As filed with the Securities and Exchange Commission on November 18, 2003
SEC Registration No. 333-107178
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DELAWARE ADVANCED VIRAL RESEARCH CORP. 59-2646820
(State or other jurisdiction of (Name of issuer in its charter) (I.R.S. Employer
incorporation or organization) Identification No.)
200 CORPORATE BOULEVARD SOUTH 5129 ELI WILNER
YONKERS, NEW YORK 10701 (Primary Standard Industrial 200 CORPORATE BOULEVARD SOUTH
(914) 376-7383 Classification Code Number) YONKERS, NEW YORK 10701
(Address and telephone number of (914) 376-7383
Registrant's principal executive (Name, address, and telephone
offices) number of agent for service)
WITH COPIES TO:
Clayton E. Parker, Esq.
Harris C. Siskind, Esq.
Kirkpatrick & Lockhart LLP
201 S. Biscayne Blvd., Suite 2000
Miami, FL 33131
Telephone No. (305) 539-3305
Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to Completion, dated November 18, 2003.
PROSPECTUS
ADVANCED VIRAL RESEARCH CORP.
497,517,232 SHARES OF COMMON STOCK
This prospectus may be used only in connection with the resale of up to
497,517,232 shares of common stock of Advanced Viral Research Corp. by the
selling stockholders listed on pages 18-19 of this prospectus.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over the Counter Bulletin Board. The
prices will fluctuate based on the demand for the shares of common stock. Our
common stock is traded on the National Association of Securities Dealers, Inc.'s
OTC Bulletin Board under the symbol "ADVR." On November 13, 2003, the high and
low bid prices for the common stock on the Bulletin Board were $0.115 and $0.105
per share, respectively.
The selling stockholders consist of:
- Cornell Capital Partners, L.P., which intends to sell up to
378,892,473 shares of our common stock, of which (i)
95,712,595 shares are issuable pursuant to an Equity Line of
Credit Agreement between Advanced Viral and Cornell Capital,
(ii) 15,000,000 are issuable upon the exercise of certain
warrants; and (iii) the remainder of which are issuable in
connection with the conversion of certain convertible
debentures.
- Katalyst Securities LLC, which intends to sell up to 107,527
shares of common stock received in consideration for its
services as placement agent. Katalyst Securities may be deemed
to be an underwriter in connection with the sale of common
stock under the Equity Line of Credit Agreement.
- Certain investors in a private placement as more fully set
forth on page 21, who intend to sell 56,435,630 shares of
common stock, of which 14,758,375 shares are issuable upon the
exercise of certain warrants and 19,027,255 shares are
issuable upon the conversion of certain convertible
debentures.
- Certain officers and employees of Advanced Viral as more fully
set forth on page 22, who intend to sell up to 62,081,602
shares of common stock issuable upon the exercise of certain
stock options.
Cornell Capital is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit Agreement. Cornell Capital will pay Advanced Viral 100% of
the lowest closing bid price of the common stock during the five consecutive
trading day period immediately following an advance notice date. Of each advance
notice, Cornell Capital will retain a fee in the amount of 5% as an underwriting
discount. Our obligation to sell our common stock is conditioned, at our option,
upon the per share purchase price being equal to or greater than a minimum
acceptable price we set on the advance notice date, which may not be set any
closer than 7.5% percent below the closing bid price of the common stock the day
prior to an advance date. In connection with a Securities Purchase Agreement
entered into on April 28, 2003, Cornell Capital has purchased $1,500,000 of
convertible debentures, shall purchase an additional $1,000,000 in convertible
debentures, and has received warrants to Cornell Capital to purchase up to
15,000,000 shares of common stock exercisable for 5 years at an exercise price
of $0.091. In connection with a Securities Purchase Agreement entered July 18,
2003, Cornell Capital has purchased an additional $1,000,000 in secured
convertible debentures from Advanced Viral.
Advanced Viral engaged Katalyst Securities LLC, an unaffiliated
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. Katalyst Securities LLC was paid a fee of 107,527 shares of our common
stock in consideration for placement agent services. Katalyst Securities may be
deemed to be an underwriter in connection with the sale of common stock under
the Equity Line of Credit.
Brokers or dealers effecting transactions in these shares should
confirm that the shares are registered under applicable state law or that an
exemption from registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
BEGINNING ON PAGE 9, WE HAVE LISTED SEVERAL RISK FACTORS WHICH YOU SHOULD
CONSIDER. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE YOU MAKE YOUR
INVESTMENT DECISION.
With the exception of Cornell Capital, which is an "underwriter" within
the meaning of the Securities Act of 1933, no other underwriter or person has
been engaged to facilitate the sale of shares of common stock in this offering.
This offering will terminate 24 months after the accompanying registration
statement is declared effective by the Securities and Exchange Commission, or 36
months after the effective date if we file either an amendment hereto or a new
registration statement has been declared effective by the Securities and
Exchange Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING STOCKHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
The date of this prospectus is _______, 2003.
TABLE OF CONTENTS
PAGE NO.
PROSPECTUS SUMMARY..................................................................................... 1
THE OFFERING........................................................................................... 3
SUMMARY FINANCIAL DATA................................................................................. 5
SELECTED CONSOLIDATED FINANCIAL DATA................................................................... 6
SUPPLEMENTARY FINANCIAL INFORMATION.................................................................... 7
CAPITALIZATION......................................................................................... 8
RISK FACTORS........................................................................................... 9
FORWARD-LOOKING STATEMENTS............................................................................. 15
USE OF PROCEEDS........................................................................................ 15
DETERMINATION OF OFFERING PRICE........................................................................ 16
DILUTION............................................................................................... 16
SELLING STOCKHOLDERS................................................................................... 18
PLAN OF DISTRIBUTION................................................................................... 22
DESCRIPTION OF SECURITIES TO BE REGISTERED............................................................. 23
INTERESTS OF NAMED EXPERT AND COUNSEL LEGAL MATTERS.................................................... 26
DESCRIPTION OF BUSINESS................................................................................ 26
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS.......... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDIDTION AND RESULTS OF OPERATIONS................. 38
CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS.............................................................. 56
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................. 56
MANAGEMENT............................................................................................. 56
AUDIT COMMITTEE REPORT................................................................................. 58
EXECUTIVE COMPENSATION................................................................................. 59
COMPARATIVE STOCK PERFORMANCE.......................................................................... 62
PRINCIPAL STOCKHOLDERS................................................................................. 63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................... 64
DESCRIPTION OF SECURITIES.............................................................................. 65
HOW TO GET MORE INFORMATION............................................................................ 66
FINANCIAL STATEMENTS................................................................................... F-1
PROSPECTUS SUMMARY
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). A later formulation of Reticulose was known as
"Product R," which was renamed in September 2003 as "AVR118." We believe AVR118
may be employed in the treatment of certain viral and autoimmune diseases such
as:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers,
leukemias and lymphomas; and
- Rheumatoid arthritis.
Since 1962, when Reticulose was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose to be
marketed in the United States. A forfeiture action was instituted in 1962 by the
FDA against Reticulose, and it was withdrawn from the United States market. The
injunction obtained by the FDA prohibits, among other things, any shipment of
AVR118 except in compliance with FDA rules and regulations, which may include
approval by the FDA of a new drug application, or NDA. FDA approval of an NDA
first requires clinical testing of AVR118 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 September 30, 2003 we had incurred a cumulative net loss of
$53,680,991. Our ability to generate substantial operating revenue depends upon
our success in gaining FDA approval for the commercial use and distribution of
AVR118.
Our operations over the last five years have been limited principally
to research, testing and analysis of AVR118 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 AVR118 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 AVR118 as a topical treatment for
genital warts caused by the human papilloma virus (HPV) infection. In September
2001, the FDA cleared the IND application to begin Phase 1 clinical trials. Our
Phase 1 study was performed in the United States on human volunteers. In March
2002, we completed the Phase 1 trial and submitted to the FDA the results, which
indicated that AVR118 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 AVR118 as a topical treatment for
genital warts caused by HPV infection.
GOING CONCERN
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty. We are
currently seeking additional financing and do not have cash available to meet
our anticipated expenditures. We anticipate that we can continue operations
through December 2003 with our current liquid assets, if none of our outstanding
options or warrants are exercised or additional securities sold. However, there
can be no assurance that these actions will result in sufficient funds to
finance operations. If we do not raise sufficient cash from external sources to
satisfy our on-going expenditures, we will be required to materially limit our
operations. Failure to raise additional capital and materially limit our
operations could have a material adverse effect on our operations. This raises
substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
1
ISRAELI CLINICAL TRIALS
In November 2002 we began testing injectable AVR118 in the following
clinical trials in Israel:
- PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that AVR118 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 AVR118 may prove to be an important "enabler"
drug in the treatment of AIDS.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain due to financing constraints.
Because of our limited personnel, we believe it to be in our best
interests to focus our clinical efforts on our one ongoing Phase I/Phase II
open-label dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. The
primary indication of the trial is the treatment of cachexia. Out of 30 total
patients contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required under the
study. Results from the first 15 patients showed improvement in appetite, weight
gain or stability, and enhanced quality of life in all the patients. None of the
15 patients reported any significant side effects from AVR118 therapy.
We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon funds available for research and
development and the availability of patients meeting the prescribed protocol and
the ability of Israel and its hospitals to meet the requirements of the
protocol. From inception of all the clinical studies in Israel we have expended
approximately $1,550,000. The cost to complete the Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS for the additional 15 patients (for a
total of 30) is estimated to be $300,000.
Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR 118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR 118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR 118 in mice with an induced immune
skin reaction. AVR 118 did not inhibit the appearance of this immune skin
reaction.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
Our objective for the Israeli trials is to determine the safety,
tolerance and metabolic characteristics of AVR118. 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 AVR118 with the FDA.
In November 2002, we reduced our staff by from 33 to 10 employees. Of
the 23 terminated employees, 18 were directly involved in our research and
development efforts and 5 were performing administrative functions. We currently
have 10 employees which we feel can sustain the reduced operations, none of whom
are engaged on a full-time basis in research and development activities. Our
only current research and development activity is our Phase I/II study in Israel
for cachectic patients needing salvage therapy for AIDS.
2
Whether we will be able to proceed with clinical trials in Israel for
injectable AVR118 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 materially limit our operations by, among other things, limiting our
clinical trials for AVR118. We may not be able to raise the funds we currently
need to continue or complete the clinical trials for injectable AVR118 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 AVR118 will require significant cash
expenditures. AVR118 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.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number is (914) 376-7383. We have also established a
website: www.adviral.com. Information contained on our website is not a part of
this prospectus.
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or who are beneficially deemed to be, our stockholders. The selling
stockholders consist of:
- Cornell Capital, who intends to sell up to 378,892,473 shares
of common stock.
- Other selling stockholders, who intend to sell up to
118,517,232 shares of common stock.
- Katalyst Securities, LLC, who intends to sell up to 107,527
shares of common stock received in consideration for placement
agent services. Katalyst Securities may be deemed to be an
underwriter in connection with the sale of common stock under
the Equity Line of Credit.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital shares of common stock for a
total purchase price of $50 million. For each share of common stock purchased
under the Equity Line of Credit, Cornell Capital will pay 100% of the lowest
closing bid price of our common stock on the Over the Counter Bulletin Board for
the five trading days immediately following the notice date. The amount of each
advance is subject to a maximum of $500,000 per advance, with a minimum of seven
trading days between advances. In addition, Cornell Capital shall retain 5% of
each advance under the Equity Line of Credit. Our obligation to sell our common
stock is conditioned, at our option, upon the per share purchase price being
equal to or greater than a minimum acceptable price, set by us on the advance
notice date, which may not be set any closer than 7.5% below the closing bid
price of our common stock the day prior to the notice date. For each day during
the five days after the notice date that the closing bid price for our common
stock is below a minimum acceptable price, the amount of the advance shall
decrease by twenty percent (20%) of the amount requested. Cornell Capital
intends to sell any shares purchased under the Equity Line of Credit at the then
prevailing market price. This prospectus relates to the resale of shares of our
common stock to be issued under the Equity Line of Credit, the shares which may
be issued upon conversion of up to $3,500,000 of convertible debentures issued
or to be issued pursuant to certain securities purchase agreements, and shares
of common stock underlying warrants issued to Cornell Capital to purchase
15,000,000 shares of our common stock.
We have not registered the resale of a sufficient number of shares of
common stock in this offering to fully draw down the $50 million available under
the Equity Line of Credit. At an assumed offering price of $0.08 per share, we
would only be able to draw a total gross amount of $7,657,008 under the Equity
Line of Credit using all of the 95,712,595 shares being registered in this
offering. Based on an assumed offering price of $0.08 per share, we would need
to issue 625,000,000 shares of common stock to draw the entire $50 million
available under the Equity Line of Credit. If the price of our common stock
decreased to $0.04 per share we would need 1,250,000,000 shares of common stock
to draw the entire $50 million available under the Equity Line of Credit. Based
on the 521,971,079 shares of stock currently outstanding, we do not have
sufficient authorized shares of common stock to draw down the entire $50 million
available under the Equity Line of Credit at an assumed stock price of either
$0.08 or $0.04 per share. To increase the number of authorized shares of our
common stock, we would need to obtain stockholder approval. We are uncertain
that we could obtain this approval based on the dilutive effect of the issuance
of shares under the Equity Line of Credit. Additionally, we would need to file
another registration statement to cover any shares under the Equity Line of
Credit other than the 95,712,595 being registered in this registration
statement.
3
We have engaged Katalyst Securities LLC, an unaffiliated registered
broker-dealer, to advise us in connection with the Equity Line of Credit.
Katalyst Securities LLC was paid a fee of 107,527 shares of our common stock,
which were valued at $10,000 in consideration for placement agent services.
Katalyst Securities may be deemed to be an underwriter in connection with the
sale of common stock under the Equity Line of Credit.
COMMON STOCK OFFERED 497,517,232 shares
OFFERING PRICE Market Price
COMMON STOCK OUTSTANDING
PRIOR TO THIS OFFERING (1) 521,971,079 shares
USE OF PROCEEDS The shares of common stock offered pursuant to this
prospectus are offered by the Selling Stockholders
listed on page 21. Other than proceeds received from
the sale of common stock to Cornell Capital under the
Equity Line of Credit, which will be used for general
working capital, we will not receive any proceeds
from the sale of common stock by the selling
stockholders. We will receive the cash proceeds, if
any, from the exercise of warrants and options held
by the selling stockholders. See "Use of Proceeds."
RISK FACTORS An investment in our common stock is highly
speculative and involves a high degree of risk and
immediate substantial dilution. You should read the
"Risk Factors" and "Dilution" sections.
OTC BULLETIN BOARD SYMBOL ADVR.OB
- ---------------
(1) This represents the number of shares of common stock outstanding on
November 14, 2003, but excludes: (i) outstanding stock options to
purchase an aggregate of approximately 87.7 million shares of common
stock at an exercise prices ranging from $0.052 to $0.36, of which
approximately 81.7 million are currently exercisable; (ii) outstanding
warrants to purchase an aggregate of approximately 72.1 million shares
of common stock at prices ranging from $0.091 to $1.00, all of which
warrants are currently exercisable; (iii) approximately 40.3 million
shares of common stock underlying certain outstanding convertible
debentures; and (iv) up to 95,712,595 shares of common stock to be
issued under the Equity Line of Credit. Some of these equity
equivalents include shares of common stock being registered in this
offering.
4
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 has been derived from
our audited financial statements. The financial data as of and for the nine
months ended September 30, 2003 is derived from our unaudited consolidated
financials included elsewhere in this prospectus. The selected consolidated
financial data set forth below should be read along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
------------- ------------------------------------------------------------------------------
2002 2001 2000 1999
SEP 30, 2003 RESTATED RESTATED RESTATED RESTATED 1998
------------- ------------- ------------- ------------- ------------- -------------
Net revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656
Net loss (5,347,124) (8,913,405) (10,729,863) (8,816,192) (6,323,431) (4,557,710)
Net loss per common share (0.01) (0.02) (0.03) (0.02) (0.02) (0.02)
Weighted average # of shares 481,941,317 439,009,322 389,435,324 362,549,690 302,361,109 294,809,073
SUMMARY BALANCE SHEET DATA
AS OF AS OF DECEMBER 31,
------------- ------------------------------------------------------------------------------
2002 2001 2000 1999
SEP 30, 2003 RESTATED RESTATED RESTATED RESTATED 1998
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 4,005,810 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
Total current liabilities 895,930 684,591 1,932,149 983,168 798,282 317,359
Long-term liabilities 2,316,223 1,621,212 74,568 163,013 4,676,652 1,625,299
Capital lease obligations
- long-term portion -- 5,834 42,370 106,567 152,059 167,380
Notes payable - long-term
portion -- 4,879 32,198 56,446 77,964 --
Stockholders' (deficit) equity 793,657 1,756,326 3,442,074 7,662,533 (2,613,360) 762,295
Shares outstanding at period end 522,918,079 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907
Cash dividends -- -- -- -- -- --
5
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from
our audited financial statements. The financial data as of and for the nine
months ended September 30, 2003 is derived from our unaudited consolidated
financials included elsewhere in this prospectus. The selected consolidated
financial data set forth below should be read along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
SELECTED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
NINE MONTHS
ENDED 2002 2001 2000 1999
SEP 30, 2003 RESTATED RESTATED RESTATED RESTATED 1998
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656
Costs and Expenses:
Research and development 1,066,596 4,439,592 5,150,869 3,192,551 1,948,937 1,659,456
General and administrative 2,541,689 2,654,296 4,063,022 2,413,601 1,831,061 1,420,427
Compensation and other expense
for options and warrants 74,368 476,102 691,404 1,901,927 195,375 --
Depreciation 703,276 977,746 511,216 346,227 230,785 110,120
------------- ------------- ------------- ------------- ------------- -------------
4,385,929 8,547,736 10,416,511 7,854,306 4,206,158 3,190,003
------------- ------------- ------------- ------------- ------------- -------------
Loss from Operations (4,385,929) (8,547,736) (10,398,910) (7,845,943) (4,195,205) (3,189,347)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 10,661 27,659 113,812 161,832 42,744 102,043
Other income -- -- -- -- -- 293
Interest expense (949,260) (192,174) 116,849 (908,220) (2,170,970) (1,470,699)
Severance expense -
former directors -- -- (302,500) -- -- --
------------- ------------- ------------- ------------- ------------- -------------
(938,599) (164,515) (71,839) (746,388) (2,128,226) (1,368,363)
------------- ------------- ------------- ------------- ------------- -------------
Loss from continuing operations (5,324,528) (8,712,251) (10,470,749) (8,592,331) (6,323,431) (4,557,710)
Loss from discontinued operations (22,596) (201,154) (259,114) (223,861) n/a n/a
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (5,347,124) $ (8,913,405) $ (10,729,863) $ (8,816,192) $ (6,323,431) $ (4,557,710)
============= ============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted
Continuing operations $ (0.01) $ (0.02) $ (0.03) $ (0.02) $ (0.02) $ (0.02)
============= ============= ============= ============= ============= =============
Discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.00) n/a n/a
============= ============= ============= ============= ============= =============
- ---------------
See notes to consolidated financial statements.
6
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31,
------------------------------------------------------------------------------
AS OF 2002 2001 2000 1999
SEP 30, 2003 RESTATED RESTATED RESTATED RESTATED 1998
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 938,590 $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 836,876 $ 924,420
Investments -- -- -- -- -- 821,047
Assets held for sale 152,273 172,601 188,999 179,622 178,182 --
Inventory -- -- -- 19,729 19,729 19,729
Other current assets 107,747 121,895 63,162 34,804 59,734 29,818
------------- ------------- ------------- ------------- ------------- -------------
Total current assets 1,198,610 1,770,251 1,751,970 6,196,788 1,094,521 1,795,014
------------- ------------- ------------- ------------- ------------- -------------
Property and Equipment, Net 1,541,002 2,244,118 2,818,045 1,771,038 1,204,202 1,049,593
Other Assets 1,266,198 931,660 878,776 840,888 562,851 460,346
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 4,005,810 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
============= ============= ============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Litigation settlement -- -- -- -- -- --
Accounts payable and
accrued liabilities $ 867,881 $ 554,707 $ 1,843,706 $ 902,961 $ 728,872 $ 279,024
Current portion of capital
lease obligation 18,389 104,719 64,197 58,690 50,315 $ 38,335
Current portion of note payable 9,660 25,165 24,246 21,517 19,095 --
------------- ------------- ------------- ------------- ------------- -------------
Total current liabilities 895,930 684,591 1,932,149 983,168 798,282 317,359
------------- ------------- ------------- ------------- ------------- -------------
Long-Term Debt:
Convertible debentures, net 2,316,223 1,610,499 -- -- 4,446,629 1,457,919
Capital lease obligation -
long term portion -- 5,834 42,370 106,567 152,059 167,380
Note payable - long term
portion -- 4,879 32,198 56,446 77,964 --
------------- ------------- ------------- ------------- ------------- -------------
Total long-term debt 2,316,223 1,621,212 74,568 163,013 4,676,652 1,625,299
------------- ------------- ------------- ------------- ------------- -------------
Deposit on Securities Purchase
Agreement -- -- -- -- -- 600,000
Common Stock Subscribed but
not Issued -- 883,900 -- -- -- --
Stockholders' Equity (Deficiency):
Common stock: 1,000,000,000
shares of $.00001 par value
authorized 5,229 4,555 4,033 3,802 3,034 2,964
Additional paid-in capital 54,659,037 50,122,024 42,858,802 36,349,629 17,255,858 14,325,076
Deficit accumulated during
development stage (53,680,991) (48,333,867) (39,420,462) (28,690,599) (19,874,407) (13,550,976)
Deferred compensation cost -- -- -- -- -- (14,769)
Discount on warrants (189,618) (36,386) (299) (299) 2,155 --
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders'
equity (deficiency) 793,657 1,756,326 3,442,074 7,662,533 (2,613,360) 762,295
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 4,005,810 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
============= ============= ============= ============= ============= =============
Shares outstanding at
period end 522,918,079 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907
============= ============= ============= ============= ============= =============
- ---------------
See notes to consolidated financial statements.
SUPPLEMENTARY FINANCIAL INFORMATION
The following supplementary financial information has been derived from
our unaudited financial statements for the quarterly periods in the years ended
December 31, 2001 and 2002 and the quarterly periods ended March 31, 2003, June
30, 2003 and September 30, 2003.
2003 2002
--------------------------------------- -----------------------------------------------------
Q2 Q1 Q4 Q3 Q2 Q1
Q3 RESTATED RESTATED RESTATED RESTATED RESTATED RESTATED
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Sales $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
Costs and
Expenses (1,341,340) (1,462,080) (1,582,509) (1,769,297) (1,863,976) (2,334,122) (2,580,341)
Net Loss (2,102,194) (1,576,919) (1,668,011) (1,896,233) (1,983,135) (2,402,336) (2,631,701)
Loss Per Share (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01)
2001
-----------------------------------------------------
Q4 Q3 Q2 Q1
RESTATED RESTATED RESTATED RESTATED
----------- ----------- ----------- -----------
Net Sales $ 3,664 $ 2,454 $ 9,118 $ 2,365
Costs and
Expenses (3,509,998) (2,434,013) (1,900,545) (2,554,354)
Net Loss (3,722,208) (2,524,382) (1,961,091) (2,522,182)
Loss Per Share (0.01) (0.01) (0.01) (0.01)
7
CAPITALIZATION
The following table sets forth as of September 30, 2003, Advanced
Viral's actual capitalization and pro forma capitalization as of November 14,
2003 after giving effect to the issuance of (i) 95,712,595 shares of common
stock under the Equity Line of Credit; (ii) the issuance of 62,081,602 shares of
common stock upon the exercise of certain stock options; (iii) the issuance of
29,836,500 shares of common stock upon the exercise of certain warrants; and
(iv) the issuance of up to 40,250,000 shares of common stock upon the conversion
of outstanding convertible debentures. This information assumes a purchase price
under the Equity Line of Credit of $0.08 per share resulting in gross proceeds
of $7,657,008, less estimated offering expenses of $85,000 and a retention of
$382,850, for net proceeds of $7,189,157. This table should be read in
conjunction with the information contained in "Management's Discussion and
Analysis or Plan of Operation" and the consolidated financial statements and the
notes thereto included elsewhere in this prospectus.
SEPTEMBER 30, 2003
--------------------------------
ACTUAL PROFORMA(1)
------------ ------------
Long-term debt, net of current portion $ 2,316,223 $ 2,316,223
------------ ------------
Stockholders' equity:
Common stock, $0.00001 par value, 1,000,000,000 authorized, 522,918,079
shares issued and outstanding as of September 30, 2003, 521,971,079 shares
outstanding as of November 14, 2003, 749,773,651 shares outstanding Pro
Forma as Adjusted(1) $ 5,229 $ 7,498
Additional paid-in capital: $ 54,659,037 $ 70,777,273
Discount on warrants $ (189,618) $ (189,618)
Accumulated deficit $(53,680,991) $(53,680,991)
------------ ------------
Total stockholders' equity $ 793,657 $ 16,914,161
------------ ------------
- -----------------------------
(1) Does not include: (i) shares issuable pursuant to outstanding stock
options to purchase an aggregate of approximately 25.6 million shares
of common stock at exercise prices ranging from $0.052 to $0.36; and
(ii) shares issuable pursuant to outstanding warrants to purchase an
aggregate of approximately 42.3 million shares of common stock at
prices ranging from $0.091 to $1.00.
8
RISK FACTORS
We are subject to various risks which may materially harm our business,
financial condition and results of operations. Before purchasing our shares of
common stock, you should carefully consider the risks described below in
addition to the other information in this prospectus. If any of these risks or
uncertainties actually occur, our business, prospects, financial condition, and
results of operations could be materially and adversely affected. In that case,
the trading price of our common stock could decline and you could lose all or
part of your investment.
RISKS SPECIFIC TO ADVANCED VIRAL
1. WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, HAVE NO PRODUCT REVENUE,
AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE
We have incurred substantial losses since our inception, and anticipate
incurring substantial losses for the foreseeable future. We incurred net losses
of $5,347,124 for the nine months ended September 30, 2003, and $8,913,405,
$10,729,863, and $8,816,192 for the years ended December 31, 2002, 2001 and
2000, respectively. Our accumulated deficits were $53,680,991, $48,333,867 and
$39,420,462 as of as of September 30, 2003, December 31, 2002 and December 31,
2001, respectively. We had stockholders' equity of $793,657, $1,756,326 and
$3,442,074 at September 30, 2003, December 31, 2002 and December 31, 2001,
respectively.
The only product revenues we have ever had are insignificant amounts
related to our distribution of AVR118 for testing purposes. We do not currently
have any source of product revenue. At this time, there is substantial risk that
we will never generate operating revenues from the sale of AVR118. To succeed,
AVR118 must be approved for sale in the United States or another industrially
developed country. To the extent we have available financing, we intend to
expend substantial resources to continue clinical trials in Israel for
injectable AVR118. These research and development expenses must be incurred well
in advance of the recognition of revenue. As a result, we may not be able to
achieve or sustain profitability.
2. OUR INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO THEIR
REPORT ON OUR FINANCIAL STATEMENTS WHICH MEANS THAT WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS
The report of our independent auditors, with respect to our financial
statements and the related notes for the year ended December 31, 2002, indicate
that, at the date of their report, we had suffered recurring losses from
operations and our current cash position raised substantial doubt about our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from this uncertainty. The notes to our
financial statements state that our cash position may be inadequate to pay all
the costs associated with the full range of testing and clinical trials of
AVR118 required by the FDA, and, unless and until AVR118 is approved for sale in
the United States or another industrially developed country, we may be dependent
upon the continued sale of our securities, debt or equity financing for funds to
meet our cash requirements.
Our current cash position is as follows:
Current Assets as of September 30, 2003: $1,198,610
Cash at September 30, 2003: $ 938,590
Our past, current and projected cash expenditures are as follows:
12 months ended December 31, 2002: $7,066,229
9 months ended September 30, 2003: $3,597,624
3 months ended December 31, 2003: $1,100,000 (estimated)
3 months ended March 31, 2004: $1,100,000 (estimated)
3 months ended June 30, 2004: $1,100,000 (estimated)
3 months ended September 30, 2004: $1,100,000 (estimated)
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 AVR118. We currently do not have cash availability to meet
our anticipated expenditures other than the convertible debentures and the
Equity Line of Credit. We have not secured any other financing as of the date of
this filing to fund operations. Our cash balance as of September 30, 2003, is
$938,590. Based on current cash balances and operating budgets, we believe we
only have enough operating capital to last through December
9
2003. Since inception we have relied on external financing to fund the costs of
maintaining a public listing and other aspects of our operations. Such financing
has historically come from a combination of borrowings and the sale of common
stock to third parties. We currently do not have the funds needed to begin or
continue the planned Phase 2 clinical trials for our current IND for the topical
therapy of genital warts in the United States. There can be no assurances that
we will continue or complete such clinical trials or maintain operations at
current levels, and we may be required to curtail certain of our operations,
including the testing and clinical trials of AVR118. Our inability to obtain
adequate financing will result in the need to reduce the pace of business
operations. Any of these events could be materially harmful to our business and
may result in a lower stock price. We will need to raise additional capital from
either the equity market or from debt sources to fund our current and
anticipated future research costs.
If capital raised from financing efforts and our financial resources
are insufficient we may require additional financing in order to execute on our
operating plan and continue as a going concern. In the event that any future
financing should take the form of a sale of equity securities, the holders of
the common stock may experience additional dilution. However, we may not be able
to obtain the necessary additional capital on a timely basis, on acceptable
terms, or at all. In any of these events, we may be unable to implement our
current plans to repay our debt obligations as they become due or respond to
competitive pressures, any of which circumstances could force us to reduce or
cease operations or to seek protection from our creditors under the United
States Bankruptcy Code or analogous state statutes.
3. OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE
DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ listed stock must still have a price of not
less than $5.00 per share); or
- In issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $10.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0
million for the last three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor.
4. OUR COMMON STOCK TRADES SPORADICALLY; THE MARKET PRICE OF OUR
SECURITIES MAY BE VOLATILE
Our common stock currently trades sporadically on the OTC Bulletin
Board. The market for our common stock may continue to be an inactive market.
Accordingly, unless and until an active public market develops, you may have
difficulty selling your shares of common stock at a price that is attractive to
you.
From time to time after this offering, the market price of our common
stock may experience significant volatility. Our quarterly results, failure to
meet analysts expectations, announcements by us or our competitors regarding
acquisitions or dispositions, loss of existing clients, new procedures or
technology, changes in general conditions in the economy, and general market
conditions could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market has experienced significant price
and volume fluctuations that have particularly affected the trading prices of
equity securities of many technology companies. These price and volume
fluctuations often have been unrelated to the operating performance of the
affected companies.
5. WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our future success will depend in large part on our ability to attract,
train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other pharmaceutical companies and more established
organizations, many of which have significantly larger operations
10
and greater financial, marketing, human, and other resources than we have. We
may not be successful in attracting and retaining qualified personnel on a
timely basis, on competitive terms, or at all. Our failure to attract and retain
qualified personnel would have a material adverse effect on our business,
prospects, financial condition, and results of operations will be materially
adversely affected.
Our success depends on the skills of certain key management and
technical personnel, including Eli Wilner, our President, Chief Executive
Officer and Chairman of the Board of Directors. The loss or unavailability to us
of the services of Mr. Wilner could materially harm our business and any
potential earning capacity. We have not entered into an employment agreement
with Mr. Wilner, nor have we obtained "key-man" insurance on the life of Mr.
Wilner.
6. WE WILL NOT PAY CASH DIVIDENDS AND INVESTORS MAY HAVE TO SELL THEIR
SHARES IN ORDER TO REALIZE THEIR INVESTMENT
We have not paid any cash dividends on our common stock and do not
intend to pay cash dividends in the foreseeable future. We intend to retain
future earnings, if any, for reinvestment in the development and marketing of
our products and services. As a result, investors may have to sell their shares
of common stock to realize their investment.
RISKS RELATING TO OUR INDUSTRY
7. IF WE DO NOT RAISE ADDITIONAL FUNDS, WE WILL NOT BE ABLE TO COMPLETE
THE NECESSARY CLINICAL TRIALS TO COMPLETE DEVELOPMENT OF AVR118 AND WILL NOT BE
ABLE TO SELL IT ANYWHERE
AVR118 is the only product we are developing, we will not be able to
sell it in the United States unless we submit, and the FDA approves, a new drug
application, or NDA. We must conduct clinical trials of AVR118 in humans before
we submit an NDA. On July 30, 2001, we submitted an IND application to the FDA
to begin Phase 1 clinical trials of AVR118 as a topical treatment for genital
warts caused by the human papilloma virus (HPV) infection. In September 2001,
the FDA cleared the IND application to begin Phase 1 clinical trials. Our Phase
1 study was performed in the United States on human volunteers. In March 2002,
we completed the Phase 1 trial and submitted to the FDA the results, which
indicated that AVR118 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 AVR118 as a topical treatment for
genital warts caused by HPV infection.
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. 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. 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 AVR118 with the FDA.
Because of the large uncertainties involved in the FDA approval process
for commercial drug use on humans, it is possible that we may never be able to
sell AVR118 commercially. In addition, whether we will be able to proceed with
clinical trials in Israel for injectable AVR118 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 materially limit our operations by, among
other things, limiting our clinical trials for AVR118. We may not be able to
raise the funds we currently need to continue or complete the clinical trials
for injectable AVR118 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.
8. WE DO NOT HAVE A "FREE SALE" CERTIFICATE LIMITING OUR ABILITY TO
REGISTER AVR118 IN OTHER COUNTRIES
We haven't been able to sell AVR118 outside the United States because
we don't have a free sales certificate for AVR118. A free sales certificate is a
document issued by the country in which a pharmaceutical product is
manufactured, certifying that the country permits the "free sale" of the product
in that country. Most countries require that a pharmaceutical product be at
least registered and certified for free sale in the country in which it is
manufactured before allowing the registration of the product in that country. If
we are not able to meet registration requirements in the countries that require
the
11
certificate, we will be unable to sell AVR118 in those countries. AVR118,
produced at our Yonkers, New York facility has not been approved for sale in the
U.S. by the FDA.
9. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT; IF WE ARE UNABLE TO PROTECT
OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS WILL BE HARMED
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation or
other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and could
result in substantial costs and diversion of our efforts.
We have eight issued U.S. patents, some covering the composition of
AVR118 and others covering various uses of the AVR118. We have nine pending U.S.
patent applications and seventeen pending foreign patent applications. In
addition, we have two issued Australian patents and one issued Chinese patent
covering several uses of AVR118. 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 technology.
As patent applications in the United States are maintained in secrecy
until published or patents issue and as publication of discoveries in the
scientific or patent literature often lag behind the actual discoveries, we
cannot be certain that we were the first to make the inventions covered by each
of our pending patent applications or that we were the first to file patent
applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
10. CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY
MAY RESULT IN LIABILITY FOR DAMAGES OR STOP OUR DEVELOPMENT AND
COMMERCIALIZATION EFFORTS.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with AVR118. Therefore, AVR118 and any other drug candidates may give rise to
claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties.
We cannot be sure that any license required under any such patents or
proprietary rights would be made available on terms acceptable to us, if at all.
If we do not obtain such licenses, we may encounter delays in product market
introductions, or may find that the development, manufacture or sale of products
requiring such licenses may be precluded. In addition, we could incur
substantial costs in defending ourselves in legal proceedings instituted before
the PTO or in a suit brought against it by a private party based on such patents
or proprietary rights, or in suits by us asserting our patent or proprietary
rights against another party, even if the outcome is not adverse to us. We have
not conducted any searches or made any independent investigations of the
existence of any patents or proprietary rights of other parties.
12
RISKS SPECIFIC TO THIS OFFERING
11. THE EXERCISE OF OUR OUTSTANDING CONVERTIBLE SECURITIES OR DRAW DOWNS
UNDER OUR EQUITY LINE OF CREDIT COULD HAVE A SIGNIFICANT NEGATIVE IMPACT ON THE
MARKET PRICE OF OUR COMMON STOCK.
On April 28, 2003, we entered into an Equity Line of Credit with
Cornell Capital. Pursuant to the Equity Line of Credit, we may, at our
discretion, periodically sell to Cornell Capital shares of common stock for a
total purchase price of up to $50.0 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay Advanced
Viral 100% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the five days immediately following the notice date.
Further, Cornell Capital is entitled to a retain 5% of each advance under the
Equity Line of Credit. Our obligation to sell our common stock is conditioned,
at our option, upon the per share purchase price being equal to or greater than
a minimum acceptable price, set by us on the advance notice date, which may not
be set any closer than 7.5% below the closing bid price of our common stock the
day prior to the notice date. We are registering 95,712,595 shares in this
offering that may be issued under the Equity Line of Credit. No shares of common
stock have been issued under the Equity Line of Credit to date.
The sale of shares pursuant to the Equity Line of Credit and the
issuance of shares of common stock pursuant to the exercise or conversion of
outstanding warrants, stock options and convertible debentures will have a
dilutive impact on our stockholders. As a result, our net loss per share could
increase in future periods, and the market price of our common stock could
decline. In addition, the lower our stock price is the more shares of common
stock we will have to issue under the convertible debentures and under the
Equity Line of Credit to draw down the full amount available. If our stock price
is lower, then our existing stockholders would experience greater dilution. For
example, if we assume that, in addition to the 521,971,079 shares of our common
stock currently outstanding, we will issue 95,712,595 shares of common stock
under the Equity Line of Credit at an assumed offering price of $0.08 (a recent
closing bid price), then new stockholders would experience dilution of $0.0696
per share. Dilution per share at prices of $0.06, $0.04 and $0.02 per share
would be $0.0526, $0.0355 and $0.0184, respectively. Additionally, Cornell
Capital has the right to convert the convertible debentures at a discount of 20%
to the lowest closing bid price for the four trading prior to a conversion, or
$0.08, whichever is lower. This could also cause dilution for our existing
stockholders.
