AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 2003.
REGISTRATION NO. 333-100403
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ADVANCED VIRAL RESEARCH CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 5129 59-2646820
(State or other (Primary Standard Industrial IRS Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number
organization)
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701 (914) 376-7383
(Address and telephone number of registrant's principal executive offices)
SHALOM Z. HIRSCHMAN, MD
PRESIDENT AND CHIEF EXECUTIVE OFFICER
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701 (914) 376-7383
(Name, address and telephone number of agent for service)
Copies to:
CHARLES J. RENNERT
BERMAN RENNERT VOGEL & MANDLER, P.A.
BANK OF AMERICA TOWER, SUITE 2900, 100 SOUTHEAST SECOND STREET
MIAMI, FLORIDA 33131-2130
PHONE: (305) 577-4177 FAX: (305) 347-6463
Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
SUBJECT TO COMPLETION, DATED May 30, 2003
PROSPECTUS
71,196,132 SHARES
ADVANCED VIRAL RESEARCH CORP.
COMMON STOCK
This prospectus may be used only in connection with the resale of
71,196,132 shares of common stock of Advanced Viral Research Corp. by the
selling stockholders listed on page 49 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 May 22, 2003, the
high and low bid prices for the common stock on the Bulletin Board were $0.091
and $0.082 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 INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
The date of this prospectus is May __, 2003.
TABLE OF CONTENTS
PROSPECTUS SUMMARY................................................................................................1
THE OFFERING......................................................................................................3
SUMMARY FINANCIAL DATA............................................................................................4
RISK FACTORS......................................................................................................5
ABOUT THIS PROSPECTUS............................................................................................10
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS........................................................10
WHERE TO FIND MORE INFORMATION...................................................................................10
USE OF PROCEEDS..................................................................................................11
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED STOCKHOLDER MATTERS................................11
CAPITALIZATION...................................................................................................12
SELECTED CONSOLIDATED FINANCIAL DATA.............................................................................13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................15
DESCRIPTION OF BUSINESS..........................................................................................27
MANAGEMENT.......................................................................................................40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................................................47
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................48
SELLING STOCKHOLDERS.............................................................................................49
PLAN OF DISTRIBUTION.............................................................................................50
DESCRIPTION OF COMMON STOCK......................................................................................51
LEGAL MATTERS....................................................................................................51
EXPERTS .........................................................................................................51
DISCLOSURE OF SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES......52
INDEX TO FINANCIAL STATEMENTS...................................................................................F-1
PART II - INFORMATION NOT REQUIRED IN THE PROSPECTUS...........................................................II-1
SIGNATURES....................................................................................................II-13
You should rely only on the information provided in this prospectus. We
have authorized no one to provide you with different information. The selling
stockholders 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). The current formulation of Reticulose is currently
known as "Product R." We believe 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 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.
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of March 31, 2003 we had incurred a cumulative net loss of
$52,887,259. 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.
Our operations over the last five years have been limited principally to
research, testing and analysis of Product R in the United States, and since
November 2002, primarily in Israel, 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 both
inside and 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 the Phase 2 clinical trials of Product
R as a topical treatment for genital warts caused by HPV infection.
1
In November 2002 we began testing injectable Product R in the following
clinical trials in Israel:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on 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 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 I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. 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.
Whether we will be able to proceed with clinical trials in Israel for
injectable Product R or anywhere else in the world 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
continue or complete the clinical trials for injectable Product R in Israel.
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.
Conducting the clinical trials of Product R will require significant cash
expenditures. 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.
GOING CONCERN
The independent certified public accountants' report on our consolidated
financial statements for the fiscal year ended December 31, 2002, includes an
explanatory paragraph regarding our ability to continue as a going concern. Note
2 to the consolidated financial statements states that our ability to continue
operations is dependent upon the continued sale of our securities and debt
financing for funds to meet our cash requirements, which raise substantial doubt
about our ability to continue as a going concern. Further, the accountants'
report states that the financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
2
ABOUT US
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Yonkers, New York 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) .....................................71,196,132 shares of common stock issued or issuable upon the exercise
or conversion of certain options and convertible debentures.
Percentage of our currently outstanding
securities represented by offering. ........................13.2%
Common stock to be outstanding
after the offering (2) .....................................538,361,486 shares of common stock assuming exercise or conversion of
all 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 stockholders. We will receive the cash proceeds, if any, from
the exercise of options held by the selling stockholders.
Risk factors ...............................................An investment in the shares involves a high degree of risk. See "Risk
Factors."
OTC Bulletin Board trading symbol .........................."ADVR"
- ----------
(1) Includes an aggregate of (a) 44,629,377 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 (b) up to 18,742,500 shares issued or issuable upon the
conversion of our 5% convertible debentures held by certain selling
stockholders. Assumes the full exercise or conversion of such options and
debentures held by selling stockholders.
(2) As of May 27, 2003. Does not reflect approximately 63.4 million shares
issuable upon exercise of certain outstanding options, warrants and
convertible debentures other than those held by the selling stockholders
in this prospectus.
3
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the years
ended December 31, 2002, 2001, 2000 1999 and 1998 has been derived from our
audited financial statements. The financial data as of and for the three months
ended March 31, 2003 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
3 MONTHS YEAR ENDED DECEMBER 31
ENDED ---------------------------------------------------------------------------------
MARCH 31, 2003 2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
Net revenues ............... $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656
Net loss ................... $ (1,749,454) $ (10,342,335) $ (11,715,568) $ (9,354,664) $ (6,174,262) $ (4,557,710)
Net loss per common share .. $ (0.00) $ (0.02) $ (0.03) $ (0.03) $ (0.02) $ (0.02)
Weighted average # of shares 469,468,368 439,009,322 389,435,324 362,549,690 302,361,109 294,809,073
SUMMARY BALANCE SHEET DATA
AS OF DECEMBER 31
AS OF ------------------------------------------------------------------------
MARCH 31, 2003 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
Total Assets ................... $ 3,864,778 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
Long-term liabilities .......... 1,184,765 $ 1,668,944 $ 74,568 $ 163,013 $ 4,676,652 $ 1,625,299
Stockholders' equity per share . $ 0.00 $ 0.00 $ 0.01 $ 0.02 $ 0.00 $ 0.00
Shares outstanding at period end 474,042,609 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907
[The remainder of this page is intentionally left blank]
4
RISK FACTORS
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.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO OUR CASH REQUIREMENTS AND LACK OF REVENUE, WHICH MEANS THAT WE MAY NOT BE
ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING.
The independent certified public accountants' report on our consolidated
financial statements for the fiscal year ended December 31, 2002 includes an
explanatory paragraph regarding our ability to continue as a going concern. Note
2 to the consolidated financial statements states that our ability to continue
operations is dependent upon the continued sale of our securities and debt
financing for funds to meet our cash requirements, which raises substantial
doubt about our ability to continue as a going concern. 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. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
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.
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 474,989,609 shares of our common
stock currently outstanding, we have outstanding:
- stock options to purchase an aggregate of 61.9 million shares
of common stock at exercise prices ranging from $0.08 to
$0.36, of which 53.7 million are currently exercisable;
- warrants to purchase an aggregate of 62.7 million shares of
common stock at prices ranging from $0.097 to $1.00, of which
warrants to purchase 42.7 million shares are currently
exercisable; and
- convertible debentures which are convertible into
approximately 24.4 million shares of common stock.
5
If all of the foregoing were fully issued, exercised and/or converted, as
the case may be, we would receive proceeds of approximately $34.0 million, and
we would have approximately 624.3 million shares of common stock outstanding,
not including shares issuable pursuant to the equity line of credit agreements.
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.
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 March 31, 2003, we had an accumulated deficit of
$52,887,259. 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.
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.
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 available to meet
our anticipated expenditures. We are currently seeking additional financing. We
anticipate that we can continue operations through June 2003 with our current
liquid assets, if none of our outstanding 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.
From time to time, the recent prevailing market price for shares of common
stock has 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, 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 materially 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.
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.
6
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. 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 the Phase 2
clinical trials of Product R as a topical treatment for genital warts caused by
HPV infection.
In November 2002 we began testing injectable Product R in the following
clinical trials in Israel:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on 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 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 I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. 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. However, 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.
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.
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We currently have 10 patent applications pending with the United States
Patent and Trademark Office (PTO) and 15 patent applications pending in other
countries relating to Product R. In the United States, we have 10 issued patents
from the PTO. We also have 2 issued patents in Australia and one patent granted
in China. During April 2002, under the terms of a settlement agreement entered
as part of a final judgment on March 25, 2002, we were assigned all rights,
title and interest in two issued U.S. patents pertaining to Reticulose(R)
technology.
7
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 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
8
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.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT AND THE SALE OF CONVERTIBLE DEBENTURES
The sale of shares pursuant to the conversion of debentures and pursuant
to the equity line of credit with Cornell Capital Partners, L.P. entered in
April 2003 will have a dilutive impact on our stockholders. As a result, our net
income per share could decrease in future periods, and the market price of our
common stock could decline. In addition, the lower our stock price is the more
shares of common stock we will have to issue upon full conversion of the
debenture and under the equity line of credit to draw down the full amount. If
our stock price is lower, then our existing stockholders would experience
greater dilution. For example, if we assume that we will issue 640,243,902
shares of common stock (provided that we amend our Articles of Incorporation to
increase our authorized common stock) upon full conversion of the debenture and
under the equity line of credit at an assumed offering price of $0.082 (our
lowest closing bid price for the five trading days before May 28, 2003) and
fully utilized the $50.0 million available under the equity line of credit, then
new shareholders would experience dilution of $0.0468 per share.
THE INVESTOR IN THE EQUITY LINE OF CREDIT INTENDS TO SELL ITS SHARES OF COMMON
STOCK IN THE MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
Cornell Capital intends to sell in the public market the shares of common
stock sold pursuant to the conversion of debentures and pursuant to the equity
line of credit. That means that up to 640,243,902 shares of common stock may be
sold, which represents approximately 57% of the total number of shares of common
stock outstanding upon their issuance. Such sales may cause our stock price to
decline.
THE SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR STOCK CAUSED BY THE SALE
OF MATERIAL AMOUNTS OF COMMON STOCK COULD ENCOURAGE SHORT SALES BY THIRD
PARTIES, WHICH COULD CONTRIBUTE TO THE FURTHER DECLINE OF OUR STOCK PRICE
The significant downward pressure on our stock price caused by the sale of
our stock could encourage short sales by third parties. Such short sales could
place further downward pressure on our stock price.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Our common stock is quoted for trading on the Over-the-Counter
Bulletin Board. Our common stock is thinly traded compared to larger more widely
known companies in our industry. Thinly
9
traded common stock can be more volatile than common stock trading in an active
public market. We cannot predict the extent to which an active public market for
the common stock will develop or be sustained after this offering.
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 stockholders 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.
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 stockholders nor the issuance of the shares should create any
implication to the contrary.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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 SEC. 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.
10
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. We will receive the cash proceeds, if any, from the
exercise of any of the stock options and warrants held by the selling
stockholders. All proceeds received from the exercise of stock options and
warrants will be used by us for general corporate purposes.
MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded is
the over-the-counter market electronic Bulletin Board. The following table shows
the range of reported low bid and high bid per share quotations for our common
stock for each full quarterly period during the two recent years ended December
31, 2001 and 2002, and for the first and second quarter of 2003. 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 2001.........................................$0.285 $0.410
Second Quarter 2001.........................................0.265 0.495
Third Quarter 2001..........................................0.171 0.395
Fourth Quarter 2001.........................................0.179 0.400
First Quarter 2002..........................................0.158 0.285
Second Quarter 2002.........................................0.096 0.300
Third Quarter 2002..........................................0.112 0.220
Fourth Quarter 2002.........................................0.065 0.119
First Quarter 2003..........................................0.054 0.085
Second Quarter 2003 through May 27, 2003....................0.064 0.105
STOCKHOLDERS
The approximate number of holders of record of our common stock as of May
27, 2003 is 3,181, 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.
11
CAPITALIZATION
The following table sets forth our capitalization at May 27, 2003: (1) on
a historical basis and (2) as adjusted to give effect to the sale of 71,196,132
shares of common stock issued or issuable to certain investors upon the exercise
of certain 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: MARCH 31, 2003 AS ADJUSTED *
- --------------------- -------------- -------------
Common stock;
1,000,000,000 shares of $.00001 par value authorized, 474,042,609 and
455,523,990 shares issued and outstanding Actual as of March 31, 2003;
538,361,486 shares outstanding Pro Forma as Adjusted 4,740 5,452
Additional paid-in-capital 56,130,347 70,963,522
Deficit accumulated during the development stage (52,887,259) (52,887,259)
Discount on Warrants (2,650,283) (2,650,283)
Total Stockholders' Equity: 597,545 15,431,432
- ----------
(1) Does not reflect approximately 63.4 million shares issuable upon exercise
of certain outstanding options, warrants and convertible debentures other
than those held by the selling stockholders in this prospectus.
12
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from our audited
financial statements. The financial data as of and for the three months ended
March 31, 2003 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.
SELECTED STATEMENT OF OPERATIONS DATA
3 MONTHS
ENDED YEAR ENDED DECEMBER 31
MARCH 31 ----------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------
Revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656
------------ ------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Research and development 457,910 4,439,592 5,150,869 3,192,551 1,948,937 1,659,456
General and administrative 863,202 2,654,296 4,063,022 2,413,601 1,831,061 1,420,427
Compensation expense -- 755,397 691,404 1,901,927 210,144 --
Depreciation 237,740 977,746 511,216 346,227 230,785 110,120
------------ ------------ ------------ ------------ ------------ ------------
1,558,852 8,827,031 10,416,511 7,854,306 4,220,927 3,190,003
------------ ------------ ------------ ------------ ------------ ------------
Loss from Operations (1,528,852) (8,827,031) (10,398,910) (7,845,943) (4,209,974) (3,189,347)
------------ ------------ ------------ ------------ ------------ ------------
Other Income (Expense):
Interest income 6,189 27,659 113,812 161,832 42,744 102,043
Other income -- -- -- -- -- 293
Interest expense (187,139) (1,341,809) (868,856) (1,446,692) (2,007,032) (1,470,699)
Severance expense - former directors -- -- (302,500) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
(180,950) (1,314,150) (1,057,544) (1,284,860) (1, 964,288) (1,368,363)
------------ ------------ ------------ ------------ ------------ ------------
Loss from continuing operations (1,739,802) (10,141,181) (11,456,454) (9,130,803) (6,174,262) (4,557,710)
Loss from discontinued operations (9,652) (201,154) (259,114) (223,861) n/a n/a
Net Loss $ (1,749,454) $(10,342,335) $(11,715,568) $ (9,354,664) $ (6,174,262) $ (4,557,710)
============ ============ ============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted
Continuing operations $ (0.00) $ (0.02) $ (0.03) $ (0.03) $ (0.02) $ (0.02)
============ ============ ============ ============ ============ ============
Discontinued operations (0.00) $ (0.00) $ (0.00) $ (0.00) n/a n/a
------------ ============ ============ ============
See notes to consolidated financial statements.
13
SELECTED BALANCE SHEET DATA
AS OF AS OF DECEMBER 31
MARCH 31, -------------------------------------------------------------------------
2003 2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 511,121 $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 836,876 $ 924,420
Investments 104,837 -- -- -- -- 821,047
Assets held for sale 162,539 172,601 -- -- -- --
Inventory -- -- -- 19,729 19,729 19,729
Other current assets 68,837 121,895 252,161 34,804 59,734 29,818
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 847,334 1,770.251 1,751,970 6,017,166 916,339 1,795,014
Property and Equipment, Net 2,006,377 2,244,118 2,818,045 1,944,199 1,375,923 1,049,593
Other Assets 1,011,067 931,660 878,776 847,349 569,312 460,346
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 3,864,778 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
============= ============= ============= ------------- ------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current Liabilities:
Litigation settlement $ 1,098,812 -- -- -- -- --
Accounts payable and accrued
liabilities 888,960 $ 554,707 $ 1,843,706 $ 902,961 $ 728,872 $ 279,024
Current portion of capital lease
obligation 71,245 104,719 64,197 58,690 50,315 $ 38,335
Current portion of note payable 23,451 25,165 24,246 21,517 19,095 --
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 2,082,468 684,591 1,932,149 983,168 798,282 317,359
------------- ------------- ------------- ------------- ------------- -------------
Long-Term Debt:
Convertible debentures, net 1,184,765 1,658,231 -- -- 4,446,629 1,457,919
Capital lease obligation -
long term portion -- 5,834 42,370 106,567 152,059 167,380
Note payable - long term portion -- 4,879 32,198 56,446 77,964 --
------------- ------------- ------------- ------------- ------------- -------------
Total long-term debt 1,184,765 1,668,944 74,568 163,013 4,676,652 1,625,299
------------- ------------- ------------- ------------- ------------- -------------
Deposit on Securities Purchase
Agreement -- -- -- -- -- 600,000
Common Stock Subscribed but not
Issued -- 883,900 -- -- -- --
Stockholders' Equity (Deficiency):
Common stock: 1,000,000,000 shares
of $.00001 par value authorized,
474,042,609 and 455,523,990 shares
issued and outstanding 4,740 4,555 4,033 3,802 3,034 2,964
Additional paid-in capital 56,130,347 57,530,605 47,666,141 39,969,373 17,537,333 14,325,076
Deficit accumulated during
development stage (52,887,259) (51,137,805) (40,795,470) (29,079,902) (19,725,238) (13,550,976)
Deferred compensation cost -- -- -- -- -- (14,769)
Discount on warrants (2,650,283) (4,688,761) (3,432,630) (3,230,740) (428,489) --
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders' equity
(deficiency) 597,545 1,708,594 3,442,074 7,662,533 (2,613,360) 762,295
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity (deficiency) $ 3,864,778 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
============= ============= ============= ============= ============= =============
Shares outstanding at period end 474,042,609 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907
------------- ------------- ------------- ------------- ------------- -------------
See notes to consolidated financial statements.
14
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, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of March 31, 2003 we had incurred a cumulative net loss of
$52,887,259. 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.
Conducting the clinical trials of Product R will require significant cash
expenditures. 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. We currently do not have sufficient funds to continue our
testing of Product R. We are attempting to secure funds through the sale of our
securities.
During 2002, the Board of Directors approved a plan to sell Advance Viral
Research Ltd. (LTD), the Company's Bahamian subsidiary whose substantial asset
is the Company's Bahamian manufacturing facility. The decision was based upon
the Company completing construction on its facility in Yonkers, New York capable
of providing all functions previously provided by the Freeport, Bahamas plant.
The assets of LTD have been classified on the Balance Sheet of the Company at
March 31, 2003 and December 31, 2002 as Assets held for Sale. LTD had no
liabilities as of March 31, 2003, except inter-company payables which have been
eliminated in consolidation. The operations for LTD have been classified in the
Consolidated Statements of Operations for the three months ended March 31, 2003
and for the years ended December 31, 2002, 2001 and 2000 as Loss from
Discontinued Operations.
The independent certified public accountants' report on our consolidated
financial statements for the fiscal year ended December 31, 2002, includes an
explanatory paragraph regarding our ability to continue as a going concern. Note
2 to the consolidated financial statements states that our ability to continue
operations is dependent upon the continued sale of our securities and debt
financing for funds to meet our cash requirements, which raise substantial doubt
about our ability to continue as a going concern. Further, the accountants'
report states that the financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 VS MARCH 31, 2002
For the three months ended March 31, 2003, we incurred losses from
continuing operations of approximately $1,740,000 vs. $2,831,000 for the three
months ended March 31, 2002. Our current losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
decreased in the
15
three months ended March 31, 2003 to approximately $458,000 vs. approximately
$1,661,000 during the three months ended March 31, 2002. We have reduced our
research and development activities to include only research performed in
Israel. As such, allocations for research and development related expenses such
as salaries, benefits, rent and utilities at our headquarters in Yonkers, New
York, which were made for the quarter ended March 31, 2002, were not made for
the quarter ended March 31, 2003, with the exception of our Chief Scientific
Officer, who is also our Chief Executive Officer, who allocates approximately
30% of his time to oversight of our clinical trials and therefore approximately
$31,000 of his compensation has been allocated to research and development
expense with the balance allocated to general and administrative expense for the
quarter ended March 31, 2003. The decrease in research and development expenses
primarily resulted from:
- allocation of research and development expenditures relating
to salaries and benefits of approximately $31,000 were made
for the three months ended March 31, 2003 vs. approximately
$73,000 for salaries and benefits and approximately $73,000
for rent and utilities allocated to research and development
during the first quarter ended March 31, 2002;
- expenditures in connection with Product R research in Israel
were $412,000 for the three months ended March 31, 2003 vs.
