SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
(Exact name of registrant as specified in its charter)
Delaware 59-2646820
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Corporate Boulevard South, Yonkers, New York 10701
------------------------------------------------ --------
Address of principal executive offices) Zip Code
(914) 376-7383
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). [ ] Yes [X] No
The number of shares outstanding of the issuer's common stock, par
value $0.00001 per share as of August 14, 2003 was 485,047,136.
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
Quarter Ended June 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED).........................................................................1
Item 1. Financial Statements (Unaudited)....................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............37
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................49
Item 4. Controls And Procedures............................................................................49
PART II. OTHER INFORMATION.......................................................................................49
Item 1. Legal Proceedings..................................................................................50
Item 2. Changes in Securities and Use of Proceeds..........................................................50
Item 3. Defaults upon Senior Securities....................................................................50
Item 4. Submission of Matters to Vote of Security Holders..................................................50
Item 5. Other Information..................................................................................50
Item 6. Exhibits and Reports on Form 8-K...................................................................50
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements (Unaudited)
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 115,045 $ 1,475,755
Prepaid insurance 98,742 86,368
Assets held for sale 157,406 172,601
Other current assets 14,106 35,527
------------ ------------
Total current assets 385,299 1,770,251
Property and Equipment, Net 1,769,254 2,244,118
Other Assets 1,158,724 931,660
------------ ------------
Total assets $ 3,313,277 $ 4,946,029
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Accounts payable 995,933 417,061
Accrued liabilities 164,886 137,646
Current portion of capital lease obligation 42,738 104,719
Current portion of note payable 16,659 25,165
------------ ------------
Total current liabilities 1,220,216 684,591
------------ ------------
Long-Term Debt:
Convertible debenture, net 2,038,248 1,658,231
Capital lease obligation -- 5,834
Note payable -- 4,879
------------ ------------
Total long-term debt 2,038,248 1,668,944
------------ ------------
Common Stock Subscribed but not Issued 125,000 883,900
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
------------ ------------
Stockholders' (Deficit) Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized,483,484,636 and 455,523,990 shares issued
and outstanding 4,834 4,555
Additional paid-in capital 58,589,787 57,530,605
Deficit accumulated during the development stage (54,872,452) (51,137,805)
Discount on warrants (3,792,356) (4,688,761)
------------ ------------
Total stockholders' (deficit) equity (70,187) 1,708,594
------------ ------------
Total liabilities and stockholders' (deficit) equity $ 3,313,277 $ 4,946,029
============ ============
</Table>
See notes to consolidated financial statements.
1
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended Six Months Ended (February 20,
June 30, June 30, 1984 to
------------------------------ ------------------------------ June 30,
2003 2002 2003 2002 2003
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ -- $ -- $ -- $ 231,892
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 389,100 878,093 847,010 2,539,266 19,162,426
General and administrative 805,014 659,148 1,668,216 1,350,219 19,262,693
Compensation and other expense for
options and warrants 4,250 615,542 4,250 615,542 3,563,122
Depreciation 237,284 231,214 475,024 459,311 2,642,213
------------- ------------- ------------- ------------- -------------
1,435,648 2,383,997 2,994,500 4,964,338 44,630,454
------------- ------------- ------------- ------------- -------------
Loss from Operations (1,435,648) (2,383,997) (2,994,500) (4,964,338) (44,398,562)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 1,661 2,752 7,850 4,823 909,285
Other income -- -- -- -- 120,093
Interest expense (544,507) (270,204) (731,646) (523,006) (9,607,224)
Severance expense - former directors -- -- -- -- (302,500)
------------- ------------- ------------- ------------- -------------
(542,846) (267,452) (723,796) (518,183) (8,880,346)
------------- ------------- ------------- ------------- -------------
Loss from Continuing Operations (1,978,494) (2,651,449) (3,718,296) (5,482,521) (53,278,908)
Loss from Discontinued Operations (6,699) (44,524) (16,351) (86,960) (1,593,544)
------------- ------------- ------------- ------------- -------------
Net Loss $ (1,985,193) $ (2,695,973) $ (3,734,647) $ (5,569,481) $ (54,872,452)
============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.00) $ (0.01) $ (0.01) $ (0.01)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------- ------------- ------------- -------------
Net loss $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 479,826,716 427,978,535 477,552,231 417,455,420
============= ============= ============= =============
See notes to consolidated financial statements.
2
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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.
3
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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 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.
4
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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.
5
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 2003
Deficit
Common Stock Accumulated
--------------------------------------- during the Deferred
Amount Additional Subscrip- Develop- Compen-
Per Paid-In tion ment 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.