12. YOU MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING OPTIONS
AND WARRANTS ARE EXERCISED
As of the date of this prospectus, we had outstanding stock options to
purchase approximately 87.7 million shares of common stock, warrants to purchase
approximately 72.1 million shares of common stock, and approximately 40.3
million shares of common stock underlying certain outstanding convertible
debentures. Some of these equity equivalents include shares of common stock
being registered in this offering. To the extent such options, warrants or
debentures are exercised or converted, there will be further dilution. In
addition, in the event that any future financing should be in the form of, be
convertible into, or exchangeable for, equity securities, and upon the exercise
of options and warrants, investors may experience additional dilution.
13. THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR
LOWER THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the OTC Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
14. THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK
IN THE PUBLIC MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell the shares of common stock
being registered in this offering in the public market. That means that up to
497,517,232 shares of common stock, the number of shares being registered in
this offering may be sold. Such sales may cause our stock price to decline.
13
15. FUTURE SALES OF COMMON STOCK BY OUR STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
The market price of our common stock could decline as a result of sales
of a large number of shares of our common stock in the market as a result of
this offering, or the perception that these sales could occur. These sales also
might make it more difficult for us to sell equity securities in the future at a
time and at a price that we deem appropriate. As of the date of this prospectus,
we have 521,971,079 shares of common stock outstanding. Up to 95,712,595 of the
shares being registered in this offering underlie our Equity Line of Credit
Agreement with Cornell Capital. Under the terms of the agreement, at our
discretion, Cornell Capital is obligated to buy up to $500,000 worth of our
common stock every seven days at a price equal to 100% of the lowest closing bid
price during the five-day period subsequent to delivery by us of an advance
notice. Assuming such lowest closing bid price is $.08 on the day this
registration statement becomes effective, and that we deliver an advance notice
of purchase of $500,000 worth of our common stock, we would issue 6,250,000
shares of our common stock. Remaining shares would become outstanding as we
continue to sell them under the Equity Line of Credit, with the number of shares
dependent on the market price of our common stock at the time of the put. The
number of shares to be issued upon each put is dependent on the stock price and
cannot be determined exactly at this time.
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 521,971,079 shares of common stock outstanding as of the date of this
prospectus, approximately 370 million shares are, or will be, freely tradable
without restriction, unless held by our "affiliates." The remaining 113 million
shares of common stock held by existing stockholders are "restricted securities"
and may be resold in the public market only if registered or pursuant to an
exemption from registration. Some of these shares may be resold under Rule 144.
16. POSSIBLE LACK OF SUFFICIENT AUTHORIZED SHARES
There is a possibility that Advanced Viral may not currently have
sufficient authorized shares to convert all of the shares of common stock needed
under the Equity Line of Credit and a proposal may be required to be placed
before the stockholders to facilitate an increase in the number of authorized
shares within the next several years. Based on an assumed offering price of
$0.08 per share, we would need to issue 625,000,000 shares of common stock to
draw the entire $50 million available under the Equity Line of Credit. If the
price of our common stock decreased to $0.04 per shares, we would need
1,250,000,000 shares of common stock to draw the entire $50 million available
under the Equity Line of Credit. Based on the 483,484,636 shares of stock
currently outstanding, we do not have sufficient authorized shares of common
stock to draw down the entire $50 million available under the Equity Line of
Credit at an assumed stock price of either $0.08 or $0.04 per share. To increase
the number of authorized shares of our common stock, we would need to obtain
stockholder approval. We are uncertain that we could obtain this approval based
on the dilutive effect of the issuance of shares under the Equity Line of
Credit. Additionally, we would need to file another registration statement to
cover any shares under the Equity Line of Credit other than the 95,712,595 being
registered in this registration statement.
17. THE SALE OF OUR STOCK UNDER OUR EQUITY LINE COULD ENCOURAGE SHORT
SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR
STOCK PRICE
In many circumstances the provision of an equity line of credit for
companies that are traded on the OTCBB has the potential to cause a significant
downward pressure on the price of common stock. This is especially the case if
the shares being placed into the market exceed the market's ability to take up
the increased stock or if Advanced Viral has not performed in such a manner to
show that the equity funds raised will be used to grow Advanced Viral. Such an
event could place further downward pressure on the price of common stock. Under
the terms of our Equity Line of Credit, Advanced Viral may request numerous draw
downs. Even if Advanced Viral uses the equity line to increase its business or
invest in assets which are materially beneficial to Advanced Viral the
opportunity exists for short sellers and others to contribute to the future
decline of Advanced Viral's stock price. If there are significant short sales of
stock, the price decline that would result from this activity will cause the
share price to decline more so which in turn may cause long holders of the stock
to sell their shares thereby contributing to sales of stock in the market. If
there is an imbalance on the sell side of the market for the stock the price
will decline.
It is not possible to predict if the circumstances where by a short
sales could materialize or to what the share price could drop. In some companies
that have been subjected to short sales the stock price has dropped to near
zero. This could happen to Advanced Viral.
14
18. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE
OF CREDIT WHEN NEEDED
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the Equity Line of
Credit and the convertible debentures. No assurances can be given that such
financing will be available in sufficient amounts or at all when needed, in
part, because we are limited to a maximum draw down of $500,000 during any seven
trading day period. In addition, based on an assumed offering price of $0.08, we
will only be able to draw a total net amount of $7,189,157 under the Equity Line
of Credit. This net amount will utilize all of the 95,712,595 shares of our
common stock registered for the Equity Line of Credit under this Registration
Statement.
19. WE MAY NOT BE ABLE TO DRAW DOWN UNDER THE EQUITY LINE OF CREDIT IF THE
INVESTOR HOLDS MORE THAN 9.9% OF OUR COMMON STOCK
In the event Cornell Capital holds more than 9.9% of our
then-outstanding common stock, we will be unable to draw down on the Equity Line
of Credit. Currently, Cornell Capital has beneficial ownership of 7.42% of our
common stock and therefore we would be able to draw down on the Equity Line of
Credit so long as Cornell Capital's beneficial ownership remains below 10%. If
Cornell Capital's beneficial ownership increases above 10%, we would be unable
to draw down on the Equity Line of Credit. Because Cornell Capital is not
limited by a percentage ownership limitation with respect to converting the
convertible debentures, a possibility exists that Cornell Capital Partners may
own more than 9.9% of Advanced Viral's outstanding common stock at a time when
we would otherwise plan to make an advance under the Equity Line of Credit. In
that event, if we are unable to obtain additional external funding or have not
generated revenue, we could be forced to curtail or cease our operations.
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive proceeds from the sale of additional convertible
debentures to Cornell Capital, the sale of shares of common stock to Cornell
Capital under the Equity Line of Credit, and upon the exercise of any
outstanding options or warrants. The purchase price for the additional
debentures is $1,000,000 less a ten percent discount. The purchase price of the
shares purchased by Cornell Capital under the Equity Line of Credit will be
equal to 100% of the lowest closing bid price of our common stock on the OTC
Bulletin Board for the 5 trading days immediately following the notice date.
For illustrative purposes, we have set forth below our intended use of
net proceeds indicated below to be received from both additional convertible
debentures and under the Equity Line of Credit. The table assumes estimated
offering expenses of $85,000 and a fee of 5% of the gross proceeds raised under
the Equity Line of Credit and a 10% discount to the gross proceeds under the
convertible debentures. The first column shows the use of the net proceeds from
$1,000,000 in additional debentures without any proceeds from the Equity Line of
Credit. The second column shows the use of the net
15
proceeds from $1,000,000 in additional debentures combined with the use of net
proceeds from the Equity Line of Credit, at an assumed price of $0.08 per share,
using all 95,712,595 shares being registered for the Equity Line of Credit.
GROSS PROCEEDS(1) $1,000,000 $8,657,008(1)
NET PROCEEDS $ 815,000 $8,089,158
USE OF PROCEEDS:
Accounts payable 815,000 996,000
General Working Capital 0 7,093,158
---------- ----------
TOTAL $ 815,000 $8,089,158
========== ==========
- ----------------
(1) Includes $1,000,000 from the sale of additional convertible debentures to
Cornell Capital. At an assumed price of $0.08, Advanced Viral would receive
gross proceeds of $7,657,008 under the Equity Line of Credit if all of the
95,712,595 shares being registered in this offering were issued by Advanced
Viral.
There is no guarantee that we will receive any proceeds from this
transaction. Any proceeds received upon exercise of outstanding options and
warrants will be used for general working capital purposes.
DETERMINATION OF OFFERING PRICE
As this registration statement relates to shares of common stock that
may be sold from time to time by certain stockholders, and not by Advanced
Viral, we cannot determine the actual price at which shares of our common stock
will be sold pursuant to this registration statement. As discussed more fully in
the "Description of Securities to be Registered" section, Cornell Capital will
obtain shares of our common stock under: (1) the convertible debentures, at a
conversion price equal to the lower of $0.08 or 80% of the lowest bid price
during the four trading days immediately preceding a conversion date; (2) under
the Equity Line of Credit, at a price equal to 100% of the lowest closing bid
price during the five consecutive trading days immediately following an advance
notice date; and (3) under the warrants at a price of $0.091. While not
determined by Advanced Viral, Advanced Viral believes that Cornell Capital, and
the other selling stockholders, will sell shares of our common stock at the
prevailing market price at the time of sale and that the market price will
fluctuate during the time period in which the selling stockholders sell their
shares of our common stock.
DILUTION
The net tangible book value of our company as of September 30, 2003 was
$(764,421) or $(0.0015) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of Advanced Viral (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to Advanced Viral, our net
tangible book value will be unaffected by this offering. Our net tangible book
value, however, will be impacted by the common stock to be issued under the
Equity Line of Credit. The amount of dilution will depend on the offering price
and number of shares to be issued under the Equity Line of Credit. The following
example shows the dilution to new investors at an offering price of $0.08 per
share.
If we assume that Advanced Viral had issued 95,712,595 shares of common
stock under the Equity Line of Credit at an assumed offering price of $0.08 per
share (i.e., the maximum number of shares registered in this offering under the
Equity Line of Credit), less retention fees of $382,850 and offering expenses of
$85,000, our net tangible book value as of September 30, 2003 would have been
$6,424,736 or $0.0104 per share. Note that at an offering price of $0.08 per
share, Advanced Viral would receive gross proceeds of $7,657,008 or $42,342,992
less than is available under the Equity Line of Credit. Such an offering would
represent an immediate increase in net tangible book value to existing
stockholders of $0.0118 per share and an immediate dilution to new stockholders
of $0.0696 per share. The following table illustrates the per share dilution:
16
Assumed public offering price per share $0.0800
Net tangible book value per share before this offering $(0.0015)
Increase attributable to new investors $ 0.0118
--------
Net tangible book value per share after this offering $0.0104
-------
Dilution per share to new stockholders $0.0696
=======
The offering price of our common stock is based on the then-existing
market price. In order to give prospective investors an idea of the dilution per
share they may experience, we have prepared the following table showing the
dilution per share at various assumed offering prices:
DILUTION PER
ASSUMED NO. OF SHARES SHARE TO NEW
OFFERING PRICE TO BE ISSUED(1) INVESTORS
-------------- --------------- ------------
$0.08 95,712,595 $0.0696
$0.06 95,712,595 $0.0526
$0.04 95,712,595 $0.0355
$0.02 95,712,595 $0.0184
- ---------------------
(1) This represents the maximum number of shares of common stock that are
currently being registered under the Equity Line of Credit in this
offering.
17
SELLING STOCKHOLDERS
The following table presents information regarding the beneficial
ownership of the common stock as of the date hereof by each of the selling
stockholders. The selling stockholders are categorized in groups based on their
relationship to Advanced Viral. A description of each selling stockholder's
relationship to Advanced Viral and how each selling stockholder acquired the
shares to be sold in this offering is detailed in the information immediately
following this table. Unless otherwise indicated below, to our knowledge all
persons listed below have sole voting and investment power with respect to the
shares of common stock beneficially owned, except to the extent authority is
shared by spouses under applicable law. The information included below is based
upon information provided by the selling stockholders. Because the selling
stockholders may offer all, some or none of their shares, no definitive estimate
as to the number of shares that will be held by the selling stockholders after
such offering can be provided and the following table has been prepared on the
assumption that all shares offered under this prospectus will be sold.
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH CORNELL CAPITAL
PERCENTAGE
PERCENTAGE OF
OF OUTSTANDING PERCENTAGE
OUTSTANDING SHARES TO BE SHARES TO BE OF SHARES
SHARES SHARES ACQUIRED ACQUIRED BENEFICIALLY
BENEFICIALLY BENEFICIALLY UNDER THE UNDER THE SHARES TO BE OWNED
OWNED BEFORE OWNED BEFORE EQUITY LINE EQUITY LINE SOLD IN THE AFTER
SELLING STOCKHOLDERS OFFERING OFFERING(1) OF CREDIT OF CREDIT OFFERING OFFERING(1)
- -------------------- ------------ ------------ ------------ ----------- ------------ -----------
Cornell Capital
Partners, L.P. 53,213,443(2) 9.5% 95,712,595 18.3% 378,892,473(3) 0%
Katalyst Securities
LLC.* 107,527 * -- -- 107,527 0%
---------- --- ---------- ---- ----------- ---
TOTAL 53,320,970 7.5% 95,712,595 18.3% 379,000,000 0%
========== === ========== ==== =========== ===
- ---------------------
* Katalyst Securities LLC is an unaffiliated registered broker-dealer and
received such shares in consideration for placement agent services. Katalyst
Securities may be deemed to be an underwriter in connection with the sale of
common stock under the Equity Line of Credit. To our knowledge, no other selling
stockholder is a broker-dealer or an affiliate of a broker-dealer.
SHARES ACQUIRED IN FINANCING TRANSACTIONS THROUGH
PRIVATE PLACEMENTS OR PURSUANT TO THE EXERCISE OF OPTIONS
PERCENTAGE OF PERCENTAGE
OUTSTANDING SHARES OF SHARES
SHARES SHARES BENEFICIALLY BENEFICIALLY
BENEFICIALLY BENEFICIALLY SHARES TO BE OWNED OWNED
OWNED BEFORE OWNED BEFORE SOLD IN AFTER AFTER
SELLING STOCKHOLDER OFFERING OFFERING(1) THE OFFERING OFFERING OFFERING(1)
------------------- ------------ ------------- ------------ ------------ ------------
AVIX, Inc. 468,750 * 468,750 (4) -- *
Elliot Bauer 2,800,000 * 2,320,000 (4) 480,000 *
Michael Berman 2,160,773 * 1,000,000 (4) 1,160,773 *
Phillip Brennan 500,000 * 500,000 (4) -- *
Gene Cartwright 1,200,000 * 1,200,000 (4) -- *
Henry E. Cartwright 800,000 * 800,000 (4) -- *
Dorothy Christofides 880,000 * 640,000 (4) 240,000 *
Frederick Cohen 160,000 * 160,000 (4) -- *
Leonard Cohen 3,480,000 * 1,120,000 (4) 2,360,000 *
Todd Cohen 1,025,000 * 800,000 (4) 225,000 *
CSP, Inc. 500,000 * 500,000 (4) -- *
Gerald Director 480,000 * 160,000 (4) 320,000 *
Charles Ernst 500,000 * 500,000 (4) -- *
Eric Goldstein 250,000 * 250,000 (4) -- *
Edward Gorkes 5,300,000 1.0% 5,000,000 (4) 300,000 *
Alan Halpert 320,000 * 320,000 (4) -- *
Barry L. Johnston TR 630,000 * 480,000 (4) 150,000 *
Ira Kent 160,000 * 160,000 (4) -- *
Benjamin H. Kirsch 3,360,000 * 3,000,000 (4) 360,000 *
Russell Kuhn 5,525,226 1.1% 3,500,000 (4) 2,025,226 *
18
Keith Leonard 1,000,000 * 1,000,000 (4) -- *
Lawrence Pomerantz 19,344,055 3.6% 3,784,000 (4) 15,560,055 2.9%
Frederick Lutz 1,876,363 * 500,000 (4) 1,376,363 *
David Provence 500,000 * 500,000 (4) -- *
Michael Rapf 250,000 * 250,000 (4) -- *
Allen Ross 160,000 * 160,000 (4) -- *
David Sass 1,000,000 * 1,000,000 (4) -- *
Dean Skillman 1,050,000 * 1,000,000 (4) 50,000 *
Gerald Smallberg 320,000 * 320,000 (4) -- *
Diego Vallone 15,625 * 15,625 (4) -- *
Frank Vigliarolo 1,000,000 * 1,000,000 (4) -- *
Eli Wilner 21,562,500 4.0% 4,150,000 (5a) 17,412,500 3.5%
Shalom Z. Hirschman, MD 39,100,000 7.0% 39,100,000 (5a) -- *
Alan Gallanter 4,547,880 * 4,547,880 (5a) -- *
David Seligman 6,450,000 1.2% 3,950,000 (5a) 2,500,000 *
Nancy J. Van Sant 4,450,000 * 1,950,000 (5a) 2,500,000 *
Roy S. Walzer 5,078,800 1.0% 2,578,800 (5a) 2,500,000 *
Paul R. Bishop 123,151 * 123,151 (5a) -- *
Richard S. Kent, MD 431,271 * 431,271 (5a) -- *
Christopher Forbes 150,000 * 150,000 (5a) -- *
George P. Canellos, MD 500,000 * 500,000 (5a) -- *
Michael Harris, MD 500,000 * 500,000 (5a) -- *
James D'Olimpio, MD 500,000 * 500,000 (5a) -- *
Ms. Carol Armenti 500,000 * 500,000 (5a) -- *
Howard Young, MD 500,000 * 500,000 (5a) -- *
Sidney Pestka 500,000 * 500,000 (5a) -- *
Albert Reichmann 250,000 * 250,000 (5a) -- *
Peter Lunder 250,000 * 250,000 (5a) -- *
Jozef Straus, Ph.D., D.Sc.(Hon.) 187,500 * 187,500 (5a) -- *
Martin Bookman 25,000 * 25,000 (5a) -- *
Maria Dediego 100,000 * 100,000 (5a) -- *
Paul Fioriti 1,000 * 1,000 (5a) -- *
John Fisher 150,000 * 150,000 (5a) -- *
Maritza Garcia 2,000 * 2,000 (5a) -- *
Maria Marino 30,000 * 30,000 (5a) -- *
Malcolm Santer 100,000 * 100,000 (5a) -- *
Andrew Szalkiewicz 155,000 * 155,000 (5a) -- *
Irach Taraporewala 150,000 * 150,000 (5a) -- *
Peter Lunder 4,587,797 * 4,587,797 (5b) -- *
O. Frank Rushing & Justine Simoni 4,989,502 1.0% 4,989,502 (5b) -- *
James Dicke II 15,149,956 2.9% 15,149,956 (4,5a,5b) -- *
=========== ==== =========== ========== ===
Total 547,037,149 53.4% 497,517,232 49,519,917 4.8%
=========== ==== =========== ========== ===
- ---------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 521,971,079 shares of common
stock outstanding as of November 14, 2003, together with securities exercisable
or convertible into shares of common stock within 60 days thereof, for each
stockholder, but excluding: (i) outstanding stock options to purchase an
aggregate of approximately 25.6 million shares of common stock at an exercise
prices ranging from $0.052 to $0.36; and (ii) outstanding warrants to purchase
an aggregate of approximately 29.1 million shares of common stock at prices
ranging from $0.091 to $1.00. Beneficial ownership is determined in accordance
with the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common stock
subject to securities exercisable or convertible into shares of common stock
that are currently exercisable or exercisable within 60 days of November 14,
2003 are deemed to be beneficially owned by the person holding such securities
for the purpose of computing the percentage of ownership of such person, but are
not treated as outstanding for the purpose of computing the percentage ownership
of any other person. Note that affiliates are subject to Rule 144 and Insider
trading regulations - percentage computation is for form purposes only.
(2) Includes 39,062,500 shares of common stock underlying the $2,500,000 of
convertible debentures owned by Cornell Capital as of November 14, 2003, at an
assumed conversion price of 80% of $0.08.
(3) Represents the number of shares being registered under the Equity Line of
Credit, plus a good-faith estimate of the shares needed to convert the
$2,500,000 of convertible debentures already sold to Cornell Capital, and the
$1,000,000 of convertible debentures Cornell Capital is obligated to purchase
within twenty (20) business days after this registration statement is declared
effective by the Securities and Exchange Commission. Of the 268,179,878 shares
being registered under the convertible debenture, 190,054,878 shares were agreed
to by Advanced Viral in the investor registration rights agreement dated April
28, 2003 and 78,125,000 shares were agreed to in the investor registration
rights agreement dated July 18, 2003. Also includes 15,000,000 underlying
warrants issued to Cornell Capital, but not exercisable until six months from
the issuance date.
(4) Includes warrants to purchase an aggregate of 14,758,375 shares of common
stock at an exercise price of $0.12 per share commencing six months after date
of issuance and expiring five years from the date of issuance.
19
(5) Includes an aggregate of (a) 62,081,602 shares of common stock underlying
stock options issued to certain directors, advisory board members, employees and
others which have exercise prices ranging from $.12 to $.36 per share; and (b)
up to 19,027,255 shares issued or issuable upon the conversion of our 5%
convertible debentures held by certain selling stockholders. See "Prospectus
Summary--The Offering". Assumes the full exercise or conversion of such options
and debentures held by selling stockholders.
The following information contains a description of each selling
stockholder's relationship to Advanced Viral and how each selling stockholder
acquired the shares to be sold in this offering is detailed below. None of the
selling stockholders have held a position or office, or had any other material
relationship, with Advanced Viral, except as follows:
SHARES ACQUIRED IN FINANCING TRANSACTIONS WITH CORNELL CAPITAL
CORNELL CAPITAL PARTNERS, L.P. Cornell Capital is the investor under
the Equity Line of Credit Agreement and a holder of convertible debentures and
warrants. All investment decisions of Cornell Capital are made by its general
partner, Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville
Advisors, makes the investment decisions on behalf of Yorkville Advisors.
Cornell Capital acquired all shares being registered in this offering in
financing transactions with Advanced Viral. Those transactions are explained
below:
- EQUITY LINE OF CREDIT.
On April 28, 2003, we entered into an Equity Line of Credit
with Cornell Capital. Pursuant to the Equity Line of Credit,
we may, at our discretion, periodically sell to Cornell
Capital shares of common stock for a total purchase price of
up to $50.0 million. For each share of common stock purchased
under the Equity Line of Credit, Cornell Capital will pay
Advanced Viral 100% of the lowest closing bid price of our
common stock on the Over-the-Counter Bulletin Board or other
principal market on which our common stock is traded for the
five days immediately following the notice date. Further,
Cornell Capital is entitled to a retain 5% of each advance
under the Equity Line of Credit. Our obligation to sell our
common stock is conditioned, at our option, upon the per share
purchase price being equal to or greater than a minimum
acceptable price, set by us on the advance notice date, which
may not be set any closer than 7.5% below the closing bid
price of our common stock the day prior to the notice date. We
are registering 95,712,595 shares in this offering that may be
issued under the Equity Line of Credit.
- CONVERTIBLE DEBENTURES.
On April 28, 2003, we entered into a securities purchase
agreement with Cornell Capital, whereby Cornell Capital shall
purchase up to $2,500,000 of convertible debentures. On April
28, 2003, Cornell Capital purchased $1,000,000 of convertible
debentures. On July 18, 2003, Cornell Capital purchased an
additional $500,000 of convertible debentures under the April
28, 2003 securities purchase agreement. Cornell Capital is
obligated to purchase an additional $1,000,000 of convertible
debentures upon the effectiveness of this registration
statement. The debentures accrued interest at a rate of 5% per
year and have a five-year term. Cornell Capital will receive a
10% discount to the purchase price of the convertible
debentures purchased under the securities purchase agreement
dated April 28, 2003. The debentures are convertible at the
holder's option any time up to maturity at a conversion price
equal to the lower of (i) an amount equal to eight cents
($0.08) or (ii) 80% of the lowest closing bid price of the
common stock for the four trading days immediately preceding
the conversion date. At maturity, Advanced Viral has the
option to either pay the holder the outstanding principal
balance and accrued interest or to convert the debentures into
shares of common stock at a conversion price equal to the
lower of (i) an amount equal to eight cents ($0.08) or (ii)
80% of the lowest closing bid price of the common stock for
the four trading days immediately preceding the conversion
date. Cornell Capital may only convert $600,000 of all
convertible debentures it holds within any thirty (30) day
period. Advanced Viral has redemption rights relating to
debentures. If Advanced Viral exercises certain of these
redemption rights, Advanced Viral shall pay Cornell Capital
115% of the face amount redeemed plus accrued interest and
Cornell Capital shall receive warrants to purchase 1,000,000
shares of common stock for each $100,000 of such convertible
debentures redeemed. Advanced Viral is registering 190,054,878
shares of common stock in this offering underlying the
convertible debentures purchased pursuant to the securities
purchase agreement dated April 28, 2003.
On July 18, 2003, we entered into an additional securities
purchase agreement with Cornell Capital, whereby Cornell
Capital purchased $1,000,000 of secured convertible
debentures. Cornell Capital received a 10% discount to the
purchase price of the convertible debentures purchased under
the securities purchase agreement dated July 18, 2003. The
debentures accrued interest at a rate of 5% per year and have
a five-
20
year term. The convertible debentures are secured by the
assets of Advanced Viral until 50 days after the effectiveness
of the registration statement of which this prospectus is a
part. The debentures are convertible at the holder's option
any time up to maturity at a conversion price equal to the
lower of (i) an amount equal to eight cents ($0.08) or (ii)
80% of the lowest closing bid price of the common stock for
the four trading days immediately preceding the conversion
date. Cornell Capital may only convert $600,000 of all
convertible debentures it holds within any thirty (30) day
period. At maturity, Advanced Viral has the option to either
pay the holder the outstanding principal balance and accrued
interest or to convert the debentures into shares of common
stock at a conversion price equal to the lower of (i) an
amount equal to eight cents ($0.08) or (ii) 80% of the lowest
closing bid price of the common stock for the four trading
days immediately preceding the conversion date. Advanced Viral
has redemption rights relating to debentures. If Advanced
Viral elects to redeem all or part of these convertible
debentures, Advanced Viral shall pay Cornell Capital 115% of
the face amount redeemed plus accrued interest and Cornell
Capital shall receive warrants to purchase 1,000,000 shares of
common stock for each $100,000 of convertible debentures
redeemed. Advanced Viral is registering 78,125,000 shares of
common stock in this offering underlying the convertible
debentures purchased pursuant to the securities purchase
agreement dated July 18, 2003.
- WARRANTS.
In connection with the securities purchase agreement dated
April 28, 2003, Cornell Capital received warrants to purchase
15,000,000 shares of common stock as a commitment fee on April
28, 2003. The exercise price of the warrants is $0.091 per
share. The warrants may not be exercised prior to October 28,
2003 and expire five years after their issuance. Cornell
Capital may not exercise the warrants if such an exercise
would cause Cornell Capital to beneficially own more than
9.99% of the outstanding shares of Advance Viral's common
stock, except within sixty days of the expiration of the
warrants.
THERE ARE CERTAIN RISKS RELATED TO SALES BY CORNELL CAPITAL, INCLUDING:
- Some of the shares issued to Cornell Capital will be issued at
a discount to the market rate. As a result, the lower the
stock price around the time Cornell Capital is issued shares,
the greater chance that Cornell Capital gets more shares. This
could result in substantial dilution to the interests of other
holders of common stock.
- To the extent Cornell Capital sells shares of our common
stock, the common stock price may decrease due to the
additional shares in the market. Because Cornell Capital
receives more shares of our common stock upon conversion of
the convertible debentures or upon an advance under the Equity
Line of Credit, as the price of our common stock decreases, a
decrease in the price of our common stock could allow Cornell
Capital to sell greater amounts of common stock. This could
further depress the stock price.
- The significant downward pressure on the price of the common
stock as Cornell Capital sells material amounts of common
stocks could encourage short sales by Cornell Capital or
others. This could place further downward pressure on the
price of the common stock.
KATALYST SECURITIES LLC. Katalyst Securities LLC is an unaffiliated
registered broker-dealer that was retained by us as placement agent. John
Fitzpatrick, Katalyst Securities LLC's President, makes the investment decisions
on behalf of Katalyst Securities LLC. For its services as placement agent in
connection with the Equity Line of Credit, Katalyst Securities LLC received a
fee of 107,527 shares of common stock, which were valued at $10,000. These
shares are being registered in this offering. Katalyst Securities may be deemed
to be an underwriter in connection with the sale of common stock under the
Equity Line of Credit.
SHARES ISSUED OR ISSUABLE IN FINANCING TRANSACTIONS WITH CERTAIN INVESTORS, UPON
THE EXERCISE OF CERTAIN STOCK OPTIONS OR WARRANTS, OR UPON THE CONVERSION OF
CERTAIN CONVERTIBLE DEBENTURES.
21
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 21,620,000 shares of our common stock and warrants to purchase up to
10,810,000 shares of our common stock, for an aggregate purchase price of
$1,081,000, or $0.05 per share, pursuant to securities purchase agreements with
certain purchasers. The warrants are exercisable at $0.10 per share. In
connection with the agreements, we paid finders' fees to Harbor View Group,
AVIX, Inc and Robert Nowinski consisting in the aggregate of (i) approximately
$115,667 and (ii) warrants to purchase 2,378,200 shares of our common stock. All
of the aforementioned warrants are exercisable at $0.10 per share commencing six
months after the issuance date, for a period of five years. As of the date
hereof, none of such warrants had been exercised.
From December 2002 through June 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 Robert Nowinski consisting in the aggregate of (i)
approximately $98,095 and (ii) warrants to purchase 1,246,500 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.
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 September 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.
During 2001 and 2002, we granted to certain directors, employees and
advisory board members options to purchase an aggregate of 62,081,602 shares of
common stock to at exercise prices ranging from $0.12 to $0.36 per share for a
period of eight years from the date of issuance, in consideration for their
service to Advanced Viral.
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the OTC Bulletin Board or in
any other market on which the price of our shares of common stock are quoted or
(ii) in transactions otherwise than on the OTC Bulletin Board or in any other
market on which the price of our shares of common stock are quoted. Any of such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at varying prices determined at
the time of sale or at negotiated or fixed prices, in each case as determined by
the selling stockholders or by agreement between the selling stockholders and
underwriters, brokers, dealers or agents, or purchasers. If the selling
stockholders effect such transactions by selling their shares of common stock to
or through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The selling
stockholders and any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Equity Line of Credit. Cornell Capital Partners will pay us 100% of the lowest
closing bid price of our common stock on the OTC Bulletin Board or other
principal trading market on which our common stock is
22
traded for the five trading days immediately following the advance date. In
addition, Cornell Capital Partners will retain 5% of the proceeds from each
advance received by us under the Equity Line of Credit. This 5% retainage is an
underwriting discount. In addition, we engaged Katalyst Securities LLC, an
unaffiliated registered broker-dealer, to advise us in connection with the
Equity Line of Credit. For its services as placement agent, Katalyst Securities
LLC received 107,527 shares of our common stock, which was valued at $10,000.
Katalyst Securities may be deemed to be an underwriter in connection with the
sale of common stock under the Equity Line of Credit.
Cornell Capital Partners, L.P. was formed in February 2000 as a
Delaware limited partnership. Cornell Capital Partners is a domestic hedge fund
in the business of investing in and financing public companies. Cornell Capital
Partners does not intend to make or market in Advanced Viral's stock or to
otherwise engage in stabilizing or other transactions intended to help support
the stock price. Prospective investors should take these factors into
consideration before purchasing Advanced Viral's common stock.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers, dealers or agents effecting transactions on behalf of the selling
stockholders are registered to sell securities in all fifty states. In addition,
in certain states the shares of common stock may not be sold unless the shares
have been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify Cornell Capital Partners and its controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000. In addition, we engaged Katalyst Securities LLC, a
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services, Katalyst Securities LLC received 107,527 shares of our
common stock, which was valued at $10,000. The offering expenses consist of: a
SEC registration fee of $3,232.12 printing expenses of $10,000, accounting fees
of $4,000, legal fees of $50,000 and miscellaneous expenses of $17,767.88 We
will not receive any proceeds from the sale of any of the shares of common stock
by the selling stockholders. We will, however, receive proceeds from the sale of
common stock under the Equity Line of Credit, the issuance of additional
convertible debentures and from the issuance of shares upon the exercise of
warrants.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Equity Line of Credit. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then, to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
DESCRIPTION OF SECURITIES TO BE REGISTERED
The securities being registered are shares of Advanced Viral's common
stock. The holders of common stock:
- have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
- entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
- do not have preemptive, subscription or conversion rights and
there are no redemption or sinking fund provisions applicable
thereto; and
- are entitled to one noncumulative vote per share on all
matters which stockholders may vote on at all meeting of
stockholders.
23
Cornell Capital and Katalyst Securities acquired, or will be acquiring,
their shares of Advanced Viral's common stock as a result of financing
transactions with Advanced Viral consummated on April 28, 2003 and July 18,
2003. Pursuant to a securities purchase agreement dated April 28, 2003, Cornell
Capital has agreed to purchase $2,500,000 in convertible debentures and has
received warrants to purchase 15,000,000 shares of Advanced Viral's common
stock. Cornell Capital also entered into an Equity Line of Credit with Advanced
Viral, dated April 28, 2003, pursuant to which Cornell Capital agreed to
purchase $50 million of Advanced Viral's common stock. Pursuant to a securities
purchase agreement dated July 18, 2003, Cornell Capital has agreed to purchase
$1,000,000 in additional convertible debentures. The convertible debentures,
warrants and Equity Line of Credit are more fully explained below.
DEBENTURES
On April 28, 2003 we entered into a securities purchase agreement with
Cornell Capital to sell up to $2,500,000 of our 5% convertible debentures due
April 28, 2008, $1,000,000 of which was purchased on April 28, 2003; $500,000 of
which was purchased on July 18, 2003; and $1,000,000 of which will be purchased
within twenty business days from the date the registration statement is declared
effective by the SEC. Pursuant to the agreement, Cornell Capital will receive a
10% discount to the purchase price of the convertible debentures purchased,
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. Pursuant to the terms of the agreement, commencing July 27,
2003, Cornell Capital may convert the debenture plus accrued interest, (which
may be taken at Cornell Capital'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 for all debentures held by Cornell Capital.
Advanced Viral has redemption rights. If Advanced Viral exercises certain of
these redemption rights, Advanced Viral may redeem a portion or the entire
outstanding debenture at a price equal to 115% of the amount redeemed plus
accrued interest and Cornell Capital will receive warrants to purchase 1,000,000
shares of our stock for every $100,000 redeemed. The warrant shall be
exercisable on a cash basis and have an exercisable price of the higher of 110%
of the closing bid price of our common stock on the closing date or $0.08. The
warrant shall have "piggy back" registration rights and shall survive for 5
years from the closing date.
On July 18, 2003 we entered into an additional securities purchase
agreement, pursuant to which Cornell Capital purchased $1,000,000 of our 5%
secured convertible debentures, due July 17, 2008. Pursuant to the agreement,
Cornell Capital received a 10% discount to the purchase price of the convertible
debentures purchased. The convertible debentures are secured by the assets of
Advanced Viral until fifty (50) days after the effectiveness of the registration
statement of which this prospectus is a part. Pursuant to the terms of the
agreement, commencing October 18, 2003, Cornell Capital may convert the
debenture plus accrued interest, (which may be taken at Cornell Capital's option
in cash or common stock), in shares of our common stock at a conversion price
equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of
our common stock for the four trading days immediately preceding the conversion
date. No more than $600,000 may be converted in any thirty-day period. Subject
to certain exceptions, at our option, we may redeem a portion or the entire
outstanding debenture at a price equal to 115% of the amount redeemed plus
accrued interest and Cornell Capital will receive warrants 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.
WARRANTS
The warrants to purchase 15,000,000 shares of our common stock have an
exercise price of $0.091 per share. The warrants may not be exercised prior to
October 28, 2003 and expire five years after their issuance. Cornell Capital may
not exercise the warrants if such an exercise would cause Cornell Capital to
beneficially own more than 9.99% of the outstanding shares of Advance Viral's
common stock, except within sixty days of the expiration of the warrants.
EQUITY LINE OF CREDIT
SUMMARY. On April 28, 2003, we entered into an Equity Line of Credit
with Cornell Capital. Pursuant to the Equity Line of Credit, we may, at our
discretion, periodically sell to Cornell Capital shares of common stock for a
total purchase price of up to $50.0 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay 100% of the
lowest closing bid price of our common stock on the OTC Bulletin Board or other
principal market on which our common stock is traded for the five trading days
immediately following the notice date. Cornell Capital is a private limited
partnership whose business operations are conducted through its general partner,
Yorkville Advisors, LLC. Further, Cornell Capital will retain 5% of each advance
under the Equity Line of Credit. Our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
minimum acceptable price,
24
set by us on the advance notice date, which may not be set any closer than 7.5%
below the closing bid price of our common stock the day prior to the notice
date. For each day during the five days after the notice date that the closing
bid price for our common stock is below the Minimum Acceptable Price, the amount
of the advance shall decrease by twenty percent (20%) of the amount requested.
