UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
[X] ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended
DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [no fee
required]
Commission File Number 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2646820
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Corporate Boulevard South, Yonkers, New York 10701
- ------------------------------------------------ -----
Address of principal executive offices) Zip Code
(914) 376-7383
--------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The estimated aggregate market value of the voting and non-voting common equity
held by nonaffiliates of the registrant as of June 28, 2002, was approximately
$75.3 million.
As of March 28, 2003, the Registrant had 472,792,609 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
ADVANCED VIRAL RESEARCH CORP.
FORM 10-K/A
DECEMBER 31, 2002
EXPLANATORY NOTE
Advanced Viral Research Corp. is filing this Amendment No. 2 to Annual Report
on Form 10-K/A to amend its Annual Report on Form 10-K for the fiscal year
ended December 31, 2002, as amended by Amendment No. 1 filed on December 19,
2003 to amend Item 15 "Exhibits, Financial Statement Schedules and Reports on
Form 8-K" of Part IV of Amendment No. 1.
TABLE OF CONTENTS
PART I............................................................................................................. 1
ITEM 1. BUSINESS......................................................................................... 1
ITEM 2. DESCRIPTION OF PROPERTY.......................................................................... 10
ITEM 3. LEGAL PROCEEDINGS................................................................................ 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 11
PART II............................................................................................................ 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................ 11
ITEM 6. SELECTED FINANCIAL DATA.......................................................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................................ 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............. 21
PART III........................................................................................................... 22
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................... 22
ITEM 11. EXECUTIVE COMPENSATION........................................................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS... 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................... 30
ITEM 14. CONTROLS AND PROCEDURES.......................................................................... 30
PART IV............................................................................................................ 31
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................. 31
ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................................................... 34
SIGNATURES......................................................................................................... 36
FORWARD-LOOKING STATEMENTS
Advanced Viral cautions readers that some of the information in this
report contains forward-looking statements within the meaning of the federal
securities laws. For this purpose, any statements contained in this report that
are not statements of historical fact may be deemed to be forward-looking
statements. Forward-looking statements typically are identified by use of terms
like "may," "will," "expect," "anticipate," "estimate", "believe", "intend",
"could", "would" and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ
materially from those contained in the forward-looking statements due to a
number of factors, including our limited operating history and substantial
operating losses, availability of capital resources, ability to effectively
compete, economic conditions, unanticipated difficulties in pharmaceutical
research and development, ability to continue research and development, ability
to gain governmental approvals, uncertainty relating to timing of governmental
approval process, dependence on equity and debt financing for continued
operations, dependence on third party distributors and consultants, dependence
on our key personnel, ability to protect our intellectual property and the
impact of future government regulation on our business. You should also consider
carefully the risks described in this report or detailed from time to time in
our filings with the Securities and Exchange Commission (the "SEC").
As used in this Annual Report on Form 10-K, the terms "we," "us,"
"our," and "Advanced Viral" mean Advanced Viral Research Corp. and its
subsidiaries (unless the context indicates a different meaning).
PART I
ITEM 1. BUSINESS
OVERVIEW
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). The current formulation of Reticulose is currently
known as "Product R." We believe Product R may be employed in the treatment of
certain viral and autoimmune diseases such as:
- Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers, leukemias
and lymphomas; and
- Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either in
vitro (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients both inside and outside the United States. On July
30, 2001, we submitted an IND application to the FDA to begin Phase 1 clinical
trials of Product R as a topical treatment for genital warts caused by the human
papilloma virus (HPV) infection. In September 2001, the FDA cleared the IND
application to begin Phase 1 clinical trials. Our Phase 1 study was performed in
the United States on human volunteers. In March 2002, we completed the Phase 1
trial and submitted to the FDA the results, which indicated that Product R was
safe and well tolerated dermatologically in all the doses applied in the study.
Currently, we do not have sufficient funds available to pursue the Phase 2
clinical trials of Product R as a topical treatment for genital warts caused by
HPV infection.
In 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:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that Product R may have three major
beneficial effects in patients with AIDS:
- First, its therapeutic effects on body wasting
(cachexia) seen in patients with AIDS;
- Second, the mitigation of the toxicity of drugs
included in HAART regimens for the treatment of AIDS;
- Third, the synergistic activity with drugs used in
HAART regimens to suppress the replication of HIV and
increase the CD4 and CD8 cell counts in patients with
AIDS.
1
Thus, we believe that Product R may prove to be an
important "enabler" drug in the treatment of AIDS.
- Phase I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as
colonic, lung, breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable Product R with the FDA.
In April 2001, we 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, we paid $242,000 for such research.
In September 2002, we entered into a contract with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the 3 clinical studies listed above. Under the terms of
this agreement, EnviroGene will (1) finalize all Israeli government and hospital
approval documents, (2) complete and organize the 3 clinical trials including
establishing a network of scientists to perform said study/trial and initiate
recruitment of patients and (3) perform the studies/trials and evaluate the
results. Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $625,000 has been paid
through December 31, 2002.
In the fourth quarter of 2002, we entered into various agreements
supporting the clinical trials in Israel aggregating approximately $1,000,000 to
be paid over a twelve-month period. These services include the monitoring and
auditing of the clinical sites, hospital support and laboratory testing.
In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.
On July 8, 2002, we extended an agreement with the Weizmann Institute
of Science and Yeda its developmental arm in Israel, to conduct research on the
effects of Product R on the immune system, especially on T lymphocytes. In
addition, scientists will explore the effects of Product R in animal models.
Under its provisions the study period is extended for another twelve months to
July 7, 2003. Total costs incurred in connection with this research are expected
to be $138,000, of which payments of $40,000 were made in July 2002 and November
2002.
Whether we will be able to proceed with clinical trials in Israel for
injectable Product R is dependent upon our ability to secure sufficient funds.
If sufficient funds do not become available, we will have to curtail our
operations by, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to continue or complete
the clinical trials for injectable Product R in Israel. While we continue to
attempt to secure funds through the sale of our securities, there is no
assurance that such funds will be raised on favorable terms, if at all.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Yonkers, New York is (914) 376-7383. We have
also established a website: www.adviral.com. Information contained on our
website is not a part of this report.
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Product R, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
2
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market Product
R, or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or in vitro testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: Phase 1 clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; Phase 2 clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and Phase 3
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the 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
3
substance as well as the availability of the drug products made from the
substance. NDA's contain lists of all components used in the manufacture of the
drug product and a statement of the specifications and analytical methods for
each component. Also included are studies of the toxicological actions of the
drug as they relate to the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
In February 1998, we contracted with GloboMax LLC to advise and assist
us in our preparation of the IND that was filed with the FDA in July 2001 and
cleared for Phase 1 trials in September 2001, and to otherwise guide us through
the FDA process. During 2001 and 2002, GloboMax continued its project management
services for the pre-clinical development and IND submission of Product R to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of Product R. Expenses paid during 2001 and
2002 relating to the GloboMax agreement were approximately $3,587,000. Pursuant
to the agreement with GloboMax, we are obligated to pay for services on an
hourly basis, at prescribed rates.
It is possible that the clinical tests of Product R on humans will not
be approved by the FDA for human clinical trials on HPV or other diseases, and
that any tests previously conducted or to be conducted will not satisfy FDA
requirements. It is also possible that the results of such human clinical
trials, if performed, will not prove that Product R is safe or effective in the
treatment of HPV or other diseases, or that the FDA will not approve the sale of
Product R in the United States if we submitted a proper NDA. It is not known at
this time how extensive the Phase 2 and Phase 3 clinical trials will be, if they
are conducted. The data generated may not show that the drug Product R is safe
and effective, and even if the data shows that Product R is safe and effective,
obtaining approval of the NDA could take years and require financing of amounts
not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of Product R for a considerable period
of time and impose costly procedures upon our activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United States. Clinical studies
conducted outside of any country may not be accepted by such country, and the
approval of any pharmaceutical or diagnostic product in one country does not
assure that such product will be approved in another country. Accordingly, until
registration is granted, if ever, in the United States or another developed or
developing country, we do not expect that we will be able to generate material
sales revenue.
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through December 31,
2002 we expended approximately $18,315,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. We currently are funding
research and testing at several institutes and medical centers in Israel to:
- determine the safety and efficacy of Product R on animals and
cultured human cells;
- determine the effectiveness of Product R in the treatment of
cachexia (body wasting) in patients with AIDS taking a
multi-drug cocktail (highly active anti-retroviral therapy
(HAART));
- determine the effectiveness of Product R in the treatment of
cachexia in patients with solid cancers;
- determine the effectiveness of Product R in the treatment of
cachexia in patients with leukemias and lymphomas;
4
- study the effects of Product R in mitigating the toxic effects
of other drugs used to treat HIV infections, such as nucleoside
analogues, protease inhibitors and non-nucleoside reverse
transcriptase inhibitors;
- study the effects of Product R in mitigating the toxic effects
of drugs used in the chemotherapy of cancers; and
- assess the direct inhibitory and therapeutic effects of Product
R on neoplasias, including lymphomas and lymphocytic leukemia.
In 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:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that Product R may have three major
beneficial effects in patients with AIDS:
- First, its therapeutic effects on body wasting
(cachexia) seen in patients with AIDS:
- Second, the mitigation of the toxicity of drugs
included in HAART regimens for the treatment of AIDS:
- Third, the synergistic activity with drugs used in
HAART regimens to suppress the replication of HIV and
increase the CD4 and CD8 cell counts in patients with
AIDS:
Thus, we believe that Product R may prove to be an important
"enabler" drug in the treatment of AIDS.
- Phase I Study in Cachectic Patients with Leukemia and Lymphoma.
Included are patients with acute lymphocytic leukemia, multiple
Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable Product R with the FDA.
In April 2001, we 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, we paid $242,000 for such research.
In September 2002, we entered into a contract with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the 3 clinical studies listed above. Under the terms of
this agreement, EnviroGene will (1) finalize all Israeli government and hospital
approval documents, (2) complete and organize the 3 clinical trials including
establishing a network of scientists to perform said study/trial and initiate
recruitment of patients and (3) perform the studies/trials and evaluate the
results. Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $625,000 has been paid
through December 31, 2002.
In the fourth quarter of 2002, we entered into various agreements
supporting the clinical trials in Israel aggregating approximately $1,000,000 to
be paid over a twelve-month period. These services include the monitoring and
auditing of the clinical sites, hospital support and laboratory testing.
In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients on (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.
5
On July 8, 2002, we extended an agreement with the Weizmann Institute
of Science and Yeda its developmental arm in Israel, to conduct research on the
effects of Product R on the immune system, especially on T lymphocytes. In
addition, scientists will explore the effects of Product R in animal models.
Under its provisions the study period is extended for another twelve months to
July 7, 2003. Total costs incurred in connection with this research are expected
to be $138,000, of which payments of $40,000 were made in July 2002 and November
2002.
Whether we will be able to proceed with Phase 2 clinical trials of
Product R for topical therapy of genital warts and clinical trials in Israel for
injectable Product R is dependent upon our ability to secure sufficient funds.
If sufficient funds do not become available, we will have to curtail our
operations by, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to begin or complete the
topical Phase 2 for Product R or to continue the clinical trials for injectable
Product R in Israel. While we continue to attempt to secure funds through the
sale of our securities, there is no assurance that such funds will be raised on
favorable terms, if at all.
