD Member of Scientific Advisory Board 250,000 $0.12
Michael Harris, MD Member of Scientific Advisory Board 250,000 $0.12
James D'Olimpio, MD Member of Scientific Advisory Board 250,000 $0.12
Carol Armenti Member of Scientific Advisory Board 250,000 $0.12
Howard Young, MD Member of Scientific Advisory Board 250,000 $0.12
Mark H. Kaplan, MD Member of Scientific Advisory Board 250,000 $0.12 (2d)
Albert Reichmann Member of Business Advisory Board 250,000 $0.12
Jozef Straus, PhD., DSc Hon. Member of Business Advisory Board (resigned 11/6/02) 250,000 $0.12
Peter Lunder Member of Business Advisory Board 250,000 $0.12
Sidney Pestka, MD Member of Scientific Advisory Board 250,000 $ .14 (2e)
---------
TOTAL 7,658,252
- ---------
(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.
EMPLOYEES. In 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.
53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have granted stock options to certain of our executive officers, as
described under the caption "Executive Compensation." We have entered into
employment agreements with certain of our executive officers, and have entered
into severance agreements with certain of our former officers and directors as
described under the caption "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements."
In connection with satisfying our financial obligations to our
retiring directors under the Severance Agreements, we obtained a loan in the
amount of $200,000 from our Chief Financial Officer, Alan V. Gallantar, as
evidenced by a demand promissory note dated December 14, 2001. This promissory
note was repaid in full on December 17, 2001.
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 issuance 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
Advanced Viral in shares of common stock.
Other than the foregoing, there were no material transactions between
Advanced Viral and any of its officers or directors which involved $60,000 or
more during the past three fiscal years.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
common shares of Advanced Viral owned as of the date hereof (i) by each person
who beneficially owns more than 5% of the common shares, (ii) by each of our
directors, (iii) by each of our Named Executive Officers identified in the
Summary Compensation Table above and (iv) by all directors and executive
officers of Advanced Viral as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to such
common shares.
NAME OF BENEFICIAL OWNER NUMBER OF SHARES (1) PERCENTAGE OWNERSHIP
- ------------------------ -------------------- --------------------
Bernard Friedland (2, 3) 39,146,730 8.6%
William Bregman (2, 4) 38,146,988 8.4%
Shalom Z. Hirschman, MD (5) 39,101,000 7.9%
Alan V. Gallantar (6) 4,547,880 1.0%
Eli Wilner (7) 4,396,600 1.0%
David Seligman (8) 675,000 *
Nancy J. Van Sant (8) 450,000 *
Roy Walzer (8) 264,400 *
Richard S. Kent, MD (8) 60,274 *
James F. Dicke, II (9) 1,899,545 *
Paul R. Bishop (8) 119,178 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS
A GROUP (7 PERSONS) 51,513,877 10.2%
54
- ---------
* Represents less than 1%
(1) Shares beneficially owned include shares that may be acquired pursuant
to the exercise of outstanding stock options that are exercisable
within 60 days of the date hereof.
(2) Pursuant to their severance agreements with Advanced Viral, each of
Messrs. Bregman and Friedland have granted to Advanced Viral (i) the
right of first refusal to purchase their shares of common stock
subject to certain conditions and for a limited time; and (ii) with
respect to the election of directors and compensation packages for
directors of Advanced Viral, an irrevocable proxy to vote such shares
of common stock at any stockholders meeting until the earlier to occur
of November 29, 2003 or as to those shares sold, the date of the sale
of such shares by either Mr. Bregman or Mr. Friedland, as the case may
be, to one or more unrelated parties.
(3) Includes 1,000,000 shares of common stock owned by Mr. Friedland and
Beth Friedland, his daughter, as joint tenants; 20,000,000 shares
owned by Mr. Friedland and Shirley Friedland, his spouse, as joint
tenants; and 400,000 shares owned by the B&SD Friedland Foundation, a
not-for-profit foundation controlled by Mr. Friedland. Does not
include 15,000 shares owned by Shirley Friedland as to which Mr.
Friedland disclaims beneficial ownership.
(4) Includes 22,293,614 shares held in a trust for which Mr. Bregman is
the sole trustee and sole beneficiary; 165,000 shares owned by Carol
Bregman, his daughter; 165,000 shares owned by Janet Berlin, his
daughter; 165,000 shares owned by Forest Berlin, his grandson; 165,000
shares owned by Jessica Berlin, his granddaughter; and 55,000 shares
owned by David Berlin, his son-in-law.
(5) Includes 39,100,000 shares that may be acquired pursuant to options to
purchase common stock exercisable within 60 days from the date hereof,
and 1,000 shares owned by FranE Hirschman, his spouse. Dr. Hirschman
is the President, CEO and a Director of Advanced Viral Research Corp.
(6) Represents shares that may be acquired pursuant to currently
exercisable stock options. Mr. Gallantar is the CFO of Advanced Viral
Research Corp.
(7) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 1,050,000 shares that may be acquired
pursuant to currently exercisable stock options; (iii) 782,500 shares
beneficially owned by his wife Barbara Ann Brennan; (iv) 70,000 shares
beneficially owned by his step-daughter Celia Conaway; (v) 17,000
shares beneficially owned by his mother Zelotta Wilner; (vi) 16,900
shares beneficially owned by his father Abraham Wilner; and (vii)
50,000 shares held in a trust for which Mr. Wilner is the sole trustee
and his niece and nephew are the sole beneficiaries. Mr. Wilner is the
Secretary and Chairman of the Board of Directors of Advanced Viral
Research Corp.
(8) Represents shares that may be acquired pursuant to currently
exercisable stock options. The persons listed are Directors of Advanced
Viral Research Corp.
(9) Includes 600,000 shares that may be acquired pursuant to currently
exercisable stock options. Mr. Dicke is a Director of Advanced Viral
Research Corp.
55
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date hereof by each of the
selling shareholders assuming the full exercise of certain warrants. Unless
otherwise indicated below, to our knowledge all persons listed below have sole
voting and investment power with respect to the shares of common stock, except
to the extent authority is shared by spouses under applicable law. The
information included below is based upon information provided by the selling
shareholders. Because the selling shareholders may offer all, some or none of
their shares, no definitive estimate as to the number of shares that will be
held by the selling shareholders after such offering can be provided and the
following table has been prepared on the assumption that all shares offered
under this prospectus will be sold.
SHARES OWNED SHARES OWNED
POSITION WITH OR BEFORE OFFERING (1) AFTER OFFERING (3)
RELATIONSHIP TO --------------------- SHARES BEING SOLD -------------------
SELLING SHAREHOLDER ADVANCED VIRAL NUMBER PERCENT IN OFFERING (2) NUMBER PERCENT
- ------------------- ----------------------- ---------- ------- ----------------- --------- -------
SDS Merchant Fund, LP None 6,503,999 1.4% 4,821,428 (2a) 1,682,571 1.0%
Stonestreet Limited
Partnership None 0 * 4,017,857 (2a) 0 0%
01144 Ltd. None 739,801 * 535,715 (2a) 204,086 *
Bristol Investment Fund Ltd. None 3,313,000 * 2,142,857 (2a) 1,170,143 *
Alpha Capital None 5,014,500 1.1% 2,678,571 (2a) 2,335,929 *
Xmark Fund, Ltd. None 1,060,000 * 825,000 (2a) 235,000 *
Xmark Fund, L.P. None 300,000 * 300,000 (2a) 0 0%
RIG MicroCap Fund LP None 535,715 * 535,715 (2a) 0 0%
Richard Melnick None 267,857 * 267,857 (2a) 0 0%
Eli Wilner Secretary, Director 4,746,600 * 1,400,000 (2b) 3,346,600 *
Shalom Z. Hirschman, MD President and CEO 39,101,000 7.9% 39,100,000 (2b) 1,000 *
Alan V. Gallantar CFO 4,547,880 1.0% 4,547,880 (2b) 0 0%
David Seligman Director 1,200,000 * 1,200,000 (2b) 0 0%
James F. Dicke II Director 10,919,545 2.4% 10,919,545 (2b, c) 0 0%
Nancy J. Van Sant Director 600,000 * 600,000 (2b) 0 0%
Roy S. Walzer Director 528,800 * 528,800 (2b) 0 0%
Paul R. Bishop Director 238,356 * 238,356 (2b) 0 0%
Richard S. Kent, MD Director 241,096 * 241,096 (2b) 0 0%
Christopher Forbes Former Director 150,000 * 150,000 (2b) 0 0%
George P. Canellos, MD Scientific Advisory
Board 250,000 * 250,000 (2b) 0 0%
Michael Harris, MD Scientific Advisory
Board 250,000 * 250,000 (2b) 0 0%
James D'Olimpio, MD Scientific Advisory
Board 250,000 * 250,000 (2b) 0 0%
Ms. Carol Armenti Scientific Advisory
Board 250,000 * 250,000 (2b) 0 0%
Howard Young, MD Scientific Advisory
Board 250,000 * 250,000 (2b) 0 0%
Mark H. Kaplan, MD Scientific Advisory
Board 250,000 * 250,000 (2b) 0 0%
Sidney Pestka Business Advisory Board 250,000 * 250,000 (2b) 0 0%
Albert Reichmann Business Advisory Board 250,000 * 250,000 (2b) 0 0%
Jozef Straus, Ph.D.,
D.Sc. (Hon.) Business Advisory Board 250,000 * 250,000 (2b) 0 0%
Peter Lunder Business Advisory Board 5,762,500 1.3% 5,762,500 (2b, c) 0 0%
Elliot Bauer Affiliate of AVIX 3,799,500 * 3,499,500 (2b) 300,000 *
Alexander, Richard Employee 125,000 * 125,000 (2b) 0 0%
Beschastnykh, Olga Employee 13,000 * 13,000 (2b) 0 0%
Bookman, Martin Employee 25,000 * 25,000 (2b) 0 0%
Camposano, Elena Employee 1,000 * 1,000 (2b) 0 0%
Chimezie, Eleanore Employee 1,000 * 1,000 (2b) 0 0%
Choudhury, Kanak Employee 100,000 * 100,000 (2b) 0 0%
Chowdhury, Ahmed Employee 12,000 * 12,000 (2b) 0 0%
Dediego, Maria Employee 100,000 * 100,000 (2b) 0 0%
Dragonetti, Lisa Employee 1,000 * 1,000 (2b) 0 0%
Droguett, Gustavo Employee 1,000 * 1,000 (2b) 0 0%
Engel, Helen Employee 1,000 * 1,000 (2b) 0 0%
Fioriti, Paul Employee 1,000 * 1,000 (2b) 0 0%
Fisher, John Employee 150,000 * 150,000 (2b) 0 0%
Fonseca, Gris Employee 1,000 * 1,000 (2b) 0 0%
Fonseca, Grisselis Employee 10,000 * 10,000 (2b) 0 0%
Gallace, Maria Employee 30,000 * 30,000 (2b) 0 0%
Garcia, Maritza Employee 2,000 * 2,000 (2b) 0 0%
Geoghagen, Neil Employee 3,000 * 3,000 (2b) 0 0%
56
Huberman, Kara Employee 13,000 * 13,000 (2b) 0 0%
Keerthy, Shivaleela Employee 2,000 * 2,000 (2b) 0 0%
Lazzarino, Debbie Employee 100,000 * 100,000 (2b) 0 0%
Li, Fensheng Employee 28,000 * 28,000 (2b) 0 0%
Malia, Sharon Employee 30,000 * 30,000 (2b) 0 0%
Meyer, Kerrie A Employee 1,000 * 1,000 (2b) 0 0%
Mowla, Khondakar Employee 1,000 * 1,000 (2b) 0 0%
Munoz, Patria Employee 1,000 * 1,000 (2b) 0 0%
Musi, Elgilda Employee 38,000 * 38,000 (2b) 0 0%
Noel, Beatrice Employee 1,000 * 1,000 (2b) 0 0%
Noronha, William Employee 1,000 * 1,000 (2b) 0 0%
Santer, Malcom Employee 100,000 * 100,000 (2b) 0 0%
Sheobaran, Annie Employee 12,000 * 12,000 (2b) 0 0%
Szalkiewicz, Andrew Employee 155,000 * 155,000 (2b) 0 0%
Taraporewala, Irach Employee 150,000 * 150,000 (2b) 0 0%
Tudor, Ray Employee 100,000 * 100,000 (2b) 0 0%
Venugopal, D Employee 5,000 * 5,000 (2b) 0 0%
O. Frank Rushing &
Justine Simoni None 102,359,097 18.7% 5,319,091 (2c) 0 0%
TOTAL SHARES (1) % 93,083,768 8,275,329 1.7%
SHARES OUTSTANDING AFTER
OFFERING (2) 546,399,122
- ---------
* Less than 1%
(1) Includes shares of common stock issuable pursuant to outstanding
purchase warrants, stock options and convertible debentures held by the
selling shareholders.
(2) Includes an aggregate of (a) 16,125,000 shares underlying warrants to
purchase shares of our common stock at an exercise price equal to $.25
per share or as may be adjusted from time to time through September 9,
2007; (b) 56,007,632 shares of common stock underlying stock options
issued to certain directors, advisory board members, employees and
others which have exercise prices ranging from $.12 to $.36 per share;
and (c) up to 20,951,136 shares issuable upon the conversion of our 5%
convertible debentures held by certain selling shareholders assuming a
conversion price of $.10 for the unconverted portion of the debentures
as of the date hereof. See "Prospectus Summary--The Offering". Assumes
the full exercise or conversion of such warrants, options or debentures
held by selling shareholders.
(3) Assumes that all of the shares are sold by the selling shareholders
and no additional shares of common stock are acquired.
57
PLAN OF DISTRIBUTION
We are registering the proposed resale by the selling shareholders of
93,083,768 shares of our common stock issuable upon the exercise of certain
stock options and the conversion of certain convertible debentures. The selling
shareholders may offer the shares at various times in one or more of the
following transactions:
- in the over-the-counter market;
- in transactions other than market transactions;
- in connection with short sales of our shares;
- by pledge to secure debts or other obligations;
- in connection with the writing of non-traded and
exchange-traded call options, in hedge transactions and in
settlement of other transactions in standardized or
over-the-counter options;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
- in a combination of any of the above.
The selling shareholders may sell shares at market prices then
prevailing, at prices related to prevailing market prices, at negotiated prices
or at fixed prices.
The selling shareholders may use broker-dealers to sell shares. If
this happens, broker-dealers will either receive discounts or commissions from
the selling shareholders, or they will receive commissions from purchasers of
shares for whom they have acted as agents. Selling shareholders may be deemed
to be underwriters with respect to the shares sold by them. Broker-dealers who
act in connection with the sale of the common stock may also be deemed to be
underwriters. Profits on any resale of the common stock as a principal by these
broker-dealers, and any commissions received by the broker-dealers, may be
deemed underwriting discounts and commissions under the Securities Act of 1933.
No underwriting commissions or finder's fees have been or will be paid
to us. The selling shareholders will pay all broker-dealer commissions and
related selling expenses associated with the sale of the common stock. The
common stock offered hereby is being registered pursuant to our contractual
obligations, and we have agreed to pay the costs of registering the shares,
including the fees outlined above.