In addition, we engaged Katalyst Securities LLC, an unaffiliated
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services as placement agent, Katalyst Securities LLC received
107,527 shares of our common stock, which was valued at $10,000. Katalyst
Securities may be deemed to be an underwriter in connection with the sale of
common stock under the Equity Line of Credit. The effectiveness of the sale of
the shares under the Equity Line of Credit is conditioned upon us registering
the shares of common stock with the Securities and Exchange Commission. The
costs associated with this registration statement will be borne by us.
EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit,
we may periodically sell shares of common stock to Cornell Capital to raise
capital to fund our working capital needs. The periodic sale of shares is known
as an advance. We may request an advance every seven days. A closing will be
held not less than six days after such written notice at which time we will
deliver shares of common stock and Cornell Capital will pay the advance amount,
less the 5% Retainage.
We may request advances under the Equity Line of Credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until Cornell Capital has
advanced $50.0 million or two years after the effective date of the accompanying
registration statement, whichever occurs first. However, pursuant to the terms
of the Equity Line of Credit, Advanced Viral may request advances for thirty-six
(36) months if Advanced Viral files an amendment to an effective registration
statement or files a new registration statement.
The amount of each advance is subject to a maximum of $500,000 with a
minimum of seven trading days between advances. The amount available under the
Equity Line of Credit is not dependent on the price or volume of our common
stock. Cornell Capital may not own more than 9.9% of our outstanding common
stock at any time.
Based on a stock price of $0.08, Cornell Capital's beneficial ownership
of shares of our common stock is 3.18%, and, therefore, we would be permitted to
make draws under the Equity Line of Credit as long as Cornell Capital's
beneficial ownership of our common stock was not more than 9.9%. However,
Cornell Capital is not limited by a percentage ownership limitation with respect
to converting the convertible debentures, and therefore a possibility exists
that Cornell Capital may own more than 9.9% of Advanced Viral's outstanding
common stock at a time when we would otherwise plan to make an advance under the
Equity Line of Credit.
There is a possibility that Advanced Viral may not currently have
sufficient authorized shares to convert all of the shares of common stock needed
under the Equity Line of Credit and a proposal may be required to be placed
before the stockholders to facilitate an increase in the number of authorized
shares within the next several years. Based on an assumed offering price of
$0.08 per share, we would need to issue 625,000,000 shares of common stock to
draw the entire $50 million available under the Equity Line of Credit. If the
price of our common stock decreased to $0.04 per shares, we would need
1,250,000,000 shares of common stock to draw the entire $50 million available
under the Equity Line of Credit. Based on the 483,484,636 shares of stock
currently outstanding, we do not have sufficient authorized shares of common
stock to draw down the entire $50 million available under the Equity Line of
Credit at an assumed stock price of either $0.08 or $0.04 per share. To increase
the number of authorized shares of our common stock, we would need to obtain
stockholder approval. We are uncertain that we could obtain this approval based
on the dilutive effect of the issuance of shares under the Equity Line of
Credit. Additionally, we would need to file another registration statement to
cover any shares under the Equity Line of Credit other than the 95,712,595 being
registered in this registration statement.
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. Assuming we issued 95,712,595 shares to Cornell
Capital, based on a recent price of $0.08 per share under the Equity Line of
Credit, we would receive gross proceeds of $7,657,008 less estimated offering
expenses of $85,000 and a retention of $382,850. These shares would represent
15.5% of our outstanding common stock upon issuance.
25
We expect to incur expenses of approximately $85,000 in connection with
this registration, consisting primarily of professional fees. In addition,
Cornell Capital will retain 5% from each advance. In addition, we issued 107,527
shares of common stock to Katalyst Securities LLC, an unaffiliated registered
broker-dealer, as a placement agent fee, valued at $10,000. Katalyst Securities
may be deemed to be an underwriter in connection with the sale of common stock
under the Equity Line of Credit.
There is an inverse relationship between our stock price and the number
of shares to be issued under the Equity Line of Credit. That is, as our stock
price declines, we would be required to issue a greater number of shares under
the Equity Line of Credit for a given advance. This inverse relationship is
demonstrated by the following table, which shows the number of shares to be
issued and the net proceeds under the Equity Line of Credit at a recent price of
$0.08 per share and 25%, 50% and 75% discounts to the recent price.
Purchase Price $ 0.08 $ 0.06 $ 0.04 $ 0.02
No. of Shares(1): 95,712,595 95,712,595 95,712,595 95,712,595
Total Outstanding(2): 617,683,674 617,683,674 617,683,674 617,683,674
Percent Outstanding(3): 15.5% 15.5% 15.5% 15.5%
Net Cash to Advanced Viral $ 7,189,157 $ 5,370,618 $ 3,552,079 $ 1,733,539
- ----------------------
(1) Represents the number of shares of common stock to be issued to Cornell
Capital under the Equity Line of Credit at the prices set forth in the
table and are being registered hereunder.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital under the Equity Line of
Credit, not including shares issued under the convertible debentures,
warrants or options.
(3) Represents the shares of common stock to be issued as a percentage of
the total number shares outstanding.
Proceeds used under the Equity Line of Credit will be used in the
manner set forth in the "Use of Proceeds" section of this prospectus. We cannot
predict the total amount of proceeds to be raised in this transaction because we
have not determined the total amount of the advances we intend to draw.
INTERESTS OF NAMED EXPERT AND COUNSEL
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their
being fully paid, legally issued and non-assessable will be passed upon for us
by Kirkpatrick and Lockhart LLP, Miami, Florida. Kirkpatrick & Lockhart LLP does
not have any interests in Advanced Viral and has never been employed by Advanced
Viral on a contingent basis.
The audited consolidated financial statements of Advanced Viral
Research Corp. and its subsidiaries for the year ended December 31, 2002,
December 31, 2001, and December 31, 2000, included in this prospectus and
elsewhere in the registration statement have been audited by Rachlin Cohen &
Holtz, LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report. Reference is made to
said report, which includes an explanatory paragraph with respect to the
uncertainty regarding Advanced Viral's ability to continue as a going concern,
as discussed in Note 2 to the financial statements. Rachlin Cohen & Holtz, LLP,
does not have any interests in Advanced Viral and has never been employed by
Advanced Viral on a contingent basis.
DESCRIPTION OF BUSINESS
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. The current formulation of Reticulose is currently
known as "AVR118." We believe AVR118 may be employed in the treatment of certain
viral and autoimmune diseases such as:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers,
leukemias and lymphomas; and
- Rheumatoid arthritis.
26
Since 1962, when Reticulose was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose to be
marketed in the United States. A forfeiture action was instituted in 1962 by the
FDA against Reticulose, and it was withdrawn from the United States market. The
injunction obtained by the FDA prohibits, among other things, any shipment of
AVR118 except in compliance with FDA rules and regulations, which may include
approval by the FDA of a new drug application, or NDA. FDA approval of an NDA
first requires clinical testing of AVR118 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 September 30, 2003 we had incurred a cumulative net loss of
$53,680,991. Our ability to generate substantial operating revenue depends upon
our success in gaining FDA approval for the commercial use and distribution of
AVR118. All of our research and development efforts have been devoted to the
development of AVR118.
Our operations over the last five years have been limited principally
to research, testing and analysis of AVR118 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 AVR118 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 AVR118 as a topical treatment for
genital warts caused by the human papilloma virus (HPV) infection. In September
2001, the FDA cleared the IND application to begin Phase 1 clinical trials. Our
Phase 1 study was performed in the United States on human volunteers. In March
2002, we completed the Phase 1 trial and submitted to the FDA the results, which
indicated that AVR118 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 AVR118 as a topical treatment for
genital warts caused by HPV infection.
In November 2002 we began testing injectable AVR118 in the following
clinical trials in Israel:
- PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that AVR118 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 AVR118 may prove to be an important "enabler"
drug in the treatment of AIDS.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of AVR118. 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 AVR118 with the FDA.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain because of financing constraints.
Because of our limited personnel, we believe it to be in our best
interests to focus our clinical efforts on our one ongoing Phase I/Phase II
open-label dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. The
primary indication of the trial is the treatment of cachexia. Out of 30 total
patients contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required under the
study. Results from the first 15 patients showed improvement in appetite, weight
gain
27
or stability, and enhanced quality of life in all the patients. None of the 15
patients reported any significant side effects from AVR118 therapy.
We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon funds available for research and
development and the availability of patients meeting the prescribed protocol and
the ability of Israel and its hospitals to meet the requirements of the
protocol. From inception of all the clinical studies in Israel we have expended
approximately $1,550,000. The cost to complete the Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS for the additional 15 patients (for a
total of 30) is estimated to be $300,000.
Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR 118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR 118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR 118 in mice with an induced immune
skin reaction. AVR 118 did not inhibit the appearance of this immune skin
reaction.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
Whether we will be able to proceed with clinical trials in Israel for
injectable AVR118 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 AVR118. We may not be able to raise the funds we currently need to
continue or complete the clinical trials for injectable AVR118 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.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number is (914) 376-7383. We have also established a
website: www.adviral.com. Information contained on our website is not a part of
this prospectus.
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as AVR118, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market AVR118,
or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or in vitro testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: Phase 1 clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; Phase 2 clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and Phase 3
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure
28
the proper identification, quality, purity and strength of the investigational
drug. A description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or in vitro tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible in some limited circumstances to use
well documented clinical experience as a substitute for other pre-clinical work.
After the FDA approves the IND, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.
When all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the availability of the drug products made from the substance. NDA's contain
lists of all components used in the manufacture of the drug product and a
statement of the specifications and analytical methods for each component. Also
included are studies of the toxicological actions of the drug as they relate to
the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
In February 1998, we contracted with GloboMax LLC to advise and assist
us in our preparation of the IND that was filed with the FDA in July 2001 and
cleared for Phase 1 trials in September 2001, and to otherwise guide us through
the FDA process. During 2001 and 2002, GloboMax continued its project management
services for the pre-clinical development and IND submission of AVR118 to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of AVR118. Expenses paid during 2001 and
2002 relating to the GloboMax agreement were approximately $3,587,000. Pursuant
to the agreement with GloboMax, we were obligated to pay for services on an
hourly basis, at prescribed rates. GloboMax LLC is no longer providing services
to, or representing, Advanced Viral.
It is possible that the clinical tests of AVR118 on humans will not be
approved by the FDA for human clinical trials on HPV or other diseases, and that
any tests previously conducted or to be conducted will not satisfy FDA
requirements. It is also possible that the results of such human clinical
trials, if performed, will not prove that AVR118 is safe or effective in the
treatment of HPV or other diseases, or that the FDA will not approve the sale of
AVR118 in the United States if we submitted a proper NDA. It is not known at
this time how extensive the Phase 2 and Phase 3 clinical trials will be, if they
are conducted. The data generated may not show that the drug AVR118 is safe and
effective, and even if the data shows that
29
AVR118 is safe and effective, obtaining approval of the NDA could take years and
require financing of amounts not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of AVR118 for a considerable period of
time and impose costly procedures upon our activities. The extent of potentially
adverse government regulations which might arise from future legislation or
administrative action cannot be predicted. Whether or not FDA approval has been
obtained for a product, approval of the product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process may be more or less rigorous from
country to country, and the time required for approval may be longer or shorter
than that required in the United States. Clinical studies conducted outside of
any country may not be accepted by such country, and the approval of any
pharmaceutical or diagnostic product in one country does not assure that such
product will be approved in another country. Accordingly, until registration is
granted, if ever, in the United States or another developed or developing
country, we do not expect that we will be able to generate material sales
revenue.
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through September 30,
2003 we expended approximately $19,382,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. We planned research and
testing at several institutes and medical centers in Israel to:
- determine the safety and efficacy of AVR118 on animals and
cultured human cells;
- determine the effectiveness of AVR118 in the treatment of
cachexia (body wasting) in patients with AIDS taking a
multi-drug cocktail (highly active anti-retroviral therapy
(HAART));
- determine the effectiveness of AVR118 in the treatment of
cachexia in patients with solid cancers;
- determine the effectiveness of AVR118 in the treatment of
cachexia in patients with leukemias and lymphomas;
- study the effects of AVR118 in mitigating the toxic effects of
other drugs used to treat HIV infections, such as nucleoside
analogues, protease inhibitors and non-nucleoside reverse
transcriptase inhibitors;
- study the effects of AVR118 in mitigating the toxic effects of
drugs used in the chemotherapy of cancers; and
- assess the direct inhibitory and therapeutic effects of AVR118
on neoplasias, including lymphomas and lymphocytic leukemia.
In November 2002 we began testing injectable AVR118 in the following
clinical trials in Israel:
- PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that AVR118 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 AVR118 may prove to be an important "enabler"
drug in the treatment of AIDS.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
30
- PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of AVR118. 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 AVR118 with the FDA.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain.
Because of our limited personnel, we believe it to be in our best
interests to focus our clinical efforts on our one ongoing Phase I/Phase II
open-label dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. The
primary indication of the trial is the treatment of cachexia. Out of 30 total
patients contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required under the
study. Results from the first 15 patients showed improvement in appetite, weight
gain or stability, and enhanced quality of life in all the patients. None of the
15 patients reported any significant side effects from AVR118 therapy.
We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon funds available for research and
development and the availability of patients meeting the prescribed protocol and
the ability of Israel and its hospitals to meet the requirements of the
protocol. From inception of all the clinical studies in Israel we have expended
approximately $1,550,000. The cost to complete the Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS for the additional 15 patients (for a
total of 30) is estimated to be $300,000.
Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR 118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR 118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR 118 in mice with an induced immune
skin reaction. AVR 118 did not inhibit the appearance of this immune skin
reaction.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
MATERIAL AGREEMENTS
In September 2002 we entered into an agreement 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
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. The agreement terminates upon receipt and approval of the final
report required under the Agreement, and upon such termination we retain all
rights to the research performed under the agreement. Total costs incurred in
connection with EnviroGene's services are expected to be $1,551,000, of which
approximately $1,323,000 has been expensed and approximately $875,000 has been
paid from inception through September 30, 2003. Approximately $100,000 and
$697,000 has been expensed during the three and nine months ended September 30,
2003. If all three clinical studies in Israel were concluded, the additional
cost under this contract is estimated to be approximately $228,000. We cannot at
this time determine the financial impact of reducing the number of trials under
this contract.
In October 2002 we entered into an agreement with Quintiles Israel Ltd.
to act as the auditor and monitor of the clinical studies. The agreement
terminates upon completion of the services unless terminated earlier by either
party upon prior written notice or upon a material breach and a failure to cure,
and upon such termination we retain all rights to the research performed under
the agreement. We have expensed $126,495 since inception of the contract through
September 30, 2003. If all three clinical studies in Israel were concluded, the
additional cost under this contract would be $126,505. We cannot at this time
determine the financial impact of reducing the number of trials under this
contract.
In November 2002 we entered into an agreement with Kaplan Medical
Center in Israel to act as the center for the Phase I/ Phase II study using
AVR118 for cachectic patients with AIDS. The agreement terminates upon
conclusion of the
31
study, or upon prior written notice, and upon such termination we retain all
rights to the research performed under the agreement. To date, 15 patients have
been enrolled in the study out of 30 patients contemplated under the study
protocol, and the estimated completion date for the study with 30 patients is
the second quarter of 2004. We have expensed $51,750 since inception of the
contract through September 30, 2003, and an additional $34,500 was expensed in
October 2003.
The cost to complete the Phase I/II study in Israel of AVR118 for
cachectic patients with AIDS for the additional 15 patients (for a total of 30)
is estimated to be $300,000.
In July 2003 our agreement entered in July 2002 with the Weizmann
Institute of Science and Yeda, its developmental arm in Israel, to conduct
research on the effects of AVR118 on the immune system expired in accordance
with its terms, and upon such termination we retained all rights to the research
performed under the agreement. Total costs incurred in connection with this
research are expected to be $138,000. Since inception to date, we have expensed
$130,000 and paid $90,000 in connection with this agreement. Final payment has
not been made pending receipt, review and approval of the final report.
Our 12-month agreement formalized in April 2001 with the Selikoff
Center in Israel to develop clinical trials in Israel using AVR118 has
concluded. The amount paid under the agreement was $242,000.
Whether we will be able to proceed with Phase 2 clinical trials of
AVR118 for topical therapy of genital warts and clinical trials in Israel for
injectable AVR118 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 AVR118. We may not be
able to raise the funds we currently need to begin or complete the topical Phase
2 for AVR118 or to continue the clinical trials for injectable AVR118 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.
The studies being conducted in Israel are subject to risks associated
with the political, economic and military conditions affecting Israel and the
Middle East, and recent world events, including terrorism and war, have made it
difficult to predict whether or in what manner these problems will be resolved.
Our studies detailing the results of the research and testing being
conducted in Israel may not positively impact the FDA's decision to approve a
new IND for injectable AVR118 or approve the marketing, sales or distribution of
AVR118 within the United States, and as a result may not improve our chances of
gaining approval for the marketing, sales or distribution of AVR118 anywhere in
the world. We currently do not have the resources to engage in further testing,
and we cannot provide assurances that we will acquire such financial resources
to continue or complete the studies, or, if we acquire such resources, that we
will do so on favorable terms.
SCIENTIFIC ADVISORY BOARD
In January 2002, we formed a Scientific Advisory Board currently
consisting people with experience in oncology, hematology, women's health and
related fields for the purpose of having access to additional expertise and
counsel to support the development of AVR118 in connection with the rigorous
clinical trials required by the FDA's regulatory approval process. The current
members of the Scientific Advisory Board are:
DR. GEORGE P. CANELLOS is the William Rosenberg Professor of Medicine
at Harvard Medical School where he served as Chief of the Division of Medical
Oncology for 20 years at the Dana-Farber Cancer Institute, and was Acting
Clinical Director of the National Cancer Institute (NCI) and a member of the
FDA's Oncologic Drugs Advisory Committee. Dr. Canellos was also a past president
of the American Society for Clinical Oncology and a former Editor-in-Chief of
the Journal of Clinical Oncology. Dr. Canellos currently serves as Medical
Director for Network Development, Dana-Farber/Partners CancerCare and is on the
senior staff at the Brigham and Women's Hospital, Dana-Farber Cancer Institute
and Massachusetts General Hospital.
DR. MICHAEL HARRIS is Director of the Tomorrows Children's Institute
for Cancer and Blood Disorders, Chief of Pediatric Hematology-Oncology at the
Hackensack University Medical Center and Professor of Pediatrics at the
UMDNJ-New Jersey Medical School. Additionally, Dr. Harris is a member of the
National Cancer Institute's Special Review Committee where he is responsible for
the review of Community Clinical Oncology Programs, and Associate Editor for
Pediatric Oncology for the scientific journal Cancer Investigation. Dr. Harris
previously served as Chief of Pediatric Hematology-Oncology at The Mt. Sinai
Medical Center in New York City.
DR. JAMES D'OLIMPIO is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also Associate
Professor of Medical Oncology at New York University's School of Medicine. His
32
research has focused on improving the quality of life of cancer patients,
especially by reversing the wasting process (cachexia) associated with cancer,
and in cancer treatment related fatigue syndrome. In November 2003, we retained
Dr. D'Olimpio as our "spokesperson at large.'' In this capacity, Dr. D'Olimpio
will be paid on an hourly basis to provide such services as requested, including
representing Advanced Viral at industry-wide and scientific conferences.
DR. HOWARD YOUNG currently serves on the staff of a cancer research
institute. He has been elected to serve as the Vice President of the
International Society for Interferon and Cytokine Research in 2002 and 2003 and
as President in 2004 and 2005. During 2001, Dr. Young was elected a fellow to
the American Academy of Microbiology. Dr. Young served as Chair of the
Immunology Division of the American Society for Microbiology from 1996-1997. Dr.
Young has authored/co-authored over 200 research papers in the field of cellular
and molecular immunology. Dr. Young is a member of the editorial boards of the
"Journal of Interferon and Cytokine Research," "The Journal of Biological
Chemistry, "Genes and Immunity," and served on the editorial board of "The
Journal of Immunology" from 1997-2001. Dr. Young is Editor-in-Chief of the
"Newsletter of the International Society of Interferon and Cytokine Research."
DR. SIDNEY PESTKA, a recipient of the National Medal of Technology for
2001, is currently Professor and Chairman of the Department of Molecular
Genetics, Microbiology and Immunology at New Jersey's Robert Wood Johnson
Medical School of the University of Medicine and Dentistry. Previously he was
Associate Director of the Roche Institute of Molecular Biology. His work in the
development of interferons, which are used clinically for treating a range of
diseases, including hepatitis B, multiple sclerosis and hairy cell leukemia, is
the basis of several U.S. and more than 100 foreign patents. Dr. Pestka was
inducted into the New Jersey Inventor's Hall of Fame in 1993. He has also
received the Selman Waksman Award in Microbiology and the Milstein Award from
the International Society for Interferon and Cytokine Research. He has served on
the National Cancer Institute's Breast Cancer Task Force, the Basic Pharmacology
Advisory Committee of the Pharmaceutical Manufacturers Association Foundation
and is secretary, and former President, of the International Society of
Interferon Research. Dr. Pestka received his undergraduate degree in chemistry
from Princeton University in 1957 and his medical degree from the University of
Pennsylvania School of Medicine in 1961. Over the past 30 years, he has
published several books and written more than 400 research articles for
prestigious peer-reviewed scientific journals.
PATENTS
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We have eight issued U.S. patents, some covering the composition of
AVR118 and others covering various uses of the AVR118. We have nine pending U.S.
patent applications and seventeen pending foreign patent applications. In
addition, we have two issued Australian patents and one issued Chinese patent
covering several uses of AVR118. 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 technology. As patent applications in the United States
are maintained in secrecy until published or patents issue and as publication of
discoveries in the scientific or patent literature often lag behind the actual
discoveries, we cannot be certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. Furthermore, the patent positions
of biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of twenty years from the date of such
filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
our products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain marketing
exclusivity for a period of time following FDA approval of certain drug
applications, regardless of patent status, if the drug is a new chemical entity
or if new clinical studies were used to support the marketing application for
the drug. Pursuant to the FDA Modernization Act of 1997, the period of
exclusivity can be extended if the applicant performs certain studies in
pediatric patients. This marketing exclusivity prevents a third party from
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the period of time between the
filing of the NDA and FDA approval, with a
33
five year maximum patent extension. We cannot be sure that we will be able to
take advantage of either the patent term extension or marketing exclusivity
provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with AVR118. Therefore, AVR118 and any other drug candidates may give rise to
claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.
MARKETING AND SALES
Except for limited sales of AVR118 for testing and other purposes,
AVR118 is not sold commercially anywhere in the world. To date, our efforts or
the efforts of our representatives have produced no material benefits to us
regarding our ability to have AVR118 sold commercially anywhere in the world. We
have entered into exclusive distribution agreements with four separate entities
granting exclusive rights to distribute AVR118 in the countries of Canada,
China, Japan, Hong Kong, Macao, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil and Chile. Pursuant to these agreements, the distributors are
obligated to cause AVR118 to be approved for commercial sale in such countries
and upon such approval, to purchase from us certain minimum quantities of AVR118
to maintain the exclusive distribution rights. Our marketing plans for AVR118
are still dependent upon registration of AVR118 for sale in various
jurisdictions. We have made no sales under the distribution agreements other
than for testing purposes.
To date we have received no information that would lead us to believe
that we will be positioned to sell AVR118 commercially anywhere in the world. On
July 30, 2001, we submitted an IND application to the FDA to begin Phase 1
clinical trials of AVR118 as a topical treatment for genital warts caused by the
human papilloma virus (HPV) infection. In September 2001, the FDA cleared the
IND application to begin Phase 1 clinical trials. In March 2002, Advanced Viral
completed a Phase 1 trial and submitted to the FDA the results, which indicated
that AVR118 was safe and well tolerated dermatologically in all the doses
applied in the study Due to limited financial resources, we currently are unable
to pursue the Phase 2 clinical trials.
Initially we targeted our sales and marketing efforts to those
countries where Reticulose was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes simplex
and herpes zoster. Those countries included Singapore, Hong Kong, Malaysia,
Taiwan, the Philippines and Malta. Registration of AVR118 will be required in
such countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. The registration of AVR118
for sale in these countries has been frustrated due to our inability to obtain
the registration and approval to sell AVR118 in the Bahamas, the country of
origin, and a general lack of published data on the effectiveness of AVR118.
Until AVR118 is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, we will not generate any material sales of AVR118.
For the years ended December 31, 2002, 2001 and 2000 and for the nine months
ended September 30, 2003, we reported no commercial sales except limited sales
for testing purposes. AVR118 is not legally available for commercial sale
anywhere in the world, except for testing purposes. See "--Research, Development
and Testing."
34
We currently produce bulk clinical trial batches for AVR118 in our
facility in Yonkers, New York under current Good Manufacturing Procedures (cGMP)
as set forth by the FDA. The FDA has not approved AVR118 for distribution or
sale in the United States, nor has it approved our Yonkers, New York facility.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop AVR118, it will compete with numerous
existing therapies. In addition, many companies are pursuing novel drugs that
target the same diseases we are targeting with AVR118. We believe that a
significant number of drugs are currently under development and will become
available in the future for the treatment of HIV, HPV, other viruses, cachexia
(body wasting) and rheumatoid arthritis. We anticipate that we will face intense
and increasing competition as new products enter the market and advanced
technologies become available. Our competitors' products may be more effective,
or more effectively marketed and sold, than AVR118. Competitive products may
render AVR118 obsolete or noncompetitive before we can recover the expenses of
developing and commercializing AVR118. Furthermore, the development of a cure or
new treatment methods for the diseases we are targeting could render AVR118
noncompetitive, obsolete or uneconomical. Many of our competitors:
- have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products;
- have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products; and
- have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe AVR118 should be added to such cocktails in order to
enhance their effectiveness and mitigate the toxic effects of other drugs used
to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
Several products are currently marketed for the treatment of cachexia
(body wasting) included Megace(R) oral suspension manufactured by Bristol-Myers
Squibb and Serostim(R) (injectable human growth hormone) marketed by Serono
Laboratories Inc.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. AVR118, if approved for commercial sale by the FDA, would also
compete with surgical, chemical, and other methods of treating HPV. Products
developed by our competitors or advances in other methods of the treatment of
HPV may have a negative impact on the commercial viability of AVR118.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed Phase 3 trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for AVR118 as a treatment for rheumatoid arthritis.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for AVR118, we will face
competition based on the safety and effectiveness of AVR118, the timing and
scope of regulatory approvals, the availability of supply, marketing and sales
capability, reimbursement coverage, price, patent position and other factors.
Our competitors may develop or commercialize
35
more effective or more affordable products, or obtain more effective patent
protection, than we do. Accordingly, our competitors may commercialize products
more rapidly or effectively than we do, which could hurt our competitive
position and adversely affect our business. If and when we obtain FDA approval
for AVR118, we expect to compete primarily on the basis of product performance
and price with a number of pharmaceutical companies, both in the United States
and abroad.
EMPLOYEES
We have nine full-time employees, consisting of our Chief Scientist,
Chief Financial Officer, two employees involved in operations, one employee
responsible for quality assurance and quality control, an assistant controller,
a chief information officer and two administrative employees. Dr. Hirschman, our
Chief Scientist, and Alan V. Gallantar, our Chief Financial Officer and
Treasurer, each devote all of their business time to our day-to-day business
operations. Eli Wilner, President, interim Chief Executive Officer, Secretary
and Chairman of the Board of Directors, devotes as much time to his duties as is
reasonably necessary. Additionally, we may hire, as and when needed, and as
available, such sales and technical support staff and consultants for specific
projects on a contract basis. See "Management --Employment Contracts,
Termination of Employment and Change-in-Control Arrangements."
DESCRIPTION OF PROPERTY
We lease approximately 16,650 square feet for executive offices,
including research laboratory space and production area at 200 Corporate
Boulevard South, Yonkers, New York from an unaffiliated third party (the
"Yonkers Lease"). The term of the Yonkers Lease is five years through April 2005
and our annual rental obligation under the Yonkers Lease is approximately
$290,000.
The Bahamian manufacturing facility, which was acquired on December 16,
1987, is located in Freeport, Bahamas and consists of an approximate 29,000
square foot site containing a one-story concrete building of approximately 7,300
square feet and is equipped for all topical phases of the testing, production,
and packaging of bulk AVR118. We are currently negotiating the sale of the
Bahamian facility, after which sale we intend to manufacture AVR118 exclusively
at our facility in Yonkers, New York.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation, nor, to the
knowledge of management, is any such litigation currently threatened.
36
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 2001 and 2002, and for the first, second, third and fourth quarter
of 2003 to date. The high and low bid prices for the periods indicated reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
LOW BID HIGH BID
------- --------
First Quarter 2001 $0.285 $0.410
Second Quarter 2001 0.265 0.495
Third Quarter 2001 0.171 0.395
Fourth Quarter 2001 0.179 0.400
First Quarter 2002 0.158 0.285
Second Quarter 2002 0.096 0.300
Third Quarter 2002 0.112 0.220
Fourth Quarter 2002 0.065 0.119
First Quarter 2003 0.054 0.085
Second Quarter 2003 0.064 0.105
Third Quarter 2003 0.051 0.078
Fourth Quarter 2003 through November 13, 2003 0.058 0.15
STOCKHOLDERS
The approximate number of holders of record of our common stock as of
November 14, 2003 is 3,304, inclusive of those brokerage firms and/or clearing
houses holding shares of common stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
DIVIDEND POLICY
We have not declared or paid any dividends on our shares of common
stock. We intend to retain future earnings, if any, that may be generated from
our operations to finance our future operations and expansion and do not plan
for the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend on our
results of operations and financial position and such other factors as our board
of directors in its discretion deems relevant.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDIDTION AND RESULTS OF
OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements of Advanced Viral and the notes thereto
appearing elsewhere in this filing. Statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this prospectus that are not statements of historical or current fact constitute
"forward-looking statements."
OVERVIEW
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of September 30, 2003 we had incurred a cumulative net loss of
$53,680,991. Our ability to generate substantial operating revenue depends upon
our success in gaining FDA approval for the commercial use and distribution of
AVR118. All of our research and development efforts have been devoted to the
development of AVR118.
Conducting the clinical trials of AVR118 will require significant cash
expenditures. AVR118 may never be approved for commercial distribution by any
country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the
foreseeable future. We currently do not have sufficient funds to continue our
testing of AVR118. We are attempting to secure funds through the sale of our
securities.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain.
Because of our limited personnel, we believe it to be in our best
interests to focus our clinical efforts on our one ongoing Phase I/Phase II
open-label dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. The
primary indication of the trial is the treatment of cachexia. Out of 30 total
patients contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required under the
study. Results from the first 15 patients showed improvement in appetite, weight
gain or stability, and enhanced quality of life in all the patients. None of the
15 patients reported any significant side effects from AVR118 therapy.
We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon funds available for research and
development and the availability of patients meeting the prescribed protocol and
the ability of Israel and its hospitals to meet the requirements of the
protocol. From inception of all the clinical studies in Israel we have expended
approximately $1,550,000. The cost to complete the Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS for the additional 15 patients (for a
total of 30) is estimated to be $300,000.
38
The costs relating to the three Israeli clinical studies incurred
during 2002 and 2003 to date, as well as the estimated costs for completion, are
presented below:
COSTS
1ST Q 2ND Q 3RD Q 4TH Q THROUGH 1ST Q 2ND Q 3RD Q COST TO
COST CATEGORY 2002 2002 2002 2002 12/31/02 2003 2003 2003 TO DATE COMPLETE
------- -------- -------- -------- -------- -------- -------- ------- ---------- --------
EnviroGene -- -- $127,820 $498,018 $625,840 $298,809 $298,809 $99,603 $1,323,059 227,663
Quintiles -- -- -- $ 52,226 $ 52,226 $ 44,061 $ 15,877 $14,331 $ 126,495 126,505
Insurance Cost -- -- -- $ 3,359 $ 3,359 $ 10,076 $ 10,076 $10,076 $ 33,587 2,717
Lab Costs -- -- -- $ 500 $ 500 $ 9,227 $ 12,621 $ 9,772 $ 32,120 67,977
Yeda Research $40,000 $(40,000) $ 40,000 $ 40,000 $ 80,000 $ 40,000 -- -- $ 120,000 18,000
Kaplan AIDS-Study -- -- -- -- -- -- $ 25,875 $25,875 $ 51,750 120,750
Phase I (leukemia/
lymphoma study) -- -- -- -- -- -- -- -- -- $210,000
Phase I (solid
tumor study) -- -- -- -- -- -- -- -- -- $219,000
We currently do not have the funds to complete the Phase I/Phase II
clinical trial in Israel. Our ability to raise additional funds will depend upon
the timing and positive outcome of each portion of the clinical trial and the
ultimate date of completion of the trial. We may not be able to continue as a
going concern if we can not continue or complete this trial timely.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
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. We are
currently seeking additional financing. We anticipate that we can continue
operations through December 2003 with our current liquid assets, if none of our
outstanding options or warrants are exercised or additional securities sold.
However, there can be no assurance that these actions will result in sufficient
funds to finance operations. If we do not raise sufficient cash from external
sources to satisfy our on-going expenditures, we will be required to curtail or
suspend operations. Failure to raise additional capital and reduce certain
discretionary spending could have a material adverse effect on our operations.
This raises substantial doubt about our ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
We have incurred substantial losses since our inception, and anticipate
incurring substantial losses for the foreseeable future. We incurred net losses
of $5,347,124 for the nine months ended September 30, 2003, and $8,913,405,
$10,729,863, and $8,816,192 for the years ended December 31, 2002, 2001 and
2000, respectively. Our accumulated deficits were $53,680,991, $48,333,867 and
$39,420,462 as of as of September 30, 2003, December 31, 2002 and December 31,
2001, respectively. We had stockholders' equity (deficit) of $793,657,
$1,756,326 and $3,442,074 at September 30, 2003, December 31, 2002 and December
31, 2001, respectively.
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research Ltd. (LTD), our Bahamian subsidiary whose substantial asset is
our Bahamian manufacturing facility. The facility being sold produced topical
AVR118 which is no longer being produced by Advanced Viral. The assets of LTD
have been classified on our Balance Sheet at September 30, 2003, December 31,
2002 and 2001 as Assets held for Sale. LTD had no liabilities as of September
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 nine months ended
September 30, 2003 and for the years ended December 31, 2002, 2001 and 2000 as
Loss from Discontinued Operations.
39
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 VS.
SEPTEMBER 30, 2002
The accompanying financial statements for the three and nine months
ending September 30, 2002 have been restated to reflect changes in accounting
for warrants issued in connection with equity transactions as well as options
issued to the Board of Directors and employees (on a pro-forma basis only) and
our advisory board. The restatement resulted in income which reduced the
previously reported net loss for the three and nine months ended September 30,
2002 by approximately $415,000 and $950,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the nine months ended September 30, 2002 and was reduced by $0.01 to
($0.00) from ($0.01) for the three months ended September 30, 2002. Our deficit
accumulated during the development stage was reduced by $2,803,938 for the year
ended December 31, 2002. The restatement did not impact our net cash in
investing and financing activities and net cash used in operating activities
remained unchanged, however, certain components within operating activities
consisting of amortization of deferred interest cost, discount on warrants and
compensation expense for options and warrants, were restated for the nine months
ended September 30, 2002.
For the three and nine months ended September 30, 2003, we incurred
losses of approximately $2,102,000 and $5,347,000 vs. approximately $1,983,000
and $7,017,000 for the three and nine months ended September 30, 2002. Our
losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
decreased in the three and nine months ended September 30, 2003 to approximately
$220,000 and $1,067,000 vs. approximately $979,000 and $3,518,000 during the
three and nine months ended September 30, 2002. We have reduced our research and
development activities to include only research performed in Israel. As such,
allocations for research and development related expenses for salaries,
benefits, rent and utilities at our headquarters in Yonkers, New York, which
were included in research and development for the three and nine months ended
September 30, 2002, are recorded in general and administrative expense for the
three and nine months ended September 30, 2003, with the exception that in 2003,
Dr. Hirschman, who was our Chief Scientific Officer and our Chief Executive
Officer until August 2003, allocated approximately 30% of his time to research
and development during 2003 vs. 50% for the three and nine months ended
September 30, 2002. Therefore, approximately $25,000 and $81,000 for the three
and nine months ended September 30, 2003 vs. approximately $46,000 and $139,000
for the three and nine months ended September 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 nine months ended September
30, 2003 and 2002.
The decrease in research and development expenses primarily resulted
from:
- allocation of research and development expenditures relating
to salaries and benefits excluding Dr. Hirschman were
approximately $433,000 and $1,320,000 for the three and nine
months ended September 30, 2002 with no corresponding amounts
for the three and nine months ended September 30, 2003.
Approximately $91,000 and $253,000 for rent and utilities were
allocated to research and development expense during the three
and nine months ended September 30, 2002 with no corresponding
amounts allocated to research and development expense for the
three and nine months ended September 30, 2003;
- expenditures in connection with AVR118 research in Israel were
approximately $160,000 and $925,000 for the three and nine
months ended September 30, 2003 vs. approximately $168,000 for
the three months and nine months ended September 30, 2002. The
increase was attributable to expenses for the three and nine
months ended September 30, 2003 of approximately $100,000 and
$697,000 relating to EnviroGene (consultant), approximately
$14,000 and $74,000 relating to Quintiles Israel Ltd.
