As filed with the Securities and Exchange Commission on February 12, 2004
SEC Registration No. 333-112296
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ADVANCED VIRAL RESEARCH CORP.
(Name of issuer in its charter)
DELAWARE 5129 59-2646820
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
200 CORPORATE BOULEVARD SOUTH
YONKERS, NEW YORK 10701
(914) 376-7383
(Address and telephone number of Registrant's principal executive offices)
ELI WILNER
200 CORPORATE BOULEVARD SOUTH
YONKERS, NEW YORK 10701
(914) 376-7383
(Name, address and telephone number of agent for service)
WITH COPIES TO:
Charles J. Rennert, Esq.
Berman Rennert Vogel & Mandler, P.A.
100 Southeast Second Street, Suite 2900
Miami, FL 33131
Telephone No. (305) 577-4177
Telecopy No.: (305) 373-6036
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
PROPOSED PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) PRICE (1) FEE
- ---------------------------------------------------------------------------------------------------------------------
Common stock, par value $0.00001 per
share 262,519,658 shares $0.156 $40,953,067 $5,189 (2)
- ---------------------------------------------------------------------------------------------------------------------
- ----------
(1) In accordance with Rule 457(c), the price represents the average of the
high and low sale prices of the registrant's common stock on February
9, 2004, on the Over-the-Counter Bulletin Board.
(2) $1,572 of the fee has already been paid.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. Neither
the selling stockholders nor we may sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 2004
PROSPECTUS
ADVANCED VIRAL RESEARCH CORP.
262,519,658 SHARES
OF COMMON STOCK
This prospectus may be used only in connection with the resale of up to
262,519,658 shares of common stock of Advanced Viral Research Corp. by the
selling stockholders listed on pages 17-18 of this prospectus.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over the Counter Bulletin Board. The
prices will fluctuate based on the demand for the shares of common stock. Our
common stock is traded on the National Association of Securities Dealers, Inc.'s
OTC Bulletin Board under the symbol "ADVR." On February 9, 2004, the high and
low sale prices for the common stock on the Bulletin Board were $0.16 and $0.152
per share, respectively.
The selling stockholders consist of:
- Certain investors in private placements as more fully set
forth on pages 17-20, who intend to sell 177,984,658 shares of
common stock, of which 34,197,992 shares are issuable upon the
exercise of certain warrants.
- Certain officers and directors of Advanced Viral as more fully
set forth on pages 17-20, who intend to sell up to 84,535,000
shares of common stock issuable upon the exercise of certain
stock options.
Brokers or dealers effecting transactions in these shares should
confirm that the shares are registered under applicable state law or that an
exemption from registration is available.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
BEGINNING ON PAGE 9, WE HAVE LISTED SEVERAL RISK FACTORS THAT YOU SHOULD
CONSIDER. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY BEFORE YOU MAKE YOUR
INVESTMENT DECISION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is February __, 2004.
TABLE OF CONTENTS
PAGE NO.
PROSPECTUS SUMMARY..................................................................................................... 1
THE OFFERING........................................................................................................... 4
SUMMARY FINANCIAL DATA................................................................................................. 4
SELECTED CONSOLIDATED FINANCIAL DATA................................................................................... 6
SUPPLEMENTARY FINANCIAL INFORMATION.................................................................................... 7
CAPITALIZATION......................................................................................................... 8
RISK FACTORS........................................................................................................... 9
FORWARD-LOOKING STATEMENTS............................................................................................. 16
USE OF PROCEEDS........................................................................................................ 16
DETERMINATION OF OFFERING PRICE........................................................................................ 16
DILUTION............................................................................................................... 16
SELLING STOCKHOLDERS................................................................................................... 17
PLAN OF DISTRIBUTION................................................................................................... 20
DESCRIPTION OF SECURITIES TO BE REGISTERED............................................................................. 21
INTERESTS OF NAMED EXPERT AND COUNSEL LEGAL MATTERS.................................................................... 21
DESCRIPTION OF BUSINESS................................................................................................ 21
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS.......................... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 34
CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS.............................................................................. 55
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................................. 55
MANAGEMENT............................................................................................................. 55
AUDIT COMMITTEE REPORT................................................................................................. 57
EXECUTIVE COMPENSATION................................................................................................. 58
COMPARATIVE STOCK PERFORMANCE.......................................................................................... 62
PRINCIPAL STOCKHOLDERS................................................................................................. 63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................................... 65
DESCRIPTION OF SECURITIES.............................................................................................. 66
HOW TO GET MORE INFORMATION............................................................................................ 67
FINANCIAL STATEMENTS................................................................................................... F-1
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS....................................................................... II-1
PROSPECTUS SUMMARY
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). A later formulation of Reticulose was known as
"Product R," which was renamed in September 2003 as "AVR118." We believe AVR118
may be employed in the treatment of certain viral and autoimmune diseases such
as:
- Human immunodeficiency virus, or HIV, including acquired
immune deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers,
leukemias and lymphomas; and
- Rheumatoid arthritis.
Since 1962, when Reticulose was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose to be
marketed in the United States. A forfeiture action was instituted in 1962 by the
FDA against Reticulose, and it was withdrawn from the United States market. The
injunction obtained by the FDA prohibits, among other things, any shipment of
AVR118 except in compliance with FDA rules and regulations, which may include
approval by the FDA of a new drug application, or NDA. FDA approval of an NDA
first requires clinical testing of AVR118 in human trials, which cannot be
conducted until we first satisfy the regulatory protocols and the substantial
pre-approval requirements imposed by the FDA upon the introduction of any new or
unapproved drug product pursuant to an investigational new drug application, or
IND.
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of September 30, 2003 we had incurred a cumulative net loss of
$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.
Our operations over the last five years have been limited
principally to research, testing and analysis of AVR118 in the United States,
and since November 2002, primarily in Israel, either in vitro (outside the
living body in an artificial environment, such as in a test tube), or on
animals, and engaging others to perform testing and analysis of AVR118 on human
patients both inside and outside the United States. On July 30, 2001, we
submitted an IND application to the FDA to begin Phase 1 clinical trials of
AVR118 as a topical treatment for genital warts caused by the human papilloma
virus (HPV) infection. In September 2001, the FDA cleared the IND application to
begin Phase 1 clinical trials. Our Phase 1 study was performed in the United
States on human volunteers. In March 2002, we completed the Phase 1 trial and
submitted to the FDA the results, which indicated that AVR118 was safe and well
tolerated dermatologically in all the doses applied in the study. Currently, we
are determining whether to proceed with Phase 2 clinical trials of AVR118 as a
topical treatment for genital warts caused by HPV infection.
GOING CONCERN
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty. In February
2004, we entered into an agreement with James Dicke II and his son James Dicke
III, whereby we agreed to sell an aggregate of 120 million shares of our common
stock and warrants to purchase 15 million shares of our common stock for an
aggregate purchase price of $12 million. Pursuant to the agreement, the funding
shall take place in four equal stages of $3 million each, once every 90 days
with the first $3 million funding having occurred on
1
February 5, 2004. We anticipate that we can continue operations for the next 12
months with our current liquid assets, if none of our outstanding options or
warrants are exercised or additional securities sold.
ISRAELI CLINICAL TRIALS
In November 2002 we began testing injectable AVR118 in the following
clinical trials in Israel:
- PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that AVR118 may have three major
beneficial effects in patients with AIDS. First, its
therapeutic effects on body wasting (cachexia) seen in
patients with AIDS. Second, the mitigation of the toxicity of
drugs included in HAART regimens for the treatment of AIDS.
Third, the synergistic activity with drugs used in HAART
regimens to suppress the replication of HIV and increase the
CD4 and CD8 cell counts in patients with AIDS. Thus, we
believe that AVR118 may prove to be an important "enabler"
drug in the treatment of AIDS.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain due to financing constraints.
We are focusing 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 through September 30, 2003. The cost to complete the
Phase I/II study in Israel of AVR118 for cachectic patients with AIDS for the
additional 15 patients (for a total of 30) is estimated to be $300,000.
2
Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR 118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR 118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR 118 in mice with an induced immune
skin reaction. AVR 118 did not inhibit the appearance of this immune skin
reaction.
In January 2004, we were awarded a patent for a method for treating
papilloma virus infections. The patent describes the use of AVR118 (previously
known as Product R) for the topical treatment of patients suffering with lesions
resulting from human papillomavirus (HPV) infections, including genital warts.
We have completed a Phase I clinical trial in the U.S. to evaluate the safety of
topical application of AVR118 in healthy volunteers. There were no local adverse
reactions to the application of AVR118 to the skin of these subjects.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
Our objective for the Israeli trials is to determine the safety,
tolerance and metabolic characteristics of AVR118. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable AVR118 with the FDA.
In November 2002, we reduced our staff by from 33 to 10 employees. Of
the 23 terminated employees, 18 were directly involved in our research and
development efforts and 5 were performing administrative functions. We currently
have 11 employees which we feel can sustain the reduced operations, none of whom
are engaged on a full-time basis in research and development activities. Our
only current research and development activity is our Phase I/II study in Israel
for cachectic patients needing salvage therapy for AIDS.
In February 2004, we engaged Elma S. Hawkins, Ph.D. to be our President
and Chief Executive Officer on a full time basis. Pursuant to the employment
agreement, the term of Dr. Hawkins' employment commences February 18, 2004 and
continues until February 2006 unless terminated earlier as provided in the
agreement. Dr. Hawkins shall receive a base salary of $350,000 per year, and
shall be eligible to receive an annual cash bonus of up to 50% of her then base
salary based on certain performance objectives in the sole discretion of the
Board of Directors. In addition, we agreed to pay Dr. Hawkins a signing bonus of
$50,000. Pursuant to the agreement, Dr. Hawkins also received an option to
purchase 40 million shares of our common stock which options become exercisable
monthly over for five years so long as she is employed by Advanced Viral at
exercise prices ranging from $0.12 to $0.160. See "EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS."
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 near
future.
3
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number is (914) 376-7383. We have also established a
website: www.adviral.com. Information contained on our website is not a part of
this prospectus.
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or who are beneficially deemed to be, our stockholders. The selling
stockholders consist of:
- Certain investors in a private placements as more fully set
forth on pages 17-20, who intend to sell 177,984,658 shares of
common stock, of which 34,197,992 shares are issuable upon the
exercise of certain warrants.
- Certain officers and directors of Advanced Viral as more fully
set forth on page 17-20, who intend to sell up to 84,535,000
shares of common stock issuable upon the exercise of certain
stock options.
COMMON STOCK OFFERED 262,519,658 shares
OFFERING PRICE Market Price
COMMON STOCK OUTSTANDING
PRIOR TO THIS OFFERING (1) 589,633,458 shares
COMMON STOCK OUTSTANDING
AFTER THIS OFFERING (2) 798,366,450 shares
USE OF PROCEEDS The shares of common stock offered pursuant
to this prospectus are offered by the
Selling Stockholders listed on page 15. We
will not receive any proceeds from the sale
of common stock by the selling stockholders.
We will receive the cash proceeds, if any,
from the exercise of warrants and options
held by the selling stockholders. See "Use
of Proceeds."
RISK FACTORS An investment in our common stock is highly
speculative and involves a high degree of
risk and immediate substantial dilution. You
should read the "Risk Factors" and
"Dilution" sections.
OTC BULLETIN BOARD SYMBOL ADVR.OB
- ----------
(1) This represents the number of shares of common stock issued and
outstanding on February 10, 2004.
(2) Includes the shares issued or issuable to the selling stockholders in this
offering. Excludes: (i) 62.1 million shares issuable upon the exercise of
outstanding stock options at exercise prices ranging from $0.052 to $0.36;
(ii) 58.9 million shares issuable pursuant to outstanding warrants at
exercise prices ranging from $0.091 to $1.00; and (iii) approximately 16.5
million shares issuable upon the conversion of outstanding convertible
debentures.
