UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 2
[X] QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended
SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to _______________
Commission File Number 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 59-2646820
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Corporate Boulevard South, Yonkers, New York 10701
------------------------------------------------ -----
Address of principal executive offices) Zip Code
(914) 376-7383
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes [X] No [ ]
- --------------------------------------------------------------------------------
Indicate the number of shares outstanding of the registrant's Common Stock
outstanding as of the close of business on November 14, 2003: 521,921,079.
- --------------------------------------------------------------------------------
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q/A
SEPTEMBER 30, 2003
EXPLANATORY NOTE
Advanced Viral Research Corp. is filing this Amendment No. 2 to Quarterly
Report on Form 10-Q/A to amend its Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003, as amended by Amendment No. 1 filed on
December 19, 2003 to amend Item 6 "Exhibits and Reports on Form 8-K" of Part II
of Amendment No. 1.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION................................................................................... 1
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)..................................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................................................. 44
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................... 58
ITEM 4. CONTROLS AND PROCEDURES............................................................................ 58
PART II. OTHER INFORMATION....................................................................................... 59
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 59
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 59
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 59
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.................................................. 59
ITEM 5. OTHER INFORMATION.................................................................................. 59
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 59
SIGNATURES....................................................................................................... 60
ADVANCED VIRAL RESEARCH CORP.
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements include the accounts of the
Company and have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. In the opinion of the Company, all adjustments
(consisting solely of normal recurring adjustments) necessary to present fairly
the information in the following unaudited consolidated financial statements of
the Company have been included. The results of operations for such interim
periods are not necessarily indicative of the results for the full year.
These unaudited consolidated financial statements should be read in
conjunction with the restated consolidated financial statements and the notes
thereto included in the Company's latest Annual Report on Form 10-K/A.
1
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
(Unaudited) (Audited)
----------- ---------
Restated Restated
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 938,590 $ 1,475,755
Prepaid insurance 102,648 86,368
Assets held for sale 152,273 172,601
Other current assets 5,099 35,527
------------ ------------
Total current assets 1,198,610 1,770,251
Property and Equipment, Net 1,541,002 2,244,118
Other Assets 1,266,198 931,660
------------ ------------
Total assets $ 4,005,810 $ 4,946,029
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 733,000 417,061
Accrued liabilities 134,881 137,646
Current portion of capital lease obligation 18,389 104,719
Current portion of note payable 9,660 25,165
------------ ------------
Total current liabilities 895,930 684,591
------------ ------------
Long-Term Debt:
Convertible debenture, net 2,316,223 1,610,499
Capital lease obligation - 5,834
Note payable - 4,879
------------ ------------
Total long-term debt 2,316,223 1,621,212
------------ ------------
Common Stock Subscribed but not Issued 883,900
------------
Commitments and Contingencies - -
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized,522,918,079 and 455,523,990 shares issued
and outstanding 5,229 4,555
Additional paid-in capital 55,678,190 51,141,177
Deficit accumulated during the development stage (54,700,144) (49,098,231)
Discount on warrants (189,618) (291,175)
------------ ------------
Total stockholders' equity 793,657 1,756,326
------------ ------------
Total liabilities and stockholders' equity $ 4,005,810 $ 4,946,029
============ ============
See notes to consolidated financial statements.
2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended Inception
September 30, September 30, February 20,
------------- ------------- (1984) to
2003 2002 2003 2002 September 30,
---- ---- ---- ---- -------------
Restated (Restated) Restated (Restated) 2003
-------- ---------- -------- ---------- ----
Revenues $ - $ - $ - $ - $ 231,892
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 219,586 978,658 1,066,596 3,517,924 19,382,012
General and administrative 873,473 708,133 2,541,689 2,058,352 20,136,166
Compensation and other expense for
options and warrants 70,988 25,055 329,157 794,552 4,652,393
Depreciation 228,252 254,045 703,276 713,356 2,576,401
------------- ------------- ------------- ------------- -------------
1,392,299 1,965,891 4,640,718 7,084,184 46,746,972
------------- ------------- ------------- ------------- -------------
Loss from Operations (1,392,299) (1,965,891) (4,640,718) (7,084,184) (46,515,080)
------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 2,811 6,482 10,661 11,305 912,096
Other income - - - - 120,093
Interest expense (757,420) (83,543) (949,260) (120,980) (7,314,964)
Severance expense - former directors - - - - (302,500)
------------- ------------- ------------- ------------- -------------
(754,609) (77,061) (938,599) (109,675) (6,585,275)
------------- ------------- ------------- ------------- -------------
Loss from Continuing Operations (2,146,908) (2,042,952) (5,579,317) (7,193,859) (53,100,355)
Loss from Discontinued Operations (6,245) (42,098) (22,596) (129,058) (1,599,789)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,153,153) $ (2,085,050) $ (5,601,913) $ (7,322,917) $ (54,700,144)
============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.00) $ (0.00) $ (0.01) $ (0.02)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------- ------------- ------------- -------------
Net loss $ (0.00) $ (0.00) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 496,522,776 425,952,540 481,941,317 425,952,540
============= ============= ============= =============
See notes to consolidated financial statements.
3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
----------- ----- ------- --------
Adjustment for pooling of interests - (1,000) 1,000 -
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- ----- ------- --------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $ 0.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- ----- ------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 0.01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- ----- ------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ----- ------- --------
See notes to consolidated financial statements.
4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ---------- ------------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $0.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, year ended December 31, 1987 - - - (258,663)
------------ ------- ---------- ------------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
------------ ------- ---------- ------------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
------------ ------- ---------- ------------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption
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.
5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------------ ------- ----------- ------------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $0.05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants 0.08 2,500 - 200 -
Issuance of common stock, exercise of underwriter warrants 0.12 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
------------ ------- ----------- ------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing 0.04 10,000,000 100 404,900 -
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 -
Expenses of stock issuance - - (7,792) -
Net loss, year ended December 31, 1992 - - - (839,981)
------------ ------- ----------- ------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 -
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 -
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
------------ ------- ----------- ------------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------- ----------- ------------
See notes to consolidated financial statements.
6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------ ----------- ------------ ------------ ------------
Balance, December 31, 1993 236,276,991 $2,363 $ 3,416,070 $ - $ (2,854,076) $ -
Issuance of common stock,
for consulting services $0.05 4,750,000 47 237,453 - - -
Issuance of common stock,
exercise of options 0.08 400,000 4 31,996 - - -
Issuance of common stock,
exercise of options 0.10 190,000 2 18,998 - - -
Net loss, year ended
December 31, 1994 - - - - (440,837) -
----------- ----- --------- ---- ------------ ----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
-
Issuance of common stock,
exercise of options 0.05 3,333,333 33 166,633 - - -
Issuance of common stock,
exercise of options 0.08 2,092,850 21 167,407 - - -
Issuance of common stock,
exercise of options 0.10 2,688,600 27 268,833 - - -
Issuance of common stock,
for consulting services 0.11 1,150,000 12 126,488 - - -
Issuance of common stock,
for consulting services 0.14 300,000 3 41,997 - - -
Net loss, year ended
December 31, 1995 - - - - (401,884) -
----------- ----- --------- ---- ------------ ----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
----------- ----- --------- ---- ------------ ----
See notes to consolidated financial statements.
7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- -------- ----------- ------------ ------------ ------------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ - $ (3,696,797) $ -
Issuance of common stock,
exercise of options $0.05 3,333,334 33 166,634 - - -
Issuance of common stock,
exercise of options 0.08 1,158,850 12 92,696 - - -
Issuance of common stock,
exercise of options 0.10 7,163,600 72 716,288 - - -
Issuance of common stock,
exercise of options 0.11 170,000 2 18,698 - - -
Issuance of common stock,
exercise of options 0.12 1,300,000 13 155,987 - - -
Issuance of common stock,
exercise of options 0.18 1,400,000 14 251,986 - - -
Issuance of common stock,
exercise of options 0.19 500,000 5 94,995 - - -
Issuance of common stock,
exercise of options 0.20 473,500 5 94,695 - - -
Issuance of common stock,
for services rendered 0.50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended
December 31, 1996 - - - - (1,154,740) -
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----- --------- ------- ---------- --------
See notes to consolidated financial statements.
8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------- ----------- ------- ----------- ------------ ------------ ------------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $ (4,851,537) $ (473,159)
Issuance of common stock,
exercise of options $ 0.08 3,333,333 33 247,633 - - -
Issuance of common stock,
conversion of debt 0.20 1,648,352 16 329,984 - - -
Issuance of common stock,
conversion of debt 0.15 894,526 9 133,991 - - -
Issuance of common stock,
conversion of debt 0.12 2,323,580 23 269,977 - - -
Issuance of common stock,
conversion of debt 0.15 1,809,524 18 265,982 - - -
Issuance of common stock,
conversion of debt 0.16 772,201 8 119,992 - - -
Issuance of common stock,
for services rendered 0.41 50,000 - 20,500 - - -
Issuance of common stock,
for services rendered 0.24 100,000 1 23,999 - - -
Beneficial conversion feature,
February debenture - - 413,793 - - -
Beneficial conversion feature,
October debenture - - 1,350,000 - - -
Warrant costs, February debenture - - 37,242 - - -
Warrant costs, October debenture - - 291,555 - - -
Amortization of deferred
compensation cost - - - - - 399,322
Imputed interest on
convertible debenture - - 4,768 - - -
Net loss, year ended
December 31, 1997 - - - - (4,141,729) -
----------- ----- ---------- ------- ---------- -------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ----- ---------- ------- ---------- -------
See notes to consolidated financial statements.
9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
------- ----------- ------- ------------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767
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)
Net loss, year ended December 31, 1998 - - -
----------- ----- ----------
Balance, December 31, 1998 296,422,907 2,964 14,325,076
----------- ----- ----------
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
------------ ------------ ------------
Balance, December 31, 1997 $ (19,000) $ (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 19,000 - -
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.
10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Subscription Development on
Share Shares Amount Capital Receivable Stage Warrant
------- ----------- ------- ------------ ------------- ------------ ---------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $ (13,550,976) $ (14,769) $ -
Issuance of common stock,
securities purchase agreement $ 0.16 4,917,276 49 802,451 - - -
Issuance of common stock,
securities purchase agreement 0.27 1,851,852 18 499,982 - - -
Issuance of common stock,
for services rendered 0.22 100,000 1 21,999 - - -
Issuance of common stock,
for services rendered 0.25 180,000 2 44,998 - - -
Beneficial conversion feature,
August debenture - - 950,036 - - -
Beneficial conversion feature,
December debenture - - 361,410 - - -
Amortization of warrant costs,
convertible debentures - - 300 - - (300)
Warrant costs, related to
convertible debentures - - 2,455
Warrant costs, August debenture - - 49,964 - - -
Warrant costs, December debenture - - 4,267 - - -
Amortization of warrant costs,
securities purchase agreement - - - - -
Amortization of deferred
compensation cost - - (14,769) - 14,769 -
Credit arising from
modification of option terms - - 210,144 - - -
Net loss, year ended
December 31, 1999 - - - (6,323,431) - -
----------- ----- ---------- ------------- --------- ------
Balance, December 31,
1999 (Restated) 303,472,035 3,034 17,255,858 (19,874,407) - 2,155
----------- ----- ---------- ------------- --------- ------
See notes to consolidated financial statements.
11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ----------- ------- ------------ ----- --------
Balance, December 31,
1999 (Restated) 303,472,035 $ 3,034 $ 17,255,858 $ (19,874,407) $ 2,155
Issuance of common stock,
exercise of options $ 0.1400 600,000 6 83,994 - -
Issuance of common stock,
exercise of options 0.1500 1,600,000 16 239,984 - -
Issuance of common stock,
exercise of options 0.1600 650,000 7 103,994 - -
Issuance of common stock,
exercise of options 0.1700 100,000 1 16,999 - -
Issuance of common stock,
exercise of options 0.2100 792,500 8 166,417 - -
Issuance of common stock,
exercise of options 0.2500 1,000,000 10 246,090 - -
Issuance of common stock,
exercise of options 0.2700 281,000 3 75,867 - -
Issuance of common stock,
exercise of options 0.3600 135,000 1 48,599 - -
Issuance of common stock,
exercise of warrants 0.2040 220,589 2 44,998 - -
Issuance of common stock,
exercise of warrants 0.2448 220,589 2 53,998 - -
Issuance of common stock,
exercise of warrants 0.2750 90,909 1 24,999 - -
Issuance of common stock,
exercise of warrants 0.3300 90,909 1 29,999 - -
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 - -
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 - -
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 - -
Issuance of common stock,
conversion of debt 0.3600 43,960 - 15,667 - -
Issuance of common stock,
cashless exercise of warrants 563,597 6 326,153 - -
Issuance of common stock,
services rendered 0.4650 100,000 1 46,499 - -
Private placement of common stock 0.2200 13,636,357 136 2,999,864 - -
Private placement of common stock 0.3024 4,960,317 50 1,499,950 - -
Private placement of common stock 0.4000 13,265,000 133 5,305,867 - -
Cashless exercise of warrants - - (326,159) - -
Beneficial conversion feature,
January Debenture - - 395,236 - -
Warrant costs, consulting agreement - - 200,249 - -
Warrant costs, January Debenture - - 13,418 - -
Warrant costs, related to
convertible debentures - - - - (2,454)
Recovery of subscription receivable
previously written off - - 19,000 - -
Credit arising from modification
of option terms - - 1,901,927 - -
Net loss, year ended
December 31, 2000 - - - (8,816,192) -
----------- ----- ---------- ----------- -------
Balance, December 31,
2000 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
----------- ----- ---------- ----------- -------
See notes to consolidated financial statements.
12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ------------ ------- ------------ ------------ ---------
Balance, December 31,
2000 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
Issuance of common stock,
exercise of options $ 0.2700 40,000 1 10,799
Issuance of common stock, - -
exercise of options 0.3600 20,000 1 7,199
Issuance of common stock,
cashless exercise of warrants 76,411 1 77,491 - - -
Issuance of common stock, for - -
services rendered 0.3500 100,000 1 34,999 - -
Sale of common stock, for cash 0.1500 6,666,667 66 999,933 - -
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 - -
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 - -
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 - -
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904
Warrant costs, private equity - -
line of credit 1,019,153
Amortization of warrant costs, (1,019,043)
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.