In connection with the offering, persons participating in the offering
may purchase and sell shares of common stock on the open market. These
transactions may include short sales, stabilizing transactions in accordance
with Rule 104 of Regulation M under the Exchange Act and purchases to cover
positions created by short sales. Short sales involve the sale by an
underwriter of a greater number of shares than they are required to purchase in
the offering which creates a short position. Stabilizing transactions consist
of certain bids or purchases made for the purpose of preventing or limiting a
decline in the market price of the common stock.
These activities, if taken by the underwriters, may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected in the over-the-counter market or otherwise.
58
DESCRIPTION OF COMMON STOCK
Our Certificate of Incorporation authorizes us to issue 1,000,000,000
shares of common stock, par value $0.00001 per share. As of the date hereof,
there were outstanding 455,523,990 shares of common stock, all of which are
fully paid for and non-assessable. The holders of common stock:
- have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
- entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
- do not have preemptive, subscription, or conversion rights
and there are no redemption or sinking fund provisions
applicable thereto; and
- are entitled to one noncumulative vote per share on all
matters which shareholders may vote on at all meetings of
shareholders.
American Stock Transfer & Trust Company is our transfer agent and
registrar, and is located in Brooklyn, New York.
LEGAL MATTERS
The validity of the shares offered in this prospectus will be passed
upon for Advanced Viral by Berman Rennert Vogel & Mandler, P.A., Bank of
America Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida 33131.
EXPERTS
The Consolidated Financial Statements of Advanced Viral Research Corp.
included in this prospectus and in the registration statement except as they
pertain to periods unaudited, have been audited by Rachlin Cohen & Holtz LLP,
independent certified public accountants, for the periods indicated in their
report appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon the report of such firm given upon the authority of
such firm as experts in accounting and auditing.
DISCLOSURE OF SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certificate of incorporation provides that none of our directors
shall be liable to us or our shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to us or our
shareholders;
- for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives improper
personal benefit.
59
The effect of this provision is to eliminate our rights and those of
our shareholders (through shareholders' derivative suits on behalf of Advanced
Viral) to recover monetary damages against a director for breach of his or her
fiduciary duty of care as a director (including breaches resulting from
negligent or grossly negligent behavior) except in the situations described
above. The limitations summarized above, however, do not affect our ability or
that of our shareholders to seek non-monetary remedies, such as an injunction
or rescission, against a director for breach of his or her fiduciary duty.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers, or persons controlling Advanced Viral pursuant to the
foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
No dealer, salesperson, or other person has been authorized to give
any information or to make any representations other than those contained in
this prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized. Neither the delivery of this
prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in our affairs since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof. This prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities offered hereby by
anyone in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making the offer is not qualified to do so or
to anyone to whom it is unlawful to make such offer or solicitation.
60
ADVANCED VIRAL RESEARCH CORP.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 30, 2001, 2000 AND 1999
Report of Independent Certified Public Accountants......................................................... F-1
Consolidated Financial Statements Years Ended 2001, 2000 and 1999
Balance Sheets, December 31, 2001 and 2000............................................................ F-2
Statements of Operations for the Years Ended December 31, 2001, 2000
and 1999 and from Inception (February 20, 1984) to December 31, 2001............................. F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 2001................................................................................. F-4
Statements of Cash Flows for the Years Ended December 31, 2001, 2000
and 1999 and from Inception (February 20, 1984) to December 31, 2002............................. F-11
Notes to Consolidated Financial Statements........................................................... F-12
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
Consolidated Financial Statements Three and Six Months Ended June 30, 2002
Balance Sheets, June 30, 2002 and December 31, 2001.................................................. F-45
Statements of Operations for the Three and Six Months Ended June 30, 2002
and 2001 and from Inception (February 20, 1984) to June 30, 2002................................. F-46
Statements of Stockholders' Equity from Inception (February 20, 1984)
to June 30, 2002................................................................................. F-47
Statements of Cash Flows for the Six Months Ended June 30, 2002
and 2001 and from Inception (February 20, 1984) to June 30, 2002................................. F-58
Notes to Consolidated Condensed Financial Statements................................................. F-59
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
2001 and for the period from inception (February 20, 1984) to December 31, 2001.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2001 and 2000
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2001 and for the period from
inception (February 20, 1984) to December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
As more fully described in Note 2, the Company is subject to certain liquidity
considerations. The Company's plans with respect to this matter are also
described in Note 2.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
March 25, 2002
F-1
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,499,809 $ 5,962,633
Inventory -- 19,729
Other current assets 63,162 34,804
------------ ------------
Total current assets 1,562,971 6,017,166
Property and Equipment, Net 3,000,583 1,944,199
Other Assets 885,237 847,349
------------ ------------
Total assets $ 5,448,791 $ 8,808,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,843,706 $ 902,961
Current portion of capital lease obligation 64,197 58,690
Current portion of note payable 24,246 21,517
------------ ------------
Total current liabilities 1,932,149 983,168
------------ ------------
Long-Term Debt:
Capital lease obligation - long term portion 42,370 106,567
Note payable - long term portion 32,198 56,446
------------ ------------
Total long-term debt 74,568 163,013
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 403,296,863 and 380,214,618
shares issued and outstanding 4,033 3,802
Additional paid-in capital 47,666,141 39,969,373
Deficit accumulated during the development stage (40,795,470) (29,079,902)
Discount on warrants (3,432,630) (3,230,740)
------------ ------------
Total stockholders' equity 3,442,074 7,662,533
------------ ------------
Total liabilities and stockholders' equity $ 5,448,791 $ 8,808,714
============ ============
See notes to consolidated financial statements.
F-2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
----------------------------------------------- DECEMBER 31,
2001 2000 1999 2001
------------- ------------- ------------- ------------
Revenues $ 17,601 $ 8,363 $ 10,953 $ 231,892
------------- ------------- ------------- ------------
Costs and Expenses:
Research and development 5,150,869 3,192,551 1,948,937 13,875,824
General and administrative 4,301,333 2,621,542 1,831,061 16,069,183
Compensation expense relating to
modifications of option terms 691,404 1,901,927 210,144 2,803,475
Depreciation 532,264 362,392 230,785 1,440,879
------------- ------------- ------------- ------------
10,675,870 8,078,412 4,220,927 34,189,361
------------- ------------- ------------- ------------
Loss from Operations (10,658,269) (8,070,049) (4,209,974) (33,957,469)
------------- ------------- ------------- ------------
Other Income (Expense):
Interest income 114,057 162,077 42,744 878,175
Other income -- -- -- 120,093
Interest expense (868,856) (1,446,692) (2,007,032) (7,533,769)
Severance expense - former directors (302,500) -- -- (302,500)
------------- ------------- ------------- ------------
(1,057,299) (1,284,615) (1,964,288) (6,838,001)
------------- ------------- ------------- ------------
Net Loss $ (11,715,568) $ (9,354,664) $ (6,174,262) $(40,795,470)
============= ============= ============= ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.03) $ (0.03) $ (0.02)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 389,435,324 362,549,690 302,361,109
============= ============= =============
See notes to consolidated financial statements.
F-3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
----------------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
----------- ----------- --------- ----------- ---------
Balance, inception (February 20, 1984)
as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
----------- --------- -------- ---------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- --------- -------- ---------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $ 0.00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
----------- --------- -------- ---------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 0.01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
----------- --------- -------- ---------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- --------- -------- ---------
See notes to consolidated financial statements.
F-4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
--------------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ------------ ------------ ------------ ------------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $ 0.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, year ended December 31, 1987 -- -- -- (258,663)
------------ ------------ ------------ ------------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
------------ ------------ ------------ ------------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
------------ ------------ ------------ ------------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption 0.05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
------------ ------------ ------------ ------------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
F-5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE
PER PAID-IN DEVELOPMENT
SHARE SHARES AMOUNT CAPITAL STAGE
------ ------------ ------------ ------------ ------------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ 0.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants 0.08 2,500 -- 200 --
Issuance of common stock, exercise of underwriter warrants 0.12 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
------------ ------------ ------------ ------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing 0.04 10,000,000 100 404,900 --
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
------------ ------------ ------------ ------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services 0.055 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.035 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
------------ ------------ ------------ ------------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------------ ------------ ------------
See notes to consolidated financial statements.
F-6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ----------- --------- ----------- ------------ ----------- ------------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting
services $0.05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of options 0.08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of options 0.10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- --------- ----------- ----- ----------- -----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
Issuance of common stock, exercise of options 0.05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting
services 0.11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting
services 0.14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- --------- ----------- ----- ----------- -----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- --------- ----------- ----- ----------- -----
See notes to consolidated financial statements.
F-7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
----------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
----- ----------- ----------- ------------ ------------- ----------- ------------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock, exercise
of options $0.05 3,333,334 33 166,634 -- -- --
Issuance of common stock, exercise
of options 0.08 1,158,850 12 92,696 -- -- --
Issuance of common stock, exercise
of options 0.10 7,163,600 72 716,288 -- -- --
Issuance of common stock, exercise
of options 0.11 170,000 2 18,698 -- -- --
Issuance of common stock, exercise
of options 0.12 1,300,000 13 155,987 -- -- --
Issuance of common stock, exercise
of options 0.18 1,400,000 14 251,986 -- -- --
Issuance of common stock, exercise
of options 0.19 500,000 5 94,995 -- -- --
Issuance of common stock, exercise
of options 0.20 473,500 5 94,695 -- -- --
Issuance of common stock, for
services rendered 0.50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended December 31, 1996 -- -- -- -- (1,154,740) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------------ ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
-------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 0 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock, exercise
of options $ 0.08 3,333,333 33 247,633 -- -- --
Issuance of common stock, conversion
of debt 0.20 1,648,352 16 329,984 -- -- --
Issuance of common stock, conversion
of debt 0.15 894,526 9 133,991 -- -- --
Issuance of common stock, conversion
of debt 0.12 2,323,580 23 269,977 -- -- --
Issuance of common stock, conversion
of debt 0.15 1,809,524 18 265,982 -- -- --
Issuance of common stock, conversion
of debt 0.16 772,201 8 119,992 -- -- --
Issuance of common stock, for
services rendered 0.41 50,000 -- 20,500 -- -- --
Issuance of common stock, for
services rendered 0.24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture 0 -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture 0 -- -- 1,350,000 -- -- --
Warrant costs, February debenture 0 -- -- 37,242 -- -- --
Warrant costs, October debenture 0 -- -- 291,555 -- -- --
Amortization of deferred
compensation cost 0 -- -- -- -- -- 399,322
Imputed interest on convertible
debenture 0 -- -- 4,768 -- -- --
Net loss, year ended December 31, 1997 0 -- -- -- -- (4,141,729) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 0 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ----------- ----------- ----------- ----------- -----------
See notes to consolidated financial statements.
F-9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
---------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED
PER PAID-IN SUBSCRIPTION DEVELOPMENT COMPENSATION
SHARE SHARES AMOUNT CAPITAL RECEIVABLE STAGE COST
------ ----------- ------ ------------ -------- ------------ ------------
Balance, December 31, 1997 277,962,574 $2,779 $ 10,512,767 $(19,000) $ (8,993,266) $(73,837)
Issuance of common stock,
exercise of options $0.12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options 0.14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options 0.16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options 0.20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options 0.26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt 0.13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt 0.14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt 0.15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt 0.18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt 0.19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt 0.22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt 0.23 1,870,869 19 424,981 -- -- --
Issuance of common stock, for
services rendered 0.21 100,000 1 20,999 -- -- --
Beneficial conversion feature,
November debenture -- -- 625,000 -- -- --
Warrant costs, November debenture -- -- 48,094 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 59,068
Write off of subscription
receivable -- -- (19,000) 19,000 -- --
Net loss, year ended
December 31, 1998 -- -- -- -- (4,557,710) --
----------- ------ ------------ -------- ------------ --------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
----------- ------ ------------ -------- ------------ --------
See notes to consolidated financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
---------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DEFERRED DISCOUNT
PER PAID-IN DEVELOPMENT COMPENSATION ON
SHARE SHARES AMOUNT CAPITAL STAGE COST WARRANTS
----- ----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1998 296,422,907 $2,964 $14,325,076 $(13,550,976) $(14,769) $ --
Issuance of common stock, securities
purchase agreement $0.16 4,917,276 49 802,451 -- -- --
Issuance of common stock, securities
purchase agreement 0.27 1,851,852 18 499,982 -- -- --
Issuance of common stock, for services
rendered 0.22 100,000 1 21,999 -- -- --
Issuance of common stock, for services
rendered 0.25 180,000 2 44,998 -- -- --
Beneficial conversion feature, August
debenture -- -- 687,500 -- -- --
Beneficial conversion feature, December
debenture -- -- 357,143 -- -- --
Warrant costs, securities purchase
agreement -- -- 494,138 -- -- (494,138)
Warrant costs, securities purchase
agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August debenture -- -- 52,592 -- -- --
Warrant costs, December debenture -- -- 4,285 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- 102,674
Amortization of deferred
compensation cost -- -- -- -- 14,769 --
Credit arising from modification of
option terms -- -- 210,144 -- -- --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262) -- --
----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
----------- ------ ----------- ------------ -------- ---------
See notes to consolidated financial statements.
F-11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DISCOUNT
PER PAID-IN DEVELOPMENT ON
SHARE SHARES AMOUNT CAPITAL STAGE WARRANTS
------- ----------- ------ ------------ ------------ -----------
Balance, December 31, 1999 303,472,035 $3,034 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of common stock, exercise
of options $0.1400 600,000 6 83,994 -- --
Issuance of common stock, exercise
of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock, exercise
of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock, exercise
of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock, exercise
of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock, exercise
of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock, exercise
of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock, exercise
of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock, exercise
of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock, exercise
of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock, exercise
of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock, exercise
of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock, cashless
exercise of warrants 563,597 6 326,153 -- --
Issuance of common stock, services
rendered 0.4650 100,000 1 46,499 -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- (326,159) -- --
Beneficial conversion feature,
January Debenture -- -- 386,909 -- --
Warrant costs, consulting agreement -- -- 200,249 -- --
Warrant costs, January Debenture -- -- 13,600 -- --
Warrant costs, private placement -- -- 3,346,414 -- (3,346,414)
Recovery of subscription receivable
previously written off -- -- 19,000 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 544,163
Credit arising from modification of
option terms -- -- 1,901,927 -- --
Net loss, year ended December 31, 2000 -- -- -- (9,354,664) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 3,802 39,969,373 (29,079,902) (3,230,740)
----------- ------ ------------ ------------ -----------
See notes to consolidated financial statements.
F-12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2001
COMMON STOCK DEFICIT
-------------------------------- ACCUMULATED
AMOUNT ADDITIONAL DURING THE DISCOUNT
PER PAID-IN DEVELOPMENT ON
SHARE SHARES AMOUNT CAPITAL STAGE WARRANTS
------ ----------- ------- ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 $ 3,802 $ 39,969,373 $(29,079,902) $(3,230,740)
Issuance of common stock, exercise
of options 0.2700 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 financial statements.