6
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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.
7
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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.
8
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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)
------------ ------------ ------------ ------------ ------------ ------------
</Table>
See notes to consolidated financial statements.
9
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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.
10
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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 $ 0.14 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options 0.15 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options 0.16 650,000 7 103,994 -- --
Issuance of common stock,
exercise of options 0.17 100,000 1 16,999 -- --
Issuance of common stock,
exercise of options 0.21 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options 0.25 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options 0.27 281,000 3 75,867 -- --
Issuance of common stock,
exercise of options 0.36 135,000 1 48,599 -- --
Issuance of common stock,
exercise of warrants 0.20 220,589 2 44,998 -- --
Issuance of common stock,
exercise of warrants 0.24 220,589 2 53,998 -- --
Issuance of common stock,
exercise of warrants 0.27 90,909 1 24,999 -- --
Issuance of common stock,
exercise of warrants 0.33 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.14 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.19 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.20 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.36 43,960 -- 15,667 -- --
Issuance of common stock,
cash less exercise of
warrants 563,597 6 326,153 -- --
Issuance of common stock,
services rendered 0.46 100,000 1 46,499 -- --
Private placement of
common stock 0.22 13,636,357 136 2,999,864 -- --
Private placement of
common stock 0.30 4,960,317 50 1,499,950 -- --
Private placement of
common stock 0.40 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- (326,159) -- --
Beneficial conversion
feature, January Debenture -- -- 386,909 -- --
Warrant costs, consulting
agreement -- -- 200,249 -- --
Warrant costs, January Debenture -- -- 13,600 -- --
Warrant costs, private placement -- -- 3,346,414 -- (3,346,414)
Recovery of subscription
receivable previously
written off -- -- 19,000 -- --
Amortization of warrant
costs, securities purchase
agreements -- -- -- -- 544,163
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.
11
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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 $ 0.270 40,000 1 10,799 -- --
Issuance of common stock,
exercise of options 0.360 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 0.350 100,000 1 34,999 -- --
Sale of common stock, for cash 0.150 6,666,667 66 999,933
Sale of common stock, for cash 0.300 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.320 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.400 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.270 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.
12
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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 403,296,86 $ 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 455,523,99 $ 4,555 $ 57,530,605 $(51,137,805) $ (4,688,761)
============ ======= ============ ============ ============
See notes to consolidated financial statements.
13
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 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 21,087,500 210 1,686,790 -- --
Issuance of common stock,
conversion of debt 0.1000 5,155,754 52 515,674 -- --
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 -- --
Issuance of common stock,
for services rendered 0.0930 107,527 1 9,999 -- --
Warrant costs, issued with
sale of common stock,
for cash -- -- 477,944 -- (477,944)
Warrant costs, issued with
issue of convertible
debenture -- -- 1,071,000 -- (1,071,000)
Expenses of stock issuance -- -- (70,947) -- 36,385
Amortization of warrant
costs, securities
purchase agreements -- -- -- -- 658,601
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) -- --
Litigation settlement stock 0.0800 947,000 9 75,751 -- --
Options issued for
services rendered -- -- 4,250 -- --
Beneficial conversion
feature, April debenture -- -- 250,000 -- --
Net loss, Six Months
Ended June 30, 2003 -- -- -- (3,734,647) --
------------ ------------ ------------ ------------ -----------
Balance, June 30, 2003
(unaudited) 483,484,636 $ 4,834 $ 58,589,787 $(54,872,452) $(3,792,356)
============ ============ ============ ============ ===========
See notes to consolidated financial statements.
14
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
Six Months Ended (February 20,
June 30, 1984) to
------------------------------ June 30,
2003 2002 2003
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (3,734,647) $ (5,569,481) $(54,872,452)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 482,945 469,735 2,921,608
Amortization of debt issuance costs 30,458 8,370 859,095
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 210,386 14,884 4,165,783
Amortization of discount on warrants 434,870 483,614 3,802,419
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 37,685 1,753 157,322
Issuance of common stock for services -- -- 1,586,000
Compensation expense for options and warrants 4,250 615,542 3,563,122
Changes in operating assets and liabilities:
(Increase) decrease in other current assets 11,391 (72,766) (133,920)
Increase in other assets (115,022) (72,389) (1,750,211)
Increase (decrease) in accounts payable and accrued liabilities 606,111 (864,563) 1,167,018
------------ ------------ ------------
Total adjustments 1,703,074 584,180 17,098,736
------------ ------------ ------------
Net cash used by operating activities (2,031,573) (4,985,301) (37,773,716)
------------ ------------ ------------
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 4,769 (52,354) (4,318,615)
------------ ------------ ------------
Net cash provided (used) by investing activities 4,769 (52,354) (4,318,615)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt- net of issuance costs 867,500 500,000 12,367,500
Proceeds from sale of securities, net of issuance costs 1,660,340 3,438,988 31,190,026
Proceeds from common stock subscribed but not issued (758,900) -- 125,000
Payments under litigation settlement (1,021,647) -- (1,021,647)
Payments under capital lease (67,814) (77,285) (377,842)
Payments on note payable (13,385) (13,790) (94,661)
Recovery of subscription receivable written off -- -- 19,000
------------ ------------ ------------
Net cash provided by financing activities 666,094 3,847,913 42,207,376
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,360,710) (1,189,742) 115,045
Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 115,045 $ 310,067 $ 115,045
============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the period for interest $ 8,246 $ 14,385
============ ============
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.