(consultant), approximately $26,000 and $52,000 relating to
Kaplan Medical Center (AIDS clinical trial site in Israel) and
approximately $0 and $40,000 relating to the Weizmann
Institute of Science (consultant). This compares to expenses
for the three and nine months ended September 30, 2002 of
approximately $128,000 relating to EnviroGene, and
approximately $40,000 relating to the Weizmann Institute of
Science (consultant);
- consulting expenses payable in connection with the preparation
and filing with the FDA of the IND for topical AVR118 were
approximately $42,000 and $1,036,000 for the three and nine
months ended September 30, 2002, compared to $0 in 2003. As of
January 2003, GloboMax LLC is no longer providing services to
or on behalf of Advanced Viral; and
40
- expenditures for laboratory supplies were approximately
$67,000 and $275,000 for the three and nine months ended
September 30, 2002. Expenditures for lab supplies of
approximately $4,000 and $20,000 for the three and nine months
ended September 30, 2003 were allocated to General and
Administrative expense. Research and Development expenses
before allocations were approximately $195,000 and $986,000
for the three and nine months ended September 30, 2003 vs.
approximately $409,000 and $1,806,000 for the three and nine
months ended September 30, 2002.
Research and development expenses before allocations decreased by
$214,000 for the three months ended September 30, 2003 compared to the three
months ended September 30, 2002. Expenses for the Israeli studies decreased by
approximately $98,000 due to lower consulting costs of approximately $16,000,
lab supplies of approximately $63,000 and university studies of approximately
$35,000. Research and development expenses before allocations were approximately
$986,000 for the nine months ended September 30, 2003 compared to approximately
$1,806,000 for the nine months ended September 30, 2002. The decrease was due
primarily to lower consulting costs of approximately $1,078,000 and laboratory
supplies of approximately $275,000 and lab processing costs of approximately
$91,000 offset by increased expenditures relating to the Israeli studies.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased for the three and nine months ended September 30, 2003 to
approximately $873,000 and $2,542,000 vs. approximately $708,000 and $2,058,000
during the three and nine months ended September 30, 2002. The increase in
general and administrative expenses primarily resulted from:
- increased professional fees of approximately $185,000 and
$689,000 for the three and nine months ended September 30,
2003 vs. approximately $109,000 and $402,000 for the three and
nine months September 30, 2002, which increase was primarily
attributable to certain legal fees for litigation (See Note 3)
which were approximately $3,000 and $302,000 for the three and
nine months ended September 30, 2003 vs. approximately $0 and
$7,000 for the three and nine months September 30, 2002;
- increased payroll and related expenses of approximately
$259,000 and $797,000 for the three and nine months ended
September 30, 2003 vs. approximately $238,000 and $687,000 for
the three and nine months ended September 30, 2002, which
increase is attributable to the allocation of staff expenses
from research and development functions. For the three and
nine months ended September 30, 2003, salaries and benefits
were recorded as general and administrative expense with the
exception of Dr. Hirschman, who was our Chief Scientific
Officer and our Chief Executive Officer until August 2003, who
allocated approximately 30% of his time to research and
development of our clinical trials in 2003 vs. 50% for the
three and nine months ended September 30, 2002. Approximately
$58,000 and $185,000 for the three and nine months ended
September 30, 2003 vs. approximately $46,000 and $139,000 for
the three and nine months ended September 30, 2002 of his
compensation has been allocated to general and administrative
expense. Payroll and related expenses for the three and nine
months ended September 30, 2002 before allocation to research
and development expense was approximately $717,000 and
$2,146,000. Before allocation to general and administrative
expense, payroll and related expenses were approximately
$284,000 and $877,000 for the three and nine months ended
September 30, 2003 due to a reduction of personnel during
November 2002 from 33 to 10 employees;
- increased rent and utility expenses of approximately $136,000
and $347,000 for the three and nine months ended September 30,
2003 vs. $22,000 and $60,000 for the three and nine months
ended September 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 nine months ended September 30, 2003, all rent
and utilities expenses were recorded as general and
administrative expense. Rent and utility expenses for the
three and nine months ended September 30, 2002 before
allocation to research and development expense was
approximately $113,000 and $313,000, respectively.
General and administrative expenses before allocations decreased to
approximately $899,000 and $2,623,000 for the three and nine months ended
September 30, 2003 vs. approximately $1,278,000 and $3,770,000 for the three and
nine months ended September 30, 2002. The decrease is primarily attributable to
a reduction in staff from 33 to 10 employees during November 2002.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. Compensation
expense was approximately $20,000 and $74,000 for the three and nine months
ended September 30, 2003 vs. $(77,000) and $489,000 for
41
the three and nine months ended September 30, 2002, which amounts are based on
the fair value of options using the Black-Scholes Pricing Model. During May
2003, we issued an option to a non-employee for services with a fair value of
approximately $4,000 using the Black-Scholes Pricing Model. In addition, we had
compensation expense of approximately $20,000 and $70,000 for the three and nine
months ended September 30, 2003 representing the fair value of options issued to
advisory board members using the Black-Scholes Pricing Model. For the three
months ended September 30, 2002, we revised the Black-Scholes valuation of
options granted to members of our advisory board by $(77,000). For the nine
months ended September 30, 2002 we extended the exercise date of a
non-employee's option, $178,000, granted options to members of our advisory
board, $120,000, and issued warrants to an outside consultant, Harbor View
Group, Inc., $191,000.
DEPRECIATION EXPENSE. Depreciation expense decreased to approximately
$228,000 and $703,000 for the three months and nine months ended September 30,
2003 vs. $254,000 and $713,000 for the three and nine months ended September 30,
2002, for assets acquired during 2002 which were fully depreciated in 2003.
INTEREST INCOME (EXPENSE). Interest income decreased to approximately
$2,800 and $11,000 for the three and nine months ended September 30, 2003 vs.
approximately $6,500 and $11,000 for the three months nine months ended
September 30, 2002 due to fluctuating cash balances invested in money market
accounts.
Our losses during the three and nine months ended September 30, 2003
are also due to increased interest expense of approximately $757,000 and
$949,000 vs. approximately $84,000 and $121,000 for the three and nine months
ended September 30, 2002. Included in the interest expense are:
- the increase in the beneficial conversion feature on certain
convertible debentures of approximately $329,000 and $417,000
for the three and nine months ended September 30, 2003 vs.
approximately $45,000 and $58,000 for the three and nine
months ended September 30, 2002. This increase was due to the
issuance of a $1,000,000 convertible debenture during April
2003;
- increase interest expense associated with certain convertible
debentures of approximately $37,000 and $74,000 for the three
and nine months ended September 30, 2003 vs. approximately
$20,000 and $22,000 for the three and nine months ended
September 30, 2002;
- amortization of discount on certain warrants increased
approximately $310,000 and approximately $328,000 for the
three and nine months ended September 30, 2003 vs. $0 for the
three months and nine months ended September 30, 2002; and
- amortization of loan costs increased approximately $75,000 and
$116,000 for the three and nine months ended September 30,
2003 vs. $13,000 and $21,000 for the three and nine months
ended September 30, 2002.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the three and nine months ended September 30, 2003 were approximately
$(2,096,000) and $(5,325,000) vs. approximately $(1,941,000) and $(6,888,000)
for the three and nine months ended September 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.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the three and nine months ended September 30, 2003 were approximately
$(6,000) and $(23,000) vs. approximately $(42,000) and $(129,000) for the three
and nine months ended September 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 facility being sold produced topical
AVR118 which is no longer being produced by Advanced Viral. The assets of AVR
Ltd. have been classified on our Consolidated Balance Sheet at September 30,
2003 and December 31, 2002 as Assets held for Sale. AVR Ltd. had no liabilities
as of September 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
nine months ended September 30, 2003 and 2002 as Loss from Discontinued
Operations.
REVENUES. We had no revenues for the three months and nine months ended
September 30, 2003 or September 30, 2002.
42
In November 2002, we reduced our staff from 33 to 10 employees. Of the
23 terminated employees, 18 were directly involved in our research and
development efforts and 5 were performing administrative functions.
Specifically, the following positions were eliminated:
POSITION ELIMINATED CURRENT EMPLOYEE RESPONSIBILITY
------------------- -------------------------------
VP drug development Chief Scientist
VP QA, QC .Mfg Manager of Research and Quality
QC Manager Manager of Research and Quality
Research Assistants (10) Scientist
Group Leader No longer necessary due to staff reduction
Scientists (4) Scientist
UNIX administrator Director of MIS
Purchasing agent Asst. Controller
Secretaries (3) No longer necessary due to staff reduction
We believe we can sustain operations to carry out the research and
development project in Israel with our current staff of 10 employees as follows:
Interim Chief Executive Officer
Chief Financial Officer
Chief Scientist
Asst. Controller
Director of MIS
Manager of Research and Quality
Manager of Manufacturing
Receptionist
Office Manager
Scientist
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2001
The accompanying financial statements for the years ended December 31,
2002, 2001 and 2000 have been restated to reflect changes in accounting for
warrants issued in connection with equity transactions as well as options
issued to the Board of Directors and employees (on a pro-forma basis only) and
our advisory board. The restatement resulted in income which reduced the
previously reported net loss for 2002, 2001 and 2000 by approximately
$1,429,000, $986,000, and $538,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. For the year ended December
31, 2000, the net loss per share from operations was reduced by $0.01 to ($0.02)
from ($0.03). Our deficit accumulated during the development stage was reduced
by $2,803,938, $1,375,008, and $389,303 at December 31, 2002, 2001 and 2000,
respectively. The restatement did not impact our net cash in investing and
financing activities and net cash used in operating activities remained
unchanged However, certain components within operating activities consisting of
amortization of deferred interest cost, discount on warrants and compensation
expense for options and warrants, were restated.
During the years ended December 31, 2002 and 2001 we incurred losses
from continuing operations of approximately $8,712,000 and $10,471,000,
respectively. Our losses for the years ended December 31, 2002 and 2001 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $2,654,000 and $4,063,000 in 2002 and 2001,
respectively. General and administrative expenses decreased by approximately
$1,409,000 in 2002 compared to 2001, resulting primarily from:
- decreased payroll and related expenses (approximately $866,000
in 2002 compared to increases of $1,039,000 in 2001). The
decrease in 2002 was primarily attributable to a reduction in
personnel from 33 to 10 employees as a cost cutting measure;
43
- increased insurance costs (approximately $564,000 in 2002
compared to $412,000 in 2001) representing increased premiums
for employee medical insurance and additional corporate
liability insurance including directors and officers liability
coverage; and
- decreased professional fees (approximately $501,000 in 2002
compared to $1,431,000 in 2001); and
- decreased consulting fees (approximately $34,000 in 2002
compared to $212,000 in 2001). This decrease is primarily due
to lower outside computer consultant costs; and
- decreased recruiting expenses (approximately $7,000 in 2002
compared to $135,000 in 2001). The 2001 expense was for the
hiring of new employees.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. Compensation
expense was approximately $476,000 in 2002, compared to $691,000 in 2001. These
amounts are the result of the calculation of the fair value of options, using
the Black-Scholes Pricing Model, resulting from extending the exercise date of
various non-employee options outstanding.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $4,440,000 in 2002, compared to $5,151,000 in 2001. The decrease
from 2001 to 2002 resulted primarily from research expenses (approximately
$1,778,000) relating to the GloboMax agreement in connection with the
preparation of our first IND filing and offset by an increase of approximately
$749,000 for research expenditures relating to research and testing of AVR118 in
Israel. The approximate costs of rent, personnel, operating costs and laboratory
supplies associated with research and development activities at the Yonkers
facility for the years ended 2002 and 2001, which were charged to research and
development expense, were $2,467,000 and $2,230,000, respectively.
DEPRECIATION EXPENSE. Depreciation expense was approximately $978,000
in 2002 compared to $511,000 in 2001. In addition, leasehold improvements were
made to the laboratory and production areas during 2002 and 2001. The increase
in 2002 over 2001 resulted from equipment and leasehold improvements acquired
during 2002 and full year's depreciation expense recorded in 2002 for 2001
additions.
INTEREST EXPENSE. Interest expense for the years ended 2002 and 2001
was approximately $(192,000) and $117,000, respectively. Included in interest
expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $89,000 and $0 for the years ended
2002 and 2001, respectively;
- interest expense associated with certain convertible
debentures of approximately $43,000 and $0 for the years ended
2002 and 2001, respectively;
- amortization of loan costs of approximately $34,000 and
$15,000 for the years ended 2002 and 2001, respectively;
- additional financing costs related to effective date of
certain registration statements of approximately $286,000 in
1999 (of which approximately $156,000 was reversed in 2001).
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and Advanced Viral.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the years ended 2002 and 2001 was approximately $8,712,000 and $10,471,000,
respectively. The decrease from 2002 to 2001 resulted primarily from a reduction
in general and administrative expenses due to a reduction in legal fees due to
the settlement of litigation during 2001 and a reduction of personnel during
2002 from 33 to 10 employees.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the years ended 2002 and 2001 was approximately $201,000 and $259,000,
respectively, relating to losses from our 99% owned subsidiary, Advance Viral
Research Ltd.
44
REVENUES. There were approximately $0 and $18,000 in sales revenue in
2002 and 2001, respectively. All sales revenue resulted from purchases of AVR118
for testing purposes. Interest income was approximately $28,000 and $114,000 in
2002 and 2001, respectively.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2000
During the years ended December 31, 2001 and 2000 we incurred losses
from continuing operations of approximately $10,471,000 and $8,592,000,
respectively. Our losses for the years ended December 31, 2001 and 2000 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $4,063,000 and $2,414,000 in 2001 and 2000,
respectively. General and administrative expenses increased by $1,649,000 in
2001 compared to 2000, resulting primarily from:
- increased payroll and related expenses (increases of
$1,039,000 in 2001 and $717,000 in 2000). The increase in 2001
and 2000 was primarily attributable to increased employee and
officer salaries and the addition of two vice presidents for
drug development and quality assurance in 2001;
- increased insurance costs (approximately $412,000 in 2001 and
$299,000 in 2000) representing increased premiums for employee
medical insurance and additional corporate liability insurance
including directors and officers liability coverage; and
- increased professional fees (approximately $1,431,000 in 2001
and $385,000 in 2000). The increase in 2001 is primarily
attributable to certain legal proceedings the cost of which
was approximately $953,000 in 2001; and
- decreased consulting fees (approximately $212,000 in 2001 and
$305,000 in 2000). This decrease is primarily due to lower
outside computer consultant costs; and
- increased recruiting expenses (approximately $135,000 in 2001
compared to $12,000 in 2000). The 2001 expense was for the
hiring of new employees.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. Compensation
expense was approximately $691,000 and $1,902,000 in 2001 and 2000,
respectively. These amounts are the result of the calculation of the fair value
of options, using the Black-Scholes Pricing Model, resulting from extending the
exercise date of various non-employee options outstanding.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $5,151,000 and $3,193,000 in 2001 and 2000, respectively. The
increase from 2000 to 2001 resulted primarily from research expenses related to
the GloboMax agreement of approximately $1,417,000. The approximate costs of
rent, personnel, operating costs and laboratory supplies associated with
research and development activities at the Yonkers facility for the years ended
2001 and 2000, which were charged to research and development expense, were
$2,230,000 and $1,696,000, respectively.
DEPRECIATION EXPENSE. Depreciation expense was approximately $511,000
and $346,000 in 2001 and 2000, respectively. The increase from 2000 to 2001
resulted primarily from the acquisition of furniture, fixtures and equipment for
the Yonkers office, laboratory and production facility. In addition, leasehold
improvements were made to the laboratory and production areas during 2001 and
2000.
INTEREST EXPENSE. Interest expense for the years ended 2001 and 2000
was approximately $117,000 and ($908,000), respectively. Included in interest
expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $0, and $395,000 for the years
ended 2001 and 2000, respectively;
- interest expense associated with certain convertible
debentures of approximately $0 and $76,000 for the years ended
2001 and 2000, respectively;
45
- amortization of discount on certain warrants of approximately
$0 and $64,000 for the years ended 2001 and 2000,
respectively;
- amortization of loan costs of approximately $15,000 and
$106,000 for the years ended 2001 and 2000, respectively;
- fees of approximately $265,000 in connection with the November
2000 securities purchase agreement with various investors;
- additional financing costs related to the effective date of
certain registration statements of approximately $286,000 in
1999 (of which approximately $156,000 was reversed in 2001).
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and Advanced Viral.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the years ended 2001 and 2000 was approximately $10,471,000 and $8,592,000,
respectively.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the years ended 2001 and 2000 was approximately $259,000 and $224,000,
respectively, relating to losses from our 99% owned subsidiary, Advance Viral
Research Ltd.
REVENUES. There were approximately $18,000 in sales revenue in 2001,
compared to $8,000 in sales revenues for 2000. All sales revenue resulted from
purchases of AVR118 for testing purposes. Interest income was approximately
$114,000 in 2001, compared to approximately $162,000 in 2000.
LIQUIDITY
AS OF SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
As of September 30, 2003, we had current assets of approximately
$1,199,000 compared to approximately As of September 30, 2003, we had current
assets of approximately $1,199,000 compared to approximately $1,770,000 as of
December 31, 2002. We had total assets of approximately $4,006,000 and
$4,946,000 at September 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
September 30, 2003, we had current liabilities of approximately $896,000
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 nine months ended September 30, 2003, we used cash of
approximately $3,419,000 for operating activities, as compared to approximately
$6,779,000 during the nine months ended September 30, 2002. During the nine
months ended September 30, 2003, our expenses included:
- approximately $877,,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $799,000 for other professional and consulting
fees, including $302,000 for legal fees relating to settled
litigation. (See "Legal Proceedings");
- approximately $312,000 for insurance costs;
- approximately $347,000 for rent and utilities for our Yonkers
facility; and
- approximately $1,067,000 for expenditures for AVR118 research
in Israel.
During the nine months ended September 30, 2003, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock issued of approximately $1,853,000, the issuance of convertible debentures
of $2,187,000, offset by the payment under litigation settlement $1,051,000 and
principal payments of $112,000 on equipment
46
obligations. During the nine months ended September 30, 2003, cash flow used by
investing activities reflected the sale of an automobile located at our facility
in the Bahamas.
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 with
Cornell Capital. Pursuant to the Equity Line of Credit, we may, at our
discretion, periodically sell to Cornell Capital shares of common stock for a
total purchase price of up to $50.0 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay 100% of the
lowest closing bid price of our common stock on the OTC Bulletin Board or other
principal market on which our common stock is traded for the five trading days
immediately following the notice date. Cornell Capital is a private limited
partnership whose business operations are conducted through its general partner,
Yorkville Advisors, LLC. Further, Cornell Capital will retain 5% of each advance
under the Equity Line of Credit. Our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
minimum acceptable price, set by us on the advance notice date, which may not be
set any closer than 7.5% below the closing bid price of our common stock the day
prior to the notice date. For each day during the five days after the notice
date that the closing bid price for our common stock is below the Minimum
Acceptable Price, the amount of the advance shall decrease by twenty percent
(20%) of the amount requested.
In addition, we engaged Katalyst Securities LLC, an unaffiliated
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services as placement agent, Katalyst Securities LLC received
107,527 shares of our common stock, which was valued at $10,000. Katalyst
Securities may be deemed to be an underwriter in connection with the sale of
common stock under the Equity Line of Credit. The effectiveness of the sale of
the shares under the Equity Line of Credit is conditioned upon us registering
the shares of common stock with the Securities and Exchange Commission. The
costs associated with this registration statement will be borne by us.
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.
We have no off-balance sheet transactions.
The following table shows total contractual payment obligations as of
September 30, 2003.
TOTAL CONTRACTUAL OBLIGATIONS TABLE:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- --------- --------- --------- ---------
Long-Term Debt Obligations $2,316,223 $1,518,469 $ 0 $797,754 $0
Capital Lease Obligations $ 18,389 $ 18,389 $ 0 $ 0 $0
Operating Lease Obligations $ 482,000 $ 299,000 $183,000 $ 0 $0
Purchase Obligations $ 0 $ 0 $ 0 $ 0 $0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP $ 0 $ 0 $ 0 $ 0 $0
---------- ---------- -------- -------- --
Total $2,816,612 $1,835,858 $183,000 $797,754 $0
---------- ---------- -------- -------- --
47
AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001
As of December 31, 2002, we had current assets of approximately
$1,770,000, compared to approximately $1,752,000 at December 31, 2001. We had
total assets of approximately $4,946,000 and $5,449,000 at December 31, 2002 and
2001, respectively. Total asset levels did not change materially but total
assets declined due to the increase in fixed asset depreciation for property and
equipment acquisitions.
During 2002, we used cash of approximately $8,701,000 for operating
activities, as compared to approximately $8,577,000 in 2001. During 2002, we
incurred expenses of:
- approximately $2,809,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $904,000 in consulting fees to GloboMax and its
subcontractors;
- approximately $395,000 for rent and utilities for our Yonkers
facility;
- approximately $295,000 for laboratory supplies;
- approximately $986,000 in expenditures on AVR118 research in
Israel;
- approximately $573,000 for insurance costs and approximately
$501,000 for other professional fees.
During the year ended December 31, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $7,114,000 and $2,000,000 in convertible debentures,
offset by principal payments of approximately $169,000 on equipment obligations.
This compares to the year ended December 31, 2001 where funds of approximately
$5,783,000 were provided by the sale of common stock offset by principal
payments of approximately $80,000 on equipment obligations.
During the year ended December 31, 2002, cash flow used by investing
activities were used for expenditures of approximately $268,000 for leasehold
improvements and research and laboratory equipment at our Yonkers, New York
facility.
The following table shows total contractual payment obligations as of
December 31, 2002.
TOTAL CONTRACTUAL OBLIGATIONS TABLE:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----- --------- --------- --------- ---------
Long-Term Debt Obligations $1,688,275 $ 25,165 $1,663,110 $0 $0
Capital Lease Obligations $ 110,553 $104,719 $ 5,834 $0 $0
Operating Lease Obligations $ 703,000 $299,000 $ 404,000 $0 $0
Purchase Obligations $ 0 $ 0 $ 0 $0 $0
Other Long-Term Liabilities
Reflected on the
Registrant's Balance Sheet
under GAAP $ 0 $ 0 $ 0 $0 $0
---------- -------- ---------- -- --
Total $2,501,828 $428,884 $2,072,944 $0 $0
---------- -------- ---------- -- --
48
CAPITAL RESOURCES
We have 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/
CONVERSION
GROSS CONVERTIBLE/ PRICE/ EXPIRATION
DATE ISSUED PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE DATE
- ----------- -------- --------------- ---------------- --------------- ----------
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 n/a
share
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 $562,000 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. 15,625,000(6) shares 4/2008
Warrants 15,000,000 shares $0.091 per share 4/2008(7)
June 2003 $125,000 Common stock 1,562,500 shares $0.08 per share n/a
Warrants 1,109,375 shares $0.12 per share 6/2008
July 2003 $1,500,000 Convertible debentures 18,750,000 shares (8) 7/2008
Sep 2003 $1,081,000 Common stock 21,620,000 shares $0.05 per share n/a
Warrants 13,188,200 shares $0.10 per share 9/2008
- ---------------
(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 $790,748 has been paid to date, and of which $257,143
shall be paid in four 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.
49
On March 31, 2000, we filed a shelf registration statement on Form S-3
with the SEC relating to the offering of shares of our common stock to be used
in connection with financings. As of September 30, 2003, we had 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
unaffiliated accredited 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. With certain
exceptions, the warrant exercise price and the number of shares of common stock
issuable upon exercise of such warrants shall be adjusted from time to time upon
(i) the issuance of common stock without consideration, (ii) a stock split,
reverse stock split or a stock dividend; (iii) a reorganization or
reclassification; or (iv) a liquidation, dissolution or distribution. 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 James Dicke II, a
former director, Peter Lunder, a former advisory board member, and O. Frank
Rushing and Justine Simoni an aggregate of $2,000,000 principal amount of our 5%
convertible debentures at par in several private placements pursuant to Section
4(2) of the Securities Act. 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 September 30, 2003, principal and
interest on the debentures in the amount of $1,127,904 had been converted into
10,027,255 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 the
investors listed below 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 a private offering transaction pursuant to Section 4(2) of the
Securities Act.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
------------- -------------- ------ --------
SDS Merchant Fund, LP $ 900,000 6,428,571 4,821,429
Stonestreet Limited Partnership 750,000 5,357,143 4,017,857
01144 Ltd. 100,000 714,286 535,714
Bristol Investment Fund Ltd. 400,000 2,857,143 2,142,857
Alpha Capital 500,000 3,571,429 2,678,571
Xmark Fund, Ltd. 154,000 1,100,000 825,000
Xmark Fund, L.P. 56,000 400,000 300,000
RIG MicroCap Fund LP 100,000 714,286 535,714
Richard Melnick 50,000 357,143 267,857
$3,010,000 21,500,000 16,125,000
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
50
preceding the applicable determination date is $0.14 or greater. In December
2002 we filed suit against certain of the investors in connection with the
warrant repricing provisions of the agreement, and during May 2003, we entered
into settlement and mutual release agreements with the parties involved in both
the Florida and New York litigation, which, among other things, dismissed the
lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with
prejudice. Pursuant to the agreements, in exchange 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 $790,748 has been paid to date, and of
which $257,143 shall be paid in four 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 June 2003, 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 pursuant to securities purchase agreements with the
purchasers listed below, in the following amounts in a private offering
transaction pursuant to Section 4(2) of the Securities Act. In connection with
the agreement, we paid finders' fees to Harbor View Group, AVIX, Inc. and Robert
Nowinski consisting of an aggregate (i) approximately $98,095 and (ii) warrants
to purchase 1,246,500 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
hereof, none of such warrants had been exercised.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
------------- -------------- ------ --------
Frank Vigliarolo $ 50,000 625,000 375,000
Keith Leonard $ 50,000 625,000 375,000
Edward & Linda Gorkes $ 200,000 2,500,000 1,500,000
Russell Kuhn (Parkside) $ 100,000 1,250,000 750,000
Larry Pomerantz $ 50,000 625,000 375,000
Michael Berman $ 50,000 625,000 375,000
Ira Kent $ 8,000 100,000 60,000
Frederick Cohen $ 8,000 100,000 60,000
Gerald Director $ 8,000 100,000 60,000
Allen & Barbara Ross $ 8,000 100,000 60,000
Alan Halpert $ 16,000 200,000 120,000
Leonard Cohen $ 24,000 300,000 180,000
Barry L. Johnston TR $ 24,000 300,000 180,000
Todd & Lynda Cohen $ 40,000 500,000 300,000
Henry E. & Dixie Cartwright $ 40,000 500,000 300,000
Benjamin H. Kirsch $ 150,000 1,875,000 1,125,000
Gene Cartwright $ 60,000 750,000 450,000
Beth & Elliot Bauer $ 74,000 925,000 555,000
Gerald Smallberg $ 16,000 200,000 120,000
Leonard Cohen $ 32,000 400,000 240,000
David Sass $ 50,000 625,000 375,000
Beth and Elliot Bauer $ 42,000 525,000 315,000
Larry Pomerantz $ 50,000 625,000 375,000
Frank Smith $ 25,000 312,500 187,500
Russell & Jean Kuhn $ 25,000 312,500 187,500
Charles & Janet Ernst $ 25,000 312,500 187,500
Dorothy Christofides $ 32,000 400,000 240,000
Edward & Linda Gorkes $ 50,000 625,000 375,000
Pomerantz Trust $ 30,000 375,000 225,000
Russell Kuhn $ 50,000 625,000 375,000
Frederick Lutz $ 25,000 312,500 187,500
Dean Skillman $ 50,000 625,000 375,000
Harbor View Group $ 25,000 312,500 187,500
Phillip Brennan $ 25,000 312,500 187,500
Eric Goldstein $ 12,500 156,250 93,750
Michael Rapf $ 12,500 156,250 93,750
--------- ---------- ----------
TOTAL $1,812,000 22,650,000 13,590,000
51
On April 11, 2003 pursuant to a securities purchase agreement with
James F. Dicke II, a former member of our Board of Directors, we sold 3,125,000
shares of common stock and warrants to purchase 1,875,000 shares of common stock
at an exercise price of $0.12 per share through April 2007, for an aggregate
purchase price of $250,000 in a private offering transaction pursuant to Section
4(2) of the Securities Act.
On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section 4(2) of the
Securities Act, we sold 312,500 shares of common stock and warrants to purchase
187,500 shares of common stock at an exercise price of $0.12 per share through
April 2007, for an aggregate purchase price of $25,000. In connection with the
transaction, we paid a finders' fee to Harbor View Group consisting of warrants
to purchase 15,625 shares of our common stock at an exercise price per share of
$0.12 until April 2004.
On April 28, 2003 we entered into a securities purchase agreement with
Cornell Capital, in a private offering transaction pursuant to Section 4(2) of
the Securities Act, to sell up to $2,500,000 of our 5% convertible debentures,
due April 28, 2008, $1,000,000 of which was purchased on April 28, 2003;
$500,000 of which was purchased on July 18, 2003; and $1,000,000 of which will
be purchased within 20 business days from the date the registration statement is
declared effective by the SEC. Interest is payable in cash or common stock at
the option of Cornell. Pursuant to the agreement, Cornell Capital received a 10%
discount to the purchase price of the convertible debentures purchased , 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. Pursuant to the terms of the agreement, commencing July 27, 2003, Cornell
Capital may convert the debenture plus accrued interest, (which may be taken at
Cornell Capital'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. Advanced Viral has redemption rights. If Advanced Viral
exercises certain of these redemption rights, Advanced Viral may redeem a
portion or the entire outstanding debenture at a price equal to 115% of the
amount redeemed plus accrued interest and Cornell Capital 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. In addition, in connection with the
securities purchase agreement, we issued to Cornell Capital a warrant to
purchase 15,000,000 shares of our common stock exercisable for 5 years at an
exercise price of $0.091. The warrant is not exercisable prior to October 28,
2003. As of September 30, 2003, principal on the debentures in the amount of
$600,000 had been converted into 14,150,943 shares of common stock. On November
6, 2003, Cornell converted $600,000 principal amount of the convertible
debentures into 12,500,000 shares of common stock at a conversion price of
$0.048 per share.
On April 28, 2003, we entered into an Equity Line of Credit Agreement
with Cornell in a private offering transaction pursuant to Section 4(2) of the
Securities Act. 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.
For its services as placement agent, Katalyst Securities LLC received 107,527
shares of our common stock, which was valued at $10,000. Katalyst Securities may
be deemed to be an underwriter in connection with the sale of common stock under
the Equity Line of Credit.
On July 18, 2003 we entered into an additional securities purchase
agreement with Cornell Capital, in a private offering transaction pursuant to
Section 4(2) of the Securities Act, whereby Cornell Capital purchased $1,000,000
of our 5% secured convertible debentures, due July 17, 2008. Pursuant to the
agreement, Cornell Capital received a 10% discount to the purchase price of the
convertible debentures purchased. The convertible debentures are secured by the
assets of Advanced Viral until 50 days after the effectiveness of the
registration statement of which this prospectus is a part. Pursuant to the terms
of the agreement, commencing October 18, 2003, Cornell Capital may convert the
debenture plus accrued interest, (which
52
may be taken at Cornell Capital's option in cash or common stock), in shares of
our common stock at a conversion price equal to the lesser of (a) $0.08 or (b)
80% of the lowest closing bid price of our common stock for the four trading
days immediately preceding the conversion date. No more than $600,000 may be
converted in any thirty-day period. Subject to certain exceptions, at our
option, we may redeem a portion or the entire outstanding debenture at a price
equal to 115% of the amount redeemed plus accrued interest and Cornell Capital
will receive warrants 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.
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 21,620,000 shares of our common stock and warrants to purchase up to
10,810,000 shares of our common stock, for an aggregate purchase price of
$1,081,000, or $0.05 per share, pursuant to securities purchase agreements with
the purchasers listed below, in the amounts listed below. The warrants are
exercisable at $0.10 per share. In connection with the agreements, we paid
finders' fees to Harbor View Group, AVIX, Inc and Robert Nowinski consisting in
the aggregate of (i) approximately $115,667 and (ii) warrants to purchase
2,378,200 shares of our common stock. All of the aforementioned warrants are
exercisable at $0.10 per share commencing six months after the issuance date,
for a period of five years. As of the date hereof, none of such warrants had
been exercised.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
-------------- ---------- ----------
Angela Amato $ 16,000 320,000 160,000
Ralph Albergo $ 10,000 200,000 100,000
Beth & Elliot Bauer $ 25,000 500,000 250,000
John Billard $ 50,000 1,000,000 500,000
Philip Brennan $ 45,000 900,000 450,000
Dorothy Christofides $ 25,000 500,000 250,000
Michael Contillo $ 25,000 500,000 250,000
Joseph Deglomini $ 25,000 500,000 250,000
Edward Gorkes $ 50,000 1,000,000 500,000
Harborview Group $ 175,000 3,500,000 1,750,000
Benjamin Kirsch $ 25,000 500,000 250,000
Russell W. Kuhn $ 200,000 4,000,000 2,000,000
Mark Levine $ 60,000 1,200,000 600,000
Steven or Wendi Levitt $ 25,000 500,000 250,000
Barry & Marci Mainzer $ 15,000 300,000 150,000
Gerald S. Schuster $ 40,000 800,000 400,000
Roberta Schwartz $ 25,000 500,000 250,000
Avraham Sibony $ 50,000 1,000,000 500,000
R. Frank Smith $ 30,000 600,000 300,000
Michael Tannenhauser $ 15,000 300,000 150,000
Frank Vigliarolo $ 75,000 1,500,000 750,000
Michael Villani $ 25,000 500,000 250,000
Scott Weil $ 30,000 600,000 300,000
Mike Weiner $ 20,000 400,000 200,000
---------- ---------- ----------
TOTAL $1,081,000 21,620,000 10,810,000
OUTSTANDING SECURITIES
As of the date of this prospectus, in addition to the 521,971,079
shares of our common stock currently outstanding, we have: (i) outstanding stock
options to purchase an aggregate of approximately 87.7 million shares of common
stock at exercise prices ranging from $0.052 to $0.36, of which approximately
81.7 million are currently exercisable; (ii) outstanding warrants to purchase an
aggregate of approximately 72.1 million shares of common stock at prices ranging
from $0.091 to $1.00, all of which warrants 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 agreement.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $33.0 million,
and we would have approximately 722.0 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of
53
the common stock. Additionally, the sale or availability for sale of this number
of shares may lessen the likelihood that additional equity financing will be
available to us, on favorable or unfavorable terms. Furthermore, the sale or
availability for sale of this number of shares could limit the annual amount of
net operating loss carryforwards that could be utilized.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for AVR118. 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 December 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 AVR118
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 or suspend 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 AVR118 commercially.
GOING CONCERN
The independent certified public accountants' reports 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. We are
currently seeking additional financing and do not have cash available to meet
our anticipated expenditures. We anticipate that we can continue operations
through December 2003 with our current liquid assets, if none of our outstanding
options or warrants are exercised or additional securities sold. However, there
can be no assurance that these actions will result in sufficient funds to
finance operations. If we do not raise sufficient cash from external sources to
satisfy our on-going expenditures, we will be required to materially limit or
suspend our operations. Failure to raise additional capital and materially limit
our operations could have a material adverse effect on our operations. This
raises substantial doubt about our ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
CRITICAL ACCOUNTING POLICIES
OTHER ASSETS
Patent development costs are capitalized as incurred. Such costs will
be amortized over the life of the patent, commencing at the time AVR118 is
marketed. Loan costs include fees paid in connection with the February 2001
private equity line of credit agreement and are being amortized over the life of
the agreement.
STOCK-BASED COMPENSATION
Advanced Viral has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, in accounting for its employee stock options rather
than the alternative fair value accounting allowed by SFAS No. 123, Accounting
for Stock-Based Compensation. APB No. 25 provides that the
54
compensation expense relative to Advanced Viral's employee stock options is
measured based on the intrinsic value of the stock option. SFAS No. 123 requires
companies that continue to follow APB No. 25 to provide a pro-forma disclosure
of the impact of applying the fair value method of SFAS No. 123. Advanced Viral
follows SFAS No. 123 in accounting for stock options issued to non-employees.
RECENT ACCOUNTING PRONOUNCEMENTS
During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". SFAS 149 amends and clarifies accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. SFAS 149 is
effective for contracts entered into or modified after JUNE 30, 2003 and for
hedging relationships designated after JUNE 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 will not have any impact on our
operating results or financial position as we do not have any derivative
instruments that are affected by SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity". SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 did not have any impact on our operating
results or financial position as we do not have any financial instruments with
characteristics of both liabilities and equity that are not already classified
as liabilities.
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. Advanced Viral is not a guarantor
under any significant guarantees and thus this interpretation is not expected to
have a significant effect on Advanced Viral's financial position or results of
operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS 123.
The standard provides additional transition guidance for companies that elect to
voluntarily adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. SFAS 148 does not change the provisions of SFAS 123
that permits entities to continue to apply the intrinsic value method of APB 25,
Accounting for Stock Issued to Employees. As Advanced Viral continues to follow
APB 25, its accounting for stock-based compensation will not change as a result
of SFAS 148. SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are effective
immediately and have been included in Advanced Viral's consolidated financial
statements. The new interim disclosure provisions will be effective in the first
quarter of 2003.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. Advanced Viral does not
expect the adoption of this standard to have any impact on its financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 is effective for fiscal years beginning after May 15,
2002. Advanced Viral has not determined the impact that SFAS 145 will have, if
any, on its financial statements.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. SFAS 144 retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. Advanced Viral adopted SFAS 144 on January 1, 2002.