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 has been derived from
our audited financial statements. The financial data as of and for the nine
months ended September 30, 2003 is derived from our unaudited consolidated
financials included elsewhere in this prospectus. The selected consolidated
financial data set forth below should be read along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
SUMMARY STATEMENT OF OPERATIONS DATA
4
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED --------------------------------------------------------------------
SEP 30, 2003 2002 2001 2000 1999
RESTATED RESTATED RESTATED RESTATED RESTATED 1998
------------ ----------- ----------- ----------- ----------- ------------
Net revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953 $ 656
Net loss (5,601,913) (9,321,065) (11,086,567) (8,816,192) (6,323,431) (4,557,710)
Net loss per common share (0.01) (0.02) (0.03) (0.02) (0.02) (0.02)
Weighted average # of shares 481,941,317 439,009,322 389,435,324 362,549,690 302,361,109 294,809,073
SUMMARY BALANCE SHEET DATA
AS OF DECEMBER 31,
AS OF ---------------------------------------------------------------------
SEP 30, 2003 2002 2001 2000 1999
RESTATED RESTATED RESTATED RESTATED RESTATED 1998
------------- ------------ ------------ ------------ ------------ -------------
Total assets $ 4,005,810 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574 $ 3,304,953
Total current liabilities 895,930 684,591 1,932,149 983,168 798,282 317,359
Long-term liabilities 2,316,223 1,621,212 74,568 163,013 4,676,652 1,625,299
Capital lease obligations - long-term
portion -- 5,834 42,370 106,567 152,059 167,380
Notes payable-long-term portion -- 4,879 32,198 56,446 77,964 --
Stockholders' (deficit) equity 793,657 1,756,326 3,442,074 7,662,533 (2,613,360) 762,295
Shares outstanding at period end 522,918,079 455,523,990 403,296,863 380,214,618 303,472,035 296,422,907
Cash dividends -- -- -- -- -- --
5
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from
our audited financial statements. The financial data as of and for the nine
months ended September 30, 2003 is derived from our unaudited consolidated
financials included elsewhere in this prospectus. The selected consolidated
financial data set forth below should be read along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
prospectus.
SELECTED STATEMENT OF OPERATIONS DATA
NINE MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------------------------------------
SEP 30, 2003 2002 2001 2000 1999
RESTATED RESTATED RESTATED RESTATED RESTATED
-------------- -------------- -------------- -------------- --------------
Revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953
Costs and Expenses:
Research and development 1,066,596 4,439,592 5,150,869 3,192,551 1,948,937
General and administrative 2.541,689 2,654,296 4,063,022 2,413,601 1,831,061
Compensation and other expense for
options and warrants 329,157 883,762 1,048,108 1,901,927 195,375
Depreciation 703,276 977,746 511,216 346,227 230,785
-------------- -------------- -------------- -------------- --------------
4,640,718 8,955,396 10,773,215 7,854,306 4,206,158
-------------- -------------- -------------- -------------- --------------
Loss from Operations (4,640,718) (8,955,396) (10,755,614) (7,845,943) (4,195,205)
-------------- -------------- -------------- -------------- --------------
Other Income (Expense):
Interest income 10,661 27,659 113,812 161,832 42,744
Other income -- -- -- -- --
Interest expense (949,260) (192,174) 116,849 (908,220) (2,170,970)
Severance expense - former directors -- -- (302,500) -- --
-------------- -------------- -------------- -------------- --------------
(938,599) (164,515) (71,839) (746,388) (2,128,226)
-------------- -------------- -------------- -------------- --------------
Loss from continuing operations (5,579,317) (9,119,911) (10,827,453) (8,592,331) (6,323,431)
Loss from discontinued operations (22,596) (201,154) (259,114) (223,861) n/a
-------------- -------------- -------------- -------------- --------------
Net Loss $ (5,601,913) $ (9,321,065) $ (11,086,567) $ (8,816,192) $ (6,323,431)
============== ============== ============== ============== ==============
Net Loss Per Share of Common
Stock - Basic and Diluted
Continuing operations $ (0.01) $ (0.02) $ (0.03) $ (0.02) $ (0.02)
============== ============== ============== ============== ==============
Discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.00) n/a
============== ============== ============== ============== ==============
1998
--------------
Revenues $ 656
Costs and Expenses:
Research and development 1,659,456
General and administrative 1,420,427
Compensation and other expense for
options and warrants --
Depreciation 110,120
--------------
3,190,003
--------------
Loss from Operations (3,189,347)
--------------
Other Income (Expense):
Interest income 102,043
Other income 293
Interest expense (1,470,699)
Severance expense - former directors --
--------------
(1,368,363)
--------------
Loss from continuing operations (4,557,710)
Loss from discontinued operations n/a
--------------
Net Loss $ (4,557,710)
==============
Net Loss Per Share of Common
Stock - Basic and Diluted
Continuing operations $ (0.02)
==============
Discontinued operations n/a
==============
- ----------
See notes to consolidated financial statements.
6
SELECTED BALANCE SHEET DATA
AS OF DECEMBER 31,
AS OF ----------------------------------------------------------------
SEP 30, 2003 2002 2001 2000 1999
RESTATED RESTATED RESTATED RESTATED RESTATED
------------- ------------- ------------- ------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 938,590 $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 836,876
Investments -- -- -- -- --
Assets held for sale 152,273 172,601 188,999 179,622 178,182
Inventory -- -- -- 19,729 19,729
Other current assets 107,747 121,895 63,162 34,804 59,734
------------- ------------- ------------- ------------- -------------
Total current assets 1,198,610 1,770,251 1,751,970 6,196,788 1,094,521
------------- ------------- ------------- ------------- -------------
Property and Equipment, Net 1,541,002 2,244,118 2,818,045 1,771,038 1,204,202
Other Assets 1,266,198 931,660 878,776 840,888 562,851
------------- ------------- ------------- ------------- -------------
Total assets $ 4,005,810 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574
============= ============= ============= ============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Litigation settlement -- -- -- -- --
Accounts payable and accrued liabilities $ 867,881 $ 554,707 $ 1,843,706 $ 902,961 $ 728,872
Current portion of capital lease obligation 18,389 104,719 64,197 58,690 50,315
Current portion of note payable 9,660 25,165 24,246 21,517 19,095
------------- ------------- ------------- ------------- -------------
Total current liabilities 895,930 684,591 1,932,149 983,168 798,282
------------- ------------- ------------- ------------- -------------
Long-Term Debt:
Convertible debentures, net 2,316,223 1,610,499 -- -- 4,446,629
Capital lease obligation - long term
portion -- 5,834 42,370 106,567 152,059
Note payable - long term portion -- 4,879 32,198 56,446 77,964
------------- ------------- ------------- ------------- -------------
Total long-term debt 2,316,223 1,621,212 74,568 163,013 4,676,652
------------- ------------- ------------- ------------- -------------
Deposit on Securities Purchase Agreement -- -- -- -- --
Common Stock Subscribed but not Issued -- 883,900 -- -- --
Stockholders' Equity (Deficiency):
Common stock: 1,000,000,000 shares of
$.00001 par value authorized 5,229 4,555 4,033 3,802 3,034
Additional paid-in capital 55,678,190 51,141,177 43,877,955 36,349,629 17,255,858
Deficit accumulated during development
stage (54,700,144) (49,098,231) (39,777,166) (28,690,599) (19,874,407)
Deferred compensation cost -- -- -- -- --
Discount on warrants (189,618) (291,175) (662,748) (299) 2,155
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficiency) 793,657 1,756,326 3,442,074 7,662,533 (2,613,360)
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders'
equity $ 4,005,810 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574
============= ============= ============= ============= =============
Shares outstanding at period end 522,918,079 455,523,990 403,296,863 380,214,618 303,472,035
============= ============= ============= ============= =============
1998
-------------
ASSETS
Current Assets:
Cash and cash equivalents $ 924,420
Investments 821,047
Assets held for sale --
Inventory 19,729
Other current assets 29,818
-------------
Total current assets 1,795,014
-------------
Property and Equipment, Net 1,049,593
Other Assets 460,346
-------------
Total assets $ 3,304,953
=============
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Litigation settlement --
Accounts payable and accrued liabilities $ 279,024
Current portion of capital lease obligation $ 38,335
Current portion of note payable --
-------------
Total current liabilities 317,359
-------------
Long-Term Debt:
Convertible debentures, net 1,457,919
Capital lease obligation - long term
portion 167,380
Note payable - long term portion --
-------------
Total long-term debt 1,625,299
-------------
Deposit on Securities Purchase Agreement 600,000
Common Stock Subscribed but not Issued --
Stockholders' Equity (Deficiency):
Common stock: 1,000,000,000 shares of
$.00001 par value authorized 2,964
Additional paid-in capital 14,325,076
Deficit accumulated during development
stage (13,550,976)
Deferred compensation cost (14,769)
Discount on warrants --
-------------
Total stockholders' equity (deficiency) 762,295
-------------
Total liabilities and stockholders'
equity $ 3,304,953
=============
Shares outstanding at period end 296,422,907
=============
- ----------
See notes to consolidated financial statements.
SUPPLEMENTARY FINANCIAL INFORMATION
The following supplementary financial information has been derived from
our unaudited financial statements for the quarterly periods in the years ended
December 31, 2001 and 2002 and the quarterly periods ended March 31, 2003, June
30, and September 30, 2003.
2003 2002
------------------------------------ ---------------------------------------------------
Q3 Q2 Q1 Q4 Q3 Q2 Q1
RESTATED RESTATED RESTATED RESTATED RESTATED RESTATED RESTATED
---------- ---------- ---------- ----------- ---------- ----------- -----------
Net Sales $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 0.0
Costs and
Expenses (1,392,299) (1,563,995) (1,684,424) (1,871,212) (1,965,891) (2,436,037) (2,682,256)
Net Loss (2,153,153) (1,678,834) (1,769,926) (1,998,148) (2,085,050) (2,504,251) (2,733,616)
Loss Per Share (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01)
2001
-------------------------------------------------
Q4 Q3 Q2 Q1
RESTATED RESTATED RESTATED RESTATED
---------- ----------- ---------- ----------
Net Sales $ 3,664 $ 2,454 $ 9,118 $ 2,365
Costs and
Expenses (3,509,998) (2,434,013) (1,900,545) (2,554,354)
Net Loss (3,722,208) (2,524,382) (1,961,091) (2,522,182)
Loss Per Share (0.01) (0.01) (0.01) (0.01)
7
CAPITALIZATION
The following table sets forth our capitalization at September 30,
2003: (1) on a historical basis and (2) as adjusted as of February 10, 2004, and
(3) as adjusted on a pro forma basis to give effect to the sale of (i)
34,197,991 shares of common stock issuable to certain selling stockholders upon
the exercise of certain warrants; (ii) 84,535,000 shares of common stock
issuable to certain selling stockholders upon the exercise of certain stock
options; and (iii) 90 million shares issuable to certain selling stockholders
in three fundings by November 3, 2004 pursuant to a securities purchase
agreement. This table should be read in conjunction with our financial
statements and related notes, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the other financial data appearing
elsewhere in this prospectus.
ACTUAL AS OF ACTUAL AS OF PRO FORMA
STOCKHOLDERS' EQUITY: SEPTEMBER 30, 2003 FEBRUARY 10, 2004 AS ADJUSTED (1)
- ------------------------------------------------------------- ------------------ ------------------ ----------------
Common stock, $0.00001 par value, 1,000,000,000 $ 5,229 $ 5,896 $ 7,983
authorized; 522,918,079 shares issued and outstanding
as of September 30, 2003; 589,633,458 shares outstanding
as of February 10, 2004; 798,366,450 shares outstanding Pro
Forma as Adjusted (1)
Additional paid-in capital: $ 55,678,190 $ 61,415,324 88,060,950
Discount on warrants $ (189,618) $ (189,618) $ (189,618)
Accumulated deficit $ (54,700,144) $ (54,700,144) $ (54,700,144)
------------------ ------------------ ----------------
Total stockholders' equity $ 793,657 $ 6,531,459 $ 33,179,170
------------------ ------------------ ----------------
- ----------
(1) Excludes: (i) 62.1 million shares issuable upon the exercise of outstanding
stock options at exercise prices ranging from $0.052 to $0.36; (ii) 58.9
million shares issuable pursuant to outstanding warrants at exercise prices
ranging from $0.091 to $1.00; and (iii) approximately 16.5 million shares
issuable upon the conversion of outstanding convertible debentures.
8
RISK FACTORS
We are subject to various risks which may materially harm our business,
financial condition and results of operations. Before purchasing our shares of
common stock, you should carefully consider the risks described below in
addition to the other information in this prospectus. If any of these risks or
uncertainties actually occur, our business, prospects, financial condition, and
results of operations could be materially and adversely affected. In that case,
the trading price of our common stock could decline and you could lose all or
part of your investment.
RISKS SPECIFIC TO ADVANCED VIRAL
1. WE HAVE INCURRED LOSSES SINCE OUR INCEPTION, HAVE NO PRODUCT
REVENUE, AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE
We have incurred substantial losses since our inception, and anticipate
incurring substantial losses for the foreseeable future. We incurred net losses
of $5,601,913 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.
The only product revenues we have ever had are insignificant amounts
related to our distribution of AVR118 for testing purposes. We do not currently
have any source of product revenue. At this time, there is substantial risk that
we will never generate operating revenues from the sale of AVR118. To succeed,
AVR118 must be approved for sale in the United States or another industrially
developed country. To the extent we have available financing, we intend to
expend substantial resources to continue clinical trials in Israel for
injectable AVR118. These research and development expenses must be incurred well
in advance of the recognition of revenue. As a result, we may not be able to
achieve or sustain profitability.