F-13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
------------------------------------------- DECEMBER 31,
2001 2000 1999 2001
------------ ------------ ----------- ------------
Cash Flows from Operating Activities:
Net loss $(11,715,568) $ (9,354,664) $(6,174,262) $(40,795,470)
------------ ------------ ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 532,264 362,392 230,785 1,440,789
Amortization of debt issue costs 15,344 106,030 331,250 794,559
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture -- 386,909 1,044,643 3,818,663
Amortization of discount on warrants 985,705 611,134 148,262 2,035,398
Amortization of discount on warrants - consulting services -- 230,249 -- 230,249
Amortization of deferred compensation cost -- -- 14,769 760,500
Issuance of common stock for debenture interest -- 76,212 -- 76,212
Issuance of common stock for services 35,000 46,500 67,000 1,586,000
Compensation related to modification of option terms 691,404 1,901,927 210,144 2,803,475
Changes in operating assets and liabilities:
Increase in other current assets (28,358) (5,063) (29,917) (93,156)
Decrease in inventory 19,729 -- -- --
Increase in other assets (53,232) (278,037) (440,216) (1,548,227)
Increase in accounts payable and accrued liabilities 940,745 174,089 449,848 1,849,906
------------ ------------ ----------- ------------
Total adjustments 3,138,601 3,612,342 2,026,568 13,754,368
------------ ------------ ----------- ------------
Net cash used by operating activities (8,576,967) (5,742,322) (4,147,694) (27,041,102)
------------ ------------ ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- -- (6,292,979)
Proceeds from sale of investments -- -- 821,047 6,292,979
Acquisition of property and equipment (1,588,648) (917,471) (407,150) (4,055,669)
------------ ------------ ----------- ------------
Net cash provided (used) by investing activities (1,588,648) (917,471) 413,897 (4,055,669)
------------ ------------ ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- 1,000,000 3,000,000 9,500,000
Proceeds from sale of securities, net of issuance costs 5,783,000 10,835,970 702,500 23,300,058
Payments under capital lease (58,690) (50,324) (41,986) (167,602)
Payments on note payable (21,519) (19,096) (14,261) (54,876)
Recovery of subscription receivable written off -- 19,000 -- 19,000
------------ ------------ ----------- ------------
Net cash provided by financing activities 5,702,791 11,785,550 3,646,253 32,596,580
------------ ------------ ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,462,824) 5,125,757 (87,544) 1,499,809
Cash and Cash Equivalents, Beginning 5,962,633 836,876 924,420 --
------------ ------------ ----------- ------------
Cash and Cash Equivalents, Ending $ 1,499,809 $ 5,962,633 $ 836,876 $ 1,499,809
============ ============ =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 20,556 $ 36,681 $ 118,870
============ ============ ===========
During 2000, the Company purchased equipment
under a capital lease totaling $13,197.
See notes to consolidated financial statements.
F-14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the
purpose of manufacturing and marketing a pharmaceutical product
initially named Reticulose, the current formulation of which is now
known as and hereinafter referred to as "Product R". While the
Company has had limited sales of this product, primarily for
research purposes, the success of the Company will be dependent
upon obtaining certain regulatory approval for its pharmaceutical
product, Product R, to commence commercial operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research,
Ltd. (LTD), a Bahamian Corporation. All significant intercompany
accounts have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
As described above, the Company was incorporated on July 31, 1985,
and, since that time, has been primarily involved in organizational
activities, research and development activities, and raising
capital. Planned operations, as described above, have not commenced
to any significant extent. Accordingly, the Company is considered
to be in the development stage, and the accompanying consolidated
financial statements represent those of a development stage
enterprise.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments (primarily a
money market fund), with original maturities of three months or
less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets. Gain or loss on disposition of assets is recognized
currently. Maintenance and repairs are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the
Company.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
OTHER ASSETS
Patent development costs are capitalized as incurred. Such costs
will be amortized over the life of the patent, commencing at the
time Product R is marketed. Loan costs include fees paid in
connection with the February 2001 private equity line of credit
agreement and are being amortized over the life of the agreement
(see Note 6).
INCOME TAXES
The Company accounts for its income taxes using Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR
INCOME TAXES, which requires recognition of deferred tax
liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the
estimated fair value of the Company's financial instruments
presented in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 107. Fair value estimates
discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31,
2001 and 2000. Since the reported fair values of financial
instruments are based upon a variety of factors, they may not
represent actual values that could have been realized as of
December 31, 2001 and 2000 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial
instruments include cash, a money market fund and accounts payable.
Fair values were assumed to approximate carrying values for these
financial instruments since they are short-term in nature and their
carrying amounts approximate fair values or they are receivable or
payable on demand.
CONCENTRATIONS OF CREDIT RISk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At
various times during the year, the Company had cash balances in
excess of federally insured limits. The Company maintains its cash,
which consists primarily of demand deposits, with high quality
financial institutions, which the Company believes limits this
risk.
F-16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No.
25), and related interpretations, in accounting for its employee
stock options rather than the alternative fair value accounting
allowed by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
APB No. 25 provides that the compensation expense relative to the
Company's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a
pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in
accounting for stock options issued to non-employees.
NET LOSS PER COMMON SHARE
The Company computes loss per share in accordance with SFAS No.
128, EARNINGS PER SHARE. This standard requires dual presentation
of basic and diluted earnings per share on the face of the income
statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the
diluted earnings per share computation.
Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average number of common shares
outstanding during the year. The Company's potentially issuable
shares of common stock pursuant to outstanding stock options and
warrants are excluded from the Company's diluted computation, as
their effect would be anti-dilutive.
REVENUE RECOGNITION
The limited sales generated by the Company have consisted of sales
of Product R for testing and other purposes. The Company records
sales when the product is shipped to customers.
USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they
may ultimately differ from actual results.
RECLASSIFICATIONS
Certain amounts in the 1999 and 2000 financial statements have been
reclassified to conform to 2001 presentation.
F-17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued Statement No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS 144), which
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 supersedes Statement No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and
reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS
OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A
BUSINESS, and EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING
EVENTS AND TRANSACTIONS, for the disposal of a segment of a
business. SFAS 144 retains the requirement in Opinion No. 30 to
report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed
of or is classified as held for sale. The Company has not
determined the impact that SFAS 144 will have, if any, on its
financial statements.
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS,
and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS which
replace Accounting Principles Board Opinion Nos. 16, BUSINESS
COMBINATIONS and 17, INTANGIBLE ASSETS, respectively. SFAS No. 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, and that the
use of the pooling-of-interests method be prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method to
an impairment-only method. Amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon
adoption of SFAS No. 142, which the Company will be required to
adopt on January 1, 2002. After December 31, 2001, goodwill can
only be written down upon impairment discovered during annual tests
for fair value, or discovered during tests taken when certain
triggering events occur. The Company believes that the adoption of
this statement will not have an impact on the results of operations
or financial position of the Company.
In June 1999, the Financial Accounting Standards Board issued SFAS
No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133 AN
AMENDMENT OF SFAS NO. 133, which deferred the effective date to all
fiscal quarters of all fiscal years beginning after June 15, 2000.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Adoption of the new standard on January 1, 2001 had no effect on
the financial statements.
In March 2000, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF
APB OPINION NO. 25 (FIN 44). FIN 44 clarifies the application of
APB Opinion No. 25 and, among other issues, clarifies the
following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan
qualifies as a noncompensatory plan; the accounting consequences of
various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 was effective
July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12,
2000. The Company adopted FIN 44 in the third quarter of 2000 and
there was no material impact on the Company's results of operations
or financial position.
F-18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. LIQUIDITY
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of approximately $41,000,000 during its
history. The Company is dependent upon registration of Product R for
sale before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA. Unless
and until Product R is approved for sale in the United States or
another industrially developed country, the Company will be dependent
upon the continued sale of its securities, debt or equity financing for
funds to meet its cash requirements.
During the year ended December 31, 2001, the Company completed several
equity transactions in which it received cash proceeds of approximately
$5,800,000, of which $2,610,000 was received in December 2001. In
addition, in February 2001, the Company entered into an equity line
credit agreement to sell up to $50,000,000 of the Company's common
stock (see Note 6).
Subsequent to year end, the Company completed several private
placements of its securities under a previously filed shelf
registration in which it received cash proceeds of $2,000,000 (see Note
6).
Management believes that cash flows from sales of securities and from
current financing arrangements will be sufficient to fund operations
for the next year. Management intends to continue to sell the Company's
securities in an attempt to meet its cash flow requirements; however,
no assurance can be given that equity or debt financing, if and when
required, will be available.
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a
Bahamian Corporation with pharmaceutical manufacturing and warehousing
facilities, on February 20, 1984. The acquisition was a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market Reticulose
(currently referred to as Product R) worldwide, except within the
Bahamas, for $50,000. The Company also purchased inventory of Product R
from LTD for $45,000 and was obligated to pay $3 per ampule of Product
R for the initial 100,000 ampules purchased and $2 per ampule for
purchases exceeding 100,000 ampules. On December 16, 1987, the Company
acquired the controlling beneficial interest in 99.6% of the common
stock of LTD through an appropriate trust agreement to satisfy the
rules of the Bahamian Government, from two of the principal
stockholders of the Company. Both stockholders concurrently canceled
$86,565 of indebtedness due them from LTD.
F-19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL
LIVES (YEARS) 2001 2000
----------------- ---------- ----------
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 1,233,524 896,720
Machinery and equipment 5 3,170,759 1,918,693
---------- ----------
4,438,833 2,849,963
Less accumulated depreciation 1,438,250 905,764
---------- ----------
$3,000,583 $1,944,199
========== ==========
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $433,119 as of
December 31, 2001 and $402,694 as of December 31, 2000, including
$17,623 expended in 1987 to purchase a land lease expiring in 2068.
Included with machinery and equipment is $13,197 of equipment purchased
under a capital lease during 2000. Depreciation expense for equipment
under the capital leases was approximately $10,368, $7,729 and $47,040
in 2001, 2000 and 1999, respectively. These amounts are included above.
NOTE 5. OTHER ASSETS
2001 2000
-------- --------
Patent development costs $765,388 $715,655
Loan costs, net of accumulated amortization of $794,559
and $779,225 68,353 80,198
Other 51,496 51,496
-------- --------
$885,237 $847,349
======== ========
NOTE 6. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000,
respectively, principal amount of its ten-year 7% Convertible
Debentures (the "February Debenture" and the "October Debenture",
collectively, the "Debentures") due February 28, 2007 and August
30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities
Act of 1933, as amended. Accrued interest under the Debentures was
payable semi-annually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date
of interest payment. The Debentures were convertible, at the option
of the holder, into shares of Common Stock pursuant to specified
formulas. As of May 5, 1998, the October Debenture was fully
converted.
F-20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants was $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants were
estimated to be $37,242 ($0.209 per warrant), $19,196 ($0.108 per
warrant), and $9,946 ($0.056 per warrant), respectively, based upon
a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model. This amount has been reflected in the
accompanying financial statements as interest expense related to
the convertible February Debenture.
In connection with the issuance of the October Debenture, the
Company issued to RBB three warrants (the "October Warrants") to
purchase Common Stock, each such October Warrant entitling the
holder to purchase, from the date of grant through August 30, 2007,
600,000 shares of the Common Stock. The exercise price of the three
October Warrants was $0.20, $0.23 and $0.27 per warrant share,
respectively. The fair value of the three October Warrants was
established to be $106,571 ($0.178 per warrant), $97,912 ($0.163
per warrant) and $87,472 ($0.146 per warrant), respectively, based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model. This amount has been reflected in the
accompanying financial statements as a discount on the convertible
debenture, with a corresponding credit to additional paid-in
capital, and is being amortized over the expected term of the
notes, which at December 31, 1997 was 120 months. In May 1998, the
remaining unamortized discount of $276,957 was amortized upon full
conversion of the October Debenture.
In November 1998, in order to finance further research and
development, the Company sold $1,500,000 principal amount of its
ten year 7% Convertible Debenture (the "November Debenture") due
October 31, 2008, to RBB. As of March 7, 2000, the November
Debenture was fully converted.
In connection with the issuance of the November Debenture, the
Company issued to RBB two warrants (the "November Warrants") to
purchase Common Stock, each such November Warrant entitling the
holder to purchase 375,000 shares of the Common Stock at any time
and from time to time through October 31, 2008. The exercise price
of the two November Warrants was $0.20 and $0.24 per warrant share,
respectively. The fair value of the November warrants was estimated
to be $48,000 ($0.064 per warrant) based upon a financial analysis
of the terms of the warrants using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one
year. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
In August 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to issue an aggregate of 20 units, each unit consisting
of $100,000 principal amount of the Company's 7% convertible
debenture (the "August Debenture") due August 3, 2009 to Focus
Investors LLC ("Focus"). Accrued interest under the August
Debenture is payable semi-annually, computed at the rate of 7% on
the unpaid principal balance from the date of issuance until the
date of the interest payment. No payment of the principal of the
August Debenture may be made prior to the maturity date without the
consent of the holder. The August Debenture was convertible, at the
option of the holder, into shares of common stock. On January 19,
2000, February 17, 2000 and March 3, 2000 pursuant to notice by the
holder, Focus, to the Company under the August Debenture, $300,000,
$900,000 and $800,000, respectively, of the principal amount of the
August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3,
2000 the November Debenture was fully converted. Based on the terms
for conversion associated with the August Debenture, there was an
intrinsic value associated with the beneficial conversion feature
of $687,500. This amount has been recorded as interest expense in
1999.
In connection with the issuance of the August Debenture, the
Company issued to Focus one warrant (the "August Warrant") to
purchase Common Stock, such August Warrant entitling the holder to
purchase 1,000,000 shares of the Common Stock at any time and from
time to time through August 3, 2004. The exercise price of the
August Warrant was $0.2461 per warrant share. The fair value of the
August Warrants was estimated to be $52,592 ($0.0526 per warrant
share) based upon a financial analysis of the terms of the warrant
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate
of 5.75% and an expected holding period of five years. This amount
is being amortized to interest expense in the accompanying
consolidated financial statements.
In December 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to sell $2,000,000 principal amount of the Company's 7%
convertible debenture (the December Debenture) due December 28,
2009 to Endeavour Capital ("Endeavour"). Accrued interest under the
December Debenture was payable semi-annually, computed at the rate
of 7% on the unpaid principal balance from the date of issuance
until the date of the interest payment. No payment of the principal
of the December Debenture may be made prior to the maturity date
without the consent of the holder. The December Debenture was
convertible, at the option of the holder, into shares of common
stock. During 1999, $1,000,000 of these debentures was sold. The
remaining $1,000,000 was not available until the shares underlying
the first $1,000,000 were registered. Such registration statement
was declared effective in January 2000 and the remaining $1,000,000
transaction was consummated. Based on the terms for conversion
associated with the first $1,000,000 of the December Debenture,
there was an intrinsic value associated with the beneficial
conversion feature of $357,143. This amount has been recorded as
interest expense in 1999. Based on the terms for conversion
associated with the second $1,000,000 of the December Debenture,
there was an intrinsic value associated with the beneficial
conversion feature of $386,909. This amount has been recorded as
interest expense in 2000.
F-22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES (Continued)
On January 27, 2000, February 22, 2000, February 23, 2000, February
24, 2000, February 29, 2000 and October 25, 2000 pursuant to notice
by the holder, Endeavour, to the Company under the December
Debenture, $150,000, $135,000, $715,000, $785,000, $200,000 and
$15,000, respectively, of the principal amount of the December
Debenture was converted into 1,105,435, 988,913, 5,149,035,
5,622,696, 1,036,674 and 43,960 shares of the common stock,
respectively.