55
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets which replace Accounting
Principles Board Opinion Nos. 16, Business Combinations and 17, Intangible
Assets, respectively. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and that the use of the pooling-of-interests method be prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only method. Amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS No. 142, which
Advanced Viral will be required to adopt on January 1, 2002. After December 31,
2001, goodwill can only be written down upon impairment discovered during annual
tests for fair value, or discovered during tests taken when certain triggering
events occur. Advanced Viral adopted SFAS 142 on January 1, 2002 and there was
no impact on the results of operations or financial position of Advanced Viral.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25 (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. Advanced Viral
adopted FIN 44 in the third quarter of 2000 and there was no material impact on
Advanced Viral's results of operations or financial position.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133 an Amendment of SFAS No. 133, which deferred
the effective date to all fiscal quarters of all fiscal years beginning after
June 15, 2000. Historically, Advanced Viral has not entered into derivatives
contracts to hedge existing risks or for speculative purposes. Adoption of the
new standard on January 1, 2001 had no effect on the financial statements.
CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes to, or disagreements with, our accountants,
Rachlin Cohen & Holtz LLP, during the past two fiscal years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Advanced Viral does not own any securities or instruments subject to
market risk for which disclosure is required.
MANAGEMENT
DIRECTORS AND OFFICERS
Our directors and executive officers, their respective ages, and their
positions held with us are as follows:
NAME AGE POSITION
- ---- --- --------
Eli Wilner 47 President, Chief Executive Officer,
Secretary and Chairman of the Board
Alan V. Gallantar 45 Chief Financial Officer and Treasurer
David Seligman 64 Director
Nancy J. Van Sant 53 Director
Roy S. Walzer 55 Director
The following is certain summary information with respect to the
directors and executive officers of Advanced Viral. There are no family
relationships between or among the directors, executive officers or any other
person. None of Advanced Viral's directors or executive officers is a director
of any company that files reports with the SEC. None of the Advanced Viral's
directors have been involved in any bankruptcy or criminal proceeding (excluding
traffic or other minor offenses), nor has been enjoined from engaging in any
business.
56
Eli Wilner, our President, Chief Executive Officer, Secretary and
Chairman of the Board of Directors, has been a director since December 2001,
Chairman of the Board since May 2002 and President and Chief Executive Officer
since August 2003. He is the founder and CEO of Eli Wilner & Company, a New York
City art gallery established in 1983, and is also a leading frame dealer,
restorer, collector and published author. Mr. Wilner was a Bryant Fellows Member
of the Metropolitan Museum of Art in New York City from 1990 to 2000 and since
1990 has been a member of the Forum and Director's Circle of the National Museum
of American Art in Washington, D.C. Mr. Wilner is a graduate of Brandeis
University, where he received his B.A. in Fine Arts in 1976, and Hunter College,
where he received his M.A. in 1978.
Alan V. Gallantar has been Chief Financial Officer since October 1999
and Treasurer since December 2001. Mr. Gallantar was treasurer and controller
from 1998 to 1999 of AMBI, Inc., a nutraceutical company, senior vice president
and chief financial officer from 1992 to 1997 of Bradley Pharmaceuticals, Inc.,
a pharmaceutical manufacturer, and vice president and divisional controller from
1989 to 1991 for PaineWebber Incorporated. From 1985 to 1989, Mr. Gallantar was
second vice president at The Chase Manhattan Bank, N.A., and from 1983 to 1985,
was a senior accountant at Philip Morris Incorporated. From 1979 to 1983, Mr.
Gallantar was a senior accountant in the audit department of Deloitte & Touche.
David Seligman, a director since December 2001, is a partner and
founder of the Law Office of David Seligman, established in 1995. Since 1997,
Mr. Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan,
Griffinger and Vecchione, a New Jersey based law firm. Mr. Seligman has over
thirty years of legal experience in the pharmaceutical industry, twenty-five of
which were spent supervising the activities of law department attorneys and
outside counsel. From 1989 to 1995, Mr. Seligman was Associate Vice President
and responsible for the general legal activities of various divisions of
Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York and New Jersey
State Bar Associations, and is a member of the board and Greenbrook
Pharmaceuticals, LLC. Mr. Seligman graduated from Columbia University, College
of Pharmacy (B.S.) in 1959, Fordham University School of Law (J.D.) in 1962, and
New York University School of Law (L.L.M.) in 1966.
Nancy J. Van Sant, Esq., a director since May 2002, has been a director
of the Miami, Florida law firm of Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A. and/or its predecessors since 1992. From 1977
through 1990, Ms. Van Sant was an attorney with the SEC serving as Regional
Trial Counsel and Chief of the Branch of Investigations and Enforcement.
Roy S. Walzer was appointed to the Board of Directors in June 2002.
Since 1987, Mr. Walzer has been the President of the private investment firms
Litchfield Partners, Ltd. and the Managing Partner of Litchfield Partners I
since 1999, which firms invest in pharmaceuticals, biotech and technology
companies. Prior to founding Litchfield Partners, Mr. Walzer served as Executive
Vice President and General Counsel with Sealy Connecticut from 1976 to 1986.
Shalom Z. Hirschman, M.D. resigned in August 2003 from his position as
our President, Chief Executive Officer and Chief Scientific Officer and a
director of Advanced Viral, which positions he had held since October 1996, in
order to devote his full efforts to his position as our Chief Scientist with
responsibilities assigned by the Board. Dr. Hirschman was Director of the
Division of Infectious Diseases and Professor of Medicine at Mount Sinai School
of Medicine, New York, New York, from May 1969 until October 1996. Dr. Hirschman
has been responsible for bringing our principal product, AVR118, into human
clinical trials.
We have initiated a search for a new President and Chief Executive
Officer. In the immediate period, Mr. Wilner will assume the role of interim
President and Chief Executive Officer until a Chief Executive Officer and
President is retained.
ELECTION OF DIRECTORS AND OFFICERS
Directors are elected at each annual meeting of stockholders and hold
office until the next succeeding annual meeting and the election and
qualification of their respective successors. Officers are elected annually by
the Board of Directors and hold office at the discretion of the Board of
Directors. Advanced Viral's By-Laws permit the Board of Directors to fill any
vacancy and such director may serve until the next annual meeting of
stockholders and the due election and qualification of his successor.
MEETINGS OF THE BOARD OF DIRECTORS
During our fiscal year ended December 31, 2002, our Board of Directors
held 20 meetings. All members of the Board of Directors attended at least 75% of
such meetings. Advanced Viral does not pay directors for their attendance at
meetings, but may revisit this position in the future.
57
RESIGNATIONS OF MEMBERS OF THE BOARD OF DIRECTORS
Richard Kent, M.D. and Shalom Z. Hirschman, M.D. resigned as members of
our Board of Directors in February 2003 and August 2003, respectively.
COMMITTEES OF THE BOARD OF DIRECTORS
Advanced Viral's Board of Directors has an Executive Management
Committee, Audit Committee, Compensation Committee and an Investment Analysis
Committee. The Board of Directors does not have a standing Nominating Committee.
EXECUTIVE MANAGEMENT COMMITTEE. The Executive Management Committee has
been delegated the authority to oversee the strategic management of Advanced
Viral. Eli Wilner and David Seligman serve as members of the Executive
Management Committee.
AUDIT COMMITTEE. The Audit Committee is responsible for nominating
Advanced Viral's independent accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with Advanced Viral's
independent accountants, and reviewing the financial statements, audit practices
and internal controls of Advanced Viral. The current members of the Audit
Committee are David Seligman and Roy A. Walzer. During 2002, the Audit Committee
held one meeting.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of Advanced
Viral to the Board of Directors. The current members of the Compensation
Committee are Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer.
INVESTMENT ANALYSIS COMMITTEE. The Investment Analysis Committee has
been delegated the authority to analyze financing and investment alternatives
for Advanced Viral. Roy A. Walzer serves as the sole member of this committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists
of Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer. During the last
fiscal year, no interlocking relationship existed between Advanced Viral's Board
of Directors or Compensation Committee and the board of directors or
compensation committee of any other company.
AUDIT COMMITTEE REPORT
The Audit Committee for the last fiscal year consisted of three
non-employee Directors. The Board of Directors has determined that none of the
members of the Audit Committee has a relationship to Advanced Viral that may
interfere with his independence from Advanced Viral and its management.
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing financial
reports and other financial information provided by Advanced Viral to any
governmental body or the public, Advanced Viral's systems of internal controls
regarding finance, accounting, legal compliance and ethics that management and
the Board of Directors have established, and Advanced Viral's auditing,
accounting and financial processes generally. The Audit Committee annually
recommends to the Board of Directors the appointment of a firm of independent
auditors to audit the financial statements of Advanced Viral and meets with such
personnel of Advanced Viral to review the scope and the results of the annual
audit, the amount of audit fees, Advanced Viral's internal accounting controls,
Advanced Viral's financial statements contained in Advanced Viral's Annual
Report to Stockholders and other related matters.
The Audit Committee has reviewed and discussed with management the
financial statements for fiscal year 2002 audited by Rachlin Cohen, Advanced
Viral's independent auditors. The Audit Committee has discussed with Rachlin
Cohen various matters related to the financial statements, including those
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU ss. 380). The Audit Committee has also received the
written disclosures and the letter from Rachlin Cohen required by Independence
Standards Board Standard No. 1 (Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees), and has discussed with the firm
its independence. Based upon such review and discussions the Audit Committee
recommended to the Board of Directors that the audited financial
58
statements be included in Advanced Viral's Annual Report on Form 10-K for the
fiscal year ending December, 2002 for filing with the Securities and Exchange
Commission.
The report of the Audit Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this prospectus or
registration statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that the filing
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
The following table summarizes all compensation awarded to, earned by
or paid to (a) our Chief Executive Officer and (b) our other executive officers
whose total salary and bonus exceeded $100,000 (together, the "Named Executive
Officers") for services rendered in all capacities to us during the years
indicated.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------ ---------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) OPTIONS/SARS(3) COMPENSATION(4)
- --------------------------- ---- ------ -------- --------------- --------------- ---------------
Shalom Z. Hirschman, MD, Chairman 2002 $361,000 $25,000 $26,800 $ 17,865
December 2001 to May 2002, 2001 $361,000 $25,000 $30,192 -- $ 21,270
President, Chief Executive Officer 2000 $361,000 $ 0 $30,775 -- $ 4,540
and Chief Scientific Officer from
October 1996 to August 2003
and consultant from May 24, 1995
until October 1996
Alan V. Gallantar, Chief Financial 2002 $223,000 $22,500 $ 6,000 -- --
Officer since October 1999; 2001 $225,000 $25,000 $ 6,000 -- --
Treasurer since December 2001 2000 $200,000 $25,000 $21,000 -- --
William Bregman, Secretary and 2002 n/a n/a n/a n/a n/a
director from 1985 until 2001 $ 70,000 -- -- -- $150,000(5)
December 2001, treasurer 2000 $ 60,000 -- -- -- $ 2,500(4)
from 1985 to 1999.
Bernard Friedland, Chairman of 2002 n/a n/a n/a n/a n/a
Advanced Viral and President of 2001 $ 70,000 -- -- -- $150,000(5)
subsidiary Advance Viral 2000 $ 60,000 -- -- -- $ 1,800(4)
Research Ltd. from 1985 to
December 2001
- ---------------
(1) With respect to Dr. Hirschman, represents portion of bonus paid to Dr.
Hirschman pursuant to the terms of his employment agreement in
connection with the IND number granted by the FDA. The remaining
$50,000 due has been accrued as of December 31, 2002.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate
incremental cost to Advanced Viral of Dr. Hirschman's automobile lease,
gas, oil, repairs and maintenance. Other Annual Compensation for Mr.
Gallantar includes an automobile allowance of $500 per month and
allowance for moving expenses of approximately $15,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) Represents the dollar value of insurance premiums paid by or on behalf
of Advanced Viral with respect to term life insurance for the benefit
of the Named Executive Officers.
(5) Represents payments made to Messrs. Bregman and Friedland pursuant to
the terms of the severance agreements discussed below.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2002 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2002 by the Named Executive Officers.
59
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME ON EXERCISE (#) VALUE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- ----------------- ------------------------- -------------------------
Shalom Z. Hirschman, M.D. 0 N/A 39,100,000 / O $0 / $0 (2)(3)
Alan V. Gallantar 0 N/A 4,547,880 / 0 $0 / $0 (2)(4)
William Bregman 0 N/A 0 / 0 $0 / $0
Bernard Friedland 0 N/A 0 / 0 $0 / $0
- ---------------
(1) Based on the difference between the average of the high and low bid
prices per share of the common stock as reported by the Bulletin Board
on the date of exercise, and the exercise or base price.
(2) Based on the difference between the average of the closing bid and ask
prices per share of the common stock as reported by the Bulletin Board
on December 31, 2002, $0.08, and the exercise or base price of
in-the-money stock options.
(3) As of December 31, 2002, Dr. Hirschman held options to purchase
4,100,000 shares of common stock at $0.18 per share; 4,000,000 shares
of common stock at $0.19 per share; 4,000,000 shares of common stock at
$0.27 per share; 4,000,000 shares of common stock at $0.36 per share,
and 23,000,000 shares of common stock at $0.27, all of which are
currently exercisable.
(4) As of December 31, 2002, Mr. Gallantar held options to purchase
4,547,880 shares of common stock at $0.24255 per share, all of which
were exercisable as of such date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
On August 27, 2003, Shalom Z. Hirschman, M.D. resigned as an officer
and director of Advanced Viral upon the terms and conditions of a Third Amended
and Restated Employment Agreement dated August 27, 2003, and Eli Wilner was
appointed as interim President and Chief Executive Officer of Advanced Viral.
The resignation of Dr. Hirschman was not due to any disagreement with Advanced
Viral on any matter relating to Advanced Viral's operations, policies or
practices.
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to a Third Amended and Restated Employment Agreement dated as
of August 26, 2003 between Advanced Viral and Dr. Hirschman, we employ Dr.
Hirschman on a full business time basis as our as our Chief Science Officer.
Pursuant to the agreement, the term of Dr. Hirschman's employment continues
until December 31, 2004 unless sooner terminated pursuant to the agreement. If
the agreement is terminated by us for cause, all unvested stock options granted
to Dr. Hirschman expire within 90 days of such termination date. If the
agreement is terminated by Dr. Hirschman for good reason, we are required to pay
to Dr. Hirschman his annual salary and employee benefits through the term of the
agreement. Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
- lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price
not in excess of $40,000, and pay for all gas, oil, repairs
and maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;
- reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses (i) his license fees, membership dues in professional
organizations, subscriptions to two professional journals, not
to exceed $1,200; (ii) necessary travel, hotel and
entertainment expenses incurred in connection with overnight,
out-of-town trips that contribute to the benefit of the
Company and as requested by the board of directors, and all
other expenses that may be pre-approved by our board of
directors; and
- provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.
60
The agreement also provides for the payment of $50,000 to Dr.
Hirschman provided (i) the Company receives new financing or a capital
investment of not less than $1,500,000, and (ii) Dr. Hirschman is terminated
other than for cause. The agreement further contains certain confidentiality and
non-compete provisions, ratifies his currently outstanding stock options, and
obligates us to use our best efforts to cause shares underlying the options to
be registered or to have the registration of such shares to continue to be
effective in order that the shares may be resold without a restrictive legend.
SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and
James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.
In connection with their resignation, we paid $150,000 in one lump sum
to each of Messrs. Bregman and Friedland, and $2,500 to Mr. Silver. In addition,
the Severance Agreements provide as follows:
- That Messrs. Bregman and Friedland shall have the combined
right until November 29, 2003 to appoint one additional member
to the Board of Directors of Advanced Viral reasonably
acceptable to Advanced Viral, so long as both Messrs. Bregman
and Friedland own shares of Advanced Viral. The
Bregman/Friedland designee, if elected, shall serve on
Advanced Viral's Board of Directors until his successor is
duly elected and qualified, and may be removed as a member of
the Board of Directors of Advanced Viral, with or without
cause, by the affirmative vote of the members of Advanced
Viral's then Board of Directors at any time following the date
which is the earlier to occur of: (i) November 29, 2003 or
(ii) the complete divestiture of both Messrs. Bregman's and
Friedland's ownership in Advanced Viral.
- All agreements regarding the voting or disposition of shares
of common stock of Advanced Viral held by each of Messrs.
Bregman and Friedland are terminated.
- Advanced Viral shall have a right of first refusal to purchase
shares of common stock owned by Messrs. Bregman and Friedland
upon the receipt by Messrs. Bregman or Friedland, as the case
may be, of a bona fide offer from an unrelated third party to
purchase such shares in an "on-the-market" or "off-the-market"
transaction, upon the terms set forth in the Severance
Agreements.
- With respect to the election of directors and compensation
packages for directors of Advanced Viral, each of Messrs.
Bregman and Friedland agreed to grant Advanced Viral an
irrevocable proxy to vote all the shares of its common stock
they beneficially own at any annual, special or adjourned
meeting of the stockholders of Advanced Viral until the
earlier to occur of November 29, 2003 or, as to those shares
sold, the date of the sale of such shares by Messrs. Bregman
or Friedland, as the case may be, to one or more unrelated
third parties in a bona fide sale after Messrs. Bregman or
Friedland, as the case may be, shall have first complied with
Advanced Viral's right of first refusal described in the
Severance Agreements.
- Advanced Viral agreed, to the fullest extent permitted by
Delaware law and its charter documents, to indemnify each of
Messrs. Bregman, Friedland and Silver for all amounts
(including reasonable attorneys' fees) incurred or paid in
connection with any action, proceeding, suit or investigation
arising out of or relating to their performance of services
for Advanced Viral.
- Advanced Viral agreed to continue the directors' and officers'
liability insurance for each of Messrs. Bregman, Friedland and
Silver until November 29, 2007.
In connection with satisfying our financial obligations to our retiring
directors under the Severance Agreements, we obtained a loan in the amount of
$200,000 from our Chief Financial Officer, Alan Gallantar, as evidenced by a
Demand Promissory Note dated December 14, 2001 (the "Note"). We were obligated
to repay the Note upon our receipt of proceeds upon the consummation of new
financing. The Note was repaid in full on December 17, 2001.
61
ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(K))
Advanced Viral has adopted a 401(k) plan that allows eligible employees
to contribute up to 20% of their salary, subject to annual limits, which were
$10,500 in 2001. We match 50% of the first 6% of the employee contributions with
our common stock and may from time to time, at our discretion, make additional
contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions. At December 31, 2002 we
accrued $40,675 to fund the 401k plan representing our match for the plan year
2002. We intend to purchase our common stock in the open market at prevailing
market prices to satisfy our 2002 matching contribution obligations. In March
2003, we amended the terms of the 401(k) plan to terminate our obligation to
make matching contributions.
COMPARATIVE STOCK PERFORMANCE
SEC rules require that a line graph performance presentation be
provided comparing cumulative total stockholder return with a performance
indicator of a broad market index and a nationally recognized industry index.
The graph and table set forth below compare the cumulative total stockholder
return on Advanced Viral's Common Stock for 1997 through 2002 with the Dow Jones
Pharmaceuticals Index and the Dow Jones Equity Market Index for the same period.
The graph and table assume an investment of $100 in the Common Stock and each
index on December 31, 1996 and the reinvestment of all dividends, if any.
5-YEAR CUMULATIVE TOTAL RETURN
12/97 12/98 12/99 12/00 12/01 12/02
----- ----- ----- ----- ----- -----
Advanced Viral Research Corp. 100.00 109.61 98.70 168.83 137.66 41.56
Dow Jones Pharmaceuticals 100.00 124.90 153.28 139.07 122.50 95.45
Dow Jones Equity Market 100.00 148.67 133.94 185.78 155.22 123.59
[CHART]
62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the common
shares of Advanced Viral owned as of November 14, 2003: (i) by each person who
beneficially owns more than 5% of the common shares, (ii) by each of our
directors, (iii) by each of our Named Executive Officers identified in the
Summary Compensation Table above and (iv) by all directors and executive
officers of Advanced Viral as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to such
common shares.
PERCENTAGE
NAME OF BENEFICIAL OWNER NUMBER OF SHARES OWNERSHIP(1)
- ------------------------ ---------------- ------------
William Bregman(2, 3) 38,086,988 7.3%
Shalom Z. Hirschman, MD(4) 39,100,000 7.0%
Eli Wilner(5) 20,762,500 3.8%
Alan V. Gallantar(6) 4,547,880 *
David Seligman(7) 5,762,500 1.1%
Nancy J. Van Sant(7) 4,112,500 *
Roy Walzer(7) 4,566,300 *
Cornell Capital Partners, LP 53,213,443 9.5%
All directors and executive officers as a group (5 persons) 39,751,680 7.1%
- ---------------
* Represents less than 1% .
(1) The applicable percentage ownership is based on 521,971,079 shares
outstanding as of November 14, 2003, together with securities
exercisable or convertible into shares of common stock within 60 days
thereof.
(2) Pursuant to their severance agreements with Advanced Viral, each of
Messrs. Bregman and Friedland have granted to Advanced Viral, with
respect to the election of directors and compensation packages for
directors of Advanced Viral, an irrevocable proxy to vote such shares
of common stock at any stockholders meeting until the earlier to occur
of November 29, 2003 or as to those shares sold, the date of the sale
of such shares by either Mr. Bregman or Mr. Friedland, as the case may
be, to one or more unrelated parties.
(3) Includes 21,758,614 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 215,000 shares owned by Carol
Bregman, his daughter; 215,000 shares owned by Janet Berlin, his
daughter; 215,000 shares owned by Forest Berlin, his grandson; 215,000
shares owned by Jessica Berlin, his granddaughter; and 105,000 shares
owned by David Berlin, his son-in-law.
(4) Represents 39,100,000 shares that may be acquired pursuant to currently
exercisable options to purchase common stock.
(5) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 18,462,500 shares that may be acquired
pursuant to currently exercisable stock options; (iii) 362,500 shares
beneficially owned by his wife Barbara Ann Brennan; and (iv) 50,000
shares beneficially owned by his step-daughter Celia Conaway. Mr.
Wilner is the interim President, Chief Executive Officer and Secretary
and Chairman of the Board of Directors of Advanced Viral Research Corp.
(6) Represents shares that may be acquired pursuant to currently
exercisable stock options. Mr. Gallantar is the CFO and Treasurer of
Advanced Viral Research Corp.
(7) Represents shares that may be acquired pursuant to currently
exercisable stock options. The persons listed are Directors of Advanced
Viral Research Corp.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have granted stock options to certain of our executive officers, as
described under the caption "Executive Compensation." We have entered into
severance agreements with certain of our former officers and directors as
described under the caption "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements."
In November 2002, we retained Sacher, Zelman, Van Sant, Paul,
Beiley, Hartman, Terzo & Waldman, P.A., a law firm of which Ms. Van Sant is a
partner, to provide legal services in connection with certain legal proceedings.
For the fiscal year ended December 2002 we were billed and paid $69,115. Since
January 2003, we were billed $321,513 and have paid $319,003 to date.
In April 2003, Advanced Viral entered into a six-month consulting
agreement with Robert Nowinski, Ph.D., which agreement terminated in October
2003. Pursuant to the agreement, Mr. Nowinski acted as a consultant to the Board
of Directors and advised Advanced Viral in the areas of fund raising, strategic
partnerships and operations. Pursuant to the consulting agreement, Mr. Nowinski
received approximately $22,500 monthly, which amount was increased in July 2003
from $15,700. In addition, Mr. Nowinski received 5% in cash and 5% in warrants
of any net proceeds received by Advanced Viral from the sale by Advanced Viral
of Advanced Viral's securities during the period of time Mr. Nowinski was a
consultant to Advanced Viral.
Article 9 of our Certificate of Incorporation contains the following
provision with respect to indemnification of directors and officers:
"The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person, who has ceased
to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the Delaware
General Corporation Law ("DGCL").
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article 11, which
provides:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit."
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
Pursuant to the foregoing, we currently maintain directors and officers
insurance coverage. We may be required to indemnify certain officers and
directors against liabilities that arise by reason of their status or service as
officers or directors. In certain circumstances, we may be required to advance
the expenses an officer or director incurs in legal proceedings. We believe that
the provisions in our Certificate of Incorporation are necessary to attract and
retain qualified persons as directors and officers.
We believe that all of the above transactions were conducted at "arm's
length", representing what we believe to be fair market value for those
services.
64
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Advanced
Viral's officers and directors, and persons who own more than ten percent of a
registered class of Advanced Viral's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than ten-percent stockholders are required by
SEC regulation to furnish Advanced Viral with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such forms furnished to
Advanced Viral, Advanced Viral believes that during 2002 there was no
delinquency in the Section 16(a) filing obligations of Advanced Viral's
officers, directors and ten percent beneficial owners.
DESCRIPTION OF SECURITIES
Our Certificate of Incorporation authorizes us to issue 1,000,000,000
shares of common stock, par value $0.00001 per share. As of November 14, 2003,
there were outstanding 521,971,079 shares of common stock, all of which are
fully paid for and non-assessable. The holders of common stock (i) have equal
ratable rights to dividends from funds legally available therefore, when, as and
if declared by our board of directors; (ii) are entitled to share ratably in all
of our assets available for distribution to holders of common stock upon
liquidation, dissolution or winding up of our affairs; (iii) do not have
preemptive, subscription, or conversion rights and there are no redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
noncumulative vote per share on all matters which stockholders may vote on at
all meetings of stockholders.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, located in Brooklyn, New York. The transfer agent's
phone number is 718-921-8120.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law ("DGCL"), we have
included in Article 9 of our Certificate of Incorporation the following with
respect to indemnification of directors and officers:
"The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person, who has ceased
to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article 11, which
provides:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of Advanced Viral pursuant to the foregoing provisions, or otherwise,
Advanced
65
Viral has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
HOW TO GET MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, D.C. 20549. You should call
1-800-SEC-0330 for more information on the operation of the Public Reference
Room. The SEC maintains an Internet site at http://www.sec.gov where certain
information regarding issuers, including Advanced Viral, may be found. Our Web
site is http://www.adviral.com.
This prospectus is part of a registration statement that we filed with
the SEC. The registration statement contains more information than this
prospectus regarding Advanced Viral and its common stock, including certain
exhibits and schedules. You can get a copy of the registration statement from
the SEC at the address listed above or from its Internet site, www.sec.gov.
66
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements Years Ended 2002, 2001 and 2000 F-3
Balance Sheets, December 31, 2002 and 2001
Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 and from Inception
(February 20, 1984) to December 31, 2002 F-4
Statements of Stockholders' Equity from Inception (February 20, 1984) to December 31, 2002 F-5
Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 and from Inception
(February 20, 1984) to December 31, 2002 F-16
Notes to Consolidated Financial Statements F-17 - F-46
Balance Sheet for the Nine Months Ended September 30, 2003 and the Year Ended December 31, 2002 F-47
Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002
and from Inception (February 20, 1984) to September 30, 2003 F-48
Statements of Stockholders' Equity from Inception (February 20, 1984) to September 30, 2003 F-49
Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 and from Inception
(February 20, 1984) to September 30, 2003 F-61
Notes to Consolidated Condensed Financial Statements F-62 - F-87
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
2002 and for the period from inception (February 20, 1984) to December 31, 2002.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2002 and for the period from
inception (February 20, 1984) to December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered accumulated losses from
operations since its inception and its cash position may be inadequate to fund
the full range of testing required by the FDA in order to approve Product R for
sale. These issues raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the Company's financial statements, errors in the
valuation of certain options and warrants which resulted in an overstatement of
previously reported expenses for the years ended December 31, 2002, 2001 and
2000 were discovered by the Company's management. Accordingly, the financial
statements for the years ended December 31, 2002, 2001 and 2000 have been
restated to correctly reflect the valuations of such options and warrants.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 21, 2003
Except for Note 3, as to which the date is November 11, 2003
F-2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
(Restated) (Restated)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,475,755 $ 1,499,809
Prepaid insurance 86,368 51,702
Assets held for sale 172,601 188,999
Other current assets 35,527 11,460
------------ ------------
Total current assets 1,770,251 1,751,970
Property and Equipment, Net 2,244,118 2,818,045
Other Assets 931,660 878,776
------------ ------------
Total assets $ 4,946,029 $ 5,448,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 417,061 $ 1,620,150
Accrued liabilities 137,646 223,556
Current portion of capital lease obligation 104,719 64,197
Current portion of note payable 25,165 24,246
------------ ------------
Total current liabilities 684,591 1,932,149
------------ ------------
Long-Term Debt:
Convertible debenture, net 1,610,499 --
Capital lease obligation 5,834 42,370
Note payable 4,879 32,198
------------ ------------
Total long-term debt 1,621,212 74,568
------------ ------------
Common Stock Subscribed but not Issued 883,900 --
------------ ------------
Commitments and Contingencies -- --
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 455,523,990 and 403,296,863 shares issued
and outstanding 4,555 4,033
Additional paid-in capital 50,122,024 42,858,802
Deficit accumulated during the development stage (48,333,867) (39,420,462)
Discount on warrants (36,386) (299)
------------ ------------
Total stockholders' equity 1,756,326 3,442,074
------------ ------------
Total liabilities and stockholders' equity $ 4,946,029 $ 5,448,791
============ ============
See notes to consolidated financial statements.
F-3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Inception
(February 20,
Year Ended December 31, 1984) to
--------------------------------------------------------- December 31,
2002 2001 2000 2002
------------- ------------- ------------- -------------
(Restated) (Restated) (Restated) (Restated)
Revenues $ -- $ 17,601 $ 8,363 $ 231,892
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 4,439,592 5,150,869 3,192,551 18,315,416
General and administrative 2,654,296 4,063,022 2,413,601 17,594,477
Compensation and other expense for --
options and warrants 476,102 691,404 1,901,927 3,558,872
Depreciation 977,746 511,216 346,227 1,873,125
------------- ------------- ------------- -------------
8,547,736 10,416,511 7,854,306 41,341,890
------------- ------------- ------------- -------------
Loss from Operations (8,547,736) (10,398,910) (7,845,943) (41,109,998)
------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 113,812 161,832 901,435
Other income -- -- -- 120,093
Interest expense (192,174) 116,849 (908,220) (6,365,704)
Severance expense - former directors -- (302,500) -- (302,500)
------------- ------------- ------------- -------------
(164,515) (71,839) (746,388) (5,646,676)
------------- ------------- ------------- -------------
Loss from Continuing Operations (8,712,251) (10,470,749) (8,592,331) (46,756,674)
Loss from Discontinued Operations (201,154) (259,114) (223,861) (1,577,193)
------------- ------------- ------------- -------------
Net Loss $ (8,913,405) $ (10,729,863) $ (8,816,192) $ (48,333,867)
============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.02) $ (0.03) $ (0.02)
Discontinued operations (0.00) (0.00) (0.00)
------------- ------------- -------------
Net loss $ (0.02) $ (0.03) $ (0.02)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 439,009,322 389,435,324 362,549,690
============= ============= =============
See notes to consolidated financial statements.
F-4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
----------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------------- ------- --------- -----------
Balance, inception (February 20, 1984)
as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
------------- ------- --------- --------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
------------- ------- --------- --------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $0.00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
------------- ------- --------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 0.01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
------------- ------- --------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
------------- ------- --------- --------
See notes to consolidated financial statements.
F-5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
------ ----------- ------ ----------- -----------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $0.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, year ended December 31, 1987 -- -- -- (258,663)
----------- -------- ---------- ---------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
----------- -------- ---------- ---------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
----------- -------- ---------- ---------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption
offer on "B" warrants 0.05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
------------ ------ ---------- ---------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
------------ ------ ---------- -----------
See notes to consolidated financial statements.
F-6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
---------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ----------- ------- ----------- ------------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $0.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants 0.08 2,500 -- 200 --
Issuance of common stock, exercise of underwriter warrants 0.12 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- - (249,871)
----------- ------- ----------- ---------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing 0.04 10,000,000 100 404,900 --
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 --
Expenses of stock issuance -- -- (7,792) --
Net loss, year ended December 31, 1992 -- -- -- (839,981)
----------- ------- ----------- ---------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
----------- ------- ----------- ---------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------- ----------- ---------
See notes to consolidated financial statements.
F-7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------ ----------- ------------ ------------ ------------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $ (2,854,076) $ --
Issuance of common stock,
for consulting services $0.05 4,750,000 47 237,453 -- -- --
Issuance of common stock,
exercise of options 0.08 400,000 4 31,996 -- -- --
Issuance of common stock,
exercise of options 0.10 190,000 2 18,998 -- -- --
Net loss, year ended
December 31, 1994 -- -- - -- (440,837) --
----------- ------ ----------- ------ ------------ ------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
Issuance of common stock,
exercise of options 0.05 3,333,333 33 166,633 -- -- --
Issuance of common stock,
exercise of options 0.08 2,092,850 21 167,407 -- -- --
Issuance of common stock,
exercise of options 0.10 2,688,600 27 268,833 -- -- --
Issuance of common stock,
for consulting services 0.11 1,150,000 12 126,488 -- -- --
Issuance of common stock,
for consulting services 0.14 300,000 3 41,997 -- -- --
Net loss, year ended
December 31, 1995 -- -- -- -- (401,884) --
----------- ------ ----------- ------ ------------ ------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------ ----------- ------ ------------ ------
See notes to consolidated financial statements.
F-8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------ ----------- ------------ ------------ -------------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $ (3,696,797) $ --
Issuance of common stock,
exercise of options $0.05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options 0.08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options 0.10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options 0.11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options 0.12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options 0.18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options 0.19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options 0.20 473,500 5 94,695 -- -- --
Issuance of common stock,
for services rendered 0.50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended
December 31, 1996 -- -- -- -- (1,154,740) --
----------- ------ ----------- -------- ------------ ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------ ----------- -------- ------------ ---------
See notes to consolidated financial statements.
F-9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ----------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock,
exercise of options $0.08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt 0.20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt 0.15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt 0.12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt 0.15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt 0.16 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered 0.41 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered 0.24 100,000 1 23,999 -- -- --
Beneficial conversion
feature, February debenture -- -- 413,793 -- -- --
Beneficial conversion
feature, October debenture -- -- 1,350,000 -- -- --
Warrant costs,
February debenture -- -- 37,242 -- -- --
Warrant costs,
October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- - -- -- 399,322
Imputed interest on
convertible debenture -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- - -- (4,141,729) --
----------- ------- ----------- --------- ----------- ----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------- ----------- --------- ----------- ----------
See notes to consolidated financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ----------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $(8,993,266) $ (73,837)
----------- ------- ------------ --------- ----------- ---------
Issuance of common stock,
exercise of options $ 0.12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options 0.14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options 0.16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options 0.20 10,000 - 2,000 -- -- --
Issuance of common stock,
exercise of options 0.26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt 0.13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt 0.14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt 0.15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt 0.18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt 0.19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt 0.22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt 0.23 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered 0.21 100,000 1 20,999 -- -- --
Beneficial conversion
feature, November debenture -- -- 625,000 -- -- --
Warrant costs,
November debenture -- -- 48,094 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 59,068
Write off of subscription
receivable -- -- (19,000) 19,000 -- --
Net loss, year ended
December 31, 1998 -- -- -- -- (4,557,710) --
----------- ------- ------------ --------- ----------- ---------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
----------- ------- ------------ --------- ----------- ---------
See notes to consolidated financial statements.
F-11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------------------------- Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
----- ----------- ------- ----------- ------------ ----------- ------------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $(13,550,976) $ (14,769) $ --
Issuance of common stock,
securities purchase agreement $ 0.16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase agreement 0.27 1,851,852 18 499,982 -- -- --
Issuance of common stock,
for services rendered 0.22 100,000 1 21,999 -- -- --
Issuance of common stock,
for services rendered 0.25 180,000 2 44,998 -- -- --
Beneficial conversion feature,
August debenture -- -- 950,036 -- -- --
Beneficial conversion feature,
December debenture -- -- 361,410 -- -- --
Amortization of warrant costs,
convertible debentures -- -- 300 -- -- (300)
Warrant costs, related to
convertible debentures -- -- -- -- -- 2,455
Warrant costs, August
debenture -- -- 49,964 -- -- --
Warrant costs, December
debenture -- -- 4,267 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- --
Amortization of deferred
compensation cost -- -- (14,769) -- 14,769 --
Credit arising from modification
of option terms -- -- 210,144 -- -- --
Net loss, year ended
December 31, 1999 -- -- -- (6,323,431) -- --
----------- ------- ------------ ------------ --------- --------
Balance, December 31, 1999
(Restated) 303,472,035 3,034 17,255,858 (19,874,407) -- 2,155
----------- ------- ------------ ------------ --------- --------
See notes to consolidated condensed financial statements.
F-12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ----------- ------- ----------- ------------ -----------
Balance, December 31, 1999
(Restated) 303,472,035 $ 3,034 $ 17,255,858 $ (19,874,407) $ 2,155
Issuance of common stock,
exercise of options $ 0.1400 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock,
exercise of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock,
exercise of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock,
exercise of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock,
exercise of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock,
exercise of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock,
exercise of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock,
exercise of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock,
cashless exercise of warrants 563,597 6 326,153 -- --
Issuance of common stock,
services rendered 0.4650 100,000 1 46,499 -- --
Private placement of
common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of
common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of
common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of
warrants -- -- (326,159) -- --
Beneficial conversion
feature, January Debenture -- -- 395,236 -- --
Warrant costs, consulting
agreement -- -- 200,249 -- --
Warrant costs, January
Debenture -- -- 13,418 -- --
Warrant costs, related to
convertible debentures -- -- -- -- (2,454)
Recovery of subscription
receivable previously
written off -- -- 19,000 -- --
Credit arising from
modification of option
terms -- -- 1,901,927 -- --
Net loss, year ended
December 31, 2000 -- -- -- (8,816,192) --
----------- ------- ------------ ------------ ---------
Balance, December 31, 2000
(Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
----------- ------- ------------ ------------ ---------
See notes to consolidated condensed financial statements.