13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ----------- -------- ------------ ------------ ----------
Balance, December 31,
2001 (Restated) 403,296,863 4,033 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
------------ ------- ------------
Balance, December 31,
2002 (Restated) $(49,098,231) $ (291,175)
------------ ------------
See notes to consolidated financial statements.
14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ----------- ------- ----------- ------------ ----------
Balance, December 31,
2002 (Restated) 455,523,990 4,555 51,141,177 (49,098,231) (291,175)
Sale of common stock,
for cash $ 0.0500 21,620,000 216 1,080,784 - -
Sale of common stock,
for cash $ 0.0800 22,650,000 226 1,811,774 - -
Issuance of common stock,
conversion of debt $ 0.0424 14,150,943 142 599,858 - -
Issuance of common stock,
conversion of debt 0.1000 7,255,754 73 725,653 - -
Issuance of common stock,
conversion of debt 0.1818 562,865 6 102,323 - -
Issuance of common stock,
for services rendered 0.0790 100,000 1 7,899 - -
Issuance of common stock,
for services rendered 0.0930 107,527 1 9,999 - -
Warrant costs, issued with
issue of convertible debenture - - 517,141 - (517,141)
Expenses of stock issuance - - (199,989 - 36,386
Amortization of warrant costs,
related to convertible debenture - - - - 327,523
Amortization of warrant costs,
equity line of credit 254,789
Litigation settlement
- cash and stock - - (1,126,407 - -
Litigation settlement stock 0.0800 947,000 9 75,751 - -
Options issued for services
rendered - - 74,368 - -
Beneficial conversion feature,
April debenture - - 482,859 - -
Beneficial conversion feature,
July debenture - - 375,000 - -
Net loss, Nine Months Ended
September 30, 2003 - - - (5,601,913) -
----------- ------- ----------- ------------ ----------
Balance, September 30,
2003 (Restated) 522,918,079 $ 5,229 $55,678,190 $(54,700,144) $ (189,618)
----------- ------- ----------- ------------ ----------
See notes to consolidated financial statements.
15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
Nine Months Ended (February 20,
September 30, 1984) to
------------- September 30,
2003 2002 2003
---- ---- ----
Restated Restated
-------- ---------
Cash Flows from Operating Activities:
Net loss $ (5,601,913) $ (7,322,917) $(54,700,144)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 715,158 728,817 3,153,821
Amortization of debt issuance costs 105,922 21,224 934,559
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 417,145 57,574 4,599,940
Amortization of discount on warrants 582,312 305,745 1,976,953
Amortization of deferred compensation cost - - 760,500
Issuance of common stock for debenture interest 74,493 21,863 194,130
Issuance of common stock for services - - 1,586,000
Compensation expense for options and warrants 74,368 488,807 3,339,176
Changes in operating assets and liabilities:
(Increase) decrease in other current assets 17,664 (45,452) (127,647)
Increase in other assets (117,446) (112,517) (1,752,635)
Increase (decrease) in accounts payable and accrued liabilities 313,176 (921,847) 874,083
------------ ------------ ------------
Total adjustments 2,182,792 544,214 15,538,880
------------ ------------ ------------
Net cash used by operating activities (3,419,121) (6,778,703) (39,161,264)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments - - (6,292,979)
Proceeds from sale of investments - - 6,292,979
Disposal (Acquision) of property and equipment 4,769 (192,755) (4,318,615)
------------ ------------ ------------
Net cash provided (used) by investing activities 4,769 (192,755) (4,318,615)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt- net of issuance costs 2,186,986 2,000,000 13,686,986
Proceeds from sale of securities, net of issuance costs 2,737,298 6,279,788 32,266,984
Proceeds from common stock subscribed but not issued (883,900) - -
Payments under litigation settlement (1,050,649) - (1,050,649)
Payments under capital lease (92,164) (109,528) (402,192)
Payments on note payable (20,384) (17,911) (101,660)
Recovery of subscription receivable written off - - 19,000
------------ ------------ ------------
Net cash provided by financing activities 2,877,187 8,152,349 44,418,469
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (537,165) 1,180,891 938,590
Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 -
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 938,590 $ 2,680,700 $ 938,590
============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the period for interest $ 14,177 $ 11,305
============ ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements at
September 30, 2003 have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information on Form 10-Q and reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
the financial position as of September 30, 2003 and results of
operations for the three and nine months ended September 30, 2003 and
2002 and cash flows for the nine months ended September 30, 2003 and
2002. All such adjustments are of a normal recurring nature. Certain
general and administrative expenses from inception relating to
consulting services were reclassified to compensation expense for
options and warrants to be consistent with current presentation. The
Company has discontinued allocating the majority of its general and
administrative expenses to research and development, since, subsequent
to December 31, 2002, the Company reduced its research and development
activities to include only research performed in Israel. Therefore, the
Company's allocation to research and development includes only those
direct expenses relating to the research and development activities in
Israel and 30% of salaries and payroll taxes for the Company's Chief
Scientist, who oversees the clinical trials in Israel and spends
approximately 30% of his time in these initiatives. This change was
necessary to reflect current operating costs relating to the Company's
Yonkers, New York facility. The results of operations for interim
periods are not necessarily indicative of the results to be expected
for a full year. The statements should be read in conjunction with the
audited consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 will not have any
impact on the Company's operating results or financial position as the
Company does not have any derivative instruments that are affected by
SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have any impact on the Company's
operating results or financial position as the Company does not have
any financial instruments with characteristics of both liabilities and
equity that are not already classified as liabilities.
17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $54,700,144 since inception and is
dependent upon registration of AVR118 (formerly known as "Product R"
until October 2003) for sale before it can begin commercial operations.
The Company's cash position is inadequate to pay all the costs
associated with operations and the full range of testing and clinical
trials required by the FDA. Unless and until AVR118 is approved for
sale in the United States or another industrially developed country,
the Company will be dependent upon the continued sale of its
securities, debt or equity financing for funds to meet its cash
requirements. The foregoing issues raise substantial doubt about the
Company's ability to continue as a going concern.
Management intends to continue to sell the Company's securities in an
attempt to meet its cash flow requirements; however, no assurance can
be given that equity or debt financing, if and when required, will be
available.
18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements for the three and nine months
ending September 30, 2003 and 2002 have been restated to reflect
changes in accounting for warrants issued in connection with equity
transactions as well as options issued to the Board of Directors and
employees (on a pro-forma basis only) and its Advisory Board. The
restatement resulted in expense which increases the previously reported
net loss for the three and nine months ending September 30, 2003 by
approximately $51,000 and $255,000, respectively, and reduces the
previously reported net loss for the three and nine months ending
September 30, 2002 by approximately $313,000 and $644,000,
respectively.
Basic and diluted net loss per common share on operations remained the
same for the three and nine months ended September 30, 2003. Basic and
diluted net loss per common share on operations changed by $(.01) from
$(.01) to $(.00) for the three months ended September 30, 2002, and
remained the same for the nine months ended September 30, 2002. The
Company's deficit accumulated during the development stage was reduced
by $2,039,574 for the year ended December 31, 2002. The Company's
deficit accumulated during the development stage was increased by
$1,019,153 at September 30, 2003. The restatement did not impact the
Company's net cash in investing and financing activities and net cash
used in operating activities remained unchanged, however, certain
components within operating activities consisting of amortization of
deferred interest cost, discount on warrants and compensation expense
for options and warrants, were restated for the three and nine months
ended September 30, 2003 and September 30, 2002.
AS OF SEPTEMBER 30, 2003
------------------------
AS REPORTED ADJUSTMENT RESTATED
------------ ------------ ------------
ASSETS
Current Assets $ 1,198,610 - $ 1,198,610
Property and Equipment, net 1,541,002 - 1,541,002
Other Assets 1,266,198 - 1,266,198
------------ ------------ ------------
Total assets $ 4,005,810 $ 4,005,810
============ ============
LIABILITIES AND STOCKHOLDERS" EQUITY
Current Liabilities 895,930 - 895,930
Long-Term Debt:
Convertible debenture-net 2,316,223 - 2,316,223
Capital lease obligation
Note payable
Total long-term debt 2,316,223 - 2,316,223
------------ ------------ ------------
Stockholders' Equity
Common stock 5,229 - 5,229
Additional paid-in capital 54,659,037 1,019,153 55,678,190
Deficit accumulated during development stage (53,680,991) (1,019,153) (54,700,144)
Discount on warrants (189,618) - (189,618)
Total stockholders' equity 793,657 - 793,657
------------ ------------ ------------
Total liabilities and stockholders' equity $ 4,005,810 $ - $ 4,005,810
============ ============ ============
19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
AS OF DECEMBER 31, 2002
-----------------------
AS REPORTED ADJUSTMENTS RESTATED
----------- ----------- -----------
ASSETS
Current Assets 1,770,251 - 1,770,251
Property and Equipment, Net 2,244,118 - 2,244,118
Other Assets 931,660 - 931,660
----------- -----------
Total assets 4,946,029 - 4,946,029
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 684,591 - 684,591
Long-Term Debt:
Convertible debenture, net 1,658,231 (47,732) 1,610,499
Capital lease obligation 5,834 - 5,834
Note payable 4,879 - 4,879
----------- ----------- -----------
Total long-term debt 1,668,944 (47,732) 1,621,212
----------- ----------- -----------
Common Stock Subscribed but not Issued 883,900 - 883,900
----------- ----------- -----------
Stockholders' Equity:
Common stock 4,555 - 4,555
Additional paid-in capital 57,530,605 (6,389,428) 51,141,177
Deficit accumulated during development stage (51,137,805) 2,039,574 (49,098,231)
Discount on warrants (4,688,761) 4,397,586 (291,175)
----------- ----------- -----------
Total stockholders' equity 1,708,594 47,732 1,756,326
----------- ----------- -----------
Total liabilities and stockholders' equity 4,946,029 - 4,946,029
=========== =========== ===========
THREE MONTHS ENDED SEPTEMBER 30, 2003 NINE MONTHS ENDED SEPTEMBER 30, 2003
AS REPORTED ADJUSTMENTS RESTATED AS REPORTED ADJUSTMENTS RESTATED
------------ --------- ------------ ------------ ---------- ------------
Revenues $ - $ - $ - $ - $ - $ -
------------ --------- ------------ ------------ ---------- ------------
Costs and Expenses:
Research and development 219,586 - 219,586 1,066,596 - 1,066,596
General and administrative 873,473 - 873,473 2,541,689 - 2,541,689
Compensation and other
expense for options and warrants 20,029 50,959 70,988 74,368 254,789 329,157
Depreciation 228,252 - 228,252 703,276 - 703,276
------------ --------- ------------ ------------ ---------- ------------
1,341,340 50,959 1,392,299 4,385,929 254,789 4,640,718
------------ --------- ------------ ------------ ---------- ------------
Loss from Operations (1,341,340) (50,959) (1,392,299) (4,385,929) (254,789) (4,640,718)
------------ --------- ------------ ------------ ---------- ------------
Other Income (Expense):
Interest income 2,811 - 2,811 10,661 - 10,661
Other income - - - - -
Interest expense (757,420) - (757,420) (949,260) - (949,260)
Severance expense - former
directors - - - - - -
------------ --------- ------------ ------------ ---------- ------------
(754,609) - (754,609) (938,599) - (938,599)
------------ --------- ------------ ------------ ---------- ------------
Loss from Continuing Operations (2,095,949) (50,959) (2,146,908) (5,324,528) (254,789) (5,579,317)
Loss from Discontinued Operations (6,245) - (6,245) (22,596) - (22,596)
------------ --------- ------------ ------------ ---------- ------------
Net Loss $ (2,102,194) $ (50,959) $ (2,153,153) $ (5,347,124) $ (254,789) $ (5,601,913)
============ ========= ============ ============ ========== ============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.00) $ (0.00) $ (0.01) $ (0.01)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------ ------------ ------------ ------------
Net loss $ (0.00) $ (0.00) $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 496,522,776 496,522,776 481,941,317 481,941,317
============ ============ ============ ============
20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------- --------------------------------------
AS REPORTED ADJUSTMENTS RESTATED AS REPORTED ADJUSTMENTS RESTATED
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ - $ - $ - $ - $ - $ -
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 978,658 - 978,658 3,517,924 - 3,517,924
General and administrative 708,133 - 708,133 2,058,352 - 2,058,352
Compensation and other expense
for options and warrants 30,462 (5,407) 25,055 646,004 148,548 794,552
Depreciation 254,045 - 254,045 713,356 - 713,356
------------- ------------- ------------- ------------- ------------- -------------
1,971,298 (5,407) 1,965,891 6,935,636 148,548 7,084,184
------------- ------------- ------------- ------------- ------------- -------------
Loss from Operations (1,971,298) 5,407 (1,965,891) (6,935,636) (148,548) (7,084,184)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense): - - - -
Interest income 6,482 - 6,482 11,305 - 11,305
Other income - - - - - -
Interest expense (390,830) 307,287 (83,543) (913,836) 792,856 (120,980)
Severance expense - former
directors - - - - - -
------------- ------------- ------------- ------------- ------------- -------------
(384,348) 307,287 (77,061) (902,531) 792,856 (109,675)
------------- ------------- ------------- ------------- ------------- -------------
Loss from Continuing Operations (2,355,646) 312,694 (2,042,952) (7,838,167) 644,308 (7,193,859)
Loss from Discontinued Operations (42,098) - (42,098) (129,058) - (129,058)
------------- ------------- ------------- ------------- -------------
Net Loss $ (2,397,744) $ 312,694 (2,085,050) $ (7,967,225) $ 644,308 $ (7,322,917)
============= ============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.01) $ (0.00) $ (0.02) $ (0.02)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
------------- ------------- ------------- -------------
Net loss $ (0.01) $ (0.00) $ (0.02) $ (0.02)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 425,952,540 425,952,540 425,952,540 425,952,540
============= ============= ============= =============
21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sales of the Company's product. The Company has not as
yet received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since AVR118
was initially marketed in the 1940's; however, one study noted adverse
reactions from highly concentrated doses in guinea pigs. Therefore, the
Company could be subjected to claims for adverse reactions resulting
from the use of AVR118. In the event any claims for substantial amounts
were successful, they could have a material adverse effect on the
Company's financial condition and on the marketability of AVR118.