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 Product R or approve the marketing, sales or distribution
of Product R within the United States, and as a result may not improve our
chances of gaining approval for the marketing, sales or distribution of Product
R anywhere in the world. We currently do not have the resources to engage in
further testing, and we cannot provide assurances that we will acquire such
financial resources to continue or complete the studies, or, if we acquire such
resources, that we will do so on favorable terms.
SCIENTIFIC ADVISORY BOARD
In January 2002, we formed a Scientific Advisory Board currently
consisting of six people with experience in oncology, hematology, women's health
and related fields for the purpose of having access to additional expertise and
counsel to support the development of Product R in connection with the rigorous
clinical trials required by the FDA's regulatory approval process. The current
members of the Scientific Advisory Board are:
DR. GEORGE P. CANELLOS is the William Rosenberg Professor of Medicine
at Harvard Medical School where he served as Chief of the Division of Medical
Oncology for 20 years at the Dana-Farber Cancer Institute, and was Acting
Clinical Director of the National Cancer Institute (NCI) and a member of the
FDA's Oncologic Drugs Advisory Committee. Dr. Canellos was also a past president
of the American Society for Clinical Oncology and a former Editor-in-Chief of
the Journal of Clinical Oncology. Dr. Canellos currently serves as Medical
Director for Network Development, Dana-Farber/Partners CancerCare and is on the
senior staff at the Brigham and Women's Hospital, Dana-Farber Cancer Institute
and Massachusetts General Hospital.
DR. MICHAEL HARRIS is Director of the Tomorrows Children's Institute
for Cancer and Blood Disorders, Chief of Pediatric Hematology-Oncology at the
Hackensack University Medical Center and Professor of Pediatrics at the
UMDNJ-New Jersey Medical School. Additionally, Dr. Harris is a member of the
National Cancer Institute's Special Review Committee where he is responsible for
the review of Community Clinical Oncology Programs, and Associate Editor for
Pediatric Oncology for the scientific journal Cancer Investigation. Dr. Harris
previously served as Chief of Pediatric Hematology-Oncology at The Mt. Sinai
Medical Center in New York City.
DR. JAMES D'OLIMPIO is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also Associate
Professor of Medical Oncology at New York University's School of Medicine. His
research has focused on improving the quality of life of cancer patients,
especially by reversing the wasting process (cachexia) associated with cancer,
and in cancer treatment related fatigue syndrome.
MS. CAROL ARMENTI is the founder and Executive Director of the Center
for Cervical Health, a patient advocacy organization primarily devoted to
cervical health issues in the U.S. Ms. Armenti serves on the FDA advisory board
and other governmental consulting boards, and is a lecturer on women's health
issues.
6
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 currently have 10 patent applications pending with the United States
Patent and Trademark Office (PTO) and 15 patent applications pending in other
countries relating to Product R. In the United States, we have 10 issued patents
from the PTO. We also have 2 issued patents in Australia and one patent granted
in China. During April 2002, under the terms of a settlement agreement entered
as part of a final judgment on March 25, 2002, we were assigned all rights,
title and interest in two issued U.S. patents pertaining to Reticulose(R)
technology.
As patent applications in the United States are maintained in secrecy
until patents issue and as publication of discoveries in the scientific or
patent literature often lag behind the actual discoveries, we cannot be certain
that we were the first to make the inventions covered by each of our pending
patent applications or that we were the first to file patent applications for
such inventions. Furthermore, the patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions, and, therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be
predicted. We cannot be sure that any additional patents will issue from any of
our patent applications or, should any patents issue, that we will be provided
with adequate protection against potentially competitive products. Furthermore,
we cannot be sure that should patents issue, they will be of commercial value to
us, or that private parties, including competitors, will not successfully
challenge our patents or circumvent our patent position in the United States or
abroad.
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of twenty years from the date of such
filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
our products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain marketing
exclusivity for a period of time following FDA approval of certain drug
applications, regardless of patent status, if the drug is a new chemical entity
or if new clinical studies were used to support the marketing application for
the drug. Pursuant to the FDA Modernization Act of 1997, the period of
exclusivity can be extended if the applicant performs certain studies in
pediatric patients. This marketing exclusivity prevents a third party from
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms for
a period equal
7
to one-half the period of time elapsed between the filing of an IND and the
filing of the corresponding NDA plus the period of time between the filing of
the NDA and FDA approval, with a five year maximum patent extension. We cannot
be sure that we will be able to take advantage of either the patent term
extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with Product R. Therefore, Product R and any other drug candidates may give rise
to claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.
MARKETING AND SALES
Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. To date, our efforts
or the efforts of our representatives have produced no material benefits to us
regarding our ability to have Product R sold commercially anywhere in the world.
We have entered into exclusive distribution agreements with four separate
entities granting exclusive rights to distribute Product R in the countries of
Canada, China, Japan, Hong Kong, Macao, Taiwan, Mexico, Argentina, Bolivia,
Paraguay, Uruguay, Brazil and Chile. Pursuant to these agreements, the
distributors are obligated to cause Product R to be approved for commercial sale
in such countries and upon such approval, to purchase from us certain minimum
quantities of Product R to maintain the exclusive distribution rights. Our
marketing plans for Product R are still dependent upon registration of Product R
for sale in various jurisdictions. We have made no sales under the distribution
agreements other than for testing purposes.
To date we have received no information that would lead us to believe
that we will be positioned to sell Product R commercially anywhere in the world.
On July 30, 2001, we submitted an IND application to the FDA to begin Phase 1
clinical trials of Product R as a topical treatment for genital warts caused by
the human papilloma virus (HPV) infection. In September 2001, the FDA cleared
the IND application to begin Phase 1 clinical trials. In March 2002, Advanced
Viral completed a Phase 1 trial and submitted to the FDA the results, which
indicated that Product R was safe and well tolerated dermatologically in all the
doses applied in the study 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 Product R will be required in
such countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. The registration of Product
R for sale in these countries has been frustrated due to our inability to obtain
the registration
8
and approval to sell Product R in the Bahamas, the country of origin, and a
general lack of published data on the effectiveness of Product R. Until Product
R is registered and approved for sale in the United States, in another developed
country or in the other countries included in the distributors' territories, we
will not generate any material sales of Product R. For the years ended December
31, 2002, 2001 and 2000, we reported no commercial sales except limited sales
for testing purposes. Product R is not legally available for commercial sale
anywhere in the world, except for testing purposes. See "--Research, Development
and Testing."
We currently produce bulk clinical trial batches for Product R in our
facility in Yonkers, New York under current Good Manufacturing Procedures (cGMP)
as set forth by the FDA. The FDA has not approved Product R for distribution or
sale in the United States, nor has it approved our Yonkers, New York facility.
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Product R, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Product R. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, other viruses,
cachexia (body wasting) and rheumatoid arthritis. We anticipate that we will
face intense and increasing competition as new products enter the market and
advanced technologies become available. Our competitors' products may be more
effective, or more effectively marketed and sold, than Product R. Competitive
products may render Product R obsolete or noncompetitive before we can recover
the expenses of developing and commercializing Product R. Furthermore, the
development of a cure or new treatment methods for the diseases we are targeting
could render Product R noncompetitive, obsolete or uneconomical. Many of our
competitors:
- have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products;
- have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products; and
- have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Product R should be added to such cocktails in order
to enhance their effectiveness and mitigate the toxic effects of other drugs
used to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
Several products are currently marketed for the treatment of cachexia
(body wasting) included Megace(R) oral suspension manufactured by Bristol-Myers
Squibb and Serostim(R) (injectable human growth hormone) marketed by Serono
Laboratories Inc.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Product R, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Product R.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed Phase 3 trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an
9
expanded indication for Remicade for rheumatoid arthritis in January 1999. These
products represent significant competition for Product R as a treatment for
rheumatoid arthritis.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for Product R, we will
face competition based on the safety and effectiveness of Product R, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Product R, we expect
to compete primarily on the basis of product performance and price with a number
of pharmaceutical companies, both in the United States and abroad.
EMPLOYEES
We have ten full-time employees, consisting of our two executive
officers, two employees involved in research, two employees responsible for
quality assurance and quality control, an assistant controller, a chief
information officer and two administrative employees. Dr. Hirschman, our
President, Chief Executive Officer and a director, and Alan V. Gallantar, our
Chief Financial Officer and Treasurer, each devote all of their business time to
our day-to-day business operations. Eli Wilner, Chairman of the Board of
Directors and Secretary, devotes as much time to his duties as is reasonably
necessary. Additionally, we may hire, as and when needed, and as available, such
sales and technical support staff and consultants for specific projects on a
contract basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
ITEM 2. 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 Product R. We are currently negotiating the sale of the
Bahamian facility, after which sale we intend to manufacture Product R
exclusively at our facility in Yonkers, New York.
ITEM 3. LEGAL PROCEEDINGS
In December 2002 Advanced Viral filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors "misrepresented
their intentions in investing in Advanced Viral" and "engaged in a series of
manipulative activities to depress the price of Advanced Viral stock." Advanced
Viral 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. Advanced Viral 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.
10
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 Advanced
Viral. 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 we issued and sold to certain investors 21,500,000 shares of
our common stock for total gross proceeds of $3,010,000, or $.14 per share. We
also issued warrants to purchase an aggregate of 16,125,002 shares of our 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 Advanced Viral'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) we 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, we
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 Advanced Viral to immediately deliver the warrant shares to the Alpha
Plaintiffs upon their payment of the exercise price and posting of a bond,
without further delay and no later than April 8, 2003. We have appealed the
order denying the motion for reconsideration. We continue to consider and pursue
all of our options relating to the litigation, including resolution through
settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 2002, no
matters were submitted to a vote of security holders of Advanced Viral.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 2001 and 2002, and for the first quarter of 2003. The high and low
bid prices for the periods indicated reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
Low Bid High Bid
------- --------
First Quarter 2001......................................... 0.285 0.410
Second Quarter 2001........................................ 0.265 0.495
Third Quarter 2001......................................... 0.171 0.395
Fourth Quarter 2001........................................ 0.179 0.400
First Quarter 2002......................................... 0.158 0.285
Second Quarter 2002........................................ 0.096 0.300
Third Quarter 2002......................................... 0.112 0.220
Fourth Quarter 2002........................................ 0.065 0.119
First Quarter 2003 through March 28, 2003.................. 0.054 0.085
11
STOCKHOLDERS
The approximate number of holders of record of our common stock as of
March 28, 2003 is 3,135, 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.
ITEM 6. SELECTED 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 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 report.
SELECTED STATEMENT OF OPERATIONS DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000 1999
RESTATED RESTATED RESTATED RESTATED 1998
------------ ------------ ------------ ------------ ------------
Revenues $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656
Costs and Expenses:
Research and development 4,439,592 5,150,869 3,192,551 1,948,937 1,659,456
General and administrative 2,654,296 4,063,022 2,413,601 1,831,061 1,420,427
Compensation and other expense for options and
warrants 883,762 1,048,108 1,901,927 195,375 ---
Depreciation 977,746 511,216 346,227 230,785 110,120
------------ ------------ ------------ ------------ ------------
8,955,396 10,773,215 7,854,306 4,206,158 3,190,003
------------ ------------ ------------ ------------ ------------
Loss from Operations (8,955,396) (10,755,614) (7,845,943) (4,195,205) (3,189,347)
------------ ------------ ------------ ------------ ------------
Other Income (Expense):
Interest income 27,659 113,812 161,832 42,744 102,043
Other income --- --- --- --- 293
Interest expense (192,174) 116,849 (908,220) (2,170,970) (1,470,699)
Severance expense - former directors --- (302,500) --- --- ---
------------ ------------ ------------ ------------ ------------
(164,515) (71,839) (746,388) (2,128,226) (1,368,363)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (9,119,911) (10,827,453) (8,592,331) (6,323,431) (4,557,710)
Loss from discontinued operations (201,154) (259,114) (223,861) n/a n/a
------------ ------------ ------------ ------------ ------------
Net Loss $ (9,321,065) $(11,086,567) $ (8,816,192) $ (6,323,431) $ (4,557,710)
============ ============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted
Continuing operations $ (0.02) $ (0.03) $ (0.02) $ (0.02) $ (0.02)
============ ============ ============ ============ ============
Discontinued operations $ (0.00) $ (0.00) $ (0.00) n/a n/a
============ ============ ============ ============ ============
- --------------------------
See notes to consolidated financial statements.