2. OUR INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO
THEIR REPORT ON OUR FINANCIAL STATEMENTS WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS
The report of our independent auditors, with respect to our financial
statements and the related notes for the year ended December 31, 2002, indicate
that, at the date of their report, we had suffered recurring losses from
operations and our current cash position raised substantial doubt about our
ability to continue as a going concern. Our financial statements do not include
any adjustments that might result from this uncertainty. The notes to our
financial statements state that our cash position may be inadequate to pay all
the costs associated with the full range of testing and clinical trials of
AVR118 required by the FDA, and, unless and until AVR118 is approved for sale in
the United States or another industrially developed country, we may be dependent
upon the continued sale of our securities, debt or equity financing for funds to
meet our cash requirements.
Our current cash position is as follows:
Current Assets as of September 30, 2003: $1,198,610
Cash at September 30, 2003: $ 938,590
Our past, current and projected cash expenditures are as follows:
12 months ended December 31, 2002: $7,066,229
9 months ended September 30, 2003: $3,597,624
3 months ended December 31, 2003: $1,100,000 (estimated)
3 months ended March 31, 2004: $1,100,000 (estimated)
3 months ended June 30, 2004: $1,100,000 (estimated)
3 months ended September 30, 2004: $1,100,000 (estimated)
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for AVR118. In February 2004, we entered into an agreement with
James Dicke II and his son James Dicke III, whereby we agreed to sell an
aggregate of 120 million shares of our common stock and
9
warrants to purchase 15 million shares of our common stock for an aggregate
purchase price of $12 million. Pursuant to the agreement, the funding shall take
place in four equal stages of $3 million each, once every 90 days with the first
$3 million funding having occurred on February 5, 2004. We anticipate that we
can continue operations for the next 12 months with our current liquid assets,
if none of our outstanding options or warrants are exercised or additional
securities sold. Since inception we have relied on external financing to fund
the costs of maintaining a public listing and other aspects of our operations.
Such financing has historically come from a combination of borrowings and the
sale of common stock to third parties.
If capital raised from financing efforts and our financial resources
are insufficient we may require additional financing in order to execute on our
operating plan and continue as a going concern. In the event that any future
financing should take the form of a sale of equity securities, the holders of
the common stock may experience additional dilution. However, we may not be able
to obtain the necessary additional capital on a timely basis, on acceptable
terms, or at all. In any of these events, we may be unable to implement our
current plans to repay our debt obligations as they become due or respond to
competitive pressures, any of which circumstances could force us to reduce or
cease operations or to seek protection from our creditors under the United
States Bankruptcy Code or analogous state statutes.
3. OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT
MORE DIFFICULT FOR INVESTORS TO SELL THEIR SHARES DUE TO SUITABILITY
REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline. Penny stocks are stock:
- With a price of less than $5.00 per share;
- That are not traded on a "recognized" national exchange;
- Whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ listed stock must still have a price of not
less than $5.00 per share); or
- In issuers with net tangible assets less than $2.0 million (if
the issuer has been in continuous operation for at least three
years) or $10.0 million (if in continuous operation for less
than three years), or with average revenues of less than $6.0
million for the last three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor.
4. OUR COMMON STOCK TRADES SPORADICALLY; THE MARKET PRICE OF OUR
SECURITIES MAY BE VOLATILE
Our common stock currently trades sporadically on the OTC Bulletin
Board. The market for our common stock may continue to be an inactive market.
Accordingly, unless and until an active public market develops, you may have
difficulty selling your shares of common stock at a price that is attractive to
you.
From time to time after this offering, the market price of our common
stock may experience significant volatility. Our quarterly results, failure to
meet analysts' expectations, announcements by us or our competitors regarding
acquisitions or dispositions, loss of existing clients, new procedures or
technology, changes in general conditions in the economy, and general market
conditions could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market has experienced significant price
and volume fluctuations that have particularly affected the trading prices of
equity securities of many technology companies. These price and volume
fluctuations often have been unrelated to the operating performance of the
affected companies.
10
5. WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our future success will depend in large part on our ability to attract,
train, and retain additional highly skilled executive level management,
creative, technical, and sales personnel. Competition is intense for these types
of personnel from other pharmaceutical companies and more established
organizations, many of which have significantly larger operations and greater
financial, marketing, human, and other resources than we have. We may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. Our failure to attract and retain qualified
personnel would have a material adverse effect on our business, prospects,
financial condition, and results of operations will be materially adversely
affected.
Our success depends on the skills of certain key management and
technical personnel, including Elma S. Hawkins, Ph.D., who will succeed Eli
Wilner as President and Chief Executive Officer commencing February 18, 2004,
and Eli Wilner, our Chairman of the Board of Directors. The loss or
unavailability to us of the services of Dr. Hawkins or Mr. Wilner could
materially harm our business and any potential earning capacity. We have entered
into an employment agreement with Dr. Hawkins, and are attempting to obtain
"key-man" insurance on the life of Dr. Hawkins. We have not entered into an
agreement with Mr. Wilner, nor have we obtained "key-man" insurance on the life
of Mr. Wilner.
6. WE WILL NOT PAY CASH DIVIDENDS AND INVESTORS MAY HAVE TO SELL THEIR
SHARES IN ORDER TO REALIZE THEIR INVESTMENT
We have not paid any cash dividends on our common stock and do not
intend to pay cash dividends in the foreseeable future. We intend to retain
future earnings, if any, for reinvestment in the development and marketing of
our products and services. As a result, investors may have to sell their shares
of common stock to realize their investment.
RISKS RELATING TO OUR INDUSTRY
7. IF WE DO NOT RAISE ADDITIONAL FUNDS, WE WILL NOT BE ABLE TO COMPLETE
THE NECESSARY CLINICAL TRIALS TO COMPLETE DEVELOPMENT OF AVR118 AND
WILL NOT BE ABLE TO SELL IT ANYWHERE
AVR118 is the only product we are developing, we will not be able to
sell it in the United States unless we submit, and the FDA approves, a new drug
application, or NDA. We must conduct clinical trials of AVR118 in humans before
we submit an NDA. On July 30, 2001, we submitted an IND application to the FDA
to begin Phase 1 clinical trials of AVR118 as a topical treatment for genital
warts caused by the human papilloma virus (HPV) infection. In September 2001,
the FDA cleared the IND application to begin Phase 1 clinical trials. Our Phase
1 study was performed in the United States on human volunteers. In March 2002,
we completed the Phase 1 trial and submitted to the FDA the results, which
indicated that AVR118 was safe and well tolerated dermatologically in all the
doses applied in the study. We are considering submitting an IND application to
the FDA for the systemic use of AVR118 in clinical trials for the treatment of
cachexia in AIDS patients in the US.
We are currently focusing our clinical efforts on the Phase I/Phase II
Study in cachectic patients needing salvage therapy for AIDS. In August 2003, we
decided to defer the continuation of, and re-examine the procedures, protocol
and objectives of, the two Phase I studies in cachectic patients with solid
tumors, leukemia and lymphoma. Although there can be no assurances, we
anticipate that the clinical trials in Israel will help facilitate the planned
investigational new drug (IND) application process for injectable AVR118 with
the FDA.
Because of the large uncertainties involved in the FDA approval process
for commercial drug use on humans, it is possible that we may never be able to
sell AVR118 commercially. In addition, whether we will be able to proceed with
clinical trials in Israel for injectable AVR118 or anywhere else in the world is
dependent upon our ability to secure sufficient funds. If sufficient funds do
not become available, we will have to materially limit our operations by, among
other things, limiting our clinical trials for AVR118. We may not be able to
raise the funds we currently need to continue or complete the
11
clinical trials for injectable AVR118 in Israel. While we continue to attempt to
secure funds through the sale of our securities, there is no assurance that such
funds will be raised on favorable terms, if at all.
8. WE DO NOT HAVE A "FREE SALE" CERTIFICATE LIMITING OUR ABILITY TO
REGISTER AVR118 IN OTHER COUNTRIES
We have not been able to sell AVR118 outside the United States because
we do not have a free sales certificate for AVR118. A free sales certificate is
a document issued by the country in which a pharmaceutical product is
manufactured, certifying that the country permits the "free sale" of the product
in that country. Most countries require that a pharmaceutical product be at
least registered and certified for free sale in the country in which it is
manufactured before allowing the registration of the product in that country. If
we are not able to meet registration requirements in the countries that require
the certificate, we will be unable to sell AVR118 in those countries. AVR118,
produced at our Yonkers, New York facility has not been approved for sale in the
U.S. by the FDA.
9. WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS, WHICH MAY OFFER ONLY
LIMITED PROTECTION AGAINST POTENTIAL INFRINGEMENT; IF WE ARE UNABLE
TO PROTECT OUR PATENTS AND PROPRIETARY RIGHTS, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL BE HARMED
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation or
other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and could
result in substantial costs and diversion of our efforts.
We have eight issued U.S. patents, some covering the composition of
AVR118 and others covering various uses of the AVR118. We have nine pending U.S.
patent applications and seventeen pending foreign patent applications. In
addition, we have two issued Australian patents and one issued Chinese patent
covering several uses of AVR118. During April 2002, under the terms of a
settlement agreement entered as part of a final judgment on March 25, 2002, we
were assigned all rights, title and interest in two issued U.S. patents
pertaining to Reticulose technology.
As patent applications in the United States are maintained in secrecy
until published or patents issue and as publication of discoveries in the
scientific or patent literature often lag behind the actual discoveries, we
cannot be certain that we were the first to make the inventions covered by each
of our pending patent applications or that we were the first to file patent
applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
10. CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY
TECHNOLOGY MAY RESULT IN LIABILITY FOR DAMAGES OR STOP OUR
DEVELOPMENT AND COMMERCIALIZATION EFFORTS.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with AVR118. Therefore, AVR118 and any other drug candidates may give rise to
claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions.
12
An adverse claim could subject us to significant liabilities to such other
parties and/or require disputed rights to be licensed from such other parties.
We cannot be sure that any license required under any such patents or
proprietary rights would be made available on terms acceptable to us, if at all.
If we do not obtain such licenses, we may encounter delays in product market
introductions, or may find that the development, manufacture or sale of products
requiring such licenses may be precluded. In addition, we could incur
substantial costs in defending ourselves in legal proceedings instituted before
the PTO or in a suit brought against it by a private party based on such patents
or proprietary rights, or in suits by us asserting our patent or proprietary
rights against another party, even if the outcome is not adverse to us. We have
not conducted any searches or made any independent investigations of the
existence of any patents or proprietary rights of other parties.
RISKS SPECIFIC TO THIS OFFERING
11. THE EXERCISE OF OUR OUTSTANDING OPTIONS, WARRANTS OR CONVERTIBLE
SECURITIES OR ISSUANCES OF ADDITIONAL SHARES COULD HAVE A DILUTIVE
IMPACT ON OUR STOCHOLDERS, AND A SIGNIFICANT NEGATIVE IMPACT ON THE
MARKET PRICE OF OUR COMMON STOCK.
The sale of the 262,519,658 shares of common stock being offered hereto
including shares underlying warrants and options, will have a dilutive impact on
our stockholders. As of the date of this prospectus, we had outstanding stock
options to purchase approximately 146.7 million shares of common stock, warrants
to purchase approximately 93.1 million shares of common stock, and approximately
16.5 million shares of common stock underlying certain outstanding convertible
debentures. Some of these equity equivalents include 118.7 million shares of
common stock being registered in this offering. To the extent such options,
warrants or debentures are exercised or converted, there will be further
dilution. In addition, upon the sale of 90 million shares in three fundings by
November 3, 2004 pursuant to a securities purchase agreement, or in the event
that any future financing should be in the form of, be convertible into, or
exchangeable for, equity securities, and upon the exercise of options and
warrants, investors may experience additional dilution.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $53.5 million,
and we would have approximately 935.8 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of the common
stock.
12. THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER
OR LOWER THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS
OFFERING
13
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the OTC Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
13. FUTURE SALES OF COMMON STOCK BY OUR STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK
OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 589,633,458 shares of common stock outstanding as of the date of this
prospectus, approximately 581 million shares are, or will be, freely tradable
without restriction, unless held by our "affiliates." The remaining shares of
common stock held by existing stockholders are "restricted securities" and may
be resold in the public market only if registered or pursuant to an exemption
from registration. Some of these shares may be resold under Rule 144.
14. POSSIBLE LACK OF SUFFICIENT AUTHORIZED SHARES
On April 28, 2003, we entered into an Equity Line of Credit with
Cornell Capital Partners LP. 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 million. For each share of common stock
purchased under the Equity Line of Credit, Cornell Capital will pay Advanced
Viral 100% of the lowest closing bid price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the five days immediately following the notice date.
Further, Cornell Capital is entitled to a retain 5% of each advance under the
Equity Line of Credit. Our obligation to sell our common stock is conditioned,
at our option, upon the per share purchase price being equal to or greater than
a minimum acceptable price, set by us on the advance notice date, which may not
be set any closer than 7.5% below the closing bid price of our common stock the
day prior to the notice date. In December 2003, we registered 95,712,595 shares
that may be issued under the Equity Line of Credit.