F-13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ----------- ------- ----------- ------------ -----------
Balance, December 31, 2000 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
Issuance of common stock,
exercise of options $ 0.2700 40,000 1 10,799 -- --
Issuance of common stock,
exercise of options 0.3600 20,000 1 7,199 -- --
Issuance of common stock,
cashless exercise of warrants 76,411 1 77,491 -- --
Issuance of common stock, for
services rendered 0.3500 100,000 1 34,999 -- --
Sale of common stock, for cash 0.1500 6,666,667 66 999,933 -- --
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904 -- --
Cashless exercise of warrants -- -- (77,491) -- --
Credit arising from modification
of option terms -- -- -- 691,404 -- --
Net loss, year ended December 31, 2001 -- -- -- (10,729,863) --
----------- ------- ------------ ------------ ---------
Balance, December 31, 2001 (Restated) 403,296,863 $ 4,033 $ 42,858,802 $(39,420,462) $ (299)
=========== ======= ============ ============ =========
See notes to consolidated condensed financial statements.
F-14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
--------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ----------- ------- ----------- ------------ -----------
Balance, December 31, 2001 (Restated) 403,296,863 4,033 42,858,802 (39,420,462) (299)
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 -- -- 36,086 -- --
Expenses of stock issuance -- -- (50,160) -- (36,087)
Warrants granted for consulting services -- -- 107,382 -- --
Credit arising from modification of
option terms -- -- 177,963 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- --
Beneficial conversion feature,
May debenture -- -- 55,413 -- --
Beneficial conversion feature,
July debentures -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- (8,913,405) --
----------- ------- ------------ ------------ ---------
Balance, December 31, 2002 (Restated) 455,523,990 $ 4,555 $ 50,122,024 $ (48,333,867) $ (36,386)
=========== ======= ============ ============= ==========
See notes to consolidated condensed financial statements.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
2002 2001 2000 2002
------------ ------------ ------------ ------------
(Restated) (Restated) (Restated) (Restated)
Cash Flows from Operating Activities:
Net loss $ (8,913,405) $(10,729,863) $ (8,816,192) $(48,333,867)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 997,874 532,264 362,392 2,438,663
Amortization of debt issuance costs 34,078 15,344 106,030 828,637
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 89,001 -- 395,236 4,182,795
Amortization of discount on warrants -- -- 64,335 400,028
Amortization of discount on warrants - consulting services -- -- 230,249 230,249
Amortization of deferred compensation cost -- -- -- 760,500
Issuance of common stock for debenture interest 43,425 -- 76,212 119,637
Issuance of common stock for services -- 35,000 46,500 1,586,000
Compensation expense for options and warrants 476,102 691,404 1,901,927 3,264,808
Changes in operating assets and liabilities: -- -- -- --
Increase in other current assets (52,155) (28,358) (5,063) (145,311)
Decrease in inventory -- 19,729 -- --
Increase in other assets (86,962) (53,232) (278,037) (1,635,189)
Increase (decrease) in accounts payable and
accrued liabilities (1,288,999) 940,745 174,089 560,907
------------ ------------ ------------ ------------
Total adjustments 212,364 2,152,896 3,073,870 12,591,724
------------ ------------ ------------ ------------
Net cash used by operating activities (8,701,041) (8,576,967) (5,742,322) (35,742,143)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- -- (6,292,979)
Proceeds from sale of investments -- -- -- 6,292,979
Acquisition of property and equipment (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Net cash used by investing activities (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 -- 1,000,000 11,500,000
Proceeds from sale of securities, net of issuance costs 6,229,628 5,783,000 10,835,970 29,529,686
Proceeds from common stock subscribed but not issued 883,900 -- -- 883,900
Payments under capital lease (142,426) (58,690) (50,324) (310,028)
Payments on note payable (26,400) (21,519) (19,096) (81,276)
Recovery of subscription receivable written off -- -- 19,000 19,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 8,944,702 5,702,791 11,785,550 41,541,282
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (24,054) (4,462,824) 5,125,757 1,475,755
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 836,876 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 1,475,755
============ ============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 25,669 $ 20,556 $ 36,681
============ ============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to financial statements.
F-16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the purpose of
manufacturing and marketing a pharmaceutical product initially named
Reticulose, the current formulation of which is now known as and
hereinafter referred to as "Product R." The success of the Company will
be dependent upon obtaining certain regulatory approval for its
pharmaceutical product, Product R, to commence commercial operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research, Ltd.
(LTD), a Bahamian Corporation. LTD is presented in the financial
statements under "Discontinued Operations" (See Notes 5 and 15). All
significant intercompany accounts have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
As described above, the Company was incorporated on July 31, 1985, and,
since that time, has been primarily involved in organizational
activities, research and development activities, and raising capital.
Planned operations, as described above, have not commenced to any
significant extent. Accordingly, the Company is considered to be in the
development stage, and the accompanying consolidated financial
statements represent those of a development stage enterprise.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments (primarily a
money market fund), with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized currently.
Maintenance and repairs are charged to expense as incurred. Major
replacements and betterments are capitalized and depreciated over the
remaining useful lives of the assets.
F-17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the Company.
Internal research and development services that the Company contracts
out are expensed as incurred by the Company. The Company does not
conduct research and development for third parties. Research and
development costs may include consultants, Israel studies, U.S. studies
at universities, laboratory gases, gloves and apparel, and travel.
An allocation of rent, utilities, payroll, payroll taxes (except CEO
salary, payroll taxes) and telephone were allocated to research and
development at 80% of actual costs with 20% of actual costs allocated
to general and administrative through December 31, 2002. Approximately
50% of the salary and payroll taxes through December 31, 2002 for Dr.
Hirschman, the Company's Chief Executive Officer and Chief Scientific
Officer, were allocated to research and development expense.
In November 2002, the Company reduced its staff from 43 employees to 10
and limited its research and development efforts to the studies being
performed in Israel. As a result, beginning in January 2003 and going
forward, the Company discontinued allocating the above expenses to
research and development expense with the exception of 30% of the
salary and payroll taxes of Dr. Hirschman, which were allocated to
research and development.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company regularly evaluates its long-lived assets for indicators of
possible impairment, whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the
use of the asset and its eventual disposition are less than its
carrying amount.
OTHER ASSETS
Patent development costs are capitalized as incurred. Such costs will
be amortized over the life of the patent, commencing at the time
Product R is marketed. Loan costs include fees paid in connection with
the February 2001 private equity line of credit agreement and are being
amortized over the life of the agreement (see Note 7).
INCOME TAXES
The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, which
requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.
F-18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated
fair value of the Company's financial instruments presented in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 2002 and 2001. Since the
reported fair values of financial instruments are based upon a variety
of factors, they may not represent actual values that could have been
realized as of December 31, 2002 and 2001 or that will be realized in
the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, a money market fund and accounts payable. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short-term in nature and their carrying
amounts approximate fair values or they are receivable or payable on
demand.
CONCENTRATIONS OF CREDIT RISk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At various
times during the year, the Company had cash balances in excess of
federally insured limits. The Company maintains its cash, which
consists primarily of demand deposits, with high quality financial
institutions, which the Company believes limits this risk.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in accounting
for stock options issued to non-employees.
No stock-based employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
F-19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (Continued)
Year Ended December 31,
-----------------------------------------------------------------------------------
2002 2002 2001 2001 2000 2000
------------ ----------- ------------ ------------ ----------- -----------
Reported Restated Reported Restated Reported Restated
Net loss $(10,342,335) $(8,913,405) $(11,715,568) $(10,729,863) $(9,354,664) $(8,816,192)
Deduct: total stock-based
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (2,016,132) (724,048) (2,374,643) (154,034) (1,799,827) (992,475)
------------ ----------- ------------ ------------ ----------- -----------
Pro forma net loss $(12,358,467) $(9,637,453) $(14,090,211) $(10,883,897) $(11,154,491) $(9,808,667)
Loss per share - basic and
diluted
As reported $(0.02) $(0.02) $(0.03) $(0.03) $(0.03) $(0.02)
Pro forma $(0.03) $(0.02) $(0.04) $(0.03) $(0.03) $(0.03)
There are no other options outstanding that would require pro forma
presentation.
NET LOSS PER COMMON SHARE
The Company computes loss per share in accordance with SFAS No. 128,
EARNINGS PER SHARE. This standard requires dual presentation of basic
and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted earnings
per share computation.
Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding
during the year. The Company's potentially issuable shares of common
stock pursuant to outstanding stock options and warrants are excluded
from the Company's diluted computation, as their effect would be
anti-dilutive.
REVENUE RECOGNITION
The limited sales generated by the Company have consisted of sales of
Product R for testing and other purposes. The Company records sales
when the product is shipped to customers. There were no sales for the
year ended December 31, 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from
actual results.
RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to
conform to 2002 presentation.
F-20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
INCLUDING INDIRECT GUARANTEE OF INDEBTEDNESS OF OTHERS. FIN 45 requires
that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. FIN 45's provisions for initial recognition and measurement
should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The guarantor's previous accounting
for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The
disclosure requirements are effective for financial statements of both
interim and annual periods that end after December 15, 2002. The
Company is not a guarantor under any significant guarantees and thus
this interpretation is not expected to have a significant effect on the
Company's financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF
SFAS 123. The standard provides additional transition guidance for
companies that elect to voluntarily adopt the accounting provisions of
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 does not
change the provisions of SFAS 123 that permits entities to continue to
apply the intrinsic value method of APB 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. As the Company continues to follow APB 25, its accounting
for stock-based compensation will not change as a result of SFAS 148.
SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are
effective immediately and have been included in Note 10 of the
Company's consolidated financial statements. The new interim disclosure
provisions will be effective in the first quarter of 2003.
In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of this standard to have any
impact on its financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND
TECHNICAL CORRECTIONS. SFAS 145 is effective for fiscal years beginning
after May 15, 2002. The Company has not determined the impact that SFAS
145 will have, if any, on its financial statements.
In August 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes Statement No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED Of, and the accounting and reporting provisions of APB Opinion
No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
DISPOSAL OF A SEGMENT OF A BUSINESS, and EXTRAORDINARY, UNUSUAL AND
INFREQUENTLY OCCURRING EVENTS AND Transactions, for the disposal of a
segment of a business. SFAS 144 retains the requirement in Opinion No.
30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
or is classified as held for sale. The Company adopted SFAS 144 on
January 1, 2002 (see Notes 5 and 15).
In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS which replace
Accounting Principles Board Opinion Nos. 16, BUSINESS COMBINATIONS and
17, INTANGIBLE ASSETS, respectively. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and that the use of the
pooling-of-interests method be prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an
impairment-only method. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of
SFAS No. 142, which the Company will be required to adopt on January 1,
2002. After December 31, 2001, goodwill can only be written down upon
impairment discovered during annual tests for fair value, or discovered
during tests taken when certain triggering events occur. The Company
adopted SFAS 142 on January 1, 2002 and there was no impact on the
results of operations or financial position of the Company.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB OPINION NO. 25
(FIN 44). FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the
accounting consequences of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occurred after either December 15, 1998 or January
12, 2000. The Company adopted FIN 44 in the third quarter of 2000 and
there was no material impact on the Company's results of operations or
financial position.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133 AN AMENDMENT OF SFAS NO.
133, which deferred the effective date to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Historically, the Company
has not entered into derivatives contracts to hedge existing risks or
for speculative purposes. Adoption of the new standard on January 1,
2001 had no effect on the financial statements.
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $48,333,867 since inception and is
dependent upon registration of Product R for sale before it can begin
commercial operations. The Company's cash position may be inadequate to
pay all the costs associated with operations and the full range of
testing and clinical trials required by the FDA. Unless and until
Product R is approved for sale in the United States or
F-22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. GOING CONCERN (Continued)
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. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements for the years ended December 31,
2002, 2001 and 2000 have been restated to reflect changes in accounting
for warrants issued in connection with equity transactions as well as
options issued to the Board of Directors and employees (on a pro-forma
basis only) and its Advisory Board. The restatement resulted in income
which reduced the previously reported net loss for 2002, 2001 and 2000
by approximately $1,429,000 and $986,000, and $538,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. For the year ended
December 31, 2000, the net loss per share from operations was reduced
by $0.01 to ($0.02) from ($0.03). The Company's deficit accumulated
during the development stage was reduced by $2,803,938, $1,375,008, and
$389,303 at December 31, 2002, 2001 and 2000, respectively. The
restatement did not impact the Company's net cash in investing and
financing activities and net cash used in operating activities remained
unchanged However, certain components within operating activities
consisting of amortization of deferred interest cost, discount on
warrants and compensation expense for options and warrants, were
restated.
As of December 31, 2002 As of December 31, 2001
----------------------------------------- -----------------------------------------
As Reported Adjustments Restated As Reported Adjustments Restated
----------- ----------- ----------- ----------- ----------- -----------
ASSETS
Current Assets 1,770,251 -- 1,770,251 1,751,970 -- 1,751,970
Property and Equipment, Net 2,244,118 -- 2,244,118 2,818,045 -- 2,818,045
Other Assets 931,660 -- 931,660 878,776 -- 878,776
----------- ----------- ----------- ----------- ----------- -----------
Total assets 4,946,029 -- 4,946,029 5,448,791 -- 5,448,791
=========== ----------- =========== =========== ----------- ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 684,591 -- 684,591 1,932,149 -- 1,932,149
Long-Term Debt:
Convertible debenture, net 1,658,231 (47,732) 1,610,499 -- -- --
Capital lease obligation 5,834 -- 5,834 42,370 -- 42,370
Note payable 4,879 -- 4,879 32,198 -- 32,198
----------- ----------- ----------- ----------- ----------- -----------
Total long-term debt 1,668,944 (47,732) 1,621,212 74,568 -- 74,568
----------- ----------- ----------- ----------- ----------- -----------
Common Stock Subscribed but not
issued 883,900 -- 883,900 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock 4,555 -- 4,555 4,033 -- 4,033
Additional paid-in capital 57,530,605 (7,408,581) 50,122,024 47,666,141 (4,807,339) 42,858,802
Deficit accumulated during the
development stage (51,137,805) 2,803,938 (48,333,867) (40,795,470) 1,375,008 (39,420,462)
Discount on warrants (4,688,761) 4,652,375 (36,386) (3,432,630) 3,432,331 (299)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' equity 1,708,594 47,732 1,756,326 3,442,074 -- 3,442,074
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' Equity 4,946,029 -- 4,946,029 5,448,791 -- 5,448,791
=========== =========== =========== =========== =========== ===========
</Table>
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
2002 2001
-------------------------------------------------- -------------------------------------------------
As Reported Adjustments Restated As Reported Adjustments Restated
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ -- $ -- $ -- $ 17,601 $ -- $ 17,601
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and
development 4,439,592 -- 4,439,592 5,150,869 -- 5,150,869
General and
administrative 2,654,296 -- 2,654,296 4,063,022 -- 4,063,022
Compensation
and other
expense for
options and
warrants 755,397 (279,295) 476,102 691,404 -- 691,404
Depreciation 977,746 -- 977,746 511,216 -- 511,216
------------- ------------- ------------- ------------- ------------- -------------
8,827,031 (279,295) 8,547,736 10,416,511 -- 10,416,511
------------- ------------- ------------- ------------- ------------- -------------
Loss from Operations (8,827,031) 279,295 (8,547,736) (10,398,910) -- (10,398,910)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 -- 27,659 113,812 -- 113,812
Other income
Interest expense (1,341,809) 1,149,635 (19,2174) (868,856) 985,705 116,849
Severance expense -
former directors -- -- -- (302,500) -- (302,500)
(1,314,150) 1,149,635 (164,515) (1,057,544) 985,705 (71,839)
------------- ------------- ------------- ------------- ------------- -------------
Loss from Continuing
Operations (10,141,181) 1,428,930 (8,712,251) (11,456,454) 985,705 (10,470,449)
Loss from Discontinued
Operations (201,154) -- (201,154) (259,114) -- (259,114)
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (10,342,335) $ 1,428,930 $ (8,913,405) $ (11,715,568) $ 985,705 $ (10,729,863)
============= ============= ============= ============= ============= =============
Net Loss Per Common
Share
Basic and Diluted:
Continuing
operations (0.02) (0.02) (0.03) (0.03)
Discontinued
operations (0.00) (0.00) (0.00) (0.00)
------------- ------------- ------------- -------------
Net loss (0.02) (0.02) (0.03) (0.03)
============= ============= ============= =============
Weighted Average Number
of Common Shares
Outstanding 439,009,322 439,009,322 389,435,324 389,435,324
============= ============= ============= =============
2000
--------------------------------------------------------
As Reported Adjustments Restated
----------- ------------- -------------
Revenues $ 8,363 $ -- $ 8,363
------------- ------------- -------------
Costs and Expenses:
Research and
development 3,192,551 -- 3,192,551
General and
administrative 2,413,601 -- 2,413,601
Compensation
and other
expense for
options and
warrants 1,901,927 -- 1,901,927
Depreciation 346,227 -- 346,227
------------- ------------- -------------
7,854,306 -- 7,854,306
------------- ------------- -------------
Loss from Operations (7,845,943) -- (7,845,943)
------------- ------------- -------------
Other Income (Expense):
Interest income 161,832 -- 161,832
Other income
Interest expense (1,446,692) 538,472 (908,220)
Severance expense -
former directors -- -- --
(1,284,860) 538,472 (746,388)
------------- ------------- -------------
Loss from Continuing
Operations (9,130,803 538,472 (8,592,331
Loss from Discontinued
Operations (223,861) -- (223,861)
------------- ------------- -------------
Net Loss $(9,354,664) $ 538,472 (8,816,192)
============= ============= =============
Net Loss Per Common
Share
Basic and Diluted:
Continuing
operations (0.03) (0.02)
Discontinued
operations (0.00) (0.00)
------------- -------------
Net loss (0.03) (0.02)
============= =============
Weighted Average Number
of Common Shares
Outstanding 362,549,690 362,549,690
============= =============
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. PROPERTY AND EQUIPMENT
Estimated Useful Lives (Years) 2002 2001
------------------------------ ---------- ----------
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 1,410,165 1,233,524
Machinery and equipment 5 3,394,431 3,170,759
---------- ----------
4,839,146 4,438,833
Less accumulated depreciation 2,433,185 1,438,250
---------- ----------
2,405,961 3,000,583
Less property and equipment included in assets held for sale, net (Note 5) 161,843 182,538
---------- ----------
$2,244,118 $2,818,045
========== ==========
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $429,782 as of
December 31, 2002 and $433,119 as of December 31, 2001. Included with
machinery and equipment is equipment purchased under capital leases of
$135,537 during 2002. Depreciation expense for equipment under the
capital leases was approximately $27,488, $10,368 and $7,729 in 2002,
2001 and 2000, respectively. These amounts are included above.
NOTE 5. OTHER ASSETS
2002 2001
-------- --------
Patent development costs $897,385 $765,388
Loan costs, net of accumulated amortization of $828,637
and $794,559 34,275 68,353
Other 6,461 51,496
-------- --------
938,121 885,237
Less other assets included in assets held for sale, net (Note 5) 6,461 6,461
-------- --------
$931,660 $878,776
======== ========
NOTE 6. ASSETS HELD FOR SALE
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. The
facility being sold produced topical Product R which is no longer being
produced by the Company. As required under SFAS 144, the net book
values of the assets (LTD had no liabilities as of December 31, 2002
other than an inter-company payable that has been eliminated) have been
reflected on the balance sheet as held for sale and the operations have
been included in discontinued operations for the years ended December
31, 2002, 2001 and 2000 (see Note 15).
Although no formal contract has been executed, management believes that
the estimated selling price less estimated cost to sell exceeds the net
book value of LTD and therefore there is no impairment loss charged to
discontinued operations.
F-25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7. ACCRUED LIABILITIES
Accrued bonus $ 50,000 $100,000
Accrued 401k contribution 40,675 32,717
Accrued payroll 35,157 81,181
Other 11,814 9,658
-------- --------
$137,646 $223,556
======== ========
NOTE 8. NOTE PAYABLE
During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
equipment and calls for monthly installments of $2,476, including
interest at 12% per annum, with a final installment in February 2004.
The aggregate maturities of the installment purchase agreement are as
follows:
Year ending December 31:
2003 $25,165
2004 4,879
-------
30,044
Less current portion 25,165
-------
Note payable - long-term portion $ 4,879
=======
NOTE 9. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $.199 to $.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 5%
convertible debentures at par in several private placements. Under the
terms of each 5% convertible debenture, 20% of the original issue is
convertible on the original date of issue at a price equal to the
closing bid price quoted on the OTC Bulletin Board on the trading day
immediately preceding the original issue date (except for the
Rushing/Simoni issuance detailed below which had an initial conversion
price of $0.11 per share). Thereafter, 20% of the principal balance may
be converted at six-month intervals at a conversion price equal to the
higher of (i) 90% of the average closing bid price for the five trading
days prior to the conversion date (the "Market Price"); or (ii) ten
cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable
by Advanced Viral in shares of common stock and mature two years from
the date of issuance. The shares issued upon conversion of the
debentures cannot be sold or transferred for a period of one year from
the applicable vesting date of the convertible portion of the
debentures. The Company issued its 5% convertible debentures as
follows:
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
o On May 30, 2002, the Company sold to O. Frank Rushing
and Justine Simoni, as joint tenants, $500,000
principal amount of its 5% convertible debenture.
Based on the terms for conversion associated with
this debenture, there was an intrinsic value
associated with the beneficial conversion feature,
which was recorded as deferred interest expense and
is presented as a discount on the convertible
debenture. On June 3, 2002, these investors converted
the first 20% ($100,000) into 909,091 shares of
common stock at a conversion price of $0.11 per
share. In January 2003, the holder converted the
second 20% ($100,000 plus interest of $3,041) into
1,030,411 shares of common stock at a conversion
price of $.10 per share.
o On July 3, 2002, the Company sold to James F. Dicke
II, who was then a member of its Board of Directors,
$1,000,000 principal amount of its 5% convertible
debenture. Based on the terms for conversion
associated with this debenture, there was an
intrinsic value associated with the beneficial
conversion feature which was recorded as deferred
interest expense and is presented as a discount on
the convertible debenture. On July 3, 2002, Mr. Dicke
converted the first 20% of the debenture ($200,000)
for 1,299,545 shares of common stock at a conversion
price of $0.1539 per share. . In January 2003, the
holder converted the second 20% ($200,000 plus
interest of $5,041) of the debenture into 2,050,411
shares of common stock at a conversion price of $.10
per share.
o On July 15, 2002, the Company sold to Peter Lunder
$500,000 principal amount of the Company's 5%
convertible debenture. Based on the terms for
conversion associated with this debenture, there was
an intrinsic value associated with the beneficial
conversion feature, which was recorded as deferred
interest expense and is presented as a discount on
the convertible debenture. In January 2003, the
holder converted 40% ($200,000 plus interest of
$4,822) of the debenture into 1,587,797 shares of
common stock, the first 20% of which was converted at
a conversion price of $.1818 per share, and the
second 20% of which was converted at a conversion
price of $.10 per share.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
December 31, 2002, warrants to purchase approximately 16.5 million
shares of the Company's common stock relating to these securities
purchase agreements were outstanding with expiration dates through
2006.
During the quarter ended March 31, 2002, under several stock purchase
agreements, the Company sold an aggregate of 9,999,999 shares of its
common stock at $0.15 per share, for cash consideration of $1,500,000.
On April 12, 2002, pursuant to stock purchase agreements with various
institutional investors, the Company issued 17,486,491 shares of its
common stock at a market price of $0.11089 per share and received net
proceeds of approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's common stock at an exercise
price of $0.25 per share, subject to adjustment, as described below. In
addition, pursuant to a placement agent agreement with H. C. Wainwright
& Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that 60 trading days
following the original issue date of the warrants (the "First
Determination Date"), a certain number of warrants shall become
exercisable at $0.001. The number of shares for which the warrants are
exercisable at $0.001 per share is equal to the positive difference, if
any, between (i) $3,010,000 divided by the volume weighted average
price ("VWAP") of the Company's common stock for the 60 trading days
preceding the First Determination Date and (ii) 21,500,000. Upon 120
trading days following the original issue date of the warrants (the
"Second Determination Date"), a certain number of remaining warrants
shall become exercisable at $0.001. The number of shares for which the
Warrants are exercisable at $.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the VWAP of the
Company's common stock for the 60 trading days preceding the Second
Determination Date and (ii) 21,500,000. No adjustment will be made in
the event that the VWAP for the 60 trading day period preceding the
applicable determination date is $0.14 or greater (see Note 13).
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, finders fees of approximately $50,000
were paid in December 2002 and 627,000 warrants were issued during
January 2003.
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS (Continued)
On December 23, 2002 the Company received an additional $40,000 from
various investors representing 500,000 shares of common stock or $0.08
per share. These shares of common stock were issued during January 2003
along with warrants dated January 2003 to purchase 300,000 shares of
common stock at an exercise price of $0.12 per share until January
2008. In connection with this transaction the Company paid a finders
fee of $2,400 during January 2003 and issued warrants to purchase
30,000 shares of common stock with an exercise price of $.12 for a
period of five years.
PRIVATE EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell Capital Partners, LP, an institutional investor,
to sell up to $50,000,000 of the Company's common stock. Under such
agreement, the Company may exercise "put options" to sell shares for
certain prices based on certain average trading prices. Upon signing
this agreement, the Company issued to its placement agent, May Davis
Group, Inc., and certain investors, Class A warrants to purchase an
aggregate of 5,000,000 shares of common stock at an exercise price of
$1.00 per share, exercisable in part or whole until February 9, 2006,
and Class B warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price equal to the greater of $1.00 or 110%
of the bid price on the applicable advance date. Such Class B warrants
are exercisable pro rata with respect to the number of warrant shares
as determined by the fraction of the advance payable on that date as
the numerator and $20,000,000 as the denominator multiplied by
5,000,000, until sixty months from the date of issuance. The Company
has not issued any shares under this equity line, which expired in
August 2003. The Class B Warrants have expired by their terms. There is
no financial statement impact for the Class A and Class B Warrants
issued under this equity line.
SUBSEQUENT FINANCINGS - STOCK PURCHASE AGREEMENTS
During January 2003, pursuant to a Stock Purchase Agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a negotiated price of $0.08 per share, for a total purchase price of
$124,000 along with warrants to purchase 930,000 shares of common stock
at an exercise price of $0.12 per share until January 2008. In
connection with this transaction the Company paid a finders fee of
$7,440 during January 2003 and issued warrants to purchase 93,000
shares of common stock with an exercise price of $.12 for a period of
five years.
During March 2003, pursuant to a Stock Purchase Agreement with various
investors, the Company issued 1,250,000 shares of common stock at a
negotiated price of $0.08 per share, for a total purchase price of
$100,000 along with warrants to purchase 750,000 shares of common stock
at an exercise price of $0.12 per share through March 2007. In
connection with this transaction the Company paid a finders fee of
$6,000 during March 2003 and issued warrants to purchase 75,000 shares
of common stock with an exercise price of $.12 for a period of five
years.
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
SUMMARY OF WARRANT ACTIVITY
A summary of warrants issued and outstanding in connection with
convertible debentures and equity transactions as discussed above is
presented below. Upon exercise, warrants are convertible into an equal
number of the Company's .00001 par value common stock. The warrants are
exercisable immediately, with one exception, 5,000,000 Class B warrants
issued in 2001.
2002 2001 2000
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of
year 33,597,172 .555 24,476,498 .353 8,088,450 .264
Granted 24,022,000 .042 10,735,000 .0967 17,011,044 .392
Exercised 0 0 (181,818) .275 (622,996) .247
Forfeited (500,600) .20 (1,432,508) .234 0 0
Outstanding at end of year 57,118,572 .342 33,597,172 .555 24,476,498 .353
Warrants exercisable at
year-end 52,118,572 .279 28,597,172 .533 24,476,498 .353
The following table summarizes information about fixed stock warrants
outstanding at December 31, 2002:
Warrants Outstanding Warrants Exercisable
------------------------------------------------------------------------------ -----------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices At 12/31/02 Contractual Life Exercise Price At 12/31/02 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
.00001 16,125,000 9/02 .00001 16,125,000 .00001
.12 - .18 7,897,000 5/02 -12/02 .1276 7,897,000 .1276
.19 - .27 7,753,102 8/97 - 1/00 .2311 7,753,102 .2311
.28 - .41 6,195,214 8/97 - 2/00 .3101 6,195,214 .3101
.42 - 61 8,969,878 2/97 - 7/01 .5211 8,969,878 .5211
.62 - .92 178,378 2/97 .864 178,378 .864
.93 - 1.38 5,000,000 2/01 1.00 5,000,000 1.00
.93 - 1.38 5,000,000 N/A
NOTE 10. COMMON STOCK SUBSCRIBED BUT NOT ISSUED
Represents cash received during December 2002 pursuant to several
private placements of securities with various investors ($876,000) for
10,950,000 shares of common stock at a negotiated price of $0.08 per
share. These shares of common stock were issued during January 2003. In
addition, 100,000 shares of common stock were issued during January
2003 pursuant to an employment agreement. The value of these shares on
the date of issue was $7,900, which was recorded as compensation
expense.
F-30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of Product R. The Company has not as yet received
any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since Product
R was initially marketed in the 1940's; however, one study noted
adverse reactions from highly concentrated doses in guinea pigs.
Therefore, the Company could be subjected to claims for adverse
reactions resulting from the use of Product R. In the event any claims
for substantial amounts were successful, they could have a material
adverse effect on the Company's financial condition and on the
marketability of Product R. During November 2002, the Company secured
$3,000,000 of product liability coverage at a cost of approximately
$24,000 per annum. In addition, during October 2002, the Company
secured $3,000,000 in liability coverage for each of the three clinical
trials in Israel at a cost of approximately $16,000. There can be no
assurance that the
PRODUCT LIABILITY
Company will be able to secure additional insurance in adequate amounts
or at reasonable premiums if it determined to do so. Should the Company
be unable to secure additional product liability insurance, the risk of
loss to the Company in the event of claims would be greatly increased
and could have a material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has 10 issued U.S. patents, two issued Australian patents
and one granted China patent for the use of Product R. The Company
currently has 10 patent applications pending with the U.S. Patent
Office and 15 foreign patent applications. The Company can give no
assurance that other companies, having greater economic resources, will
not be successful in developing a similar product. There can be no
assurance that such patents, if obtained, will be enforceable.
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. The Company
has commenced these clinical trials. The Phase I initial trials are
placebo controlled, open label, dose escalation safety studies in
healthy volunteers. These studies are being conducted in the United
States under the supervision of GloboMax, LLC. On
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
STATUS OF FDA FILINGS (Continued)
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 June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following clinical trials using injectable Product R,
which began during November 2002:
o Phase I/Phase II Study in Cachectic Patients Needing
Salvage Therapy for AIDS. These patients have failed
highly active anti-retroviral therapy (HAART), remain
on HAART, and require salvage therapy. The Company
believes that Product R may have three major
beneficial effects in patients with AIDS:
o First, its therapeutic effects on body
wasting (cachexia) seen in patients with
AIDS:
o Second, the mitigation of the toxicity of
drugs included in HAART regimens for the
treatment of AIDS:
o Third, the synergistic activity with drugs
used in HAART regimens to suppress the
replication of HIV and increase the CD4 and
CD8 cell counts in patients with AIDS:
The Company believes that Product R may prove to be
an important "enabler" drug in the treatment of AIDS.
o Phase I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute
lymphocytic leukemia, multiple Myeloma, Hodgkin's
disease and non-Hodgkin's lymphoma.
o Phase I Study in Cachectic Patients with Solid
Tumors. Included are patients with solid tumors such
as colonic, lung, breast, stomach and kidney cancers.
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of Product R.
Although there can be no assurances, the Company anticipate that the
clinical trials in Israel will help facilitate the planned
investigational new drug (IND) application process for injectable
Product R with the FDA.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel using
Product R. It is anticipated that these trials will support future FDA
applications. As of December 31, 2002, the Company paid $242,000 for
such research.
F-32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (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 3 clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the 3 clinical trials including establishing a network of
scientists to perform said study/trial and initiate recruitment of
patients and (3) perform the studies/trials and evaluate the results.
Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $625,000 has
been paid through December 31, 2002.
In the fourth quarter of 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve-month period. These
services include the monitoring and auditing of the clinical sites,
hospital support and laboratory testing.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of Product R
for the treatment of AIDS patients (who have failed HAART and remain on
HAART therapy) into late Phase II blinded, controlled clinical trials.
On July 8, 2002, the Company extended an agreement with the Weizmann
Institute of Science and Yeda its developmental arm in Israel, to
conduct research on the effects of Product R on the immune system,
especially on T lymphocytes. In addition, scientists will explore the
effects of Product R in animal models. Under its provisions the study
period is extended for another twelve months to July 7, 2003. Total
costs incurred in connection with this research are expected to be
$138,000, of which payments of $40,000 were made in July 2002 and
November 2002.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of December 31,
2002, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.
F-33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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 March 1999 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 March 1999 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 March 1999 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, except for 75,000 at $0.27 and 75,000 at
$0.36. During March 2001 these options were extended until December
2001. As a result of this modification of the option terms, the fair
value of the option was estimated to be $23,291 based on a financial
analysis of the terms of the option using the Black-Scholes pricing
model with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount was recorded in March 2001. These
options were further extended in December 2001 until June 2002. 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 was recorded in December 2001. These options
were further extended in June 2002 until December 2002, and the
exercise prices were increased to $0.28 and $0.37, respectively. This
amount was recorded in June 2002. As a result of this modification of
the option terms, the fair value of the options was estimated to be
$3,078 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%.
From October 1996 to August 2003, Dr. Hirschman was the Chief Executive
Officer of the Company. In February 1998, the Company granted to Dr.
Hirschman options to purchase 23,000,000 shares of the Company's common
stock at an exercise price of $0.27 from time to time until February
2008. These options vested upon the Company's filing an IND application
with the FDA. In February 1998, the Company extended the expiration
date of the following options previously granted to Dr. Hirschman from
March 1999 to February 2008: (i) options to purchase 4,100,000 shares
at $0.18 per share; (ii) options to purchase 4,000,000 shares at $0.19
per share; (iii) options to purchase 4,000,000 shares at $0.27 per
share; and (iv) options to purchase 4,000,000 shares at $0.36 per
share. The fair value of these options was estimated to be
F-34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
$867,100 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 32 months.
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 December 31,
2002.
The Agreement also provides for previously issued options to acquire
23,000,000 shares of common stock at $0.27 per option share to be
immediately vested as of the date of this agreement and are exercisable
until February 17, 2008.
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.
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
F-35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
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%.
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.
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
The Company values these options based upon a measurement date
consistent with the vesting schedule of the options.
In May 2002, the Company granted to members of its of the Scientific
Advisory Board and Business Advisory Board options to purchase an
aggregate of 2,250,000 shares of common stock at an exercise price of
$0.12 per share, which options are exercisable 25% immediately, 25% on
June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002
through May 5, 2010. Compensation expense for the year ended December
31, 2002 was $100,944.
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. Compensation
expense for the year ended December 31, 2002 was $6,438.
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. Because the options did not begin to vest until March 2003, there
was no compensation expense for the year ended December 31, 2002.
F-36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
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.
In June 2002, the Company granted to Roy S. Walzer, upon his becoming a
member of the Board of Directors and member of various committees of
the Board, options to purchase 528,800 shares of common stock at an
exercise price of $0.295 per share, which options are exercisable 25%
immediately, 25% on September 10, 2002, 25% on December 10, 2002 and
25% on March 10, 2003 through June 9, 2010. The fair value of the these
options was estimated to be $140,608 ($0.2659 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years.
In July 2002, the Company granted to Paul Bishop, upon his becoming a
member of the Board of Directors, options to purchase 238,356 shares of
common stock at an exercise price of $0.17 per share,) which options
are exercisable 25% immediately, 25% on October 29, 2002, 25% on
January 29, 2003 and 25% on April 29, 2003 through July 28, 2010. The
fair value of the these options was estimated to be $38,509 ($0.1616
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 133%; a risk free interest rate of
4.38% and an expected life of eight years.
In September 2002, the Company granted to Richard Kent, upon his
becoming a member of the Board of Directors, and member of various
committees of the Board, options to purchase 241,096 shares of common
stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 24, 2002, 25% on March 24,
2003 and 25% on June 24, 2003 through September 23, 2010. The fair
value of the these options was estimated to be $29,377 ($0.1218 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 127%; a risk free interest rate of
4.38% and an expected life of eight years.
F-37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years.
Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.
There were no other options outstanding that would require pro forma
presentation.
On November 4, 2002, Paul Bishop resigned from the Company's Board of
Directors. Under the terms of his option agreement he is entitled to
exercise options to purchase 119,178 shares of the Company's common
stock until November 3, 2005.
On November 4, 2002, James F. Dicke, II resigned from the Company's
Board of Directors. Under the terms of his option agreement, he is
entitled to exercise options to purchase 600,000 shares of the
Company's common stock until November 3, 2005.