12
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999
RESTATED RESTATED RESTATED RESTATED 1998
-------- -------- -------- -------- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 836,876 $ 924,420
Investments -- -- -- -- 821,047
Assets held for sale 172,601 188,999 179,622 178,182 --
Inventory -- -- 19,729 19,729 19,729
Other current assets 121,895 63,162 34,804 59,734 29,818
------------- ------------- ------------- ------------- -------------
Total current assets 1,770,251 1,751,970 6,196,788 1,094,521 1,795,014
------------- ------------- ------------- ------------- -------------
Property and Equipment, Net 2,244,118 2,818,045 1,771,038 1,204,202 1,049,593
Other Assets 931,660 878,776 840,888 562,851 460,346
------------- ------------- ------------- ------------- -------------
Total assets $ 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 $ 554,707 $ 1,843,706 $ 902,961 $ 728,872 $ 279,024
Current portion of capital lease obligation 104,719 64,197 58,690 50,315 $ 38,335
Current portion of note payable 25,165 24,246 21,517 19,095 --
------------- ------------- ------------- ------------- -------------
Total current liabilities 684,591 1,932,149 983,168 798,282 317,359
------------- ------------- ------------- ------------- -------------
Long-Term Debt:
Convertible debentures, net 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 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 4,555 4,033 3,802 3,034 2,964
Additional paid-in capital 51,141,177 43,877,955 36,349,629 17,255,858 14,325,076
Deficit accumulated during development stage (49,098,231) (39,777,166) (28,690,599) (19,874,407) (13,550,976)
Deferred compensation cost -- -- -- -- (14,769)
Discount on warrants (291,175) (662,748) (299) 2,155 --
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficiency) 1,756,326 3,442,074 7,662,533 (2,613,360) 762,295
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
============= ============= ============= ============= =============
Shares outstanding at period end 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907
============= ============= ============= ============= =============
- -------------------
See notes to consolidated financial statements.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the results of operations and the financial
condition of Advanced Viral should be read in conjunction with Advanced Viral's
Consolidated Financial Statements and Notes thereto included elsewhere in this
report.
OVERVIEW
Since our inception in July 1985, Advanced Viral has been engaged
primarily in research and development activities. We have not generated
significant operating revenues, and as of December 31, 2002 we had incurred a
cumulative net loss of $49,098,231. Our ability to generate substantial
operating revenue depends upon our success in gaining FDA approval for the
commercial use and distribution of Product R. All of our research and
development efforts have been devoted to the development of Product R.
Conducting the clinical trials of Product R will require significant
cash expenditures. Product R may never be approved for commercial distribution
by any country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the
foreseeable future. We currently do not have sufficient funds to continue our
testing of Product R. We are attempting to secure funds through the sale of our
securities.
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research Ltd. (LTD), the Company's Bahamian subsidiary. The decision was
based upon the Company completing construction on its facility in Yonkers, New
York capable of providing all functions previously provided by the Freeport,
Bahamas plant. The assets of LTD have been classified on the Balance Sheet of
the Company at December 31, 2002 and 2001 as Assets held for Sale. LTD had no
liabilities as of 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 years ended December 31, 2002,
2001 and 2000 as Loss from Discontinued Operations.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
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 $1,021,000, $629,000,
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. Our deficit accumulated
during the development stage was reduced by $2,039,574, $1,018,304, 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.
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
During the years ended December 31, 2002, 2001 and 2000 we incurred
losses from continuing operations of approximately $9,119,911, $10,827,453 and
$8,592,331, respectively. Our losses for the years ended December 31, 2002, 2001
and 2000 were attributable primarily to:
14
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $2,654,000, $4,063,000 and $2,414,000 in 2002, 2001
and 2000, respectively. General and administrative expenses decreased by
approximately $1,409,000 in 2002 vs.2001 and increased by $1,649,000 in 2001
vs.2000, resulting primarily from:
- decreased payroll and related expenses (approximately $866,000
in 2002 vs. increases of $1,039,000 in 2001 and $717,000 in
2000) The decrease in 2002 was primarily attributable to a
reduction in personnel from 33 to 10 employees as a cost
cutting measure. The increase in 2001 and 2000 was primarily
attributable to increased employee and officer salaries and the
addition of two vice presidents for drug development and
quality assurance in 2001;
- increased insurance costs (approximately $564,000 in 2002 vs.
$412,000in 2001 and $299,000 in 2000) representing increased
premiums for employee medical insurance and additional
corporate liability insurance including directors and officers
liability coverage; and
- decreased professional fees (approximately $501,000 in 2002 vs.
$1,431,000 in 2001, compared to $385,000 in 2000). The increase
in 2001 is primarily attributable to certain legal proceedings
the cost of which was approximately $953,000 in 2001 vs.
$61,000 in 2002; and
- decreased consulting fees (approximately $34,000 in 2002 vs.
$212,000 in 2001 and $305,000 in 2000). This decrease is
primarily due to lower outside computer consultant costs; and
- decreased recruiting expenses (approximately $7,000 in 2002 vs.
$135,000 in 2001 vs. $12,000 in 2000). The 2001 expense was for
the hiring of new employees.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. Compensation
expense was approximately $884,000 in 2002, compared to $1,048,000 in 2001 and
1,902,000 in 2000. 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 of
$476,000, $691,000 and 1,902,000, respectively, and the amortization of warrant
costs relating to private equity line of credit issued in 2001 using the
Black-Scholes Pricing Model of $408,000 and $357,000, respectively.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $4,440,000 in 2002, compared to $5,151,000 and $3,193,000 in 2001
and 2000, respectively. The decrease from 2001 to 2002 resulted primarily from
research expenses (approximately $1,778,000) relating to the GloboMax agreement
in connection with the preparation of our first IND filing and offset by an
increase of approximately $749,000 for research expenditures relating to
research and testing of Product R in Israel. The increase from 2000 to 2001
resulted primarily from research expenses related to the GloboMax agreement of
approximately $1,417,000. The approximate costs of rent, personnel, operating
costs and laboratory supplies associated with research and development
activities at the Yonkers facility for the years ended 2002, 2001 and 2000,
which were charged to research and development expense, were $2,467,000,
$2,230,000 and $1,696,000, respectively.
DEPRECIATION EXPENSE. Depreciation expense was approximately $978,000
in 2002 compared to $511,000 and $346,000 in 2001 and 2000, respectively. The
increase from 2000 to 2001 resulted primarily from the acquisition of furniture,
fixtures and equipment for the Yonkers office, laboratory and production
facility. In addition, leasehold improvements were made to the laboratory and
production areas during 2002, 2001 and 2000. The increase in 2002 over 2001
resulted from equipment and leasehold improvements acquired during 2002 and full
year's depreciation expense recorded in 2002 for 2001 additions.
INTEREST EXPENSE. Interest expense for the years ended 2002, 2001 and
2000 was approximately $192,000, $117,000 and $908,000, respectively. Included
in interest expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $89,000, $0, and $387,000 for
the years ended 2002, 2001 and 2000, respectively;
- interest expense associated with certain convertible
debentures of approximately $43,000, $0 and $76,000 for
the years ended 2002, 2001 and 2000, respectively;
15
- amortization of loan costs of approximately $34,000,
$15,000 and $106,000 for the years ended 2002, 2001 and
2000, respectively;
- fees of approximately $265,000 in connection with the
November 2000 securities purchase agreement with various
investors;
- additional financing costs related to effective date of
certain registration statements of approximately $286,000
in 1999 (of which approximately $156,000 was reversed in
2001).
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and the Company.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the years ended 2002, 2001 and 2000 was approximately $9,120,000, $10,827,000
and $8,592,000, 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, 2001 and 2000 was approximately $201,000, $259,000 and
$224,000, respectively, relating to losses from our 99% owned subsidiary,
Advance Viral Research Ltd.
REVENUES. There were approximately $0 and $18,000 in sales revenue in
2002 and 2001, respectively, compared to $8,000 in sales revenues for 2000. All
sales revenue resulted from purchases of Product R for testing purposes.
Interest income was approximately $28,000 and $114,000 in 2002 and 2001,
respectively, compared to approximately $162,000 in 2000.
LIQUIDITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
As of December 31, 2002, we had current assets of approximately
$1,770,000, compared to approximately $1,752,000 at December 31, 2001. We had
total assets of approximately $4,946,000 and $5,449,000 at December 31, 2002 and
2001, respectively. Total asset levels did not change materially but total
assets declined due to the increase in fixed asset depreciation for property and
equipment acquisitions.
During 2002, we used cash of approximately $8,701,000 for operating
activities, as compared to approximately $8,577,000 in 2001. During 2002, we
incurred expenses of:
- approximately $2,809,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
- approximately $904,000 in consulting fees to GloboMax and its
subcontractors;
- approximately $395,000 for rent and utilities for our Yonkers
facility;
- approximately $295,000 for laboratory supplies;
- approximately $986,000 in expenditures on Product R research in
Israel;
- approximately $573,000 for insurance costs and approximately
$501,000 for other professional fees.
During the year ended December 31, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $7,114,000 and $2,000,000 in convertible debentures,
offset by principal payments of approximately $169,000 on equipment obligations.
This compares to the year ended December 31, 2001 where funds of approximately
$5,783,000 were provided by the sale of common stock offset by principal
payments of approximately $80,000 on equipment obligations.
16
During the year ended December 31, 2002, cash flow used by investing
activities were used for expenditures of approximately $268,000 for leasehold
improvements and research and laboratory equipment at our Yonkers, New York
facility.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
CAPITAL RESOURCES
We have been and will continue to be dependent upon the proceeds from
the continued sale of our securities for the funds required to continue
operations at present levels and to fund further research and development
activities. The following table summarizes sales of our securities over the last
two years.