15
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 June
30, 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 June 30, 2003 and results of operations for
the three and six months ended June 30, 2003 and 2002 and cash flows
for the six months ended June 30, 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 the majority of its general and administrative expenses to
research and development. This change was necessary to reflect current
operating costs relating to the Company's Yonkers, New York facility.
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 $54,872,452 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.
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.
16
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
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
We have eight issued U.S. patents, some covering the composition of
Product R and others covering various uses of the Product R. We have
nine pending U.S. patent applications, among which two have been
allowed. We have eighteen pending foreign patent applications. In
addition, we have two issued Australian patents covering a use of
Product R.
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 published or patents are issued, 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.
17
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
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.
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 Phase I/Phase II Study in cachectic patients needing salvage
therapy for AIDS is continuing with 15 patients currently enrolled in
this study, five of whom have completed the first dose of Product R
required under the study.
In August 2003, we decided to defer the continuation of, and re-examine
the procedures, protocol and objectives of, the two Phase I studies in
cachectic patients with solid tumors, leukemia and lymphoma. Because
of our limited resources we currently believe it to be in our best
interests to focus our clinical efforts on the Phase I/Phase II Study
in cachectic patients needing salvage therapy for AIDS.
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. It is anticipated that these trials will
support future FDA applications. The Company paid $242,000 under this
agreement.
18
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
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, of which approximately
$1,223,000 has been expensed and approximately $875,000 has been paid
for the six months ended June 30, 2003. Approximately $299,000 has been
expensed and approximately $50,000 was paid during the three months
ended June 30, 2003.
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 $82,000 has been
expensed and approximately $76,000 has been paid for the six months
ended June 30, 2003, and approximately $28,000 has been incurred and
approximately $0 was paid during the three months 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 were expected to be
$138,000, of which payments of $40,000 each were made in July 2002 and
November 2002. No other payments have been made.
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
19
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
the consulting agreement, the Company issued to Dr. Hirschman 1,000,000
shares of the Company's common stock and the option to acquire
5,000,000 shares of the Company's common stock for a period of three
years as per the vesting schedule as referred to in the agreement, at a
purchase price of $0.18 per share. As of June 30, 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 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.
20
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 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. 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.
21
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
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).
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).
In May 2003, the Company issued options to purchase 100,000 shares of
our Company's stock at an exercise price of $0.085 per share for
outside services associated with the maintenance of our facility in the
Bahamas. These options are compensation for services rendered from
March 2003 to February 2004 with an expiration date of February 28,
2004. The fair value of this option was estimated to be $4,250 (price
per option of $0.0425) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 139%; a risk free interest rate of
2.72%. This expense is recorded under compensation and other expenses
for options and warrants on the statement of operations
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
22
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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)
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 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).
23
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 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).
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
24
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
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.
Six Months
Ended June 30,
----------------------------
2003 2002
----------- -----------
Net loss as reported $(3,734,647) $(5,569,481)
Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (94,121) (1,140,423)
----------- -----------
Pro forma net loss $(3,828,768) $(6,709,904)
=========== ===========
Earnings per share - basic and diluted:
As reported $(0.01) $(0.01)
=========== ===========
Pro forma $(0.01) $(0.02)
=========== ===========
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.
25
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
GLOBOMAX AGREEMENT (Continued)
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 $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
26
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
DISTRIBUTION AGREEMENTS (Continued)
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 $182,000 has been paid at June 30, 2003. Additional
payments are scheduled through August 2003.
SETTLED 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.
27
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
SETTLED LITIGATION (Continued)
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.
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 our common stock and agreed to pay an aggregate of
$1,047,891 to such parties, of which $855,034 was paid as of June 30,
2003. The balance shall be paid in three equal monthly installments
until September 2003.