In connection with the issuance of the first $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrant
entitling the holder to purchase 100,000 shares of the Common Stock
at any time and from time to time through December 31, 2002. The
exercise price of the December Warrant was $0.19 per warrant share.
The fair value of the December Warrants was estimated to be $4,285
($0.0429 per warrant share) based upon a financial analysis of the
terms of the warrant using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of three years.
This amount was amortized to interest expense.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrants
entitling the holder to purchase 110,000 shares of the Common Stock
at any time and from time to time through December 31, 2002. The
exercise price of the December Warrant was $0.20 per warrant share.
The fair value of the December Warrants was estimated to be $13,600
($0.136 per warrant share) based upon a financial analysis of the
terms of the warrant using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 90%; a risk free
interest rate of 6% and an expected holding period of three years.
This amount was amortized to interest expense.
OTHER
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an
aggregate purchase price of $802,500. Such agreement also provided
for the issuance of four warrants to purchase a total of 2,366,788
shares of common stock at prices ranging from $0.204 to $0.2448 per
share at any time until December 31, 2003. The fair value of these
warrants was estimated to be $494,138 ($0.209 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 6% and an
expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements. As of December 31, 2001, 482,830 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $126,000.
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company issued
1,851,852 shares of its common stock for an aggregate purchase
price of $500,000. These proceeds were received in July 1999. Such
agreement also provided for the issuance of warrants to purchase an
aggregate of 925,926 shares of common stock at any time until June
30, 2004. The fair value of these warrants was estimated to be
$37,000 ($0.04 per warrant) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
Pursuant to a securities purchase agreement with Harbor View Group
and other various purchasers, dated February 16, 2000, the Company
received $3,000,000 on March 9, 2000 in exchange for 13,636,357
shares of common stock.
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%)
of the warrants are exercisable at $0.275 per share and fifty
percent (50%) of the warrants are exercisable at $0.33 per share,
until February 28, 2005. The fair value of these warrants was
estimated to be $1,582,734 ($0.295 and $0.285 per warrant share)
based upon a financial analysis of the terms of the warrant using
the Black-Scholes Pricing Model with the following assumptions;
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements. As of December 31, 2001, 216,577 shares of
common stock were issued pursuant to the exercise of these warrants
for an aggregate exercise price of approximately $105,000.
On November 8, 2000, the Company entered into a securities purchase
agreement with Harbor View Group, Inc. and various other
purchasers, whereby the Company authorized the issuance and sale of
up to 50,000,000 shares of common stock in a private offering
transaction at a purchase price of $0.40 per share. As of December
31, 2001, 13,427,500 shares were issued for a purchase price of
$5,371,000.
Such agreement also provided for the issuance of warrants to
purchase an aggregate of 30,000,000 shares of common stock, half at
an exercise price of $0.48 and half at an exercise price of $0.56.
As of December 31, 2000, 7,959,000 warrants had been issued
(3,979,500 at $0.48 and 3,979,500 at $0.56) exercisable at any time
until November 8, 2005. The fair value of these warrants was
estimated to be $1,763,680 ($0.222 per warrant) based upon a
financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; a risk free interest rate of 6% and an
expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements. The Company paid a fee of $265,300 relative
to this agreement, which has been charged to interest expense in
the accompanying consolidated financial statements.
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
OTHER (Continued)
On November 16, 2000, the Company entered into a securities
purchase agreement with Roseworth Group, Ltd., whereby the Company
agreed to sell 4,960,317 shares of its common stock at a price of
$0.3024 per share for an aggregate purchase price of $1,500,000.
The Company received such proceeds in November 2000.
On July 19, 2001, the Company entered into a securities purchase
agreement with BNC Bach International, Ltd., whereby the Company
sold to BNC Bach International 3,125,000 shares of its common stock
at a price of $0.32 per share for an aggregate purchase price of
$1,000,000.
On July 27, 2001, pursuant to a securities purchase agreement with
various purchasers, the Company issued 1,225,000 shares of its
common stock at a price of $0.40 per share for an aggregate
purchase price of $490,000. Such agreement also provided for the
issuance of 735,000 warrants to purchase common stock, half of such
warrants are exercisable at $0.48 per share and half of such are
exercisable at $0.56 per share until July 27, 2006. The fair value
of these warrants was estimated to be $144,500 ($0.20 per warrant
for $0.48 warrants) and ($0.19 per warrant for $0.56 warrants)
based upon a financial analysis of the terms of the warrants using
the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; a risk free interest rate of 5.5% and
an expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements.
On August 20, 2001, the Company entered into an additional
securities purchase agreement with BNC Bach International, Ltd.
whereby the Company sold to BNC Bach International 2,000,000 shares
of its common sock at a price of $0.30 per share for an aggregate
purchase price of $600,000.
On September 28, 2001, the Company entered into a securities
purchase agreement with Cambois Finance, Ltd. whereby the Company
agreed to sell 6,666,667 shares of its common stock to Cambois
Finance, Ltd. for an aggregate purchase price of $1,000,000. The
Company received such proceeds and issued such shares of common
sock on October 1, 2001.
In December 2001, the Company sold 9,666,667 shares of its common
stock at $0.27 per share to various purchasers for an aggregate
purchase price of $2,610,000. The purchasers included Harbor View
Group, Inc. (1,518,519 shares), BNC Bach International, Ltd.
(7,407,407 shares) and an individual purchaser (740,741 shares).
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
F-25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
PRIVATE EQUITY LINE OF CREDIT (Continued)
Company's common stock. Under such agreement, the Company may
exercise "put options" to sell shares for certain prices based on
certain average trading prices. Upon signing this agreement, the
Company issued to its placement agent, May Davis Group, Inc., and
certain investors, Class A warrants to purchase an aggregate of
5,000,000 shares of common stock at an exercise price of $1.00 per
share, exercisable in part or whole until February 9, 2006, and
Class B warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price equal to the greater of $1.00 or
110% of the bid price on the applicable advance date. Such Class B
warrants are exercisable pro rata with respect to the number of
warrant shares as determined by the fraction of the advance payable
on that date as the numerator and $20,000,000 as the denominator
multiplied by 5,000,000, until sixty months from the date of
issuance.
The fair value of the Class A warrants was estimated to be
$1,019,153 ($0.204 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 80%; a risk
free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
SUBSEQUENT FINANCINGS
On February 7, 2002, the Company 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.
On February 21, 2002, the Company 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.
On March 22, 2002, the Company 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.
NOTE 7. NOTE PAYABLE
During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
equipment and calls for monthly installments of $2,476 at 12% per annum
for 60 months, commencing in March 1999 and expiring in February 2004.
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. NOTE PAYABLE (Continued)
The aggregate maturities of the installment purchase agreement are as
follows:
Year ending December 31:
2002 $24,246
2003 27,521
2004 4,677
-------
56,444
Less current portion 24,246
-------
Note payable - long-term portion $32,198
=======
NOTE 8. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of Product R. The Company has not as yet
received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since
Product R was initially marketed in the 1940's; however, one study
noted adverse reactions from highly concentrated doses in guinea
pigs. Therefore, the Company could be subjected to claims for
adverse reactions resulting from the use of Product R. In the event
any claims for substantial amounts were successful, they could have
a material adverse effect on the Company's financial condition and
on the marketability of Product R. As of the date hereof, the
Company does not have product liability insurance for Product R.
There can be no assurance that the Company will be able to secure
such insurance in adequate amounts or at reasonable premiums if it
determined to do so. Should the Company be unable to secure such
product liability insurance, the risk of loss to the Company in the
event of claims would be greatly increased and could have a
material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has six issued patents and one allowed U.S. patent and
one issued Australian patent for the use of Product R. The Company
currently has 11 patent applications pending with the U.S. Patent
Office and 23 foreign patent applications. The Company can give no
assurance that other companies, having greater economic resources,
will not be successful in developing a similar product. There can
be no assurance that such patents, if obtained, will be
enforceable.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $0.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$0.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options were exercisable through June 30, 2000
at an exercise price of $0.15 and $0.17, respectively. The fair
value of these options was estimated to be $32,925 ($0.0348 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Through December 31, 2001, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
ARGENTINE AGREEMENT
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug Product R on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50.
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, Dr. Flichman delivered the Written
Report to the Company. Upon delivery of the Written Report to the
Company, the Company delivered to the principals of DCT options to
acquire 2,000,000 shares of the Company's common stock for a period
of one year from the date of the delivery of the Written Report, at
a purchase price of $0.20 per share. Pursuant to several
amendments, the DCT options were exercisable through June 30, 2000
at an exercise price of $0.21 per share. The fair value of these
options was estimated to be $1,788 ($0.0012 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. Effective July
1, 2000, these options were extended to December 31, 2000 at an
exercise price of $0.22 per share. As a result of the modification
of the option terms, the fair value of these options was estimated
to be $166,860 ($0.2273 per option share) based on a financial
analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility
of 50%; risk free interest rate of 6%. This amount has been charged
to expense related to modification of existing option terms during
the year ended December 31, 2000. Effective December 31, 2000,
these options were extended to December 31, 2001 at an exercise
price of $0.24 per share. As a result of the modification of the
option terms, the fair value of these options was estimated to be
$108,429 ($0.1457 per option share) based on a financial analysis
of the terms of the options using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount has been charged to expense
related to modification of existing option terms during the year
ended December 31, 2000. As of December 31, 2001, 1,256,000 shares
of common stock were issued pursuant to the exercise of these
options for an aggregate exercise price of approximately $261,500.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
Product R in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of Product R for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
to advance additional funds towards such study. In connection with
the HIV-HPV Agreement, the Company advanced approximately $665,000,
which was accounted for as research and development expense. The
amounts have been used to cover expenses associated with clinical
activities of the HIV-HPV Study. The HIV-HPV Agreement provides
that (i) in the event the data from the HIV-HPV Study is used in
connection with Product R being approved for commercial sale
anywhere within the territory granted under the DCT Exclusive
Distribution Agreement or (ii) DCT receives financing to cover the
costs of the HIV-HPV Study, then DCT is obligated to reimburse the
Company for all amounts expended in connection with the HIV-HPV
Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively, to assess the efficacy of the topical application of
Product R for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company advanced approximately
$58,000 and $132,000, respectively. Such expenses were accounted
for as research and development expense. The amounts expended have
been used to cover expenses associated with pre-clinical
activities. Neither the Herpes Study nor the HPV Topical Study has
commenced. Both Agreements with DCT provide that (i) in the event
the data from the Studies are used in connection with Product R
being approved for commercial sale anywhere within the territory
granted under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and Product R with those taking a
three drug cocktail and a placebo. As of December 31, 2001, the
Company advanced approximately $50,000 for such study, which has
been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company advanced approximately
$95,000, which has been accounted for as research and development
expense.
F-30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
ARGENTINE AGREEMENT (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of December 31, 2001, the Company advanced
approximately $70,000 for such study, which has been accounted for
as research and development expense.
As of December 31, 2001, the Company advanced approximately
$442,000 for expenses in connection with the drug approval process
in Argentina, which has been accounted for as research and
development expense. Based on information received from DCT, the
Company believes that the drug will not be approved for commercial
distribution in Argentina in the foreseeable future.
ISRAEL STUDIES
In January 2001, the Company entered into a 12 month agreement with
the Weizmann Institute of Science, and Yeda, its developmental arm
in Israel, to conduct research on the effects of Product R on the
immune system, especially on T lymphocytes. In addition, scientists
will explore the effects of Product R in animal models. The total
cost to the Company of this research is expected to be $118,000. As
of December 31, 2001, the Company advanced $118,000 for such
research, which has been accounted for as research and development
expense.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel
using Product R. It is anticipated that these trials will support
future FDA applications. The cost of the first phase of this
research is expected to be $242,000. As of December 31, 2001, the
Company advanced $115,000 for such research, which has been
accounted for as research and development expense.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
assisting the Company in seeking joint ventures with and financing
of companies in such industries. In connection with the consulting
agreement, the Company issued to Dr. Hirschman 1,000,000 shares of
the Company's common stock and the option to acquire 5,000,000
shares of the Company's common stock for a period of three years as
per the vesting schedule as referred to in the agreement, at a
purchase price of $0.18 per share. As of December 31, 2001, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending February 17, 2008 at
an exercise price of $0.19 per share, of which options to acquire
500,000 shares (exercisable until March 23, 2001) were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman; (ii)
options to purchase 5,000,000 shares exercisable at any time and
from time to time commencing March 24, 1997 and ending February 17,
2008 at an exercise price of $0.27 per share, of which options to
acquire 500,000 shares (exercisable until March 23, 2001) were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending February 17, 2008 at an exercise price of $0.36 per
share, of which options to acquire 500,000 shares (exercisable
until March 23, 2001) were assigned by Dr. Hirschman to Richard
Rubin, consultant to Dr. Hirschman. In addition, the Company has
agreed to cause the shares underlying these options to be
registered so long as there is no cost to the Company.
As of December 31, 2001, 976,000 shares of common stock were
issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options
and 75,000 of his $0.36 options to Elliot Bauer, an individual who
also received and exercised shares and options as a result of the
"Cohen Agreements".
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $0.19, 500,000 at $0.27, and 500,000 at $0.36).
F-32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
Effective March 23, 2001, the remaining unexercised $0.19, $0.27
and $0.36 options referred to above which were exercisable until
March 23, 2001, were extended to December 31, 2001 at their same
exercise prices. As a result of the modification of the option
terms, the fair value of the options was estimated to be $357,975
based on a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; risk free interest rate of 6%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2001.
Effective December 31, 2001, the remaining unexercised $0.27 and
$0.36 options, which had been extended to December 31, 2001, were
further extended to June 30, 2002 at exercise prices of $0.28 and
$0.37, respectively. As a result of this modification of the option
terms, the fair value of the options was estimated to be $6,158
based on a financial analysis of the terms of the options using the
Black-Scholes pricing model with the following assumptions:
expected volatility of 80%; risk free interest rate of 5%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2001.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement.
Pursuant to this Agreement, Dr. Hirschman was employed to serve as
Chief Executive Officer and President of the Company until December
31, 2002. The Agreement further provides that Bernard Friedland and
William Bregman will vote all shares owned or voted by them in
favor of Dr. Hirschman as a member of the Board of Directors of the
Company. The Agreement provides for Dr. Hirschman to receive an
annual base salary of $361,000 (effective January 1, 2000), use of
an automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment and for the
payment of $100,000 to Dr. Hirschman on the earlier to occur of (i)
the date an IND number is obtained from and approved by the FDA so
that human research may be conducted using Product R; or (ii) the
execution of an agreement relating to co-marketing pursuant to
which one or more third parties commit to make payments to us of at
least $15 million. On September 4, 2001, the Company received an
IND number from the FDA. Therefore, of the $100,000 described
above, $25,000 was paid as of December 31, 2001. The Agreement also
provides for previously issued options to acquire 23,000,000 shares
of common stock at $0.27 per option share to be immediately vested
as of the date of this agreement and are exercisable until February
17, 2008.
The fair value of these options was estimated to be $5,328,441
($0.2317 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 80%; a risk free
interest rate of
F-33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
6% and an expected life of 32 months. The Company is recognizing
the $5,328,441 fair value of the options as compensation expense on
a pro-forma basis over the 32 month service period (the term of the
employment agreement).