PURCHASE PRICE
CONVERTIBLE / CONVERSION PRICE / MATURITY DATE /
DATE ISSUED GROSS PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE EXPIRATION DATE
- ----------- -------------- --------------- ---------------- ------------------ ---------------
Feb-2001 equity line warrants 10,000,000 shares (1) $1.00 per share 2/9/2006
Jul-2001 $ 1,000,000 common stock 3,125,000 shares $0.32 per share n/a
Jul-2001 $ 490,000 common stock 1,225,000 shares $0.40 per share n/a
warrants 367,500 shares $0.48 per share 7/27/2006
367,500 shares $0.56 per share
Aug-2001 $ 600,000 common stock 2,000,000 shares $0.30 per share n/a
Sep-2001 $ 1,000,000 common stock 6,666,667 shares $0.15 per share n/a
Dec-2001 $ 2,000,000 common stock 7,407,407 shares $0.27 per share n/a
Dec-2001 $ 410,000 common stock 1,518,519 shares $0.27 per share n/a
Dec-2001 $ 200,000 common stock 740,741 shares $0.27 per share n/a
Feb-2002 $ 500,000 common stock 3,333,333 shares $0.15 per share n/a
Feb-2002 $ 500,000 common stock 3,333,333 shares $0.15 per share n/a
Mar-2002 $ 500,000 common stock 3,333,333 shares $0.15 per share n/a
Apr-2002 $ 1,939,000 common stock 17,486,491 shares $0.11089 per share n/a
May-2002 $ 500,000 convertible
debenture Approx. 4,412,000 shares (2) 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 (3) 7/3/2004
Jul-2002 $ 500,000 convertible
debenture Approx. 4,588,000 shares (4) 7/15/2004
Sep-2002 $ 3,010,000 common stock 21,500,000 shares (5) $0.14 per share n/a
warrants 16,125,000 shares $0.001 per share 9/9/2007
(6)
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
- -------------------------
(1) Represents warrants issued in connection with an equity line of credit,
including Class A Warrants to purchase in the aggregate 5 million shares of
our common stock at an exercise price per share equal to $1.00, exercisable
at any time until February 9, 2006, and Class B Warrants to purchase in the
aggregate 5 million shares of our common stock at an exercise price equal
to the greater of $1.00 or 110% of the bid price of the common stock on the
applicable advance date. Each Class B Warrant is exercisable pro rata on or
after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5 million by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20 million, until sixty
months from the date of issuance.
(2) $0.11 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the average closing bid price for the five trading days prior to the
conversion date (the "Market Price"); or (ii) ten cents ($0.10) which
amount is subject to certain adjustments.
(3) $0.1539 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(4) $0.1818 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(5) 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.
(6) See "Item 3. LEGAL PROCEEDINGS."
17
EQUITY LINE OF CREDIT AGREEMENT. On February 9, 2001, we entered into
an equity line of credit agreement with Cornell Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 of our common stock. Under the
private equity line of credit, under which we may exercise "put options" to sell
shares for a price equal to 95% of the average of the three lowest reported
closing bid prices of our common stock over a 25 trading day period ending on
the advance notice date (the "Average Bid Price"). The agreement provides that
the closing bid price of the common stock on the put option notice date shall
not be less than the average closing bid price for the previous 25 trading days.
Upon signing the agreement, we issued to our placement agent, May Davis Group,
Inc., and certain investors Class A Warrants to purchase in the aggregate
5,000,000 shares of common stock at an exercise price per share equal to $1.00,
exercisable in part or in whole at any time until February 9, 2006, and Class B
Warrants to purchase in the aggregate 5,000,000 shares of common stock at an
exercise price equal to the greater of $1.00 or 110% of the bid price of the
common stock on the applicable advance date. Each Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of warrant
shares equal to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty months
from the date of issuance.
The fair value of the Class A Warrants is estimated to be $1,019,153
($0.204 per warrant share) based in a financial analysis of the terms of the
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to compensation and
other expense for options and warrants over the life of the equity line of
credit (30 months).
As of December 30, 2001, we had incurred approximately $83,700 in fees
in connection with the equity line of credit. Such fees have been deferred and
will be amortized over the life of the line of credit. We have no present plans
to draw on this equity line of credit but may negotiate a similar arrangement on
terms we consider more beneficial to Advanced Viral.
VARIOUS PURCHASERS. On July 27, 2001, pursuant to a securities purchase
agreement with various purchasers, we authorized the issuance of and sold
1,225,000 shares of our common stock and warrants to purchase an aggregate of
735,000 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act for a purchase price of $0.40 per share, for
an aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of March 28,
2003, none of the warrants had been exercised.
SHELF OFFERINGS
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 and resales of the shares issued thereunder by the
recipients of such shares. Because we no longer satisfy the registrant
requirements set forth in the General Instructions for Use of Form S-3 for the
registration of securities under the Securities Act of 1933, the shelf
registration statement is no longer available for issuances of our common stock.
As of March 28, 2003, we have issued and sold approximately 59 million shares of
our common stock and received proceeds of approximately $11.2 million under the
shelf registration statement, as follows:
BNC BACH INTERNATIONAL. During 2001, we entered into several
stock purchase agreements with BNC Bach International, Ltd., a British Virgin
Islands corporation, as follows:
- On July 19, 2001, we entered into a stock purchase
agreement with BNC Bach pursuant to which we issued
and sold to BNC Bach 3,125,000 shares of our common
stock at $0.32 per share for an aggregate purchase
price of $1,000,000.
- On August 20, 2001, we entered into a stock purchase
agreement with BNC Bach pursuant to which we issued
and sold to BNC Bach 2,000,000 shares of our common
stock at $0.30 per share for an aggregate purchase
price of $600,000.
18
- On December 18, 2001, we entered into a Stock purchase
agreement with BNC Bach pursuant to which we issued
and sold to BNC Bach 7,407,407 shares of our common
stock at a negotiated price of $0.27 per share, for a
total purchase price of $2,000,000.
CAMBOIS FINANCE, LTD. On September 28, 2001, we entered into a
stock purchase agreement with Cambois Finance, Ltd. pursuant to which we issued
and sold to Cambois 6,666,667 shares of our common stock at $0.15 per share for
an aggregate purchase price of $1,000,000.
HARBOR VIEW GROUP, INC. On December 17, 2001, we entered into
a Stock purchase agreement with Harbor View Group, Inc. pursuant to which we
issued and sold to Harbor View 1,518,519 shares of our common stock at a
negotiated price of $0.27 per share, for a total purchase price of $410,000.
RUSSEL KUHN. On December 17, 2001, we entered into a Stock
purchase agreement with Russel Kuhn pursuant to which we issued and sold to Mr.
Kuhn 740,741 shares of our common stock at a negotiated price of $0.27 per
share, for a total purchase price of $200,000.
ROSEWORTH GROUP. During the first quarter of 2002, we entered
into the following stock purchase agreements with Roseworth Group Limited, a
British Virgin Islands corporation wholly-owned subsidiary of Creon Management,
S.A., a British Virgin Islands corporation whose wholly-owned subsidiary,
Cambois Finance, Ltd., is discussed above:
- On February 7, 2002, we entered into a Stock purchase
agreement with Roseworth Group pursuant to which we
issued and sold to Roseworth Group 3,333,333 shares of
our common stock at a negotiated price of $0.15 per
share, for a total purchase price of $500,000.
- On February 21, 2002, we entered into a Stock purchase
agreement with Roseworth Group pursuant to which we
issued and sold to Roseworth Group 3,333,333 shares of
our common stock at a negotiated price of $0.15 per
share, for a total purchase price of $500,000.
- On March 22, 2002, we entered into a Stock purchase
agreement with Roseworth Group pursuant to which we
issued and sold to Roseworth Group 3,333,333 shares of
our common stock at a negotiated price of $0.15 per
share, for a total purchase price of $500,000.
VARIOUS PURCHASERS. On April 12, 2002, we issued and sold an
aggregate of 17,486,491 shares of our common stock pursuant to subscription
agreements with each of Alpha Capital AG (3,497,298 shares), Ellis Enterprises
(1,311,487 shares), Kazi Management, Inc. (3,060,136 shares), Palisades Equity
Fund L.P. (4,808,785 shares) and Stonestreet L.P. (4,808,785 shares), for net
proceeds of approximately $1,939,000, or $0.11089 per share.
VARIOUS PURCHASERS. On September 10, 2002, we issued and sold
an aggregate of 21,500,000 shares of our common stock pursuant to a Securities
Purchase Agreement with certain investors for total proceeds of approximately
$3,010,000, or $0.14 per share, along with warrants to purchase 16,125,000
shares of our common stock at an exercise price of $0.25 per share, subject to
adjustment, as described below. In addition, pursuant to a placement agent
agreement with H. C. Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee
of $150,500 cash and issued to HCW 1,032,000 shares of our common stock. An
adjustment provision in the Warrants provides that 60 trading days following the
original issue date of the Warrants (the "First Determination Date"), a certain
number of Warrants shall become exercisable at $.001. The number of shares for
which the Warrants are exercisable at $.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the volume weighted
average price ("VWAP") of our common stock for the 60 trading days preceding the
First Determination Date and (ii) 21,500,000. Upon 120 trading days following
the original issue date of the Warrants (the "Second Determination Date"), a
certain number of remaining Warrants shall become exercisable at $.001. The
number of shares for which the Warrants are exercisable at $.001 per share is
equal to the positive difference, if any, between (i) $3,010,000 divided by the
VWAP of our common stock for the 60 trading days preceding the Second
Determination Date and (ii) 21,500,000. No adjustment will be made in the event
that the VWAP for the 60 trading day period preceding the applicable
determination date is $.14 or greater.
HARBOR VIEW GROUP, INC. On May 30, 2002 we entered into an agreement
with Harbor View to terminate a consulting agreement effective as of December
31, 2001. The consultant continued to perform services after
19
the termination date and as full compensation we granted warrants to purchase
1,000,000 shares of our common stock at an exercise price of $0.18 per share.
The warrants are exercisable in whole or in part at any time and from time to
time prior to May 30, 2008.
CONVERTIBLE DEBENTURES. During the second quarter of 2002, we issued to
certain investors an aggregate of $2,000,000 principal amount of our 5%
convertible debentures at par in several private placements. Under the terms of
each 5% convertible debenture, 20% of the original issue is convertible on the
original date of issue at a price equal to the closing bid price quoted on the
OTC Bulletin Board on the preceding trading day (except for the Rushing/Simoni
issuance which had an initial conversion price of $0.11 per share). Thereafter,
20% of the principal balance may be converted at six-month intervals at a
conversion price equal to the higher of (i) 90% of the average closing bid price
for the five trading days prior to the conversion date (the "Market Price"); or
(ii) ten cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable by
Advanced Viral in shares of common stock and mature two years from the date of
issuance. The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date of the
convertible portion of the debentures. We issued our 5% convertible debentures
as follows:
- On May 30, 2002, we sold to O. Frank Rushing and Justine Simoni
$500,000 principal amount of our 5% convertible debenture. On
June 3, 2002, the holder converted the first 20% ($100,000) of
the debenture 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.
- On July 3, 2002, we sold to James F. Dicke II, a member of our
Board of Directors, $1,000,000 principal amount of our 5%
convertible debenture. On July 3, 2002, Mr. Dicke converted the
first 20% ($200,000) of the debenture 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.
- On July 15, 2002, we sold to Peter Lunder $500,000 principal
amount of our 5% 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.
VARIOUS PURCHASERS. From December 2002 through March 2003, pursuant to
securities purchase agreements with various purchasers, we authorized the
issuance of and sold 13,750,000 shares of our common stock and warrants to
purchase up to 8,250,000 shares of our common stock at $0.08 per share, for an
aggregate purchase price of $1,100,000. In connection with the agreement, we
paid finders' fees of approximately $50,000 in December 2002 and issued warrants
to purchase 825,000 shares of our common stock to Harbor View Group and AVIX,
Inc. 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 March 28, 2003, none of such warrants had been exercised.