During November 2002, the Company secured $3,000,000 of product
liability coverage at a cost of approximately $24,000 per annum. In
addition, during October 2002, the Company secured $3,000,000 in
liability coverage for each of the three clinical trials in Israel at a
cost of approximately $16,000. There can be no assurance that the
Company will be able to secure additional insurance in adequate amounts
or at reasonable premiums if it determined to do so. Should the Company
be unable to secure additional product liability insurance, the risk of
loss to the Company in the event of claims would be greatly increased
and could have a material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has eight issued U.S. patents, some covering the
composition of AVR118 and others covering various uses of the AVR118.
The Company has nine pending U.S. patent applications, among which two
have been allowed. The Company has seventeen pending foreign patent
applications. In addition, the Company has two issued Australian
patents and one issued Chinese patent covering several uses of AVR118.
During April 2002, under the terms of a settlement agreement entered as
part of a final judgment on March 25, 2002, the Company was assigned
all rights, title and interest in two issued U.S. patents pertaining to
Reticulose(R) technology. As patent applications in the United States
are maintained in secrecy until published or patents are issued, and as
publication of discoveries in the scientific or patent literature often
lag behind the actual discoveries, the Company cannot be certain that
the Company were the first to make the inventions covered by each of
its pending patent applications or that the Company were the first to
file patent applications for such inventions. Furthermore, the patent
positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions, and,
therefore, the breadth of claims allowed in biotechnology and
pharmaceutical patents or their enforceability cannot be predicted. The
Company cannot be sure that any additional patents will issue from any
of its
22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
LACK OF PATENT PROTECTION (Continued)
patent applications or, should any patents issue, that the Company will
be provided with adequate protection against potentially competitive
products. Furthermore, the Company cannot be sure that should patents
issue, they will be of commercial value to us, or that private parties,
including competitors, will not successfully challenge its patents or
circumvent its patent position in the United States or abroad.
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of AVR118 as a topical treatment
for genital warts caused by human papilloma virus (HPV) infection. In
September 2001, the FDA cleared the Company's IND application for
AVR118 to begin Phase I clinical trials. On April 12, 2002, the Company
successfully completed Phase 1 trials. Phase 2 trials are pivotal
clinical investigations designed to establish the efficacy and safety
of AVR118. Currently, the Company does not have sufficient funds
available to pursue the Phase 2 clinical trials of AVR118 as a topical
treatment for genital warts caused by HPV infection.
STATUS OF ISRAEL CLINICAL TRIALS
In November 2002 the Company began testing injectable AVR118 in the
following clinical trials in Israel:
- Phase I/Phase II Study in Cachectic Patients Needing Salvage
Therapy for AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. The Company believes that AVR118 may have three
major beneficial effects in patients with AIDS. First, its
therapeutic effects on body wasting (cachexia) seen in patients
with AIDS. Second, the mitigation of the toxicity of drugs
included in HAART regimens for the treatment of AIDS. Third, the
synergistic activity with drugs used in HAART regimens to suppress
the replication of HIV and increase the CD4 and CD8 cell counts in
patients with AIDS. The Company believes that AVR118 may prove to
be an important "enabler" drug in the treatment of AIDS.
- 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.
23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of AVR118. Although
there can be no assurances, the Company anticipates that the clinical
trials in Israel will help facilitate the planned investigational new
drug (IND) application process for injectable AVR118 with the FDA.
The Company's 12-month agreement formalized in April 2001 with the
Selikoff Center in Israel to develop clinical trials in Israel using
AVR118 has concluded. It is anticipated that these trials will support
future FDA applications. The Company paid $242,000 under this
agreement.
In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the three clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the three clinical trials including establishing a network
of scientists to perform said study/trial and initiate recruitment of
patients and (3) perform the studies/trials and evaluate the results.
Total costs incurred in connection with EnviroGene's services are
expected to be $1,551,000, of which approximately $1,323,000 has been
expensed from inception and approximately $875,000 has been paid
through September 30, 2003. Approximately $100,000 and $697,000 has
been expensed during the three and nine months ended September 30,
2003.
In the fourth quarter of 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve-month period. These
services include the monitoring and auditing of the clinical sites,
hospital support and laboratory testing. Approximately $210,000 has
been expensed and approximately $186,000 has been paid for the nine
months ended September 30, 2003, and approximately $60,000 has been
expensed and approximately $52,000 was paid during the three months
ended September 30, 2003.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of AVR118 for
the treatment of AIDS patients (who have failed HAART and remain on
HAART therapy) into late Phase II blinded, controlled clinical trials.
In August 2003, the Company decided to defer the continuation of and
re-examine the procedures, protocol and objectives of the Phase I study
in Israel using AVR118 for cachectic patients with leukemia and
lymphoma and a recent Phase I study for cachectic patients with solid
tumors. Estimated completion date for such studies is uncertain.
Because of its limited resources, the Company currently believes it to
be in its best interests to focus its clinical efforts on the Phase
I/Phase II Study in cachectic patients needing salvage therapy for
AIDS.
24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
The Company currently has one ongoing Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS. Out of 30 total patients
contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required
under the study. The estimated completion date of this study is the
second quarter of 2004. It is uncertain at this time when cash inflows
will result from this study. The completion of the study is dependent
upon funds available for research and development and the availability
of patients meeting the prescribed protocol and the ability of Israel
and its hospitals to meet the requirements of the protocol. From
inception of all the clinical studies in Israel the Company have
expended approximately $1,550,000. The cost to complete the Phase I/II
study in Israel of AVR118 for cachectic patients with AIDS for the
additional 15 patients (for a total of 30) is estimated to be $300,000.
In July 2003 the agreement entered in July 2002 with the Weizmann
Institute of Science and Yeda, its developmental arm in Israel, to
conduct research on the effects of AVR118 on the immune system, expired
in accordance with its terms, and upon such termination the Company
retained all rights to the research performed under the agreement.
Total costs incurred in connection with this research are expected to
be $138,000, of which payments of $40,000 were made in each of July
2002 and November 2002, and an additional $10,000 was paid in October
2003. Final payment has not been made pending receipt, review and
approval of the final report. The Company has expensed $120,000 since
inception of the contract through September 30, 2003.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of September 30,
2003, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.
25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1996
and ending March 1999 at an exercise price of $0.19 per share; (ii)
options to purchase 5,000,000 shares exercisable at any time and from
time to time commencing March 24, 1997 and ending March 1999 at an
exercise price of $0.27 per share; and (iii) options to purchase
5,000,000 shares exercisable at any time and from time to time
commencing March 24, 1998 and ending March 1999 at an exercise price of
$0.36 per share. In addition, the Company has agreed to cause the
shares underlying these options to be registered so long as there is no
cost to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
From October 1996 to August 2003, Dr. Hirschman was the Chief Executive
Officer of the Company. In February 1998, the Company granted to Dr.
Hirschman options to purchase 23,000,000 shares of the Company's common
stock at an exercise price of $0.27 from time to time until February
2008. These options vested upon the Company's filing an IND application
with the FDA. In February 1998, the Company extended the expiration
date of the following options previously granted to Dr. Hirschman from
March 1999 to February 2008: (i) options to purchase 4,100,000 shares
at $0.18 per share; (ii) options to purchase 4,000,000 shares at $0.19
per share; (iii) options to purchase 4,000,000 shares at $0.27 per
share; and (iv) options to purchase 4,000,000 shares at $0.36 per
share.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
superseded in its entirety the July 1998 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002,
provided, however, the Agreement is extended automatically by one year,
each year, unless notice of termination has been given by either Dr.
Hirschman or the Company. The Agreement provided for Dr. Hirschman to
receive an annual base salary of $361,000 (effective January 1, 2000),
use 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
26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
(i) the date an IND number is obtained from and approved by the FDA so
that human research may be conducted using AVR118; or (ii) the
execution of an agreement relating to co-marketing pursuant to which
one or more third parties commit to make payments to the Company of at
least $15 million. On September 4, 2001, the Company received an IND
number from the FDA. Therefore, of the $100,000 described above,
$25,000 was paid as of December 31, 2001 with an additional $25,000
paid through December 31, 2002. No further payments have been made to
date. The Agreement also provides for previously issued options to
acquire 23,000,000 shares of common stock at $0.27 per option share to
be immediately vested as of the date of this agreement and are
exercisable until February 17, 2008. The fair value of these options
was estimated to be $5,328,000 ($0.0377 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
80%; a risk free interest rate of 6% and an expected life of 32 months.
The Company is 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.
Dr. Hirschman, M.D. resigned in August 2003 from his position as
President, Chief Executive Officer and Chief Scientific Officer and a
director of Advanced Viral in order to devote his full efforts to his
position as Chief Scientist with responsibilities assigned by the Board
pursuant to a Third Amended and Restated Employment Agreement dated
August 26, 2003. Pursuant to the Third Amended and Restated Employment
Agreement, stock options currently held by Dr. Hirschman shall expire
on February 17, 2008; provided, however, that the options shall expire
either 90 days after Dr. Hirschman terminates his employment without
good reason, or the Company terminates him for cause. Pursuant to the
agreement, Dr. Hirschman may exercise the options upon the occurrence
of a change of control until the expiration date. Furthermore, the
agreement provides that, in the event that Dr. Hirschman has
unexercised options outstanding on February 17, 2008, and the common
stock of the Company has a trading price of less than $1, then the
expiration of options to acquire 10 million shares (or such lesser
number then outstanding) shall be extended for an additional 2 years
until February 17, 2010 at an exercise price of $0.50 per share.
Pursuant to the agreement, the Company acknowledge that the options are
fully vested, that the shares underlying the options have been
registered, and agreed to use its best efforts to cause such shares to
be registered or to have the registration of such shares to continue to
be effective in order that the shares may be resold without a
restrictive legend.
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.
27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
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).
In May 2003, the Company issued options to purchase 100,000 shares of
the Company's stock at an exercise price of $0.085 per share for
outside services associated with the maintenance of its facility in the
Bahamas. These options are compensation for services rendered from
March 2003 to February 2004 with an expiration date of February 28,
2004. The fair value of this option was estimated to be $4,250 (price
per option of $0.0425) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 139%; a risk free interest rate of
2.72%.
In August 2003, the Company granted an aggregate of 3,010,000 options
to purchase shares of the Company's Common stock to certain employees.
The options are exercisable at $0.052 per share through August 26,
2008, and vest in 20 equal installments each quarter over five years.
The fair value of the options was estimated to be $147,177 ($0.049 per
option) based upon a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 128%; a risk free interest rate of 3.99% and an
expected holding period of 8 years. The Company will recognize 5% of
the fair value of the
28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
options as compensation expense on a pro-forma basis over the vesting
period of the options.
In May 2002, the Company granted to members of its Scientific Advisory
Board and Business Advisory Board options to purchase an aggregate of
2,250,000 shares of common stock at an exercise price of $0.12 per
share, which options are exercisable 25% immediately, 25% on June 20,
2002, 25% on September 20, 2002 and 25% on December 20, 2002 through
May 5, 2010. The fair value of the options was estimated to be $246,822
($0.1097 per option) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 115%; a risk free interest rate of
4.88% and an expected holding period of eight years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002. The Business Advisory Board was dissolved
during December 2002.
In September 2002, the Company granted to Sidney Pestka, M.D., a member
of the Scientific Advisory Board, options to purchase 250,000 shares of
common stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18.
2003 and 25% on June 18, 2003 through September 17, 2010. Compensation
expense for the year ended December 31, 2002 was $6,438. Compensation
expense for the three and nine months ended September 30, 2003 was
$7,188.
In December 2002, the Company granted to members of its Scientific
Advisory Board options to purchase an additional 1,500,000 shares of
common stock at an exercise price of $0.075 per share, which options
are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on
September 20, 2003 and 25% on December 20, 2003 through December 20,
2010. Compensation expense for the three and nine months ended
September 30, 2003 was $20,029 and $62,929.
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 25% of the fair value of the options
as compensation expense on a pro-forma basis at each vesting period.
29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
In June 2002, the Company granted to Roy S. Walzer, a member of the
Board of Directors and member of various committees of the Board,
options to purchase 528,800 shares of common stock at an exercise price
of $0.295 per share, which options are exercisable 25% immediately, 25%
on September 10, 2002, 25% on December 10, 2002 and 25% on March 10,
2003 through June 9, 2010. This amount represents a pro rata share of
options issued to members of the Board of Directors during 2002. The
fair value of the these options was estimated to be $140,344 ($0.2659
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 115%; a risk free interest rate of
4.88% and an expected life of eight years. The Company will recognize
25% of the fair value of the options as compensation expense on a
pro-forma basis at each vesting period.
In July 2002, the Company granted to Paul Bishop, a member of the Board
of Directors, options to purchase 238,356 shares of common stock at an
exercise price of $0.17 per share, which options are exercisable 25%
immediately, 25% on October 29, 2002, 25% on January 29, 2003 and 25%
on April 29, 2003 through July 28, 2010. This amount represents a pro
rata share of options issued to members of the Board of Directors
during 2002. The fair value of the these options was estimated to be
$38,509 ($0.1616 per option share) based upon a financial analysis of
the terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 133%; a risk free
interest rate of 4.38% and an expected life of eight years. The Company
will recognize 25% of the fair value of the options as compensation
expense on a pro-forma basis at each vesting period.