GALLANTAR AGREEMENT
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial Officer of the Company for a period of
three years, subject to earlier termination by either party, either
for cause as defined in and in accordance with the provisions of
the agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $0.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options was estimated to be $376,126
($0.0827 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected life of ten years. The Company
is recognizing the $376,126 fair value of the options as
compensation costs on a pro-forma basis over the three year service
period (the term of the employment agreement). Performance bonuses
for Mr. Gallantar's first two years in the amount of $25,000 each
year have been charged to expense in the appropriate years in the
accompanying consolidated financial statements.
OTHER EMPLOYEES
On January 3 and December 29, 2000, the Company issued to certain
other employees stock options to acquire an aggregate of 430,000
and 716,000 shares of common stock at an exercise price of $0.21
and $0.33 per share, respectively. These options expire on January
2, 2010 and December 29, 2010, respectively, and vest in 20%
increments at the end of each year for five years.
The fair value of the these options was estimated to be $42,342
($0.1721 per option share) and $117,893 ($0.2788 per option share),
respectively, based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate
of 6%; an expected life of ten years; and a
F-34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
termination rate of 10%. The Company will recognize the fair value
of the options as compensation costs on a pro-forma basis over a
one year service period (the term of the employment agreements).
Financial reporting of the Hirschman, Gallantar and other employee
options has been prepared pursuant to the Company's policy of
following APB No. 25, and related interpretations, in accounting
for its employee stock options. Accordingly, the following pro
forma financial information is presented to reflect amortization of
the fair value of the options.
AS REPORTED PRO FORMA AS
DECEMBER 31, 2001 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (11,715,568) $ (2,374,643) $ (14,090,211)
============== ============== ==============
Net loss per share $ (0.03) $ (0.01) $ (0.04)
============== ============== ==============
AS REPORTED PRO FORMA AS
DECEMBER 31, 2000 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (9,354,664) $ (1,799,827) $ (11,154,491)
============== ============== ==============
Net loss per share $ (0.03) $ (0.00) $ (0.03)
============== ============== ==============
AS REPORTED PRO FORMA AS
DECEMBER 31, 1999 ADJUSTMENT ADJUSTED
----------------- -------------- --------------
Net loss $ (6,174,262) $ (31,344) $ (6,205,606)
============== ============== ==============
Net loss per share $ (0.02) $ (0.00) $ (0.02)
============== ============== ==============
There were no other options outstanding that would require pro
forma presentation.
COHEN AGREEMENTS
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen
F-35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through June 30, 2000), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $0.09
per share (which exercise price has been increased to $0.16 per
share) (the "September 1992 Cohen Options"). The fair value of
these options was estimated to be $59,030 ($0.0347 per option
share) based upon a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Effective July 1, 2000, these options were extended to December 31,
2000 at an exercise price of $0.17 per share. As a result of the
modification of the option terms, the fair value of these options
was estimated to be $55,023 ($0.2751 per option share) based on a
financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 50%; risk free interest rate of 6%. This
amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. Effective December 31, 2000, these options were
extended to December 31, 2001 at an exercise price of $0.19 per
share. As a result of the modification of the option terms, the
fair value of these options was estimated to be $17,311 ($0.1731
per option share) based on a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; risk free interest rate of
6%. This amount has been charged to compensation expense related to
modification of existing option terms during the year ended
December 31, 2000. Effective December 31, 2001, these options were
further extended to June 30, 2002 at an exercise price of $0.20. As
a result of this modification of the option terms, the fair value
of the options was estimated to be $8,912 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 bas been charged
to compensation expense related to the modification of existing
option terms during the year ended December 31, 2001. As of
December 31, 2001, 2,900,000 of the September 1992 Cohen Options
have been exercised for cash consideration of $403,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
F-36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS (Continued)
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution
agreement, the Company issued: (i) to Mr. Cohen, an additional
2,500,000 shares (the "April 1994 Cohen Shares") and (ii) to each
of Elliot Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and
Rizzuto Shares") as well as options to acquire an additional
5,000,000 shares each at $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 assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. Effective July
1, 2000, these options were extended to December 31, 2000 at an
exercise price of $0.16 per share. As a result of the modification
of the option terms, the fair value of these options was estimated
to be $953,885 ($0.2848 per option share) based on a financial
analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility
of 50%; risk free interest rate of 6%. This amount has been charged
to expense related to modification of existing option terms during
the year ended December 31, 2000. Effective December 31, 2000,
these options were extended to December 31, 2001 at an exercise
price of $0.18 per share. As a result of the modification of the
option terms, the fair value of these options was estimated to be
$600,419 ($0.1793 per option share) based on a financial analysis
of the terms of the options using the Black-Scholes Pricing Model
with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount has been charged to
compensation expense related to modification of existing option
terms during the year ended December 31, 2000. Effective December
31, 2001, these options were further extended to June 30, 2002 at
an exercise 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 bas been charged to compensation expense related to
the modification of existing option terms during the year ended
December 31, 2001. Through December 31, 2001, 6,650,500 shares were
issued pursuant to the exercise of the Bauer and Rizzuto Options
for an aggregate exercise price of $696,050.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting
agreement with Globomax LLC to provide services at hourly rates
established by the contract to the Company's Investigational New
Drug application submission and to perform all work that is
necessary to obtain FDA approval. In addition, GloboMax and its
subcontractors are assisting the Company in conducting Phase I
clinical trials for Product R. The contract was extended by
F-37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GLOBOMAX AGREEMENT (Continued)
mutual consent of both parties. The Company has paid approximately
$4,127,000 for services rendered and reimbursement of expenses by
GloboMax and its subcontractors through December 31, 2001.
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting
agreement with Harbor View Group, Inc. for past and future
consulting services related to corporate structures, financial
transactions, financial public relations and other matters through
December 31, 2000.
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share
and warrants to purchase 1,750,000 shares at an exercise price of
$0.26 per share until February 28, 2005. The fair value of the
warrants was estimated to be $200,249 ($0.057 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions:
expected volatility of 90%; a risk free interest rate of 6% and an
expected holding period of eleven months (the term of the
consulting agreement). This amount has been amortized to consulting
expense during the year ended December 31, 2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities, whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. Pursuant to these agreements, distributors are
obligated to cause Product R to be approved for commercial sale in such
countries and, upon such approval, to purchase from the Company certain
minimum quantities of Product R to maintain the exclusive distribution
rights. Leonard Cohen, a former consultant to the Company, has informed
the Company that he is an affiliate of two of these entities. To date,
the Company has recorded revenue classified as other income for the
sale of territorial rights under the distribution agreements. The
Company has made no sales under the distribution agreements other than
for testing purposes.
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
F-38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
SOFTWARE ACQUISITION
During 2001, the Company contracted with a software vendor at a cost of
approximately $500,000 to acquire and install an SAP system for
accounting, administrative and production control. As of December 31,
2001, the entire cost has been incurred and has been capitalized as an
additional element of cost of the computer equipment.
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. The Company
has commenced these clinical trials. The Phase I initial trials are
placebo controlled, open label, dose escalation safety studies in
healthy volunteers. These studies are being conducted in the United
States under the supervision of GloboMax, LLC. Upon successful
completion of Phase I studies, the Company expects to initiate Phase II
trials to investigate the efficacy and dosages of Product R in the
topical treatment of genital warts. Phase III trials are pivotal
clinical investigations designed to establish the efficacy and safety
of Product R.
LEASES
CAPITAL LEASES
During 1998, the Company entered into a purchase lease agreement
for equipment totaling $222,318. The lease calls for monthly
payments of $4,529 for 60 months commencing on September 1998 and
expiring on July 2003. During 1999, the Company entered into a
purchase lease agreement for equipment totaling $38,645. The lease
calls for monthly payments of $965 for 48 months commencing in
August 1999 and expiring in July 2003. Additionally, during 2000,
the Company entered into a purchase lease agreement for equipment
totaling $13,197. The lease calls for monthly payments of $447 for
36 months commencing in January 2001 and expiring in December 2003.
Future minimum capital lease payments and the net present value of
the future minimum lease payments at December 31, 2001 are as
follows:
Year ending December 31:
2002 $ 71,292
2003 43,822
--------
Total minimum lease payments 115,114
Less amount representing interest 8,547
--------
Net present value of future minimum lease payments 106,567
Less current maturities 64,197
--------
$ 42,370
========
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (Continued)
OPERATING LEASES
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $17,000 annually. The Company has three options to
renew for an additional one year per option. Management has
exercised its second option for the year 2001. Effective December
2001, the Company closed its Florida office.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective
May 1, 1999. The new lease adds 10,550 square feet (for a total of
16,650 square feet) and extends its term until April 2005. Annual
rent on the original lease is approximately $85,000. Rent for the
additional facilities is approximately $175,000. Total rental
commitment for the Yonkers facilities will be $260,000 until May 1,
2002 at which time it will increase to approximately $290,000.
The Company leased an automobile in November 1999 for 36 months at
$711 per month expiring in November 2002.
Total lease expense for the years ended December 31, 2001, 2000 and
1999 amounted to $263,609, $296,064 and $191,974, respectively.
Future minimum lease commitments as of December 31, 2001 are as
follows:
Year ending December 31:
2002 $ 288,000
2003 290,000
2004 290,000
2005 290,000
----------
Total $1,158,000
==========
NOTE 9. SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of the Company upon the term
and conditions of separate severance agreements. The resignations were
not due to any disagreement with the Company or any matter relating to
the Company's operations, policies or practices.
In connection with their resignation, the Company paid $150,000 to each
of Messrs. Bregman and Friedland and $2,500 to Mr. Silver. In
connection with the severance agreements, the Company obtained a loan
in the amount of $200,000 from the Company's Chief Financial Officer,
as evidenced by a demand promissory note dated December 14, 2001. The
note was repaid in full on December 17, 2001.
F-40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. LITIGATION
In June 2000, the Company filed an action and complaint in the Supreme
Court of New York, Westchester County, against Commonwealth
Pharmaceuticals, Ltd. ("Commonwealth"), Immune Modulation Maximum Corp.
("IMMC") and Charles E. Miller (collectively, the "Defendants")
alleging a breach by Commonwealth of an exclusive distribution
agreement between the Company and Commonwealth, misappropriation of
trade secrets and confidential information, conversion and conspiracy
to convert the Company's property interests in Reticulose(R). The
agreement, which the Company alleges in its complaint is currently in
force and effect, provides that: (i) all laboratory or clinical studies
initiated by Commonwealth for which Reticulose(R) is provided for free
must first be approved by the Company; (ii) the results of all studies,
all research data and documentation and any research publications
resulting from studies initiated by Commonwealth or any of its agents
will belong to the Company and will be made use of at the Company's
discretion; and (iii) such studies are only permitted as part of such
agreement. In its complaint, the Company alleged that Defendant Miller
filed and obtained a U.S. patent entitled "Composition Containing
Peptides and Nucleic Acids and Methods of Making Same" (the "1996
Patent") based on a study conducted by a third party using
Reticulose(R) obtained free of charge from the Company, and that such
patent was assigned to Defendant IMMC, a company controlled by
Defendant Miller, in violation of the exclusive distribution agreement.
In its complaint, the Company seeks relief in the form of (i)
assignment of the patent to the Company; (ii) adjudgment that
Defendants breached, misappropriated, converted and conspired to
convert the Company's property rights; (iii) damages, profits realized
and interest thereon; and (iv) attorneys' fees, costs and expenses. In
response, on August 3, 2000, Defendants filed a Motion to Dismiss the
Complaint alleging lack of personal jurisdiction or, in the
alternative, that the agreement underlying the Company's claim is
legally inoperative.
In August 2000, Commonwealth and IMMC filed a suit against the Company
in the United States District Court for the Eastern District of
Michigan which alleged that IMMC, and not the Company, was the owner of
the exclusive/broad rights in Reticulose(R), and sought, among other
things, (i) a declaratory judgment that Defendant IMMC was the
exclusive owner of the broad/exclusive rights to Reticulose(R) and the
subject patent; (ii) an injunction against the Company from further
attempts to use, market or assert any claims of ownership over any
broad/exclusive rights in Reticulose(R), or the use, publication or
disclosure of information regarding Reticulose(R); (iii) return of such
information to IMMC; (iv) that the Company assign any
Reticulose(R)-related trademarks to IMMC; and (v) that the Company pay
Plaintiffs of this case damages, profits, costs and attorneys' fees.
The Company was served with the Complaint on August 8, 2000.
In January 2001, the Company and Commonwealth, et al., agreed to
dismiss the case in New York without prejudice. In July 2001, the
Company filed a Motion for Summary Judgment seeking dismissal of the
Defendants' claim of exclusive ownership of Reticulose(R) and grant of
such exclusive ownership to the Company.
F-41
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. LITIGATION (Continued)
On November 8, 2001, the U.S. District Court for the Eastern District
of Michigan dismissed with prejudice all of the claims of the
Defendants. In connection with its dismissal order, the U.S. District
Court further held that the Company is the exclusive owner of all
Reticulose(R) technology. In connection with the Company's
counterclaims against the Defendants, on March 20, 2002, the Company
and the Defendants entered into a Settlement Agreement in settlement of
the Company's claims against Defendants. The Settlement Agreement was
entered as part of the final judgment of the District Court on March
25, 2002, and all remaining claims were dismissed. The Settlement
Agreement provided, among other things, that:
(i) the Defendants acknowledged that the Company is the sole and
rightful owner of all rights, title and interests for the United
States and throughout the world in and to the Reticulose(R)
trademark and all Reticulose(R) technology;
(ii) the Defendants sold, assigned and transferred, jointly and
severally, to the Company, its successors and assigns, all their
claims, rights, title and interests for the United States and
throughout the world in and to Reticulose(R), the Reticulose(R)
trademark, the Reticulose(R) technology, any modifications,
improvements or derivations thereto, and all related patents,
inventions, discoveries, currently pending patent applications
and any patents, discoveries and inventions resulting therefrom
or described therein, free and clear from any encumbrance
whatsoever;
(iii) the Company granted to IMMC a non-exclusive, non-transferable,
royalty-free license to make, use and sell products coming within
the scope of the patents transferred by the Defendants to the
Company, but only to the extent such products are in the form of
oral dietary supplements which were already being sold on IMMC's
then current website;
(iv) Defendants agreed to indemnify, hold harmless and reimburse the
Company from and for any and all liabilities arising from the
manufacture, distribution, marketing, sale or use of any of
IMMC's products; and
(v) the Defendants agreed not to advertise or publicize that there is
any connection between any of Defendants' products and the
Company, its predecessors or Reticulose(R), nor will it copy,
distribute or publicize, orally or otherwise, any data obtained
by or produced on behalf of the Company or any of its
predecessors relating to Reticulose(R) or any other product of
the Company as if the data were developed by or for Defendants or
was derived from product of any of the Defendants, and such data
shall be returned to the Company to the extent it is in the
possession of the Defendants.
NOTE 11. STOCKHOLDERS' EQUITY
During 2000, the Company issued 76,742,583 shares of common stock for
an aggregate consideration of $16,564,500. The amounts were comprised
of the issuance of 31,861,674 shares of common stock for cash of
$9,806,000, issuance of 5,158,500 shares common stock
F-42
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. STOCKHOLDERS' EQUITY (Continued)
pursuant to the exercise of options for $982,000, issuance of 1,186,593
shares of common stock pursuant to the exercise of warrants for
$154,000, issuance of common stock upon conversion of debt of
38,435,816 shares for $5,576,000 and issuance of 100,000 shares of
common stock in exchange for services for $46,500.