On November 6, 2002, Jozef Straus resigned from the Company's Business
Advisory Board. Under the terms of his option agreement he is entitled
to exercise options to purchase 187,500 shares of the Company's common
stock until November 5, 2005.
During February 2003, Richard S. Kent resigned from the Company's Board
of Directors. Under the terms of his option agreements he is entitled
to exercise options to purchase 394,437 shares of the Company's common
stock until February 2006.
Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.
F-38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
SUMMARY OF STOCK OPTIONS
The fair value of each option is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 2001, and 2002, respectively:
divided yield of 0.0% percent for all years; expected volatility of
80%, N/A, and 113% to 133%, risk-free interest rates of 6%, N/A, and
4-6% and expected lives of 10, N/A, and 8 to 10 years. A summary of the
status of the Company's fixed stock options as of December 31, 2002,
2001 and 2000, and changes during the years ending on those dates is
presented below:
2002 2001 2000
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of
year 51,056,380 .2557 51,426,380 .2560 55,438,880 .265
Granted 19,782,252 .10 100,000 .31 1,146,000 .2818
Exercised -- -- (60,000) .30 (5,158,500) .27
Forfeited (7,005,205) -- (410,000) -- --
Outstanding at end of year 63,833,427 .2122 51,056,380 .2557 51,426,380 .2560
Options exercisable at year-end
Weighted-average fair value of
options granted during the year 50,473,879 .2433 48,518,420 .2553 48,394,460 .2568
.10 .31 .2818
The following table summarizes information about stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------- ---------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices At 12/31/02 Contractual Life Exercise Price At 12/31/02 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
.08 - .12 17,937,500 9.5 years .093 5,837,500 .12
.13 - .18 4,865,096 5.5 years .1754 4,345,548 .1777
.19 - .27 35,832,880 5.4 years .2571 35,661,880 .2573
.28 - .36 5,197,951 5.6 years .3485 4,628,951 .3519
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
SUMMARY OF STOCK OPTIONS (Continued)
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.
Year Ended December 31,
---------------------------------------------------------------------------------
2002 2002 2001 2001 2000 2000
Reported Restated Reported Restated as Reported Restated
-------- -------- -------- -------- ----------- --------
Net loss $(10,342,335) $(8,913,405) $(11,715,568) $(10,729,863) $(9,354,664) $(8,816,192)
Deduct: total stock-based
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (2,016,132) (724,048) (2,374,643) (154,034) (1,799,827) (992,475)
Pro forma net loss $(12,358,467) $(9,637,453) $(14,090,211) $(10,883,897) $(11,154,491) $(9,808,667)
Loss per share - basic and
diluted
As reported $(0.02) $(0.02) $(0.03) $(0.03) $(0.03) $(0.02)
Pro forma $(0.03) $(0.02) $(0.04) $(0.03) $(0.03) $(0.03)
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with GloboMax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for Product R. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002.
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share and warrants
to purchase 1,750,000 shares at an exercise price of $0.26 per share
until February 28, 2005. The fair value of the warrants was estimated
to be $200,249 ($0.057 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 90%; a
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT (Continued)
risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). This amount was
amortized to consulting expense during the year ended December 31,
2000.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the year ended
December 31, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities, whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. Pursuant to these agreements, distributors are
obligated to cause Product R to be approved for commercial sale in such
countries and, upon such approval, to purchase from the Company certain
minimum quantities of Product R to maintain the exclusive distribution
rights. Leonard Cohen, a former consultant to the Company, has informed
the Company that he is an affiliate of two of these entities. To date,
the Company has recorded revenue classified as other income for the
sale of territorial rights under the distribution agreements. The
Company has made no sales under the distribution agreements other than
for testing purposes.
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000, which has not been paid at December 31, 2002.
F-40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
SOFTWARE ACQUISITION
During 2001, the Company contracted with a software vendor at a cost of
approximately $500,000 to acquire and install an SAP system for
accounting, administrative and production control. As of December 31,
2001, the entire cost was incurred and was capitalized as an additional
element of cost of the computer equipment.
LEASES
CAPITAL LEASES
During 1998, the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments of
$4,529 for 60 months commencing on September 1998 and expiring on July
2003. During 1999, the Company entered into a purchase lease agreement
for equipment totaling $38,645. The lease calls for monthly payments of
$965 for 48 months commencing in August 1999 and expiring in July 2003.
During 2000, the Company entered into a purchase lease agreement for
equipment totaling $13,197. The lease calls for monthly payments of
$447 for 36 months commencing in January 2001 and expiring in December
2003. During 2002, the Company entered into a purchase lease agreement
for equipment totaling $146,672. The lease calls for monthly payments
of $5,903 for 24 months commencing in February 2002 and expiring in
January 2004.
Future minimum capital lease payments and the net present value of the
future minimum lease payments at December 31, 2002 are as follows:
Year ending December 31:
2003 $ 108,764
2004 5,903
---------
Total minimum lease payments 114,667
Less amount representing interest 4,114
---------
Net present value of future minimum lease payments 110,553
Less current maturities 104,719
---------
$ 5,834
=========
OPERATING LEASES
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $17,000 annually. The Company has three options to renew
for an additional one year per option. Management has exercised its
second option for the year 2001. Effective December 2001, the Company
closed its Florida office.
On December 30, 1998, the Company executed an amendment to its existing
lease dated April 1997 for the laboratory facilities in Yonkers, New
York. The lease on the additional space is effective May 1, 1999. The
new lease adds 10,550 square feet (for a total of 16,650 square feet)
F-41
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (Continued)
OPERATING LEASES (Continued)
and extends its term until April 2005. Annual rent on the original
lease is approximately $85,000. Rent for the additional facilities is
approximately $175,000. Total rental commitment for the Yonkers
facilities will be $260,000 until May 1, 2002 at which time it will
increase to approximately $290,000.
The Company leased an automobile in November 1999 for 39 months at $711
per month expiring in January 2003. The Company entered into a new 39
month lease for $716 per month, starting in February 2003 and expiring
in April 2006.
Total lease expense for the years ended December 31, 2002, 2001 and
2000 amounted to $298,763, $263,609 and $296,064, respectively.
Future minimum lease commitments as of December 31, 2002 are as
follows:
Year ending December 31:
2003 $ 299,000
2004 299,000
2005 105,000
---------
Total $ 703,000
=========
NOTE 12. SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of the Company upon the terms
and conditions of separate severance agreements. The resignations were
not due to any disagreement with the Company or any matter relating to
the Company's operations, policies or practices.
In connection with their resignation, the Company paid $150,000 to each
of Messrs. Bregman and Friedland and $2,500 to Mr. Silver. In
connection with the severance agreements, the Company obtained a loan
in the amount of $200,000 from the Company's Chief Financial Officer,
as evidenced by a demand promissory note. The note was repaid on
December 17, 2001.
F-42
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleges that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company is seeking a judgment
for damages, interest and costs.
The complaint names SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claims
that the "defendants have each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of the largest shareholders of
the Company. The complaint alleges that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,002 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charges the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits in the U.S. District Court for the
Southern District of New York. The suits sought a preliminary
injunction and other relief for breach of contract. The District Court
entered an order on February 11, 2003 upon a motion of the Alpha
Plaintiffs, that required that (i) the Company deliver to the Alpha
Plaintiffs the shares of Company common stock issuable upon exercise of
the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000
or the market value of the warrant shares, whichever is higher for each
group of warrants as of the first and second determination dates; and
(iii) all the proceeds from the sale of the warrant shares be placed in
escrow pending final resolution of the litigation. Within ten days of
the entry of the order, the Company moved to alter/amend the judgment
and/or reconsideration of the Court's order requesting relief from the
Court's order. The Court denied this motion and ordered the Company to
immediately deliver the warrant shares to the Alpha Plaintiffs upon
their payment of the exercise price and posting of a bond, without
further delay and no later than April 8, 2003. The Company has appealed
the order denying the motion for reconsideration. The Company continues
to consider and pursue all of its options relating to the litigation,
including resolution through settlement.
F-43
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. STOCKHOLDERS' EQUITY
During 2001, the Company issued 23,082,245 shares of common stock for
an aggregate consideration of $5,895,491. The amounts were comprised of
the issuance of 22,845,834 shares of common stock for cash of
$5,765,000, issuance of 60,000 shares common stock pursuant to the
exercise of options for $18,000, issuance of 76,411 shares of common
stock pursuant to the cashless exercise of warrants for $77,491 and
issuance of 100,000 shares of common stock in exchange for services for
$35,000.
During 2002, Company issued 52,227,127 shares of common stock for an
aggregate consideration of $6,529,608. The amounts were comprised of
the issuance of 50,018,491 shares of common stock for cash of
$6,229,608 and issuance of 2,208,636 shares of common stock upon
conversion of $300,000 of convertible debentures.
During 2002, 2001 and 2000, additional paid-in-capital was recorded of
$177,963, $691,404 and $1,901,927, respectively. A summary of these
modifications to equity instruments is set forth below:
SUMMARY OF MODIFICATIONS TO EQUITY INSTRUMENTS
Original New New
Black-scholes Exercise Original Exercise Expiration
Year Grantee Calculation Option Shares Price Expiration Date Price Date
---- ------- ----------- ------------- ----- --------------- ----- ----
2000 DCT $166,860 734,000 $0.21 7/1/2000 $0.22 12/31/2000
2000 DCT $108,429 744,000 $0.22 12/31/2000 $0.24 12/31/2001
2000 Leonard Cohen $55,023 200,000 $0.16 7/1/2000 $0.17 12/31/2000
2000 Leonard Cohen $17,311 100,000 $0.17 12/31/2000 $0.19 12/31/2001
2000 Elliott Bauer $953,885 3,349,500 $0.14 7/1/2000 $0.16 12/31/2000
2000 Elliott Bauer $600,419 3,349,500 $0.16 12/31/2000 $0.18 12/31/2001
---------- ---------
$1,901,927 8,477,000
2001 Richard Rubin $25,595 144,000 $0.27 3/23/2001 $0.27 12/31/2001
2001 Richard Rubin $38,518 290,000 $0.36 3/23/2001 $0.36 12/31/2001
2001 Elliott Bauer $13,330 75,000 $0.27 3/23/2001 $0.27 12/31/2001
2001 Elliott Bauer $9,961 75,000 $0.36 3/23/2001 $0.36 12/31/2001
2001 Henry Kamioner $115,291 500,000 $0.19 3/23/2001 $0.19 12/31/2001
2001 Henry Kamioner $88,870 500,000 $0.27 3/23/2001 $0.27 12/31/2001
2001 Henry Kamioner $66,410 500,000 $0.36 3/23/2001 $0.36 12/31/2001
2001 Elliott Bauer $318,359 3,349,500 $0.18 12/31/2001 $0.19 6/30/2002
2001 Elliott Bauer $3,958 75,000 $0.27 12/31/2001 $0.28 6/30/2002
2001 Elliott Bauer $2,200 75,000 $0.36 12/31/2001 $0.37 6/30/2002
2001 Leonard Cohen $8,912 100,000 $0.19 12/31/2001 $0.20 6/30/2002
---------- ---------
$691,404 5,683,500
2002 Bauer $174,068 3,349,500 $0.19 6/30/2002 $0.19 12/31/2002
2002 Bauer $2,372 75,000 $0.28 6/30/2002 $0.28 12/31/2002
2002 Bauer $1,523 75,000 $0.37 6/30/2002 $0.37 12/31/2002
---------- ---------
$177,963 3,499,500
F-44
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME
TAXES. SFAS No. 109 is an asset and liability approach for computing
deferred income taxes.
As of December 31, 2002 and 2001, the Company had net operating loss
carryforwards for Federal income tax reporting purposes amounting to
approximately $40,100,000 and $31,000,000, which expire in varying
amounts to 2021.
The Company presently has temporary differences between financial
reporting and income tax reporting relating to the amortization of
warrant costs, compensation expense for the extension of options,
depreciation and patent costs.
The components of the deferred tax asset as of December 31, 2002 and
2001 were as follows:
2002 2002 2001 2001
Reported Restated Reported Restated
-------- -------- -------- --------
Benefit of net operating loss carryforwards $13,634,000 $12,852,000 $11,730,000 $11,254,000
Less valuation allowance 13,634,000 12,852,000 11,730,000 11,254,000
----------- ------------ ----------- -----------
Net deferred tax asset $ -- $ -- $ -- $ --
=========== ============ =========== ===========
</Table>
As of December 31, 2002 and 2001, sufficient uncertainty exists
regarding the realizability of these operating loss carryforwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. The
Company's utilization of its tax benefit carryforwards may be further
restricted in the event of future changes in the ownership of the
Company from the exercise of options and warrants or other future
issuances of common stock.
F-45
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16. DISCONTINUED OPERATIONS
SFAS No. 144 requires the operating results of any assets with their
own identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented must also be reclassified as discontinued
operations. See Note 1 and Note 5 for more detail regarding the planed
sale of LTD and classification as held for sale during 2002. The
following table details the amounts reclassified to discontinued
operations:
Inception
(February 20,
Year Ended December 31, 1984) to
--------------------------------------------------- December 31,
2002 2001 2000 2002
----------- ----------- ----------- -----------
Revenues $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Costs and Expenses:
General and administrative 181,348 238,311 207,941 1,310,350
Depreciation 20,062 21,048 16,165 271,498
----------- ----------- ----------- -----------
201,410 259,359 224,106 1,581,848
----------- ----------- ----------- -----------
Loss from Operations (201,410) (259,359) (224,106) (1,581,848)
Other Income 256 245 245 4,655
----------- ----------- ----------- -----------
Discontinued operations $ (201,154) $ (259,114) $ (223,861) $(1,577,193)
=========== =========== =========== ===========
NOTE 17. 401(K) PLAN
In December 1999, the Company adopted a 401(k) plan that allows
eligible employees to contribute up to 20% of their salary, subject to
annual limits imposed by the Internal Revenue Service. The Company
matches 50% of the first 6% of the employee contributions in common
stock and may, at its discretion, make additional contributions based
upon earnings. In March 2001, the Company funded the 401(k) plan with
$23,757 to enable the 401(k) plan to purchase shares of common stock on
the open market to contribute to the 401(k) plan for the employer match
for the year ended December 31, 2001. At December 31, 2002 the Company
accrued $40,675 to fund the 401k plan representing the Company's match
for the plan year 2002. The Company intends to purchase common stock in
the open market at prevailing market prices to satisfy its 2002
matching contribution obligations. In March 2003, the Company amended
the terms of the Company's 401(k) plan to terminate the obligation to
make matching contributions.
F-46
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(UNAUDITED) (AUDITED)
(RESTATED)
ASSETS
Current Assets:
Cash and cash equivalents $ 938,590 $ 1,475,755
Prepaid insurance 102,648 86,368
Assets held for sale 152,273 172,601
Other current assets 5,099 35,527
------------ ------------
Total current assets 1,198,610 1,770,251
Property and Equipment, Net 1,541,002 2,244,118
Other Assets 1,266,197 931,660
------------ ------------
Total assets $ 4,005,809 $ 4,946,029
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 733,000 417,061
Accrued liabilities 134,881 137,646
Current portion of capital lease obligation 18,389 104,719
Current portion of note payable 9,660 25,165
------------ ------------
Total current liabilities 895,930 684,591
------------ ------------
Long-Term Debt:
Convertible debenture, net 2,316,223 1,610,499
Capital lease obligation -- 5,834
Note payable -- 4,879
------------ ------------
Total long-term debt 2,316,223 1,621,212
------------ ------------
Common Stock Subscribed but not Issued 883,900
------------
Commitments and Contingencies -- --
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized,522,918,079 and 455,523,990 shares issued
and outstanding 5,229 4,555
Additional paid-in capital 54,659,037 50,122,024
Deficit accumulated during the development stage (53,680,991) (48,333,867)
Discount on warrants (189,618) (36,386)
------------ ------------
Total stockholders' equity 793,657 1,756,326
------------ ------------
Total liabilities and stockholders' equity $ 4,005,810 $ 4,946,029
============ ============
See notes to consolidated financial statements.
F-47
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION
SEPTEMBER 30, SEPTEMBER 30, (FEBRUARY 20,
------------------------------ ------------------------------ 1984) TO
2002 2002 SEPTEMBER 30,
2003 (Restated) 2003 (Restated) 2003
------------- ------------- ------------- ------------- -------------
Revenues $ -- $ -- $ -- $ -- $ 231,892
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 219,586 978,658 1,066,596 3,517,924 19,382,012
General and administrative 873,473 708,133 2,541,689 2,058,352 20,136,166
Compensation and other expense for
options and warrants 20,029 (76,860) 74,368 488,807 3,339,176
Depreciation 228,252 254,045 703,276 713,356 2,870,465
------------- ------------- ------------- ------------- -------------
1,341,340 1,863,976 4,385,929 6,778,439 45,727,819
------------- ------------- ------------- ------------- -------------
Loss from Operations (1,341,340) (1,863,976) (4,385,929) (6,778,439) (45,495,927)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 2,811 6,482 10,661 11,305 912,096
Other income -- -- -- -- 120,093
Interest expense (757,420) (83,543) (949,260) (120,980) (7,314,964)
Severance expense - former directors -- -- -- -- (302,500)
------------- ------------- ------------- ------------- -------------
(754,609) (77,061) (938,599) (109,675) (6,585,275)
------------- ------------- ------------- ------------- -------------
Loss from Continuing Operations (2,095,949) (1,941,037) (5,324,528) (6,888,114) (52,081,202)
Loss from Discontinued Operations (6,245) (42,098) (22,596) (129,058) (1,599,789)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,102,194) $ (1,983,135) $ (5,347,124) $ (7,017,172) $ (53,680,991)
============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.00) $ (0.00) $ (0.01) $ (0.02)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------- ------------- ------------- -------------
Net loss $ (0.00) $ (0.00) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 496,522,776 425,952,540 481,941,317 425,952,540
============= ============= ============= =============
See notes to consolidated financial statements.
F-48
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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.
F-49
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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.
F-50
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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.
F-51
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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, 1993 236,276,991 $2,363 $3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting services $0.05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of options 0.08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of options 0.10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
-----
Issuance of common stock, exercise of options 0.05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting services 0.11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting services 0.14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------ ---------- ----- ----------- -----
See notes to consolidated financial statements.
F-52
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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.
F-53
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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.
F-54
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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)
----------- ------ ------------ -------- ------------ --------
See notes to consolidated financial statements.
F-55
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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 -- -- 950,036 -- -- --
Beneficial conversion feature,
December debenture -- -- 361,410 -- -- --
Amortization of warrant costs,
convertible debentures -- -- 300 -- -- (300)
Warrant costs, related to
convertible debentures -- -- 2,455
Warrant costs, August debenture -- -- 49,964 -- -- --
Warrant costs, December debenture -- -- 4,267 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- --
Amortization of deferred
compensation cost -- -- (14,769) -- 14,769 --
Credit arising from modification
of option terms -- -- 210,144 -- -- --
Net loss, year ended
December 31, 1999 -- -- -- (6,323,431) -- --
----------- ------ ------------ ------------ -------- -------
Balance, December 31, 1999 (Restated) 303,472,035 3,034 17,255,858 (19,874,407) -- 2,155
----------- ------ ------------ ------------ -------- -------
See notes to consolidated financial statements.
F-56
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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 (Restated) 303,472,035 $3,034 $17,255,858 $(19,874,407) $2,155
Issuance of common stock,
exercise of options $0.1400 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock,
exercise of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock,
exercise of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock,
exercise of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock,
exercise of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock,
exercise of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock,
exercise of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock,
exercise of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock,
cashless exercise of warrants 563,597 6 326,153 -- --
Issuance of common stock,
services rendered 0.4650 100,000 1 46,499 -- --
Private placement of
common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of
common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of
common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- (326,159) -- --
Beneficial conversion
feature, January Debenture -- -- 395,236 -- --
Warrant costs, consulting agreement -- -- 200,249 -- --
Warrant costs, January Debenture -- -- 13,418 -- --
Warrant costs, related to
convertible debentures -- -- -- -- (2,454)
Recovery of subscription receivable
previously written off -- -- 19,000 -- --
Credit arising from modification
of option terms -- -- 1,901,927 -- --
Net loss, year ended
December 31, 2000 -- -- -- (8,816,192) --
----------- -------- ------------ ------------ -------
Balance, December 31, 2000 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
----------- -------- ------------ ------------ -------
See notes to consolidated financial statements.
F-57
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
Issuance of common stock,
exercise of options $0.2700 40,000 1 10,799 -- --
Issuance of common stock,
exercise of options 0.3600 20,000 1 7,199 -- --
Issuance of common stock,
cashless exercise of warrants 76,411 1 77,491 -- --
Issuance of common stock,
for services rendered 0.3500 100,000 1 34,999 -- --
Sale of common stock, for cash 0.1500 6,666,667 66 999,933 -- --
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904 -- --
Cashless exercise of warrants -- -- (77,491) -- --
Credit arising from modification
of option terms -- -- 691,404 -- --
Net loss, year ended
December 31, 2001 -- -- -- (10,729,863) --
----------- ------- ------------ ------------ -----
Balance, December 31, 2001 (Restated) 403,296,863 $4,033 $42,858,802 $(39,420,462) $(299)
=========== ======= ============ ============ =====
See notes to consolidated financial statements.
F-58
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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 (Restated) 403,296,863 4,033 42,858,802 (39,420,462) (299)
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 -- -- 36,086 --
Expenses of stock issuance -- -- (50,160) -- (36,087)
Warrants granted for consulting
services -- -- 107,382 -- --
Credit arising from modification
of option terms -- -- 177,963 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- --
Beneficial conversion feature,
May debenture -- -- 55,413 -- --
Beneficial conversion feature,
July debentures -- -- 166,515 -- --
Net loss, year ended
December 31, 2002 -- -- -- (8,913,405) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2002 (Restated) 455,523,990 $4,555 $50,122,024 $(48,333,867) $(36,386)
=========== ====== ============ ============ ===========
See notes to consolidated financial statements.
F-59
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 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 (Restated) 455,523,990 4,555 50,122,024 (48,333,867) (36,386)
Sale of common stock, for cash $0.0500 21,620,000 216 1,080,784 -- --
Sale of common stock, for cash $0.0800 22,650,000 226 1,811,774
Issuance of common stock,
conversion of debt $0.0424 14,150,943 142 599,858
Issuance of common stock,
conversion of debt 0.1000 7,255,754 73 725,653 -- --
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
issue of convertible debenture -- -- 517,141 -- (517,141)
Expenses of stock issuance -- -- (199,989) -- 36,386
Amortization of warrant costs,
related to convertible debenture -- -- -- -- 327,523
Litigation settlement -- --
cash and stock -- -- (1,126,407) -- --
Litigation settlement stock 0.0800 947,000 9 75,751 -- --
Options issued for services rendered -- -- 74,368 -- --
Beneficial conversion feature,
April debenture -- -- 482,859 -- --
Beneficial conversion feature,
July debenture 375,000
Net loss, Nine Months
Ended September30, 2003 -- -- -- (5,347,124) --
-------- ----------- ----------- ------------ ------------ -----------
Balance, September 30, 2003
(unaudited) 522,918,079 $ 5,229 $ 54,659,037 $(53,680,991) $ (189,618)
-------- =========== =========== ============ ============ ===========
See notes to consolidated financial statements.
F-60
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCEPTION
(FEBRUARY 20,
NINE MONTHS ENDED 1984) TO
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ------------
2002
2003 (Restated) 2003
----------- ----------- ------------
Cash Flows from Operating Activities:
Net loss $(5,347,124) $(7,017,172) $(53,680,991)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 715,158 728,817 3,153,821
Amortization of debt issuance costs 105,922 21,224 934,559
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 417,145 57,574 4,599,940
Amortization of discount on warrants 327,523 -- 957,800
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 74,493 21,863 194,130
Issuance of common stock for services -- -- 1,586,000
Compensation expense for options and warrants 74,368 488,807 3,339,176
Changes in operating assets and liabilities:
(Increase) decrease in other current assets 17,664 (45,452) (127,647)
Increase in other assets (117,446) (112,517) (1,752,635)
Increase (decrease) in accounts payable and accrued liabilities 313,176 (921,847) 874,083
----------- ----------- ------------
Total adjustments 1,928,003 238,469 14,519,727
----------- ----------- ------------
Net cash used by operating activities (3,419,121) (6,778,703) (39,161,264)
----------- ----------- ------------
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 (192,755) (4,318,615)
----------- ----------- ------------
Net cash provided (used) by investing activities 4,769 (192,755) (4,318,615)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt- net of issuance costs 2,186,986 2,000,000 13,686,986
Proceeds from sale of securities, net of issuance costs 2,737,298 6,279,788 32,266,984
Proceeds from common stock subscribed but not issued (883,900) -- --
Payments under litigation settlement (1,050,649) -- (1,050,649)
Payments under capital lease (92,164) (109,528) (402,192)
Payments on note payable (20,384) (17,911) (101,660)
Recovery of subscription receivable written off -- -- 19,000
----------- ----------- ------------
Net cash provided by financing activities 2,877,187 8,152,349 44,418,469
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (537,165) 1,180,891 938,590
Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 --
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 938,590 $ 2,680,700 $ 938,590
=========== =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the period for interest $ 14,177 $ 11,305
=========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
F-61
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
September 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 September 30, 2003 and results of
operations for the three and nine months ended September 30, 2003 and
2002 and cash flows for the nine months ended September 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, since, subsequent
to December 31, 2002, the Company reduced its research and development
activities to include only research performed in Israel. Therefore, the
Company's allocation to research and development includes only those
direct expenses relating to the research and development activities in
Israel and 30% of salaries and payroll taxes for the Company's Chief
Scientist, who oversees the clinical trials in Israel and spends
approximately 30% of his time in these initiatives.
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.
During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 will not have any
impact on the Company's operating results or financial position as the
Company does not have any derivative instruments that are affected by
SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have any impact on the Company's
operating results or financial position as the Company does not have
any financial instruments with characteristics of both liabilities and
equity that are not already classified as liabilities.
F-62
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $53,680,991 since inception and is
dependent upon registration of AVR118 (formerly known as "Product R"
until October 2003) 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 AVR118 is approved for
sale in the United States or another industrially developed country,
the Company will be dependent upon the continued sale of its
securities, debt or equity financing for funds to meet its cash
requirements. The foregoing issues raise substantial doubt about the
Company's ability to continue as a going concern.
Management intends to continue to sell the Company's securities in an
attempt to meet its cash flow requirements; however, no assurance can
be given that equity or debt financing, if and when required, will be
available.
F-63
ADVANCED VIRAL RESEARCH CORP. (A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements for the three and nine months
ending September 30, 2002 have been restated to reflect changes in
accounting for warrants issued in connection with equity transactions
as well as options issued to the Board of Directors and employees (on a
pro-forma basis only) and its Advisory Boards. The restatement resulted
in income which reduced the previously reported net loss for the three
and nine months ended September 30, 2002 by approximately $415,000 and
$950,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the nine months ended September 30, 2002 and was reduced by
$0.01 to ($0.00) from ($0.01) for the three months ended September 30,
2002. The Company's deficit accumulated during the development stage
was reduced by $2,803,938 for the year ended December 31, 2002. The
restatement did not impact the Company's net cash in investing and
financing activities and net cash used in operating activities remained
unchanged, however, certain components within operating activities
consisting of amortization of deferred interest cost, discount on
warrants and compensation expense for options and warrants, were
restated for the nine months ended September 30, 2002.
AS OF DECEMBER 31, 2002
----------------------------------------------
AS REPORTED ADJUSTMENTS RESTATED
----------- ---------- -----------
ASSETS
Current Assets 1,770,251 -- 1,770,251
Property and Equipment, Net 2,244,118 -- 2,244,118
Other Assets 931,660 -- 931,660
----------- ---------- -----------
Total assets 4,946,029 -- 4,946,029
=========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 684,591 -- 684,591
Long-Term Debt:
Convertible debenture, net 1,658,231 (47,732) 1,610,499
Capital lease obligation 5,834 -- 5,834
Note payable 4,879 -- 4,879
----------- ---------- -----------
Total long-term debt 1,668,944 (47,732) 1,621,212
----------- ---------- -----------
Common Stock Subscribed but not Issued 883,900 -- 883,900
----------- ---------- -----------
Stockholders' Equity:
Common stock 4,555 -- 4,555
Additional paid-in capital 57,530,605 (7,408,581) 50,122,024
Deficit accumulated during development
Stage (51,137,805) 2,803,938 (48,333,867)
Discount on warrants (4,688,761) 4,652,375 (36,386)
----------- ---------- -----------
Total stockholders' equity 1,708,594 47,732 1,756,326
----------- ---------- -----------
Total liabilities and stockholders' equity 4,946,029 -- 4,946,029
=========== ========== ===========
F-64
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------------- -------------------------------------------
AS REPORTED ADJUSTMENTS RESTATED AS REPORTED ADJUSTMENTS RESTATED
------------- ----------- ------------- ------------- ----------- -----------
Revenues $ -- $ -- $ -- $ -- $ -- $ --
------------- ----------- ------------- ------------- ----------- -----------
Costs and Expenses:
Research and development 978,658 -- 978,658 3,517,924 -- 3,517,924
General and administrative 708,133 -- 708,133 2,058,352 -- 2,058,352
Compensation and other expense
for options and warrants 30,462 (107,322) (76,860) 646,004 (157,197) 488,807
Depreciation 254,045 -- 254,045 713,356 -- 713,356
------------- ----------- ------------- ------------- ----------- -----------
1,971,298 (107,322) 1,863,976 6,935,636 (157,197) 6,778,439
------------- ----------- ------------- ------------- ----------- -----------
Loss from Operations (1,971,298) 107,322 (1,863,976) (6,935,636) 157,197 (6,778,439)
------------- ----------- ------------- ------------- ----------- -----------
Other Income (Expense): -- -- --
Interest income 6,482 -- 6,482 11,305 -- 11,305
Other income -- -- --
Interest expense (390,830) 307,287 (83,543) (913,836) 792,856 (120,980)
Severance expense - former
directors -- -- -- -- -- --
------------- ----------- ------------- ------------- ----------- -----------
(384,348) 307,287 (77,061) (902,531) 792,856 (109,675)
------------- ----------- ------------- ------------- ----------- -----------
Loss from Continuing Operations (2,355,646) 414,609 (1,941,037) (7,838,167) 950,053 (6,888,114)
Loss from Discontinued Operations (42,098) -- (42,098) (129,058) -- (129,058)
------------- ----------- ------------- ------------- ----------- -----------
Net Loss $ (2,397,744) $ 414,609 $ (1,983,135) $ (7,967,225) $ 950,053 $(7,017,172)
============= =========== ============= ============= =========== ===========
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.01) $ (0.00) $ (0.02) $ (0.02)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------- ------------- ------------- -----------
Net loss $ (0.01) $ (0.00) $ (0.02) $ (0.02)
============= ============= ============= ===========
Weighted Average Number of Common
Shares Outstanding 425,952,540 425,952,540 425,952,540 425,952,540
============= ============= ============= ===========
F-65
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sales of the Company's product. The Company has not as
yet received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since AVR118
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 AVR118. 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 AVR118.
During November 2002, the Company secured $3,000,000 of product
liability coverage at a cost of approximately $24,000 per annum. In
addition, during October 2002, the Company secured $3,000,000 in
liability coverage for each of the three clinical trials in Israel at a
cost of approximately $16,000. There can be no assurance that the
Company will be able to secure additional insurance in adequate amounts
or at reasonable premiums if it determined to do so. Should the Company
be unable to secure additional product liability insurance, the risk of
loss to the Company in the event of claims would be greatly increased
and could have a material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has eight issued U.S. patents, some covering the
composition of AVR118 and others covering various uses of the AVR118.
The Company has nine pending U.S. patent applications, among which two
have been allowed. The Company has seventeen pending foreign patent
applications. In addition, the Company has two issued Australian
patents and one issued Chinese patent covering several uses of AVR118.
During April 2002, under the terms of a settlement agreement entered as
part of a final judgment on March 25, 2002, the Company was 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, the Company cannot be certain that
the Company were the first to make the inventions covered by each of
its pending patent applications or that the Company 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. The
Company cannot be sure that any additional patents will issue from any
of its
F-66
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
LACK OF PATENT PROTECTION (Continued)
patent applications or, should any patents issue, that the Company will
be provided with adequate protection against potentially competitive
products. Furthermore, the Company 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 its patents or
circumvent its patent position in the United States or abroad.
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 AVR118 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
AVR118 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 AVR118. Currently, the Company does not have sufficient funds
available to pursue the Phase 2 clinical trials of AVR118 as a topical
treatment for genital warts caused by HPV infection.
STATUS OF ISRAEL CLINICAL TRIALS
In November 2002 the Company began testing injectable AVR118 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 AVR118 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 AVR118 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.
F-67
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are
patients with solid tumors such as colonic, lung, breast, stomach
and kidney cancers.
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of AVR118. 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 AVR118 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
AVR118 has concluded. It is anticipated that these trials will support
future FDA applications. The Company paid $242,000 under this
agreement.
In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the three clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the three clinical trials including establishing a network
of scientists to perform said study/trial and initiate recruitment of
patients and (3) perform the studies/trials and evaluate the results.
Total costs incurred in connection with EnviroGene's services are
expected to be $1,551,000, of which approximately $1,323,000 has been
expensed from inception and approximately $875,000 has been paid
through September 30, 2003. Approximately $100,000 and $697,000 has
been expensed during the three and nine months ended September 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 $210,000 has
been expensed and approximately $186,000 has been paid for the nine
months ended September 30, 2003, and approximately $60,000 has been
expensed and approximately $52,000 was paid during the three months
ended September 30, 2003.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of AVR118 for
the treatment of AIDS patients (who have failed HAART and remain on
HAART therapy) into late Phase II blinded, controlled clinical trials.
In August 2003, the Company decided to defer the continuation of and
re-examine the procedures, protocol and objectives of the Phase I study
in Israel using AVR118 for cachectic patients with leukemia and
lymphoma and a recent Phase I study for cachectic patients with solid
tumors. Estimated completion date for such studies is uncertain.
Because of its limited
F-68
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
resources, the Company currently believes it to be in its best
interests to focus its clinical efforts on the Phase I/Phase II Study
in cachectic patients needing salvage therapy for AIDS.
The Company currently has one ongoing Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS. Out of 30 total patients
contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required
under the study. The estimated completion date of this study is the
second quarter of 2004. It is uncertain at this time when cash inflows
will result from this study. The completion of the study is dependent
upon funds available for research and development and the availability
of patients meeting the prescribed protocol and the ability of Israel
and its hospitals to meet the requirements of the protocol. From
inception of all the clinical studies in Israel the Company have
expended approximately $1,550,000. The cost to complete the Phase I/II
study in Israel of AVR118 for cachectic patients with AIDS for the
additional 15 patients (for a total of 30) is estimated to be $300,000.
In July 2003 the agreement entered in July 2002 with the Weizmann
Institute of Science and Yeda, its developmental arm in Israel, to
conduct research on the effects of AVR118 on the immune system, expired
in accordance with its terms, and upon such termination the Company
retained all rights to the research performed under the agreement.
Total costs incurred in connection with this research are expected to
be $138,000, of which payments of $40,000 were made in each of July
2002 and November 2002, and an additional $10,000 was paid in October
2003. Final payment has not been made pending receipt, review and
approval of the final report. The Company has expensed $120,000 since
inception of the contract through September 30, 2003.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of September 30,
2003, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.
F-69
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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 March 1999 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 March 1999 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 March 1999 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.
From October 1996 to August 2003, Dr. Hirschman was the Chief Executive
Officer of the Company. In February 1998, the Company granted to Dr.
Hirschman options to purchase 23,000,000 shares of the Company's common
stock at an exercise price of $0.27 from time to time until February
2008. These options vested upon the Company's filing an IND application
with the FDA. In February 1998, the Company extended the expiration
date of the following options previously granted to Dr. Hirschman from
March 1999 to February 2008: (i) options to purchase 4,100,000 shares
at $0.18 per share; (ii) options to purchase 4,000,000 shares at $0.19
per share; (iii) options to purchase 4,000,000 shares at $0.27 per
share; and (iv) options to purchase 4,000,000 shares at $0.36 per
share. The fair value of these options was estimated to be $867,100
($0.0377 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 32 months.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
superseded 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. The Agreement provided for Dr. Hirschman to
receive an annual base salary of $361,000 (effective January 1, 2000),
use
F-70
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
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 AVR118; 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 December 31,
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.
Dr. Hirschman, M.D. resigned in August 2003 from his position as
President, Chief Executive Officer and Chief Scientific Officer and a
director of Advanced Viral in order to devote his full efforts to his
position as Chief Scientist with responsibilities assigned by the Board
pursuant to a Third Amended and Restated Employment Agreement dated
August 26, 2003. Pursuant to the Third Amended and Restated Employment
Agreement, stock options currently held by Dr. Hirschman shall expire
on February 17, 2008; provided, however, that the options shall expire
either 90 days after Dr. Hirschman terminates his employment without
good reason, or the Company terminates him for cause. Pursuant to the
agreement, Dr. Hirschman may exercise the options upon the occurrence
of a change of control until the expiration date. Furthermore, the
agreement provides that, in the event that Dr. Hirschman has
unexercised options outstanding on February 17, 2008, and the common
stock of the Company has a trading price of less than $1, then the
expiration of options to acquire 10 million shares (or such lesser
number then outstanding) shall be extended for an additional 2 years
until February 17, 2010 at an exercise price of $0.50 per share.