28
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
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:
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. In May 2003, the holders converted
the third 20% ($100,000 plus interest of $5,000) into
1,050,000 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
29
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
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. In July 2003, Mr.
Dicke converted the third 20% ($200,000 plus interest of
$10,000) of the debenture into 2,100,000 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. In July 2003, Mr. Lunder informed the Company
that he elected not to convert his third 20% tranche of
$100,000.
o On April 28, 2003 and July 18, 2003 the Company entered into
separate securities purchase agreements with Cornell (i) 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 were purchased in
July 2003 immediately following debentures issued pursuant to
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 (the
"April Agreement"); and (ii) whereby we sold to Cornell an
additional $1,000,000 of our 5% convertible debentures due
July 18, 2008 for gross cash consideration of $1,000,000 (the
"July Agreement"). The Company received net proceeds of
$1,312,500 and $869,486 for the April and July Agreements,
respectively.
Pursuant to the April Agreement and the July Agreement,
Cornell or its assignees 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 $0.091 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 under
the April Agreement, we have the right to redeem the last
$1,000,000 convertible debenture at
30
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
the face amount of the convertible debenture within 10 days of
the effectiveness of the registration statement. Pursuant to
the terms of the April Agreement, commencing July 27, 2003,
and in the case of the July Agreement, commencing October 18,
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 immediately preceding the conversion date. No more than
$600,000 may be converted in any thirty-day period under both
the April and July Agreements 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.
Our obligations under the convertible debentures and the April
and July Agreements are secured by a first priority security
interest in substantially all of our assets. This security
interest expires upon the earlier to occur of (i) the fiftieth
(50th) day following the effectiveness of the registration
statement covering the resale of the shares underlying the
convertible debentures; (ii) the date we receive, three
million dollars ($3,000,000) of capital, in any form other
than through the issuance of free-trading shares of the
Company's common stock, from sources other than Cornell; or
(iii) the satisfaction of our obligations under the April and
July Agreements, the convertible debentures and the ancillary
documents entered into thereby.
The legal expenses associated with these transactions are
estimated to be approximately $73,000 which has been paid as
of July 2003.
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.
31
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
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").
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
32
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
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.
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
33
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
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 2006.
In April and May 2003, pursuant to securities purchase agreements with
various investors, the Company sold 3,900,000 shares of 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 2008, for an aggregate purchase price $312,000. The fair
value of all warrants issued under this agreement was estimated to be
$153,000 (price per warrant of $0.0545 to $0.00730 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 139%; a risk free interest rate of 2.72% and an expected
holding period of five years. In connection with this transaction, the
Company paid 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 through April 2008.
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 through April 2008. The fair value of all warrants issued under
this agreement was estimated to be $151,000 (price per warrant of
$0.0806 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 139%; a risk free interest rate of
2.72% and an expected holding period of five years.
In June 2003, pursuant to a securities purchase agreement with an
investor, the Company sold 1,562,500 shares of common stock at $0.08
per share for a total purchase price of $125,000, along with warrants
to purchase 937,500 shares of common stock at an exercise price per
share of $0.12 through June 2008. The fair value of all warrants issued
under this agreement was estimated to be $58,000 (price per warrant of
$0.0538 to $0.0622 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 139%; a risk free
interest rate of 2.72% and an expected holding period of five years In
July in connection with this transaction, the Company paid a finders'
fee to Avix, Inc. consisting of (i) $8,000 and (ii) warrants to
purchase 93,750 shares of common stock at an exercise price per share
of $0.12 through June 2008. As at June 30, 2003 these shares were not
issued and were reflected on the Balance Sheet as Common Stock
subscribed but not issued in the amount of $125,000.
34
ADVANCED VIRAL RESEARCH CORP.
(A Development State Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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 June
30, 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. 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. However, Cornell's
obligation to purchase and 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 lower 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. At the time of each advance, the Company is
obligated to pay Cornell a fee equal to five percent of amount of each
advance. 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.
35
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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:
Inception
(February 20,
Three Months Six Months 1984) to
Ended June 30, Ended June 30, June 30,
---------------------------- --------------------------- -----------
2003 2002 2003 2002 2003
----------- ----------- ----------- ----------- -----------
Revenues $ -- $ -- $ -- $ -- $ --
----------- ----------- ----------- ----------- -----------
Costs and Expenses:
General and administrative 2,739 39,312 8,430 76,536 1,318,780
Depreciation 3,960 5,212 7,921 10,424 279,419
----------- ----------- ----------- ----------- -----------
6,699 44,524 16,351 86,960 1,598,199
----------- ----------- ----------- ----------- -----------
Loss from Operations (6,699) (44,524) (16,351) (86,960) (1,598,199)
Other Income -- -- -- -- 4,655
----------- ----------- ----------- ----------- -----------
Discontinued operations $ (6,699) $ (44,524) $ (16,351) $ (86,960) $(1,593,544)
=========== =========== =========== =========== ===========
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements of Advanced Viral Research Corp. included in Item 1 of this
Quarterly Report on Form 10-Q. The results of operations for interim periods are
not necessarily indicative of the results to be expected for a full year. The
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2002.