During 2001, the Company issued 23,082,245 shares of common stock for
an aggregate consideration of $5,895,491. The amounts were comprised of
the issuance of 22,845,834 shares of common stock for cash of
$5,765,000, issuance of 60,000 shares common stock pursuant to the
exercise of options for $18,000, issuance of 76,411 shares of common
stock pursuant to the cashless exercise of warrants for $77,491 and
issuance of 100,000 shares of common stock in exchange for services for
$35,000.
NOTE 12. INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING
FOR INCOME TAXES. SFAS No. 109 is an asset and liability approach for
computing deferred income taxes.
As of December 31, 2001 and 2000, the Company had net operating loss
carryforwards for Federal income tax reporting purposes amounting to
approximately $34,500,000 and $21,000,000, which expire in varying
amounts to 2020.
The Company presently has temporary differences between financial
reporting and income tax reporting relating to the amortization of
warrant costs, compensation expense for the extension of options,
depreciation and patent costs.
The components of the deferred tax asset as of December 31, 2001 and
2000 were as follows:
2001 2000
----------- ----------
Benefit of net operating loss carryforwards $11,730,000 $7,174,000
Less valuation allowance 11,730,000 7,174,000
----------- ----------
Net deferred tax asset $ -- $ --
=========== ==========
As of December 31, 2001 and 2000, sufficient uncertainty exists
regarding the realizability of these operating loss carryforwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. The
Company's utilization of its tax benefit carryforwards may be further
restricted in the event of future changes
F-43
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. INCOME TAXES (Continued)
in the ownership of the Company from the exercise of options and
warrants or other future issuances of common stock.
NOTE 13. 401(K) PLAN
In December 1999, the Company adopted a 401(K) plan that allows
eligible employees to contribute up to 20% of their salary, subject to
annual limits imposed by the Internal Revenue Service. The Company
matches 50% of the first 6% of the employee contributions in our stock
and may, at our discretion, make additional contributions based upon
earnings. In March 2001, the Company funded the plan with approximately
$24,000 to enable the plan to purchase shares of the Company's common
stock on the open market in order to contribute the employer match for
the year ended December 31, 2000. As of March 22, 2002, the Company has
not funded its matching contribution of approximately $33,000 for the
year ended December 31, 2001.
F-44
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
Statements
June 30, December 31,
2002 2001
------------- -------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 310,067 $ 1,499,809
Other current assets 146,803 63,162
------------- -------------
Total current assets 456,870 1,562,971
Property and Equipment, Net 2,718,739 3,000,583
Other Assets 949,256 885,237
------------- -------------
Total assets $ 4,124,865 $ 5,448,791
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 979,143 $ 1,843,706
Current portion of capital lease obligation 132,956 64,197
Current portion of note payable 25,994 24,246
------------- -------------
Total current liabilities 1,138,093 1,932,149
------------- -------------
Long-Term Liabilities:
Convertible debentures, net 361,224 --
Capital lease obligation, non-current portion 42,738 42,370
Note payable, non-current portion 16,660 32,198
------------- -------------
Total long-term liabilities 420,622 74,568
------------- -------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 431,692,444 and 403,296,863
shares issued and outstanding 4,317 4,033
Additional paid-in capital 51,875,800 47,666,141
Deficit accumulated during the development stage (46,364,951) (40,795,470)
Discount on warrants (2,949,016) (3,432,630)
------------- -------------
Total stockholders' equity 2,566,150 3,442,074
------------- -------------
Total liabilities and stockholders' equity $ 4,124,865 $ 5,448,791
============= =============
See notes to consolidated condensed financial statements.
F-45
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended Six Months Ended (February 20,
June 30, June 30, 1984) to
------------------------------- ------------------------------- June 30,
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ 9,118 $ -- $ 11,483 $ 231,892
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 878,093 903,764 2,539,266 2,142,872 16,415,090
General and administrative 698,460 956,315 1,426,755 1,840,145 15,909,938
Compensation expense for
options and warrants 615,542 -- 615,542 357,975 5,005,017
Depreciation 236,426 103,818 469,735 229,092 1,910,614
------------- ------------- ------------- ------------- -------------
2,428,521 1,963,897 5,051,298 4,570,084 39,240,659
------------- ------------- ------------- ------------- -------------
Loss from Operations (2,428,521) (1,954,779) (5,051,298) (4,558,601) (39,008,767)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 2,752 28,324 4,823 96,955 882,998
Other income -- -- -- -- 120,093
Interest expense (270,204) (272,495) (523,006) (479,051) (8,056,775)
Severance expense - former directors -- -- -- -- (302,500)
------------- ------------- ------------- ------------- -------------
(267,452) (244,171) (518,183) (382,096) (7,356,184)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,695,973) $ (2,198,950) $ (5,569,481) $ (4,940,697) $ (46,364,951)
============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 410,479,091 375,730,988 410,479,091 375,730,988
============= ============= ============= =============
See notes to consolidated condensed financial statements.
F-46
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- ----------- ------- ----------- ------------
Balance, Inception (February 20, 1984) as Previously Reported -- $ 1,000 $ -- $ (1,000)
Adjustment for Pooling of Interests -- (1,000) 1,000 --
----------- ------- --------- ---------
Balance, Inception, as Restated -- -- 1,000 (1,000)
Net Loss, Period Ended December 31, 1984 -- -- -- (17,809)
----------- ------- --------- ---------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of Common Stock for Cash $.00 113,846,154 1,138 170 --
Net Loss, Year Ended December 31, 1985 -- -- -- (25,459)
----------- ------- --------- ---------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of Common Stock - Public Offering .01 40,000,000 400 399,600 --
Issuance of Underwriter's Warrants -- -- 100 --
Expenses of Public Offering -- -- (117,923) --
Issuance of Common Stock, Exercise of "A" Warrants .03 819,860 9 24,587 --
Net Loss, Year Ended December 31, 1986 -- -- -- (159,674)
----------- ------- --------- ---------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ------- --------- ---------
See notes to consolidated condensed financial statements.
F-47
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- ----------- ------- ----------- ------------
Balance, December 31, 1986 154,666,014 $1,547 $ 307,534 $ (203,942)
Issuance of Common Stock, Exercise of "A" Warrants $.03 38,622,618 386 1,158,321 --
Expenses of Stock Issuance -- -- (11,357) --
Acquisition of Subsidiary for Cash -- -- (46,000) --
Cancellation of Debt Due to Stockholders -- -- 86,565 --
Net Loss, Period Ended December 31, 1987 -- -- -- (258,663)
----------- ------ ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net Loss, Year Ended December 31, 1988 -- -- -- (199,690)
----------- ------ ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net Loss, Year Ended December 31, 1989 -- -- -- (270,753)
----------- ------ ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of Common Stock, Expiration of Redemption
Offer on "B" Warrants .05 6,729,850 67 336,475 --
Issuance of Common Stock, Exercise of "B" Warrants .05 268,500 3 13,422 --
Issuance of Common Stock, Exercise of "C" Warrants .08 12,900 -- 1,032 --
Net Loss, Year Ended December 31, 1990 -- -- -- (267,867)
----------- ------ ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ------ ----------- -----------
See notes to consolidated condensed financial statements.
F-48
\
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the
Per Paid-In Development
Share Shares Amount Capital Stage
-------- ----------- ------- ----------- ------------
Balance, December 31, 1990 200,299,882 $2,003 $ 1,845,992 $(1,200,915)
Issuance of Common Stock, Exercise of "B" Warrants $ .05 11,400 -- 420 --
Issuance of Common Stock, Exercise of "C" Warrants .08 2,500 -- 200 --
Issuance of Common Stock, Exercise of Underwriters Warrants .012 3,760,000 38 45,083 --
Net Loss, Year Ended December 31, 1991 -- -- -- (249,871)
----------- ------ ----------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of Common Stock, for Testing .0405 10,000,000 100 404,900 --
Issuance of Common Stock, for Consulting Services .055 500,000 5 27,495 --
Issuance of Common Stock, Exercise of "B" Warrants .05 7,458,989 75 372,875 --
Issuance of Common Stock, Exercise of "C" Warrants .08 5,244,220 52 419,487 --
Expenses of Stock Issuance (7,792)
Net Loss, Year Ended December 31, 1992 -- -- -- (839,981)
----------- ------ ----------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of Common Stock, for Consulting Services .055 500,000 5 27,495 --
Issuance of Common Stock, for Consulting Services .03 3,500,000 35 104,965 --
Issuance of Common Stock, for Testing .035 5,000,000 50 174,950 --
Net Loss, Year Ended December 31, 1993 -- -- -- (563,309)
----------- ------ ----------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ----------- -----------
See notes to consolidated condensed financial statements.
F-49
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------- ----------- -------------
Balance, December 31, 1993 236,276,991 $2,363 $3,416,070 $ -- $(2,854,076) $ --
Issuance of Common Stock, for Consulting
Services $ .05 4,750,000 47 237,453 -- -- --
Issuance of Common Stock, Exercise of
Options .08 400,000 4 31,996 -- -- --
Issuance of Common Stock, Exercise of
Options .10 190,000 2 18,998 -- -- --
Net Loss, Year Ended December 31, 1994 -- -- -- -- (440,837) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
-----
Issuance of Common Stock, Exercise of
Options .05 3,333,333 33 166,633 -- -- --
Issuance of Common Stock, Exercise of
Options .08 2,092,850 21 167,407 -- -- --
Issuance of Common Stock, Exercise of
Options .10 2,688,600 27 268,833 -- -- --
Issuance of Common Stock, for Consulting
Services .11 1,150,000 12 126,488 -- -- --
Issuance of Common Stock, for Consulting
Services .14 300,000 3 41,997 -- -- --
Net Loss, Year Ended December 31, 1995 -- -- -- -- (401,884) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------ ---------- ----- ----------- -----
See notes to consolidated condensed financial statements.
F-50
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------- ----------- -------------
Balance, December 31, 1995 251,181,774 $2,512 $4,475,875 $ -- $(3,696,797) $ --
Issuance of Common Stock, Exercise
of Options $ .05 3,333,334 33 166,634 -- -- --
Issuance of Common Stock, Exercise
of Options .08 1,158,850 12 92,696 -- -- --
Issuance of Common Stock, Exercise
of Options .10 7,163,600 72 716,288 -- -- --
Issuance of Common Stock, Exercise
of Options .11 170,000 2 18,698 -- -- --
Issuance of Common Stock, Exercise
of Options .12 1,300,000 13 155,987 -- -- --
Issuance of Common Stock, Exercise
of Options .18 1,400,000 14 251,986 -- -- --
Issuance of Common Stock, Exercise
of Options .19 500,000 5 94,995 -- -- --
Issuance of Common Stock, Exercise
of Options .20 473,500 5 94,695 -- -- --
Issuance of Common Stock, for
Services Rendered .50 350,000 3 174,997 -- -- --
Options Granted -- -- 760,500 -- -- (473,159)
Subscription Receivable -- -- -- (19,000) -- --
Net Loss, Year Ended December 31, 1996 -- -- -- -- (1,154,740) --
----------- ------ ---------- -------- ----------- ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------ ---------- -------- ----------- ---------
See notes to consolidated condensed financial statements.
F-51
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------- ----------- -------------
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of Common Stock, Exercise
of Options $.08 3,333,333 33 247,633 -- -- --
Issuance of Common Stock, Conversion
of Debt .20 1,648,352 16 329,984 -- -- --
Issuance of Common Stock, Conversion
of Debt .15 894,526 9 133,991 -- -- --
Issuance of Common Stock, Conversion
of Debt .12 2,323,580 23 269,977 -- -- --
Issuance of Common Stock, Conversion
of Debt .15 1,809,524 18 265,982 -- -- --
Issuance of Common Stock, Conversion
of Debt .16 772,201 8 119,992 -- -- --
Issuance of Common Stock, for
Services Rendered .41 50,000 -- 20,500 -- -- --
Issuance of Common Stock, for
Services Rendered .24 100,000 1 23,999 -- -- --
Beneficial Conversion Feature,
February Debenture -- -- 413,793 -- -- --
Beneficial Conversion Feature,
October Debenture -- -- 1,350,000 -- -- --
Warrant Costs, February Debenture -- -- 37,242 -- -- --
Warrant Costs, October Debenture -- -- 291,555 -- -- --
Amortization of Deferred Compensation
Cost -- -- -- -- -- 399,322
Imputed Interest on Convertible
Debenture -- -- 4,768 -- -- --
Net Loss, Year Ended
December 31, 1997 -- -- -- -- (4,141,729) --
----------- ------ ----------- -------- ----------- ---------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------ ----------- -------- ----------- ---------
See notes to consolidated condensed financial statements.
F-52
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------- ----------- -------------
Balance, December 31, 1997 277,962,574 $2,779 $ 10,512,767 $(19,000) $ (8,993,266) $(73,837)
Issuance of Common Stock, Exercise
of Options $.12 295,000 3 35,397 -- -- --
Issuance of Common Stock, Exercise
of Options .14 500,000 5 69,995 -- -- --
Issuance of Common Stock, Exercise
of Options .16 450,000 5 71,995 -- -- --
Issuance of Common Stock, Exercise
of Options .20 10,000 -- 2,000 -- -- --
Issuance of Common Stock, Exercise
of Options .26 300,000 3 77,997 -- -- --
Issuance of Common Stock, Conversion
of Debt .13 1,017,011 10 132,990 -- -- --
Issuance of Common Stock, Conversion
of Debt .14 2,512,887 25 341,225 -- -- --
Issuance of Common Stock, Conversion
of Debt .15 5,114,218 51 749,949 -- -- --
Issuance of Common Stock, Conversion
of Debt .18 1,491,485 15 274,985 -- -- --
Issuance of Common Stock, Conversion
of Debt .19 3,299,979 33 619,967 -- -- --
Issuance of Common Stock, Conversion
of Debt .22 1,498,884 15 335,735 -- -- --
Issuance of Common Stock, Conversion
of Debt .23 1,870,869 19 424,981 -- -- --
Issuance of Common Stock, for Services
Rendered .21 100,000 1 20,999 -- -- --
Beneficial Conversion Feature, November
Debenture 625,000
Warrant Costs, November Debenture 48,094
Amortization of Deferred Compensation Cost -- -- -- -- -- 59,068
Write Off of Subscription Receivable -- -- (19,000) 19,000 -- --
Net Loss, Year Ended December 31, 1998 -- -- -- -- (4,557,710) --
----------- ------ ------------ -------- ------------ --------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
----------- ------ ------------ -------- ------------ --------
See notes to consolidated condensed financial statements.