In September 2002, the Company granted to Richard Kent, a member of the
Board of Directors, and member of various committees of the Board
options to purchase 241,096 shares of common stock at an exercise price
of $0.14 per share, which options are exercisable 25% immediately, 25%
on December 24, 2002, 25% on March 24, 2003 and 25% on June 24 2003
through September 23, 2010. This amount represents a pro rata share of
options issued to members of the Board of Directors during 2002. The
fair value of the these options was estimated to be $29,377 ($0.1218
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 127%; a risk free interest rate of
4.38% and an expected life of eight years. In December 2002, Mr. Kent
was granted options to purchase 1,700,000 share of common stock. During
February 2003, Richard S. Kent resigned from the Company's Board of
Directors. Under the terms of his option agreements, out of the
original 1,941,096 options to purchase common stock, he is entitled to
exercise options to purchase 431,271 shares of common stock until
February 2006. The Company will recognize 25% of the fair value of the
options as compensation expense on a pro-forma basis at each vesting
period.
30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years. The Company will recognize 25% of the
fair value of the options as compensation expense on a pro-forma basis
at each vesting period.
In August 2003, the Company granted an aggregate of 22,500,000 options
to purchase shares of the Company's Common stock to certain members of
the Board of Directors. Options to purchase 17,500,000 shares are
exercisable at $0.052 per share through August 26, 2013. Options to
purchase 5,000,000 shares are exercisable at $0.063 per share through
August 26, 2013. The fair value of the options was estimated to be
$1,129,017 ($0.05 per option) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 128%; a risk free
interest rate of 4.47% and an expected holding period of 10 years. The
Company recognized the total fair value of the options as compensation
expense on a pro forma basis since vesting was immediate.
Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
123, Accounting for Stock-Based Compensation. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in accounting
for stock options issued to non-employees.
31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND
ADVISORY BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
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.
Nine Months Ended September 30,
-------------------------------
2003 2003 2002 2002
----------- ----------- ----------- -----------
(Reported) (Restated) (Reported) (Restated)
----------- ----------- ----------- -----------
Net loss $(5,347,124) $(5,601,913) $(7,967,225) $(7,322,917)
Total stock-based compensation expense
determined under fair value based method
for all awards, net of related tax effects $(1,692,293) $(1,692,293) $(1,725,185) $ (439,291)
------------ ------------ ------------ ------------
Pro forma net loss $(7,039,417) $(7,294,206) $(9,692,410) $(7,762,208)
============ ============ ============ ============
Earnings per share - basic and diluted:
As reported ($ 0.01) ($ 0.01) ($ 0.02) ($ 0.02)
============ ============ ============ ============
Pro forma ($ 0.01) ($ 0.02) ($ 0.02) ($ 0.02)
============ ============ ============ ============
There were no other options outstanding that would require pro
forma presentation.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with GloboMax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for AVR118. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002. GloboMax is no longer providing services or
representing the Company.
32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
HARBOR VIEW AGREEMENTS
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share and warrants
to purchase 1,750,000 shares at an exercise price of $0.26 per share
until February 28, 2005. The fair value of the warrants was estimated
to be $200,249 ($0.057 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 90%; a risk free
interest rate of 6% and an expected holding period of eleven months
(the term of the consulting agreement). This amount was amortized to
consulting expense during the year ended December 31, 2000.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the quarter ended
June 30, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities whereby the Company has granted exclusive rights to
distribute AVR118 in the countries of Canada, China, Japan, Macao, Hong
Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil and
Chile. Pursuant to these agreements, distributors are obligated to
cause AVR118 to be approved for commercial sale in such countries and,
upon such approval, to purchase from the Company certain minimum
quantities of AVR118 to maintain the exclusive distribution rights.
Leonard Cohen, a former consultant to the Company, has informed the
Company that he is an affiliate of two of these entities. To date, the
Company has recorded revenue classified as other income for the sale of
territorial rights under the distribution agreements. The Company has
made no sales under the distribution agreements other than for testing
purposes.
33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000 and were paid during 2003.
SETTLED LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleged that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company sought a judgment for
damages, interest and costs.
The complaint named SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claimed
that the "defendants had each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida and one of the largest shareholders of
the Company. The complaint alleged that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $0.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,000 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charged the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
SETTLED LITIGATION (Continued)
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits against the Company in the U.S.
District Court for the Southern District of New York. The suits sought
a preliminary injunction and other relief for breach of contract. The
District Court entered an order on February 11, 2003 upon a motion of
the Alpha Plaintiffs, that required that (i) the Company deliver to the
Alpha Plaintiffs the shares of Company common stock issuable upon
exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of
either $100,000 or the market value of the warrant shares, whichever is
higher for each group of warrants as of the first and second
determination dates; and (iii) all the proceeds from the sale of the
warrant shares be placed in escrow pending final resolution of the
litigation. Within ten days of the entry of the order, the Company
moved to alter/amend the judgment and/or reconsideration of the Court's
order requesting relief from the Court's order. The Court denied this
motion and ordered the Company to immediately deliver the warrant
shares to the Alpha Plaintiffs upon their payment of the exercise price
and posting of a bond, without further delay and no later than April 8,
2003. The Company appealed the order denying the motion for
reconsideration.
During May 2003, the Company entered into a settlement and mutual
release agreements with the parties involved in both the Florida and
New York litigation, which, among other things, dismissed the lawsuits
with prejudice. Pursuant to the agreements, in exchange for release by
the parties to the lawsuits of their rights to exercise the warrants
issued in the September 2002 financing, the Company issued an aggregate
of 947,000 shares of common stock and agreed to pay an aggregate of
$1,047,891 to such parties was paid as of September 30, 2003.
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $0.199 to $0.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 5%
convertible debentures at par in private placements. Under the terms of
each 5% convertible debenture, 20% of the original issue is convertible
on the original date of issue at a price equal to the closing bid price
quoted on the OTC Bulletin Board on the trading day immediately
preceding the original issue date (except for the Rushing/Simoni
issuance detailed below which had an initial conversion price of $0.11
per share). Thereafter, 20% of the principal balance may be converted
at six-month intervals at a conversion price equal to the higher of (i)
90% of the average closing bid price for the five trading days prior to
the conversion date (the "Market Price"); or (ii) ten cents ($0.10)
which
35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS
amount is subject to certain adjustments. The convertible debentures,
including interest accrued thereon, are payable by Advanced Viral in
shares of common stock and mature two years from the date of issuance.
The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date
of the convertible portion of the debentures. The Company issued its 5%
convertible debentures as follows:
- On May 30, 2002, the Company sold to O. Frank Rushing and Justine
Simoni, as joint tenants, $500,000 principal amount of its 5%
convertible debenture. Based on the terms for conversion associated
with this debenture, there was an intrinsic value associated with
the beneficial conversion feature, which was recorded as deferred
interest expense and is presented as a discount on the convertible
debenture. On June 3, 2002, these investors converted the first 20%
($100,000) into 909,091 shares of common stock at a conversion price
of $0.11 per share. In January 2003, the holders converted the
second 20% ($100,000 plus interest of $3,041) into 1,030,411 shares
of common stock at a conversion price of $0.10 per share. In May
2003, the holders converted the third 20% ($100,000 plus interest of
$5,000) into 1,050,000 shares of common stock at a conversion price
of $0.10 per share.
- On July 3, 2002, the Company sold to James F. Dicke II, who was then
a member of its Board of Directors, $1,000,000 principal amount of
its 5% convertible debenture. Based on the terms for conversion
associated with this debenture, there was an intrinsic value
associated with the beneficial conversion feature which was recorded
as deferred interest expense and is presented as a discount on the
convertible debenture. On July 3, 2002, Mr. Dicke converted the
first 20% of the debenture ($200,000) for 1,299,545 shares of common
stock at a conversion price of $0.1539 per share. In January 2003,
Mr. Dicke converted the second 20% ($200,000 plus interest of
$5,041) of the debenture into 2,050,411 shares of common stock at a
conversion price of $0.10 per share. In July 2003, Mr. Dicke
converted the third 20% ($200,000 plus interest of $10,000) of the
debenture into 2,100,000 shares of common stock at a conversion
price of $0.10 per share.
- On July 15, 2002, the Company sold to Peter Lunder $500,000
principal amount of the Company's 5% convertible debenture. Based on
the terms for conversion associated with this debenture, there was
an intrinsic value associated with the beneficial conversion feature
which was recorded as deferred interest expense and is presented as
a discount on the convertible debenture. In January 2003, Mr. Lunder
converted 40% ($200,000 plus interest of $4,822) of the debenture
into 1,587,797 shares of common stock, the first 20% of which was
converted at a conversion price of $0.1818 per share, and the second
20% of which was converted at a conversion price of $0.10 per share.
In July 2003, Mr. Lunder informed the Company that he elected not to
convert his third 20% tranche of $100,000.
36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
- On April 28, 2003 and July 18, 2003 the Company entered into
separate securities purchase agreements with Cornell (i) to sell up
to $2,500,000 of the Company's 5% convertible debentures, due April
28, 2008, $1,000,000 of which was purchased on April 28, 2003;
$500,000 of which was purchased on July 18, 2003; and $1,000,000 of
convertible debentures will be purchased within 20 business days
from the date the registration statement is declared effective by
the SEC (the "April Agreement"); and (ii) whereby the Company sold
to Cornell an additional $1,000,000 of the Company's 5% convertible
debentures due July 18, 2008 for gross cash consideration of $1
million (the "July Agreement"). Interest is payable in cash or
common stock at the option of Cornell. The Company received net
proceeds of $1,312,500 and $869,486 for the April and July
debentures respectively. On September 10, 2003, Cornell converted
$600,000 principal amount of the convertible debenture into
14,150,943 shares of the Company's common stock at a conversion
price of $0.0424 per share. On November 6, 2003, Cornell converted
$600,000 principal amount of the convertible debentures into
12,500,000 shares of common stock at a conversion price of $0.048
per share.
Pursuant to the April Agreement and the July Agreement, Cornell or its
assignees receive cash compensation equal to 10% of the gross proceeds
of the convertible debentures purchased by Cornell, along with warrants
to purchase an aggregate of 15,000,000 shares of common stock at an
exercise price of $0.091 commencing on October 28, 2003 through April
28, 2008. In the event the closing bid price of common stock on the
date the Company's registration statement is declared effective by the
SEC is less than $0.10, then under the April Agreement, the Company
have the right to redeem the last $1,000,000 convertible debenture at
the face amount of the convertible debenture within 10 days of the
effectiveness of the registration statement. Pursuant to the terms of
the April Agreement, commencing July 27, 2003, and in the case of the
July Agreement, commencing October 18, 2003, Cornell may convert the
debenture plus accrued interest, (which may be taken at Cornell's
option in cash or common stock), in shares of common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of common stock for the four trading days
immediately preceding the conversion date. No more than $600,000 may be
converted in any thirty-day period under both the April and July
Agreements Subject to certain exceptions, at its option, the Company
may redeem a portion or the entire outstanding debenture at a price
equal to 115% of the amount redeemed plus accrued interest and Cornell
will receive a warrant to purchase 1,000,000 shares of common stock for
every $100,000 redeemed. The warrant shall be exercisable on a cash
basis and have an exercisable price of the higher of 110% of the
closing bid price of common stock on the closing date or $0.08. The
warrant shall have "piggy back" registration rights and shall survive
for 5 years from the closing date.
37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
The Company's obligations under the convertible debentures and the
April and July Agreements are secured by a first priority security
interest in substantially all of its assets. This security interest
expires upon the earlier to occur of (i) the fiftieth (50th) day
following the effectiveness of the registration statement covering the
resale of the shares underlying the convertible debentures; (ii) the
date the Company receive, three million dollars ($3,000,000) of
capital, in any form other than through the issuance of free-trading
shares of the Company's common stock, from sources other than Cornell;
or (iii) the satisfaction of the Company's obligations under the April
and July Agreements, the convertible debentures and the ancillary
documents entered into thereby.
The legal expenses associated with these transactions were
approximately $73,000 and were paid as of September 2003.
SECURITIES PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
March 31, 2003, warrants to purchase approximately 16.5 million shares
of the Company's common stock relating to these securities purchase
agreements were outstanding with expiration dates through 2006.
During the quarter ended March 31, 2002, under several securities
purchase agreements, the Company sold an aggregate of 9,999,999 shares
of its common stock at $0.15 per share, for cash consideration of
$1,500,000.
38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On April 12, 2002, pursuant to securities purchase agreements with
various institutional investors, the Company issued 17,486,491 shares
of its common stock at a market price of $0.11089 per share and
received net proceeds of approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's common stock at an exercise
price of $0.25 per share, subject to adjustment, as described below. In
addition, pursuant to a placement agent agreement with H. C. Wainwright
& Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that at 60 and 120
trading days following the original issue date of the Warrants, a
certain number of warrants shall become exercisable at $0.001. The
number of shares for which the warrants are exercisable at $0.001 per
share is equal to the positive difference, if any, between (i)
$3,010,000 divided by the volume weighted average price ("VWAP") of the
Company's common stock for the 60 trading days preceding the First
Determination Date and (ii) 21,500,000; provided however, that no
adjustment will be made in the event that the VWAP for the 60 trading
day period preceding the applicable determination date is $0.14 or
greater. In December 2002, the Company filed suite against certain of
the investors in connection with the warrant repricing provisions of
the agreement (see Note 4 "SETTLED LITIGATION"). During May 2003, the
Company entered into a settlement and mutual release agreements with
the parties involved in both the Florida and New York litigation,
which, among other things, dismissed the lawsuits with prejudice.
Pursuant to the agreements, in exchange for release by the parties to
the lawsuits of their rights to exercise the warrants issued in the
September 2002 financing, the Company issued an aggregate of 947,000
shares of common stock and agreed to pay an aggregate of $1,047,891 to
such parties, of which $25,000 was paid as of March 31, 2003, $701,463
was paid subsequent to quarter end, and of which $321,428 shall be paid
in five equal monthly installments until September 2003. The Company
recorded a settlement of litigation liability at March 31, 2003 of
$1,098,812 which represents cash to be paid to litigants of $1,022,891
and 947,000 shares of common stock to be issued at $0.08 per share
totaling $75,921. (See Note 4 "SETTLED LITIGATION").
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total gross
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, the Company paid finders' fees to
Harbor View and AVIX consisting of (i) approximately $50,000 and (ii)
warrants to purchase
39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
627,000 shares of the Company common stock at an exercise price of
$0.12 per share through December 2007.