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:
o Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
o Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
o Cachexia (body wasting) in patients with solid cancers,
leukemias and lymphomas; and
o Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND.
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 June 30, 2003 we had incurred a cumulative net loss of
$54,872,452. 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
37
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:
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. 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.
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 Phase I/Phase II Study in cachectic patients needing salvage
therapy for AIDS is continuing with 15 patients currently enrolled in this
study, five of whom have completed the first dose of Product R required under
the study.
In August 2003, we decided to defer the continuation of, and re-examine
the procedures, protocol and objectives of, the two Phase I studies in cachectic
patients with solid tumors, leukemia and lymphoma. Because of our limited
resources we currently believe it to be in our best interests to focus our
clinical efforts on the Phase I/Phase II Study in cachectic patients needing
salvage therapy for AIDS.
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 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 approximately $1,223,000
has been expensed and approximately $875,000 of which has been paid during the
six months ended June 30, 2003. Approximately $299,000 has been expensed and
approximately $50,000 was paid during the three months ended June 30, 2003.
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 $82,000 has been expensed and approximately $76,000 has
been paid during the
38
six months ended June 30, 2003, and approximately $28,000 has been expensed and
$0 was paid during the three months ended June 30, 2003.
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.
During 2002, our 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 June 30, 2003 and December 31, 2002 as Assets Held For Sale. LTD had
no liabilities as of June 30, 2003 and December 31, 2002, 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
and six months ended June 30, 2003 and for the years ended December 31, 2002,
2001 and 2000 as Loss from Discontinued Operations.
In August 2003, our Board of Directors approved a resolution to have a
mandatory retirement age of 70 for members, nominees or appointees to the Board
of Directors.
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.
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 report.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 2003, we incurred losses of
approximately $1,985,000 and approximately $3,735,000 vs. approximately
$2,696,000 and $5,569,000 for the three and six months ended June 30, 2002. Our
losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
decreased in the three and six months ended June 30, 2003 to approximately
$389,000 and approximately $847,000 vs. approximately $878,000 and approximately
$2,539,000 during the three and six months ended June 30, 2002. We have reduced
our research and development activities to include only research
39
performed in Israel. As such, allocations for research and development related
expenses for salaries, benefits, rent and utilities at our headquarters in
Yonkers, New York, which were included in research and development for the three
and six months ended June 30, 2002, are recorded in general and administrative
expense for the three and six months ended June 30, 2003, with the exception
that in 2003 our Chief Scientific Officer, who is also our Chief Executive
Officer, allocates approximately 30% of his time to research and development
vs.50% for the three and six months ended June 30, 2002. Therefore,
approximately $25,000 and approximately $56,000 for the three and six months
ended June 30, 2003 vs. approximately $46,000 and approximately $93,000 for the
three and six months ended June 30, 2002 of his compensation has been allocated
to research and development expense. The balance is allocated to general and
administrative expense for the three and six months ended June 30, 2003 and
2002.
The decrease in research and development expenses primarily resulted from:
o allocation of research and development expenditures relating
to salaries and benefits excluding our Chief Executive Officer
were approximately $442,000 and approximately $887,000 for the
three and six months ended June 30, 2002 with no corresponding
amounts for the three and six months ended June 30, 2003.
Approximately $89,000 and approximately $162,000 for rent and
utilities were allocated to research and development expense
during the three and six months ended June 30, 2002 with no
corresponding amounts allocated to research and development
expense for the three and six months ended June 30, 2003;
o expenditures in connection with Product R research in Israel
were approximately $363,000 and approximately $765,000 for the
three and six months ended June 30, 2003 vs. approximately
$88,000 and approximately $128,000 for the three months and
six months ended June 30, 2002. The increase was attributable
to expenses for the three and six months ended June 30, 2003
of approximately $299,000 and approximately $598,000 of
EnviroGene (consultant), approximately $16,000 and
approximately $60,000 of Quintiles Israel Ltd. (consultant)
and approximately $40,000 and $0 of the Weizmann Institute of
Science (consultant). This compares to expenses for the three
and six months ended June 30, 2002 of approximately $87,000
and approximately $127,000 made to EnviroGene and;
o consulting expenses payable in connection with the preparation
and filing with the FDA of the IND for topical Product R were
approximately $85,000 and approximately $994,000 for the three
and six months ended June 30, 2002, compared to $0 in 2003. As
of January 2003, GloboMax LLC is no longer providing services
to or on behalf of the Company;
o expenditures for laboratory supplies were approximately
$76,000 and approximately $211,000 for the three and six
months ended June 30, 2002. Expenditures for lab supplies of
approximately $5,000 and approximately $15,000 for the three
and six months ended June 30, 2003 were allocated to General
and Administrative expense.Research and Development expenses
before allocations were approximately $364,000 and
approximately $791,000 for the three and six months ended June
30, 2003 vs. approximately $301,000 and approximately
$1,397,000 for the three and six months ended June 30, 2002.