There is a possibility that Advanced Viral may not currently have
sufficient authorized shares to issue all of the shares underlying the Equity
Line and outstanding convertible securities and a proposal may be required to be
placed before the stockholders to facilitate an increase in the number of
authorized shares within the next several years. Based on the 589,633,458 shares
of stock currently outstanding, we do not have sufficient authorized shares of
common stock to draw down the entire $50 million available under the Equity Line
of Credit at an assumed stock price of $0.08 per share. To increase the number
of authorized shares of our common stock, we would need to obtain stockholder
approval. We are uncertain that we could obtain this approval based on the
dilutive effect of the issuance of shares under the Equity Line of Credit.
15. THE SALE OF OUR STOCK UNDER OUR EQUITY LINE COULD ENCOURAGE SHORT
SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE
OF OUR STOCK PRICE
14
In many circumstances the provision of an equity line of credit for
companies that are traded on the OTCBB has the potential to cause a significant
downward pressure on the price of common stock. This is especially the case if
the shares being placed into the market exceed the market's ability to take up
the increased stock or if Advanced Viral has not performed in such a manner to
show that the equity funds raised will be used to grow Advanced Viral. Such an
event could place further downward pressure on the price of common stock. Under
the terms of our Equity Line of Credit, Advanced Viral may request numerous draw
downs. Even if we use the Equity Line to increase our business or invest in
assets which are materially beneficial to Advanced Viral, the opportunity exists
for short sellers and others to contribute to the future decline of our stock
price. If there are significant short sales of stock, the price decline that
would result from this activity will cause our share price to decline more so
which in turn may cause long holders of our stock to sell their shares thereby
contributing to sales of stock in the market. If there is an imbalance on the
sell side of the market for our stock the price will decline.
It is not possible to predict if the circumstances where by a short
sales could materialize or to what our share price could drop. In some companies
that have been subjected to short sales the stock price has dropped to near
zero. This could happen to Advanced Viral.
16. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE
OF CREDIT WHEN NEEDED
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the convertible
debentures and the Equity Line of Credit. No assurances can be given that future
financing will be available in sufficient amounts or at all when needed, in
part, because we are limited to a maximum draw down of $500,000 during any seven
trading day period. In addition, based on an assumed offering price of $0.08, we
will only be able to draw a total net amount of $7,189,157 under the Equity Line
of Credit. This net amount will utilize all of the 95,712,595 shares of our
common stock registered for the Equity Line of Credit under a prior Registration
Statement.
Additionally, in the event Cornell Capital holds more than 9.9% of our
then-outstanding common stock, we will be unable to draw down on the Equity Line
of Credit. Currently, Cornell Capital is the record owner of approximately 5.6%
of our common stock and therefore we would be able to draw down on the Equity
Line of Credit so long as Cornell Capital's beneficial ownership remains below
10%. If Cornell Capital's beneficial ownership increases above 10%, we would be
unable to draw down on the Equity Line of Credit. Because Cornell Capital is not
limited by a percentage ownership limitation with respect to converting the
convertible debentures, a possibility exists that Cornell Capital Partners may
own more than 9.9% of Advanced Viral's outstanding common stock at a time when
we would otherwise plan to make an advance under the Equity Line of Credit. In
that event, if we are unable to obtain additional external funding or have not
generated revenue, we could be forced to curtail or cease our operations.
15
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive proceeds upon the exercise of any outstanding options
or warrants. Any proceeds received upon exercise of outstanding options and
warrants will be used for general working capital purposes.
DETERMINATION OF OFFERING PRICE
As this registration statement relates to shares of common stock that
may be sold from time to time by certain stockholders, and not by Advanced
Viral, we cannot determine the actual price at which shares of our common stock
will be sold pursuant to this registration statement. As discussed more fully in
the "Description of Securities to be Registered" section, Advanced Viral
believes that the selling stockholders will sell shares of our common stock at
the prevailing market price at the time of sale and that the market price will
fluctuate during the time period in which the selling stockholders sell their
shares of our common stock.
DILUTION
The net tangible book value of our company as of September 30, 2003 was
$(384,824) or $(0.00074) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of Advanced Viral (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to Advanced Viral, our net
tangible book value will be unaffected by this offering.
16
SELLING STOCKHOLDERS
The following table presents information regarding the beneficial
ownership of the common stock as of the date hereof by each of the selling
stockholders. A description of each selling stockholder's relationship to
Advanced Viral and how each selling stockholder acquired the shares to be sold
in this offering is detailed in the information immediately following this
table. Unless otherwise indicated below, to our knowledge all persons listed
below have sole voting and investment power with respect to the shares of common
stock beneficially owned, except to the extent authority is shared by spouses
under applicable law. The information included below is based upon information
provided by the selling stockholders. Because the selling stockholders may offer
all, some or none of their shares, no definitive estimate as to the number of
shares that will be held by the selling stockholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares offered under this prospectus will be sold.
17
SHARES & OF SHARES SHARES % OF SHARES
OWNED BEFORE OWNED BEFORE SHARES TO BE SOLD IN OWNED AFTER OWNED AFTER
SELLING STOCKHOLDER RELATIONSHIP TO AVR OFFERING (1) OFFERING (1) THE OFFERING (2-8) OFFERING OFFERING (8)
- --------------------------- ------------------- ------------ ------------ -------------------- ------------ ------------
Footnote
Ralph Albergo Investor 300,000 * 300,000 2 0 --
Angela Amato Investor 480,000 * 480,000 2 0 --
AVIX, Inc. Investor 573,750 * 105,000 3 468,750 *
Elliot Bauer Investor 3,250,000 * 750,000 2 2,500,000 *
John Billard Investor 1,500,000 * 1,500,000 2 0 --
Philip Brennan Investor 1,850,000 * 1,350,000 2 500,000 *
Dorothy Christofides Investor 2,035,000 * 1,155,000 2,3 880,000 *
Michael Contillo Investor 1,000,000 * 750,000 2 250,000 *
Joseph Deglomini Investor 961,364 * 750,000 2 211,364 *
Edward Gorkes Investor 1,500,000 * 1,500,000 2 0 --
Benjamin Kirsch Investor 750,000 * 750,000 2 0 --
Russell W. Kuhn Investor 6,000,000 1.0% 6,000,000 2 0 --
Mark Levine Investor 1,800,000 * 1,800,000 2 0 --
Steven Levitt Investor 2,509,090 * 1,200,000 2,3 1,309,090 *
Barry Mainzer Investor 450,000 * 450,000 2 0 --
Robert Nowinski Investor 1,159,125 * 1,159,125 4 0 --
Lawrence Pomerantz (Harbor
View) Investor 19,592,388 3.3% 6,615,533 2,3 12,976,855 2.2%
Gerald S. Schuster Investor 2,422,500 * 1,200,000 2 1,222,500 *
Roberta Schwartz Investor 750,000 * 750,000 2 0 --
Avraham Sibony Investor 1,500,000 * 1,500,000 2 0 --
Alice Smith Investor 750,000 * 750,000 2 0 --
Robert Franklin Smith, Jr. Investor 150,000 * 150,000 2 0 --
Xiao Yuan Tang Investor 1,350,000 * 1,350,000 3 0 --
Michael Tannenhauser Investor 450,000 * 450,000 2 0 --
Frank Vigliarolo Investor 5,251,250 * 2,970,000 2,3 2,281,250 *
Michael Villani Investor 750,000 * 750,000 2 0 --
Scott Weil, custodian for
Cameron Weil Investor 900,000 * 900,000 2 0 --
Mike Weiner Investor 600,000 * 600,000 2 0 --
Elma Hawkins President, CEO,
Director 40,375,000 6.4% 41,375,000 5a, b 0 --
Eli Wilner Chairman of the
Board 31,510,000 5.1% 24,700,000 5b,c,d,e 6,810,000 1.1%
David Seligman Director 9,200,000 1.5% 5,250,000 5d,e 3,950,000 *
Nancy J. Van Sant Director 6,050,000 1.0% 4,100,000 5d,e 1,950,000 *
Roy S. Walzer Director 8,228,800 1.4% 5,650,000 5d,e 2,578,800 *
George P. Canellos, M.D. Scientific
Advisory Board 750,000 * 250,000 5d 500,000 *
Michael Harris, M.D. Scientific
Advisory Board 750,000 * 250,000 5d 500,000 *
James D'Olimpio, M.D. Scientific
Advisory Board 950,000 * 450,000 5d 500,000 *
Howard Young, M.D. Scientific
Advisory Board 750,000 * 250,000 5d 500,000 *
Sidney Pestka, M.D. Scientific
Advisory Board 750,000 * 250,000 5d 500,000 *
DeDiego, Maribel Employee 1,100,000 * 1,000,000 5e 100,000 *
Garcia, Maritza Employee 12,000 * 10,000 5e 2,000 *
Marino, Maria Employee 530,000 * 500,000 5e 30,000 *
Szalkiewicz, Andy Employee 655,000 * 500,000 5e 155,000 *
Taraporewala, Irach Employee 1,150,000 * 1,000,000 5e 150,000 *
James F. Dicke II Investor, Former
Director 85,007,686 14.1% 67,500,000 6 17,507,686 2.9%
James F. Dicke III Investor 67,500,000 11.3% 67,500,000 6 0 --
Cesar Blumtritt DCT Affiliate 1,880,000 * 1,880,000 7 0 --
Alfredo Velez DCT Affiliate 2,400,000 * 2,400,000 7 0 --
Bruce Knef DCT Affiliate 200,000 * 200,000 7 0 --
David Duffy DCT Affiliate 300,000 * 300,000 7 0 --
Arthur Hawkins DCT Affiliate 150,000 * 150,000 7 0 --
Mayer Gattegno DCT Affiliate 70,000 * 70,000 7 0 --
SELLING STOCKHOLDERS TOTAL
SHARES 320,852,953 43.2% 262,519,658 58,333,295 9.0%
SHARES OUTSTANDING AFTER OFFERING (2-8) 798,366,450
- ----------
* Less than 1%.
(1) Based on 589,633,458 shares of common stock outstanding as of February 10,
2004, together with securities being offered hereby and securities
exercisable or convertible into shares of common stock within 60 days
thereof, for each stockholder, but excluding: (i) 62.1 million shares
issuable upon the exercise of outstanding stock options at exercise prices
ranging from $0.052 to $0.36; (ii) 58.9 million shares issuable pursuant to
outstanding warrants at exercise prices ranging from $0.091 to $1.00; and
(iii) approximately 16.5 million shares issuable upon the conversion of
outstanding convertible debentures. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting
18
or investment power with respect to securities. Shares of common stock
subject to securities exercisable or convertible into shares of common
stock that are currently exercisable or exercisable within 60 days of the
date of this prospectus are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Note
that affiliates are subject to Rule 144 and insider trading regulations -
percentage computation is for form purposes only.
(2) Includes an aggregate of 13,188,200 shares issuable upon the exercise of
warrants at an exercise price of $0.10 per share commencing six months
after date of issuance and expiring five years from the date of issuance.
(3) Includes an aggregate of 931,666 shares issuable upon the exercise of
warrants at an exercise price of $0.19 per share commencing six months
after date of issuance and expiring five years from the date of issuance.
(4) Includes (i) 78,125 shares issuable upon the exercise of warrants at an
exercise price of $0.12 per share; and (ii) 1,081,000 shares issuable upon
the exercise of warrants at an exercise price of $0.10 per share,
commencing six months after date of issuance and expiring five years from
the date of issuance.
(5) Includes an aggregate of 84,535,000 shares of common stock underlying stock
options issued to certain directors, advisory board members and employees
with exercise prices of (a) $0.12 per share; (b) $0.15 per share; (c)
$0.063 per share; (d) $0.018 per share; (e) $0.052 per share.
(6) Includes 15 million shares issued, and 45 million shares issuable to each
of James Dicke II and James Dicke III, along with 7,500,000 shares issuable
to each of James Dicke II and James Dicke III upon the exercise of warrants
at an exercise price of $0.20 per share for a period of three years from
the date of issuance.
(7) Represents shares issuable upon the exercise of warrants to purchase shares
of common stock at $0.16 per share through February 9, 2009.
(8) Assumes the full exercise of options and warrants held by selling
stockholders. Assumes that all of the shares offered hereby are sold by the
selling stockholders and no additional shares of common stock are acquired.
During 2003, we granted to certain directors, employees and advisory
board members options to purchase an aggregate of 48,260,000 shares of common
stock to at exercise prices ranging from $0.052 to $0.18 per share for a period
of 10 years from the date of issuance, in consideration for their service to
Advanced Viral.
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 21,620,000 shares of our common stock and warrants to purchase up to
10,810,000 shares of our common stock, for an aggregate purchase price of
$1,081,000, or $0.05 per share, pursuant to securities purchase agreements with
certain purchasers. 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.