On December 23, 2002, the Company entered into a securities purchase
agreement pursuant to which the Company sold to various investors
500,000 shares of common stock at $0.08 per share, for an aggregate
purchase price of $40,000. These shares of common stock were issued
during January 2003 along with warrants dated January 2003 to purchase
300,000 shares of common stock at an exercise price of $0.12 per share
until January 2008. In connection with this transaction the Company
paid finders' fees to AVIX consisting of (i) $2,400 and (ii) warrants
to purchase 30,000 shares of common stock at an exercise price per
share of $0.12 until January 2008.
During January 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a price of $0.08 per share, for a total purchase price of $124,000,
along with warrants to purchase 930,000 shares of common stock at an
exercise price of $0.12 per share until January 2008. In connection
with this transaction the Company paid a finders' fee to AVIX
consisting of (i) $7,440 and (ii) issued warrants to purchase 93,000
shares of common stock at an exercise price per share of $0.12 until
January 2008.
During March 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,250,000 shares of common stock
at $0.08 per share, for a total purchase price of $100,000, along with
warrants to purchase 750,000 shares of common stock at an exercise
price of $0.12 per share through March 2008. In connection with this
transaction the Company paid finders' fees to Harbor View consisting of
(i) $6,000 and (ii) warrants to purchase 75,000 shares of common stock
at an exercise price per share of $0.12 until March 2006.
In April and May 2003, pursuant to securities purchase agreements with
various investors, the Company sold 3,900,000 shares of common stock at
a price of $0.08 per share and issued warrants to purchase 2,340,000
shares of common stock at an exercise price per share of $0.12 through
April and May 2008, for an aggregate purchase price $312,000. In
connection with this transaction, the Company paid a finders' fee to
Harbor View consisting of (i) $18,720 and (ii) warrants to purchase
234,000 shares of common stock at an exercise price per share of $0.12
through April 2008.
On April 11, 2003, pursuant to a securities purchase agreement with
James F. Dicke II, a former member of the Company's Board of Directors,
the Company sold 3,125,000 shares of common stock at $0.08 per share
for a total purchase price of $250,000, along with warrants to purchase
1,875,000 shares of common stock at an exercise price per share of
$0.12 through April 2008.
40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section
4(2) of the Securities Act, the Company sold 312,500 shares of common
stock and warrants to purchase 187,500 shares of common stock at an
exercise price of $0.12 per share through April 2008, for an aggregate
purchase price of $25,000. In connection with the transaction, the
Company paid a finders' fee to Diego Vallone consisting of warrants to
purchase 15,625 shares of common stock at an exercise price per share
of $0.12 until April 2008.
In June 2003, pursuant to a securities purchase agreement with an
investor, the Company sold 1,562,500 shares of common stock at $0.08
per share for a total purchase price of $125,000, along with warrants
to purchase 937,500 shares of common stock at an exercise price per
share of $0.12 through June 2008. In July in connection with this
transaction, the Company paid finders' fees to Avix, Inc. and Robert
Nowinski consisting of an aggregate of $13,375 and warrants to purchase
171,875 shares of common stock at an exercise price per share of $0.12
through June 2008.
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, the Company authorized
the issuance of and sold 21,620,000 shares of common stock and warrants
to purchase up to 10,810,000 shares of common stock, for an aggregate
purchase price of $1,081,000, or $0.05 per share, pursuant to
securities purchase agreements with certain purchasers. The warrants
are exercisable at $0.10 per share. In connection with the agreements,
the Company paid finders' fees to Harbor View Group, AVIX, Inc and
Robert Nowinski consisting in the aggregate of (i) approximately
$64,860 and (ii) warrants to purchase 1,297,200 shares of common stock.
All of the aforementioned warrants are exercisable at $0.10 per share
commencing six months after the issuance date, for a period of five
years.
EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell to sell up to $50,000,000 of the Company's
common stock. The line of credit expires August 14, 2003. Under such
agreement, the Company may exercise "put options" to sell shares for
certain prices based on certain average trading prices. Upon signing
this agreement, the Company issued to its placement agent, May Davis
Group, Inc., and certain investors, Class A warrants to purchase an
aggregate of 5,000,000 shares of common stock at an exercise price of
$1.00 per share, exercisable in part or whole until February 9, 2006,
and Class B warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price equal to the greater of $1.00 or 110%
of the bid price on the applicable advance date. Such Class B warrants
are exercisable pro rata with respect to the number of warrant shares
as determined by the fraction of the advance payable on that date as
the numerator and $20,000,000 as the denominator multiplied by
41
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
EQUITY LINE OF CREDIT (Continued)
5,000,000 until sixty (60) months from the date of issuance. As of
September 30, 2003, the Company has not drawn on the equity line of
credit. The Company has not issued any shares under this equity line,
which expired in August 2003. The Class B Warrants have expired by
their terms. There is no financial statement impact for the Class 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
consolidated financial statements.
On April 28, 2003, the Company entered into an equity line of credit
agreement with Cornell. The equity line agreement provides, generally,
that Cornell has committed to purchase up to $50 million of the
Company's common stock over a three-year period, with the timing and
amount of such purchases, if any, at the Company's discretion,
provided, however, that the maximum amount of each advance is $500,000,
and the date of each advance shall be no less than six trading days
after the Company's notification to Cornell of their obligation to
purchase. Any shares of common stock sold under the equity line will be
priced at the lowest closing bid price of common stock during the five
consecutive trading days following the Company's notification to
Cornell requesting an advance under the equity line. However, Cornell's
obligation to purchase and the Company's obligation to sell the common
stock is conditioned upon the per share purchase price being equal to
or greater than a price the Company sets on the advance notice date,
the minimum acceptable price, which may not be set any lower than 7.5%
percent below the closing bid price of the common stock the day prior
to the advance notice date. In addition, there are certain other
conditions applicable to the Company's ability to draw down on the
equity line including the filing and effectiveness of a registration
statement registering the resale of all shares of common stock that may
be issued to Cornell under the equity line and the Company's adherence
with certain covenants. At the time of each advance, the Company is
obligated to pay Cornell a fee equal to five percent of amount of each
advance. In connection with this agreement, the Company issued 107,527
shares of common stock to Katalyst LLC in consideration for its
exclusive placement agent services.
42
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 6. DISCONTINUED OPERATIONS
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. SFAS No.
144 requires the operating results of any assets with their own
identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented was reclassified as discontinued
operations. The following table details the amounts reclassified to
discontinued operations:
INCEPTION
(FEBRUARY 20,
THREE MONTHS NINE MONTHS 1984) TO
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------- -------------
2003 2002 2003 2002 2003
---- ---- ---- ---- ----
Revenues $ - $ - $ - $ - $ -
------- -------- -------- --------- -----------
Costs and Expenses:
General and administrative 2,284 37,317 10,714 113,853 1,321,064
Depreciation 3,961 5,037 11,882 15,461 283,380
------- -------- -------- --------- -----------
6,245 42,354 22,596 129,314 1,604,444
------- -------- -------- --------- -----------
Loss from Operations (6,245) (42,354) (22,596) (129,314) (1,604,444)
------- -------- -------- --------- -----------
Other Income - 256 - 256 4,655
------- -------- -------- --------- -----------
Discontinued operations $(6,245) $(42,098) $(22,596) $(129,058) $(1,599,789)
------- -------- -------- --------- -----------
43
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements of Advanced Viral Research Corp. included in Item 1 of this
Quarterly Report on Form 10-Q. The results of operations for interim periods are
not necessarily indicative of the results to be expected for a full year. The
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2002.
OVERVIEW
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of September 30, 2003 we had incurred a cumulative net loss of
$54,700,144. Our ability to generate substantial operating revenue depends upon
our success in gaining FDA approval for the commercial use and distribution of
AVR118. All of our research and development efforts have been devoted to the
development of AVR118.
Conducting the clinical trials of AVR118 will require significant cash
expenditures. AVR118 may never be approved for commercial distribution by any
country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the
foreseeable future. We currently do not have sufficient funds to continue our
testing of AVR118. We are attempting to secure funds through the sale of our
securities.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain.
Because of our limited personnel, we believe it to be in our best
interests to focus our clinical efforts on our one ongoing Phase I/Phase II
open-label dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. The
primary indication of the trial is the treatment of cachexia. Out of 30 total
patients contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required under the
study. Results from the first 15 patients showed improvement in appetite, weight
gain or stability, and enhanced quality of life in all the patients. None of the
15 patients reported any significant side effects from AVR118 therapy.
We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon funds available for research and
development and the availability of patients meeting the prescribed protocol and
the ability of Israel and its hospitals to meet the requirements of the
protocol. From inception of all the clinical studies in Israel we have expended
approximately $1,550,000. The cost to complete the Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS for the additional 15 patients (for a
total of 30) is estimated to be $300,000.
44
The costs relating to our research and development efforts during 2000,
2001, 2002 and each of the quarterly periods in 2003 through September 30, 2003,
as well as the estimated costs for completion, are presented below.
1ST Q 2ND Q 3RD Q
2003 2003 2003 YTD 2000-2003 COSTS TO GRAND
COST CATEGORY 12/31/2000 12/31/2001 12/31/2002 COSTS COSTS COSTS SEP-03 TO DATE COMPLETE TOTAL
- ------------- ---------- ---------- ---------- ----- ----- ----- ------ ------- -------- -----
Envirogene 625,838 298,809 298,809 99,603 697,221 1,323,059 227,663 1,550,722
Quintiles 52,226 44,061 15,877 14,331 74,269 126,495 126,505 253,000
Insurance Cost 3,359 10,076 10,076 10,076 30,228 33,587 2,717 36,304
Lab Costs 500 9,227 12,621 9,772 31,620 32,120 67,977 100,097
Yeda Research 118,000 80,000 40,000 40,000 238,000 18,000 256,000
Kaplan AIDS- Study - 25,875 25,875 51,750 51,750 120,750 172,500
Phase I (leukemia /
lymphoma Study) - - 210,000 210,000
Phase I (solid tumor
Study) - - 219,000 219,000
R & D Consulting Services
Israel 82,314 32,44 6 32,446 114,760 - 114,760
Selikoff Center - Israel 115,000 127,000 - 242,000 - 242,000
Israel Clinical Trial
batch costs 96,173 96,173 - 96,173
R & D - Supplies - Israel
Studies 294,706 294,706 - 294,706
R & D -Regulatory
Consultants - Globomax for
Israel Trials 904,476 904,476 - 904,476
R & D Salary & Facility
allocations (New York) for
Israel Clinical Trials 2,126,082 30,554 25,355 24,933 80,842 2,206,924 - 2,206,924
R & D Travel Expenses -
Israel Clinical Trials 3,661 4,153 1,230 9,922 487 2,550 12,959 22,003 - 22,003
--------------------------------------------------------------------------------------------------------
TOTAL ISRAEL CLINICAL
TRIALS 3,661 237,153 4,393,904 442,649 389,100 219,586 1,051,33 55,686,054 429,000 881,933
--------------------------------------------------------------------------------------------------------
R&D ARGENTINA CLINICAL
STUDIES 242,586 10,582 - 253,168 - 253,168
--------------------------------------------------------------------------------------------------------
R&D UNIVERSITY STUDIES IN
U.S. 35,107 15,261 15,261 50,368 50,368
--------------------------------------------------------------------------------------------------------
R&D - Globomax 1,250,000 2,682,828 3,932,828 - 3,932,828
R&D - Lab Supplies IND
Application Studies 327,601 407,699 - 735,300 - 735,300
R&D Salary & Facility
allocations (NY) for IND
Application Studies 1,368,703 1,823,189 - 3,191,892 - 3,191,892
--------------------------------------------------------------------------------------------------------
Total U.S. Clinical Trial
expenses for IND FDA
submission 2,946,304 4,913,716 - 7,860,020 - 7,860,020
--------------------------------------------------------------------------------------------------------
TOTAL RESEARCH AND
DEVELOPMENT EXPENSE 3,192,551 5,150,869 4,439,592 457,910 389,100 219,586 1,066,596 13,849,609 429,000 9,045,488
========================================================================================================
We currently do not have the funds to complete the Phase I/Phase II
clinical trial in Israel. Our ability to raise additional funds will depend upon
the timing and positive outcome of each portion of the clinical trial and the
ultimate date of completion of the trial. We may not be able to continue as a
going concern if we can not continue or complete this trial timely.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
The independent certified public accountants' report on our consolidated
financial statements for the fiscal year ended December 31, 2002, includes an
explanatory paragraph regarding our ability to continue as a going concern. Note
2 to the consolidated financial statements states that our ability to continue
operations is dependent upon the continued sale of our securities and debt
financing for funds to meet our cash requirements, which raise substantial doubt
about our ability to continue as a going concern. Further, the accountants'
report states that the financial statements do not include any adjustments that
might result from the outcome of this uncertainty. We are currently seeking
additional financing. We anticipate that we can continue operations through
December 2003 with our current liquid assets, if none of our outstanding options
or warrants are exercised or additional securities sold. However, there can be
no assurance that these actions will result in sufficient funds to finance
operations. If we do not raise sufficient cash from external sources to satisfy
our on-going expenditures, we will be required to curtail or suspend operations.
Failure to raise additional capital and reduce certain discretionary spending
could have a material adverse effect on our operations. This raises substantial
doubt about our ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
45
We have incurred substantial losses since our inception, and anticipate
incurring substantial losses for the foreseeable future. We incurred net losses
of $5,601,913 for the nine months ended September 30, 2003, and $9,321,065,
$11,086,567, and $8,816,192 for the years ended December 31, 2002, 2001 and
2000, respectively. Our accumulated deficits were $54,700,144, $49,098,231 and
$39,777,166 as of as of September 30, 2003, December 31, 2002 and December 31,
2001, respectively. We had stockholders' equity of $793,657, $1,756,326 and
$3,442,074 at September 30, 2003, December 31, 2002 and December 31, 2001,
respectively.