F-53
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------- ----------- -------------
Balance, December 31, 1998 296,422,907 $2,964 $14,325,076 $(13,550,976) $(14,769) $ --
Issuance of Common Stock, Securities
Purchase Agreement $.16 4,917,276 49 802,451 -- -- --
Issuance of Common Stock, Securities
Purchase Agreement .27 1,851,852 18 499,982 -- -- --
Issuance of Common Stock, for
Services Rendered .22 100,000 1 21,999 -- -- --
Issuance of Common Stock, for
Services Rendered .25 180,000 2 44,998 -- -- --
Beneficial Conversion Feature,
August Debenture -- -- 687,500 -- -- --
Beneficial Conversion Feature,
December Debenture -- -- 357,143 -- -- --
Warrant Costs, Securities
Purchase Agreement -- -- 494,138 -- -- (494,138)
Warrant Costs, Securities
Purchase Agreement -- -- 37,025 -- -- (37,025)
Warrant Costs, August Debenture -- -- 52,592 -- -- --
Warrant Costs, December Debenture -- -- 4,285 -- -- --
Amortization of Warrant Costs,
Securities Purchase Agreement -- -- -- -- -- 102,674
Amortization of Deferred
Compensation Cost -- -- -- -- 14,769 --
Compensation Expense Related to
Modification of Existing Options -- -- 210,144 -- -- --
Net Loss, Year Ended
December 31, 1999 -- -- -- (6,174,262) -- --
----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
----------- ------ ----------- ------------ -------- ---------
See notes to consolidated condensed financial statements.
F-54
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
-------------------------- Accumulated
Amount Additional During the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ------ ------ ----------- ------------- -------------
Balance, December 31, 1999 303,472,035 $3,034 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of Common Stock,
Exercise of Options 0.1400 600,000 6 83,994 -- --
Issuance of Common Stock,
Exercise of Options 0.1500 1,600,000 16 239,984 -- --
Issuance of Common Stock,
Exercise of Options 0.1600 650,000 7 103,994 -- --
Issuance of Common Stock,
Exercise of Options 0.1700 100,000 1 16,999 -- --
Issuance of Common Stock,
Exercise of Options 0.2100 792,500 8 166,417 -- --
Issuance of Common Stock,
Exercise of Options 0.2500 1,000,000 10 246,090 -- --
Issuance of Common Stock,
Exercise of Options 0.2700 281,000 3 75,867 -- --
Issuance of Common Stock,
Exercise of Options 0.3600 135,000 1 48,599 -- --
Issuance of Common Stock,
Exercise of Warrants 0.2040 220,589 2 44,998 -- --
Issuance of Common Stock,
Exercise of Warrants 0.2448 220,589 2 53,998 -- --
Issuance of Common Stock,
Exercise of Warrants 0.2750 90,909 1 24,999 -- --
Issuance of Common Stock,
Exercise of Warrants 0.3300 90,909 1 29,999 -- --
Issuance of Common Stock,
Conversion of Debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of Common Stock,
Conversion of Debt 0.1900 1,431,785 14 275,535 -- --
Issuance of Common Stock,
Conversion of Debt 0.2000 1,887,500 19 377,481 -- --
Issuance of Common Stock,
Conversion of Debt 0.3600 43,960 -- 15,667 -- --
Issuance of Common Stock,
Cashless Exercise of
Warrants 563,597 6 326,153 -- --
Issuance of Common Stock,
Services Rendered 0.4650 100,000 1 46,499 -- --
Private Placement of
Common Stock 0.2200 13,636,357 136 2,999,864 -- --
Private Placement of
Common Stock 0.3024 4,960,317 50 1,499,950 -- --
Private Placement of
Common Stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless Exercise of
Warrants -- -- (326,159) -- --
Beneficial Conversion Feature,
January Debenture -- -- 386,909 -- --
Warrant Costs, Consulting
Agreement -- -- 200,249 -- --
Warrant Costs, January
Debenture -- -- 13,600 -- --
Warrant Costs, Private
Placement -- -- 3,346,414 -- (3,346,414)
Recovery of Subscription
Receivable Previously
Written Off -- -- 19,000 -- --
Amortization of Warrant Costs,
Securities Purchase
Agreements -- -- -- -- 544,163
Compensation Expense Related
to Modification of
Existing Options -- -- 1,901,927 -- --
Net Loss -- -- -- (9,354,664) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 3,802 39,969,373 (29,079,902) (3,230,740)
----------- ------ ------------ ------------ -----------
See notes to consolidated condensed financial statements.
F-55
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
------------------------------- Accumulated
Amount Additional During the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ------ ------ ----------- ------------- -------------
Balance, December 31, 2000 380,214,618 $3,802 $ 39,969,373 $(29,079,902) $(3,230,740)
Issuance of Common Stock,
Exercise of Options $0.2700 40,000 1 10,799 -- --
Issuance of Common Stock,
Exercise of Options 0.3600 20,000 1 7,199 -- --
Issuance of Common Stock,
Cashless Exercise of Warrants 76,411 1 77,491 -- --
Issuance of Common Stock,
for Services Rendered 0.3500 100,000 1 34,999 -- --
Sale of Common Stock, for Cash 0.1500 6,666,667 66 999,933
Sale of Common Stock, for Cash 0.3000 2,000,000 20 599,980 -- --
Sale of Common Stock, for Cash 0.3200 3,125,000 31 999,969 -- --
Sale of Common Stock, for Cash 0.4000 1,387,500 14 554,986 -- --
Sale of Common Stock, for Cash 0.2700 9,666,667 96 2,609,904
Cashless Exercise of Warrants -- -- (77,491) -- --
Warrant Costs, Private Placement -- -- 168,442 -- (168,442)
Warrant Costs, Private
Equity Line of Credit -- -- 1,019,153 -- (1,019,153)
Amortization of Warrant Costs,
Securities Purchase Agreements -- -- -- -- 985,705
Credit Arising from Modification
of Option Terms -- -- 691,404 -- --
Net Loss, Year Ended
December 31, 2001 -- -- -- (11,715,568) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 4,033 47,666,141 (40,795,470) (3,432,630)
----------- ------ ------------ ------------ -----------
See notes to consolidated condensed financial statements.
F-56
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the Discounts
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ----------- ------- ----------- ------------ --------------
Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
Sale of Common Stock, for Cash 0.1500 9,999,999 100 1,499,900
Sale of Common Stock, for Cash 0.1109 17,486,491 175 1,938,8130
Issuance of Common Stock,
Conversion of Debt 0.1100 909,091 9 99,991
Warrant Costs, Termination
Agreement 190,757
Options Granted for Consulting
Services 246,822
Credit Arising from Modification
of Option Terms 177,963
Amortization of Warrant Costs,
Securities Purchase Agreements -- -- -- -- 483,614
Beneficial Conversion feature,
May Debenture 55,413
Net Loss, Six Month Period
Ended June 30, 2002 -- -- -- (5,569,481) --
----------- ------ ------------- ------------ -----------
Balance, June 30, 2002 431,692,444 $4,317 $ 51,875,800 $(46,364,951) $(2,949,016)
=========== ====== ============= ============ ===========
See notes to consolidated condensed financial statements.
F-57
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Six Months Ended (February 20,
June 30, 1984) to
----------------------------- June 30,
2002 2001 2002
----------- ----------- ------------
Cash Flows from Operating Activities:
Net loss $(5,569,481) $(4,940,697) $(46,364,951)
----------- ----------- ------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 469,735 229,092 1,910,524
Amortization of debt issue costs 8,370 6,974 802,929
Amortization of deferred interest cost on beneficial
conversion feature 14,884 -- 3,833,547
Amortization of discount on warrants 483,614 457,423 2,519,012
Amortization of discount on warrants - consulting services -- -- 230,249
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 1,753 -- 77,965
Compensation expense for options and warrants 615,542 357,975 5,005,017
Changes in operating assets and liabilities:
Increase in other current assets (72,766) (83,419) (165,922)
Increase in other assets (72,389) (25,098) (1,620,616)
Increase (decrease) in accounts payable and accrued liabilities (864,563) 169,483 985,343
----------- ----------- ------------
Total adjustments 584,180 1,112,430 14,338,548
----------- ----------- ------------
Net cash used by operating activities (4,985,301) (3,828,267) (33,612,403)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Acquisition of property and equipment (52,354) (903,898) (4,108,023)
----------- ----------- ------------
Net cash used by investing activities (52,354) (903,898) (4,108,023)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 500,000 -- 10,000,000
Proceeds from sale of securities, net of issuance costs 3,438,988 83,000 26,739,046
Payments under capital lease (77,285) (28,688) (244,887)
Payments on note payable (13,790) (10,438) (68,666)
Recovery of subscription receivable written off -- -- 19,000
----------- ----------- ------------
Net cash provided by financing activities 3,847,913 43,874 36,444,493
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,189,742) (4,688,291) 357,975
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 310,067
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 310,067 $ 1,274,342 $ 310,067
=========== =========== ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during the six months ended June 30, 2002 when the Company entered into a
lease for new equipment.
See notes to consolidated condensed financial statements.
F-58
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
at June 30, 2002 have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
reflect all adjustments which, in the opinion of management, are
necessary for a fair presentation of financial position as of June 30,
2002 and results of operations for the three months and six months
ended June 30, 2002 and 2001 and cash flows for the six months ended
June 30, 2002 and 2001. All such adjustments are of a normal recurring
nature. Certain general and administrative expenses from inception
relating to consulting services were reclassified to compensation
expense for options and warrants to be consistent with current
presentation. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year.
The statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001.
NOTE 2. COMMITMENTS AND CONTINGENCIES
LIQUIDITY
The Company has accumulated net losses of approximately $46,000,000
during its history. The Company is dependent upon registration of
Product R for sale before it can begin commercial operations. As used
in this report, the term Product R refers to the current formulation as
well as the former formulation, which is known by the trade name
Reticulose(R). The Company's cash position is currently inadequate to
pay all the costs associated with the full range of testing and
clinical trials including the trials required by the FDA. Unless and
until Product R is approved for sale in the United States or another
industrially developed country, the Company will be dependent upon the
continued sale of its securities, debt or equity financing for funds to
meet its cash requirements.
In February 2001, the Company entered into a private equity line of
credit agreement to sell up to $50,000,000 of common stock (see Note 4
- Private Equity Line of Credit). The Company received cash proceeds of
$2,610,000 from various stock purchase agreements in December 2001.
During the six months of 2002, the Company entered into stock purchase
agreements dated February 7, 2002, February 21, 2002, March 22, 2002,
April 12, 2002 and a Convertible Debenture agreement dated May 30, 2002
resulting in cash proceeds of $3,939,000. During July 2002, the Company
entered into Convertible Debenture agreements resulting in cash
proceeds of $1,500,000.
Management believes that cash flows from sales of securities and from
current financing arrangements will be sufficient to fund operations
for the next year. These cash flows from securities are dependent upon
the Company's ability to satisfy the conditions precedent to draw on
the equity line of credit and receive the full amount of proceeds or
the company's ability to sell its common stock or convertible
debentures or all of the above. Management intends to continue
F-59
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
LIQUIDITY
to sell the Company's securities in an attempt to meet its cash flow
requirements; however, no assurance can be given that equity or debt
financing, if and when required, will be available. There can be no
assurance that the Company can maintain operations at its current
levels and therefore may need to reduce certain operating costs.
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of the Company's product. The Company has not as
yet received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since
Reticulose(R) was initially marketed in the 1940's; however, one study
noted adverse reactions from highly concentrated doses in guinea pigs.
The study was performed utilizing the former formulation and not the
current formulation. Therefore, the Company could be subjected to
claims for adverse reactions resulting from the use of Product R. In
the event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of Product R. As of the date hereof,
the Company does not have product liability insurance for Product R.
There can be no assurance that the Company will be able to secure such
insurance in adequate amounts or at reasonable premiums if it
determined to do so. Should the Company be unable to secure such
product liability insurance, the risk of loss to the Company in the
event of claims would be greatly increased and could have a material
adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has six issued U.S. patents, some covering the composition
of Product R and others covering various uses of the Product R. In
addition, the Company has one issued Australian patent covering a use
of Product R. Additionally, the Company has 15 pending U.S. patent
applications and 21 pending foreign patent applications. The Company
can give no assurance that other companies, having greater economic
resources, will not be successful in developing a similar product.
There can be no assurance that issued patents as well as patents that
may result from pending applications will be enforceable.
RESEARCH AGREEMENTS
ISRAEL STUDIES
In January 2001, the Company entered into a 12 month agreement with the
Weizmann Institute of Science, and Yeda, its developmental arm in
Israel, to conduct research on the
F-60
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
RESEARCH AGREEMENTS (Continued)
ISRAEL STUDIES (Continued)
effects of Product R on the immune system, especially on T lymphocytes.
In addition, scientists will explore the effects of Product R in animal
models. The total cost to the Company of this research is expected to
be $118,000. As of June 30, 2002, the Company advanced $118,000 for
such research, which has been accounted for as research and development
expense. On July 8, 2002 the Company extended the agreement with the
Weizmann Institute of Science and Yeda. Under its provisions the study
period is extended for another 12 months to July 7, 2003. The total
cost to the Company of this additional research is expected to be
$138,000 of which a down payment of $40,000 was paid during July 2002.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel using
Product R. It is anticipated that these trials will support future FDA
applications. The cost of the first phase of this research is expected
to be $242,000. As of June 30, 2002, the Company advanced $242,000 for
such research, which has been accounted for as research and development
expense. The Company is in negotiations to extend the agreement with
the Selikoff Center.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of June 30, 2002,
900,000 shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time
F-61
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
commencing March 24, 1996 and ending February 17, 2008 at an exercise
price of $0.19 per share; (ii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1997
and ending February 17, 2008 at an exercise price of $0.27 per share;
and (iii) options to purchase 5,000,000 shares exercisable at any time
and from time to time commencing March 24, 1998 and ending February 17,
2008 at an exercise price of $0.36 per share. In addition, the Company
has agreed to cause the shares underlying these options to be
registered so long as there is no cost to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
Effective December 31, 2001, the remaining unexercised $0.27 and $0.36
options, which had been extended to December 31, 2001, were further
extended to June 30, 2002 at exercise prices of $0.28 and $0.37,
respectively. As a result of this modification of the option terms, the
fair value of the options was estimated to be $6,158 based on a
financial analysis of the terms of the options using the Black-Scholes
pricing model with the following assumptions: expected volatility of
80%; risk free interest rate of 5%. This amount has been charged to
compensation expense related to modification of existing option terms
during the year ended December 31, 2001. Effective June 30, 2002, the
remaining unexercised $0.27 and $0.36 options were extended to December
31, 2002. As a result of this modification of the option terms, the
fair value of the options was estimated to be $3,895 based on a
financial analysis of the terms of the options using the Black-Scholes
pricing model with the following assumptions: expected volatility of
117%; risk free interest rate of 1.7%. This amount has been charged to
compensation expense related to modification of existing option terms
during the quarter ended June 30, 2002.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002,
provided, however, the Agreement is extended automatically by one year,
each year, unless notice of termination has been given by either Dr.
Hirschman or the Company. In July 2002, the Company notified Dr.
Hirschman that the Agreement will not be extended subsequent to
December 31, 2004. The Agreement provides for Dr. Hirschman to receive
an annual base salary of $361,000 (effective January 1, 2000), use of
an automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment and for the payment
of $100,000 to Dr. Hirschman on the earlier to occur of (i) the date an
IND number is obtained from and approved by the FDA so that human
research may be conducted using Product R; or (ii) the execution of an
agreement relating to co-marketing pursuant to which
F-62
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
one or more third parties commit to make payments to the Company of at
least $15 million. On September 4, 2001, the Company received an IND
number from the FDA. Therefore, of the $100,000 described above,
$25,000 was paid as of December 31, 2001 with an additional $25,000
paid through June 30, 2002.