19
In January 2004, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 2,166,666 shares of our common stock and warrants to purchase up to
758,334 shares of our common stock, for an aggregate purchase price of $325,000,
or $0.15 per share, pursuant to securities purchase agreements with certain
purchasers. In connection with the agreements, we paid finders' fees to Harbor
View Group consisting in the aggregate of (i) approximately $26,000 and (ii)
warrants to purchase 173,333 shares of our common stock. All of the
aforementioned warrants are exercisable at $0.19 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.
On February 3, 2004, we entered into an agreement with James Dicke II
and his son James Dicke III, whereby we agreed to sell an aggregate of 120
million shares of our common stock and warrants to purchase 15 million shares of
our common stock for an aggregate purchase price of $12 million. Pursuant to the
agreement, the funding shall take place in four equal stages of $3 million each,
once every 90 days with the first $3 million funding having occurred on February
5, 2004. There are no conditions precedent to the investors' obligation to
close other than the accuracy of our representations and warranties and our
compliance with the agreement. The warrants have an exercise price of $0.20 per
share and are exercisable at any time through February 2, 2007. In addition, we
granted demand and piggyback registration rights to the investors for the shares
issued or issuable in connection with the transaction. James F. Dicke II is the
Chairman and CEO of Crown Equipment Corporation and a former member of our Board
of Directors.
In February 2004, we engaged Elma S. Hawkins, Ph.D. to be our President
and Chief Executive Officer on a full time basis. Pursuant to the employment
agreement, the term of Dr. Hawkins' employment commences February 18, 2004 and
continues until February 2006 unless terminated earlier as provided in the
agreement. Dr. Hawkins shall receive a base salary of $350,000 per year, and
shall be eligible to receive an annual cash bonus of up to 50% of her then base
salary based on certain performance objectives in the sole discretion of the
Board of Directors. In addition, we agreed to pay Dr. Hawkins a signing bonus of
$50,000. Pursuant to the agreement, Dr. Hawkins also received an option to
purchase 40 million shares of our common stock which options become exercisable
monthly over for five years so long as she is employed by Advanced Viral at
exercise prices ranging from $0.12 to $0.160. See "EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS."
On February 9, 2004, we entered into a termination and release
agreement with DCT, S.R.L. and certain of its affiliates pursuant to which
pursuant to which a distribution agreement and various testing agreements with
DCT, along with any and all distribution rights and rights to royalties or fees
thereunder, were terminated. In addition, the agreement provides that any and
all intellectual property rights relating to the terminated agreements were the
property of Advanced Viral, and the parties released each other from claims
relating thereto. In consideration, we agreed to pay DCT $60,000 and granted
warrants to purchase an aggregate of 5 million shares of our common stock to
certain of DCT's affiliates at an exercise price of $0.16 for a period of five
years. In addition the recipients of the warrants agreed not to sell more than
an aggregate of 2 million shares of our common stock in any six month period for
a period of five years.
In connection with the engagement of Dr. Hawkins, in February 2004,
options to purchase 7,500,000 shares of common stock at an exercise price of
$0.18 held by Mr. Wilner were terminated, and options to purchase 1,125,000
shares of common stock at an exercise price of $0.18 held by Dr. Hawkins were
terminated. In addition, Mr. Wilner was issued an option to purchase 5,000,000
shares of our common stock at an exercise price of $0.15 for a period of five
years.
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the OTC Bulletin Board or in
any other market on which the price of our shares of common stock are quoted or
(ii) in transactions otherwise than on the OTC Bulletin Board or in any other
market on which the price of our shares of common stock are quoted. Any of such
transactions may be effected at market prices prevailing at the time of sale, at
prices related to such prevailing market prices, at varying prices determined at
the time of sale or at negotiated or fixed prices, in each case as determined by
the selling stockholders or by agreement between the selling stockholders and
underwriters, brokers, dealers or agents, or purchasers. If the selling
stockholders effect such transactions by selling their shares of common stock to
or through underwriters, brokers, dealers or agents, such underwriters, brokers,
dealers or agents may receive compensation in the form of discounts, concessions
or commissions from the selling stockholders or commissions from purchasers of
common stock for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transactions involved). The selling
stockholders and any brokers, dealers or agents that participate in the
distribution of the common stock may be deemed to be underwriters, and any
profit on the sale of common stock by them and any discounts, concessions or
commissions received by any such underwriters, brokers, dealers or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. The selling stockholders are advised to ensure that any underwriters,
brokers,
20
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
will not receive any proceeds from the sale of any of the shares of common stock
by the selling stockholders. We will, however, receive proceeds from the
issuance of shares upon the exercise of warrants and options.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Registration M, the selling stockholders or their agents
may not bid for, purchase, or attempt to induce any person to bid for or
purchase, shares of our common stock while such selling stockholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling stockholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. The selling
stockholders are advised that if a particular offer of common stock is to be
made on terms constituting a material change from the information set forth
above with respect to the Plan of Distribution, then, to the extent required, a
post-effective amendment to the accompanying registration statement must be
filed with the Securities and Exchange Commission.
DESCRIPTION OF SECURITIES TO BE REGISTERED
The securities being registered are shares of Advanced Viral's common
stock. The holders of common stock:
- have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
- entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
- do not have preemptive, subscription or conversion rights and
there are no redemption or sinking fund provisions applicable
thereto; and
- are entitled to one noncumulative vote per share on all matters
on which stockholders may vote at all meeting of stockholders.
INTERESTS OF NAMED EXPERT AND COUNSEL
LEGAL MATTERS
The validity of the shares of common stock offered hereby as to their
being fully paid, legally issued and non-assessable will be passed upon for us
by Berman Rennert Vogel & Mandler, P.A., Miami, Florida. Berman Rennert Vogel &
Mandler, P.A. does not have any interests in Advanced Viral and has never been
employed by Advanced Viral on a contingent basis.
The audited consolidated financial statements of Advanced Viral
Research Corp. and its subsidiaries for the year ended December 31, 2002,
December 31, 2001, and December 31, 2000, included in this prospectus and
elsewhere in the registration statement have been audited by Rachlin Cohen &
Holtz, LLP, independent certified public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report. Reference is made to
said report, which includes an explanatory paragraph with respect to the
uncertainty regarding Advanced Viral's ability to continue as a going concern,
as discussed in Note 2 to the financial statements. Rachlin Cohen & Holtz, LLP,
does not have any interests in Advanced Viral and has never been employed by
Advanced Viral on a contingent basis.
DESCRIPTION OF BUSINESS
21
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose. The current formulation of Reticulose is currently
known as "AVR118." We believe AVR118 may be employed in the treatment of certain
viral and autoimmune diseases such as:
- Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
- Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer;
- Cachexia (body wasting) in patients with solid cancers, leukemias
and lymphomas; and
- Rheumatoid arthritis.
Since 1962, when Reticulose was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose to be
marketed in the United States. A forfeiture action was instituted in 1962 by the
FDA against Reticulose, and it was withdrawn from the United States market. The
injunction obtained by the FDA prohibits, among other things, any shipment of
AVR118 except in compliance with FDA rules and regulations, which may include
approval by the FDA of a new drug application, or NDA. FDA approval of an NDA
first requires clinical testing of AVR118 in human trials, which cannot be
conducted until we first satisfy the regulatory protocols and the substantial
pre-approval requirements imposed by the FDA upon the introduction of any new or
unapproved drug product pursuant to an investigational new drug application, or
IND.
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of September 30, 2003 we had incurred a cumulative net loss of
$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.
Our operations over the last five years have been limited principally
to research, testing and analysis of AVR118 in the United States, and since
November 2002, primarily in Israel, either in vitro (outside the living body in
an artificial environment, such as in a test tube), or on animals, and engaging
others to perform testing and analysis of AVR118 on human patients both inside
and outside the United States. On July 30, 2001, we submitted an IND application
to the FDA to begin Phase 1 clinical trials of AVR118 as a topical treatment for
genital warts caused by the human papilloma virus (HPV) infection. In September
2001, the FDA cleared the IND application to begin Phase 1 clinical trials. Our
Phase 1 study was performed in the United States on human volunteers. In March
2002, we completed the Phase 1 trial and submitted to the FDA the results, which
indicated that AVR118 was safe and well tolerated dermatologically in all the
doses applied in the study. Currently, we are determining whether to proceed
with Phase 2 clinical trials of AVR118 as a topical treatment for genital warts
caused by HPV infection.
In November 2002 we began testing injectable AVR118 in the following
clinical trials in Israel:
- PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. We believe that AVR118 may have three major
beneficial effects in patients with AIDS. First, its therapeutic
effects on body wasting (cachexia) seen in patients with AIDS.
Second, the mitigation of the toxicity of drugs included in HAART
regimens for the treatment of AIDS. Third, the synergistic
activity with drugs used in HAART regimens to suppress the
replication of HIV and increase the CD4 and CD8 cell counts in
patients with AIDS. Thus, we believe that AVR118 may prove to be
an important "enabler" drug in the treatment of AIDS.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA.
Included are patients with acute lymphocytic leukemia, multiple
Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included
are patients with solid tumors such as colonic, lung, breast,
stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the
safety, tolerance and metabolic characteristics of AVR118. Although there can be
no assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable AVR118 with the FDA.
22
In August 2003, we decided to defer the continuation of and
re-examine the procedures, protocol and objectives of the Phase I study in
Israel using AVR118 for cachectic patients with leukemia and lymphoma and a
recent Phase I study for cachectic patients with solid tumors. The date of
completion of these studies is uncertain because of financing constraints.
We are focusing 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. We are considering submitting an IND
application to the FDA for the systemic use of AVR118 in clinical trials for the
treatment of cachexia in AIDS patients in the US.
Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR 118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR 118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR 118 in mice with an induced immune
skin reaction. AVR 118 did not inhibit the appearance of this immune skin
reaction.
In January 2004, we were awarded a patent for a method for
treating papillomavirus infections. The patent describes the use of AVR118
(previously known as Product R) for the topical treatment of patients suffering
with lesions resulting from human papillomavirus (HPV) infections, including
genital warts. We have completed a Phase I clinical trial in the U.S. to
evaluate the safety of topical application of AVR118 in healthy volunteers.
There were no local adverse reactions to the application of AVR118 to the skin
of these subjects. We are now planning Phase II trials for the topical use of
AVR118.
In August 2003 we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
Whether we will be able to proceed with clinical trials in Israel for
injectable AVR118 or anywhere else in the world is dependent upon our ability to
secure sufficient funds. If sufficient funds do not become available, we will
have to curtail our operations by, among other things, limiting our clinical
trials for AVR118. We may not be able to raise the funds we currently need to
continue or complete the clinical trials for injectable AVR118 in Israel. While
we continue to attempt to secure funds through the sale of our securities, there
is no assurance that such funds will be raised on favorable terms, if at all.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number is (914) 376-7383. We have also established a
website: www.adviral.com. Information contained on our website is not a part of
this prospectus.
GOVERNMENT REGULATION
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as AVR118, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the
23
manufacturer, a manufacturer may submit a new drug application, or NDA, to the
FDA. No action can be taken to market AVR118, or any therapeutic drug product,
in the United States until an NDA has been approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA, which strictly controls the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or in vitro testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: Phase 1 clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; Phase 2 clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and Phase 3
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or in vitro tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible in some limited circumstances to use
well-documented clinical experience as a substitute for other pre-clinical work.
After the FDA approves the IND, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.
When all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the availability of the drug products made from the substance. NDA's contain
lists of all components used in the manufacture of the drug product and a
statement of the specifications and analytical methods for each component. Also
included are studies of the toxicological actions of the drug as they relate to
the drug's intended uses.
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The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
In February 1998, we contracted with GloboMax LLC to advise and assist
us in our preparation of the IND that was filed with the FDA in July 2001 and
cleared for Phase 1 trials in September 2001, and otherwise to guide us through
the FDA process. During 2001 and 2002, GloboMax continued its project management
services for the pre-clinical development and IND submission of AVR118 to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of AVR118. Expenses paid during 2001 and
2002 relating to the GloboMax agreement were approximately $3,587,000. Pursuant
to the agreement with GloboMax, we were obligated to pay for services on an
hourly basis, at prescribed rates. GloboMax LLC is no longer providing services
to, or representing, Advanced Viral.