Pursuant to the agreement, the Company acknowledge that the options are
fully vested, that the shares underlying the options have been
registered, and agreed to use its best efforts to cause such shares to
be registered or to have the registration of such shares to continue to
be effective in order that the shares may be resold without a
restrictive legend.
F-71
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
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.
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%.
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.
In May 2003, the Company issued options to purchase 100,000 shares of
the Company's stock at an exercise price of $0.085 per share for
outside services associated with the maintenance of its 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%.
In August 2003, the Company granted an aggregate of 3,010,000 options
to purchase shares of the Company's Common stock to certain employees.
The options are exercisable at $0.052 per
F-72
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
share through August 26, 2008, and vest in 20 equal installments each
quarter over five years. The fair value of the options was estimated to
be $147,177 ($0.049 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 128%; a risk free
interest rate of 3.99% and an expected holding period of 8 years.
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
The Company values these options based upon a measurement date
consistent with the vesting schedule of the options.
In May 2002, the Company granted to members of its of the Scientific
Advisory Board and Business Advisory Board options to purchase an
aggregate of 2,250,000 shares of common stock at an exercise price of
$0.12 per share, which options are exercisable 25% immediately, 25% on
June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002
through May 5, 2010. Compensation expense for the year ended December
31, 2002 was $100,944. There was no compensation expense for the nine
months ended September 30, 2003.
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. Compensation
expense for the year ended December 31, 2002 was $6,438. Compensation
expense for the three and nine months ended September 30, 2003 was
$7,188.
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. Compensation expense for the three and nine months ended
September 30, 2003 was $20,029 and $62,929.
F-73
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
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. This amount represents a pro rata share of
options issued to members of the Board of Directors during 2002. 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.
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. This amount represents a pro rata share of
options issued to members of the Board of Directors during 2002. The
fair value of the these options was estimated to be $140,344 ($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.
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. This amount represents a pro
rata share of options issued to members of the Board of Directors
during 2002. 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.
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. This amount represents a pro rata share of
options issued to members of the Board of Directors during 2002. 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. In December 2002, Mr. Kent
was granted options to purchase 1,700,000 share of common stock. During
February 2003, Richard S. Kent resigned from the Company's Board of
Directors. Under the terms of his option agreements, out of the
original 1,941,096 options to purchase common stock, he is entitled to
exercise options to purchase 431,271 shares of common stock until
February 2006.
F-74
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years.
In August 2003, the Company granted an aggregate of 22,500,000 options
to purchase shares of the Company's Common stock to certain members of
the Board of Directors. Options to purchase 17,500,000 shares are
exercisable at $0.052 per share through August 26, 2013. Options to
purchase 5,000,000 shares are exercisable at $0.063 per share through
August 26, 2013. The fair value of the options was estimated to be
$1,129,017 ($0.05 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 128%; a risk free
interest rate of 4.47% and an expected holding period of 10 years.
Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in accounting
for stock options issued to non-employees.
No stock-based employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
F-75
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
2002 2002
2003 (REPORTED) (RESTATED)
------------ ------------- --------------
Net loss $(5,347,124) $(7,967,225) $(7,017,172)
Total stock-based compensation expense determined
under fair value based method for all awards, net
of related tax effects $(1,692,293) $(1,725,185) $ (439,291)
----------- ----------- -----------
Pro forma net loss $(7,039,417) $(9,692,410) $(7,456,463)
=========== =========== ===========
Earnings per share - basic and diluted:
As reported ($0.01) ($0.02) ($0.02)
=========== =========== ===========
Pro forma ($0.01) ($0.02) ($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. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for AVR118. 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.
F-76
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
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 AVR118 in the countries of Canada, China, Japan, Macao, Hong
Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil and
Chile. Pursuant to these agreements, distributors are obligated to
cause AVR118 to be approved for commercial sale in such countries and,
upon such approval, to purchase from the Company certain minimum
quantities of AVR118 to maintain the exclusive distribution rights.
Leonard Cohen, a former consultant to the Company, has informed the
Company that he is an affiliate of two of these entities. To date, the
Company has recorded revenue classified as other income for the sale of
territorial rights under the distribution agreements. The Company has
made no sales under the distribution agreements other than for testing
purposes.
F-77
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000 and were paid during 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.
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.
F-78
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
SETTLED LITIGATION (Continued)
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 common stock and agreed to pay an aggregate of
$1,047,891 to such parties was paid as of September 30, 2003.
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
F-79
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS
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, which was recorded as deferred
interest expense and is presented as a discount on the convertible
debenture. 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 which was recorded
as deferred interest expense and is presented as a discount on the
convertible debenture. On July 3, 2002, Mr. Dicke converted the
first 20% of the debenture ($200,000) for 1,299,545 shares of common
stock at a conversion price of $0.1539 per share. 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
which was recorded as deferred interest expense and is presented as
a discount on the convertible debenture. 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.
F-80
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
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 the Company's 5% convertible debentures, due April
28, 2008, $1,000,000 of which was purchased on April 28, 2003;
$500,000 of which was purchased on July 18, 2003; 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 the Company sold
to Cornell an additional $1,000,000 of the Company's 5% convertible
debentures due July 18, 2008 for gross cash consideration of $1
million (the "July Agreement"). Interest is payable in cash or
common stock at the option of Cornell. The Company received net
proceeds of $1,312,500 and $869,486 for the April and July
debentures respectively. On September 10, 2003, Cornell converted
$600,000 principal amount of the convertible debenture into
14,150,943 shares of the Company's common stock at a conversion
price of $0.0424 per share. On November 6, 2003, Cornell converted
$600,000 principal amount of the convertible debentures into
12,500,000 shares of common stock at a conversion price of $0.048
per share.
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 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 common stock on the
date the Company's registration statement is declared effective by the
SEC is less than $0.10, then under the April Agreement, the Company
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 common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of 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 its option, the Company
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 common 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 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.
F-81
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
The Company's obligations under the convertible debentures and the
April and July Agreements are secured by a first priority security
interest in substantially all of its 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 the Company 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 the Company's obligations under the April
and July Agreements, the convertible debentures and the ancillary
documents entered into thereby.
The legal expenses associated with these transactions were
approximately $73,000 and were paid as of September 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.
F-82
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. 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 4 "SETTLED 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 4 "SETTLED 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
F-83
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
627,000 shares of the Company common stock at an exercise price of
$0.12 per share through December 2007.
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. 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. 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. 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. In
connection with this transaction, the Company paid a finders' fee to
Harbor View consisting of (i) $18,720 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.
F-84
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section
4(2) of the Securities Act, the Company sold 312,500 shares of common
stock and warrants to purchase 187,500 shares of common stock at an
exercise price of $0.12 per share through April 2008, for an aggregate
purchase price of $25,000. In connection with the transaction, the
Company paid a finders' fee to Diego Vallone consisting of warrants to
purchase 15,625 shares of common stock at an exercise price per share
of $0.12 until April 2008.
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. In July in connection with this
transaction, the Company paid finders' fees to Avix, Inc. and Robert
Nowinski consisting of an aggregate of $13,375 and warrants to purchase
171,875 shares of common stock at an exercise price per share of $0.12
through June 2008.
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, the Company authorized
the issuance of and sold 21,620,000 shares of common stock and warrants
to purchase up to 10,810,000 shares of common stock, for an aggregate
purchase price of $1,081,000, or $0.05 per share, pursuant to
securities purchase agreements with various purchasers. The warrants
are exercisable at $0.10 per share. In connection with the agreements,
the Company paid finders' fees to Harbor View Group, AVIX, Inc and
Robert Nowinski consisting in the aggregate of (i) approximately
$64,860 and (ii) warrants to purchase 1,297,200 shares of common stock.
All of the aforementioned warrants are exercisable at $0.10 per share
commencing six months after the issuance date, for a period of five
years.
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
F-85
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
EQUITY LINE OF CREDIT (Continued)
5,000,000 until sixty (60) months from the date of issuance. As of
September 30, 2003, the Company has not drawn on the equity line of
credit. The Company has not issued any shares under this equity line,
which expired in August 2003. The Class B Warrants have expired by
their terms. There is no financial statement impact for the Class A and
Class B Warrants issued under this equity line.
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 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 107,527
shares of common stock to Katalyst LLC in consideration for its
exclusive placement agent services.
F-86
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 6. 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 NINE MONTHS 1984) TO
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------- -----------
2003 2002 2003 2002 2003
-------- -------- --------- ----------- -----------
Revenues $ -- $ -- $ -- $ -- $ --
-------- -------- --------- ----------- -----------
Costs and Expenses:
General and administrative 2,284 37,317 10,714 113,853 1,321,064
Depreciation 3,961 5,037 11,882 15,461 283,380
-------- -------- --------- ----------- -----------
6,245 42,354 22,596 129,314 1,604,444
-------- -------- --------- ----------- -----------
Loss from Operations (6,245) (42,354) (22,596) (129,314) (1,604,444)
-------- -------- --------- ----------- -----------
Other Income -- 256 -- 256 4,655
-------- -------- --------- ----------- -----------
Discontinued operations $(6,245) $(42,098) $(22,596) $(129,058) $(1,599,789)
-------- -------- --------- ----------- -----------
F-87
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT ADVANCED VIRAL RESEARCH CORP.
EXCEPT THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU
SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an offer to sell, or a solicitation of an
offer to buy any securities:
[ ] except the common stock offered by this prospectus;
[ ] in any jurisdiction in which the offer or solicitation is not
authorized;
[ ] in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitation;
[ ] to any person to whom it is unlawful to make the offer or
solicitation; or
[ ] to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
[ ] there have been no changes in the affairs of Advanced Viral
USA, Inc. after the date of this prospectus; or
[ ] the information contained in this prospectus is correct after
the date of this prospectus.
-----------------------
Until _________, 2003, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
----------
PROSPECTUS
----------
497,517,232 SHARES OF COMMON STOCK
ADVANCED VIRAL RESEARCH CORP.
______________, 2003
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. Advanced Viral will pay all expenses in connection with this
offering.
Securities and Exchange Commission Registration Fee $ 3,019
Printing and Engraving Expenses $ 10,000
Accounting Fees and Expenses $ 4,000
Legal Fees and Expenses $ 50,000
Miscellaneous $ 17,982
---------
TOTAL $ 85,000
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation include an indemnification provision
under which we have agreed to indemnify directors and officers of Advanced Viral
from and against certain claims arising from or related to future acts or
omissions as a director or officer of Advanced Viral. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of Advanced Viral pursuant to the
foregoing, or otherwise, Advanced Viral has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to our securities issued or sold
within the past three years which were not registered under the Securities Act.
No underwriters were employed with respect to the sale of any of the securities
listed below. Except as noted below, each of these transactions was completed
without registration of the respective securities under the Securities Act in
reliance upon the exemptions provided by Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder on the basis that such
transactions did not involve a public offering. The purchasers were
sophisticated with access to the kind of information registration would provide
and such purchasers acquired such securities without a view toward the
distribution thereof.
1. In January 2000, pursuant to the securities purchase agreement
with Endeavour Capital Fund, S.A. discussed above, we issued the second
$1,000,000 tranche of $2,000,000 in aggregate principal amount of our 7%
convertible debentures due December 31, 2004 to Endeavour Capital Fund, S.A.
2. In February 2000 pursuant to a consulting agreement with
Harbor View Group, we issued to Harbor View warrants to purchase 1,750,000
shares at an exercise price of $0.21 per share, and warrants to purchase
1,750,000 shares at an exercise price of $0.26 per share, until February 28,
2005, in exchange for consulting services provided or to be provided to us.
3. In February 2000 pursuant to a securities purchase agreement,
we sold to Harbor View Group and various other purchasers 13,636,357 shares of
common stock, and warrants to purchase an aggregate of 5,454,544 shares of
common stock for an aggregate purchase price of $3,000,000. Half of the warrants
are exercisable at $0.275 per share, and half of the warrants are exercisable at
$0.33 per share, until February 28, 2005.
4. In May 2000, we granted Louis Silver, a director stock options
to acquire 100,000 shares of common stock, exercisable at $0.25 per share, until
May 31, 2002. Mr. Silver is an "accredited investor" as defined in Rule 501(a)
under the Securities Act.
5. On September 18, 2000 we entered into a private equity line of
credit agreement with Spinneret Financial Systems, Inc., who assigned their
rights to GMF Holdings, Inc., for the right to put shares of our common stock to
the investor from time to time to raise up to $20,000,000, subject to certain
conditions and restrictions. This agreement and all
agreements contemplated in connection with such agreement was terminated by
mutual agreement of the parties on January 22, 2001.
6. From November 2000 through March 2001, pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,427,500 shares of common stock, and warrants to purchase an
aggregate of 8,056,500 shares of common stock for an aggregate purchase price of
$5,371,000. Half of the warrants are exercisable at $0.48 per share, and half of
the warrants are exercisable at $0.56 per share, until November 8, 2005.
7. During the year 2000, we issued approximately 38.4 million
shares in connection with the conversion of debentures; approximately 1.2
million shares upon the exercise of warrants; and approximately 5.2 million
shares upon exercise of options.
8. We entered into an equity line of credit agreement dated
February 9, 2001 with Cornell Capital Partners, LP. Pursuant to the equity line
of credit agreement, subject to the satisfaction of certain conditions, Cornell
Capital, an "accredited investor" as defined in Rule 501(a) under the Securities
Act, may sell and issue, from time to time, up to an aggregate of $50,000,000 of
its common stock. In connection with the equity line of credit, we issued to the
placement agent, May Davis Group, Inc., which introduced Cornell Capital to us,
and certain other investors Class A Warrants to purchase in the aggregate
5,000,000 shares of our common stock at an exercise price per share equal to
$1.00, exercisable in part or in whole at any time until February 9, 2006, and
Class B Warrants to purchase in the aggregate 5,000,000 shares of our common
stock at an exercise price equal to the greater of $1.00 or 110% of the bid
price of the common stock on the applicable advance date under the private
equity line of credit agreement. The Class B Warrant is exercisable pro rata on
or after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5,000,000 by a fraction, the numerator of
which is the amount of the advance payable on the applicable advance date and
the denominator of which is $50,000,000, until sixty months from the date of
issuance.
9. In June 2001 we issued 60,000 shares of our common stock
pursuant to the exercise of certain options.
10. On July 27, 2001, pursuant to a securities purchase agreement
with various purchasers, we authorized the issuance and sale of up to 1,225,000
shares of our common stock and warrants to purchase an aggregate of 735,000
shares of common stock in a private offering transaction pursuant to Section
4(2) of the Securities Act for a purchase price of $0.40 per share, for an
aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of the date
hereof, none of the warrants had been exercised.
11. During the year 2001, we issued approximately 76,000 shares
upon the cashless exercise of warrants, and 60,000 shares upon exercise of
options.
12. During the second quarter of 2002, we issued to certain three
investors an aggregate of $2,000,000 principal amount of our 5% convertible
debentures at par in several private placements. Under the terms of each 5%
convertible debenture, 20% of the original issue is convertible on the original
date of issue at a price equal to the closing bid price quoted on the OTC
Bulletin Board on the preceding trading day (except for $500,000 of the
debentures which had an initial conversion price of $0.11 per share).
Thereafter, 20% of the principal balance may be converted at six-month intervals
at a conversion price equal to the higher of (i) 90% of the average closing bid
price for the five trading days prior to the conversion date; or (ii) ten cents
($0.10) which amount is subject to certain adjustments. The convertible
debentures, including interest accrued thereon, are payable by Advanced Viral in
shares of common stock and mature two years from the date of issuance. The
shares issued upon conversion of the debentures cannot be sold or transferred
for a period of one year from the applicable vesting date of the convertible
portion of the debentures.
13. On September 10, 2002, we issued and sold an aggregate of
21,500,000 shares of our common stock pursuant to a securities purchase
agreement with certain investors for total proceeds of approximately $3,010,000,
or $0.14 per share, along with warrants to purchase 16,125,000 shares of our
common stock at an exercise price of $0.25 per share, subject to adjustment, as
described below. In addition, pursuant to a placement agent agreement with H. C.
Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and
issued to HCW 1,032,000 shares of our common stock. An adjustment provision in
the Warrants provides that 60 trading days following the original issue date of
the Warrants (the "First Determination Date"), a certain number of Warrants
shall become exercisable at $.001. The number of shares for which the Warrants
are exercisable at $.001 per share is equal to the positive difference, if any,
between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of
our common stock for the 60 trading days preceding the First Determination Date
and (ii) 21,500,000. Upon 120 trading days following the original issue date of
the Warrants (the "Second Determination Date"), a certain number of remaining
Warrants shall become exercisable at $.001. The number
of shares for which the Warrants are exercisable at $.001 per share is equal to
the positive difference, if any, between (i) $3,010,000 divided by the VWAP of
our common stock for the 60 trading days preceding the Second Determination Date
and (ii) 21,500,000. No adjustment will be made in the event that the VWAP for
the 60 trading day period preceding the applicable determination date is $.14 or
greater. In December 2002 we filed suit against certain of the investors in
connection with the warrant repricing provisions of the agreement, and during
May 2003, we entered into settlement and mutual release agreements with the
parties involved in both the Florida and New York litigation, which, among other
things, dismissed the lawsuits with prejudice, and Alpha Capital separately
dismissed its lawsuit with prejudice. Pursuant to the agreements, in exchange
for release by the parties to the lawsuits and certain parties to the September
2002 financing of their right to exercise the warrants issued in the September
2002 financing, we issued an aggregate of 947,000 shares of our common stock and
agreed to pay an aggregate of $1,047,891 to such parties, of which $790,748 has
been paid to date, and of which $321,428 shall be paid in five equal monthly
installments until September 2003. 680,000 of the shares issued may not be
resold until September 2003.
14. From December 2002 through June 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 Robert Nowinski consisting of (i)
approximately $98,095 and (ii) warrants to purchase an aggregate of 1,246,500
shares of our common stock. All of the aforementioned warrants are exercisable
at $0.12 per share commencing six months after the closing date of the
agreement, for a period of five years.
15. On April 28, 2003 we entered into a securities purchase
agreement with an Cornell Capital to sell up to $2,500,000 of our 5% convertible
debentures due April 28, 2008, $1,000,000 of which was purchased on April 28,
2003; $500,000 of which was purchased on July 18, 2003; and $1,000,000 of which
will be purchased within 20 business days from the date the registration
statement is declared effective by the SEC. Interest is payable in cash or
common stock at the option of Cornell. Pursuant to the agreement, Cornell
Capital received a 10% discount to the purchase price of the convertible
debentures purchased, 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. Pursuant to the terms of the agreement,
commencing July 27, 2003, Cornell Capital may convert the debenture plus accrued
interest, (which may be taken at investor's option in cash or common stock), in
shares of our common stock at a conversion price equal to the lesser of (a)
$0.08 or (b) 80% of the lowest closing bid price of our common stock for the
four trading days immediately preceding the conversion date. No more than
$600,000 may be converted in any thirty-day period of any of the convertible
debentures held by Cornell Capital. Advance Viral has redemption rights. If
Advanced Viral exercises certain of these redemption rights, Advanced Viral may
redeem a portion or the entire outstanding debenture at a price equal to 115% of
the amount redeemed plus accrued interest and investor will receive a warrant to
purchase 1,000,000 shares of our stock for every $100,000 redeemed. The warrant
shall be exercisable on a cash basis and have an exercisable price of the higher
of 110% of the closing bid price of our common stock on the closing date or
$0.08. The warrant shall have "piggy back" registration rights and shall survive
for 5 years from the closing date.
16. 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 107,527 shares of our common stock
to Katalyst LLC in consideration for its exclusive placement agent services.
17. On July 18, 2003 we entered into an additional securities
purchase agreement whereby Cornell Capital purchased $1,000,000 of our 5%
secured convertible debentures, due July 17, 2008. Pursuant to the agreement,
Cornell Capital received a 10% discount to the purchase price of the convertible
debentures purchased. The convertible debentures
are secured by the assets of Advanced Viral until 50 days after the
effectiveness of the registration statement of which this prospectus is a part.
Pursuant to the terms of the agreement, commencing October 18, 2003, Cornell
Capital may convert the debenture plus accrued interest, (which may be taken at
Cornell Capital'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 for all of the convertible debentures held by Cornell Capital.
Advanced Viral has redemption rights. If Advanced Viral exercises certain of
these redemption rights, Advanced Viral may redeem a portion or the entire
outstanding debenture at a price equal to 115% of the amount redeemed plus
accrued interest and Cornell Capital will receive warrants to purchase 1,000,000
shares of our stock for every $100,000 redeemed. The warrant shall be
exercisable on a cash basis and have an exercisable price of the higher of 110%
of the closing bid price of our common stock on the closing date or $0.08. The
warrant shall have "piggy back" registration rights and shall survive for 5
years from the closing date.
18. In September 2003, in connection with a private offering
transaction pursuant to Section 4(2) of the Securities Act, we authorized the
issuance of and sold 21,620,000 shares of our common stock and warrants to
purchase up to 10,810,000 shares of our common stock at $0.05 per share, for an
aggregate purchase price of $1,081,000 pursuant to securities purchase
agreements with the purchasers listed below, in the following amounts. In
connection with the agreements, we paid finders' fees to Harbor View Group,
AVIX, Inc and Robert Nowinski consisting in the aggregate of (i) approximately
$115,667 and (ii) warrants to purchase 2,378,200 shares of our common stock. All
of the aforementioned warrants are exercisable at $0.10 per share commencing six
months after the issuance date, for a period of five years.
We relied upon the exemption provided in Section 4(2) of the Securities
Act and/or Rule 506 thereunder, which cover "transactions by an issuer not
involving any public offering," to issue securities discussed above without
registration under the Securities Act of 1933. We made a determination in each
case that the person to whom the securities were issued did not need the
protection that registration would afford. The certificates representing the
securities issued displayed a restrictive legend to prevent transfer except in
compliance with applicable laws, and our transfer agent was instructed not to
permit transfers unless directed to do so by us, after approval by our legal
counsel. We believe that the investors to whom securities were issued had such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the prospective investment. We also believe
that the investors had access to the same type of information as would be
contained in a registration statement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT DESCRIPTION
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3.1 Certificate of Incorporation of Advanced Viral Research Corp.
("ADVR"). (2)
3.2 Bylaws of ADVR, as amended. (1)
3.3 Amendment to Certificate of Incorporation of ADVR. (2)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Specimen Warrant Certificate. (1)
4.3 Warrant Agreement between ADVR and American Stock Transfer
and Trust Company. (1)
4.4 Forms of Common Stock Options and Agreements granted by ADVR
to TRM Management Corp. (5)
4.5 Form of Common Stock Option and Agreement granted by ADVR to
Plata Partners Limited Partnership. (12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of
Common Stock granted by ADVR to Leonard Cohen. (6)
4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman,
MD dated March 24, 1996. (10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and
between ADVR and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of
common stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of
common stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and
between ADVR and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of
common stock of ADVR at $0.2040 per share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of
common stock of ADVR at $0.2448 per share. (15)
4.15 Securities Purchase Agreement dated June 23, 1999 by and
between ADVR and various purchasers. (15)
EXHIBIT DESCRIPTION
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4.16 Form of Warrant dated June 23, 1999 to purchase shares of
common stock of ADVR at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of
common stock of ADVR at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and
between ADVR and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares
of common stock at $0.2461 per share. (15)
4.21 Securities Purchase Agreement dated December 28, 1999 between
ADVR and Endeavour Capital Fund S.A. (16)
4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)
4.23 Form of Warrant dated December 28, 1999 to purchase shares of
common stock at $0.19916667 per share. (16)
4.24 Form of Warrant dated February 7, 2000 to purchase shares of
common stock at $0.21 per share. (17)
4.25 Form of Warrant dated February 7, 2000 to purchase shares of
common stock at $0.26 per share. (17)
4.26 Form of Warrant dated February 16, 2000 to purchase shares of
common stock at $0.275 per share. (17)
4.27 Form of Warrant dated February 16, 2000 to purchase shares of
common stock at $0.33 per share. (17)
4.28 Form of Class A Warrant dated September 18, 2000 to purchase
5,000,000 shares of common stock. (19)
4.29 Form of Class B Warrant dated September 18, 2000 to purchase
5,000,000 shares of common stock. (19)
4.30 Form of Class A Warrant dated February 9, 2001 to purchase
5,000,000 shares of common stock. (21)
4.31 Form of Class B Warrant dated February 9, 2001 to purchase
5,000,000 shares of common stock. (21)
5.1 Opinion and Consent of the law firm of Kirkpatrick and
Lockhart LLP (28)
10.1 Declaration of Trust by Bernard Friedland and William Bregman
in favor of ADVR dated November 16, 1987. (12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between
Clinique Medical Actuel and ADVR. (3)
10.3 Letter, dated March 15, 1991 to ADVR from Health Protection
Branch. (3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp.
and ADVR. (11)(a)
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc.
and ADVR. (4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford
Brickell Inc. and ADVR. (7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard
Cohen and ADVR. (8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993,
between Lionel Resnick, MD and ADVR. (11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories
Inc. and ADVR. (12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994,
between C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994,
between C.U.R.E. Pharmaceutica Central Americas Ltd. and ADVR.
(11)(d)
10.12 Exclusive Distribution Agreement dated as of June 17, 1994
between DCT S.R.L. and ADVR, as amended. (11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and ADVR. (11)(f)
10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver.
(9)
10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z.
Hirschman, MD. (9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995,
between AVIX International Pharmaceutical Corp. and ADVR. (12)
10.17 Supplement to Exclusive Distribution Agreement, dated November
2, 1995 with Commonwealth Pharmaceuticals. (12)
10.18 Exclusive Distributorship & Limited License Agreement, dated
December 28, 1995, between AVIX International Pharmaceutical
Corp., Beijing Unistone Pharmaceutical Co., Ltd. and ADVR.
(11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and ADVR.
(11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement
between ADVR and Shalom Z. Hirschman, MD. (10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(i)
10.23 Employment Agreement, dated October 17, 1996, between ADVR and
Shalom Z. Hirschman, MD. (11)(j)
EXHIBIT DESCRIPTION
- ------- -----------
10.24 Lease, dated February 7, 1997 between Robert Martin Company,
LLC and ADVR. (12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997
between ADVR and Interfi Capital Group. (11)(k)
10.26 Material Transfer Agreement-Cooperative Research And
Development Agreement, dated March 13, 1997, between National
Institute of Health, Food and Drug Administration and the
Centers for Disease Control and Prevention. (11)(l)
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997
between ADVR and RBB Bank AG. (11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative
Research and Development Agreement, dated March 4, 1998,
between National Institute of Health, Food and Drug
Administration and the Centers for Disease Control and
Prevention. (13)
10.29 Amended and Restated Employment Agreement dated July 8, 1998
between ADVR and Shalom Z. Hirschman, MD. (11)(n)
10.30 Agreement between ADVR and Angelo Chinnici, MD dated July 1,
1999. (14)
10.31 Consulting Agreement between ADVR and GloboMax LLC dated
January 18, 1999. (15)
10.32 Registration Rights Agreement dated August 3, 1999 between
ADVR Research and Focus Investors LLC. (15)
10.33 Employment Agreement dated October 1, 1999 between ADVR and
Alan V. Gallantar. (15)
10.34 Registration Rights Agreement dated December 28, 1999 between
ADVR and Endeavour Capital Fund, S.A. (16)
10.35 Consulting Agreement dated February 7, 2000 between ADVR and
Harbor View Group, Inc. (17)
10.36 Securities Purchase Agreement dated February 16, 2000 between
ADVR and Harbor View Group, Inc. (17)
10.37 Letter Agreement dated November 16, 1999 between ADVR and
Bratskeir & Company. (18)
10.38 Amended and Restated Employment Agreement dated May 12, 2000
between ADVR and Shalom Z. Hirschman, MD. (18)
10.39 Equity Line of Credit Agreement dated as of September 18, 2000
between ADVR and Spinneret Financial Systems, Inc. (19)
10.40 Registration Rights Agreement dated as of September 18, 2000
between ADVR and Spinneret Financial Systems, Inc. (19)
10.41 Registration Rights Agreement dated as of September 18, 2000
between ADVR and May Davis Group, Inc. (19)
10.42 Placement Agent Agreement dated September 18, 2000 between
ADVR and May Davis Group, Inc. (19)
10.43 Assignment and Assumption Agreement dated December 12, 2000
between Spinneret Financial Systems, Inc. and GMF Holdings
Inc. (20)
10.44 Agreement to Waive Assignment Rights dated December 12, 2000
by GMF Holdings Inc. (20)
10.45 Termination Agreement dated January 22, 2001 between GMF
Holdings, Inc., May Davis Group, Inc. and ADVR. (21)
10.46 Equity Line of Credit Agreement dated as of February 9, 2001
between ADVR and Cornell Capital Partners, LP. (21)
10.47 Registration Rights Agreement dated as of February 9, 2001
between ADVR and Cornell Capital Partners, LP. (21)
10.48 Registration Rights Agreement dated as of February 9, 2001
between ADVR and May Davis Group, Inc. (21)
10.49 Placement Agent Agreement dated February 9, 2001 between
ADVR and May Davis Group, Inc. (21)
10.50 Agreement dated as of April 2, 2001 between ADVR and Selikoff
Center of Ra'Anana, Israel. (22)
10.51 Agreement dated as of January 29, 2001 between ADVR and The
Weizmann Institute of Science and Yeda. (22)
10.52 Securities Purchase Agreement dated November 8, 2000 by and
between ADVR and various investors. (23)
10.53 Securities Purchase Agreement dated July 27, 2001 by and
between ADVR and various investors. (23)
10.54 Severance Agreement dated November 29, 2001 by and between
ADVR and William Bregman. (11)(p)
10.55 Severance Agreement dated November 29, 2001 by and between
ADVR and Bernard Friedland. (11)(p)
10.56 Severance Agreement dated November 29, 2001 by and between
ADVR and Louis Silver. (11)(p)
10.57 Promissory Note and Guaranty in favor of Alan V. Gallantar
dated November 29, 2001 by ADVR. (11)(p)
10.58 Settlement Agreement dated March 20, 2002 by and among ADVR,
Immune Modulation Maximum Corporation, Commonwealth
Pharmaceuticals, Ltd, and Charles E. Miller. (24)
10.59 Termination Agreement dated May 30, 2002 between ADVR and
Harbor View Group, Inc. (25)
EXHIBIT DESCRIPTION
- ------- -----------
10.60 Securities Purchase Agreement dated May 30, 2002 between ADVR
and O. Frank Rushing and Justine Simoni, as joint tenants.
(25)
10.61 Securities Purchase Agreement dated July 3, 2002 between ADVR
and James F. Dicke III. (25)
10.62 Securities Purchase Agreement dated July 15, 2002 between ADVR
and Peter Lunder. (25)
10.63 Securities Purchase Agreement dated September 9, 2002 between
ADVR and various investors. 11(q)
10.64 Form of Warrant dated September 9, 2002 between ADVR and
various investors. 11(q)
10.65 Registration Rights Agreement dated September 9, 2002 between
ADVR and various investors. 11(q)
10.66 Agreement dated May 1, 2002 (effective September 2002) between
Advanced Viral Research Corp. and EnviroGene LLC. (26)
10.67 Agreement dated October 8, 2002 between Advanced Viral
Research Corp. and Quintiles Israel Ltd. (26)
10.68 Securities Purchase Agreement dated as of April 28, 2003
between the Registrant and Cornell Capital Partners, LP. (27)
10.69 5% Convertible Debenture dated April 28, 2003. (27)
10.70 Warrant dated April 28, 2003 to purchase 15,000,000 shares of
common stock at an exercise price of $0.091 per share. (27)
10.71 Registration Rights Agreement dated as of April 28, 2003
between the Registrant and Cornell Capital Partners, LP. (27)
10.72 Equity Line of Credit Agreement dated as of April 28, 2003
between the Registrant and Cornell Capital Partners, LP. (27)
10.73 Registration Rights Agreement dated as of April 28, 2003
between the Registrant and Cornell Capital Partners, LP. (27)
10.74 Consulting Agreement dated April 22, 2003 between Registrant
and Robert Nowinski, Ph.D. (28)
10.75 Securities Purchase Agreement dated as of July 18, 2003
between the Registrant and Cornell Capital Partners, LP. (28)
10.76 5% Convertible Debenture dated July 18, 2003. (28)
10.77 Investor Registration Rights Agreement dated as of July 18,
2003 between the Registrant and Cornell Capital Partners, LP.
(28)
10.78 Escrow Agreement dated July 18, 2003, between Registrant and
Butler Gonzalez, LLP. (28)
10.79 Security agreement dated July 18, 2003 between Registrant and
Cornell Capital Partners, L.P. (provided herewith)
10.80 Placement Agent Agreement dated April 28, 2003, between
Registrant and Katalyst Securities LLC. (28)
10.81 Third Amended and Restated Employment Agreement dated August
27, 2003 between Registrant And Shalom Z. Hirschman, M.D.
(11r)
10.82 First Supplementary Agreement dated July 8, 2002 by and
between Registrant and Yeda Research And Development Company
Limited. (Provided herewith.)
10.83 Agreement dated November 19, 2002 by and between Registrant
and Kaplan Medical Center. (Provided herewith.)
21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a
Bahamian corporation.
23.1 Independent Auditors' Consent. (Provided herewith.)
- -----------------
FOOTNOTE NOTES TO INDEX TO EXHIBITS
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1. Documents incorporated by reference herein to certain exhibits
our registration statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on
March 19, 1990.
2. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-18, File No.
33-2262-A, filed with the Securities and Exchange Commission
on February 12, 1989.
3. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
4. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for period ended March 31,
1991.
5. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
6. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-Q for the period ended
September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-QSB for the period ended
March 31, 1993.
FOOTNOTE NOTES TO INDEX TO EXHIBITS
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9. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-QSB for the period ended
June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-QSB for the period ended
March 31, 1996.
11. Incorporated by reference herein to our Current Reports on
Form 8-K and exhibits thereto as follows:
11(a) A report on Form 8-K dated January 3, 1992.
11(b) A report on Form 8-K dated September 14, 1993.
11(c) A report on Form 8-K dated April 25, 1994.
11(d) A report on Form 8-K dated June 3, 1994.
11(e) A report on Form 8-K dated June 17, 1994.
11(f) A report on Form 8-K dated October 25, 1994.
11(g) A report on Form 8-K dated December 28, 1995.
11(h) A report on Form 8-K dated April 22, 1996.
11(i) A report on Form 8-K dated July 12, 1996.
11(j) A report on Form 8-K dated October 17, 1996.
11(k) A report on Form 8-K dated February 21, 1997.
11(l) A report on Form 8-K dated March 25, 1997.
11(m) A report on Form 8-K dated September 26, 1997.
11(n) A report on Form 8-K dated July 21, 1998.
11(o) A report on Form 8-K dated November 24, 1998.
11(p) A report on Form 8-K dated December 3, 2001.
11(q) A report on Form 8-K dated September 10, 2002.
11(r) A report on Form 8-K dated August 27, 2003.
12. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
15. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-1, as amended, File
No. 33-70523, filed with the Securities and Exchange
Commission on January 13, 1999, and Amendment No. 5 thereto,
declared effective on December 15, 1999.
16. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-1, as amended, File
No. 333-94529, filed with the Securities and Exchange
Commission on January 12, 2000.
17. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
18. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-1, as amended, File
No. 333-37974, filed with the Securities and Exchange
Commission on June 6, 2000.
19. Documents incorporated by reference herein to certain exhibits
to Post-effective Amendment No. 1 to our Registration
Statement on Form S-1, as amended, File No. 333-70523, filed
with the Securities and Exchange Commission on September 25,
2000.
20. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-49038,
filed with the Securities and Exchange Commission on October
31, 2000 and amended pursuant to Amendment No. 1 to Form S-1
filed with the Commission on December 15, 2000.
21. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-55430,
filed with the Securities and Exchange Commission on February
12, 2001 and amended pursuant to Amendment No. 1 to Form S-1
filed with the Commission on February 13, 2000.
22. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
23. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-62788,
filed with the Securities and Exchange Commission on June 13,
2001 and amended pursuant to Amendment No. 1 to Form S-1 filed
with the Commission on August 23, 2001.
24. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
25. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-Q for the period ended June
30, 2002.
26. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-Q for the period ended
September 30, 2002.
FOOTNOTE NOTES TO INDEX TO EXHIBITS
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27. Document incorporated by reference herein to certain exhibits
to our quarterly report for the period ended March 31, 2003.
28. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No.
333-107178, filed with the Securities and Exchange Commission
on July 18, 2003 and amended pursuant to Amendment No. 1 to
Form S-1 filed with the Commission on September 19, 2003.
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(b) Reports on Form 8-K.
Current Report on Form 8-K dated August 27, 2003 with respect
to Item 5.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made a post-effective amendment to this registration statement to:
(i) To include any prospectus required by
Sections 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any additional or changed
material information on the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities that remain unsold at the end of the offering.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 2 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Yonkers, State of New York, on November 18, 2003.
Date: November 18, 2003 ADVANCED VIRAL RESEARCH CORP. (REGISTRANT)
By: /s/ Eli Wilner
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Eli Wilner
President, Chief Executive
Officer, Chairman
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
Date: November 18, 2003 By: /s/ Alan V. Gallantar
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Alan V. Gallantar,
Principal Financial and Accounting
Officer
Date: November 18, 2003 By: /s/ David Seligman
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David Seligman, Director
Date: November 18, 2003 By: /s/ Nancy Van Sant
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Nancy Van Sant, Director
Date: November 18, 2003 By: /s/ Roy Walzer
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Roy Walzer, Director