The Agreement also provides for previously issued options to acquire
23,000,000 shares of common stock at $0.27 per option share to be
immediately vested as of the date of this agreement and are exercisable
until February 17, 2008. The fair value of these options was estimated
to be $5,328,441 ($0.2317 per option share) based upon a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 80%; a
risk free interest rate of 6% and an expected life of 32 months. The
Company is recognizing the $5,328,441 fair value of the options as
compensation expense on a pro-forma basis over the 32 month service
period (the term of the employment agreement).
GALLANTAR AGREEMENT
On October 1, 1999, the Company entered into an employment agreement
with Alan Gallantar whereby Mr. Gallantar has agreed to serve as the
Chief Financial Officer of the Company for a period of three years,
subject to earlier termination by either party, either for cause as
defined in and in accordance with the provisions of the agreement,
without cause or upon the occurrence of certain events. Such agreement
provides for Mr. Gallantar to receive a base salary of $175,000,
$200,000 and $225,000 annually for each of the three years of the term
of the agreement as well as various performance based bonuses ranging
from 10% to 50% of the base salary and various other benefits.
Additionally, in connection with such agreement, the Company granted
Mr. Gallantar options to purchase an aggregate of 4,547,880 shares of
the Company's common stock. Such options have a term of ten years and
have an exercise price of $0.24255 per share. 1,515,960 options vest on
each of the first, second and third anniversary dates of this
employment agreement. The fair value of these options was estimated to
be $376,126 ($0.0827 per option share) based upon a financial analysis
of the terms of the options using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected life of ten years. The Company is
recognizing the $376,126 fair value of the options as compensation
expense on a pro-forma basis over the three year service period (the
term of the employment agreement). Performance bonuses for Mr.
Gallantar's first two years in the amount of $25,000 each year have
been charged to expense in the appropriate years in the accompanying
consolidated financial statements.
F-63
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES
On January 3 and December 29, 2000, the Company issued to certain other
employees stock options to acquire an aggregate of 430,000 and 716,000
shares of common stock at an exercise price of $0.21 and $0.328 per
share, respectively. These options expire on January 2, 2010 and
December 28, 2010, respectively, and vest in 20% increments at the end
of each year for five years. The fair value of the these options was
estimated to be $42,342 ($0.1721 per option share) and $117,893
($0.2788 per option share), respectively, based upon a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 80%; a
risk free interest rate of 6%; an expected life of ten years; and a
termination rate of 10%. The Company is recognizing the fair value of
the options as compensation costs on a pro-forma basis over a one year
service period.
In May 2002, the Company granted to certain of its employees options to
purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38%; an expected life of 9.6 years. The Company will recognize the
fair value of the options as compensation costs on a pro-forma basis
over 9.6 years (the term of the options).
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND CERTAIN
COMMITTEES
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to the certain Members of
the Board of Directors and various committees of the Board of
Directors. The exercise price was $0.12 per share exercisable 25%
immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25% on
December 20, 2002 through May 5, 2010. The fair value of the these
options was estimated to be $455,249 ($0.1097 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation costs on a pro-forma basis over an eight year
period (the term of the options).
In June 2002, the Company granted to Roy S. Walzer, a member of the
Board of Directors and member of various committees of the Board,
options to purchase 528,800 shares of common stock at an exercise price
of $0.295 per share, which options are exercisable 25% immediately, 25%
on September 9, 2002, 25% on December 9, 2002 and 25% on March 9, 2003
through June 9, 2010. The fair value of the these options was estimated
to be $140,608 ($0.2659 per option share) based upon a financial
analysis of the terms of the options using
F-64
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND CERTAIN
COMMITTEES (Continued)
the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 115%; a risk free interest rate of 4.88% and an
expected life of eight years. The Company will recognize the fair value
of the options as compensation costs on a pro-forma basis over an eight
year period (the term of the options).
Financial reporting of the Hirschman, Gallantar, other employees and
Members of the Board of Directors and committees of the Board of
Directors has been prepared pursuant to the Company's policy of
following APB No. 25, and related interpretations, in accounting for
its employee stock options. Accordingly, the following pro forma
financial information is presented to reflect amortization of the fair
value of the options.
As Reported for the Six Months Pro forma As
Ended June 30, 2002 Adjustment Adjusted
------------------------------- ---------- --------
Net loss $(5,569,481) $(1,140,420) $(6,709,901)
========== =========== ===========
Net loss per share $ (0.01) $ (0.01) $ (0.02)
========== =========== ===========
As Reported for the Three Months Pro forma As
Ended June 30, 2001 Adjustment Adjusted
------------------------------- ---------- --------
Net loss $(4,940,697) $ (1,187,322) $(6,128,019)
========== =========== ===========
Net loss per share $ (0.01) $ (0.01) $ (0.02)
========== =========== ===========
There were no other options outstanding that would require pro forma
presentation.
COHEN AGREEMENTS
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement,
the Company issued: (i) to Mr. Cohen, an additional 2,500,000 shares
(the "April 1994 Cohen Shares") and (ii) to each of Elliot Bauer and
Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto Shares") as well as
options to acquire an additional 5,000,000 shares each at $0.10 per
share exercisable through May 1, 1996 (the "Bauer and Rizzuto
Options"). Pursuant to several amendments, the remaining Bauer options
were exercisable through June 30, 2000 at an option price of $0.14. The
fair value of these options was estimated to be $116,101 ($0.0541 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
Through June 30, 2001, 2,855,000 shares were issued pursuant to the
exercise of the Bauer and Rizzuto Options for an aggregate exercise
price of $285,500. Mr. Rizzuto sold all of his shares and all shares
underlying his options. Pursuant to several amendments, the remaining
Bauer options were exercisable through June 30, 2002 at an option price
of $0.19. As a result
F-65
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
COHEN AGREEMENTS
of this modification of the option terms, the fair value of the options
was estimated to be $318,359 based on a financial analysis of the terms
of the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; risk free interest rate of 5%.
This amount was charged to compensation expense related to the
modification of existing option terms during the year ended December
31, 2001. Effective June 30, 2002, the remaining unexercised $0.19
options were extended to December 31, 2002. As a result of this
modification of the option terms, the fair value of the options was
estimated to be $174,068 based on a financial analysis of the terms of
the options using the Black-Scholes pricing model with the following
assumptions: expected volatility of 117%; risk free interest rate of
1.7%. This amount has been charged to compensation expense related to
modification of existing option terms during the quarter ended June 30,
2002. Through June 30, 2002, 6,650,500 shares were issued pursuant to
the exercise of the Bauer and Rizzuto Options for an aggregate exercise
price of $696,050.
GLOBOMAX AGREEMENT
In January 1999, the Company entered into a consulting agreement with
GloboMax, LLC to provide services at hourly rates established by the
contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase 1 and planned Phase 2 clinical trials
for Product R. The contract was extended by mutual consent of both
parties. The Company has incurred approximately $5,114,000 for services
rendered and reimbursement of expenses by GloboMax and its
subcontractors through June 30, 2002, of which $681,000 and $84,000 was
incurred during the three and six month periods, respectively.
HARBOR VIEW AGREEMENT
In February 2000, the Company entered into a consulting agreement with
Harbor View Group, Inc. for past and future consulting services related
to corporate structure, financial transactions, public relations and
other matters through December 31, 2000.
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share and
warrants to purchase 1,750,000 shares at an exercise price of $0.26 per
share until February 28, 2005. The fair value of the warrants was
estimated to be $200,249 ($0.057 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). This amount was
amortized to consulting expense during the year ended December 31,
2000.
F-66
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT (Continued)
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of eight years. This amount was charged to
compensation expense for options and warrants during the quarter ended
June 30, 2002.
In May 2002, the Company granted to members of its of the Scientific
Advisory Board and Business Advisory Board options to purchase an
aggregate of 2,250,000 shares of common stock at an exercise price of
$0.12 per share, which options are exercisable 25% immediately, 25% on
June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002
through May 5, 2010. The fair value of the options was estimated to be
$246,822 ($0.1097 per option) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 115%; a risk free
interest rate of 4.88% and an expected holding period of eight years.
This amount was charged to compensation expense for options and
warrants during the quarter ended June 30, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. Pursuant to these agreements, distributors are
obligated to cause Product R to be approved for commercial sale in such
countries and, upon such approval, to purchase from the Company certain
minimum quantities of Product R to maintain the exclusive distribution
rights. Leonard Cohen, a former consultant to the Company, has informed
the Company that he is an affiliate of two of these entities. To date,
the Company has recorded revenue classified as other income for the
sale of territorial rights under the distribution agreements. The
Company has made no sales under the distribution agreements other than
for testing purposes.
F-67
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. STATUS OF FDA FILINGS AND CLINICAL TRIALS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase 1 clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase 1 clinical trials. The Company
has commenced these clinical trials. The Phase 1 initial trials are
placebo controlled, open label, dose escalation safety studies in
healthy volunteers. These studies are being conducted in the United
States under the supervision of GloboMax, LLC. On April 12, 2002, the
Company successfully completed Phase 1 studies and has begun to recruit
clinical sites to perform clinical Phase 2 trials to investigate the
efficacy and dosages of Product R in the topical treatment of genital
warts. Phase 2 trials are pivotal clinical investigations designed to
establish the efficacy and safety of Product R.
In June 2002, the Israeli Ministry of Health approved the testing of
Product R in the following injectable studies:
o Phase I/II study in patients needing Salvage Therapy for AIDS. The
Israeli Ministry of Health has approved these clinical trials for
patients who have failed highly active anti-retroviral therapy
(HAART) and require salvage therapy. The Company believes that
Product R may have three major beneficial effects in patients with
AIDS. First its therapeutic effects on the body wasting (cachexia)
seen in patients with AIDS. Second, the mitigation of the toxicity
of drugs included in HAART regimens for the treatment of AIDS.
Third, Product R appears to act synergistically with drugs used in
HAART regimens to suppress the replication of HIV and increase the
CD4 and CD8 cell counts in patients with AIDS. Thus Product R may
prove to be an important "enabler" drug in the treatment of AIDS.
o Phase I study in Leukemia and Lymphoma Patients. The supreme medical
ethics committee (Helsinki Committee) of the Israeli Ministry of
Health has approved this clinical trial for the study of the
treatment with injectable Product R of patients with hematopoietic
and lymphoid tumors, including acute lymphocytic leukemia, Hodgkin's
disease and non-Hodgkin's lymphoma, who also manifest symptoms of
cachexia, that is, severe weight loss and body wasting.
o Phase I study in patients with Solid Tumors. The Israeli Ministry of
Health has approved these clinical trials for the study of the
treatment with injectable Product R of body wasting (cachexia) in
patients with solid tumors such as colonic, lung breast, stomach and
kidney cancers.
The Company anticipates that these clinical trials will help facilitate
the planned injectable investigational new drug (IND) application
process for Product R in the U.S. with the U.S. Food and Drug
Administration (FDA).
The Company may not be able to raise the funds it currently needs to
begin or complete the planned topical Phase 2 clinical trials or the
injectable clinical trials in Israel. While the Company continues to
attempt to secure funds through the sale of its securities, there is no
assurance that such funds will be raised on terms beneficial to the
Company, if at all.
F-68
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
In connection with the issuance of several convertible debentures sold
during the years 1997 to 2000, which have all been fully converted to
shares of the Company's common stock, the Company issued warrants to
purchase common stock. As of June 30, 2002, approximately 4.3 million
warrants are outstanding with expiration dates through 2009.
During the second quarter of 2002, the Company issued to certain
investors, the 5% convertible debentures at par in private placements.
Under the terms of each 5% convertible debenture, 20% of the original
issue is convertible on the original date of issue at a price equal to
the closing bid price quoted on the OTC Bulletin Board on the preceding
trading day (except for the Rushing/Simoni issuance which had an
initial conversion price of $0.11 per share). Thereafter, 20% of the
principal balance may be converted at six month intervals at a
conversion price equal to the higher of (i) 90% of the average closing
bid price for the five trading days prior to the conversion date (the
"Market Price"); or (ii) ten cents ($0.10) which amount is subject to
certain adjustments. The convertible debentures, including interest
accrued thereon, are payable by Advanced Viral in shares of common
stock and mature two years from the date of issuance. The shares issued
upon conversion of the debentures cannot be sold or transferred for a
period of one year from the applicable vesting date of the convertible
portion of the debentures. Based on the terms for conversion associated
with this Debenture, there was an intrinsic value associated with the
beneficial conversion feature of approximately $55,000 which was
recorded as deferred interest expense and is presented as a discount on
the convertible debenture. This amount will be amortized over an
expected holding period of two years. Of this amount, $15,000 has been
amortized to interest expense at June 30. 2002.
o In May 2002, the Company sold to O. Frank Rushing and Justine Simoni
$500,000 principal amount of the Company's 5% convertible debenture.
On June 3, 2002, the holder converted the first 20% ($100,000) into
909,091 shares of common stock at a conversion price of $0.11 per
share.
SUBSEQUENT FINANCINGS
Subsequent to June 30, 2002, the Company issued 5% convertible
debentures as follows:
o In July 2002, the Company sold to James F. Dicke II, a member of our
Board of Directors, $1,000,000 principal amount of the Company's 5%
convertible debenture. On July 3, 2002, Mr. Dicke converted the
first 20% ($200,000) for 1,299,545 shares of common stock at a
conversion price of $0.1539 per share.
o In July 2002, the Company sold to Peter Lunder, a member of our
Business Advisory Board $500,000 principal amount of the Company's
5% convertible debenture. No conversion has taken place to date.
F-69
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS
Pursuant to several securities purchase agreements issued during 1999
through 2001, the Company issued warrants to purchase the Company's
common stock. Through December 31, 2001, the Company issued an
aggregate of 44,724,652 shares of its common stock for cash
consideration of $12,773,500 under these securities purchase
agreements. As of June 30, 2002, under these securities purchase
agreements, approximately 30 million warrants are outstanding with
expiration dates through 2006.
During the first quarter of 2002, under several stock purchase
agreements, the Company sold an aggregate of 9,999,999 shares of its
common stock at $0.15 per share, for cash consideration of $1,500,000.
On April 12, 2002, pursuant to stock purchase agreements with various
institutional investors, the Company issued 17,486,491 shares of its
common stock at a market price of $0.11089 per share and received net
proceeds of $1,938,987.
PRIVATE EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell Capital Partners, LP, an institutional investor,
to sell up to $50,000,000 of the Company's common stock. The line of
credit expires August 14, 2003. Under such agreement, the Company may
exercise "put options" to sell shares for certain prices based on
certain average trading prices. Upon signing this agreement, the
Company issued to its placement agent, May Davis Group, Inc., and
certain investors, Class A warrants to purchase an aggregate of
5,000,000 shares of common stock at an exercise price of $1.00 per
share, exercisable in part or whole until February 9, 2006, and Class B
warrants to purchase an aggregate of 5,000,000 shares of common stock
at an exercise price equal to the greater of $1.00 or 110% of the bid
price on the applicable advance date. Such Class B warrants are
exercisable pro rata with respect to the number of warrant shares as
determined by the fraction of the advance payable on that date as the
numerator and $20,000,000 as the denominator multiplied by 5,000,000
until sixty (60) months from the date of issuance.
The fair value of the Class A warrants was estimated to be $1,019,153
($0.204 per warrant) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate of
6% and an expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements.
F-70
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
93,083,768 SHARES
OF
COMMON STOCK
October 30, 2002