It is possible that the clinical tests of AVR118 on humans will not be
approved by the FDA for human clinical trials on HPV or other diseases, and that
any tests previously conducted or to be conducted will not satisfy FDA
requirements. It is also possible that the results of such human clinical
trials, if performed, will not prove that AVR118 is safe or effective in the
treatment of HPV or other diseases, or that the FDA will not approve the sale of
AVR118 in the United States if we submitted a proper NDA. It is not known at
this time how extensive the Phase 2 and Phase 3 clinical trials will be, if they
are conducted. The data generated may not show that the drug AVR118 is safe and
effective, and even if the data shows that AVR118 is safe and effective,
obtaining approval of the NDA could take years and require financing of amounts
not presently available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of AVR118 for a considerable period of
time and impose costly procedures upon our activities. The extent of potentially
adverse government regulations which might arise from future legislation or
administrative action cannot be predicted. Whether or not FDA approval has been
obtained for a product, approval of the product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process may be more or less rigorous from
country to country, and the time required for approval may be longer or shorter
than that required in the United States. Clinical studies conducted outside of
any country may not be accepted by such country, and the approval of any
pharmaceutical or diagnostic product in one country does not assure that such
product will be approved in another country. Accordingly, until registration is
granted, if ever, in the United States or another developed or developing
country, we do not expect that we will be able to generate material sales
revenue.
RESEARCH, DEVELOPMENT AND TESTING
For the period from inception (February 20, 1984) through September 30,
2003 we expended approximately $19,382,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. We planned research and
testing at several institutes and medical centers in Israel to:
- determine the safety and efficacy of AVR118 on animals and
cultured human cells;
- determine the effectiveness of AVR118 in the treatment of
cachexia (body wasting) in patients with AIDS taking a
multi-drug cocktail (highly active anti-retroviral therapy
(HAART));
- determine the effectiveness of AVR118 in the treatment of
cachexia in patients with solid cancers;
- determine the effectiveness of AVR118 in the treatment of
cachexia in patients with leukemias and lymphomas;
- study the effects of AVR118 in mitigating the toxic effects
of other drugs used to treat HIV infections, such as
nucleoside analogues, protease inhibitors and non-nucleoside
reverse transcriptase inhibitors;
- study the effects of AVR118 in mitigating the toxic effects
of drugs used in the chemotherapy of cancers; and
25
- assess the direct inhibitory and therapeutic effects of
AVR118 on neoplasias, including lymphomas and lymphocytic
leukemia.
In November 2002 we began testing injectable AVR118 in the following
clinical trials in Israel:
- PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and
require salvage therapy. We believe that AVR118 may have
three major beneficial effects in patients with AIDS. First,
its therapeutic effects on body wasting (cachexia) seen in
patients with AIDS. Second, the mitigation of the toxicity
of drugs included in HAART regimens for the treatment of
AIDS. Third, the synergistic activity with drugs used in
HAART regimens to suppress the replication of HIV and
increase the CD4 and CD8 cell counts in patients with AIDS.
Thus, we believe that AVR118 may prove to be an important
"enabler" drug in the treatment of AIDS.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic,
lung, breast, stomach and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of AVR118. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable AVR118 with the FDA.
In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. The date of completion of these
studies is uncertain.
Because of our limited personnel, we believe it to be in our best
interests to focus our clinical efforts on our one ongoing Phase I/Phase II
open-label dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. The
primary indication of the trial is the treatment of cachexia. Out of 30 total
patients contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required under the
study. Results from the first 15 patients showed improvement in appetite, weight
gain or stability, and enhanced quality of life in all the patients. None of the
15 patients reported any significant side effects from AVR118 therapy.
We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon funds available for research and
development and the availability of patients meeting the prescribed protocol and
the ability of Israel and its hospitals to meet the requirements of the
protocol. From inception of all the clinical studies in Israel we have expended
approximately $1,550,000. The cost to complete the Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS for the additional 15 patients (for a
total of 30) is estimated to be $300,000.
Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR 118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR 118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR 118 in mice with an induced immune
skin reaction. AVR 118 did not inhibit the appearance of this immune skin
reaction.
In January 2004, we were awarded a patent for its method for
treating papillomavirus infections. The patent describes the use of AVR118
(previously known as Product R) for the topical treatment of patients suffering
with lesions resulting from human papillomavirus (HPV) infections, including
genital warts. We have completed a Phase I clinical trial in the U.S. to
evaluate the safety of topical application of AVR118 in healthy volunteers.
There were no local adverse reactions to the application of AVR118 to the skin
of these subjects. We are now planning Phase II trials for the topical use of
AVR118.
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
26
requirements. Oxford Pharmaceutical bills us on an hourly basis, and we expensed
$25,192 during the quarter ended September 30, 2003 for such services.
MATERIAL AGREEMENTS
In September 2002 we entered into an agreement with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the three clinical studies listed above. Under the
agreement, EnviroGene will (1) finalize all Israeli government and hospital
approval documents, (2) complete and organize the three clinical trials
including establishing a network of scientists to perform said study/trial and
initiate recruitment of patients and (3) perform the studies/trials and evaluate
the results. The agreement terminates upon receipt and approval of the final
report required under the Agreement, and upon such termination we retain all
rights to the research performed under the agreement. Total costs incurred in
connection with EnviroGene's services are expected to be $1,551,000, of which
approximately $1,323,000 has been expensed and approximately $875,000 has been
paid from inception through September 30, 2003. Approximately $100,000 and
$697,000 has been expensed during the three and nine months ended September 30,
2003. If all three clinical studies in Israel were concluded, the additional
cost under this contract is estimated to be approximately $228,000. We cannot at
this time determine the financial impact of reducing the number of trials under
this contract.
In October 2002 we entered into an agreement with Quintiles Israel Ltd.
to act as the auditor and monitor of the clinical studies. The agreement
terminates upon completion of the services unless terminated earlier by either
party upon prior written notice or upon a material breach and a failure to cure,
and upon such termination we retain all rights to the research performed under
the agreement. We have expensed $126,495 since inception of the contract through
September 30, 2003. If all three clinical studies in Israel were concluded, the
additional cost under this contract would be $126,505. We cannot at this time
determine the financial impact of reducing the number of trials under this
contract.
In November 2002 we entered into an agreement with Kaplan Medical
Center in Israel to act as the center for the Phase I/ Phase II study using
AVR118 for cachectic patients with AIDS. The agreement terminates upon
conclusion of the study, or upon prior written notice, and upon such termination
we retain all rights to the research performed under the agreement. To date, 15
patients have been enrolled in the study out of 30 patients contemplated under
the study protocol, and the estimated completion date for the study with 30
patients is the second quarter of 2004. We have expensed $51,750 since inception
of the contract through September 30, 2003, and an additional $34,500 was
expensed in October 2003.
The cost to complete the Phase I/II study in Israel of AVR118 for
cachectic patients with AIDS for the additional 15 patients (for a total of 30)
is estimated to be $300,000.
27
In July 2003 our agreement entered in July 2002 with the Weizmann
Institute of Science and Yeda, its developmental arm in Israel, to conduct
research on the effects of AVR118 on the immune system expired in accordance
with its terms, and upon such termination we retained all rights to the research
performed under the agreement. Total costs incurred in connection with this
research are expected to be $138,000. Since inception to date, we have expensed
$130,000 and paid $90,000 in connection with this agreement. Final payment has
not been made pending receipt, review and approval of the final report.
Our 12-month agreement formalized in April 2001 with the Selikoff
Center in Israel to develop clinical trials in Israel using AVR118 has
concluded. The amount paid under the agreement was $242,000.
Whether we will be able to proceed with Phase 2 clinical trials of
AVR118 for topical therapy of genital warts and clinical trials in Israel for
injectable AVR118 is dependent upon our ability to secure sufficient funds. If
sufficient funds do not become available, we will have to curtail our operations
by, among other things, limiting our clinical trials for AVR118. We may not be
able to raise the funds we currently need to begin or complete the topical Phase
2 for AVR118 or to continue the clinical trials for injectable AVR118 in Israel.
While we continue to attempt to secure funds through the sale of our securities,
there is no assurance that such funds will be raised on favorable terms, if at
all.
The studies being conducted in Israel are subject to risks associated
with the political, economic and military conditions affecting Israel and the
Middle East, and recent world events, including terrorism and war, have made it
difficult to predict whether or in what manner these problems will be resolved.
Our studies detailing the results of the research and testing being
conducted in Israel may not positively impact the FDA's decision to approve a
new IND for injectable AVR118 or approve the marketing, sales or distribution of
AVR118 within the United States, and as a result may not improve our chances of
gaining approval for the marketing, sales or distribution of AVR118 anywhere in
the world. We currently do not have the resources to engage in further testing,
and we cannot provide assurances that we will acquire such financial resources
to continue or complete the studies, or, if we acquire such resources, that we
will do so on favorable terms.
SCIENTIFIC ADVISORY BOARD
In January 2002, we formed a Scientific Advisory Board currently
consisting people with experience in oncology, hematology, women's health and
related fields for the purpose of having access to additional expertise and
counsel to support the development of AVR118 in connection with the rigorous
clinical trials required by the FDA's regulatory approval process. The current
members of the Scientific Advisory Board are:
DR. GEORGE P. CANELLOS is the William Rosenberg Professor of Medicine
at Harvard Medical School where he served as Chief of the Division of Medical
Oncology for 20 years at the Dana-Farber Cancer Institute, and was Acting
Clinical Director of the National Cancer Institute (NCI) and a member of the
FDA's Oncologic Drugs Advisory Committee. Dr. Canellos was also a past president
of the American Society for Clinical Oncology and a former Editor-in-Chief of
the Journal of Clinical Oncology. Dr. Canellos currently serves as Medical
Director for Network Development, Dana-Farber/Partners CancerCare and is on the
senior staff at the Brigham and Women's Hospital, Dana-Farber Cancer Institute
and Massachusetts General Hospital.
DR. MICHAEL HARRIS is Director of the Tomorrows Children's Institute
for Cancer and Blood Disorders, Chief of Pediatric Hematology-Oncology at the
Hackensack University Medical Center and Professor of Pediatrics at the
UMDNJ-New Jersey Medical School. Additionally, Dr. Harris is a member of the
National Cancer Institute's Special Review Committee where he is responsible for
the review of Community Clinical Oncology Programs, and Associate Editor for
Pediatric Oncology for the scientific journal Cancer Investigation. Dr. Harris
previously served as Chief of Pediatric Hematology-Oncology at The Mt. Sinai
Medical Center in New York City.
DR. JAMES D'OLIMPIO is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also Associate
Professor of Medical Oncology at New York University's School of Medicine. His
research has focused on improving the quality of life of cancer patients,
especially by reversing the wasting process (cachexia) associated with cancer,
and in cancer treatment related fatigue syndrome. In November 2003, we retained
Dr. D'Olimpio as our "spokesperson at large." In this capacity, Dr. D'Olimpio
will be paid on an hourly basis to provide such services as requested, including
representing Advanced Viral at industry-wide and scientific conferences.
DR. HOWARD YOUNG currently serves on the staff of a cancer research
institute. He has been elected to serve as the Vice President of the
International Society for Interferon and Cytokine Research in 2002 and 2003 and
as President in
28
2004 and 2005. During 2001, Dr. Young was elected a fellow to the American
Academy of Microbiology. Dr. Young served as Chair of the Immunology Division of
the American Society for Microbiology from 1996-1997. Dr. Young has
authored/co-authored over 200 research papers in the field of cellular and
molecular immunology. Dr. Young is a member of the editorial boards of the
"Journal of Interferon and Cytokine Research," "The Journal of Biological
Chemistry, "Genes and Immunity," and served on the editorial board of "The
Journal of Immunology" from 1997-2001. Dr. Young is Editor-in-Chief of the
"Newsletter of the International Society of Interferon and Cytokine Research."
DR. SIDNEY PESTKA, a recipient of the National Medal of Technology for
2001, is currently Professor and Chairman of the Department of Molecular
Genetics, Microbiology and Immunology at New Jersey's Robert Wood Johnson
Medical School of the University of Medicine and Dentistry. Previously he was
Associate Director of the Roche Institute of Molecular Biology. His work in the
development of interferons, which are used clinically for treating a range of
diseases, including hepatitis B, multiple sclerosis and hairy cell leukemia, is
the basis of several U.S. and more than 100 foreign patents. Dr. Pestka was
inducted into the New Jersey Inventor's Hall of Fame in 1993. He has also
received the Selman Waksman Award in Microbiology and the Milstein Award from
the International Society for Interferon and Cytokine Research. He has served on
the National Cancer Institute's Breast Cancer Task Force, the Basic Pharmacology
Advisory Committee of the Pharmaceutical Manufacturers Association Foundation
and is secretary, and former President, of the International Society of
Interferon Research. Dr. Pestka received his undergraduate degree in chemistry
from Princeton University in 1957 and his medical degree from the University of
Pennsylvania School of Medicine in 1961. Over the past 30 years, he has
published several books and written more than 400 research articles for
prestigious peer-reviewed scientific journals.
PATENTS
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We have eight issued U.S. patents, some covering the composition of
AVR118 and others covering various uses of the AVR118. We have nine pending U.S.
patent applications and seventeen pending foreign patent applications. In
addition, we have two issued Australian patents and one issued Chinese patent
covering several uses of AVR118. During April 2002, under the terms of a
settlement agreement entered as part of a final judgment on March 25, 2002, we
were assigned all rights, title and interest in two issued U.S. patents
pertaining to Reticulose technology. As patent applications in the United States
are maintained in secrecy until published or patents issue and as publication of
discoveries in the scientific or patent literature often lag behind the actual
discoveries, we cannot be certain that we were the first to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. Furthermore, the patent positions
of biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.