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research Ltd. (LTD), our Bahamian subsidiary whose substantial asset is
our Bahamian manufacturing facility. The facility being sold produced topical
AVR118 which is no longer being produced by Advanced Viral. The assets of LTD
have been classified on our Balance Sheet at September 30, 2003, December 31,
2002 and 2001 as Assets held for Sale. LTD had no liabilities as of September
30, 2003 and December 31, 2002, except inter-company payables which have been
eliminated in consolidation. The operations for LTD have been classified in the
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and for the years ended December 31, 2002, 2001 and 2000 as
Loss from Discontinued Operations.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 VS.
SEPTEMBER 30, 2002
The accompanying financial statements for the three and nine months
ending September 30, 2003 and 2002 have been restated to reflect changes in
accounting for warrants issued in connection with equity transactions as well as
options issued to the Board of Directors and employees (on a pro-forma basis
only) and its Advisory Board. The restatement resulted in expense which
increases the previously reported net loss for the three and nine months ending
September 30, 2003 by approximately $51,000 and $255,000, respectively, and
reduces the previously reported net loss for the three and nine months ending
September 30, 2002 by approximately $313,000 and $644,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the three and nine months ended September 30, 2003. Basic and diluted
net loss per common share on operations changed by $(.01) from $(.01) to $(.00)
for the three months ended September 30, 2002, and remained the same for the
nine months ended September 30, 2002. The Company's deficit accumulated during
the development stage was reduced by $2,039,574 for the year ended December 31,
2002. The Company's deficit accumulated during the development stage was
increased by $1,019,153 at September 30, 2003. The restatement did not impact
the Company's net cash in investing and financing activities and net cash used
in operating activities remained unchanged, however, certain components within
operating activities consisting of amortization of deferred interest cost,
discount on warrants and compensation expense for options and warrants, were
restated for the three and nine months ended September 30, 2003 and September
30, 2002.
For the three and nine months ended September 30, 2003, we incurred
losses of approximately $2,153,000 and $5,602,000 vs. approximately $2,085,000
and $7,323,000 for the three and nine months ended September 30, 2002. Our
losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
decreased in the three and nine months ended September 30, 2003 to approximately
$220,000 and $1,067,000 vs. approximately $979,000 and $3,518,000 during the
three and nine months ended September 30, 2002. We have reduced our research and
development activities to include only research performed in Israel. As such,
allocations for research and development related expenses for salaries,
benefits, rent and utilities at our headquarters in Yonkers, New York, which
were included in research and development for the three and nine months ended
September 30, 2002, are recorded in general and administrative expense for the
three and nine months ended September 30, 2003, with the exception that in 2003,
Dr. Hirschman, who was our Chief Scientific Officer and our Chief Executive
Officer until August 2003, allocated approximately 30% of his time to research
and development during 2003 vs. 50% for the three and nine months ended
September 30, 2002. Therefore, approximately $25,000 and $81,000 for the three
and nine months ended September 30, 2003 vs. approximately $46,000 and $139,000
for the three and nine months ended September 30, 2002 of his compensation has
been allocated to research and development expense. The
46
balance is allocated to general and administrative expense for the three and
nine months ended September 30, 2003 and 2002.
The decrease in research and development expenses primarily resulted
from:
- allocation of research and development expenditures relating to
salaries and benefits excluding Dr. Hirschman were approximately
$433,000 and $1,320,000 for the three and nine months ended
September 30, 2002 with no corresponding amounts for the three and
nine months ended September 30, 2003. Approximately $91,000 and
$253,000 for rent and utilities were allocated to research and
development expense during the three and nine months ended
September 30, 2002 with no corresponding amounts allocated to
research and development expense for the three and nine months
ended September 30, 2003;
- expenditures in connection with AVR118 research in Israel were
approximately $160,000 and $925,000 for the three and nine months
ended September 30, 2003 vs. approximately $168,000 for the three
months and nine months ended September 30, 2002. The increase was
attributable to expenses for the three and nine months ended
September 30, 2003 of approximately $100,000 and $697,000 relating
to EnviroGene (consultant), approximately $14,000 and $74,000
relating to Quintiles Israel Ltd. (consultant), approximately
$26,000 and $52,000 relating to Kaplan Medical Center (AIDS
clinical trial site in Israel) and approximately $0 and $40,000
relating to the Weizmann Institute of Science (consultant). This
compares to expenses for the three and nine months ended September
30, 2002 of approximately $128,000 relating to EnviroGene, and
approximately $40,000 relating to the Weizmann Institute of
Science (consultant);
- consulting expenses payable in connection with the preparation and
filing with the FDA of the IND for topical AVR118 were
approximately $42,000 and $1,036,000 for the three and nine months
ended September 30, 2002, compared to $0 in 2003. As of January
2003, GloboMax LLC is no longer providing services to or on behalf
of Advanced Viral; and
- expenditures for laboratory supplies were approximately $67,000
and $275,000 for the three and nine months ended September 30,
2002. Expenditures for lab supplies of approximately $4,000 and
$20,000 for the three and nine months ended September 30, 2003
were allocated to General and Administrative expense. Research and
Development expenses before allocations were approximately
$195,000 and $986,000 for the three and nine months ended
September 30, 2003 vs. approximately $409,000 and $1,806,000 for
the three and nine months ended September 30, 2002.
Research and development expenses before allocations decreased by
$214,000 for the three months ended September 30, 2003 compared to the three
months ended September 30, 2002. Expenses for the Israeli studies decreased by
approximately $98,000 due to lower consulting costs of approximately $16,000,
lab supplies of approximately $63,000 and university studies of approximately
$35,000. Research and development expenses before allocations were approximately
$986,000 for the nine months ended September 30, 2003 compared to approximately
$1,806,000 for the nine months ended September 30, 2002. The decrease was due
primarily to lower consulting costs of approximately $1,078,000 and laboratory
supplies of approximately $275,000 and lab processing costs of approximately
$91,000 offset by increased expenditures relating to the Israeli studies.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased for the three and nine months ended September 30, 2003 to
approximately $873,000 and $2,542,000 vs. approximately $708,000 and $2,058,000
during the three and nine months ended September 30, 2002. The increase in
general and administrative expenses primarily resulted from:
- increased professional fees of approximately $185,000 and $689,000
for the three and nine months ended September 30, 2003 vs.
approximately $109,000 and $402,000 for the three and nine months
September 30, 2002, which increase was primarily attributable to
certain legal fees for litigation (See Note 3) which were
approximately $3,000 and $302,000 for the three and nine
47
months ended September 30, 2003 vs. approximately $0 and $7,000
for the three and nine months September 30, 2002;
- increased payroll and related expenses of approximately $259,000
and $797,000 for the three and nine months ended September 30,
2003 vs. approximately $238,000 and $687,000 for the three and
nine months ended September 30, 2002, which increase is
attributable to the allocation of staff expenses from research and
development functions. For the three and nine months ended
September 30, 2003, salaries and benefits were recorded as general
and administrative expense with the exception of Dr. Hirschman,
who was our Chief Scientific Officer and our Chief Executive
Officer until August 2003, who allocated approximately 30% of his
time to research and development of our clinical trials in 2003
vs. 50% for the three and nine months ended September 30, 2002.
Approximately $58,000 and $185,000 for the three and nine months
ended September 30, 2003 vs. approximately $46,000 and $139,000
for the three and nine months ended September 30, 2002 of his
compensation has been allocated to general and administrative
expense. Payroll and related expenses for the three and nine
months ended September 30, 2002 before allocation to research and
development expense was approximately $717,000 and $2,146,000.
Before allocation to general and administrative expense, payroll
and related expenses were approximately $284,000 and $877,000 for
the three and nine months ended September 30, 2003 due to a
reduction of personnel during November 2002 from 33 to 10
employees;
- increased rent and utility expenses of approximately $136,000 and
$347,000 for the three and nine months ended September 30, 2003
vs. $22,000 and $60,000 for the three and nine months ended
September 30, 2002, which increase is attributable to the
allocation of rent and utilities from research and development
expense to general and administrative expense. For the three and
nine months ended September 30, 2003, all rent and utilities
expenses were recorded as general and administrative expense. Rent
and utility expenses for the three and nine months ended September
30, 2002 before allocation to research and development expense was
approximately $113,000 and $313,000, respectively.
General and administrative expenses before allocations decreased to
approximately $899,000 and $2,623,000 for the three and nine months ended
September 30, 2003 vs. approximately $1,278,000 and $3,770,000 for the three and
nine months ended September 30, 2002. The decrease is primarily attributable to
a reduction in staff from 33 to 10 employees during November 2002.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. Compensation
expense was approximately $71,000 and $329,000 for the three and nine months
ended September 30, 2003 vs. $25,000 and $795,000 for the three and nine months
ended September 30, 2002, which amounts are based on the fair value of options
using the Black-Scholes Pricing Model. During May 2003, we issued an option to a
non-employee for services with a fair value of approximately $4,000 using the
Black-Scholes Pricing Model. We had compensation expense of approximately
$20,000 and $70,000 for the three and nine months ended September 30, 2003
representing the fair value of options issued to advisory board members using
the Black-Scholes Pricing Model. In addition, we had compensation expense of
approximately $51,000 and $255,000 for the three and nine months ending
September 30, 2003 representing the amortization of warrants issued relating to
a private equity line of credit issued in 2001 using the Black-Scholes Pricing
Model. For the three months ended September 30, 2002, we revised the
Black-Scholes valuation of options granted to members of our advisory board by
$(77,000) and amortized $102,000 in warrant costs relating to a private equity
line of credit. For the nine months ended September 30, 2002 we extended the
exercise date of a non-employee's option, $178,000, granted options to members
of our advisory board, $120,000, and issued warrants to an outside consultant,
Harbor View Group, Inc., $191,000, and amortized $306,000 of warrant costs
relating to a private equity line of credit.
DEPRECIATION EXPENSE. Depreciation expense decreased to approximately
$228,000 and $703,000 for the three months and nine months ended September 30,
2003 vs. $254,000 and $713,000 for the three and nine months ended September 30,
2002, for assets acquired during 2002 which were fully depreciated in 2003.
48
INTEREST INCOME (EXPENSE). Interest income decreased to approximately
$2,800 and $11,000 for the three and nine months ended September 30, 2003 vs.
approximately $6,500 and $11,000 for the three months nine months ended
September 30, 2002 due to fluctuating cash balances invested in money market
accounts.
Our losses during the three and nine months ended September 30, 2003
are also due to increased interest expense of approximately $757,000 and
$949,000 vs. approximately $84,000 and $121,000 for the three and nine months
ended September 30, 2002. Included in the interest expense are:
- the increase in the beneficial conversion feature on certain
convertible debentures of approximately $329,000 and $417,000 for
the three and nine months ended September 30, 2003 vs.
approximately $45,000 and $58,000 for the three and nine months
ended September 30, 2002. This increase was due to the issuance of
a $1,000,000 convertible debenture during April 2003;
- increase interest expense associated with certain convertible
debentures of approximately $37,000 and $74,000 for the three and
nine months ended September 30, 2003 vs. approximately $20,000 and
$22,000 for the three and nine months ended September 30, 2002;
- amortization of discount on certain warrants increased
approximately $310,000 and approximately $328,000 for the three
and nine months ended September 30, 2003 vs. $0 for the three
months and nine months ended September 30, 2002; and
- amortization of loan costs increased approximately $75,000 and
$116,000 for the three and nine months ended September 30, 2003
vs. $13,000 and $21,000 for the three and nine months ended
September 30, 2002.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the three and nine months ended September 30, 2003 were approximately
$(2,147,000) and $(5,579,000) vs. approximately $(2,043,000) and $(7,194,000)
for the three and nine months ended September 30, 2002. The decrease resulted
primarily from a reduction in expenses associated with a reduction of personnel
during 2002 from 33 to 10 employees, conclusion of a consulting contract with
GloboMax relating to research and development, and concentrating all research
and development activities on clinical trials and research in Israel.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the three and nine months ended September 30, 2003 were approximately
$(6,000) and $(23,000) vs. approximately $(42,000) and $(129,000) for the three
and nine months ended September 30, 2002, which losses resulted from our 99%
owned Bahamian subsidiary, Advance Viral Research Ltd. held for sale. During
2002, our Board of Directors approved a plan to sell Advance Viral Research Ltd.
("AVR Ltd."), our Bahamian subsidiary. The facility being sold produced topical
AVR118 which is no longer being produced by Advanced Viral. The assets of AVR
Ltd. have been classified on our Consolidated Balance Sheet at September 30,
2003 and December 31, 2002 as Assets held for Sale. AVR Ltd. had no liabilities
as of September 30, 2003 and December 31, 2002, except inter-company payables
which have been eliminated in consolidation. The operations for AVR Ltd. have
been classified in the Consolidated Statements of Operations for the three and
nine months ended September 30, 2003 and 2002 as Loss from Discontinued
Operations.
REVENUES. We had no revenues for the three months and nine months ended
September 30, 2003 or September 30, 2002.
In November 2002, we reduced our staff from 33 to 10 employees. Of the
23 terminated employees, 18 were directly involved in our research and
development efforts and 5 were performing administrative functions.
Specifically, the following positions were eliminated:
POSITION ELIMINATED CURRENT EMPLOYEE RESPONSIBILITY
- ------------------- -------------------------------
VP drug development Chief Scientist
VP QA, QC .Mfg Manager of Research and Quality
QC Manager Manager of Research and Quality
Research Assistants (10) Scientist
49
Group Leader No longer necessary due to staff reduction
Scientists (4) Scientist
UNIX administrator Director of MIS
Purchasing agent Asst. Controller
Secretaries (3) No longer necessary due to staff reduction
We believe we can sustain operations to carry out the research and
development project in Israel with our current staff of 10 employees as follows:
Interim Chief Executive Officer
Chief Financial Officer
Chief Scientist
Asst. Controller
Director of MIS
Manager of Research and Quality
Manager of Manufacturing
Receptionist
Office Manager
Scientist
LIQUIDITY
As of September 30, 2003, we had current assets of approximately
$1,199,000 compared to approximately $1,770,000 as of December 31, 2002. We had
total assets of approximately $4,006,000 and $4,946,000 at September 30, 2003
and December 31, 2002, respectively. The decrease in current and total assets
was primarily attributable to less cash on hand resulting from the use of cash
for funding operating expenditures. As of September 30, 2003, we had current
liabilities of approximately $896,000 compared to approximately $685,000 as of
December 31, 2002. The increase in current liabilities was primarily
attributable to limited funds available to pay our accounts payable.