Research and development expenses before allocations increased approximately
$364,000 for the three months ended June 30, 2003 compared to approximately
$301,000 for the three months ended June 30, 2002. Expenses for the Israeli
studies increased by approximately $275,000 offset by lower costs for
consultants of approximately $141,000 and lab supplies of approximately $71,000.
Research and
40
development expenses before allocations decreased approximately $791,000 for the
six months ended June 30, 2003 compared to approximately $1,397,000 for the six
months ended June 30, 2002. The decrease was due primarily to lower consulting
costs of approximately $1,061,000 and laboratory supplies of approximately
$182,000 offset by increased expenditures relating to the Israeli studies.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased for the three and six months ended June 30, 2003 to approximately
$805,000 and approximately $1,668,000 vs. approximately $659,000 and
approximately $1,350,000 during the three and six months ended June 30, 2002.
The increase in general and administrative expenses primarily resulted from:
o increased professional fees of approximately $193,000 and
approximately $505,000 for the three and six months ended June
30, 2003 vs. approximately $103,000 and approximately $293,000
for the three and six months June 30, 2002, which increase was
primarily attributable to certain legal fees for litigation
(See Note 3) which were approximately $106,000 and
approximately $299,000 for the three and six months ended June
30, 2003 vs. approximately $6,000 and approximately $82,000
for the three and six months June 30, 2002;
o increased payroll and related expenses of approximately
$270,000 and approximately $537,000 for the three and six
months ended June 30, 2003 vs. approximately $226,000 and
approximately $450,000 for the three and six months ended June
30, 2002, which increase is attributable to the allocation of
staff expenses from research and development functions. For
the three and six months ended June 30, 2003, salaries and
benefits were 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 research and development of our clinical
trials vs. 50% for the three and six months ended June 30,
2002. Approximately $59,000 and approximately $130,000 for the
three and six months ended June 30, 2003 vs. approximately
$45,000 and approximately $93,000 for the three and six months
ended June 30, 2002 of his compensation has been allocated to
general and administrative expense.. Payroll and related
expenses for the three and six months ended June 30, 2002
before allocation to research and development expense was
approximately $715,000 and approximately $1,429,000 Before
allocation to general and administrative expense, payroll and
related expenses were approximately $295,000 and approximately
$593,000 for the three and six months ended June 30, 2003 due
to a reduction of personnel during November 2002 from 35 to 10
employees;
o increased rent and utility expenses of approximately $107,000
and approximately $211,000 for the three and six months ended
June 30, 2003 vs. $19,000 and approximately $37,000 for the
three and six months ended June 30, 2002, which increase is
attributable to the allocation of rent and utilities from
research and development expense to general and administrative
expense. For the three and six months ended June 30, 2003, all
rent and utilities expenses were recorded as general and
administrative expense. Rent and utility expenses for the
three and six months ended June 30, 2002 before allocation to
research and development expense was approximately $108,000
and approximately $199,000, respectively.
General and administrative expenses before allocations decreased to
approximately $830,000 and approximately $1,724,000 for the three and six months
ended June 30, 2003 vs. approximately $1,236,000 and approximately $2,492,000
for the three and six months ended June 30, 2002. The decrease is primarily
attributable to a reduction in staff from 33 to 10 employees during November
2002.
41
COMPENSATION EXPENSE FOR OPTIONS AND WARRANTS. Compensation expense was
approximately $4,000 for the three and six months ended June 30, 2003 vs.
$616,000 for the three and six months ended June 30, 2002. These amounts
resulted from the calculation of the fair value of options, using the Black
Scholes Pricing Model. During May 2003, we issued of an option to an
non-employee for services of approximately ($4,000) For the three and six months
ended June 30, 2002 we extended the exercise date of a non-employee's option
($177,000), granted options to members of our advisory board ($247,000) and
issued warrants to an outside consultant, Harbor View Group, Inc. ($191,000).