In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of twenty years from the date of such
filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
our products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain marketing
exclusivity for a period of time following FDA approval of certain drug
applications, regardless of patent status, if the drug is a new chemical entity
or if new clinical studies were used to support the marketing application for
the drug. Pursuant to the FDA Modernization Act of 1997, the period of
exclusivity can be extended if the applicant performs certain studies in
pediatric patients. This marketing exclusivity prevents a third party from
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the period of time between the
filing of the NDA and FDA approval, with a five year maximum patent extension.
We cannot be sure that we will be able to take advantage of either the patent
term extension or marketing exclusivity provisions of this law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into
29
confidentiality agreements that prohibit the use or disclosure of information
that is deemed confidential. The agreements also oblige our employees,
consultants, advisors and collaborators to assign to us developments,
discoveries and inventions made by such persons in connection with their work
with us. We cannot be sure that confidentiality will be maintained or disclosure
prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with AVR118. Therefore, AVR118 and any other drug candidates may give rise to
claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.
MARKETING AND SALES
Except for limited sales of AVR118 for testing and other purposes,
AVR118 is not sold commercially anywhere in the world. To date, our efforts or
the efforts of our representatives have produced no material benefits to us
regarding our ability to have AVR118 sold commercially anywhere in the world. We
have entered into exclusive distribution agreements with four separate entities
granting exclusive rights to distribute AVR118 in the countries of Canada,
China, Japan, Hong Kong, Macao, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil and Chile. Pursuant to these agreements, the distributors are
obligated to cause AVR118 to be approved for commercial sale in such countries
and upon such approval, to purchase from us certain minimum quantities of AVR118
to maintain the exclusive distribution rights. Our marketing plans for AVR118
are still dependent upon registration of AVR118 for sale in various
jurisdictions. We have made no sales under the distribution agreements other
than for testing purposes.
To date we have received no information that would lead us to believe
that we will be positioned to sell AVR118 commercially anywhere in the world. On
July 30, 2001, we submitted an IND application to the FDA to begin Phase 1
clinical trials of AVR118 as a topical treatment for genital warts caused by the
human papilloma virus (HPV) infection. In September 2001, the FDA cleared the
IND application to begin Phase 1 clinical trials. In March 2002, Advanced Viral
completed a Phase 1 trial and submitted to the FDA the results, which indicated
that AVR118 was safe and well tolerated dermatologically in all the doses
applied in the study Due to limited financial resources, we currently are unable
to pursue the Phase 2 clinical trials.
Initially we targeted our sales and marketing efforts to those
countries where Reticulose was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes simplex
and herpes zoster. Those countries included Singapore, Hong Kong, Malaysia,
Taiwan, the Philippines and Malta. Registration of AVR118 will be required in
such countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. The registration of AVR118
for sale in these countries has been frustrated due to our inability to obtain
the registration and approval to sell AVR118 in the Bahamas, the country of
origin, and a general lack of published data on the effectiveness of AVR118.
Until AVR118 is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, we will not generate any material sales of AVR118.
For the years ended December 31, 2002, 2001 and 2000 and for the nine months
ended September 30, 2003, we reported no commercial sales except limited sales
for testing purposes. AVR118 is not legally available for commercial sale
anywhere in the world, except for testing purposes. See "--Research, Development
and Testing."
We currently produce bulk clinical trial batches for AVR118 in our
facility in Yonkers, New York under current Good Manufacturing Procedures (cGMP)
as set forth by the FDA. The FDA has not approved AVR118 for distribution or
sale in the United States, nor has it approved our Yonkers, New York facility.
30
COMPETITION
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop AVR118, it will compete with numerous
existing therapies. In addition, many companies are pursuing novel drugs that
target the same diseases we are targeting with AVR118. We believe that a
significant number of drugs are currently under development and will become
available in the future for the treatment of HIV, HPV, other viruses, cachexia
(body wasting) and rheumatoid arthritis. We anticipate that we will face intense
and increasing competition as new products enter the market and advanced
technologies become available. Our competitors' products may be more effective,
or more effectively marketed and sold, than AVR118. Competitive products may
render AVR118 obsolete or noncompetitive before we can recover the expenses of
developing and commercializing AVR118. Furthermore, the development of a cure or
new treatment methods for the diseases we are targeting could render AVR118
noncompetitive, obsolete or uneconomical. Many of our competitors:
- have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products;
- have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products; and
- have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe AVR118 should be added to such cocktails in order to
enhance their effectiveness and mitigate the toxic effects of other drugs used
to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.
Several products are currently marketed for the treatment of cachexia
(body wasting) included Megace(R) oral suspension manufactured by Bristol-Myers
Squibb and Serostim(R) (injectable human growth hormone) marketed by Serono
Laboratories Inc.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. AVR118, if approved for commercial sale by the FDA, would also
compete with surgical, chemical, and other methods of treating HPV. Products
developed by our competitors or advances in other methods of the treatment of
HPV may have a negative impact on the commercial viability of AVR118.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed Phase 3 trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for AVR118 as a treatment for rheumatoid arthritis.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for AVR118, we will face
competition based on the safety and effectiveness of AVR118, the timing and
scope of regulatory approvals, the availability of supply, marketing and sales
capability, reimbursement coverage, price, patent position and other factors.
Our competitors may develop or commercialize more effective or more affordable
products, or obtain more effective patent protection, than we do. Accordingly,
our competitors may commercialize products more rapidly or effectively than we
do, which could hurt our competitive position and adversely affect our business.
If and when we obtain FDA approval for AVR118, we expect to compete primarily on
the basis of product performance and price with a number of pharmaceutical
companies, both in the United States and abroad.
31
EMPLOYEES
We have 11 full-time employees, consisting of our President and Chief
Executive Officer, Chief Scientist, Chief Financial Officer, one employee
involved in operations, three employees responsible for quality assurance and
quality control, an assistant controller, a chief information officer and two
administrative employees. Dr. Hawkins, who will become our President and Chief
Executive Officer effective February 18, 2004, Dr. Hirschman, our Chief
Scientist, and Alan V. Gallantar, our Chief Financial Officer and Treasurer,
each devote all of their business time to our day-to-day business operations.
Eli Wilner, Secretary and Chairman of the Board of Directors, devotes as much
time to his duties as is reasonably necessary. Additionally, we may hire, as and
when needed, and as available, such sales and technical support staff and
consultants for specific projects on a contract basis. See "Management
- --Employment Contracts, Termination of Employment and Change-in-Control
Arrangements."
DESCRIPTION OF PROPERTY
We lease approximately 16,650 square feet for executive offices,
including research laboratory space and production area at 200 Corporate
Boulevard South, Yonkers, New York from an unaffiliated third party (the
"Yonkers Lease"). The term of the Yonkers Lease is five years through April 2005
and our annual rental obligation under the Yonkers Lease is approximately
$290,000.
The Bahamian manufacturing facility, which was acquired on December 16,
1987, is located in Freeport, Bahamas and consists of an approximate 29,000
square foot site containing a one-story concrete building of approximately 7,300
square feet and is equipped for all topical phases of the testing, production,
and packaging of bulk AVR118. We are currently negotiating the sale of the
Bahamian facility, after which sale we intend to manufacture AVR118 exclusively
at our facility in Yonkers, New York.
LEGAL PROCEEDINGS
We are not currently a party to any material litigation, nor, to the
knowledge of management, is any such litigation currently threatened.
32
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
COMMON STOCK
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 2002 and 2003, and for the first quarter of 2004 to date. The high
and low bid prices for the periods indicated reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions.
LOW BID HIGH BID
------- --------
First Quarter 2002.............................. $0.158 $0.285
Second Quarter 2002............................. $0.096 $0.300
Third Quarter 2002.............................. $0.112 $0.220
Fourth Quarter 2002............................. $0.065 $0.119
First Quarter 2003.............................. $0.054 $0.085
Second Quarter 2003............................. $0.064 $0.105
Third Quarter 2003.............................. $0.051 $0.078
Fourth Quarter 2003............................. $0.060 $0.279
First Quarter 2004 through February 9, 2004..... $0.121 $0.204
STOCKHOLDERS
The approximate number of holders of record of our common stock as of
February 10, 2004 is 3,367, inclusive of those brokerage firms and/or clearing
houses holding shares of common stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).
DIVIDEND POLICY
We have not declared or paid any dividends on our shares of common
stock. We intend to retain future earnings, if any, that may be generated from
our operations to finance our future operations and expansion and do not plan
for the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend on our
results of operations and financial position and such other factors as our board
of directors in its discretion deems relevant.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following information should be read in conjunction with the
consolidated financial statements of Advanced Viral and the notes thereto
appearing elsewhere in this filing. Statements in this Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in
this prospectus that are not statements of historical or current fact constitute
"forward-looking statements."
OVERVIEW
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of September 30, 2003 we had incurred a cumulative net loss of
$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.
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.
We are focusing 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.
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.
COSTS RELATING TO RESEARCH AND DEVELOPMENT EFFORTS
FROM YEAR 2000 TO SEPTEMBER 30, 2003
1ST Q 2ND Q 3RD Q
2003 2003 2003 YTD 2000-2003
COST CATEGORY 12/31/2000 12/31/2001 12/31/2002 COSTS COSTS COSTS SEP-03 TO DATE
------------- -------------- ------------ ---------- ------- ------- --------- --------- ----------
EnviroGene 625,838 298,809 298,809 99,603 697,221 1,323,059
Quintiles 52,226 44,061 15,877 14,331 74,269 126,495
Insurance Cost 3,359 10,076 10,076 10,076 30,228 33,587
Lab Costs 500 9,227 12,621 9,772 31,620 32,120
Yeda Research 118,000 80,000 40,000 40,000 238,000
Kaplan AIDS- Study - 25,875 25,875 51,750 51,750
Phase I (leukemia / lymphoma
Study) - -
COSTS GRAND
COST CATEGORY COMPLETE TOTAL
- -------------------------------- -------- ---------
EnviroGene 227,663 1,550,722
Quintiles 126,505 253,000
Insurance Cost 2,717 36,304
Lab Costs 67,977 100,097
Yeda Research 18,000 256,000
Kaplan AIDS- Study 120,750 172,500
Phase I (leukemia / lymphoma
Study) 210,000 210,000
34
1ST Q 2ND Q 3RD Q
2003 2003 2003 YTD 2000-2003
COST CATEGORY 12/31/2000 12/31/2001 12/31/2002 COSTS COSTS COSTS SEP-03 TO DATE
------------- -------------- ------------ ---------- ------- ------- --------- --------- ----------
Phase I (solid tumor Study) - -
R &D Consulting Services Israel 82,314 32,446 32,446 114,760
Selikoff Center - Israel 115,000 127,000 - 242,000
Israel Clinical Trial batch
costs 96,173 96,173
R & D - Supplies - Israel
Studies 294,706 294,706
R & D -Regulatory Consultants -
GloboMax for Israel Trials 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
R & D Travel Expenses - Israel
Clinical Trials 3,661 4,153 1,230 9,922 487 2,550 12,959 22,003
----------------------------------------------------------------------------------------------
TOTAL ISRAEL CLINICAL TRIALS 3,661 237,153 4,393,904 442,649 389,100 219,586 1,051,335 5,686,054
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
R&D ARGENTINA CLINICAL STUDIES 242,586 10,582 - 253,168
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
R&D UNIVERSITY STUDIES IN U.S. 35,107 15,261 15,261 50,368
----------------------------------------------------------------------------------------------
R&D - GloboMax 1,250,000 2,682,828 3,932,828
R&D - Lab Supplies IND
Application Studies 327,601 407,699 - 735,300
R&D Salary & Facility
allocations (NY) for IND
Application Studies 1,368,703 1,823,189 - 3,191,892
----------------------------------------------------------------------------------------------
Total U.S. Clinical Trial
expenses for IND FDA submission 2,946,304 4,913,716 - 7,860,020
----------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------
TOTAL RESEARCH AND DEVELOPMENT
EXPENSE 3,192,551 5,150,89 4,439,592 457,910 389,100 219,586 1,066,596 13,849,609
==============================================================================================
COSTS GRAND
COST CATEGORY COMPLETE TOTAL
- -------------------------------- -------- ---------
Phase I (solid tumor Study) 219,000
R &D Consulting Services Israel - 114,760
Selikoff Center - Israel - 242,000
Israel Clinical Trial batch
costs - 96,173
R & D - Supplies - Israel
Studies - 294,706
R & D -Regulatory Consultants -
GloboMax for Israel Trials - 904,476
R & D Salary & Facility
allocations (New York) for
Israel Clinical Trials - 2,206,924
R & D Travel Expenses - Israel
Clinical Trials - 22,003
-------------------
TOTAL ISRAEL CLINICAL TRIALS 429,000 881,933
-------------------
-------------------
R&D ARGENTINA CLINICAL STUDIES - 253,168
-------------------
-------------------
R&D UNIVERSITY STUDIES IN U.S. 50,368
-------------------
R&D - GloboMax - 3,932,828
R&D - Lab Supplies IND
Application Studies - 735,300
R&D Salary & Facility
allocations (NY) for IND
Application Studies - 3,191,892
-------------------
Total U.S. Clinical Trial
expenses for IND FDA submission - 7,860,020
-------------------
-------------------
TOTAL RESEARCH AND DEVELOPMENT
EXPENSE 429,000 9,045,488
===================
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. In February 2004, we entered
into an agreement with James Dicke II and his son James Dicke III, whereby we
agreed to sell an aggregate of 120 million shares of our common stock and
warrants to purchase 15 million shares of our common stock for an aggregate
purchase price of $12 million. Pursuant to the agreement, the funding shall take
place in four equal stages of $3 million each, once every 90 days with the first
$3 million funding having occurred on February 5, 2004. We anticipate that we
can continue operations for the next 12 months with our current liquid assets,
if none of our outstanding options or warrants are exercised or additional
securities sold.