During the nine months ended September 30, 2003, we used cash of
approximately $3,419,000 for operating activities, as compared to approximately
$6,779,000 during the nine months ended September 30, 2002. During the nine
months ended September 30, 2003, our expenses included:
- approximately $877,,000 for payroll and related costs primarily
for administrative staff, scientific personnel and executive
officers;
- approximately $799,000 for other professional and consulting fees,
including $302,000 for legal fees relating to settled litigation.
(See "Legal Proceedings");
- approximately $312,000 for insurance costs;
- approximately $347,000 for rent and utilities for our Yonkers
facility; and
- approximately $1,067,000 for expenditures for AVR118 research in
Israel.
During the nine months ended September 30, 2003, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock issued of approximately $1,853,000, the issuance of convertible debentures
of $2,187,000, offset by the payment under litigation settlement $1,051,000 and
principal payments of $112,000 on equipment obligations. During the nine months
ended September 30, 2003, cash flow used by investing activities reflected the
sale of an automobile located at our facility in the Bahamas.
In May 2003 we issued options to purchase 100,000 shares of our
Company's stock at an exercise price of $0.085 for outside services associated
with the maintenance of our facility in the Bahamas. These options are
compensation for services rendered and to be rendered from March 2003 to
February 2004 the same as the one year exercise period.
50
On April 28, 2003, we entered into an Equity Line of Credit with
Cornell Capital. Pursuant to the Equity Line of Credit, we may, at our
discretion, periodically sell to Cornell Capital shares of common stock for a
total purchase price of up to $50.0 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay 100% of the
lowest closing bid price of our common stock on the OTC Bulletin Board or other
principal market on which our common stock is traded for the five trading days
immediately following the notice date. Cornell Capital is a private limited
partnership whose business operations are conducted through its general partner,
Yorkville Advisors, LLC. Further, Cornell Capital will retain 5% of each advance
under the Equity Line of Credit. Our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
minimum acceptable price, set by us on the advance notice date, which may not be
set any closer than 7.5% below the closing bid price of our common stock the day
prior to the notice date. For each day during the five days after the notice
date that the closing bid price for our common stock is below the Minimum
Acceptable Price, the amount of the advance shall decrease by twenty percent
(20%) of the amount requested.
In addition, we engaged Katalyst Securities LLC, an unaffiliated
registered broker-dealer, to advise us in connection with the Equity Line of
Credit. For its services as placement agent, Katalyst Securities LLC received
107,527 shares of our common stock, which was valued at $10,000. Katalyst
Securities may be deemed to be an underwriter in connection with the sale of
common stock under the Equity Line of Credit. The effectiveness of the sale of
the shares under the Equity Line of Credit is conditioned upon us registering
the shares of common stock with the Securities and Exchange Commission. The
costs associated with this registration statement will be borne by us.
We adopted a (401k) plan that allows eligible employees to contribute
up to 20% of their salary, subject to annual limits, which were $11,000 in 2002
and $11,000 in 2003. We match 50% of the first 6% of the employee contributions
with our common stock and may from time to time, at our discretion, make
additional contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions. At December 31, 2002 we
accrued $40,675 to fund the 401(k) plan representing our match for the plan year
2002 which has been contributed to the 401(k) plan. In March 2003, we amended
the terms of the 401(k) plan to terminate our obligation to make matching
contributions.
To reduce operating costs, in November 2002 we reduced our personnel
from 33 to 10 employees. This will allow us to focus on our clinical studies and
maintain the critical functions and scientific personnel to manage the clinical
trials and continue operations. The severance cost for these employees was
approximately $54,000 which was expensed during the fourth quarter of 2002.
We have no off-balance sheet transactions.
The following table shows total contractual payment obligations as of
September 30, 2003.
TOTAL CONTRACTUAL OBLIGATIONS TABLE:
PAYMENTS DUE BY PERIOD
----------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- --------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $2,316,223 $1,518,469 $ 0 $797,754 $ 0
- --------------------------------------------------------------------------------------------------------
Capital Lease Obligations $ 18,389 $ 18,389 $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Operating Lease Obligations $ 482,000 $ 299,000 $183,000 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Purchase Obligations $ 0 $ 0 $ 0 $ 0 $ 0
- --------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities $ 0 $ 0 $ 0 $ 0 $ 0
Reflected on the Registrant's
Balance Sheet under GAAP
- --------------------------------------------------------------------------------------------------------
Total $2,816,612 $1,835,858 $183,000 $797,754 $ 0
- --------------------------------------------------------------------------------------------------------
CAPITAL RESOURCES
51
We have and continue to be dependent upon the proceeds from the
continued sale of securities for the funds required to continue operations at
present levels and to fund further research and development activities. The
following table summarizes sales of our securities over the last two years.
PURCHASE PRICE/
CONVERSION
GROSS CONVERTIBLE/ PRICE/ EXPIRATION
DATE ISSUED PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE DATE
- ----------- -------- --------------- ---------------- -------------- ----------
Dec-2001 $ 2,000,000 Common stock 7,407,407 shares $0.27 per share n/a
Dec-2001 $ 410,000 Common stock 1,518,519 shares $0.27 per share n/a
Dec-2001 $ 200,000 Common stock 740,741 shares $0.27 per share n/a
Feb-2002 $ 500,000 Common stock 3,333,333 shares $0.15 per share n/a
Feb-2002 $ 500,000 Common stock 3,333,333 shares $0.15 per share n/a
Mar-2002 $ 500,000 Common stock 3,333,333 shares $0.15 per share n/a
Apr-2002 $ 1,939,000 Common stock 17,486,491 shares $0.11089 per n/a
share
May-2002 $ 500,000 Convertible debenture Approx. 4,412,000 shares (1) 5/30/2004
May-2002 consulting Warrants 1,000,000 shares $0.18 per share 5/30/2008
services
Jul-2002 $ 1,000,000 Convertible debenture Approx. 9,350,000 shares (2) 7/3/2004
Jul-2002 $ 500,000 Convertible debenture Approx. 4,588,000 shares (3) 7/15/2004
Sep-2002 $ 3,010,000 Common stock 21,500,000 shares (4) $0.14 per share n/a
Common stock 947,000 shares (5) $0.08 per share n/a
Dec-2002 & $ 1,100,000 Common stock 13,750,000 shares $0.08 per share n/a
Mar-2003
Warrants 9,075,000 shares $0.12 per share 12/2007 -
3/2008
Apr-May 2003 $ 562,000 Common stock 7,337,500 shares $0.08 per share n/a
Warrants 4,652,125 shares $0.12 per share 4/2004 -
4/2008
Apr-2003 $ 1,000,000 Convertible debenture Approx. 15,625,000(6) shares 4/2008
Warrants 15,000,000 shares $0.091 per share 4/2008(7)
June 2003 $ 125,000 Common stock 1,562,500 shares $0.08 per share n/a
Warrants 1,109,375 shares $0.12 per share 6/2008
July 2003 $ 1,500,000 Convertible debentures 18,750,000 shares (8) 7/2008
Sep 2003 $ 1,081,000 Common stock 21,620,000 shares $0.05 per share n/a
Warrants 13,188,200 shares $0.10 per share 9/2008
- ---------------
(1) $0.11 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the average closing bid price for the five trading days prior to the
conversion date (the "Market Price"); or (ii) ten cents ($0.10) which
amount is subject to certain adjustments.
(2) $0.1539 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(3) $0.1818 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of
the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(4) Does not include an additional 1,032,000 shares of common stock issued to
H.C. Wainwright & Co. as part of the finder's fee for the transaction.
(5) Represents shares issued in connection with certain settlement and mutual
release agreements entered in May 2003, pursuant to which, among other
things, warrants to purchase 16,125,000 shares of our common stock were
cancelled, we will issue an aggregate of 947,000 shares of our common stock
and agreed to pay an aggregate of $1,047,891 to such parties, of which
$790,748 has been paid to date, and of which $257,143 shall be paid in four
equal monthly installments until September 2003. See "Legal Proceedings."
(6) The debentures are convertible commencing July 27, 2003 at a conversion
price equal to the lesser of (i) $0.08 or (ii) 80% of the lowest closing
bid price of our common stock for the four trading days immediately
preceding the conversion date. The holder may not convert more than
$600,000 in any thirty-day calendar period.
(7) The warrants are exercisable commencing October 28, 2003.
(8) The debentures are convertible commencing October 13, 2002 at a conversion
price equal to the lesser of (i) $.08 or (ii) 80% of the lowest closing bid
price of our common stock for the four trading days immediately preceding
the conversion date. The holder may not convert more than $600,000 in any
thirty-day calendar period.
52
On March 31, 2000, we filed a shelf registration statement on Form S-3
with the SEC relating to the offering of shares of our common stock to be used
in connection with financings. As of September 30, 2003, we had issued and sold
approximately 59 million shares of our common stock and received gross proceeds
of approximately $11.2 million under the shelf registration statement. The shelf
registration statement is no longer available for our use.
On July 27, 2001, pursuant to a securities purchase agreement with
unaffiliated accredited purchasers, we authorized the issuance of and sold
1,225,000 shares of our common stock and warrants to purchase an aggregate of
735,000 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act for a purchase price of $0.40 per share, for
an aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. With certain
exceptions, the warrant exercise price and the number of shares of common stock
issuable upon exercise of such warrants shall be adjusted from time to time upon
(i) the issuance of common stock without consideration, (ii) a stock split,
reverse stock split or a stock dividend; (iii) a reorganization or
reclassification; or (iv) a liquidation, dissolution or distribution. As of the
date hereof, none of the warrants had been exercised.
On May 30, 2002 we entered into an agreement with Harbor View Group,
Inc to terminate a consulting agreement effective as of December 31, 2001. The
consultant continued to perform services after the termination date and as full
compensation we granted warrants to purchase 1,000,000 shares of our common
stock at an exercise price of $0.18 per share. The warrants are exercisable in
whole or in part at any time and from time to time prior to May 30, 2008.
During the second quarter of 2002, we issued to James Dicke II, a
former director, Peter Lunder, a former advisory board member, and O. Frank
Rushing and Justine Simoni an aggregate of $2,000,000 principal amount of our 5%
convertible debentures at par in several private placements pursuant to Section
4(2) of the Securities Act. Under the terms of each 5% convertible debenture,
20% of the original issue is convertible on the original date of issue at a
price equal to the closing bid price quoted on the OTC Bulletin Board on the
trading day immediately preceding the original issue date (except for the
$500,000 of the debentures which had an initial conversion price of $0.11 per
share). Thereafter, 20% of the principal balance may be converted at six-month
intervals at a conversion price equal to the higher of (i) 90% of the average
closing bid price for the five trading days prior to the conversion date; or
(ii) ten cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable by
Advanced Viral in shares of common stock and mature two years from the date of
issuance. The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date of the
convertible portion of the debentures. As of September 30, 2003, principal and
interest on the debentures in the amount of $1,127,904 had been converted into
10,027,255 shares of our common stock.
On September 10, 2002, we issued and sold an aggregate of 21,500,000
shares of our common stock pursuant to a securities purchase agreement with the
investors listed below for total proceeds of approximately $3,010,000, or $0.14
per share, along with warrants to purchase 16,125,000 shares of our common stock
at an exercise price of $0.25 per share, subject to adjustment, as described
below, in a private offering transaction pursuant to Section 4(2) of the
Securities Act.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
- ------------- -------------- ------ --------
SDS Merchant Fund, LP $ 900,000 6,428,571 4,821,429
Stonestreet Limited Partnership 750,000 5,357,143 4,017,857
01144 Ltd. 100,000 714,286 535,714
Bristol Investment Fund Ltd. 400,000 2,857,143 2,142,857
Alpha Capital 500,000 3,571,429 2,678,571
Xmark Fund, Ltd. 154,000 1,100,000 825,000
Xmark Fund, L.P. 56,000 400,000 300,000
RIG MicroCap Fund LP 100,000 714,286 535,714
Richard Melnick 50,000 357,143 267,857
---------- ---------- ----------
TOTAL $3,010,000 21,500,000 16,125,000
53
In addition, pursuant to a placement agent agreement with H.C.
Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and
issued to HCW 1,032,000 shares of our common stock. An adjustment provision in
the warrants provided that at 60 and 120 trading days following the original
issue date of the warrants, a certain number of warrants shall become
exercisable at $0.001. The number of shares for which the warrants are
exercisable at $0.001 per share is equal to the positive difference, if any,
between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of
our common stock for the 60 trading days preceding the applicable determination
date and (ii) 21,500,000, provided however, that no adjustment will be made in
the event that the VWAP for the 60 trading day period preceding the applicable
determination date is $0.14 or greater. In December 2002 we filed suit against
certain of the investors in connection with the warrant repricing provisions of
the agreement, and during May 2003, we entered into settlement and mutual
release agreements with the parties involved in both the Florida and New York
litigation, which, among other things, dismissed the lawsuits with prejudice,
and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to
the agreements, in exchange for release by the parties to the lawsuits and
certain parties to the September 2002 financing of their right to exercise the
warrants issued in the September 2002 financing, we issued an aggregate of
947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891
to such parties, of which $790,748 has been paid to date, and of which $257,143
shall be paid in four equal monthly installments until September 2003. 680,000
of the shares issued are subject to a 145-day lock-up agreement. (See "Legal
Proceedings").