$40,000 for the three months ended March 31, 2002, which
increase was attributable to payments of approximately
$299,000 made to EnviroGene, $44,000 made to Quintiles Israel
Ltd. and $40,000 made to the Weizmann Institute of Science;
- consulting expenses payable to GloboMax LLC in connection with
the preparation and filing with the FDA of the IND for Product
R were $0 for the three months ended March 31, 2003 vs.
$910,000 for the three months ended March 31, 2002; and
- expenditures for laboratory supplies were $0 for the three
months ended March 31, 2003 vs. $136,000 for the three months
ended March 31, 2002;
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased to approximately $863,000 for the three months ended March 31, 2003
vs. $691,000 for the three months ended March 31, 2002. The increase in general
and administrative expenses primarily resulted from:
- increased professional fees of approximately $295,000 for the
three months ended March 31, 2003 vs. $176,000 for the three
months ended March 31, 2002, which increase was primarily
attributable to certain legal fees for litigation ($193,000
for the three months ended March 31, 2003 vs. $0 for the three
months ended March 31, 2002) (See "Legal Proceedings");
- increased payroll and related expenses of approximately
$267,000 for the three months ended March 31, 2003 vs.
$223,000 for the three months ended March 31, 2002, which
increase is attributable to the allocation of staff from
research and development functions. Currently, salaries and
benefits are recorded as general and administrative expense
with the exception of our Chief Scientific Officer, who is
also our Chief Executive Officer, who allocates approximately
30% of his time to oversight of our clinical trials.
Therefore, approximately $31,000 of his compensation has been
allocated to research and development expense and the balance
of $71,000 has been allocated to general and administrative
expense for the quarter ended March 31, 2003. Payroll and
related expenses for March 31, 2002 before allocation to
research and development was
16
approximately $715,000. Before allocations, payroll and
related expenses decreased to $298,000 for the three months
ended March 31, 2003 vs. $715,000 for the three months ended
March 31, 2002 due to a reduction of personnel during 2002
from 35 as of March 31, 2002 to 10 employees as of March 31,
2003;
- increased rent and utility expenses of approximately $104,000
for the three months ended March 31, 2003 vs. $18,000 for the
three months ended March 31, 2002, which increase is
attributable to the allocation of rent and utilities from
research and development expense to general and administrative
expense. Currently, all rent and utilities expenses are
recorded as general and administrative expense. Rent and
utility expenses for March 31, 2002 before allocation to
research and development was approximately $92,000.
DEPRECIATION EXPENSE. Our increased losses are also due to increased
depreciation expense of approximately $238,000 for the three months ended March
31, 2003 vs. $228,000 for the three months ended March 31, 2002, for assets
acquired during 2002 which are depreciated over a full year.
INTEREST INCOME (EXPENSE). Interest income increased approximately $6,000
for the three months ended March 31, 2003 vs. $2,000 for the three months ended
March 31, 2002 due to increased cash balances invested in money market accounts.
Our losses during the three months ended March 31, 2003 are also due to
interest expense of approximately $187,000 vs. $253,000 for the three months
ended March 31, 2002. Included in the interest expense are:
- the beneficial conversion feature on certain convertible
debentures of approximately $25,000 for the three months ended
March 31, 2003 vs. $0 for the three months ended March 31,
2002;
- interest expense associated with certain convertible
debentures of approximately $15,000 for the three months ended
March 31, 2003 vs. $0 for the three months ended March 31,
2002;
- amortization of discount on certain warrants of approximately
$131,000 for the three months ended March 31, 2003 vs.
$242,000 for the three months ended March 31, 2002; and
- amortization of loan costs of approximately $13,000, for the
three months ended March 31, 2003 vs. $4,000 for the three
months ended March 31, 2002.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for the
three months ended March 31, 2003 was approximately $1,740,000 vs. approximately
$2,831,000 for the three months ended March 31, 2002. The decrease resulted
primarily from a reduction in expenses associated with a reduction of personnel
during 2002 from 33 to 10 employees, conclusion of a consulting contract with
Globomax relating to research and development, and concentrating all research
and development activities on clinical trials and research in Israel.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations for
the three months ended March 31, 2003 were approximately $10,000 vs.
approximately $42,000 for the three months ended March 31, 2002, which losses
resulted from our 99% owned Bahamian subsidiary, Advance Viral Research Ltd.
held for sale. During 2002, our Board of Directors approved a plan to sell
Advance Viral
17
Research Ltd. ("AVR Ltd."), our Bahamian subsidiary. The decision was based upon
the completion of construction on our facility in Yonkers, New York capable of
providing all functions previously provided by the Freeport, Bahamas plant. The
assets of AVR Ltd. have been classified on our Consolidated Balance Sheet at
March 31, 2003 and December 31, 2002 as Assets held for Sale. AVR Ltd. had no
liabilities as of March 31, 2003 and December 31, 2002, except inter-company
payables which have been eliminated in consolidation. The operations for AVR
Ltd. have been classified in the Consolidated Statements of Operations for the
period ended March 31, 2003 and 2002 as Loss from Discontinued Operations.
REVENUES. We had no revenues for the three months ended March 31, 2003 or
March 31, 2002.
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
During the years ended December 31, 2002, 2001 and 2000 we incurred losses
from continuing operations of approximately $10,141,000, $11,456,000 and
$9,131,000, respectively. Our losses for the years ended December 31, 2002, 2001
and 2000 were attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $2,654,000, $4,063,000 and $2,414,000 in 2002, 2001 and 2000,
respectively. General and administrative expenses decreased by approximately
$1,409,000 in 2002 vs. 2001 and increased by $1,649,000 in 2001 vs. 2000,
resulting primarily from:
- decreased payroll and related expenses (approximately $866,000
in 2002 vs. increases of $1,039,000 in 2001 and $717,000 in
2000) The decrease in 2002 was primarily attributable to a
reduction in personnel from 33 to 10 employees as a cost
cutting measure. The increase in 2001 and 2000 was 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 $564,000 in 2002 vs.
$412,000 in 2001 and $299,000 in 2000) representing increased
premiums for employee medical insurance and additional
corporate liability insurance including directors and officers
liability coverage; and
- decreased professional fees (approximately $501,000 in 2002
vs. $1,431,000 in 2001, compared to $385,000 in 2000). The
increase in 2001 is primarily attributable to certain legal
proceedings the cost of which was approximately $953,000 in
2001 vs. $61,000 in 2002; and
- decreased consulting fees (approximately $34,000 in 2002 vs.
$212,000 in 2001 and $305,000 in 2000). This decrease is
primarily due to lower outside computer consultant costs; and
- decreased recruiting expenses (approximately $7,000 in 2002
vs. $135,000 in 2001 vs. $12,000 in 2000). The 2001 expense
was for the hiring of new employees.
COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS.
Compensation expense was approximately $755,000 in 2002, compared to $691,000
and $1,902,000 in 2001 and 2000, respectively. These amounts are the result of
the calculation of the fair value of options, using the Black-
18
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 $4,440,000 in 2002, compared to $5,151,000 and $3,193,000 in 2001
and 2000, respectively. The decrease from 2001 to 2002 resulted primarily from
research expenses (approximately $1,778,000) relating to the GloboMax agreement
in connection with the preparation of our first IND filing and offset by an
increase of approximately $749,000 for research expenditures relating to
research and testing of Product R in Israel. The increase from 2000 to 2001
resulted primarily from research expenses related to the GloboMax agreement of
approximately $1,417,000. The approximate costs of rent, personnel, operating
costs and laboratory supplies associated with research and development
activities at the Yonkers facility for the years ended 2002, 2001 and 2000,
which were charged to research and development expense, were $2,467,000,
$2,230,000 and $1,696,000, respectively.
DEPRECIATION EXPENSE. Depreciation expense was approximately $978,000 in
2002 compared to $511,000 and $346,000 in 2001 and 2000, 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 2002, 2001 and 2000. The increase in 2002 over 2001
resulted from equipment and leasehold improvements acquired during 2002 and full
year's depreciation expense recorded in 2002 for 2001 additions.
INTEREST EXPENSE. Interest expense for the years ended 2002, 2001 and 2000
was approximately $1,342,000, $869,000 and $1,447,000, respectively. Included in
interest expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $137,000, $0, and $387,000 for the
years ended 2002, 2001 and 2000, respectively;
- interest expense associated with certain convertible
debentures of approximately $43,000, $0 and $76,000 for the
years ended 2002, 2001 and 2000, respectively;
- amortization of discount on certain warrants of approximately
$1,102,000, $989,000 and $611,000 for the years ended 2002,
2001 and 2000, respectively;
- amortization of loan costs of approximately $34,000, $15,000
and $106,000 for the years ended 2002, 2001 and 2000,
respectively;
- fees of approximately $265,000 in connection with the November
2000 securities purchase agreement with various investors;
- 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.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for the
years ended 2002, 2001 and 2000 was approximately $10,141,000, $11,456,000 and
$9,131,000, respectively. The
19
decrease from 2002 to 2001 resulted primarily from a reduction in general and
administrative expenses due to a reduction in legal fees due to the settlement
of litigation during 2001 and a reduction of personnel during 2002 from 33 to 10
employees.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations for
the years ended 2002, 2001 and 2000 was approximately $201,000, $259,000 and
$224,000, respectively, relating to losses from our 99% owned subsidiary,
Advance Viral Research Ltd.
REVENUES. There were approximately $0 and $18,000 in sales revenue in 2002
and 2001, respectively, compared to $8,000 in sales revenues for 2000. All sales
revenue resulted from purchases of Product R for testing purposes. Interest
income was approximately $28,000 and $114,000 in 2002 and 2001, respectively,
compared to approximately $162,000 in 2000.
LIQUIDITY
AS OF MARCH 31, 2003 AND MARCH 31, 2002
As of March 31, 2003, we had current assets of approximately $847,000
compared to approximately $1,770,000 as of December 31, 2002. We had total
assets of approximately $3,865,000 and $4,946,000 at March 31, 2003 and December
31, 2002, respectively. The decrease in current and total assets was primarily
attributable to less cash on hand resulting from the use of cash for funding
operating expenditures. As of March 31, 2003, we had current liabilities of
approximately $2,082,000 compared to approximately $685,000 as of December 31,
2002. The increase in current liabilities was primarily attributable to a
litigation settlement of approximately $1,099,000. (See "Legal Proceedings").
During the three months ended March 31, 2003, we used cash of
approximately $1,133,000 for operating activities, as compared to approximately
$2,571,000 during the three months ended March 31, 2002. During the three months
ended March 31, 2003, our expenses included:
- approximately $298,000 for payroll and related costs primarily
for administrative staff, scientific personnel and executive
officers;
- approximately $295,000 for other professional and consulting
fees, including $193,000 for legal fees relating to
litigation. (See "Legal Proceedings");
- approximately $91,000 for insurance costs;
- approximately $104,000 for rent and utilities for our Yonkers
facility; and
- approximately $402,000 for expenditures for Product R research
in Israel.
During the three months ended March 31, 2003, cash flows provided by
financing activities were from the sale of our securities of approximately
$210,000 offset by principal payments of $46,000 on equipment obligations.
During the three months ended March 31, 2003, cash flow provided by investing
activities reflected the sale of an automobile located at our facility in the
Bahamas.
On February 9, 2001 we entered into an equity line of credit agreement with
Cornell Capital Partners, LP, an institutional investor ("Cornell"). Under the
equity line of credit agreement, we have the right to put shares of our common
stock to Cornell from time to time to raise up to $50,000,000, subject to
certain conditions and restrictions. Under the terms of a registration rights
agreement entered in connection with
20
the equity line of credit, in February 2001 we filed with the Securities and
Exchange Commission a registration statement to register the resale of shares of
common stock purchased by Cornell upon the exercise of each put option and
related warrants, which registration statement was declared effective by the
Commission. To date, we have not drawn down on the equity line of credit.
On April 28, 2003, we entered into an equity line of credit agreement with
Cornell. The equity line agreement provides, generally, that Cornell has
committed to purchase up to $50 million of our common stock over a three-year
period, with the timing and amount of such purchases, if any, at our discretion,
provided, however, that the maximum amount of each advance is $500,000, and the
date of each advance shall be no less than six trading days after our
notification to Cornell of its obligation to purchase shares. Any shares of
common stock sold under the equity line will be priced at the lowest closing bid
price of our common stock during the five consecutive trading days following our
notification to Cornell requesting an advance under the equity line. In
addition, at the time of each advance, we are obligated to pay Cornell a fee
equal to five percent (5%) of the amount of each advance. However, our
obligation to sell our common stock is conditioned upon the per share purchase
price being equal to or greater than a price we set on the advance notice date,
the minimum acceptable price, which may not be set any closer than 7.5% percent
below the closing bid price of the common stock the day prior to the date we
notify Cornell of its obligation to purchase shares. In addition, there are
certain other conditions applicable to our ability to draw down on the equity
line including the filing and effectiveness of a registration statement
registering the resale of all shares of common stock that may be issued to
Cornell under the equity line and our adherence with certain covenants. There
can be no assurance of the amount of proceeds we will receive, if any, under the
equity line of credit with Cornell. In connection with this agreement, we issued
116,279 shares of our common stock to Katalyst LLC in consideration for its
exclusive placement agent services.
We adopted a 401(k) plan that allows eligible employees to contribute up
to 20% of their salary, subject to annual limits, which were $11,000 in 2002 and
$11,000 in 2003. 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. At December 31, 2002 we
accrued $40,675 to fund the 401k plan representing our match for the plan year
2002. We intend to purchase our common stock in the open market at prevailing
market prices to satisfy our 2002 matching contribution obligations. In March
2003, we amended the terms of the 401(k) plan to terminate our obligation to
make matching contributions.
To reduce operating costs, in November 2002 we reduced our personnel from 33 to
10 employees. This will allow us to focus on the completion of our clinical
studies and maintain the critical functions and scientific personnel to manage
the clinical trials and continue operations. The severance cost for these
employees was approximately $54,000 which was expensed during the fourth quarter
of 2002.
AS OF DECEMBER 31, 2002 AND 2001
As of December 31, 2002, we had current assets of approximately
$1,770,000, compared to approximately $1,752,000 at December 31, 2001. We had
total assets of approximately $4,946,000 and $5,449,000 at December 31, 2002 and
2001, respectively. Total asset levels did not change materially but total
assets declined due to the increase in fixed asset depreciation for property and
equipment acquisitions.
During 2002, we used cash of approximately $8,701,000 for operating
activities, as compared to approximately $8,577,000 in 2001. During 2002, we
incurred expenses of:
21
- approximately $2,809,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $904,000 in consulting fees to GloboMax and its
subcontractors;
- approximately $395,000 for rent and utilities for our Yonkers
facility;
- approximately $295,000 for laboratory supplies;
- approximately $986,000 in expenditures on Product R research
in Israel;
- approximately $573,000 for insurance costs and approximately
$501,000 for other professional fees.
During the year ended December 31, 2002, cash flows provided by financing
activities was primarily due to the proceeds from the sale of common stock of
approximately $7,114,000 and $2,000,000 in convertible debentures, offset by
principal payments of approximately $169,000 on equipment obligations. This
compares to the year ended December 31, 2001 where funds of approximately
$5,783,000 were provided by the sale of common stock offset by principal
payments of approximately $80,000 on equipment obligations.
During the year ended December 31, 2002, cash flow used by investing
activities were used for expenditures of approximately $268,000 for leasehold
improvements and research and laboratory equipment at our Yonkers, New York
facility.
The independent certified public accountants' report on our consolidated
financial statements for the fiscal year ended December 31, 2002, includes an
explanatory paragraph regarding our ability to continue as a going concern. Note
2 to the consolidated financial statements states that our ability to continue
operations is dependent upon the continued sale of our securities and debt
financing for funds to meet our cash requirements, which raise substantial doubt
about our ability to continue as a going concern. Further, the accountants'
report states that the financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
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
CONVERTIBLE / CONVERSION PRICE / MATURITY DATE /
DATE ISSUED GROSS PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
- ----------- -------------- --------------- ---------------- -------------- ---------------
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 Approx. 4,412,000 shares (1) 5/30/2004
May-2002 consulting services warrants 1,000,000 shares $0.18 per share 5/30/2008
Jul-2002 $1,000,000 convertible debenture Approx. 9,350,000 shares (2) 7/3/2004
Jul-2002 $500,000 convertible debenture Approx. 4,588,000 shares (3) 7/15/2004
Sep-2002 $3,010,000 common stock 21,500,000 shares (4) $0.14 per share n/a
common stock 947,000 shares (5) $0.08 per share n/a
Dec-2002 & $1,100,000 common stock 13,750,000 shares $0.08 per share n/a
Mar-2003
warrants 9,075,000 shares $0.12 per share 12/2007 - 3/2008
Apr-May 2003 $587,000 common stock 7,337,500 shares $0.08 per share n/a
warrants 4,652,125 shares $0.12 per share 4/2004 - 4/2008
Apr-2003 $1,000,000 convertible debenture Approx. 12,500,000 shares (6) 4/2008
warrants 15,000,000 shares $0.097 per share (7) 4/2008
- ------------
(1) $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.
(2) $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.
(3) $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.
(4) Does not include an additional 1,032,000 shares of common stock issued to
H.C. Wainwright & Co. as part of the finder's fee for the transaction.
(5) Represents shares issued in connection with certain settlement and mutual
release agreements entered in May 2003, pursuant to which, among other
things, warrants to purchase 16,125,000 shares of our common stock were
cancelled, we will issue an aggregate of 947,000 shares of our common
stock and agreed to pay an aggregate of $1,047,891 to such parties, of
which $726,463 has been paid to date, and of which $321,428 shall be paid
in five equal monthly installments until September 2003. See "Legal
Proceedings."
(6) The debentures are convertible commencing July 27, 2003 at a conversion
price equal to the lesser of (i) $0.08 or (ii) 80% of the lowest closing
bid price of our common stock for the four trading days immediately
preceding the conversion date. The holder may not convert more than
$600,000 in any thirty-day calendar period.
(7) The warrants are exercisable commencing October 28, 2003.
On March 31, 2000, we filed a shelf registration statement on Form S-3
with the SEC relating to the offering of shares of our common stock to be used
in connection with financings. As of March 31, 2003, we had issued and sold
approximately 59 million shares of our common stock and received gross
23
proceeds of approximately $11.2 million under the shelf registration statement.
The shelf registration statement is no longer available for our use.
On July 27, 2001, pursuant to a securities purchase agreement with various
purchasers, we authorized the issuance of and sold 1,225,000 shares of our
common stock and warrants to purchase an aggregate of 735,000 shares of common
stock in a private offering transaction pursuant to Section 4(2) of the
Securities Act for a purchase price of $0.40 per share, for an aggregate
purchase price of $490,000. Half of the warrants are exercisable at $0.48 per
share, and half of the warrants are exercisable at $0.56 per share, until July
27, 2006. Each warrant contains anti-dilution provisions, which provide for the
adjustment of warrant price and warrant shares. As of the date hereof, none of
the warrants had been exercised.
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.
During the second quarter of 2002, we issued to certain investors an
aggregate of $2,000,000 principal amount of our 5% convertible debentures at par
in several private placements. Under the terms of each 5% convertible debenture,
20% of the original issue is convertible on the original date of issue at a
price equal to the closing bid price quoted on the OTC Bulletin Board on the
trading day immediately preceding the original issue date (except for the
$500,000 of the debentures 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; 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. As of March 31, 2003, principal and
interest on the debentures in the amount of $812,904 had been converted into
6,877,255 shares of our common stock.
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 provided that at 60 and 120 trading days following the original issue
date of the warrants, a certain number of warrants shall become exercisable at
$0.001. The number of shares for which the warrants are exercisable at $0.001
per share is equal to the positive difference, if any, between (i) $3,010,000
divided by the volume weighted average price ("VWAP") of our common stock for
the 60 trading days preceding the applicable determination date and (ii)
21,500,000, provided however, that no adjustment will be made in the event that
the VWAP for the 60 trading day period preceding the applicable determination
date is $0.14 or greater. In December 2002 we filed suit against certain of the
investors in connection with the warrant repricing provisions of the agreement,
and during May 2003, we entered into settlement and mutual release agreements
with the parties involved in both the Florida and New York litigation, which,
among other things, dismissed the lawsuits with prejudice, and Alpha Capital
separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in
exchange
24
for release by the parties to the lawsuits and certain parties to the September
2002 financing of their right to exercise the warrants issued in the September
2002 financing, we issued an aggregate of 947,000 shares of our common stock and
agreed to pay an aggregate of $1,047,891 to such parties, of which $726,463 has
been paid to date, and of which $321,428 shall be paid in five equal monthly
installments until September 2003. 680,000 of the shares issued may not be
resold until September 2003. (See "Legal Proceedings").