DEPRECIATION EXPENSE. Depreciation expense increased to approximately
$237,000 and approximately $475,000 for the three months and six months ended
June 30, 2003 vs. $231,000 and approximately $459,000 for the three and six
months ended June 30, 2002, for assets acquired during 2002 which are
depreciated over a full year in 2003.
INTEREST INCOME (EXPENSE). Interest income decreased approximately
$2,000 and increased approximately $8,000 for the three and six months ended
June 30, 2003 vs. approximately $3,000 and approximately $5,000 for the three
months six months ended June 30, 2002 due to fluctuating cash balances invested
in money market accounts.
Our losses during the three and six months ended June 30, 2003 are also
due to increased interest expense of approximately $545,000 and approximately
$732,000 vs. approximately $270,000 and approximately $523,000 for the three and
six months ended June 30, 2002. Included in the interest expense are:
o the increase in the beneficial conversion feature on certain
convertible debentures of approximately $186,000 and
approximately $210,000 for the three and six months ended June
30, 2003 vs. approximately $15,000 for the three and six
months ended June 30, 2002. This increase was due to the
issuance of a $1,000,000 convertible debenture during April
2003;
o increase interest expense associated with certain convertible
debentures of approximately $23,000 and approximately $38,000
for the three and six months ended June 30, 2003 vs.
approximately $2,000 for the three and six months ended June
30, 2002;
o amortization of discount on certain warrants increased
approximately $304,000 and decreased approximately $435,000
for the three and six months ended June 30, 2003 vs.
approximately $242,000 and approximately $484,000 for the
three months and six months ended June 30, 2002; and
o amortization of loan costs increased approximately $28,000 and
approximately $40,000 for the three and six months ended June
30, 2003 vs. $4,000 and approximately $8,000 for the three and
six months ended June 30, 2002.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the three and six months ended June 30, 2003 were approximately $1,978,000 and
approximately $3,718,000 vs. approximately $2,651,000 and approximately
$5,483,000 for the three and six months ended June 30, 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.
42
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the three and six ended June 30, 2003 were approximately $7,000 and
approximately $16,000 vs. approximately $45,000 and approximately $87,000 for
the three and six ended June 30, 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 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 June 30, 2003 and
December 31, 2002 as Assets held for Sale. AVR Ltd. had no liabilities as of
June 30, 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 three and six
months ended June 30, 2003 and 2002 as Loss from Discontinued Operations.
REVENUES. We had no revenues for the three months and six ended June
30, 2003 or June 30, 2002.
LIQUIDITY
As of June 30, 2003, we had current assets of approximately $385,000
compared to approximately $1,770,000 as of December 31, 2002. We had total
assets of approximately $3,313,000 and $4,946,000 at June 30, 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 June 30, 2003, we had current liabilities of
approximately $1,220,000 compared to approximately $685,000 as of December 31,
2002. The increase in current liabilities was primarily attributable to limited
funds available to pay our accounts payable.
During the six months ended June 30, 2003, we used cash of
approximately $2,032,000 for operating activities, as compared to approximately
$4,985,000 during the six months ended June 30, 2002. During the six months
ended June 30, 2003, our expenses included:
o approximately $593,000 for payroll and related costs primarily
for administrative staff, scientific personnel and executive
officers;
o approximately $548,000 for other professional and consulting
fees, including $299,000 for legal fees relating to settled
litigation. (See "Legal Proceedings");
o approximately $199,000 for insurance costs;
o approximately $211,000 for rent and utilities for our Yonkers
facility; and
o approximately $477,00 for expenditures for Product R research
in Israel.
During the six months ended June 30, 2003, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock issued of approximately $901,000, the issuance of a convertible debenture
of $868,000, offset by the payment under litigation settlement $1,022,000 and
principal payments of $81,000 on equipment obligations. During the six months
ended June 30, 2003, cash flow used by investing activities reflected the sale
of an automobile located at our ADVR LTD facility in the Bahamas.
43
In May 2003 we issued options to purchase 100,000 shares of our
Company's stock at an exercise price of $0.085 for outside services associated
with the maintenance of our facility in the Bahamas. These options are
compensation for services rendered and to be rendered from March 2003 to
February 2004 the same as the one year exercise period.
On April 28, 2003, we entered into an equity line of credit agreement
with Cornell Capital Partners, L.P. 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, Cornell's obligation to purchase and 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 (401k) 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 401(k) plan representing our match for the plan year
2002 which has been contributed to the 401(k) plan. 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 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.