OUTSTANDING CONVERTIBLE SECURITIES
As of March 28, 2003, in addition to the 472,792,609 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of 65.9 million shares of common stock at exercise prices
ranging from $0.08 to $0.36, of which 57.5 million are currently exercisable;
(ii) outstanding warrants to purchase an aggregate of 59.4 million shares of
common stock at prices ranging from $0.12 to $1.00, of which warrants to
purchase 54.4 million shares are currently exercisable; (iii) outstanding
convertible debentures representing approximately 12.0 million shares of common
stock assuming a conversion price of $0.10; and (iv) up to 166,666,667 shares
issuable under the equity line of credit, assuming a purchase price equal to
$0.30.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $88.7 million,
and we would have approximately 776.8 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of the common
stock. Additionally, the sale or availability for sale of this number of shares
20
may lessen the likelihood that additional equity financing will be available to
us, on favorable or unfavorable terms. Furthermore, the sale or availability for
sale of this number of shares could limit the annual amount of net operating
loss carryforwards that could be utilized.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for Product R. We currently do not have cash available to meet
our anticipated expenditures.
We are currently seeking additional financing. We anticipate that we
can continue operations through April 2003 with our current liquid assets, if
none of our outstanding options or warrants are exercised or additional
securities sold. Any proceeds received from the exercise of outstanding options
or warrants will contribute to working capital and increase our budget for
research and development and clinical trials and testing, assuming Product R
receives subsequent approvals to justify such increased levels of operation. The
recent prevailing market price for shares of common stock has from time to time
been below the exercise prices of certain of our outstanding options or
warrants. As such, recent trading levels may not be sustained nor may any
additional options or warrants be exercised. If none of the outstanding options
or warrants are exercised, and we obtain no other additional financing, in order
for us to achieve the level of operations contemplated by management, management
anticipates that we will have to materially limit operations. We anticipate that
we will be required to sell additional securities to obtain the funds necessary
to continue operations and further our research and development activities. We
are currently seeking debt financing, licensing agreements, joint ventures and
other sources of financing, but the likelihood of obtaining such financing on
favorable terms is uncertain. Management is not certain whether, at present,
debt or equity financing will be readily obtainable or whether it will be on
favorable terms. Because of the large uncertainties involved in the FDA approval
process for commercial drug use on humans, it is possible that we may never be
able to sell Product R commercially.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our directors and executive officers and further information concerning
them are as follows:
NAME AGE POSITION
- ---- --- --------
President, Chief Executive Officer, Chief Scientific Officer
Shalom Z. Hirschman, MD (1) 66 Director
Eli Wilner (1,2,3) 47 Secretary, Chairman of the Board
Alan V. Gallantar 45 Chief Financial Officer, Treasurer
David Seligman (1,2,3) 64 Director
Nancy J. Van Sant (3) 53 Director
Roy S. Walzer (2,3,4) 55 Director
------------------------
(1) Member of the Executive Management Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Member of the Investment Analysis Committee.
SHALOM Z. HIRSCHMAN, MD has been President, Chief Executive Officer and
a director since October 1996, and was Chairman of the Board from December 2001
until May 2002. Dr. Hirschman was Director of the Division of Infectious
Diseases and Professor of Medicine at Mount Sinai School of Medicine, New York,
New York, from May 1969 until October 1996.
ELI WILNER, our Secretary and Chairman of the Board of Directors, has
been a director since December 2001 and Chairman of the Board since May 2002. He
is the founder and CEO of Eli Wilner & Company, a New York City art gallery
established in 1983, and is also a leading frame dealer, restorer, collector and
published author. Mr. Wilner was a Bryant Fellows Member of the Metropolitan
Museum of Art in New York City from 1990 to 2000 and since 1990 has been a
member of the Forum and Director's Circle of the National Museum of American Art
in Washington, D.C. Mr. Wilner is a graduate of Brandeis University, where he
received his B.A. in Fine Arts in 1976, and Hunter College, where he received
his M.A. in 1978.
ALAN V. GALLANTAR has been Chief Financial Officer since October 1999
and Treasurer since December 2001. Mr. Gallantar was treasurer and controller
from 1998 to 1999 of AMBI Inc., a nutraceutical company, senior vice president
and chief financial officer from 1992 to 1997 of Bradley Pharmaceuticals, Inc.,
a pharmaceutical manufacturer, and vice president and divisional controller from
1989 to 1991 for PaineWebber Incorporated. From 1985 to 1989, Mr. Gallantar was
second vice president at The Chase Manhattan Bank, N.A., and from 1983 to 1985,
was a senior accountant at Philip Morris Incorporated. From 1979 to 1983, Mr.
Gallantar was a senior accountant in the audit department of Deloitte & Touche.
DAVID SELIGMAN, a director since December 2001, is a partner and
founder of the Law Office of David Seligman, established in 1995. Since 1997,
Mr. Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan,
Griffinger and Vecchione, a New Jersey based law firm. Mr. Seligman has over
thirty years of legal experience in the pharmaceutical industry, twenty-five of
which were spent supervising the activities of law department attorneys and
outside counsel. From 1989 to 1995, Mr. Seligman was Associate Vice President
and responsible for the general legal activities of various divisions of
Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York and New Jersey
State Bar Associations, and sits on the boards of Oxford Pharmaceutical
Services, Inc. and Greenbrook Pharmaceuticals, LLC. Mr. Seligman graduated from
Columbia University, College of Pharmacy (B.S.) in 1959, Fordham University
School of Law (J.D.) in 1962, and New York University School of Law (L.L.M.) in
1966.
22
NANCY J. VAN SANT, ESQ., a director since May 2002, has been a director
of the Miami, Florida law firm of Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A. and/or its predecessors since 1992. From 1977
through 1990, Ms. Van Sant was an attorney with the SEC serving as Regional
Trial Counsel and Chief of the Branch of Investigations and Enforcement.
ROY S. WALZER was appointed to the Board of Directors in June 2002.
Since 1987, Mr. Walzer has been the President of the private investment firms
Litchfield Partners, Ltd. and the Managing Partner of Litchfield Partners I
since 1999, which firms invest in pharmaceuticals, biotech and technology
companies. Prior to founding Litchfield Partners, Mr. Walzer served as Executive
Vice President and General Counsel with Sealy Connecticut from 1976 to 1986.
Richard Kent, MD resigned as a member of our Board of Directors in
February 2003.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between any member of our board of
directors and any other company's board of directors or compensation committee.
EXECUTIVE MANAGEMENT COMMITTEE. On May 1, 2002, we established an
Executive Management Committee, which has been delegated the authority to
oversee the strategic management of Advanced Viral. Messrs. Wilner and Seligman
and Dr. Hirschman serve as members of the Executive Management Committee.
AUDIT COMMITTEE. In late December 2001, we established an Audit and
Compensation Committee, which in November 2002 was split into two separate
committees, the Audit Committee and the Compensation Committee. The Audit
Committee, the current members of which are Eli Wilner, David Seligman and Roy
Walzer, recommends to the board of directors the independent certified public
accountants to be selected to audit our annual financial statements and will
approve any special assignments given to those accountants. The Committee also
will review the planned scope of the annual audit, the independent accountants'
letter of comments and management's response thereto regarding any major
accounting changes made or contemplated and the effectiveness and efficiency of
our internal accounting staff.
COMPENSATION COMMITTEE. The Compensation Committee, the current members
of which are Eli Wilner, David Seligman, Nancy Van Sant and Roy Walzer, makes
recommendations to the board of directors regarding the compensation payable to
our executive officers, and reviews general policies relating to the
compensation and benefits of our employees.
INVESTMENT ANALYSIS COMMITTEE. In July 2002, we established an
Investment Analysis Committee, which has been delegated the authority to analyze
financing and investment alternatives for Advanced Viral. Mr.Walzer serves as
the sole member of this committee.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTORS
We currently do not pay directors fees for their attendance at meetings
of the board of directors. Advanced Viral may revisit this position in the
future. The directors are reimbursed for their out-of-pocket expenses incurred
in connection with their attendance at meetings.
EXECUTIVE OFFICERS
The following table summarizes all compensation awarded to, earned by
or paid to (a) our Chief Executive Officer and (b) our other executive officers
whose total salary and bonus exceeded $100,000 (together, the "Named Executive
Officers") for services rendered in all capacities to us during the years
indicated.
SUMMARY COMPENSATION TABLE
23
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
NAME AND OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) COMPENSATION (2) OPTIONS/SARS (3) COMPENSATION (4)
------------------ ---- ------ --------- ---------------- ---------------- ----------------
Shalom Z. Hirschman, MD, 2002 $361,000 $25,000 $26,800 $ 17,865
Chairman December 2001 to May 2001 $361,000 $25,000 $30,192 --- $ 21,270
2002, President, Chief 2000 $361,000 $ 0 $30,775 --- $ 4,540
Executive Officer and Chief
Scientific Officer since
October 1996 and consultant
from May 24, 1995 until
October 1996.
Alan V. Gallantar, 2002 $223,000 $22,500 $ 6,000 --- ---
Chief Financial Officer since 2001 $225,000 $25,000 $ 6,000 --- ---
October 1999; Treasurer since 2000 $200,000 $25,000 $21,000 --- ---
December 2001.
William Bregman, 2002 n/a n/a n/a n/a n/a
Secretary and director from 2001 $70,000 --- --- --- $150,000 (5)
1985 until December 2001, 2000 $60,000 --- --- --- $ 2,500 (4)
treasurer from 1985 to 1999.
Bernard Friedland, 2002 n/a n/a n/a n/a n/a
Chairman of Advanced Viral 2001 $70,000 --- --- --- $150,000 (5)
and President of subsidiary 2000 $60,000 --- --- --- $ 1,800 (4)
Advance Viral Research Ltd.
from 1985 to December 2001.
- ----------------------
(1) With respect to Dr. Hirschman, represents portion of bonus paid to Dr.
Hirschman pursuant to the terms of his employment agreement in connection with
the IND number granted by the FDA. The remaining $50,000 due has been accrued as
of December 31, 2002.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate incremental cost to
Advanced Viral of Dr. Hirschman's automobile lease, gas, oil, repairs and
maintenance. Other Annual Compensation for Mr. Gallantar includes an automobile
allowance of $500 per month and allowance for moving expenses of approximately
$15,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) Represents the dollar value of insurance premiums paid by or on behalf of
Advanced Viral with respect to term life insurance for the benefit of the Named
Executive Officers.
(5) Represents payments made to Messrs. Bregman and Friedland pursuant to the
terms of the severance agreements discussed below.
24
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2002 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2002 by the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
SHARES UNDERLYING UNEXERCISED MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
NAME EXERCISE (#) REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ----------- ------------------------- -------------------------
Shalom Z. Hirschman, M.D. 0 N/A 39,100,000 / 0 $0 / $0 (2)(3)
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
HIRSCHMAN EMPLOYMENT AGREEMENT
Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf.
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least two
years in advance that such one year automatic extension shall be vitiated. If
the agreement is terminated by us for cause, we may cancel all unvested stock
options, benefits under stock bonus plans and stock appreciation rights ("SARs")
granted to Dr. Hirschman. If the agreement is terminated by Dr. Hirschman for
cause, we are required to pay to Dr. Hirschman his annual salary and employee
benefits through the remainder of the then current term. In July 2002, we gave
Dr. Hirschman notice that the agreement would not be extended after December
2004.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
- take such action as may be necessary to permit Dr. Hirschman to
be entitled to participate in stock option, stock bonus or
similar plans (including plans for SARs) as are established by
us;
25
- lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price
not in excess of $40,000, and pay for all gas, oil, repairs and
maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;
- reimburse Dr. Hirschman for all of his proven expenses incurred
in and about the course of his employment that are deductible
under the current tax law, including, among other expenses, his
license fees, membership dues in professional organizations,
subscriptions to professional journals, necessary travel, hotel
and entertainment expenses incurred in connection with
overnight, out-of-town trips that contribute to the benefit of
us in the reasonable determination of Dr. Hirschman, and all
other expenses that may be pre-approved by our board of
directors; and
- provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.