From December 2002 through March 2003, pursuant to securities purchase
agreements with various purchasers, we authorized the issuance of and sold
13,750,000 shares of our common stock and warrants to purchase up to 8,250,000
shares of our common stock at $0.08 per share, for an aggregate purchase price
of $1,100,000. In connection with the agreement, we paid finders' fees to Harbor
View Group and AVIX, Inc consisting of (i) approximately $66,000 and (ii)
warrants to purchase 825,000 shares of our common stock. All of the
aforementioned warrants are exercisable at $0.12 per share commencing six months
after the closing date of the agreement, for a period of five years. As of the
date of this prospectus, none of such warrants had been exercised.
In April and May 2003, pursuant to securities purchase agreements with
various investors, we sold 3,900,000 shares of our common stock at a price of
$0.08 per share and issued warrants to purchase 2,340,000 shares of common stock
at an exercise price per share of $0.12 for a period of five years, for an
aggregate purchase price $312,000. In connection with this transaction, we will
pay a finders' fee to Harbor View consisting of (i) $19,000 and (ii) warrants to
purchase 234,000 shares of common stock at an exercise price per share of $0.12
for a period of five years.
On April 11, 2003 pursuant to a securities purchase agreement with James
F. Dicke II, a former member of our Board of Directors, we sold 3,125,000 shares
of common stock and warrants to purchase 1,875,000 shares of common stock at an
exercise price of $0.12 per share for a period of five years, for an aggregate
purchase price of $250,000.
On April 28, 2003 pursuant to a securities purchase agreement with an
investor, we sold 312,500 shares of common stock and warrants to purchase
187,500 shares of common stock at an exercise price of $0.12 per share for a
period of five years, for an aggregate purchase price of $25,000. In connection
with the transaction, we paid a finders' fee consisting of warrants to purchase
15,625 shares of our common stock at an exercise price per share of $0.12 until
April 2004.
On April 28, 2003 we entered into a securities purchase agreement with
Cornell to sell up to $2,500,000 of our 5% convertible debentures, due April 28,
2008, of which $1,000,000 was purchased on April 28, 2003; $500,000 of
convertible debentures will be purchased within 10 business days of the filing
of the registration statement with the SEC covering the registration of shares
underlying the convertible debentures; and $1,000,000 of convertible debentures
will be purchased within 20 business days from the date the registration
statement is declared effective by the SEC. Pursuant to the agreement, Cornell
or its assignees will receive cash compensation equal to 10% of the gross
proceeds of the convertible debentures purchased by Cornell, along with warrants
to purchase an aggregate of 15,000,000 shares of our common stock at an exercise
price of $0.097 commencing on October 28, 2003 through April 28, 2008. In the
event the closing bid price of our common stock on the date our registration
statement is declared effective by the SEC is less than $0.10, then we have the
right to redeem the last $1,000,000 convertible debenture at the face amount of
the convertible debenture within 10 days of the effectiveness of the
registration statement. Pursuant to the terms of the agreement, commencing July
27, 2003, Cornell may convert the debenture plus accrued interest, (which may be
taken at Cornell's option in cash or common stock), in shares of our common
stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of our common stock for the four trading days
25
immediately preceding the conversion date. No more than $600,000 may be
converted in any thirty-day period. Subject to certain exceptions, at our
option, we may redeem a portion or the entire outstanding debenture at a price
equal to 115% of the amount redeemed plus accrued interest and Cornell will
receive a warrant to purchase 1,000,000 shares of our stock for every $100,000
redeemed. The warrant shall be exercisable on a cash basis and have an
exercisable price of the higher of 110% of the closing bid price of our common
stock on the closing date or $0.08. The warrant shall have "piggy back"
registration rights and shall survive for 5 years from the closing date.
On April 28, 2003, we entered into another equity line of credit agreement
with Cornell. The equity line agreement provides, generally, that Cornell has
committed to purchase up to $50 million of our common stock over a three-year
period, with the timing and amount of such purchases, if any, at our discretion,
provided, however, that the maximum amount of each advance is $500,000, and the
date of each advance shall be no less than six trading days after our
notification to Cornell of its obligation to purchase shares. Any shares of
common stock sold under the equity line will be priced at the lowest closing bid
price of our common stock during the five consecutive trading days following our
notification to Cornell requesting an advance under the equity line. In
addition, at the time of each advance, we are obligated to pay Cornell a fee
equal to five percent (5%) of the amount of each advance. However, our
obligation to sell our common stock is conditioned upon the per share purchase
price being equal to or greater than a price we set on the advance notice date,
the minimum acceptable price, which may not be set any closer than 7.5% percent
below the closing bid price of the common stock the day prior to the date we
notify Cornell of its obligation to purchase shares. In addition, there are
certain other conditions applicable to our ability to draw down on the equity
line including the filing and effectiveness of a registration statement
registering the resale of all shares of common stock that may be issued to
Cornell under the equity line and our adherence with certain covenants. There
can be no assurance of the amount of proceeds we will receive, if any, under the
equity line of credit with Cornell. In connection with this agreement, we issued
116,279 shares of our common stock to Katalyst LLC in consideration for its
exclusive placement agent services.
OUTSTANDING CONVERTIBLE SECURITIES
As of May 27, 2003, in addition to the 474,989,609 shares of our common
stock currently outstanding, we have: (i) outstanding stock options to purchase
an aggregate of approximately 61.9 million shares of common stock at exercise
prices ranging from $0.08 to $0.36, of which approximately 53.7 million are
currently exercisable; (ii) outstanding warrants to purchase an aggregate of
approximately 62.7 million shares of common stock at prices ranging from $0.097
to $1.00, of which warrants to purchase 42.7 million shares are currently
exercisable; and (iii) approximately 24.4 million shares of common stock
underlying certain outstanding convertible debentures. The foregoing does not
include shares issuable pursuant to the equity line of credit agreements.
If all of the foregoing were fully issued, exercised and/or converted, as
the case may be, we would receive proceeds of approximately $33.9 million, and
we would have approximately 624.0 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.
26
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 available to meet
our anticipated expenditures.
We are currently seeking additional financing. We anticipate that we can
continue operations through June 2003 with our current liquid assets, if none of
our outstanding options or warrants is 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 is
exercised, 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 materially 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 will 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). The current formulation of Reticulose is currently
known as "Product R." We believe 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 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
27
introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND.
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of March 31, 2003 we had incurred a cumulative net loss of
$52,887,259. 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.
Our operations over the last five years have been limited principally to
research, testing and analysis of Product R in the United States, and since
November 2002, primarily in Israel, 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 both
inside and 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 the Phase 2 clinical trials of Product
R as a topical treatment for genital warts caused by HPV infection.
In November 2002 we began testing injectable Product R in the following
clinical trials in Israel:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on 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 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 I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. 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.
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 three 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 three clinical trials
including establishing a network
28
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 $825,000 has been paid through March 31, 2003, and
$199,000 was paid during the first quarter of 2003. It is anticipated that these
trials will support future FDA applications.
In the fourth quarter of 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.
Approximately $76,000 has been paid through March 31, 2003, of which $53,000 was
paid during the first quarter of 2003.
In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.
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 payments of $40,000 were made in each of July 2002 and
November 2002.
Whether we will be able to proceed with clinical trials in Israel for
injectable Product R or anywhere else in the world 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
continue or complete the clinical trials for injectable Product R in Israel.
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.
Conducting the clinical trials of Product R will require significant cash
expenditures. 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.
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
29
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 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.
30
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 to advise and assist us
in our preparation of the IND that was filed with the FDA in July 2001 and
cleared for Phase 1 trials in September 2001, and to otherwise guide us through
the FDA process. During 2001 and 2002, GloboMax continued its project management
services for the pre-clinical development and IND submission of Product R to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of Product R. Expenses paid during 2001 and
2002 relating to the GloboMax agreement were approximately $3,587,000. Pursuant
to the agreement with GloboMax, we are obligated to pay for services on an
hourly basis, at prescribed rates.
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.
31
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 December 31,
2002 we expended approximately $18,315,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. We currently are funding
research and testing at several institutes and medical centers in Israel to:
- determine the safety and efficacy of Product R on animals and
cultured human cells;
- determine the effectiveness of Product R in the treatment of
cachexia (body wasting) in patients with AIDS taking a
multi-drug cocktail (highly active anti-retroviral therapy
(HAART));
- determine the effectiveness of Product R in the treatment of
cachexia in patients with solid cancers;
- determine the effectiveness of Product R in the treatment of
cachexia in patients with leukemias and lymphomas;
- study the effects of Product R in mitigating the toxic effects
of other drugs used to treat HIV infections, such as
nucleoside analogues, protease inhibitors and non-nucleoside
reverse transcriptase inhibitors;
- study the effects of Product R in mitigating the toxic effects
of drugs used in the chemotherapy of cancers; and
- assess the direct inhibitory and therapeutic effects of
Product R on neoplasias, including lymphomas and lymphocytic
leukemia.
In November 2002 we began testing injectable Product R in the following
clinical trials in Israel:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on 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 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 I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
32
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. 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.
Our 12-month agreement formalized in April 2001 with the Selikoff Center
in Israel to develop clinical trials in Israel using Product R has concluded.
The amount paid under the agreement was $242,000.
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 three 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 three 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 $825,000 has been paid
through March 31, 2003, and $199,000 was paid during the first quarter of 2003.
It is anticipated that these trials will support future FDA applications.
In the fourth quarter of 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.
Approximately $76,000 has been paid through March 31, 2003, of which $53,000 was
paid during the first quarter of 2003.
In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.
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 payments of $40,000 were made in each of July 2002 and
November 2002.
Whether we will be able to proceed with clinical trials in Israel for
injectable Product R or anywhere else in the world 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
continue or complete the clinical trials for injectable Product R in Israel.
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.
Conducting the clinical trials of Product R will require significant cash
expenditures. 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.
33
SCIENTIFIC ADVISORY BOARD
In January 2002, we formed a Scientific Advisory Board currently
consisting of six people with experience in 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:
DR. GEORGE P. CANELLOS 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.
DR. MICHAEL HARRIS 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.
DR. JAMES D'OLIMPIO 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.
MS. 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.
DR. HOWARD YOUNG 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."
DR. SIDNEY PESTKA, 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
34
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 years, he has
published several books and written more than 400 research articles for
prestigious peer-reviewed scientific journals.
PATENTS
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We currently have 10 patent applications pending with the United States
Patent and Trademark Office (PTO) and 15 patent applications pending in other
countries relating to Product R. In the United States, we have issued patents
from the PTO. We also have 2 issued patents in Australia and one patent granted
in China. During April 2002, under the terms of a settlement agreement entered
as part of a final judgment on March 25, 2002, we were assigned all rights,
title and interest in two issued U.S. patents pertaining to Reticulose(R)
technology.
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 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
35
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.
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. To date, our efforts
or the efforts of our representatives have produced no material benefits to us
regarding our ability to have Product R sold commercially anywhere in the world.
We have entered into exclusive distribution agreements with four separate
entities granting exclusive rights to distribute Product R in the countries of
Canada, China, Japan, Hong Kong, Macao, Taiwan, Mexico, Argentina, Bolivia,
Paraguay, Uruguay, Brazil and Chile. Pursuant to these agreements, the
distributors are obligated to cause Product R to be approved for commercial sale
in such countries and upon such approval, to purchase from us certain minimum
quantities of Product R to maintain the exclusive distribution rights. Our
marketing plans for Product R are still dependent upon registration of Product R
for sale in various jurisdictions. 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 in the foreseeable future to sell Product R commercially
anywhere in the world.
36
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, 2002, 2001 and 2000, 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."
We have produced bulk clinical trial batches for Product R in our
facility in Yonkers, New York under current Good Manufacturing Practice
Procedures (cGMP) as set forth by the FDA. The FDA has not approved Product R
for distribution or sale in the United States, nor has it approved our Yonkers,
New York facility.
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
37
SmithKline, Bristol-Myers Squibb, Hoffmann-La Roche, Agouron Pharmaceuticals,
Merck & Co. and DuPont Pharma.
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 ten full-time employees, consisting of our two executive officers,
two employees involved in operations, two employees responsible for quality
assurance and quality control, an assistant controller, a chief information
officer and two administrative employees. Dr. Hirschman, our President, Chief
Executive Officer and a director, 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, Chairman of the Board of Directors and
Secretary, devotes as much time to his duties as is reasonably necessary.
Additionally, we may hire, as and when needed, and as available, such sales and
technical support staff
38
and consultants for specific projects on a contract basis. See "Management
- --Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
PROPERTY
We lease approximately 16,650 square feet for executive offices, including
research laboratory space 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. We are currently negotiating the sale of the
Bahamian facility, after which sale we intend to manufacture Product R
exclusively at our facility in Yonkers, New York.
LEGAL PROCEEDINGS
In December 2002, we filed suit in the Circuit Court of the 11th Judicial
Circuit of Miami-Dade County Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and "engaged in a
series of manipulative activities to depress the price of Advanced Viral stock."
We alleged that the defendants sought to "guarantee they would be issued
significantly more shares of our common stock" as a result of warrant repricing
provisions of a September 2002 financing agreement. We sought a judgment for
damages, interest and costs.
The complaint named SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein; Knight
Securities, L.P., a limited partnership conducting securities business in
Florida; Stonestreet Limited Partnership located in Canada; and Bristol
Investment Fund, LTD., whose principal place of business is in Grand Cayman,
Cayman Islands, among others. The complaint claimed that the "defendants had
each, at times acting individually, and at times acting in concert with at least
one or more of each other," engaged in practices that violated sections of the
Florida Securities and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident of
Miami-Dade County, Florida, and one of our largest shareholders. The complaint
alleged that Mr. Bregman suffered losses of approximately $3.9 million as a
result of the stock manipulation scheme. In January 2003, certain of the
defendants removed the case to the U.S. District Court for the Southern District
of Florida.
The suit related to an agreement, announced September 9, 2002, pursuant to
which we issued and sold to certain investors 21,500,000 shares of its common
stock for total gross proceeds of $3,010,000, or $0.14 per share. We also issued
warrants to purchase an aggregate of 16,125,000 shares of our common stock,
which were covered by provisions that allowed for an adjustment of the warrant
exercise price. The complaint charged the defendants with manipulating the share
price to take favorable advantage of these warrant repricing provisions.
Following the initiation of our lawsuit in Florida, three of the
purchasers in the September financing (Alpha Capital, A.G., Bristol Investment
Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha Plaintiffs") filed
separate lawsuits in the U.S. District Court for the Southern District of New
York. The suits sought a preliminary injunction and other relief for breach of
contract. The District Court
39
entered an order on February 11, 2003 upon a motion of the Alpha Plaintiffs,
that required that (i) we deliver to the Alpha Plaintiffs the shares of our
common stock issuable upon exercise of the warrants; (ii) the Alpha Plaintiffs
post a bond of either $100,000 or the market value of the warrant shares,
whichever is higher for each group of warrants as of the first and second
determination dates; and (iii) all the proceeds from the sale of the warrant
shares be placed in escrow pending final resolution of the litigation. Within
ten days of the entry of the order, we moved to alter/amend the judgment and/or
for reconsideration of the Court's order requesting relief from the Court's
order. The Court denied this motion and ordered us to immediately deliver the
warrant shares to the Alpha Plaintiffs upon their payment of the exercise price
and posting of a bond, without further delay and no later than April 8, 2003. We
immediately appealed the order denying the motion for reconsideration.
During May 2003, we entered into settlement and mutual release agreements
with the parties involved in both the Florida and New York litigation, which,
among other things, dismissed the lawsuits with prejudice, and Alpha Capital
separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in
exchange for release by the parties to the lawsuits and certain parties to the
September 2002 financing of their rights to exercise the warrants issued in the
September 2002 financing, we issued an aggregate of 947,000 shares of our common
stock and agreed to pay an aggregate of $1,047,891 to such parties, of which
$726,463 has been paid to date, and of which $321,428 shall be paid in five
equal monthly installments until September 2003. 680,000 of the shares issued
may not be resold until September 2003.
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) 66 President, Chief Executive Officer, Chief
Scientific Officer, Director
Eli Wilner (1,2,3) 47 Secretary, Chairman of the Board
Alan V. Gallantar 45 Chief Financial Officer, Treasurer
David Seligman (1,2,3) 64 Director
Nancy J. Van Sant (3) 53 Director
Roy S. Walzer (2,3,4) 55 Director
------------------------
(1) Member of the Executive Management Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Investment Analysis 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,
40
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
1998 to 1999 of AMBI Inc., a nutraceutical company, senior vice president and
chief financial officer from 1992 to 1997 of Bradley Pharmaceuticals, Inc., a
pharmaceutical manufacturer, and vice president and divisional controller from
1989 to 1991 for PaineWebber Incorporated. From 1985 to 1989, Mr. Gallantar was
second vice president at The Chase Manhattan Bank, N.A., and from 1983 to 1985,
was a senior accountant at Philip Morris Incorporated. From 1979 to 1983, Mr.
Gallantar was a senior accountant in the audit department of Deloitte & Touche.
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
and New Jersey State Bar Associations, and sits on the boards of Oxford
Pharmaceutical Services, 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 SEC 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 Kent, MD resigned as a member of our Board of Directors in
February 2003.
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
No interlocking relationships exist between any member of our board of
directors and any other company's board of directors or compensation committee.
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
41
Advanced Viral. Messrs. Wilner and Seligman and Dr. Hirschman serve as members
of the Executive Management Committee.
AUDIT COMMITTEE. In late December 2001, we established an Audit and
Compensation Committee, which was split into two separate committees in November
2002, the Audit Committee and the Compensation Committee. The current members of
the Audit Committee are Eli Wilner, David Seligman and Roy Walzer. Each Audit
Committee member satisfies the audit committee independence standards under the
Sarbanes-Oxley Act of 2002. The Board of Directors has designated Roy Walzer as
fulfilling the qualification requirements of an "audit committee financial
expert" as set forth in recently adopted SEC regulations. The Audit 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 Audit 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.
COMPENSATION COMMITTEE. The Compensation Committee, the current members of
which are Eli Wilner, David Seligman, Nancy Van Sant and Roy Walzer, makes
recommendations to the board of directors regarding the compensation payable to
our executive officers, and reviews general policies relating to the
compensation and benefits of our employees.
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 serves as the sole
member of this committee.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS
We currently do not pay directors fees for their attendance at meetings of
the board of directors. Advanced Viral may revisit this position in the future.
The directors are reimbursed for their out-of-pocket expenses incurred in
connection with their attendance at meetings.
EXECUTIVE OFFICERS
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.
42
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------ --------------------------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION (2) OPTIONS/SARs(3) COMPENSATION(4)
------------------ ---- ------ -------- ---------------- --------------- ---------------
Shalom Z. Hirschman, MD, 2002 $361,000 $ 25,000 $ 26,800 -- $ 17,865
Chairman December 2001 to May 2001 $361,000 $ 25,000 $ 30,192 -- $ 21,270
2002, President, Chief 2000 $361,000 $ 0 $ 30,775 -- $ 4,540
Executive Officer and Chief
Scientific Officer since
October 1996 and consultant
from May 24, 1995 until
October 1996.
Alan V. Gallantar, 2002 $223,000 $ 22,500 $ 6,000 -- --
Chief Financial Officer since 2001 $225,000 $ 25,000 $ 6,000 -- --
October 1999; Treasurer since 2000 $200,000 $ 25,000 $ 21,000 -- --
December 2001.
William Bregman, 2002 n/a n/a n/a n/a n/a
Secretary and director from 2001 $ 70,000 -- -- -- $150,000 (5)
1985 until December 2001, 2000 $ 60,000 -- -- -- $ 2,500 (4)
treasurer from 1985 to 1999.
Bernard Friedland, 2002 n/a n/a n/a n/a n/a
Chairman of Advanced Viral 2001 $ 70,000 -- -- -- $ 150,000 (5)
and President of subsidiary 2000 $ 60,000 -- -- -- $ 1,800 (4)
Advance Viral Research Ltd.
from 1985 to December 2001.
- ------------------
(1) With respect to Dr. Hirschman, 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 $50,000 due has been accrued as
of December 31, 2002.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate incremental cost to
Advanced Viral of Dr. Hirschman's automobile lease, gas, oil, repairs and
maintenance. Other Annual Compensation for Mr. Gallantar includes an automobile
allowance of $500 per month and allowance for moving expenses of approximately
$15,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options. (4) 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.