From December 2002 through June 2003, we authorized the issuance of and
sold 22,650,000 shares of our common stock and warrants to purchase up to
13,590,000 shares of our common stock at $0.08 per share, for an aggregate
purchase price of $1,812,000 pursuant to securities purchase agreements with the
purchasers listed below, in the following amounts in a private offering
transaction pursuant to Section 4(2) of the Securities Act. In connection with
the agreement, we paid finders' fees to Harbor View Group, AVIX, Inc. and Robert
Nowinski consisting in the aggregate of (i) approximately $98,095 and (ii)
warrants to purchase 1,246,500 shares of our common stock. All of the
aforementioned warrants are exercisable at $0.12 per share commencing six months
after the closing date of the agreement, for a period of five years. As of the
date hereof, none of such warrants had been exercised.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
- ------------- -------------- ------ --------
Frank Vigliarolo $ 50,000 625,000 375,000
Keith Leonard $ 50,000 625,000 375,000
Edward & Linda Gorkes $ 200,000 2,500,000 1,500,000
Russell Kuhn (Parkside) $ 100,000 1,250,000 750,000
Larry Pomerantz $ 50,000 625,000 375,000
Michael Berman $ 50,000 625,000 375,000
Ira Kent $ 8,000 100,000 60,000
Frederick Cohen $ 8,000 100,000 60,000
Gerald Director $ 8,000 100,000 60,000
Allen & Barbara Ross $ 8,000 100,000 60,000
Alan Halpert $ 16,000 200,000 120,000
Leonard Cohen $ 24,000 300,000 180,000
Barry L. Johnston TR $ 24,000 300,000 180,000
Todd & Lynda Cohen $ 40,000 500,000 300,000
Henry E. & Dixie Cartwright $ 40,000 500,000 300,000
Benjamin H. Kirsch $ 150,000 1,875,000 1,125,000
Gene Cartwright $ 60,000 750,000 450,000
Beth & Elliot Bauer $ 74,000 925,000 555,000
Gerald Smallberg $ 16,000 200,000 120,000
Leonard Cohen $ 32,000 400,000 240,000
David Sass $ 50,000 625,000 375,000
Beth and Elliot Bauer $ 42,000 525,000 315,000
Larry Pomerantz $ 50,000 625,000 375,000
Frank Smith $ 25,000 312,500 187,500
Russell & Jean Kuhn $ 25,000 312,500 187,500
Charles & Janet Ernst $ 25,000 312,500 187,500
54
Dorothy Christofides $ 32,000 400,000 240,000
Edward & Linda Gorkes $ 50,000 625,000 375,000
Pomerantz Trust $ 30,000 375,000 225,000
Russell Kuhn $ 50,000 625,000 375,000
Frederick Lutz $ 25,000 312,500 187,500
Dean Skillman $ 50,000 625,000 375,000
Harbor View Group $ 25,000 312,500 187,500
Phillip Brennan $ 25,000 312,500 187,500
Eric Goldstein $ 12,500 156,250 93,750
Michael Rapf $ 12,500 156,250 93,750
---------- ---------- ----------
TOTAL $1,812,000 22,650,000 13,590,000
On April 11, 2003 pursuant to a securities purchase agreement with
James F. Dicke II, a former member of our Board of Directors, we sold 3,125,000
shares of common stock and warrants to purchase 1,875,000 shares of common stock
at an exercise price of $0.12 per share through April 2007, for an aggregate
purchase price of $250,000 in a private offering transaction pursuant to Section
4(2) of the Securities Act.
On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section 4(2) of the
Securities Act, we sold 312,500 shares of common stock and warrants to purchase
187,500 shares of common stock at an exercise price of $0.12 per share through
April 2008, for an aggregate purchase price of $25,000. In connection with the
transaction, we paid a finders' fee to Diego Vallone consisting of warrants to
purchase 15,625 shares of our common stock at an exercise price per share of
$0.12 until April 2008.
On April 28, 2003 we entered into a securities purchase agreement with
Cornell Capital, in a private offering transaction pursuant to Section 4(2) of
the Securities Act, to sell up to $2,500,000 of our 5% convertible debentures,
due April 28, 2008, of which $1,000,000 was purchased on April 28, 2003;
$500,000 of which was purchased on July 18, 2003; and $1,000,000 of which will
be purchased within 20 business days from the date the registration statement is
declared effective by the SEC. Interest is payable in cash or common stock at
the option of Cornell. Pursuant to the agreement, Cornell Capital received a 10%
discount to the purchase price of the convertible debentures purchased , along
with warrants to purchase an aggregate of 15,000,000 shares of our common stock
at an exercise price of $0.091 commencing on October 28, 2003 through April 28,
2008. Pursuant to the terms of the agreement, commencing July 27, 2003, Cornell
Capital may convert the debenture plus accrued interest, (which may be taken at
Cornell Capital's option in cash or common stock), in shares of our common stock
at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest
closing bid price of our common stock for the four trading days immediately
preceding the conversion date. No more than $600,000 may be converted in any
thirty-day period. Advanced Viral has redemption rights. If Advanced Viral
exercises certain of these redemption rights, Advanced Viral may redeem a
portion or the entire outstanding debenture at a price equal to 115% of the
amount redeemed plus accrued interest and Cornell Capital will receive a warrant
to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The
warrant shall be exercisable on a cash basis and have an exercisable price of
the higher of 110% of the closing bid price of our common stock on the closing
date or $0.08. The warrant shall have "piggy back" registration rights and shall
survive for 5 years from the closing date. In addition, in connection with the
securities purchase agreement, we issued to Cornell Capital a warrant to
purchase 15,000,000 shares of our common stock exercisable for 5 years at an
exercise price of $0.091. The warrant is not exercisable prior to October 28,
2003. As of September 30, 2003, principal on the debentures in the amount of
$600,000 had been converted into 14,150,943 shares of common stock. On November
6, 2003, Cornell converted $600,000 principal amount of the convertible
debentures into 12,500,000 shares of common stock at a conversion price of
$0.048 per share.
On April 28, 2003, we entered into an equity line of credit agreement
with Cornell in a private offering transaction pursuant to Section 4(2) of the
Securities Act. The equity line agreement provides, generally, that Cornell has
committed to purchase up to $50 million of our common stock over a three-year
period, with the timing and amount of such purchases, if any, at our discretion,
provided, however, that the maximum amount of each advance is $500,000, and the
date of each advance shall be no less than six trading days after our
notification to Cornell of its obligation to purchase shares. Any shares of
common stock sold under the equity line will be priced at the lowest closing bid
price of our common stock during the five consecutive trading days following our
55
notification to Cornell requesting an advance under the equity line. In
addition, at the time of each advance, we are obligated to pay Cornell a fee
equal to five percent (5%) of the amount of each advance. However, Cornell's
obligation to purchase and our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
price we set on the advance notice date, the minimum acceptable price, which may
not be set any closer than 7.5% percent below the closing bid price of the
common stock the day prior to the date we notify Cornell of its obligation to
purchase shares. In addition, there are certain other conditions applicable to
our ability to draw down on the equity line including the filing and
effectiveness of a registration statement registering the resale of all shares
of common stock that may be issued to Cornell under the equity line and our
adherence with certain covenants. There can be no assurance of the amount of
proceeds we will receive, if any, under the equity line of credit with Cornell.
In connection with this agreement, we issued 107,527 shares of our common stock
to Katalyst LLC in consideration for its exclusive placement agent services.
On July 18, 2003 we entered into an additional securities purchase
agreement with Cornell Capital, in a private offering transaction pursuant to
Section 4(2) of the Securities Act, whereby Cornell Capital purchased $1,000,000
of our 5% secured convertible debentures, due July 17, 2008. Pursuant to the
agreement, Cornell Capital received a 10% discount to the purchase price of the
convertible debentures purchased. The convertible debentures are secured by the
assets of Advanced Viral until 50 days after the effectiveness of the
registration statement covering the resale of the underlying shares. Pursuant to
the terms of the agreement, commencing October 18, 2003, Cornell Capital may
convert the debenture plus accrued interest, (which may be taken at Cornell
Capital's option in cash or common stock), in shares of our common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest
closing bid price of our common stock for the four trading days immediately
preceding the conversion date. No more than $600,000 may be converted in any
thirty-day period. Subject to certain exceptions, at our option, we may redeem a
portion or the entire outstanding debenture at a price equal to 115% of the
amount redeemed plus accrued interest and Cornell Capital will receive warrants
to purchase 1,000,000 shares of our stock for every $100,000 redeemed. The
warrant shall be exercisable on a cash basis and have an exercisable price of
the higher of 110% of the closing bid price of our common stock on the closing
date or $0.08. The warrant shall have "piggy back" registration rights and shall
survive for 5 years from the closing date.
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 21,620,000 shares of our common stock and warrants to purchase up to
10,810,000 shares of our common stock, for an aggregate purchase price of
$1,081,000, or $0.05 per share, pursuant to securities purchase agreements with
the purchasers listed below, in the amounts listed below. The warrants are
exercisable at $0.10 per share. In connection with the agreements, we paid
finders' fees to Harbor View Group, AVIX, Inc and Robert Nowinski consisting in
the aggregate of (i) approximately $115,667 and (ii) warrants to purchase
2,378,200 shares of our common stock. All of the aforementioned warrants are
exercisable at $0.10 per share commencing six months after the issuance date,
for a period of five years. As of the date hereof, none of such warrants had
been exercised.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
- ------------- -------------- ------ --------
Angela Amato $ 16,000 320,000 160,000
Ralph Albergo $ 10,000 200,000 100,000
Beth & Elliot Bauer $ 25,000 500,000 250,000
John Billard $ 50,000 1,000,000 500,000
Philip Brennan $ 45,000 900,000 450,000
Dorothy Christofides $ 25,000 500,000 250,000
Michael Contillo $ 25,000 500,000 250,000
Joseph Deglomini $ 25,000 500,000 250,000
Edward Gorkes $ 50,000 1,000,000 500,000
Harborview Group $ 175,000 3,500,000 1,750,000
Benjamin Kirsch $ 25,000 500,000 250,000
Russell W. Kuhn $ 200,000 4,000,000 2,000,000
Mark Levine $ 60,000 1,200,000 600,000
Steven or Wendi Levitt $ 25,000 500,000 250,000
Barry & Marci Mainzer $ 15,000 300,000 150,000
Gerald S. Schuster $ 40,000 800,000 400,000
Roberta Schwartz $ 25,000 500,000 250,000
56
Avraham Sibony $ 50,000 1,000,000 500,000
R. Frank Smith $ 30,000 600,000 300,000
Michael Tannenhauser $ 15,000 300,000 150,000
Frank Vigliarolo $ 75,000 1,500,000 750,000
Michael Villani $ 25,000 500,000 250,000
Scott Weil $ 30,000 600,000 300,000
Mike Weiner $ 20,000 400,000 200,000
---------- ---------- ----------
TOTAL $1,081,000 21,620,000 10,810,000
OUTSTANDING SECURITIES
As of the date hereof, in addition to the 521,921,079 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of approximately 87.7 million shares of common stock at
exercise prices ranging from $0.052 to $0.36, of which approximately 81.7
million are currently exercisable; (ii) outstanding warrants to purchase an
aggregate of approximately 72.0 million shares of common stock at prices ranging
from $0.091 to $1.00, all of which warrants are currently exercisable; (iii)
approximately 40.3 million shares of common stock underlying certain outstanding
convertible debentures. The foregoing does not include shares issuable pursuant
to the equity line of credit agreement.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $33.0 million,
and we would have approximately 722.9 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of the common
stock. Additionally, the sale or availability for sale of this number of shares
may lessen the likelihood that additional equity financing will be available to
us, on favorable or unfavorable terms. Furthermore, the sale or availability for
sale of this number of shares could limit the annual amount of net operating
loss carryforwards that could be utilized.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for AVR118. We currently do not have cash available to meet our
anticipated expenditures.
We are currently seeking additional financing. We anticipate that we
can continue operations through December 2003 with our current liquid assets, if
none of our outstanding options or warrants is exercised or additional
securities sold. Any proceeds received from the exercise of outstanding options
or warrants will contribute to working capital and increase our budget for
research and development and clinical trials and testing, assuming AVR118
receives subsequent approvals to justify such increased levels of operation. The
recent prevailing market price for shares of common stock has from time to time
been below the exercise prices of certain of our outstanding options or
warrants. As such, recent trading levels may not be sustained nor may any
additional options or warrants be exercised. If none of the outstanding options
or warrants is exercised, and we obtain no other additional financing, in order
for us to achieve the level of operations contemplated by management, management
anticipates that we will have to materially limit or suspend operations. We
anticipate that we will be required to sell additional securities to obtain the
funds necessary to continue operations and further our research and development
activities. We are currently seeking debt financing, licensing agreements, joint
ventures and other sources of financing, but the likelihood of obtaining such
financing on favorable terms is uncertain. Management is not certain whether, at
present, debt or equity financing will be readily obtainable or whether it will
be on favorable terms. Because of the large uncertainties involved in the FDA
approval process for commercial drug use on humans, it is possible that we will
never be able to sell AVR118 commercially.
GOING CONCERN
The independent certified public accountants' reports on our
consolidated financial statements for the fiscal year ended December 31, 2002
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent
57
upon the continued sale of our securities and debt financing for funds to meet
our cash requirements, which raise substantial doubt about our ability to
continue as a going concern. Further, the accountants' report states that the
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. We are currently seeking additional financing and
do not have cash available to meet our anticipated expenditures. We anticipate
that we can continue operations through December 2003 with our current liquid
assets, if none of our outstanding options or warrants are exercised or
additional securities sold. However, there can be no assurance that these
actions will result in sufficient funds to finance operations. If we do not
raise sufficient cash from external sources to satisfy our on-going
expenditures, we will be required to materially limit or suspend our operations.
Failure to raise additional capital and materially limit our operations could
have a material adverse effect on our operations. This raises substantial doubt
about our ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
As of a date within 90 days prior to the filing date of this report,
the Company conducted an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms as of June 30, 2003. There was no change in
our internal control over financial reporting during the fiscal quarter ended
June 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
58
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We have no material legal proceedings pending.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Part I, Item 2 of this Report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended September 30, 2003, no matters were submitted
to a vote of security holders of the Registrant, through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following Exhibits are filed with this Report:
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.
(b) REPORTS ON FORM 8-K.
Current Report on Form 8-K dated August 27, 2003 with respect to Item 5.
59
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: December 23, 2003 By: /s/ ALAN V. GALLANTAR
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Alan V. Gallantar, Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ ELI WILNER
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Eli Wilner, President and Chief Executive Officer
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