The agreement also provides for the payment of $100,000 to Dr.
Hirschman on the earlier to occur of (i) the date an IND number is obtained from
and approved by the FDA so that human research may be conducted using Product R;
or (ii) the execution of an agreement relating to co-marketing pursuant to which
one or more third parties commit to make payments to us of at least $15 million.
On September 4, 2001, the Company received an IND number from the FDA. To date,
approximately $50,000 of the $100,000 bonus described above has been paid to Dr.
Hirschman, and $50,000 has been accrued.
The agreement further provides that Dr. Hirschman is not authorized,
without the express written consent of the board of directors and other than in
the ordinary course of business, to pledge the credit of Advanced Viral, to bind
us, to release or discharge any debt due us unless we have received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998 grant
to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.
SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and
James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.
In connection with their resignation, we paid $150,000 in one lump sum
to each of Messrs. Bregman and Friedland, and $2,500 to Mr. Silver. In addition,
the Severance Agreements provide as follows:
- That Messrs. Bregman and Friedland shall have the combined
right until November 29, 2003 to appoint one additional member
to the Board of Directors of Advanced Viral reasonably
acceptable to Advanced Viral, so long as both Messrs. Bregman
and Friedland own shares of Advanced Viral. The
Bregman/Friedland designee, if appointed, shall serve on
Advanced Viral's Board of Directors until his successor is duly
elected and qualified, and may be removed as a member of the
Board of Directors of Advanced Viral, with or without cause, by
the affirmative vote of the members of
26
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.
ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(k))
Advanced Viral has adopted a 401(k) plan that allows eligible employees
to contribute up to 20% of their salary, subject to annual limits, which were
$10,500 in 2001. We match 50% of the first 6% of the employee contributions with
our common stock and may from time to time, at our discretion, make additional
contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions. At December 31, 2002
the Company accrued $40,675 to fund the 401k plan representing the Company's
match for the plan year 2002. We intend to purchase our common stock in the open
market at prevailing market prices to satisfy our 2002 matching contribution
obligations. In March 2003, we amended the terms of the 401(k) plan to terminate
our obligation to make matching contributions.
27
PERFORMANCE GRAPH
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
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG ADVANCED VIRAL RESH CORP., THE DOW JONES US TOTAL MARKET INDEX
AND THE DOW JONES US PHARMACEUTICALS INDEX
[COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN GRAPH]
* $100 invested on 12/31/97 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the common
shares of Advanced Viral owned as of March 28, 2003: (i) by each person who
beneficially owns more than 5% of the common shares, (ii) by each of our
directors, (iii) by each of our Named Executive Officers identified in the
Summary Compensation Table above and (iv) by all directors and executive
officers of Advanced Viral as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to such
common shares.
NAME OF BENEFICIAL OWNER NUMBER OF SHARES (1) PERCENTAGE OWNERSHIP
- ------------------------ -------------------- --------------------
Bernard Friedland(2, 3) 32,541,730 6.9%
William Bregman (2, 4) 38,146,988 8.1%
Shalom Z. Hirschman, MD(5) 39,100,000 7.6%
Eli Wilner(7) 4,533,900 *
Alan V. Gallantar(6) 4,547,880 *
David Seligman(8) 1,887.500 *
Nancy J. Van Sant(8) 937,500 *
Roy Walzer(8) 1,041,300 *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (6 PERSONS) 52,048,080 9.9%
- ------------------------
* Represents less than 1%
(1) Shares beneficially owned include shares that may be acquired pursuant to
the exercise of outstanding stock options that are exercisable within 60 days of
March 28, 2003.
(2) Pursuant to their severance agreements with Advanced Viral, each of Messrs.
Bregman and Friedland have granted to Advanced Viral, with respect to the
election of directors and compensation packages for directors of Advanced Viral,
an irrevocable proxy to vote such shares of common stock at any stockholders
meeting until the earlier to occur of November 29, 2003 or as to those shares
sold, the date of the sale of such shares by either Mr. Bregman or Mr.
Friedland, as the case may be, to one or more unrelated parties.
(3) Includes 20,000,000 shares owned by Mr. Friedland and Shirley Friedland, his
spouse, as joint tenants; and 400,000 shares owned by the B&SD Friedland
Foundation, a not-for-profit foundation controlled by Mr. Friedland. Does not
include 15,000 shares owned by Shirley Friedland as to which Mr. Friedland
disclaims beneficial ownership.
(4) Includes 21,758,614 shares held in a trust for which Mr. Bregman is the sole
trustee and sole beneficiary; 165,000 shares owned by Carol Bregman, his
daughter; 165,000 shares owned by Janet Berlin, his daughter; 165,000 shares
owned by Forest Berlin, his grandson; 165,000 shares owned by Jessica Berlin,
his granddaughter; and 55,000 shares owned by David Berlin, his son-in-law.
(5) Represents 39,100,000 shares that may be acquired pursuant to currently
exercisable options to purchase common stock. Dr. Hirschman is the President,
CEO and a Director of Advanced Viral Research Corp.
(6) Represents shares that may be acquired pursuant to currently exercisable
stock options. Mr. Gallantar is the CFO and Treasurer of Advanced Viral Research
Corp.
(7) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 2,087,500 shares that may be acquired pursuant to
currently exercisable stock options; (iii) 362,500 shares beneficially owned by
his wife Barbara Ann Brennan; and (iv) 50,000 shares beneficially owned by his
step-daughter Celia Conaway. Mr. Wilner is the Secretary and Chairman of the
Board of Directors of Advanced Viral Research Corp.
(8) Represents shares that may be acquired pursuant to currently exercisable
stock options. The persons listed are Directors of Advanced Viral Research Corp.
29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have granted stock options to certain of our executive officers, as
described under the caption "Executive Compensation." We have entered into an
employment agreement with our chief executive officer, and have entered into
severance agreements with certain of our former officers and directors as
described under the caption "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements."
In November 2002, we retained Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A., a law firm of which 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 approximately $69,000 and have
paid approximately $40,000 to date. From January through March 24, 2003, we were
billed approximately $109,000 and have paid approximately $55,000 to date.
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.
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports pursuant to the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our President and Chief Executive Officer and Chief
30
Financial Officer, as appropriate, to allow timely disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days prior to March 27, 2003, we carried out an evaluation,
under the supervision and with the participation of our management, including
our President and Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. Based on the foregoing, our President and Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the evaluation date.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date we carried out this evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) EXHIBITS. The following Exhibits are filed with this Report:
1. Financial Statements (see page F-1)
2. Exhibits: The Exhibits listed below are filed or incorporated
by reference as part of this report.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of Advanced Viral Research Corp.
("ADVR") (2)
3.2 Bylaws of ADVR, as amended(1)
3.3 Amendment to Certificate of Incorporation of ADVR(2)
4.1 Specimen Certificate of Common Stock(1)
4.2 Specimen Warrant Certificate(1)
4.3 Warrant Agreement between ADVR and American Stock Transfer and Trust
Company(1)
4.4 Forms of Common Stock Options and Agreements granted by ADVR to TRM
Management Corp.(5)
4.5 Form of Common Stock Option and Agreement granted by ADVR to Plata
Partners Limited Partnership(12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common
Stock granted by ADVR to Leonard Cohen(6)
4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman, MD
dated March 24, 1996(10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and between
ADVR and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common
stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and between
ADVR and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of ADVR at $0.2040 per share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common
stock of ADVR at $0.2448 per share. (15)
4.15 Securities Purchase Agreement dated June 23, 1999 by and between ADVR
and various purchasers. (15)
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of ADVR at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of ADVR at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and between
ADVR and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of
common stock at $0.2461 per share. (15)
4.21 Securities Purchase Agreement dated December 28, 1999 between ADVR
and Endeavour Capital Fund S.A. (16)
4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common
stock at $0.19916667 per share. (16)
31
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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)
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)
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)
32
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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)
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)
21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a Bahamian
corporation.
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
31.2 Certification by Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.*
32.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.*
- ---------------------------
* Filed herewith.
1. Documents incorporated by reference herein to certain exhibits our
registration statement on Form S-1, as amended, File No. 33-33895, filed
with the Securities and Exchange Commission on March 19, 1990.
2. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-18, File No. 33-2262-A, filed with the
Securities and Exchange Commission on February 12, 1989.
3. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
4. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
6. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1996.
11. Incorporated by reference herein to our Current Reports on Form 8-K and
exhibits thereto as follows:
(a) A report on Form 8-K dated January 3, 1992.
(b) A report on Form 8-K dated September 14, 1993.
(c) A report on Form 8-K dated April 25, 1994.
(d) A report on Form 8-K dated June 3, 1994.
(e) A report on Form 8-K dated June 17, 1994.
(f) A report on Form 8-K dated October 25, 1994.
(g) A report on Form 8-K dated December 28, 1995.
(h) A report on Form 8-K dated April 22, 1996.
33
(i) A report on Form 8-K dated July 12, 1996.
(j) A report on Form 8-K dated October 17, 1996.
(k) A report on Form 8-K dated February 21, 1997.
(l) A report on Form 8-K dated March 25, 1997.
(m) A report on Form 8-K dated September 26, 1997.
(n) A report on Form 8-K dated July 21, 1998.
(o) A report on Form 8-K dated November 24, 1998.
(p) A report on Form 8-K dated December 3, 2001.
(q) A report on Form 8-K dated September 10, 2002.
12. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
15. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 33-70523, filed
with the Securities and Exchange Commission on January 13, 1999, and
Amendment No. 5 thereto, declared effective on December 15, 1999.
16. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-94529, filed
with the Securities and Exchange Commission on January 12, 2000.
17. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
18. Documents incorporated by reference herein to certain exhibits to our
registration statement on Form S-1, as amended, File No. 333-37974, filed
with the Securities and Exchange Commission on June 6, 2000.
19. Documents incorporated by reference herein to certain exhibits to
Post-effective Amendment No. 1 to our Registration Statement on Form S-1,
as amended, File No. 333-70523, filed with the Securities and Exchange
Commission on September 25, 2000.
20. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-49038, filed with the
Securities and Exchange Commission on October 31, 2000 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
December 15, 2000.
21. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-55430, filed with the
Securities and Exchange Commission on February 12, 2001 and amended
pursuant to Amendment No. 1 to Form S-1 filed with the Commission on
February 13, 2000.
22. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
23. Documents incorporated by reference herein to certain exhibits to our
Registration Statement on Form S-1, File No. 333-62788, filed with the
Securities and Exchange Commission on June 13, 2001 and amended pursuant
to Amendment No. 1 to Form S-1 filed with the Commission on August 23,
2001.
24. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
25. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended June 30, 2002.
26. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended September 30, 2002.
(b) Reports on Form 8-K during and after the fiscal quarter ended
December 31, 2002: None.
ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Rachlin Cohen & Holtz LLP, independent certified public accountants,
are the principal independent accountants of Advanced Viral and its
subsidiaries. Advanced Viral's auditors are retained solely to provide audit and
audit-related services and advice with respect to tax matters, and have never
provided any other type of non-audit services to Advanced Viral or its
subsidiaries.