(5) Represents payments made to Messrs. Bregman and Friedland pursuant to
the terms of the severance agreements discussed below.
43
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2002 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2002 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE (#) REALIZED (1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ------------------------- -------------------------
Shalom Z. Hirschman, M.D. 0 N/A 39,100,000 / 0 $0 / $0 (2)(3)
4,547,880 / 0
Alan V. Gallantar 0 N/A $0 / $0 (2)(4)
0 / 0
William Bregman 0 N/A $0 / $0
0 / 0
Bernard Friedland 0 N/A $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, 2002, $0.08, and the exercise or base price of in-the-money stock
options.
(3) As of December 31, 2002, Dr. Hirschman held options to purchase 4,100,000
shares of common stock at $0.18 per share; 4,000,000 shares of common stock at
$0.19 per share; 4,000,000 shares of common stock at $0.27 per share; 4,000,000
shares of common stock at $0.36 per share, and 23,000,000 shares of common stock
at $0.27, all of which are currently exercisable.
(4) As of December 31, 2002, Mr. Gallantar held options to purchase 4,547,880
shares of common stock at $0.24255 per share, all of which were exercisable as
of such date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of May
12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman on a
full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf.
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.
44
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
- take such action as may be necessary to permit Dr. Hirschman to be
entitled to participate in stock option, stock bonus or similar
plans (including plans for SARs) as are established by us;
- lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price not
in excess of $40,000, and pay for all gas, oil, repairs and
maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;
- reimburse Dr. Hirschman for all of his proven expenses incurred in
and about the course of his employment that are deductible under the
current tax law, including, among other expenses, his license fees,
membership dues in professional organizations, subscriptions to
professional journals, necessary travel, hotel and entertainment
expenses incurred in connection with overnight, out-of-town trips
that contribute to the benefit of us in the reasonable determination
of Dr. Hirschman, and all other expenses that may be pre-approved by
our board of directors; and
- provide not less than four weeks paid vacation annually and such
paid sick or other leave as we provide to all of our employees.
The agreement also provides for the payment of $100,000 to Dr. Hirschman
on the earlier to occur of (i) the date an IND number is obtained from and
approved by the FDA so that human research may be conducted using Product R; or
(ii) the execution of an agreement relating to co-marketing pursuant to which
one or more third parties commit to make payments to us of at least $15 million.
On September 4, 2001, the Company received an IND number from the FDA. To date,
approximately $50,000 of the $100,000 bonus described above has been paid to Dr.
Hirschman, and $50,000 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
45
until the expiration of the original term, or (B) Dr. Hirschman is terminated
for cause, or (ii) until 18 months after death.
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.
- 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.
- 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.
46
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 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. At December 31, 2002
the Company accrued $40,675 to fund the 401k plan representing the Company's
match for the plan year 2002. We intend to purchase our common stock in the open
market at prevailing market prices to satisfy our 2002 matching contribution
obligations. In March 2003, we amended the terms of the 401(k) plan to terminate
our obligation to make matching contributions.
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 an
employment agreement with our chief executive officer, 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 November 2002, we retained Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A., a law firm of which Nancy Van Sant, a member of
our Board of Directors, is a partner, to provide legal services in connection
with certain legal proceedings. For the fiscal year ended December 2002 we were
billed and paid approximately $69,000 to date. From January through April 30,
2003, we were billed approximately $230,000 and have paid approximately $109,000
to date.
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.
47
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 May 27, 2003: (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) 28,541,730 6.0%
William Bregman (2, 4) 38,146,988 8.0%
Shalom Z. Hirschman, MD (5) 39,100,000 7.6%
Eli Wilner (7) 4,500,000 *
Alan V. Gallantar (6) 4,547,880 *
David Seligman (8) 1,887.500 *
Nancy J. Van Sant (8) 937,500 *
Roy Walzer (8) 1,041,300 *
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (6 PERSONS) 52,014,180 9.9%
- --------------
* 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 May 28, 2003.
(2) Pursuant to their severance agreements with Advanced Viral, each of
Messrs. Bregman and Friedland have granted to Advanced Viral, 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 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 21,758,614 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) Represents 39,100,000 shares that may be acquired pursuant to currently
exercisable options to purchase common stock. 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 and Treasurer of Advanced Viral
Research Corp.
(7) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 2,087,500 shares that may be acquired pursuant
to currently exercisable stock options; (iii) 362,500 shares beneficially
owned by his wife Barbara Ann Brennan; and (iv) 50,000 shares beneficially
owned by his step-daughter Celia Conaway. 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.
48
SELLING STOCKHOLDERS
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 stockholders 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
stockholders. Because the selling stockholders 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 stockholders 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.
POSITION WITH OR SHARES OWNED SHARES OWNED
RELATIONSHIP TO BEFORE OFFERING (1) SHARES BEING SOLD AFTER OFFERING (3)
SELLING STOCKHOLDER ADVANCED VIRAL NUMBER PERCENT IN OFFERING (2) NUMBER PERCENT
- ------------------- -------------- ------- ------- ---------------- ------ -------
Xmark Fund,Ltd. None 510,000 * 510,000 0 0%
Xmark Fund,L.P. None 170,000 * 170,000 0 0%
Richard Melnick None 267,000 * 267,000 0 0%
Eli Wilner Secretary, Director 4,500,000 1% 1,400,000 (2a) 3,100,000 *
Shalom Z. Hirschman, MD President and CEO 39,100,000 8% 39,100,000 (2a) 0 *
Alan Gallantar CFO 4,547,880 1% 4,547,880 (2a) 0 0%
David Seligman Director 3,950,000 1% 1,200,000 (2a) 2,750,000 *
James F. Dicke II Director 9,420,000 2% 9,420,000 (2a, b) 0 0%
Nancy J. VanSant Director 1,950,000 * 600,000 (2a) 1,350,000 *
Roy S. Walzer Director 2,578,800 * 528,800 (2a) 2,050,000 *
Paul R. Bishop Director 238,356 * 238,356 (2a) 0 0%
Richard S. Kent,MD Director 394,437 * 241,096 (2a) 153,341 *
Christopher Forbes Former Director 150,000 * 150,000 (2a) 0 0%
George P. Canellos, MD Scientific Advisory Board 500,000 * 250,000 (2a) 250,000 *
Michael Harris, MD Scientific Advisory Board 500,000 * 250,000 (2a) 250,000 *
James D'Olimpio, MD Scientific Advisory Board 500,000 * 250,000 (2a) 250,000 *
Ms. Carol Armenti Scientific Advisory Board 500,000 * 250,000 (2a) 250,000 *
Howard Young, MD Scientific Advisory Board 500,000 * 250,000 (2a) 250,000 *
Sidney Pestka Business Advisory Board 500,000 * 250,000 (2a) 250,000 *
Albert Reichmann Business Advisory Board 250,000 * 250,000 (2a) 0 0%
Jozef Straus, Ph.D., D.Sc. (Hon.) Business Advisory Board 187,500 * 187,500 (2a) 0 0%
Peter Lunder Business Advisory Board 5,762,500 1% 5,512,500 (2a, b) 0 0%
Bookman, Martin Employee 25,000 * 25,000 (2a) 0 0%
Dediego, Maria Employee 100,000 * 100,000 (2a) 0 0%
Fioriti, Paul Employee 1,000 * 1,000 (2a) 0 0%
Fisher, John Employee 150,000 * 150,000 (2a) 0 0%
Gallace, Maria Employee 30,000 * 30,000 (2a) 0 0%
Garcia, Maritza Employee 2,000 * 2,000 (2a) 0 0%
Santer, Malcom Employee 100,000 * 100,000 (2a) 0 0%
Szalkiewicz, Andrew Employee 155,000 * 155,000 (2a) 0 0%
Taraporewala, Irach Employee 150,000 * 150,000 (2a) 0 0%
O. Frank Rushing & Justine Simoni None 4,410,000 1% 4,410,000 (2b) 0 0%
49
POSITION WITH OR SHARES OWNED SHARES OWNED
RELATIONSHIP TO BEFORE OFFERING (1) SHARES BEING SOLD AFTER OFFERING (3)
SELLING STOCKHOLDER ADVANCED VIRAL NUMBER PERCENT IN OFFERING (2) NUMBER PERCENT
- ------------------- -------------- ------- ------- ---------------- ------ -------
TOTAL SHARES(1) 82,099,473 14.81% 71,196,132 10,903,341 2.0%
SHARES OUTSTANDING AFTER OFFERING(2) 538,361,486
- ---------------------------
*Less than 1%
(1) Includes shares of common stock issuable pursuant to outstanding purchase
warrants, stock options and convertible debentures held by the selling
stockholders.
(2) Includes an aggregate of (a) 44,629,377 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 (b)
up to 18,742,500 shares issued or issuable upon the conversion of our 5%
convertible debentures held by certain selling stockholders. See "Prospectus
Summary -- The Offering". Assumes the full exercise or conversion of such
options and debentures held by selling stockholders. (3) Assumes that all of the
shares are sold by the selling stockholders and no additional shares of common
stock are acquired.
PLAN OF DISTRIBUTION
We are registering the proposed resale by the selling stockholders of
474,989,609 shares of our common stock issuable upon the exercise of certain
stock options and the conversion of certain convertible debentures. The selling
stockholders 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 stockholders may sell shares at market prices then prevailing,
at prices related to prevailing market prices, at negotiated prices or at fixed
prices.
The selling stockholders may use broker-dealers to sell shares. If this
happens, broker-dealers will either receive discounts or commissions from the
selling stockholders, or they will receive commissions from purchasers of shares
for whom they have acted as agents. Selling stockholders 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 stockholders 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
50
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.
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 474.989.609 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 stockholders may vote on at all meetings of stockholders.
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, 29th 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.
51
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 stockholders 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
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derives improper
personal benefit.
The effect of this provision is to eliminate our rights and those of our
stockholders (through stockholders' 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 stockholders 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.
52
ADVANCED VIRAL RESEARCH CORP.
INDEX TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 30, 2002, 2001, AND 2000
<Table>
Report of Independent Certified Public Accountants ...............................................................F-2
Consolidated Financial Statements Years Ended 2002, 2001 and 2000
Balance Sheets, December 31, 2002 and 2001 ....................................................................F-3
Statements of Operations for the Years Ended December 31, 2002, 2001
and 2000 and from Inception (February 20, 1984) to December 31, 2002 .........................................F-4
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 2002 ............................................................................................F-5
Statements of Cash Flows for the Years Ended December 31, 2002, 2001
and 2000 and from Inception (February 20, 1984) to December 31, 2002 ........................................F-16
Notes to Consolidated Financial Statements ....................................................................F-17
</Table>
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
<Table>
Consolidated Financial Statements Three Months Ended March 31, 2003
Balance Sheets, March 31, 2003 and December 31, 2002 ..........................................................F-44
Statements of Operations for the Three Months Ended March 31, 2003 and 2002
and from Inception (February 20, 1984) to March 31, 2003 ...................................................F-45
Statements of Stockholders' Equity from Inception (February 20, 1984)
to March 31, 2003 ..........................................................................................F-46
Statements of Cash Flows for the Three Months Ended March 31, 2003 and
2002 and from Inception (February 20, 1984) to March 31, 2003 ..............................................F-58
Notes to Consolidated Condensed Financial Statements ..........................................................F-59
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001,
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,
2002 and for the period from inception (February 20, 1984) to December 31, 2002.
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, 2002 and 2001
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2002 and for the period from
inception (February 20, 1984) to December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered accumulated losses from
operations since its inception and its cash position may be inadequate to fund
the full range of testing required by the FDA in order to approve Product R for
sale. These issues raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 21, 2003
F-2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,475,755 $ 1,499,809
Prepaid insurance 86,368 51,702
Assets held for sale 172,601 188,999
Other current assets 35,527 11,460
------------ ------------
Total current assets 1,770,251 1,751,970
Property and Equipment, Net 2,244,118 2,818,045
Other Assets 931,660 878,776
------------ ------------
Total assets $ 4,946,029 $ 5,448,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 417,061 $ 1,620,150
Accrued liabilities 137,646 223,556
Current portion of capital lease obligation 104,719 64,197
Current portion of note payable 25,165 24,246
------------ ------------
Total current liabilities 684,591 1,932,149
------------ ------------
Long-Term Debt:
Convertible debenture, net 1,658,231 --
Capital lease obligation 5,834 42,370
Note payable 4,879 32,198
------------ ------------
Total long-term debt 1,668,944 74,568
------------ ------------
Common Stock Subscribed but not Issued 883,900 --
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 455,523,990 and 403,296,863 shares issued
and outstanding 4,555 4,033
Additional paid-in capital 57,530,605 47,666,141
Deficit accumulated during the development stage (51,137,805) (40,795,470)
Discount on warrants (4,688,761) (3,432,630)
------------ ------------
Total stockholders' equity 1,708,594 3,442,074
------------ ------------
Total liabilities and stockholders' equity $ 4,946,029 $ 5,448,791
============ ============
See notes to consolidated financial statements.
F-3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
----------------------------------------------------------- DECEMBER 31,
2002 2001 2000 2002
------------- ------------- ------------- ------------
Revenues $ -- $ 17,601 $ 8,363 $ 231,892
------------- ------------- ------------- ------------
Costs and Expenses:
Research and development 4,439,592 5,150,869 3,192,551 18,315,416
General and administrative 2,654,296 4,063,022 2,413,601 17,594,477
Compensation and other expense for
options and warrants 755,397 691,404 1,901,927 3,558,872
Depreciation 977,746 511,216 346,227 2,167,189
------------- ------------- ------------- ------------
8,827,031 10,416,511 7,854,306 41,635,954
------------- ------------- ------------- ------------
Loss from Operations (8,827,031) (10,398,910) (7,845,943) (41,404,062)
------------- ------------- ------------- ------------
Other Income (Expense):
Interest income 27,659 113,812 161,832 901,435
Other income -- -- -- 120,093
Interest expense (1,341,809) (868,856) (1,446,692) (8,875,578)
Severance expense - former directors -- (302,500) -- (302,500)
------------- ------------- ------------- ------------
(1,314,150) (1,057,544) (1,284,860) (8,156,550)
------------- ------------- ------------- ------------
Loss from Continuing Operations (10,141,181) (11,456,454) (9,130,803) (49,560,612)
Loss from Discontinued Operations (201,154) (259,114) (223,861) (1,577,193)
------------- ------------- ------------- ------------
Net Loss $ (10,342,335) $ (11,715,568) $ (9,354,664) $(51,137,805)
============= ============= ============= ============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.02) $ (0.03) $ (0.03)
Discontinued operations (0.00) (0.00) (0.00)
------------- ------------- -------------
Net loss $ (0.02) $ (0.03) $ (0.03)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 439,009,322 389,435,324 362,549,690
============= ============= =============
See notes to consolidated financial statements.
F-4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 $ 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-5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 $ 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-6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 $ 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 0.06 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
----------- ------ ---------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ---------- -----------
See notes to consolidated 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, 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 0 236,276,991 $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-8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 $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 267,031,058 159 2,529,988 (19,000) 3,321,135 (473,159)
----------- ------ ---------- -------- ----------- ---------
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, 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 $ 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 -- -- 413,793 -- -- --
Beneficial conversion
feature, October debenture -- -- 1,350,000 -- -- --
Warrant costs, February
debenture -- -- 37,242 -- -- --
Warrant costs, October
debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 399,322
Imputed interest on
convertible debenture -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- -- -- (4,141,729) --
----------- ------ ----------- -------- ----------- ---------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------ ----------- -------- ----------- ---------
See notes to consolidated financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 $ 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-11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
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-12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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
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-13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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 financial statements.
F-14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
COMMON STOCK
----------------------------------- DEFICIT
ACCUMULATED
AMOUNT ADDITIONAL DURING THE DISCOUNT
PER PAID-IN DEVELOPMENT ON
SHARE SHARES AMOUNT CAPITAL STAGE WARRANTS
---------- ----------- ------ ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
Sale of common stock,
for cash $0.1109 17,486,491 175 1,938,813
Sale of common stock,
for cash 0.1400 22,532,001 225 2,840,575 -- --
Sale of common stock,
for cash 0.1500 9,999,999 100 1,499,900
Issuance of common stock,
conversion of debt 0.1100 909,091 9 99,991 -- --
Issuance of common stock,
conversion of debt 0.1539 1,299,545 13 199,987 -- --
Warrant costs,
termination agreement -- -- 190,757 -- --
Warrant costs, issued
with sale of common
stock, for cash -- -- 2,358,033 -- (2,358,033)
Expenses of stock issuance -- -- (50,160) -- --
Warrants granted for consulting
services -- -- 386,677 -- --
Credit arising from modification
of option terms -- -- 177,963 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 1,101,902
Beneficial conversion feature,
May debenture -- -- 55,413 -- --
Beneficial conversion feature,
July debentures -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- (10,342,335) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761)
=========== ====== ============ ============ ===========
See notes to consolidated financial statements.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
------------------------------------------- DECEMBER 31,
2002 2001 2000 2002
------------ ------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $(10,342,335) $(11,715,568) $ (9,354,664) $(51,137,805)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 997,874 532,264 362,392 2,438,663
Amortization of debt issuance costs 34,078 15,344 106,030 828,637
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 136,734 -- 386,909 3,955,397
Amortization of discount on warrants 1,101,902 985,705 611,134 3,137,300
Amortization of discount on warrants - consulting services -- -- 230,249 230,249
Amortization of deferred compensation cost -- -- -- 760,500
Issuance of common stock for debenture interest 43,425 -- 76,212 119,637
Issuance of common stock for services -- 35,000 46,500 1,586,000
Compensation expense for options and warrants 755,397 691,404 1,901,927 3,558,872
Changes in operating assets and liabilities:
Increase in other current assets (52,155) (28,358) (5,063) (145,311)
Decrease in inventory -- 19,729 -- --
Increase in other assets (86,962) (53,232) (278,037) (1,635,189)
Increase (decrease) in accounts payable and
accrued liabilities (1,288,999) 940,745 174,089 560,907
------------ ------------ ------------ ------------
Total adjustments 1,641,294 3,138,601 3,612,342 15,395,662
------------ ------------ ------------ ------------
Net cash used by operating activities (8,701,041) (8,576,967) (5,742,322) (35,742,143)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- -- (6,292,979)
Proceeds from sale of investments -- -- -- 6,292,979
Acquisition of property and equipment (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Net cash used by investing activities (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 -- 1,000,000 11,500,000
Proceeds from sale of securities, net of issuance costs 6,229,628 5,783,000 10,835,970 29,529,686
Proceeds from common stock subscribed but not issued 883,900 -- -- 883,900
Payments under capital lease (142,426) (58,690) (50,324) (310,028)
Payments on note payable (26,400) (21,519) (19,096) (81,276)
Recovery of subscription receivable written off -- -- 19,000 19,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 8,944,702 5,702,791 11,785,550 41,541,282
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (24,054) (4,462,824) 5,125,757 1,475,755
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 836,876 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 1,475,755 $ 1,499,809 $ 5,962,633 1,475,755
============ ============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 25,669 $ 20,556 $ 36,681
============ ============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
F-16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
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." 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. LTD is presented in the financial
statements under "Discontinued Operations" (See Notes 5 and 15). 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.
F-17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the Company.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company regularly evaluates its long-lived assets for indicators of
possible impairment, whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the
use of the asset and its eventual disposition are less than its
carrying amount.
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 7).
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, 2002 and 2001. 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, 2002 and 2001 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.
F-18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At various
times during the year, the Company had cash balances in excess of
federally insured limits. The Company maintains its cash, which
consists primarily of demand deposits, with high quality financial
institutions, which the Company believes limits this risk.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
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. There were no sales for the
year ended December 31, 2002.
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.
F-19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to
conform to 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEE OF INDEBTEDNESS OF OTHERS. FIN 45 requires
that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. FIN 45's provisions for initial recognition and measurement
should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The guarantor's previous accounting
for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The
disclosure requirements are effective for financial statements of both
interim and annual periods that end after December 15, 2002. The
Company is not a guarantor under any significant guarantees and thus
this interpretation is not expected to have a significant effect on the
Company's financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF
SFAS 123. The standard provides additional transition guidance for
companies that elect to voluntarily adopt the accounting provisions of
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 does not
change the provisions of SFAS 123 that permits entities to continue to
apply the intrinsic value method of APB 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. As the Company continues to follow APB 25, its accounting
for stock-based compensation will not change as a result of SFAS 148.
SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are
effective immediately and have been included in Note 10 of the
Company's consolidated financial statements. The new interim disclosure
provisions will be effective in the first quarter of 2003.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of this standard to have any
impact on its financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND
TECHNICAL CORRECTIONS. SFAS 145 is effective for fiscal years beginning
after May 15, 2002. The Company has not determined the impact that SFAS
145 will have, if any, on its financial statements.
F-20
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 (Continued)
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 adopted SFAS 144 on
January 1, 2002 (see Notes 5 and 15).
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
adopted SFAS 142 on January 1, 2002 and there was no impact on the
results of operations or financial position of the Company.
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 non-compensatory 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.
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.
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $51,137,805 since inception and 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 operations and 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. The foregoing issues raise substantial
doubt about the Company's ability to continue as a going concern.
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. PROPERTY AND EQUIPMENT
ESTIMATED USEFUL LIVES (YEARS) 2002 2001
------------------------------ ---- ----
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 1,410,165 1,233,524
Machinery and equipment 5 3,394,431 3,170,759
---------- ----------
4,839,146 4,438,833
Less accumulated depreciation 2,433,185 1,438,250
---------- ----------
2,405,961 3,000,583
Less property and equipment included in
assets held for sale, net (Note 5) 161,843 182,538
---------- ----------
$2,244,118 $2,818,045
========== ==========
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $429,782 as of
December 31, 2002 and $433,119 as of December 31, 2001. Included with
machinery and equipment is equipment purchased under capital leases of
$135,537 during 2002. Depreciation expense for equipment under the
capital leases was approximately $27,488, $10,368 and $7,729 in 2002,
2001 and 2000, respectively. These amounts are included above.
F-22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. OTHER ASSETS
2002 2001
-------- --------
Patent development costs $897,385 $765,388
Loan costs, net of accumulated amortization of $828,637
and $794,559 34,275 68,353
Other 6,461 51,496
-------- --------
938,121 885,237
Less other assets included in assets held for sale, net (Note 5) 6,461 6,461
-------- --------
$931,660 $878,776
======== ========
NOTE 5. ASSETS HELD FOR SALE
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. The
Company decided to sell LTD due to the fact that the Company has
completed construction of the facility in Yonkers, New York, which
facility is capable to provide all functions previously provided by the
Freeport, Bahamas plant. As required under SFAS 144, the net book
values of the assets (LTD had no liabilities as of December 31, 2002
other than an inter-company payable that has been eliminated) have been
reflected on the balance sheet as held for sale and the operations have
been included in discontinued operations for the years ended December
31, 2002, 2001 and 2000 (see Note 15).
Although no formal contract has been executed, management believes that
the estimated selling price less estimated cost to sell exceeds the net
book value of LTD and therefore there is no impairment loss charged to
discontinued operations.
NOTE 6. ACCRUED LIABILITIES
<Table>
Accrued bonus $ 50,000 $100,000
Accrued 401k contribution 40,675 32,717
Accrued payroll 35,157 81,181
Other 11,814 9,658
-------- --------
$137,646 $223,556
======== ========
</Table>
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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, including
interest at 12% per annum, with a final installment in February 2004.
The aggregate maturities of the installment purchase agreement are as
follows:
<Table>
<Caption>
Year ending December 31:
2003 $25,165
2004 4,879
--------
30,044
Less current portion 25,165
--------
Note payable - long-term portion $ 4,879
=======
</Table>
NOTE 8. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $.199 to $.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 5%
convertible debentures at par in several private placements. Under the
terms of each 5% convertible debenture, 20% of the original issue is
convertible on the original date of issue at a price equal to the
closing bid price quoted on the OTC Bulletin Board on the trading day
immediately preceding the original issue date (except for the
Rushing/Simoni issuance detailed below 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. The Company issued its 5% convertible debentures as
follows:
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
o On May 30, 2002, the Company sold to O. Frank Rushing and Justine
Simoni, as joint tenants, $500,000 principal amount of its 5%
convertible debenture. Based on the terms for conversion associated
with this debenture, there was an intrinsic value associated with
the beneficial conversion feature of approximately $55,000, which
was recorded as deferred interest expense and is presented as a
discount on the convertible debenture. This amount will be amortized
over an expected holding period of two years. Of this amount,
$36,000 has been amortized to interest expense at December 31, 2002.
On June 3, 2002, these investors converted the first 20% ($100,000)
into 909,091 shares of common stock at a conversion price of $0.11
per share. In January 2003, the holder converted the second 20%
($100,000 plus interest of $3,041) into 1,030,411 shares of common
stock at a conversion price of $.10 per share.
o On July 3, 2002, the Company sold to James F. Dicke II, who was then
a member of its Board of Directors, $1,000,000 principal amount of
its 5% convertible debenture. Based on the terms for conversion
associated with this debenture, there was an intrinsic value
associated with the beneficial conversion feature of approximately
$111,000 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, $68,000 has been amortized to interest expense at
December 31, 2002. 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. . In January 2003, the
holder converted the second 20% ($200,000 plus interest of $5,041)
of the debenture into 2,050,411 shares of common stock at a
conversion price of $.10 per share.
o On July 15, 2002, the Company sold to Peter Lunder $500,000
principal amount of the Company's 5% convertible debenture. Based on
the terms for conversion associated with this debenture, there was
an intrinsic value associated with the beneficial conversion feature
of approximately $55,000, which was recorded as deferred interest
expense and is presented as a discount on the convertible debenture.
This amount will be amortized over an expected holding period of two
years. Of this amount, $32,000 has been amortized to interest
expense at December 31, 2002. In January 2003, the holder converted
40% ($200,000 plus interest of $4,822) of the debenture into
1,587,797 shares of common stock, the first 20% of which was
converted at a conversion price of $.1818 per share, and the second
20% of which was converted at a conversion price of $.10 per share.
F-25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
December 31, 2002, warrants to purchase approximately 16.5 million
shares of the Company's common stock relating to these securities
purchase agreements were outstanding with expiration dates through
2006.
During the quarter ended March 31, 2002, under several stock purchase
agreements, the Company sold an aggregate of 9,999,999 shares of its
common stock at $0.15 per share, for cash consideration of $1,500,000.
On April 12, 2002, pursuant to stock purchase agreements with various
institutional investors, the Company issued 17,486,491 shares of its
common stock at a market price of $0.11089 per share and received net
proceeds of approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's 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"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that 60 trading days
following the original issue date of the warrants (the "First
Determination Date"), a certain number of warrants shall become
exercisable at $0.001. The number of shares for which the warrants are
exercisable at $0.001 per share is equal to the positive difference, if
any, between (i) $3,010,000 divided by the volume weighted average
price ("VWAP") of the Company's common stock for the 60 trading days
preceding the First Determination Date and (ii) 21,500,000. Upon 120
trading days following the original issue date of the warrants (the
"Second Determination Date"), a certain number of remaining warrants
shall become exercisable at $0.001. The number of shares for which the
Warrants are exercisable at $.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the VWAP of the
Company's common stock for the 60 trading days preceding the Second
Determination Date and (ii) 21,500,000. No adjustment will be made in
the event that the VWAP for the 60 trading day period preceding the
applicable determination date is $0.14 or greater (see Note 12).
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, finders fees of approximately $50,000
were paid in December 2002 and 627,000 warrants were issued during
January 2003. The fair
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS (Continued)
value of all warrants issued under this agreement was estimated to be
$368,000 (price per warrant ranging from $0.0485 to $0.0598 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 114%; a risk free interest rate of 3.1% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements.
On December 23, 2002 the Company received an additional $40,000 from
various investors representing 500,000 shares of common stock or $0.08
per share. These shares of common stock were issued during January 2003
along with warrants dated January 2003 to purchase 300,000 shares of
common stock at an exercise price of $0.12 per share until January
2008. The fair value of all warrants issued under this agreement was
estimated to be $16,000 (price per warrant $0.0528 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 114%; a risk free interest rate of 3.1% and an expected
holding period of five years. This amount is being amortized to
interest expense in the accompanying consolidated financial statements.
In connection with this transaction the Company paid a finders fee of
$2,400 during January 2003 and issued warrants to purchase 30,000
shares of common stock with an exercise price of $.12 for a period of
five years.
PRIVATE EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell Capital Partners, LP, an institutional investor,
to sell up to $50,000,000 of the Company's common stock. Under such
agreement, the Company may exercise "put options" to sell shares for
certain prices based on certain average trading prices. Upon signing
this agreement, the Company issued to its placement agent, May Davis
Group, Inc., and certain investors, Class A warrants to purchase an
aggregate of 5,000,000 shares of common stock at an exercise price of
$1.00 per share, exercisable in part or whole until February 9, 2006,
and Class B warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price equal to the greater of $1.00 or 110%
of the bid price on the applicable advance date. Such Class B warrants
are exercisable pro rata with respect to the number of warrant shares
as determined by the fraction of the advance payable on that date as
the numerator and $20,000,000 as the denominator multiplied by
5,000,000, until sixty months from the date of issuance.
The fair value of the Class A warrants was estimated to be $1,019,153
($0.204 per warrant) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate of
6% and an expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. SECURITIES PURCHASE AGREEMENTS (Continued)
SUBSEQUENT FINANCINGS - STOCK PURCHASE AGREEMENTS
During January 2003, pursuant to a Stock Purchase Agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a negotiated price of $0.08 per share, for a total purchase price of
$124,000 along with warrants to purchase 930,000 shares of common stock
at an exercise price of $0.12 per share until January 2008. In
connection with this transaction the Company paid a finders fee of
$7,440 during January 2003 and issued warrants to purchase 93,000
shares of common stock with an exercise price of $.12 for a period of
five years.
During March 2003, pursuant to a Stock Purchase Agreement with various
investors, the Company issued 1,250,000 shares of common stock at a
negotiated price of $0.08 per share, for a total purchase price of
$100,000 along with warrants to purchase 750,000 shares of common stock
at an exercise price of $0.12 per share through March 2008. In
connection with this transaction the Company paid a finders fee of
$6,000 during March 2003 and issued warrants to purchase 75,000 shares
of common stock with an exercise price of $.12 for a period of five
years.
NOTE 9. COMMON STOCK SUBSCRIBED BUT NOT ISSUED
Represents cash received during December 2002 pursuant to several
private placements of securities with various investors ($876,000) for
10,950,000 shares of common stock at a negotiated price of $0.08 per
share. These shares of common stock were issued during January 2003. In
addition, 100,000 shares of common stock were issued during January
2003 pursuant to an employment agreement. The value of these shares on
the date of issue was $7,900, which was recorded as compensation
expense.
NOTE 10. 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. During November 2002, the Company secured
$3,000,000 of product liability coverage at a cost of approximately
$24,000 per annum. In addition, during October 2002, the Company
secured $3,000,000 in liability coverage for each of the three clinical
trials in Israel at a cost of approximately $16,000. There can be no
assurance that the
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
PRODUCT LIABILITY
Company will be able to secure additional insurance in adequate amounts
or at reasonable premiums if it determined to do so. Should the Company
be unable to secure additional 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 10 issued U.S. patents, two issued Australian patents
and one granted China patent for the use of Product R. The Company
currently has 10 patent applications pending with the U.S. Patent
Office and 15 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.
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. On April 12, 2002, the
Company successfully completed Phase 1 trials. Phase 2 trials are
pivotal clinical investigations designed to establish the efficacy and
safety of Product R. Currently, the Company does not have sufficient
funds available to pursue the Phase 2 clinical trials of Product R as a
topical treatment for genital warts caused by HPV infection.
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
STATUS OF ISRAEL CLINICAL TRIALS
In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following clinical trials using injectable Product R,
which began during November 2002:
o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY
FOR AIDS. These patients have failed highly active anti-retroviral
therapy (HAART), remain on HAART, and require salvage therapy. The
Company believes that Product R may have three major beneficial
effects in patients with AIDS:
o First, its therapeutic effects on body wasting (cachexia) seen
in patients with AIDS:
o Second, the mitigation of the toxicity of drugs included in
HAART regimens for the treatment of AIDS:
o 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:
The Company believe that Product R may prove to be an important
"enabler" drug in the treatment of AIDS.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA.
Included are patients with acute lymphocytic leukemia, multiple
Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are
patients with solid tumors such as colonic, lung, breast, stomach
and kidney cancers.
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of Product R.
Although there can be no assurances, the Company 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.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel using
Product R. It is anticipated that these trials will support future FDA
applications. As of December 31, 2002, the Company paid $242,000 for
such research.
In September 2002, the Company 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
F-30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
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 $625,000
has been paid through December 31, 2002.
In the fourth quarter of 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve-month period. These
services include the monitoring and auditing of the clinical sites,
hospital support and laboratory testing.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of Product R
for the treatment of AIDS patients (who have failed HAART and remain on
HAART therapy) into late Phase II blinded, controlled clinical trials.
On July 8, 2002, the Company 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 payments of $40,000 were made in July 2002 and
November 2002.
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 September 30,
2002, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1996
and ending February 17, 2008 at an exercise price of $0.19 per share;
(ii) options to
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
purchase 5,000,000 shares exercisable at any time and from time to time
commencing March 24, 1997 and ending February 17, 2008 at an exercise
price of $0.27 per share; and (iii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March
24, 1998 and ending February 17, 2008 at an exercise price of $0.36 per
share. In addition, the Company has agreed to cause the shares
underlying these options to be registered so long as there is no cost
to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
Effective December 31, 2001, the remaining unexercised $0.27 and $0.36
options, which had been extended to December 31, 2001, were further
extended to June 30, 2002 at exercise prices of $0.28 and $0.37,
respectively. As a result of this modification of the option terms, the
fair value of the options was estimated to be $6,158 based on a
financial analysis of the terms of the options using the Black-Scholes
pricing model with the following assumptions: expected volatility of
80%; risk free interest rate of 5%. This amount has been charged to
compensation expense for options and warrants during the year ended
December 31, 2001. Effective June 30, 2002, the remaining unexercised
$0.27 and $0.36 options were extended to December 31, 2002. As a result
of this modification of the option terms, the fair value of the options
was estimated to be $3,895 based on a financial analysis of the terms
of the options using the Black-Scholes pricing model with the following
assumptions: expected volatility of 117%; risk free interest rate of
1.7%. This amount has been charged to compensation expense for options
and warrants during the quarter ended June 30, 2002.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002,
provided, however, the Agreement is extended automatically by one year,
each year, unless notice of termination has been given by either Dr.
Hirschman or the Company. In July 2002, the Company notified Dr.
Hirschman that the Agreement will not be extended subsequent to
December 31, 2004. The Agreement provides for Dr. Hirschman to receive
an annual base salary of $361,000 (effective January 1, 2000), use of
an automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment and for the payment
of $100,000 to Dr. Hirschman on the earlier to occur of (i) the date an
IND number is obtained from and approved by the FDA so that human
research may be conducted using Product R; or (ii) the execution of an
agreement relating to co-marketing pursuant to which one or more third
parties commit to make payments to the Company of at least $15 million.
On September 4, 2001, the Company received an IND number from the FDA.
Therefore, of the $100,000 described above, $25,000 was paid as of
December 31, 2001 with an additional $25,000 paid through September 30,
2002.
F-32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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).
OTHER EMPLOYEES
In connection with the employment of its Chief Financial Officer, the
Company granted Alan 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 commencing October 1, 1999 through September 30, 2009
and have an exercise price of $0.24255 per share. These options are
fully vested.
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 has recognized the
$376,126 fair value of the options as compensation costs on a pro-forma
basis over a three year service period.
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
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).
F-33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
In May 2002, the Company granted to certain of its employees options to
purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five-year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38%; an expected life of approximately 10 years. The Company will
recognize the fair value of the options as compensation costs on a
pro-forma basis over approximately 10 years (the term of the options).
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
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 year ended December 31, 2002. The Business Advisory
Board was dissolved during December 2002.
In September 2002, the Company granted to Sidney Pestka, M.D., a member
of the Scientific Advisory Board, options to purchase 250,000 shares of
common stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18,
2003 and 25% on June 18, 2003 through September 17, 2010. The fair
value of the options was estimated to be $30,462 ($0.1218 per option)
based upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 127%; a risk free interest rate of 4.38% and an expected
holding period of eight years. This amount was charged to compensation
expense for options and warrants during the year ended December 31,
2002.
In December 2002, the Company granted to members of its Scientific
Advisory Board options to purchase an additional 1,500,000 shares of
common stock at an exercise price of $0.075 per share, which options
are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on
September 20, 2003 and 25% on December 20, 2003 through December 20,
2010. The fair value of the options was estimated to be $109,393
($0.0729 per option) based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
F-34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
assumptions: expected volatility of 114%; a risk free interest rate of
4.14% and an expected holding period of eight years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002.
BOARD OF DIRECTORS
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to certain Members of the
Board of Directors and various committees of the Board of Directors.
The exercise price was $0.12 per share exercisable 25% immediately, 25%
on June 20, 2002, 25% on September 20, 2002 and 25% on December 20,
2002 through May 5, 2010. The fair value of the these options was
estimated to be $455,249 ($0.1097 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
115%; a risk free interest rate of 4.88% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation costs on a pro-forma basis over an eight year period (the
term of the options).
In June 2002, the Company granted to Roy S. Walzer, upon his becoming a
member of the Board of Directors and member of various committees of
the Board, options to purchase 528,800 shares of common stock at an
exercise price of $0.295 per share, which options are exercisable 25%
immediately, 25% on September 10, 2002, 25% on December 10, 2002 and
25% on March 10, 2003 through June 9, 2010. The fair value of the these
options was estimated to be $140,608 ($0.2659 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation costs on a pro-forma basis over an eight year
period (the term of the options).
In July 2002, the Company granted to Paul Bishop, upon his becoming a
member of the Board of Directors, options to purchase 238,356 shares of
common stock at an exercise price of $0.17 per share,) which options
are exercisable 25% immediately, 25% on October 29, 2002, 25% on
January 29, 2003 and 25% on April 29, 2003 through July 28, 2010. The
fair value of the these options was estimated to be $38,509 ($0.1616
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 133%; a risk free interest rate of
4.38% and an expected life of eight years. The Company will recognize
the fair value of the options as compensation costs on a pro-forma
basis over an eight year period (the term of the options).
F-35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
In September 2002, the Company granted to Richard Kent, upon his
becoming a member of the Board of Directors, and member of various
committees of the Board, options to purchase 241,096 shares of common
stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 24, 2002, 25% on March 24,
2003 and 25% on June 24, 2003 through September 23, 2010. The fair
value of the these options was estimated to be $29,377 ($0.1218 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 127%; a risk free interest rate of
4.38% and an expected life of eight years. The Company will recognize
the fair value of the options as compensation costs on a pro-forma
basis over an eight year period (the term of the options).
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period 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 options granted to the Board of Directors,
Hirschman, Gallantar and other employees 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.
F-36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net loss as reported $(10,342,335) $(11,715,568) $ (9,354,664)
Deduct: total stock-based
compensation expense determined
under fair value based method for all
awards, net of related tax effects (2,016,132) (2,374,643) (1,799,827)
------------ ------------ ------------
Pro forma net loss $(12,358,467) $(14,090,211) $(11,154,491)
============ ============ ============
Earnings per share - basic and diluted:
As reported $ (0.02) $ (0.03) $ (0.03)
============ ============ ============
Pro forma $ (0.03) $ (0.04) $ (0.03)
============ ============ ============
There were no other options outstanding that would require pro forma
presentation.
On November 4, 2002, Paul Bishop resigned from the Company's Board of
Directors. Under the terms of his option agreement he is entitled to
exercise options to purchase 119,178 shares of the Company's common
stock until November 3, 2005.
On November 4, 2002, James F. Dicke, II resigned from the Company's
Board of Directors. Under the terms of his option agreement, he is
entitled to exercise options to purchase 600,000 shares of the
Company's common stock until November 3, 2005.
On November 6, 2002, Jozef Straus resigned from the Company's Business
Advisory Board. Under the terms of his option agreement he is entitled
to exercise options to purchase 187,500 shares of the Company's common
stock until November 5, 2005.
During February 2003, Richard S. Kent resigned from the Company's Board
of Directors. Under the terms of his option agreements he is entitled
to exercise options to purchase 394,437 shares of the Company's common
stock until February 2006.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with Globomax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for Product R. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002.
F-37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share and warrants
to purchase 1,750,000 shares at an exercise price of $0.26 per share
until February 28, 2005. The fair value of the warrants was estimated
to be $200,249 ($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.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the year ended
December 31, 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-38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)
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.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000, which has not been paid at December 31, 2002.
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 was incurred and was capitalized as an additional
element of cost of the computer equipment.
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.