44
CAPITAL RESOURCES
We have been and continue to be 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 warrants 1,000,000 shares $0.18 per share 5/30/2008
services
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 $0.091 per share(7) 4/2008
Jun-2003 $125,000 common stock 1,562,500 shares $0.08 per share n/a
warrants 1,031,250 shares $0.12 per share 6/2008
July 2003 $1,500,000 convertible debentures 18,750,000 shares (8) 7/2008
- -------------------------
(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.
(8) The debentures are convertible commencing October 13, 2002 at a
conversion price equal to the lesser of (i) $.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.
45
In March 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. While the shelf registration statement was available
for use, we issued and sold approximately 59 million shares of our common stock
and received gross 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 June 30, 2003, principal and
interest on the debentures in the amount of $917,904 had been converted into
7,927,255 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
46
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 are subject to a 145-day lock-up agreement.
(See "Legal Proceedings").
From December 2002 through July 2003, pursuant to securities purchase
agreements with various purchasers, we authorized the issuance of and sold
22,650,000 shares of our common stock and warrants to purchase up to 13,590,000
shares of our common stock at $0.08 per share, for an aggregate purchase price
of $1,812,000 In connection with the agreement, we paid finders' fees to Harbor
View Group, AVIX, Inc and a private investor consisting of (i) approximately
$92,220 and (ii) warrants to purchase 1,168,375 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 report, none of such warrants had been exercised. As at June
30, 2003 the "June" shares and warrants or 1,562,500 and 1,031,250 respectively,
were not issued and are reflected on the Balance Sheet as Common Stock
subscribed but not issued in the amount of $125,000.
On April 28, 2003 and July 18, 2003 we entered into separate securities
purchase agreements with Cornell (i) 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 were purchased in July 2003
immediately following 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 (the
"April Agreement"); and (ii) whereby we sold to Cornell an additional $1,000,000
of our 5% convertible debentures due July 18, 2008 for gross cash consideration
of $1,000,000 (the "July Agreement"). Pursuant to the April Agreement and the
July Agreement, Cornell or its assignees 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 $0.091 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
under the April Agreement, 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 April Agreement, commencing July 27, 2003, and in the case of the July
Agreement, commencing October 18, 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 immediately preceding the conversion date. No more than
$600,000 may be converted in any thirty-day period under both the April and July
Agreements 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.
Our obligations under the convertible debentures and the April and July
Agreements are secured by a first priority security interest in substantially
all of our assets. This security interest expires upon the earlier to occur of
(i) the fiftieth (50th) day following the effectiveness of the registration
statement
47
covering the resale of the shares underlying the convertible debentures; (ii)
the date we receive, three million dollars ($3,000,000) of capital, in any form
other than through the issuance of free-trading shares of the Company's common
stock, from sources other than Cornell; or (iii) the satisfaction of our
obligations under the April and July Agreements, the convertible debentures and
the ancillary documents entered into thereby.
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, Cornell's
obligation to purchase and 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 SECURITIES
As of August 14, 2003, in addition to the 485,047,136 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of approximately 62.1 million shares of common stock at
exercise prices ranging from $0.08 to $0.36, of which approximately 56.5 million
are currently exercisable; (ii) outstanding warrants to purchase an aggregate of
approximately 58.7 million shares of common stock at prices ranging from $0.091
to $1.00, of which warrants to purchase 43.7 million shares are currently
exercisable; (iii) approximately 40.3 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 $30.4 million,
and we would have approximately 646.1 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.
48
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 September 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
As of a date within 90 days prior to the filing date of this report,
the Company conducted an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms as of June 30, 2003. There was no change in
our internal control over financial reporting during the fiscal quarter ended
June 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATIONPART II. OTHER INFORMATION
Item 1. Legal Proceedings
We have no material legal proceedings pending.
49
Item 2. Changes in Securities and Use of Proceeds
See Part I, Item 2 of this Report.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the quarter ended June 30, 2003, no matters were submitted to a
vote of security holders of the Registrant, through the solicitation of proxies
or otherwise.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following Exhibits are filed with this Report:
31.1 Certification of Chief Executive Officer pursuant
to Item 601(b)(31) of Regulations S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Chief Financial Officer pursuant
to Item 601(b)(31) of Regulations S-K, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. None
50
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: August 14, 2003 By: /s/ Alan V. Gallantar
-------------------------------------
Alan V. Gallantar, Chief Financial
Officer (Principal Financial and
Accounting Officer)
By: /s/ Shalom Z. Hirschman, M.D.
-------------------------------------
Shalom Z. Hirschman, President and
Chief Executive Officer
51