AUDIT FEES
Rachlin Cohen & Holtz LLP billed Advanced Viral approximately $71,500
and $85,400 and were paid such amounts for 2002 and 2001, respectively, for the
following audit services: (i) audit of the annual consolidated financial
statements of Advanced Viral for the fiscal years ended December 31, 2002 and
2001; (ii) review of the interim financial statements of Advanced Viral included
in quarterly reports on Form 10-Q and quarterly reports to shareholders for the
periods ended March 31, June 30 and September 30, 2002 and 2001; (iii) the
provision of consent letters; and
34
(iv) review and advice in respect of accounting matters in connection with shelf
registration statement and prospectus filings of Advanced Viral and related
public offerings by Advanced Viral of its equity securities.
AUDIT-RELATED FEES
No audit-related services were provided by Rachlin Cohen & Holtz LLP to
Advanced Viral during 2002 and 2001.
TAX FEES
Rachlin Cohen & Holtz LLP billed Advanced Viral approximately $5,500
and $4,800 and were paid such amounts for 2002 and 2001, respectively, for the
following tax services: (i) tax compliance; (ii) tax planning; and (iii) tax
advice, including preparation of United States and state related tax filings.
ALL OTHER FEES
No other services were provided by Rachlin Cohen & Holtz LLP to
Advanced Viral during 2002 and 2001.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Company's Audit Committee has not adopted/enacted pre-approval
policies and procedures for audit and non-audit services. The Audit Committee of
Advanced Viral continues to monitor legislative and regulatory developments
concerning auditor independence and services that may be provided by independent
auditors to an audit client, including those developments under the
Sarbanes-Oxley Act of 2002 and related rules issued by the SEC.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 23, 2003 ADVANCED VIRAL RESEARCH CORP. (REGISTRANT)
By: /s/ Eli Wilner
--------------
Eli Wilner
President, Chief Executive Officer,
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: December 23, 2003 By: /s/ Alan V. Gallantar
-------------------------------------
Alan V. Gallantar,
Principal Financial and Accounting
Officer
Date: December 23, 2003 By: /s/ David Seligman
-------------------------------------
David Seligman, Director
Date: December 23, 2003 By: /s/ Nancy Van Sant
-------------------------------------
Nancy Van Sant, Director
Date: December 23, 2003 By: /s/ Roy Walzer
-------------------------------------
Roy Walzer, Director
Date: By:
-------------------------------------
Elma Hawkins, Director
36
INDEX OF EXHIBITS
Exhibit No. Description
- ----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulations S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulations S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
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 December 18, 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, Contingencies and Subsequent Events - -
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 455,523,990 and 403,296,863 shares issued
and outstanding 4,555 4,033
Additional paid-in capital 51,141,177 43,877,955
Deficit accumulated during the development stage (49,098,231) (39,777,166)
Discount on warrants (291,175) (662,748)
------------ ------------
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-2
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)
------------- ------------- -------------
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 883,762 1,048,108 1,901,927 3,558,872
Depreciation 977,746 511,216 346,227 1,873,125
------------- ------------- ------------- -------------
8,955,396 10,773,215 7,854,306 41,341,890
------------- ------------- ------------- -------------
Loss from Operations (8,955,396) (10,755,614) (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) (7,130,068)
Severance expense - former directors - (302,500) - (302,500)
------------- ------------- ------------- -------------
(164,515) (71,839) (746,388) (6,411,040)
------------- ------------- ------------- -------------
Loss from Continuing Operations (9,119,911) (10,827,453) (8,592,331) (47,521,038)
Loss from Discontinued Operations (201,154) (259,114) (223,861) (1,577,193)
------------- ------------- ------------- -------------
Net Loss $ (9,321,065) $ (11,086,567) $ (8,816,192) $ (49,098,231)
============= ============= ============= =============
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-3
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-4
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-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, 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-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
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ----------- -----------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ --
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 -- -- -- --
----------- ------- ----------- ---------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 --
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 -- -- -- --
----------- ------- ----------- ---------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 --
----------- ------- ----------- ---------
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
------------- ------------
Balance, December 31, 1993 $ (2,854,076) $ --
Issuance of common stock, for consulting services -- --
Issuance of common stock, exercise of options -- --
Issuance of common stock, exercise of options -- --
Net loss, year ended December 31, 1994 (440,837) --
------------ -----
Balance, December 31, 1994 (3,294,913) --
Issuance of common stock, exercise of options -- --
Issuance of common stock, exercise of options -- --
Issuance of common stock, exercise of options -- --
Issuance of common stock, for consulting services -- --
Issuance of common stock, for consulting services -- --
Net loss, year ended December 31, 1995 (401,884) --
------------ -----
Balance, December 31, 1995 (3,696,797) --
------------ -----
See notes to consolidated financial statements.
F-7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 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-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
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ----------- ------------
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000)
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 - - - -
Imputed interest on convertible debenture - - 4,768 -
Net loss, year ended December 31, 1997 - - - -
----------- ------ ----------- --------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000)
----------- ------ ----------- --------
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
------------ ------------
Balance, December 31, 1996 $(4,851,537) $(473,159)
Issuance of common stock, exercise of options - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, February debenture - -
Beneficial conversion feature, October debenture - -
Warrant costs, February debenture - -
Warrant costs, October debenture - -
Amortization of deferred compensation cost - 399,322
Imputed interest on convertible debenture - -
Net loss, year ended December 31, 1997 (4,141,729) -
----------- ---------
Balance, December 31, 1997 (8,993,266) (73,837)
----------- ---------
See notes to consolidated financial statements.
F-9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------- ---------- ------------
Balance, December 31, 1997 277,962,574 $ 2,779 $10,512,767 $(19,000)
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 - - - -
Write off of subscription receivable - - (19,000) 19,000
Net loss, year ended December 31, 1998 - - - -
----------- ------- ----------- --------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -
----------- ------- ----------- --------
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
------------ ------------
Balance, December 31, 1997 $ (8,993,266) $(73,837)
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, November debenture - -
Warrant costs, November debenture - -
Amortization of deferred compensation cost - 59,068
Write off of subscription receivable - -
Net loss, year ended December 31, 1998 (4,557,710) -
------------ --------
Balance, December 31, 1998 (13,550,976) (14,769)
------------ --------
See notes to consolidated financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, December 31, 1998 296,422,907 $2,964 $ 14,325,076 $(13,550,976)
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 -
Warrant costs, related to convertible debentures -
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) -
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)
----------- ------ ------------ ------------
Deferred Discount
Compensation on
Cost Warrants
---- --------
Balance, December 31, 1998 $(14,769) $ -
Issuance of common stock, securities purchase agreement - -
Issuance of common stock, securities purchase agreement - -
Issuance of common stock, for services rendered - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, August debenture - -
Beneficial conversion feature, December debenture - -
Amortization of warrant costs, convertible debentures - (300)
Warrant costs, related to convertible debentures - 2,455
Warrant costs, August debenture - -
Warrant costs, December debenture - -
Amortization of warrant costs, securities purchase agreement - -
Amortization of deferred compensation cost 14,769 -
Credit arising from modification of option terms - -
Net loss, year ended December 31, 1999 - -
-------- -------
Balance, December 31, 1999 (Restated) - 2,155
-------- -------
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 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-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, 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 -- --
Warrant costs, private equity line of credit 1,019,153 (1,019,043)
Amortization of warrant costs, equity line of credit 356,594
Cashless exercise of warrants -- -- (77,491) -- --
Credit arising from modification of option terms -- -- 691,404 -- --
Net loss, year ended December 31, 2001 -- -- -- (11,086,567) --
----------- ------ ----------- ------------- -----------
Balance, December 31, 2001 (Restated) 403,296,863 $4,033 $43,877,955 $ (39,777,166) $ (662,748)
=========== ====== =========== ============= ===========
See notes to consolidated financial statements.
F-13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ------ ------ ------- ----- --------
Balance, December 31, 2001 (Restated) 403,296,863 4,033 43,877,955 (39,777,166) (662,748)
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, equity line of credit -- -- -- -- 407,660
Beneficial conversion feature, May debenture -- -- 55,413 -- --
Beneficial conversion feature, July debentures -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- (9,321,065) --
----------- ------ ------------ ------------ ---------
Balance, December 31, 2002 (Restated) 455,523,990 $4,555 $ 51,141,177 $(49,098,231) $(291,175)
=========== ====== ============ ============ =========
See notes to consolidated financial statements.
F-14
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)
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (9,321,065) $(11,086,567) $ (8,816,192) $(49,098,231)
------------ ------------ ------------ ------------
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 407,660 356,704 64,335 1,164,392
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 620,024 2,509,600 3,073,870 13,356,088
------------ ------------ ------------ ------------
Net cash used by operating activities (8,701,041) (8,576,967) (5,742,322) (35,742,143)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments - - - (6,292,979)
Proceeds from sale of investments - - - 6,292,979
Acquisition of property and equipment (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Net cash used by investing activities (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 - 1,000,000 11,500,000
Proceeds from sale of securities, net of issuance costs 6,229,628 5,783,000 10,835,970 29,529,686
Proceeds from common stock subscribed but not issued 883,900 - - 883,900
Payments under capital lease (142,426) (58,690) (50,324) (310,028)
Payments on note payable (26,400) (21,519) (19,096) (81,276)
Recovery of subscription receivable written off - - 19,000 19,000
------------ ----------- ------------ ------------
Net cash provided by financing activities 8,944,702 5,702,791 11,785,550 41,541,282
------------ ----------- ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (24,054) (4,462,824) 5,125,757 1,475,755
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 836,876 -
------------ ----------- ------------ ------------
Cash and Cash Equivalents, Ending $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 1,475,755
============ =========== ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 25,669 $ 20,556 $ 36,681
============ =========== ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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.
F-16
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 (Continued)
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-17
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-18
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) $ (9,321,065) $(11,715,568) $(11,086,567) $ (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) (5,453,816)
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma net loss $(12,358,467) $(10,045,113) $(14,090,211) $(11,240,601) $(11,154,491) $(14,270,008)
- ---------------------------------------------------------------------------------------------------------------------------------
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) $ (0.04)
- ---------------------------------------------------------------------------------------------------------------------------------
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-19
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-20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
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 $49,098,231 since inception and is
dependent upon registration of Product R for sale before it can begin
commercial operations. The Company's cash position may be inadequate to
pay all the costs associated with operations and the full range of
testing and clinical trials required by the FDA. Unless and until
Product R is approved for sale in the United States or another
industrially developed country, the Company will be dependent upon the
continued sale
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. GOING CONCERN (Continued)
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 $1,021,000 and $629,000, 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 $2,039,574, $1,018,304, 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 (6,389,428) 51,141,177 47,666,141 (3,788,186) 43,877,955
Deficit accumulated during the
development stage (51,137,805) 2,039,574 (49,098,231) (40,795,470) 1,018,304 (39,777,166)
Discount on warrants (4,688,761) 4,397,586 (291,175) (3,432,630) 2,769,882 (662,748)
----------- ----------- ----------- ----------- ----------- -----------
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
=========== ----------- =========== =========== ----------- ===========
F-22
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 755,397 128,365 883,762 691,404 356,704 1,048,108
Depreciation 977,746 - 977,746 511,216 - 511,216
------------- ------------- ------------- ------------- ------------- -------------
8,827,031 128,365 8,955,396 10,416,511 356,704 10,773,215
------------- ------------- ------------- ------------- ------------- -------------
Loss from Operations (8,827,031) (128,365) (8,955,396) (10,398,910) (356,704)- (10,755,614)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 - 27,659 113,812 - 113,812
Other income
Interest expense (1,341,809) 1,149,635 (192,174) (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) 1,021,270 (9,119,911) (11,456,454) 629,001 (10,827,453)
Loss from Discontinued Operations (201,154) - (201,154) (259,114) - (259,114)
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (10,342,335) $ 1,021,270 $ (9,321,065) $ (11,715,568) $ 629,001 $ (11,086,567)
============= ============= ============= ============= ============= =============
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
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.