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. During 2002, the Company entered into a purchase lease agreement
for equipment totaling $146,672. The lease calls for monthly payments
of $5,903 for 24 months commencing in February 2002 and expiring in
January 2004.
Future minimum capital lease payments and the net present value of the
future minimum lease payments at December 31, 2002 are as follows:
<Table>
<Caption>
Year ending December 31:
2003 $ 108,764
2004 5,903
---------
Total minimum lease payments 114,667
Less amount representing interest 4,114
---------
Net present value of future minimum lease payments 110,553
Less current maturities 104,719
---------
$ 5,834
=========
</Table>
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. 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 39 months at $711
per month expiring in January 2003. The Company entered into a new 39
month lease for $716 per month, starting in February 2003 and expiring
in April 2006.
Total lease expense for the years ended December 31, 2002, 2001 and
2000 amounted to $298,763, $263,609 and $296,064, respectively.
Future minimum lease commitments as of December 31, 2002 are as
follows:
<Table>
<Caption>
Year ending December 31:
2003 $ 299,000
2004 299,000
2005 105,000
---------
Total $ 703,000
=========
</Table>
NOTE 11. SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of the Company upon the terms
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. The note was repaid on
December 17, 2001.
F-40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleges that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company is seeking a judgment
for damages, interest and costs.
The complaint names SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claims
that the "defendants have each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of the largest shareholders of
the Company. The complaint alleges that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,002 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charges the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits in the U.S. District Court for the
Southern District of New York. The suits sought a preliminary
injunction and other relief for breach of contract. The District Court
entered an order on February 11, 2003 upon a motion of the Alpha
Plaintiffs, that required that (i) the Company deliver to the Alpha
Plaintiffs the shares of Company common stock issuable upon exercise of
the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000
or the market value of the warrant shares, whichever is higher for each
group of warrants as of the first and second determination dates; and
(iii) all the proceeds from the sale of the warrant shares be placed in
escrow pending final resolution of the litigation. Within ten days of
the entry of the order, the Company moved to alter/amend the judgment
and/or reconsideration of the Court's order requesting relief from the
Court's order. The Court denied this motion and ordered the Company to
immediately deliver the warrant shares to the Alpha Plaintiffs upon
their payment of the exercise price and posting of a bond, without
further delay and no later than April 8, 2003. The Company has appealed
the order denying the motion for reconsideration. The Company continues
to consider and pursue all of its options relating to the litigation,
including resolution through settlement.
F-41
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. STOCKHOLDERS' EQUITY
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.
During 2002, Company issued 52,227,127 shares of common stock for an
aggregate consideration of $6,529,608. The amounts were comprised of
the issuance of 50,018,491 shares of common stock for cash of
$6,229,608 and issuance of 2,208,636 shares of common stock upon
conversion of $300,000 of convertible debentures.
NOTE 14. 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, 2002 and 2001, the Company had net operating loss
carryforwards for Federal income tax reporting purposes amounting to
approximately $40,100,000 and $31,000,000, which expire in varying
amounts to 2021.
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, 2002 and
2001 were as follows:
2002 2001
----------- -----------
Benefit of net operating loss carryforwards $13,634,000 $11,730,000
Less valuation allowance 13,634,000 11,730,000
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
As of December 31, 2002 and 2001, 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 in the ownership of the
Company from the exercise of options and warrants or other future
issuances of common stock.
F-42
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. DISCONTINUED OPERATIONS
SFAS No. 144 requires the operating results of any assets with their
own identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented must also be reclassified as discontinued
operations. See Note 1 and Note 5 for more detail regarding the planed
sale of LTD and classification as held for sale during 2002. The
following table details the amounts reclassified to discontinued
operations:
INCEPTION
(FEBRUARY 20,
YEAR ENDED DECEMBER 31, 1984) TO
---------------------------------------------- DECEMBER 31,
2002 2001 2000 2002
----------- ----------- ----------- -----------
Revenues $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Costs and Expenses:
General and administrative 181,348 238,311 207,941 1,310,350
Depreciation 20,062 21,048 16,165 271,498
----------- ----------- ----------- -----------
201,410 259,359 224,106 1,581,848
----------- ----------- ----------- -----------
Loss from Operations (201,410) (259,359) (224,106) (1,581,848)
Other Income 256 245 245 4,655
----------- ----------- ----------- -----------
Discontinued operations $ (201,154) $ (259,114) $ (223,861) $(1,577,193)
=========== =========== =========== ===========
NOTE 16. 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 common
stock and may, at its discretion, make additional contributions based
upon earnings. In March 2001, the Company funded the 401(k) plan with
$23,757 to enable the 401(k) plan to purchase shares of common stock on
the open market to contribute to the 401(k) plan for the employer match
for the year ended December 31, 2001. At December 31, 2002 the Company
accrued $40,675 to fund the 401k plan representing the Company's match
for the plan year 2002. The Company intends to purchase common stock in
the open market at prevailing market prices to satisfy its 2002
matching contribution obligations. In March 2003, the Company amended
the terms of the Company's 401(k) plan to terminate the obligation to
make matching contributions.
F-43
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 511,121 $ 1,475,755
Prepaid insurance 104,837 86,368
Assets held for sale 162,539 172,601
Other current assets 68,837 35,527
------------ ------------
Total current assets 847,334 1,770,251
Property and Equipment, Net 2,006,377 2,244,118
Other Assets 1,011,067 931,660
------------ ------------
Total assets $ 3,864,778 $ 4,946,029
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Litigation settlement $ 1,098,812 $ --
Accounts payable 711,047 417,061
Accrued liabilities 177,913 137,646
Current portion of capital lease obligation 71,245 104,719
Current portion of note payable 23,451 25,165
------------ ------------
Total current liabilities 2,082,468 684,591
------------ ------------
Long-Term Debt:
Convertible debenture, net 1,184,765 1,658,231
Capital lease obligation -- 5,834
Note payable -- 4,879
------------ ------------
Total long-term debt 1,184,765 1,668,944
------------ ------------
Common Stock Subscribed but not Issued -- 883,900
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 474,042,609 and 455,523,990 shares issued
and outstanding 4,740 4,555
Additional paid-in capital 56,130,347 57,530,605
Deficit accumulated during the development stage (52,887,259) (51,137,805)
Discount on warrants (2,650,283) (4,688,761)
------------ ------------
Total stockholders' equity 597,545 1,708,594
------------ ------------
Total liabilities and stockholders' equity $ 3,864,778 $ 4,946,029
============ ============
See notes to consolidated financial statements.
F-44
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended (February 20,
March 31, 1984) to
-------------------------------- March 31,
2003 2002 2003
------------- ------------- -------------
Revenues $ -- $ -- $ 231,892
------------- ------------- -------------
Costs and Expenses:
Research and development 457,910 1,661,173 18,773,326
General and administrative 863,202 691,071 18,457,679
Compensation and other expense for
options and warrants -- -- 3,558,872
Depreciation 237,740 228,097 2,404,929
------------- ------------- -------------
1,558,852 2,580,341 43,194,806
------------- ------------- -------------
Loss from Operations (1,558,852) (2,580,341) (42,962,914)
------------- ------------- -------------
Other Income (Expense):
Interest income 6,189 2,071 907,624
Other income -- -- 120,093
Interest expense (187,139) (252,802) (9,062,717)
Severance expense - former directors -- -- (302,500)
------------- ------------- -------------
(180,950) (250,731) (8,337,500)
------------- ------------- -------------
Loss from Continuing Operations (1,739,802) (2,831,072) (51,300,414)
Loss from Discontinued Operations (9,652) (42,436) (1,586,845)
------------- ------------- -------------
Net Loss $ (1,749,454) $ (2,873,508) $ (52,887,259)
============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.00) $ (0.01)
Discontinued operations (0.00) (0.00)
------------- -------------
Net loss $ (0.00) $ (0.01)
============= =============
Weighted Average Number of
Common Shares Outstanding 469,468,368 406,815,381
============= =============
See notes to consolidated financial statements.
F-45
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-46
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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
offer on "B" warrants 0.05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ------ ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ------ ----------- -----------
See notes to consolidated financial statements.
F-47
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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 0.06 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
----------- ------ ---------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ---------- -----------
See notes to consolidated financial statements.
F-48
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------ Accumulated Deferred
Amount Additional during the Compen-
Per Paid-In Subscription Development sation
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-49
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-50
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------ ----------- ------------ ----------- ---------
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock,
exercise of options $ 0.08 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 -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- 1,350,000 -- -- --
Warrant costs, February debenture -- -- 37,242 -- -- --
Warrant costs, October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 399,322
Imputed interest on convertible
debenture -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- -- -- (4,141,729) --
----------- ------ ----------- -------- ----------- ---------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------ ----------- -------- ----------- ---------
See notes to consolidated financial statements.
F-51
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-52
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-53
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-54
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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-55
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------ ----------- ------ ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
Sale of common stock, for cash $0.1109 17,486,491 175 1,938,813 -- --
Sale of common stock, for cash 0.1400 22,532,001 225 2,840,575 -- --
Sale of common stock, for cash 0.1500 9,999,999 100 1,499,900 -- --
Issuance of common stock,
conversion of debt 0.1100 909,091 9 99,991 -- --
Issuance of common stock,
conversion of debt 0.1539 1,299,545 13 199,987 -- --
Warrant costs, termination agreement -- -- 190,757 -- --
Warrant costs, issued with sale of
common stock, for cash -- -- 2,358,033 -- (2,358,033)
Expenses of stock issuance -- -- (50,160) -- --
Warrants granted for consulting services -- -- 386,677 -- --
Credit arising from modification
of option terms -- -- 177,963 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 1,101,902
Beneficial conversion feature, May debenture -- -- 55,413 -- --
Beneficial conversion feature, July debentures -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- (10,342,335) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761)
=========== ====== ============ ============ ===========
See notes to consolidated financial statements.
F-56
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------------ ----------- ------ ------------ ------------ -----------
Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761)
Sale of common stock, for cash $ 0.0800 13,750,000 137 1,099,863
Issuance of common stock,
conversion of debt 0.1000 4,105,754 41 410,685 -- --
Issuance of common stock,
conversion of debt 0.1818 562,865 6 102,323 -- --
Issuance of common stock,
for services rendered 0.0790 100,000 1 7,899
Warrant costs, issued with sale
of common stock, for cash -- -- 102,700 -- (102,700)
Expenses of stock issuance -- -- (52,227) -- 36,385
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 354,430
Litigation settlement - warrants
cancelled-original issue
discount reversed (1,974,094) 1,974,094
Litigation settlement -
amortization reversed (223,731)
Litigation settlement --
cash and stock (1,097,407)
Net loss, Three Months
Ended March 31, 2003 -- -- -- (1,749,454) --
----------- ------ ------------ ------------ -----------
Balance, March 31, 2003
(unaudited) 474,042,609 $4,740 $ 56,130,347 $(52,887,259) $(2,650,283)
=========== ====== ============ ============ ===========
See notes to consolidated financial statements.
F-57
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
Three Months Ended (February 20,
March 31, 1984) to
--------------------------- March 31,
2003 2002 2003
----------- ----------- ------------
Cash Flows from Operating Activities:
Net loss $(1,749,454) $(2,873,508) $(52,887,259)
----------- ----------- ------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 241,701 233,309 2,680,364
Amortization of debt issuance costs 12,854 4,185 841,491
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 24,794 -- 3,980,191
Amortization of discount on warrants 130,699 241,807 3,498,248
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 14,795 -- 134,432
Issuance of common stock for services -- -- 1,586,000
Compensation expense for options and warrants -- -- 3,558,872
Changes in operating assets and liabilities:
Increase in other current assets (50,607) (41,748) (195,918)
Increase in other assets (92,261) (54,876) (1,727,450)
Increase (decrease) in accounts payable and accrued liabilities 334,252 (80,015) 895,159
----------- ----------- ------------
Total adjustments 616,227 302,662 16,011,889
----------- ----------- ------------
Net cash used by operating activities (1,133,227) (2,570,846) (36,875,370)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Disposal (Acquisition) of property and equipment 4,929 (42,835) (4,318,455)
----------- ----------- ------------
Net cash provided (used) by investing activities 4,929 (42,835) (4,318,455)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- 1,500,000 11,500,000
Proceeds from sale of securities, net of issuance costs 1,093,465 -- 30,623,151
Proceeds from common stock subscribed but not issued (883,900) -- --
Payments under capital lease (39,308) (45,622) (349,336)
Payments on note payable (6,593) (5,793) (87,869)
Recovery of subscription receivable written off -- -- 19,000
----------- ----------- ------------
Net cash provided by financing activities 163,664 1,448,585 41,704,946
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (964,634) (1,165,096) 511,121
Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 --
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 511,121 $ 334,713 $ 511,121
=========== =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the period for interest $ 6,810 $ 3,997
=========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
F-58
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements at March
31 2003 have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information on Form 10-Q and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the
financial position as of March 31 2003 and results of operations for
the three months ended March 31, 2003 and 2002 and cash flows for the
three months ended March 31, 2003 and 2002. 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 Company has discontinued allocating certain
of its general and administrative expenses to research and development.
This change, effective in the first quarter ending March 31, 2003, was
necessary to reflect current operating costs relating to the Company's
Yonkers, New York facility which are recorded as general and
administrative expenses in line with the Company's operations in New
York and no longer allocated to research and development expense. The
Company's Chief Scientific Officer, who is also Chief Executive
Officer, allocates approximately 30% of his time to oversight of the
Company's clinical trials and therefore this percentage of his total
compensation has been allocated to research and development expense
with the balance allocated to general and administrative expense. 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 audited consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $52,887,259 since inception and is
dependent upon registration of Product R for sale before it can begin
commercial operations. The Company's cash position is inadequate to pay
all the costs associated with operations and 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. The foregoing issues raise substantial doubt about
the Company's ability to continue as a going concern.
Management intends to continue to sell the Company's securities in an
attempt to meet its cash flow requirements; however, no assurance can
be given that equity or debt financing, if and when required, will be
available.
F-59
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sales of the Company's product. The Company has not as
yet received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since 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. During November 2002, the Company secured
$3,000,000 of product liability coverage at a cost of approximately
$24,000 per annum. In addition, during October 2002, the Company
secured $3,000,000 in liability coverage for each of the three clinical
trials in Israel at a cost of approximately $16,000. There can be no
assurance that the Company will be able to secure additional insurance
in adequate amounts or at reasonable premiums if it determined to do
so. Should the Company be unable to secure additional product liability
insurance, the risk of loss to the Company in the event of claims would
be greatly increased and could have a material adverse effect on the
Company.
LACK OF PATENT PROTECTION
The Company has nine issued U.S. patents, some covering the composition
of Product R and others covering various uses of Product R. In
addition, the Company has two issued Australian patents covering the
use of Product R. Additionally, the Company has 14 pending U.S. patent
applications and 17 pending foreign patent applications. The Company
can give no assurance that other companies, having greater economic
resources, will not be successful in developing a similar product.
There can be no assurance that issued patents as well as patents that
may result from pending applications will be enforceable.
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. On April
12, 2002, the Company successfully completed Phase 1 trials. Phase 2
trials are pivotal clinical investigations designed to establish the
efficacy and safety of Product R. Currently, the Company does not have
sufficient funds available to pursue the Phase 2 clinical trials of
Product R as a topical treatment for genital warts caused by HPV
infection.
F-60
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS
In November 2002 the Company began testing injectable Product R in the
following clinical trials in Israel:
o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on 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 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. The Company
believes that Product R may prove to be an important "enabler"
drug in the treatment of AIDS.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of Product R.
Although there can be no assurances, the Company anticipates that the
clinical trials in Israel will help facilitate the planned
investigational new drug (IND) application process for injectable
Product R with the FDA.
The Company's 12-month agreement formalized in April 2001 with the
Selikoff Center in Israel to develop clinical trials in Israel using
Product R has concluded. The Company paid $242,000 under this
agreement.
In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the three 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 three 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. $825,000 has been paid
through March 31, 2003, of which $199,000 was paid during the first
quarter of 2003. It is anticipated that these trials will
support future FDA applications.
F-61
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
In the fourth quarter of 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve-month period. These
services include the monitoring and auditing of the clinical sites,
hospital support and laboratory testing. Approximately $76,000 has been
paid through March 31, 2003, of which $53,000 was paid during the first
quarter of 2003.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of Product R
for the treatment of AIDS patients (who have failed HAART and remain on
HAART therapy) into late Phase II blinded, controlled clinical trials.
On July 8, 2002, the Company 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 payments of $40,000 each were made in July 2002 and
November 2002.
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 March 31,
2003, 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
F-62
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
to purchase 5,000,000 shares exercisable at any time and from time to
time commencing March 24, 1996 and ending February 17, 2008 at an
exercise price of $0.19 per share; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March
24, 1997 and ending February 17, 2008 at an exercise price of $0.27 per
share; and (iii) options to purchase 5,000,000 shares exercisable at
any time and from time to time commencing March 24, 1998 and ending
February 17, 2008 at an exercise price of $0.36 per share. In addition,
the Company has agreed to cause the shares underlying these options to
be registered so long as there is no cost to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
Effective December 31, 2001, the remaining unexercised $0.27 and $0.36
options, which had been extended to December 31, 2001, were further
extended to June 30, 2002 at exercise prices of $0.28 and $0.37,
respectively. As a result of this modification of the option terms, the
fair value of the options was estimated to be $6,158 based on a
financial analysis of the terms of the options using the Black-Scholes
pricing model with the following assumptions: expected volatility of
80%; risk free interest rate of 5%. This amount has been charged to
compensation expense for options and warrants during the year ended
December 31, 2001. Effective June 30, 2002, the remaining unexercised
$0.27 and $0.36 options were extended to December 31, 2002. As a result
of this modification of the option terms, the fair value of the options
was estimated to be $3,895 based on a financial analysis of the terms
of the options using the Black-Scholes pricing model with the following
assumptions: expected volatility of 117%; risk free interest rate of
1.7%. This amount has been charged to compensation expense for options
and warrants during the quarter ended June 30, 2002.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve 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
F-63
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
an agreement relating to co-marketing pursuant to which one or more
third parties commit to make payments to the Company of at least $15
million. On September 4, 2001, the Company received an IND number from
the FDA. Therefore, of the $100,000 described above, $25,000 was paid
as of December 31, 2001 with an additional $25,000 paid through
September 30, 2002. No further payments have been made to date. 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).
OTHER EMPLOYEES
In connection with the employment of its Chief Financial Officer, the
Company granted Alan 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 commencing October 1, 1999 through September 30, 2009
and have an exercise price of $0.24255 per share. These options are
fully vested.
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 has recognized the
$376,126 fair value of the options as compensation expense on a
pro-forma basis over a three year service period.
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
termination rate of 10%. The Company will recognize the fair value of
the options as compensation expense on a pro-forma basis over a one
year service period (the term of the employment agreements).
F-64
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
In May 2002, the Company granted to certain of its employees options to
purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38%; an expected life of approximately 10 years. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis over approximately 10 years (the term of the options).
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
In May 2002, the Company granted to members of its 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. The Business Advisory Board was dissolved
during December 2002.
In September 2002, the Company granted to Sidney Pestka, M.D., a member
of the Scientific Advisory Board, options to purchase 250,000 shares of
common stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18.
2003 and 25% on June 18, 2003 through September 17, 2010. The fair
value of the options was estimated to be $30,462 ($0.1218 per option)
based upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 127%; a risk free interest rate of 4.38% and an expected
holding period of eight years. This amount was charged to compensation
and other expense for options and warrants during the quarter ended
September 30, 2002. In December 2002, the Company granted to members of
its Scientific Advisory Board options to purchase an additional
1,500,000 shares of common stock at an exercise price of $0.075 per
share, which options are exercisable 25% on March 20, 2003, 25% on June
20, 2003, 25% on September 20, 2003 and 25% on December 20, 2003
through December 20, 2010. The fair value of the options was estimated
to be $109,393 ($0.0729 per option) based upon a financial analysis of
the terms of the
F-65
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
MEMBERS OF ADVISORY BOARDS (Continued)
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 114%; a risk free interest rate of
4.14% and an expected holding period of eight years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002.
BOARD OF DIRECTORS
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to certain Members of the
Board of Directors and various committees of the Board of Directors.
The exercise price was $0.12 per share exercisable 25% immediately, 25%
on June 20, 2002, 25% on September 20, 2002 and 25% on December 20,
2002 through May 5, 2010. The fair value of the these options was
estimated to be $455,249 ($0.1097 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
115%; a risk free interest rate of 4.88% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over an eight year period
(the term of the options).