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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
========
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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:
- 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.
- 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.
F-25
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)
- 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.
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
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS (Continued)
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.
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 B
Warrants issued under this equity line. The fair value of the Class A
warrants was estimated to be $1,019,153 ($0.204 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 80%; a risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to
compensation and other expense for options and warrants over the life
of the equity line of credit (30 months) in the accompanying financial
statements.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
SUBSEQUENT FINANCINGS - STOCK PURCHASE AGREEMENTS
During January 2003, pursuant to a Stock Purchase Agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a negotiated price of $0.08 per share, for a total purchase price
of $124,000 along with warrants to purchase 930,000 shares of common
stock at an exercise price of $0.12 per share until January 2008. In
connection with this transaction the Company paid a finders fee of
$7,440 during January 2003 and issued warrants to purchase 93,000
shares of common stock with an exercise price of $.12 for a period of
five years.
During March 2003, pursuant to a Stock Purchase Agreement with various
investors, the Company issued 1,250,000 shares of common stock at a
negotiated price of $0.08 per share, for a total purchase price of
$100,000 along with warrants to purchase 750,000 shares of common
stock at an exercise price of $0.12 per share through March 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.
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
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
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.
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. The
Company has commenced these clinical trials. The Phase I initial
trials are placebo controlled, open label, dose escalation safety
studies in healthy volunteers. These studies are being conducted in
the United States under the supervision of GloboMax, LLC. On April 12,
2002, the Company successfully completed Phase 1 trials. Phase 2
trials are pivotal clinical investigations designed to establish the
efficacy and safety of Product R. Currently, the Company does not have
sufficient funds available to pursue the Phase 2 clinical trials of
Product R as a topical treatment for genital warts caused by HPV
infection.
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:
- Phase I/Phase Ii Study in Cachectic Patients Needing Salvage
Therapy for aids. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and
require salvage therapy. The Company believes that Product R
may have three major beneficial effects in patients with
AIDS:
- First, its therapeutic effects on body
wasting (cachexia) seen in patients with
AIDS:
- Second, the mitigation of the toxicity of
drugs included in HAART regimens for the
treatment of AIDS:
- Third, the synergistic activity with drugs
used in HAART regimens to suppress the
replication of HIV and increase the CD4 and
CD8 cell counts in patients with AIDS:
The Company believes that Product R may prove to be an
important "enabler" drug in the treatment of AIDS.
- 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.
F-30
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)
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of Product R.
Although there can be no assurances, the Company anticipate that the
clinical trials in Israel will help facilitate the planned
investigational new drug (IND) application process for injectable
Product R with the FDA.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel using
Product R. It is anticipated that these trials will support future FDA
applications. As of December 31, 2002, the Company paid $242,000 for
such research.
In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the 3 clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the 3 clinical trials including establishing a network of
scientists to perform said study/trial and initiate recruitment 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.
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
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.
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
F-32
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)
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.
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. The fair value of these options
was estimated to be $5,328,000 based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 80%; a risk free
interest rate of 6% and an expected life of 32 months. The Company has
recognized the $5,328,441 fair value of the options as compensation
expense on a pro-forma basis in May 2000 based upon the vesting terms
of the employment 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)
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. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis over approximately 5 years (the vesting period of the
options).
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)
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. The fair value of the options was estimated to be
$246,822 ($0.1097 per option) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 115%; a risk free
interest rate of 4.88% and an expected holding period of eight years.
This amount was charged to compensation expense for options and
warrants during the year ended December 31, 2002. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis recognizing 25% of the fair value over each vesting
period. The Business Advisory Board was dissolved during December
2002.
In September 2002, the Company granted to Sidney Pestka, M.D., a
member of the Scientific Advisory Board, options to purchase 250,000
shares of common stock at an exercise price of $0.14 per share, which
options are exercisable 25% immediately, 25% on December 18, 2002, 25%
on March 18, 2003 and 25% on June 18, 2003 through September 17, 2010.
Compensation expense for the year ended December 31, 2002 was $6,438.
The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis recognizing 25% of the fair
value over each vesting period.
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. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis recognizing 25% of the fair
value over each vesting period.
BOARD OF DIRECTORS
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to certain Members of
the Board of Directors and various committees of the Board of
Directors. The exercise price was $0.12 per share exercisable 25%
immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25%
on December 20, 2002 through May 5, 2010. The fair value of the these
options was estimated to be $455,249 ($0.1097 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation expense on a pro-forma basis recognizing 25%
of the fair value over each vesting period.
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)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
In June 2002, the Company granted to Roy S. Walzer, upon his becoming
a member of the Board of Directors and member of various committees of
the Board, options to purchase 528,800 shares of common stock at an
exercise price of $0.295 per share, which options are exercisable 25%
immediately, 25% on September 10, 2002, 25% on December 10, 2002 and
25% on March 10, 2003 through June 9, 2010. The fair value of the
these options was estimated to be $140,608 ($0.2659 per option share)
based upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation expense on a pro-forma basis recognizing 25%
of the fair value over each vesting period.
In July 2002, the Company granted to Paul Bishop, upon his becoming a
member of the Board of Directors, options to purchase 238,356 shares
of common stock at an exercise price of $0.17 per share,) which
options are exercisable 25% immediately, 25% on October 29, 2002, 25%
on January 29, 2003 and 25% on April 29, 2003 through July 28, 2010.
The fair value of the these options was estimated to be $38,509
($0.1616 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 133%; a risk free
interest rate of 4.38% and an expected life of eight years. The
Company will recognize the fair value of the options as compensation
expense on a pro-forma basis recognizing 25% of the fair value over
each vesting period.
In September 2002, the Company granted to Richard Kent, upon his
becoming a member of the Board of Directors, and member of various
committees of the Board, options to purchase 241,096 shares of common
stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 24, 2002, 25% on March
24, 2003 and 25% on June 24, 2003 through September 23, 2010. The fair
value of the these options was estimated to be $29,377 ($0.1218 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 127%; a risk free interest rate of
4.38% and an expected life of eight years. The Company will recognize
the fair value of the options as compensation expense on a pro-forma
basis recognizing 25% of the fair value over each vesting period.
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years. The Company will recognize the fair
value of the options as compensation expense on a pro-forma basis
recognizing 25% of the fair value over each vesting period.
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)
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.
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 50,473,879 .2433 48,518,420 .2553 48,394,460 .2568
Weighted-average fair value of
options granted during the year .10 .31 .2818
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)
SUMMARY OF STOCK OPTIONS (Continued)
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
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) $ (9,321,065) $(11,715,568) $(11,086,567) $ (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) (5,453,816)
Pro forma net loss $(12,358,467) $(10,045,113) $(14,090,211) $(11,240,601) $(11,154,491) $(14,270,008)
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) $ (0.04)
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with GloboMax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for Product R. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002.
F-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)
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share and
warrants to purchase 1,750,000 shares at an exercise price of $0.26
per share until February 28, 2005. The fair value of the warrants was
estimated to be $200,249 ($0.057 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). This amount was
amortized to consulting expense during the year ended December 31,
2000.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from
January 2002 to May 2002, the Company granted to Harbor View warrants
to purchase 1,000,000 shares of the Company's common stock at an
exercise price of $0.18 per share. The warrants are exercisable in
whole or in part at any time and from time to time prior to May 30,
2008. The fair value of the warrants was estimated to be $190,757
($0.1908 per warrant) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38% and an expected holding period of six years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities, whereby the Company has granted exclusive rights
to distribute Product R in the countries of Canada, China, Japan,
Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil and Chile. Pursuant to these agreements, distributors
are obligated to cause Product R to be approved for commercial sale in
such countries and, upon such approval, to purchase from the Company
certain minimum quantities of Product R to maintain the exclusive
distribution rights. Leonard Cohen, a former consultant to the
Company, has informed the Company that he is an affiliate of two of
these entities. To date, the Company has recorded revenue classified
as other income for the sale of territorial rights under the
distribution agreements. The Company has made no sales under the
distribution agreements other than for testing purposes.
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York
facilities, of which the entire amount has been incurred as of
December 31, 2001. During 2002, additional costs were incurred to
complete leasehold improvements for research and development purposes
of approximately $222,000, which has not been paid at December 31,
2002.
SOFTWARE ACQUISITION
During 2001, the Company contracted with a software vendor at a cost
of approximately $500,000 to acquire and install an SAP system for
accounting, administrative and production control. As of December 31,
2001, the entire cost was incurred and was capitalized as an
additional element of cost of the computer equipment.
LEASES
CAPITAL LEASES
During 1998, the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments of
$4,529 for 60 months commencing on September 1998 and expiring on July
2003. During 1999, the Company entered into a purchase lease agreement
for equipment totaling $38,645. The lease calls for monthly payments
of $965 for 48 months commencing in August 1999 and expiring in July
2003. During 2000, the Company entered into a purchase lease agreement
for equipment totaling $13,197. The lease calls for monthly payments
of $447 for 36 months commencing in January 2001 and expiring in
December 2003. During 2002, the Company entered into a purchase lease
agreement for equipment totaling $146,672. The lease calls for monthly
payments of $5,903 for 24 months commencing in February 2002 and
expiring in January 2004.
Future minimum capital lease payments and the net present value of the
future minimum lease payments at December 31, 2002 are as follows:
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
============
F-40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (Continued)
OPERATING LEASES
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $17,000 annually. The Company has three options to renew
for an additional one year per option. Management has exercised its
second option for the year 2001. Effective December 2001, the Company
closed its Florida office.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective May
1, 1999. The new lease adds 10,550 square feet (for a total of 16,650
square feet) and extends its term until April 2005. Annual rent on the
original lease is approximately $85,000. Rent for the additional
facilities is approximately $175,000. Total rental commitment for the
Yonkers facilities will be $260,000 until May 1, 2002 at which time it
will increase to approximately $290,000.
The Company leased an automobile in November 1999 for 39 months at
$711 per month expiring in January 2003. The Company entered into a
new 39 month lease for $716 per month, starting in February 2003 and
expiring in April 2006.
Total lease expense for the years ended December 31, 2002, 2001 and
2000 amounted to $298,763, $263,609 and $296,064, respectively.
Future minimum lease commitments as of December 31, 2002 are as
follows:
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-41
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-42
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
BLACK-SCHOLES ORIGINAL ORIGINAL NEW NEW
YEAR GRANTEE CALCULATION OPTION SHARES EXERCISE PRICE EXPIRATION DATE EXERCISE PRICE EXPIRATION 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-43
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 $39,400,000 and $31,600,000, 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 $13,379,340 $11,730,000 $10,727,340
Less valuation allowance 13,634,000 13,379,340 11,730,000 10,727,340
----------- ----------- ----------- -----------
Net deferred tax asset $ - $ - $ - $ -
=========== =========== =========== ===========
As of December 31, 2002 and 2001, sufficient uncertainty exists
regarding the realizability of these operating loss carryforwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a
three year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. The
Company's utilization of its tax benefit carryforwards may be further
restricted in the event of future changes in the ownership of the
Company from the exercise of options and warrants or other future
issuances of common stock.
F-44
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,
1984) to
Year Ended December 31, 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-45