In June 2002, the Company granted to Roy S. Walzer, a member of the
Board of Directors and member of various committees of the Board,
options to purchase 528,800 shares of common stock at an exercise price
of $0.295 per share, which options are exercisable 25% immediately, 25%
on September 10, 2002, 25% on December 10, 2002 and 25% on March 10,
2003 through June 9, 2010. The fair value of the these options was
estimated to be $140,608 ($0.2659 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
115%; a risk free interest rate of 4.88% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over an eight year period
(the term of the options).
In July 2002, the Company granted to Paul Bishop, a member of the Board
of Directors, options to purchase 238,356 shares of common stock at an
exercise price of $0.17 per share, which options are exercisable 25%
immediately, 25% on October 29, 2002, 25% on January 29, 2003 and 25%
on April 29, 2003 through July 28, 2010. The fair value of the these
options was estimated to be $38,509 ($0.1616 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 133%; a risk free interest rate of 4.38% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation costs on a pro-forma basis over an eight year
period (the term of the options).
F-66
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
In September 2002, the Company granted to Richard Kent, a member of the
Board of Directors, and member of various committees of the Board
options to purchase 241,096 shares of common stock at an exercise price
of $0.14 per share, which options are exercisable 25% immediately, 25%
on December 24, 2002, 25% on March 24, 2003 and 25% on June 24 2003
through September 23, 2010. The fair value of the these options was
estimated to be $29,377 ($0.1218 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
127%; a risk free interest rate of 4.38% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over an eight-year period
(the term of the options). During February 2003, Richard S. Kent
resigned from the Company's Board of Directors. Under the terms of his
option agreements he is entitled to exercise options to purchase
394,437 shares of the Company's common stock until February 2006.
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years. The Company will recognize the fair
value of the options as compensation costs on a pro forma basis over an
eight-year period (the term of the options).
Financial reporting of the options granted to Hirschman, Gallantar,
other employees and Members of the Board of Directors and committees of
the Board of Directors has been prepared pursuant to the Company's
policy of following APB No. 25, and related interpretations.
Accordingly, the following pro-forma financial information is presented
to reflect amortization of the fair value of the options.
F-67
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
<Table>
<Caption>
Three Months
Ended March 31,
---------------------------
2003 2002
----------- -----------
Net loss as reported $(1,749,454) $(2,873,508)
Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (45,998) (564,188)
----------- -----------
Pro forma net loss $(1,795,452) $(3,437,696)
=========== ===========
Earnings per share - basic and diluted:
As reported ($ 0.00) ($ 0.01)
=========== ===========
Pro forma ($ 0.00) ($ 0.01)
=========== ===========
</Table>
There were no other options outstanding that would require pro forma
presentation.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with Globomax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for Product R. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002. Globomax is no longer providing services or
representing the Company.
HARBOR VIEW AGREEMENTS
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
F-68
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
HARBOR VIEW AGREEMENTS (Continued)
$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.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the quarter ended
June 30, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. Pursuant to these agreements, distributors are
obligated to cause Product R to be approved for commercial sale in such
countries and, upon such approval, to purchase from the Company certain
minimum quantities of Product R to maintain the exclusive distribution
rights. Leonard Cohen, a former consultant to the Company, has informed
the Company that he is an affiliate of two of these entities. To date,
the Company has recorded revenue classified as other income for the
sale of territorial rights under the distribution agreements. The
Company has made no sales under the distribution agreements other than
for testing purposes.
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.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000, of which $93,000 has been paid at March 31, 2003. Additional
payments are scheduled through August 2003.
F-69
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleged that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company sought a judgment for
damages, interest and costs.
The complaint named SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claimed
that the "defendants had each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of the largest shareholders of
the Company. The complaint alleged that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $0.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,000 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charged the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits against the Company in the U.S.
District Court for the Southern District of New York. The suits sought
a preliminary injunction and other relief for breach of contract. The
District Court entered an order on February 11, 2003 upon a motion of
the Alpha Plaintiffs, that required that (i) the Company deliver to the
Alpha Plaintiffs the shares of Company common stock issuable upon
exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of
either $100,000 or the market value of the warrant shares, whichever is
higher for each group of warrants as of the first and second
determination dates; and (iii) all the proceeds from the sale of the
warrant shares be placed in escrow pending final resolution of the
litigation. Within ten days of the entry of the order, the Company
moved to alter/amend the judgment and/or reconsideration of the Court's
order requesting relief from the Court's order. The Court denied this
motion and ordered the Company to immediately deliver the warrant
shares to the Alpha Plaintiffs upon their payment of the exercise price
and posting of a bond, without further delay and no later than April 8,
2003. The Company appealed the order denying the motion for
reconsideration.
F-70
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
During May 2003, the Company entered into settlement and mutual release
agreements with the parties involved in both the Florida and New York
litigation, which, among other things, dismissed the lawsuits with
prejudice, and Alpha Capital separately dismissed its lawsuit with
prejudice. Pursuant to the agreements, in exchange for release by the
parties to the lawsuits and certain parties to the September financing
of their rights to exercise the warrants issued in the September 2002
financing, we issued an aggregate of 947,000 shares of our common stock
and agreed to pay an aggregate of $1,047,891 to such parties, of which
$25,000 was paid as of March 31, 2003, $701,463 was paid subsequent to
quarter end, and of which $321,428 shall be paid in five equal monthly
installments until September 2003.
NOTE 4. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $0.199 to $0.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 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 trading day immediately
preceding the original issue date (except for the Rushing/Simoni
issuance detailed below 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. The Company
issued its 5% convertible debentures as follows:
F-71
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
o On May 30, 2002, the Company sold to O. Frank Rushing and Justine
Simoni, as joint tenants, $500,000 principal amount of its 5%
convertible debenture. Based on the terms for conversion associated
with this debenture, there was an intrinsic value associated with
the beneficial conversion feature of approximately $55,000, which
was recorded as deferred interest expense and is presented as a
discount on the convertible debenture. This amount will be amortized
over an expected holding period of two years. Of this amount,
$42,000 has been amortized to interest expense through March 31,
2003. On June 3, 2002, these investors converted the first 20%
($100,000) into 909,091 shares of common stock at a conversion price
of $0.11 per share. In January 2003, the holders converted the
second 20% ($100,000 plus interest of $3,041) into 1,030,411 shares
of common stock at a conversion price of $0.10 per share.
o On July 3, 2002, the Company sold to James F. Dicke II, who was then
a member of its Board of Directors, $1,000,000 principal amount of
its 5% convertible debenture. Based on the terms for conversion
associated with this debenture, there was an intrinsic value
associated with the beneficial conversion feature of approximately
$111,000 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, $80,000 has been amortized to interest expense through
March 31, 2003. 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. In January 2003, Mr. Dicke
converted the second 20% ($200,000 plus interest of $5,041) of the
debenture into 2,050,411 shares of common stock at a conversion
price of $0.10 per share.
o On July 15, 2002, the Company sold to Peter Lunder $500,000
principal amount of the Company's 5% convertible debenture. Based on
the terms for conversion associated with this debenture, there was
an intrinsic value associated with the beneficial conversion feature
of approximately $55,000, which was recorded as deferred interest
expense and is presented as a discount on the convertible debenture.
This amount will be amortized over an expected holding period of two
years. Of this amount, $39,000 has been amortized to interest
expense through March 31, 2003. In January 2003, Mr. Lunder
converted 40% ($200,000 plus interest of $4,822) of the debenture
into 1,587,797 shares of common stock, the first 20% of which was
converted at a conversion price of $0.1818 per share, and the second
20% of which was converted at a conversion price of $0.10 per share.
F-72
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
March 31, 2003, warrants to purchase approximately 16.5 million shares
of the Company's common stock relating to these securities purchase
agreements were outstanding with expiration dates through 2006.
During the quarter ended March 31, 2002, under several securities
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 securities 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 approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's 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"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that at 60 and 120
trading days following the original issue date of the Warrants, a
certain number of warrants shall become exercisable at $0.001. The
number of shares for which the warrants are exercisable at $0.001 per
share is equal to the positive difference, if any, between (i)
$3,010,000 divided by the volume weighted average price ("VWAP") of the
Company's common stock for the 60 trading days preceding the First
Determination Date and (ii) 21,500,000; provided however, that no
adjustment will be made in the event that the VWAP for the 60 trading
day period preceding the applicable determination date is $0.14 or
greater. In December 2002, the Company filed suite against certain of
the investors in connection with the warrant repricing provisions of
the agreement (see Note 3 "LITIGATION"). During May 2003, the Company
entered into a settlement and mutual release agreements with the
parties involved in both the Florida and New York litigation, which,
among other things, dismissed the lawsuits with prejudice. Pursuant to
the agreements, in exchange for release by the parties to the lawsuits
of their rights to exercise the warrants issued in the September 2002
financing, the Company issued an aggregate of 947,000 shares of common
stock and agreed to pay an aggregate of $1,047,891 to such parties, of
which $25,000 was paid as of March 31, 2003, $701,463 was paid
subsequent to quarter end, and of which $321,428 shall be paid in five
equal monthly installments until September 2003. The Company recorded a
settlement of litigation liability at March 31, 2003 of $1,098,812
which represents cash to be paid to litigants of $1,022,891 and 947,000
shares of common stock to be issued at $0.08 per share totaling
$75,921. (See Note 3 "LITIGATION").
F-73
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total gross
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, the Company paid finders' fees to
Harbor View and AVIX consisting of (i) approximately $50,000 and (ii)
warrants to purchase 627,000 shares of the Company common stock at an
exercise price of $0.12 per share through December 2007. The fair value
of all warrants issued under this agreement was estimated to be
$368,000 (price per warrant ranging from $0.0485 to $0.0598 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 114%; a risk free interest rate of 3.1% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements.
On December 23, 2002, the Company entered into a securities purchase
agreement pursuant to which the Company sold to various investors
500,000 shares of common stock at $0.08 per share, for an aggregate
purchase price of $40,000. These shares of common stock were issued
during January 2003 along with warrants dated January 2003 to purchase
300,000 shares of common stock at an exercise price of $0.12 per share
until January 2008. The fair value of all warrants issued under this
agreement was estimated to be $16,000 (price per warrant $0.0528 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 114%; a risk free interest rate of 3.1% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements. In connection with this transaction the Company paid
finders' fees to AVIX consisting of (i) $2,400 and (ii) warrants to
purchase 30,000 shares of common stock at an exercise price per share
of $0.12 until January 2008.
During January 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a price of $0.08 per share, for a total purchase price of $124,000,
along with warrants to purchase 930,000 shares of common stock at an
exercise price of $0.12 per share until January 2008. The fair value of
all warrants issued under this agreement was estimated to be $57,000
(price per warrant of $0.0598 to $0.0624 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
114%; a risk free interest rate of 3.1% and an expected holding period
of five years. This amount is being amortized to interest expense in
the accompanying consolidated financial statements In connection with
this transaction the Company paid a finders' fee to AVIX consisting of
(i) $7,440 and (ii) issued warrants to purchase 93,000 shares of common
stock at an exercise price per share of $0.12 until January 2008.
F-74
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
During March 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,250,000 shares of common stock
at $0.08 per share, for a total purchase price of $100,000, along with
warrants to purchase 750,000 shares of common stock at an exercise
price of $0.12 per share through March 2008. The fair value of all
warrants issued under this agreement was estimated to be $46,000 (price
per warrant of $0.0572 to $0.0624 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 114%; a
risk free interest rate of 3.1% and an expected holding period of five
years. In connection with this transaction the Company paid finders'
fees to Harbor View consisting of (i) $6,000 and (ii) warrants to
purchase 75,000 shares of common stock at an exercise price per share
of $0.12 until March 2008.
SUBSEQUENT FINANCINGS - SECURITIES PURCHASE AGREEMENTS AND CONVERTIBLE
DEBENTURE
In April and May 2003, pursuant to securities purchase agreements with
various investors, the Company sold 3,587,500 shares of common stock at
a price of $0.08 per share and issued warrants to purchase 2,152,000
shares of common stock at an exercise price per share of $0.12 for a
period of five years, for an aggregate purchase price $287,000. In
connection with this transaction, the Company paid a finders' fee to
Harbor View consisting of (i) $17,000 and (ii) warrants to purchase
215,250 shares of common stock at an exercise price per share of $0.12
for a period of five years.
On April 11, 2003, pursuant to a securities purchase agreement with
James F. Dicke II, a former member of the Company's Board of Directors,
the Company sold 3,125,000 shares of common stock at $0.08 per share
for a total purchase price of $250,000, along with warrants to purchase
1,875,000 shares of common stock at an exercise price per share of
$0.12 for a period of five years.
On April 28, 2003, pursuant to a securities purchase agreement with an
investor, the Company sold 312,500 shares of common stock at $0.08 per
share for a total purchase price of $25,000, along with warrants to
purchase 187,500 shares of common stock at an exercise price per share
of $0.12 for a period of five years. In connection with this
transaction, the Company paid a finders' fee consisting of warrants to
purchase 15,625 shares of common stock at an exercise price per share
of $0.12 per until April 2004.
F-75
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SUBSEQUENT FINANCINGS - SECURITIES PURCHASE AGREEMENTS AND CONVERTIBLE
DEBENTURE (Continued)
On April 28, 2003, the Company entered into a securities purchase
agreement with Cornell Capital Partners, LP, an institutional investor
("Cornell") to sell up to $2,500,000 of 5% convertible debentures, due
April 28, 2008; of which $1,000,000 was purchased on April 28, 2003;
$500,000 of convertible debentures will be purchased within 10 business
days of the filing of the registration statement with the SEC to
register the underlying shares; and $1,000,000 of convertible
debentures will be purchased within 20 business days from the date the
registration statement is declared effective by the SEC. In the event
the closing bid price of the common stock on the date the Company's
registration statement is declared effective by the SEC is less than
$0.10, then the Company shall have the right to redeem the last
$1,000,000 convertible debenture. The redemption price is the face
amount of the convertible debenture. A 10% fee is paid to Cornell on
each sale.
Commencing July 27, 2003, Cornell may convert the debenture plus
accrued interest, (which may be taken at Cornell's option in cash or
common stock), into shares of the Company's common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of the Company's common stock for the 4
trading days immediately preceding the conversion date. Cornell may
convert no greater than $600,000 in any thirty day calendar period.
At the Company's option the Company may redeem a portion or all of the
outstanding debenture at a price equal to 115% of the amount redeemed
plus accrued interest and Cornell will receive a warrant to purchase
1,000,000 shares of the Company's stock for every $100,000 redeemed.
Cornell received a warrant to purchase 15,000,000 shares of our common
stock exercisable for 5 years at an exercise price per share of $0.097.
The warrant is not exercisable prior to October 28, 2003.
The legal expenses associated with this transaction are estimated to be
approximately $50,000 of which $42,500 has been paid as of April 28,
2003.
F-76
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell 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. As of
March 31, 2003, the Company has not drawn on the equity line of credit.
The fair value of the Class A warrants was estimated to be $1,019,153
($0.204 per warrant) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate of
6% and an expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements.
On April 28, 2003, the Company entered into an equity line of credit
agreement with Cornell. The equity line agreement provides, generally,
that Cornell has committed to purchase up to $50 million of the
Company's common stock over a three-year period, with the timing and
amount of such purchases, if any, at the Company's discretion,
provided, however, that the maximum amount of each advance is $500,000,
and the date of each advance shall be no less than six trading days
after the Company's notification to Cornell of their obligation to
purchase shares. Any shares of common stock sold under the equity line
will be priced at the lowest closing bid price of our common stock
during the five consecutive trading days following the Company's
notification to Cornell requesting an advance under the equity line. In
addition, at the time of each advance, the Company is obligated to pay
Cornell a fee equal to five percent (5%) of the amount of each advance.
However, the Company's obligation to sell the common stock is
conditioned upon the per share purchase price being equal to or greater
than a price the Company sets on the advance notice date, the minimum
acceptable price, which may not be set any closer than 7.5% percent
below the closing bid price of the common stock the day prior to the
advance notice date. In addition, there are certain other conditions
applicable to the Company's ability to draw down on the equity line
including the filing and effectiveness of a registration statement
registering the resale of all shares of common stock that may be issued
to Cornell under the equity line and the Company's adherence with
certain covenants. In connection with this agreement, the Company
issued 116,279 shares of our common stock to Katalyst LLC in
consideration for its exclusive placement agent services.
F-77
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. DISCONTINUED OPERATIONS
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. SFAS No.
144 requires the operating results of any assets with their own
identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented was reclassified as discontinued
operations. The following table details the amounts reclassified to
discontinued operations:
<Table>
<Caption>
Inception
Three Months (February 20,
Ended March 31, 1984) to
----------------------- March 31,
2003 2002 2003
-------- ----------- -----------
Revenues $ -- $ -- $ --
-------- ----------- -----------
Costs and Expenses:
General and administrative 5,691 37,224 1,316,041
Depreciation 3,961 5,212 275,459
-------- ----------- -----------
9,652 42,436 1,591,500
-------- ----------- -----------
Loss from Operations (9,652) (42,436) (1,591,500)
Other Income -- -- 4,655
-------- ----------- -----------
Discontinued operations $ (9,652) $ (42,436) $(1,586,845)
======== =========== ===========
</Table>
F-78
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
71,196,132 SHARES
OF
COMMON STOCK
___________, 2003
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, which will be paid
solely by Advanced Viral Research Corp. (the "Registrant"). All amounts shown
are estimates, except the Commission registration fee:
<Table>
<Caption>
Commission registration fee..........................................$0
Printing and mailing expenses...................................$10,000
Legal fees and expenses.........................................$15,000
Accounting fees and expenses....................................$ 5,000
TOTAL..................................................$30,000
</Table>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article Ninth of our Certificate of Incorporation contains the following
provision with respect to indemnification of directors and officers:
Ninth: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and
all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may
be entitled under any By-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office,
and shall continue as to a person, who has ceased to be director, officer,
employee or agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.
Section 145 of the General Corporate Law of the State of Delaware (the
"DGCL") contains provisions regarding indemnification, among others, of officers
and directors. Section 145 of the DGCL provides in relevant part:
(a) A corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right
of the corporation) by reason of the fact that the person is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by
the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause
to believe the person's conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself,
create a presumption that the
II-1
person did not act in good faith and in a manner which the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that the person's conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation
to procure a judgment in its favor by reason of the fact that the person
is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in good
faith and in a manner the person reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or
such other court shall deem proper.
(c) To the extent that a present or former director or officer of a
corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
this section, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation only
as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or
agent is proper in the circumstances because the person has met the
applicable standard of conduct set forth in subsections (a) and (b) of
this section. Such determination shall be made, with respect to a person
who is a director or officer at the time of such determination, (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) by a committee of such
directors designated by majority vote of such directors, even though less
than a quorum, or (3) if there are no such directors, or if such directors
so direct, by independent legal counsel in a written opinion, or (4) by
the stockholders.
Delaware law also permits a corporation to purchase and maintain insurance
on behalf of any person who is or was a director or officer against any
liability asserted against him and incurred by him in such capacity or arising
out of his status as such, whether or not the corporation has the power to
indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article Eleventh,
which provides:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for
II-2
liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
laws, (iii) under Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived an improper
personal benefit.
The above discussion of our Certificate of Incorporation is not intended
to be exhaustive and is respectively qualified in its entirety by such document.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to our securities issued or sold within
the past three years which were not registered under the Securities Act. No
underwriters were employed with respect to the sale of any of the securities
listed below. Except as noted below, each of these transactions was completed
without registration of the respective securities under the Securities Act in
reliance upon the exemptions provided by Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder on the basis that such
transactions did not involve a public offering. The purchasers were
sophisticated with access to the kind of information registration would provide
and such purchasers acquired such securities without a view toward the
distribution thereof.
1. In January 2000, pursuant to the securities purchase agreement with
Endeavour Capital Fund, S.A. discussed above, we issued the second $1,000,000
tranche of $2,000,000 in aggregate principal amount of our 7% convertible
debentures due December 31, 2004 to Endeavour Capital Fund, S.A.
2. In February 2000 pursuant to a consulting agreement with Harbor View
Group, we issued to Harbor View warrants to purchase 1,750,000 shares at an
exercise price of $0.21 per share, and warrants to purchase 1,750,000 shares at
an exercise price of $0.26 per share, until February 28, 2005, in exchange for
consulting services provided or to be provided to us.
3. In February 2000 pursuant to a securities purchase agreement, we sold
to Harbor View Group and various other purchasers 13,636,357 shares of common
stock, and warrants to purchase an aggregate of 5,454,544 shares of common stock
for an aggregate purchase price of $3,000,000. Half of the warrants are
exercisable at $0.275 per share, and half of the warrants are exercisable at
$0.33 per share, until February 28, 2005.
4. In May 2000, we granted Louis Silver, a director stock options to
acquire 100,000 shares of common stock, exercisable at $0.25 per share, until
May 31, 2002. Mr. Silver is an "accredited investor" as defined in Rule 501(a)
under the Securities Act.
5. On September 18, 2000 we entered into a private equity line of credit
agreement with Spinneret Financial Systems, Inc., who assigned their rights to
GMF Holdings, Inc., for the right to put shares of our common stock to the
investor from time to time to raise up to $20,000,000, subject to certain
conditions and restrictions. This agreement and all agreements contemplated in
connection with such agreement was terminated by mutual agreement of the parties
on January 22, 2001.
6. From November 2000 through March 2001, pursuant to a securities
purchase agreement, we sold to Harbor View Group and various other purchasers
13,427,500 shares of common stock, and warrants to purchase an aggregate of
8,056,500 shares of common stock for an aggregate purchase price
II-3
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.
7. During the year 2000, we issued approximately 38.4 million shares in
connection with the conversion of debentures; approximately 1.2 million shares
upon the exercise of warrants; and approximately 5.2 million shares upon
exercise of options.
8. We entered into an equity line of credit agreement dated February 9,
2001 with Cornell Capital Partners, LP. Pursuant to the equity line of credit
agreement, subject to the satisfaction of certain conditions, Cornell Capital,
an "accredited investor" as defined in Rule 501(a) under the Securities Act, may
sell and issue, from time to time, up to an aggregate of $50,000,000 of its
common stock. In connection with the equity line of credit, we issued to the
placement agent, May Davis Group, Inc., which introduced Cornell Capital to us,
and certain other investors Class A Warrants to purchase in the aggregate
5,000,000 shares of our common stock at an exercise price per share equal to
$1.00, exercisable in part or in whole at any time until February 9, 2006, and
Class B Warrants to purchase in the aggregate 5,000,000 shares of our common
stock at an exercise price equal to the greater of $1.00 or 110% of the bid
price of the common stock on the applicable advance date under the private
equity line of credit agreement. The Class B Warrant is exercisable pro rata on
or after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5,000,000 by a fraction, the numerator of
which is the amount of the advance payable on the applicable advance date and
the denominator of which is $50,000,000, until sixty months from the date of
issuance.
9. In June 2001 we issued 60,000 shares of our common stock pursuant to
the exercise of certain options.
10. On July 27, 2001, pursuant to a securities purchase agreement with
various purchasers, we authorized the issuance and sale of up to 1,225,000
shares of our common stock and warrants to purchase an aggregate of 735,000
shares of common stock in a private offering transaction pursuant to Section
4(2) of the Securities Act for a purchase price of $0.40 per share, for an
aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of the date
hereof, none of the warrants had been exercised.
11. During the year 2001, we issued approximately 76,000 shares upon the
cashless exercise of warrants, and 60,000 shares upon exercise of options.
12. During the second quarter of 2002, we issued to certain three
investors an aggregate of $2,000,000 principal amount of our 5% convertible
debentures at par in several private placements. Under the terms of each 5%
convertible debenture, 20% of the original issue is convertible on the original
date of issue at a price equal to the closing bid price quoted on the OTC
Bulletin Board on the preceding trading day (except for $500,000 of the
debentures 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; 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.
II-4
13. 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. In December 2002
we filed suit against certain of the investors in connection with the warrant
repricing provisions of the agreement, and during May 2003, we entered into
settlement and mutual release agreements with the parties involved in both the
Florida and New York litigation, which, among other things, dismissed the
lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with
prejudice. Pursuant to the agreements, in exchange for release by the parties to
the lawsuits and certain parties to the September 2002 financing of their right
to exercise the warrants issued in the September 2002 financing, we issued an
aggregate of 947,000 shares of our common stock and agreed to pay an aggregate
of $1,047,891 to such parties, of which $726,463 has been paid to date, and of
which $321,428 shall be paid in five equal monthly installments until September
2003. 680,000 of the shares issued may not be resold until September 2003.
14. From December 2002 through March 2003, pursuant to securities purchase
agreements with various purchasers, we authorized the issuance of and sold
13,750,000 shares of our common stock and warrants to purchase up to 8,250,000
shares of our common stock at $0.08 per share, for an aggregate purchase price
of $1,100,000. In connection with the agreement, we paid finders' fees to Harbor
View Group and AVIX, Inc consisting of (i) approximately $66,000 and (ii)
warrants to purchase 825,000 shares of our common stock. All of the
aforementioned warrants are exercisable at $0.12 per share commencing six months
after the closing date of the agreement, for a period of five years.
15. In April and May 2003, pursuant to securities purchase agreements with
various investors, we sold 3,900,000 shares of our common stock at a price of
$0.08 per share and issued warrants to purchase 2,340,000 shares of common stock
at an exercise price per share of $0.12 through April and May 2007, for an
aggregate purchase price $312,000. In connection with this transaction, we will
pay a finders' fee to Harbor View consisting of (i) $19,000 and (ii) warrants to
purchase 234,000 shares of common stock at an exercise price per share of $0.12
for a period of five years.
16. On April 11, 2003 pursuant to a securities purchase agreement with an
investor, we sold 3,125,000 shares of common stock and warrants to purchase
1,875,000 shares of common stock at an exercise price of $0.12 per share for a
period of five years, for an aggregate purchase price of $250,000.
17. On April 28, 2003 we entered into a securities purchase agreement with
an institutional investor to sell up to $2,500,000 of our 5% convertible
debentures, due April 28, 2008, of which $1,000,000 was purchased on April 28,
2003; $500,000 of convertible debentures will be purchased
II-5
within 10 business days of the filing of the registration statement with the SEC
covering the registration of shares underlying the convertible debentures; and
$1,000,000 of convertible debentures will be purchased within 20 business days
from the date the registration statement is declared effective by the SEC.
Pursuant to the agreement, the investor or its assignees will receive cash
compensation equal to 10% of the gross proceeds of the convertible debentures
purchased by the investor, along with warrants to purchase an aggregate of
15,000,000 shares of our common stock at an exercise price of $0.097 commencing
on October 28, 2003 through April 28, 2008. In the event the closing bid price
of our common stock on the date our registration statement is declared effective
by the SEC is less than $0.10, then we have the right to redeem the last
$1,000,000 convertible debenture at the face amount of the convertible debenture
within 10 days of the effectiveness of the registration statement. Pursuant to
the terms of the agreement, commencing July 27, 2003, the investor may convert
the debenture plus accrued interest, (which may be taken at investor's option in
cash or common stock), in shares of our common stock at a conversion price equal
to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of our
common stock for the four trading days immediately preceding the conversion
date. No more than $600,000 may be converted in any thirty-day period. Subject
to certain exceptions, at our option, we may redeem a portion or the entire
outstanding debenture at a price equal to 115% of the amount redeemed plus
accrued interest and investor will receive a warrant to purchase 1,000,000
shares of our stock for every $100,000 redeemed. The warrant shall be
exercisable on a cash basis and have an exercisable price of the higher of 110%
of the closing bid price of our common stock on the closing date or $0.08. The
warrant shall have "piggy back" registration rights and shall survive for 5
years from the closing date.
18. On April 28, 2003, we entered into another equity line of credit
agreement with an institutional investor. The equity line agreement provides,
generally, that investor has committed to purchase up to $50 million of our
common stock over a three-year period, with the timing and amount of such
purchases, if any, at our discretion, provided, however, that the maximum amount
of each advance is $500,000, and the date of each advance shall be no less than
six trading days after our notification to investor of its obligation to
purchase shares. Any shares of common stock sold under the equity line will be
priced at the lowest closing bid price of our common stock during the five
consecutive trading days following our notification to investor requesting an
advance under the equity line. In addition, at the time of each advance, we are
obligated to pay investor a fee equal to five percent (5%) of the amount of each
advance. However, our obligation to sell our common stock is conditioned upon
the per share purchase price being equal to or greater than a price we set on
the advance notice date, the minimum acceptable price, which may not be set any
closer than 7.5% percent below the closing bid price of the common stock the day
prior to the date we notify investor of its obligation to purchase shares. In
addition, there are certain other conditions applicable to our ability to draw
down on the equity line including the filing and effectiveness of a registration
statement registering the resale of all shares of common stock that may be
issued to investor under the equity line and our adherence with certain
covenants. There can be no assurance of the amount of proceeds we will receive,
if any, under the equity line of credit with investor. In connection with this
agreement, we issued 116,279 shares of our common stock to a placement agent in
consideration for its exclusive placement agent services.
II-6
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Advanced Viral Research Corp.
("ADVR") (2)
3.2 Bylaws of ADVR, as amended(1)
3.3 Amendment to Certificate of Incorporation of ADVR(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between ADVR and American Stock Transfer and Trust
Company(1)
4.4 Forms of Common Stock Options and Agreements granted by ADVR to TRM
Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by ADVR to Plata
Partners Limited Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common
Stock granted by ADVR to Leonard Cohen(6)
4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman, MD
dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and between
ADVR and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and between
ADVR and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of ADVR at $0.2040 per share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of ADVR at $0.2448 per share. (15)
4.15 Securities Purchase Agreement dated June 23, 1999 by and between ADVR
and various purchasers. (15)
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of ADVR at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of ADVR at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and between
ADVR and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of
common stock at $0.2461 per share. (15)
4.21 Securities Purchase Agreement dated December 28, 1999 between ADVR
and Endeavour Capital Fund S.A. (16)
4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common
stock at $0.19916667 per share. (16)
4.24 Form of Warrant dated February 7, 2000 to purchase shares of common
stock at $0.21 per share. (17)
4.25 Form of Warrant dated February 7, 2000 to purchase shares of common
stock at $0.26 per share. (17)
4.26 Form of Warrant dated February 16, 2000 to purchase shares of common
stock at $0.275 per share. (17)
4.27 Form of Warrant dated February 16, 2000 to purchase shares of common
stock at $0.33 per share. (17)
4.28 Form of Class A Warrant dated September 18, 2000 to purchase
5,000,000 shares of common stock. (19)
4.29 Form of Class B Warrant dated September 18, 2000 to purchase
5,000,000 shares of common stock. (19)
4.30 Form of Class A Warrant dated February 9, 2001 to purchase 5,000,000
shares of common stock. (21)
4.31 Form of Class B Warrant dated February 9, 2001 to purchase 5,000,000
shares of common stock. (21)
5.1 Opinion and Consent of the law firm of Berman Rennert Vogel &
Mandler, P.A. **
10.1 Declaration of Trust by Bernard Friedland and William Bregman in
favor of ADVR dated November 16, 1987(12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique
Medical Actuel and ADVR. (3)
10.3 Letter, dated March 15, 1991 to ADVR from Health Protection Branch(3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and
ADVR. (11)(a)
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and
ADVR. (4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell
Inc. and ADVR. (7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen
and ADVR. (8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between
Lionel Resnick, MD and ADVR. (11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc.
and ADVR. (12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between
C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between
C.U.R.E. Pharmaceutica Central Americas Ltd. and ADVR. (11)(d)
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between
DCT S.R.L. and ADVR, as amended(11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and ADVR. (11)(f)
II-7
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver(9)
10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z. Hirschman,
MD(9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between
AVIX International Pharmaceutical Corp. and ADVR. (12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2,
1995 with Commonwealth Pharmaceuticals(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December
28, 1995, between AVIX International Pharmaceutical Corp., Beijing
Unistone Pharmaceutical Co., Ltd. and ADVR. (11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and ADVR. (11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between
ADVR and Shalom Z. Hirschman, MD(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(i)
10.23 Employment Agreement, dated October 17, 1996, between ADVR and Shalom
Z. Hirschman, MD(11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and
ADVR. (12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between
ADVR and Interfi Capital Group(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development
Agreement, dated March 13, 1997, between National Institute of
Health, Food and Drug Administration and the Centers for Disease
Control and Prevention(11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between
ADVR and RBB Bank AG. (11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative
Research and Development Agreement, dated March 4, 1998, between
National Institute of Health, Food and Drug Administration and the
Centers for Disease Control and Prevention. (13)
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between
ADVR and Shalom Z. Hirschman, MD(11)(n)
10.30 Agreement between ADVR and Angelo Chinnici, MD dated July 1, 1999.
(14)
10.31 Consulting Agreement between ADVR and GloboMax LLC dated January 18,
1999. (15)
10.32 Registration Rights Agreement dated August 3, 1999 between ADVR
Research and Focus Investors LLC. (15)
10.33 Employment Agreement dated October 1, 1999 between ADVR and Alan V.
Gallantar (15)
10.34 Registration Rights Agreement dated December 28, 1999 between ADVR
and Endeavour Capital Fund, S.A. (16)
10.35 Consulting Agreement dated February 7, 2000 between ADVR and Harbor
View Group, Inc.(17)
10.36 Securities Purchase Agreement dated February 16, 2000 between ADVR
and Harbor View Group, Inc. (17)
10.37 Letter Agreement dated November 16, 1999 between ADVR and Bratskeir &
Company. (18)
10.38 Amended and Restated Employment Agreement dated May 12, 2000 between
ADVR and Shalom Z. Hirschman, MD (18)
10.39 Equity Line of Credit Agreement dated as of September 18, 2000
between ADVR and Spinneret Financial Systems, Inc.(19)
10.40 Registration Rights Agreement dated as of September 18, 2000 between
ADVR and Spinneret Financial Systems, Inc. (19)
10.41 Registration Rights Agreement dated as of September 18, 2000 between
ADVR and May Davis Group, Inc.(19)
10.42 Placement Agent Agreement dated September 18, 2000 between ADVR and
May Davis Group, Inc.(19)
10.43 Assignment and Assumption Agreement dated December 12, 2000 between
Spinneret Financial Systems, Inc. and GMF Holdings Inc. (20)
10.44 Agreement to Waive Assignment Rights dated December 12, 2000 by GMF
Holdings Inc. (20)
10.45 Termination Agreement dated January 22, 2001 between GMF Holdings,
Inc., May Davis Group, Inc. and ADVR. (21)
10.46 Equity Line of Credit Agreement dated as of February 9, 2001 between
ADVR and Cornell Capital Partners, LP. (21)
10.47 Registration Rights Agreement dated as of February 9, 2001 between
ADVR and Cornell Capital Partners, LP.(21)
10.48 Registration Rights Agreement dated as of February 9, 2001 between
ADVR and May Davis Group, Inc. (21)
10.49 Placement Agent Agreement dated February 9, 2001 between ADVR and May
Davis Group, Inc. (21)
10.50 Agreement dated as of April 2, 2001 between ADVR and Selikoff Center
of Ra'Anana, Israel. (22)
10.51 Agreement dated as of January 29, 2001 between ADVR and The Weizmann
Institute of Science and Yeda. (22)
10.52 Securities Purchase Agreement dated November 8, 2000 by and between
ADVR and various investors. (23)
10.53 Securities Purchase Agreement dated July 27, 2001 by and between ADVR
and various investors. (23)
II-8
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.54 Severance Agreement dated November 29, 2001 by and between ADVR and
William Bregman. (11)(p)
10.55 Severance Agreement dated November 29, 2001 by and between ADVR and
Bernard Friedland. (11)(p)
10.56 Severance Agreement dated November 29, 2001 by and between ADVR and
Louis Silver. (11)(p)
10.57 Promissory Note and Guaranty in favor of Alan V. Gallantar dated
November 29, 2001 by ADVR. (11)(p)
10.58 Settlement Agreement dated March 20, 2002 by and among ADVR, Immune
Modulation Maximum Corporation, Commonwealth Pharmaceuticals, Ltd,
and Charles E. Miller. (24)
10.59 Termination Agreement dated May 30, 2002 between ADVR and Harbor View
Group, Inc. (25)
10.60 Securities Purchase Agreement dated May 30, 2002 between ADVR and O.
Frank Rushing and Justine Simoni, as joint tenants. (25)
10.61 Securities Purchase Agreement dated July 3, 2002 between ADVR and
James F. Dicke III. (25)
10.62 Securities Purchase Agreement dated July 15, 2002 between ADVR and
Peter Lunder. (25)
10.63 Securities Purchase Agreement dated September 9, 2002 between ADVR
and various investors. 11(q)
10.64 Form of Warrant dated September 9, 2002 between ADVR and various
investors. 11(q)
10.65 Registration Rights Agreement dated September 9, 2002 between ADVR
and various investors. 11(q)
10.66 Agreement dated May 1, 2002 (effective September 2002) between
Advanced Viral Research Corp. and EnviroGene LLC. (26)
10.67 Agreement dated October 8, 2002 between Advanced Viral Research Corp.
and Quintiles Israel Ltd. (26)
10.68 Securities Purchase Agreement dated as of April 28, 2003 between the
Registrant and Cornell Capital Partners, LP. (27)
10.69 5% Convertible Debenture dated April 28, 2003. (27)
10.70 Warrant dated April 29, 2003 to purchase 15,000,000 shares of common
stock at an exercise price $0.097 per share. (27)
10.71 Registration Rights Agreement dated as of April 28, 2003 between the
Registrant and Cornell Capital Partners, LP. (27)
10.72 Equity Line of Credit Agreement dated as of April 28, 2003 between
the Registrant and Cornell Capital Partners, LP. (27)
10.73 Registration Rights Agreement dated as of April 28, 2003 between the
Registrant and Cornell Capital Partners, LP. (27)
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public
Accountants.**
23.2 Consent of the law firm of Berman Rennert Vogel & Mandler, P.A. (See
Exhibit 5.1).
- -----------------------------
* Previously filed.
** Filed herewith.
1. Documents incorporated by reference herein to certain exhibits our
registration statement on Form S-1, as amended, File No. 33-33895, filed
with the Securities and Exchange Commission on March 19, 1990.
2. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-18, File No. 33-2262-A, filed with the
Securities and Exchange Commission on February 12, 1989.
3. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
4. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
6. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1996.
11. Incorporated by reference herein to our Current Reports on Form 8-K and
exhibits thereto as follows:
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
II-9
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
(p) A report on Form 8-K dated December 3, 2001.
(q) A report on Form 8-K dated September 10, 2002.
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
15. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 33-70523, filed
with the Securities and Exchange Commission on January 13, 1999, and
Amendment No. 5 thereto, declared effective on December 15, 1999.
16. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-94529, filed
with the Securities and Exchange Commission on January 12, 2000.
17. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
18. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-37974, filed
with the Securities and Exchange Commission on June 6, 2000.
19. Documents incorporated by reference herein to certain exhibits to
Post-effective Amendment No. 1 to our Registration Statement on Form S-1,
as amended, File No. 333-70523, filed with the Securities and Exchange
Commission on September 25, 2000.
20. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-49038, filed with the
Securities and Exchange Commission on October 31, 2000 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
December 15, 2000.
21. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-55430, filed with the
Securities and Exchange Commission on February 12, 2001 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
February 13, 2000.
22. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
23. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-62788, filed with the
Securities and Exchange Commission on June 13, 2001 and amended pursuant
to Amendment No. 1 to Form S-1 filed with the Commission on August 23,
2001.
24. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
25. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended June 30, 2002.
26. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended September 30, 2002.
27. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended March 31, 2003.
(b) Financial Statement Schedules
All schedules have been omitted because they are not applicable or not
required or the required information is included in the financial statements or
notes thereto.
II-10
ITEM 17. UNDERTAKINGS
We hereby undertake:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding, is asserted by the director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant under Rule 424(b)(1) or (4)
II-11
or 497 (h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Yonkers, State of New
York, on May 30, 2003.
Date: May 30, 2003 ADVANCED VIRAL RESEARCH CORP. (Registrant)
By: /s/ Shalom Z. Hirschman, M.D.
---------------------------------------
Shalom Z. Hirschman, M.D.,
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
Date: May 30, 2003 By: /s/ Eli Wilner
-------------------------------------------
Eli Wilner, Chairman of the Board and
Secretary
Date: May 30, 2003 By: /s/ Alan V. Gallantar
-------------------------------------------
Alan V. Gallantar, Principal Financial and
Accounting Officer
Date: May 30, 2003 By: /s/ David Seligman
-------------------------------------------
David Seligman, Director
Date: May 30, 2003 By: /s/ Nancy Van Sant
-------------------------------------------
Nancy Van Sant, Director
Date: May 30, 2003 By: /s/ Roy Walzer
-------------------------------------------
Roy Walzer, Director
II-13
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23.1 Consent of Rachlin Cohen & Holtz LLP, Independent Certified Public
Accountants