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
35
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. Our deficit accumulated during the
development stage was reduced by $2,039,574 for the year ended December 31,
2002. Our deficit accumulated during the development stage was increased by
$1,019,153 at September 30, 2003. The restatement did not impact our net cash in
investing and financing activities and net cash used in operating activities
remained unchanged, however, certain components within operating activities
consisting of amortization of deferred interest cost, discount on warrants and
compensation expense for options and warrants, were restated for the 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 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
36
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 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.
37
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.
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 million 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)
38
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
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 11 employees as follows:
Interim President, 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 (2)
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2001
The accompanying financial statements for the years ended December 31,
2002, 2001 and 2000 have been restated to reflect changes in accounting for
warrants issued in connection with equity transactions as well as options issued
to the Board of Directors and employees (on a pro-forma basis only) and our
advisory board. The restatement resulted in income which reduced the previously
reported net loss for 2002, 2001 and 2000 by approximately $1,021,000, $629,000,
and $538,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. Our deficit accumulated
during the development stage was reduced by $2,039,574, $1,018,304, and $389,303
at December 31, 2002, 2001 and 2000, respectively. The restatement did not
impact our net cash in investing and financing activities and net cash used in
operating activities remained unchanged However, certain components within
operating activities consisting of amortization of deferred interest cost,
discount on warrants and compensation expense for options and warrants, were
restated.
39
During the years ended December 31, 2002 and 2001 we incurred losses
from continuing operations of approximately $9,120,000 and $10,827,000,
respectively. Our losses for the years ended December 31, 2002 and 2001 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $2,654,000 and $4,063,000 in 2002 and 2001,
respectively. General and administrative expenses decreased by approximately
$1,409,000 in 2002 compared to 2001, resulting primarily from:
- decreased payroll and related expenses (approximately
$866,000 in 2002 compared to increases of $1,039,000 in
2001). The decrease in 2002 was primarily attributable to a
reduction in personnel from 33 to 10 employees as a cost
cutting measure;
- increased insurance costs (approximately $564,000 in 2002
compared to $412,000 in 2001) representing increased
premiums for employee medical insurance and additional
corporate liability insurance including directors and
officers liability coverage; and
- decreased professional fees (approximately $501,000 in 2002
compared to $1,431,000 in 2001); and
- decreased consulting fees (approximately $34,000 in 2002
compared to $212,000 in 2001). This decrease is primarily
due to lower outside computer consultant costs; and
- decreased recruiting expenses (approximately $7,000 in 2002
compared to $135,000 in 2001). The 2001 expense was for the
hiring of new employees.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS.
Compensation expense was approximately $884,000 in 2002, compared to $1,048,000
in 2001 and $1,902,000 in 2000. These amounts are the result of the calculation
of the fair value of options, using the Black-Scholes Pricing Model, resulting
from extending the exercise date of various non-employee options outstanding of
$476,000, $691,000 and $1,902,000 in 2000, respectively, and the amortization of
warrant costs relating to private equity line of credit issued in 2001 using the
Black-Scholes Pricing Model of $408,000 and $357,000, respectively.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
was approximately $4,440,000 in 2002, compared to $5,151,000 in 2001. The
decrease from 2001 to 2002 resulted primarily from research expenses
(approximately $1,778,000) relating to the GloboMax agreement in connection with
the preparation of our first IND filing and offset by an increase of
approximately $749,000 for research expenditures relating to research and
testing of AVR118 in Israel. The approximate costs of rent, personnel, operating
costs and laboratory supplies associated with research and development
activities at the Yonkers facility for the years ended 2002 and 2001, which were
charged to research and development expense, were $2,467,000 and $2,230,000,
respectively.
DEPRECIATION EXPENSE. Depreciation expense was approximately
$978,000 in 2002 compared to $511,000 in 2001. In addition, leasehold
improvements were made to the laboratory and production areas during 2002 and
2001. The increase in 2002 over 2001 resulted from equipment and leasehold
improvements acquired during 2002 and full year's depreciation expense recorded
in 2002 for 2001 additions.
INTEREST EXPENSE. Interest expense for the years ended 2002 and 2001
was approximately $(192,000) and $117,000, respectively. Included in interest
expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $89,000 and $0 for the years
ended 2002 and 2001, respectively;
- interest expense associated with certain convertible
debentures of approximately $43,000 and $0 for the years
ended 2002 and 2001, respectively;
- amortization of loan costs of approximately $34,000 and
$15,000 for the years ended 2002 and 2001, respectively;
- additional financing costs related to effective date of
certain registration statements of approximately $286,000 in
1999 (of which approximately $156,000 was reversed in 2001).
40
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and Advanced Viral.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations
for the years ended 2002 and 2001 was approximately $9,120,000 and $10,827,000,
respectively. The decrease from 2002 to 2001 resulted primarily from a reduction
in general and administrative expenses due to a reduction in legal fees due to
the settlement of litigation during 2001 and a reduction of personnel during
2002 from 33 to 10 employees.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued
operations for the years ended 2002 and 2001 was approximately $201,000 and
$259,000, respectively, relating to losses from our 99% owned subsidiary,
Advance Viral Research Ltd.
REVENUES. There were approximately $0 and $18,000 in sales revenue
in 2002 and 2001, respectively. All sales revenue resulted from purchases of
AVR118 for testing purposes. Interest income was approximately $28,000 and
$114,000 in 2002 and 2001, respectively.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2000
During the years ended December 31, 2001 and 2000 we incurred losses
from continuing operations of approximately $10,827,000 and $8,592,000,
respectively. Our losses for the years ended December 31, 2001 and 2000 were
attributable primarily to:
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $4,063,000 and $2,414,000 in 2001 and 2000,
respectively. General and administrative expenses increased by $1,649,000 in
2001 compared to 2000, resulting primarily from:
- increased payroll and related expenses (increases of
$1,039,000 in 2001 and $717,000 in 2000). The increase in
2001 and 2000 was primarily attributable to increased
employee and officer salaries and the addition of two vice
presidents for drug development and quality assurance in
2001;
- increased insurance costs (approximately $412,000 in 2001
and $299,000 in 2000) representing increased premiums for
employee medical insurance and additional corporate
liability insurance including directors and officers
liability coverage; and
- increased professional fees (approximately $1,431,000 in
2001 and $385,000 in 2000). The increase in 2001 is
primarily attributable to certain legal proceedings the cost
of which was approximately $953,000 in 2001; and
- decreased consulting fees (approximately $212,000 in 2001
and $305,000 in 2000). This decrease is primarily due to
lower outside computer consultant costs; and
- increased recruiting expenses (approximately $135,000 in
2001 compared to $12,000 in 2000). The 2001 expense was for
the hiring of new employees.
COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS.
Compensation expense was approximately $1,048,000 and $1,902,000 in 2001 and
2000, respectively. These amounts are the result of the calculation of the fair
value of options, using the Black-Scholes Pricing Model, resulting from
extending the exercise date of various non-employee options outstanding of
$691,000 and $1,902,000 respectively. In 2001, approximately $357,000 of
amortization of warrant costs relating to a private equity line of credit was
incurred.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
was approximately $5,151,000 and $3,193,000 in 2001 and 2000, respectively. The
increase from 2000 to 2001 resulted primarily from research expenses related to
the GloboMax agreement of approximately $1,417,000. The approximate costs of
rent, personnel, operating costs and laboratory supplies associated with
research and development activities at the Yonkers facility for the years ended
2001 and 2000, which were charged to research and development expense, were
$2,230,000 and $1,696,000, respectively.
41
DEPRECIATION EXPENSE. Depreciation expense was approximately
$511,000 and $346,000 in 2001 and 2000, respectively. The increase from 2000 to
2001 resulted primarily from the acquisition of furniture, fixtures and
equipment for the Yonkers office, laboratory and production facility. In
addition, leasehold improvements were made to the laboratory and production
areas during 2001 and 2000.
INTEREST EXPENSE. Interest expense for the years ended 2001 and 2000
was approximately $117,000 and ($908,000), respectively. Included in interest
expense for these periods was:
- the beneficial conversion feature on certain convertible
debentures of approximately $0, and $395,000 for the years
ended 2001 and 2000, respectively;
- interest expense associated with certain convertible
debentures of approximately $0 and $76,000 for the years
ended 2001 and 2000, respectively;
- amortization of discount on certain warrants of
approximately $0 and $64,000 for the years ended 2001 and
2000, respectively;
- amortization of loan costs of approximately $15,000 and
$106,000 for the years ended 2001 and 2000, respectively;
- fees of approximately $265,000 in connection with the
November 2000 securities purchase agreement with various
investors;
- additional financing costs related to the effective date of
certain registration statements of approximately $286,000 in
1999 (of which approximately $156,000 was reversed in 2001).
SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and Advanced Viral.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations
for the years ended 2001 and 2000 was approximately $10,827,000 and $8,592,000,
respectively.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued
operations for the years ended 2001 and 2000 was approximately $259,000 and
$224,000, respectively, relating to losses from our 99% owned subsidiary,
Advance Viral Research Ltd.
REVENUES. There were approximately $18,000 in sales revenue in 2001,
compared to $8,000 in sales revenues for 2000. All sales revenue resulted from
purchases of AVR118 for testing purposes. Interest income was approximately
$114,000 in 2001, compared to approximately $162,000 in 2000.
LIQUIDITY
AS OF SEPTEMBER 30, 2003 AND SEPTEMBER 30, 2002
As of September 30, 2003, we had current assets of approximately
$1,199,000 compared to approximately As of September 30, 2003, we had current
assets of approximately $1,199,000 compared to approximately $1,770,000 as of
December 31, 2002. We had total assets of approximately $4,006,000 and
$4,946,000 at September 30, 2003 and December 31, 2002, respectively. The
decrease in current and total assets was primarily attributable to less cash on
hand resulting from the use of cash for funding operating expenditures. As of
September 30, 2003, we had current liabilities of approximately $896,000
compared to approximately $685,000 as of December 31, 2002. The increase in
current liabilities was primarily attributable to limited funds available to pay
our accounts payable.
During the nine months ended September 30, 2003, we used cash of
approximately $3,419,000 for operating activities, as compared to approximately
$6,779,000 during the nine months ended September 30, 2002. During the nine
months ended September 30, 2003, our expenses included:
- approximately $877,,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;
42
- 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.
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 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:
43
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------
LESS THAN MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 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
AS OF DECEMBER 31, 2002 AND DECEMBER 31, 2001
As of December 31, 2002, we had current assets of approximately
$1,770,000, compared to approximately $1,752,000 at December 31, 2001. We had
total assets of approximately $4,946,000 and $5,449,000 at December 31, 2002 and
2001, respectively. Total asset levels did not change materially but total
assets declined due to the increase in fixed asset depreciation for property and
equipment acquisitions.
During 2002, we used cash of approximately $8,701,000 for operating
activities, as compared to approximately $8,577,000 in 2001. During 2002, we
incurred expenses of:
- approximately $2,809,000 for payroll and related costs primarily
for administrative staff, scientific personnel and executive
officers;
- approximately $904,000 in consulting fees to GloboMax and its
subcontractors;
- approximately $395,000 for rent and utilities for our Yonkers
facility;
- approximately $295,000 for laboratory supplies;
- approximately $986,000 in expenditures on AVR118 research in
Israel;
- approximately $573,000 for insurance costs and approximately
$501,000 for other professional fees.
During the year ended December 31, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $7,114,000 and $2,000,000 in convertible debentures,
offset by principal payments of approximately $169,000 on equipment obligations.
This compares to the year ended December 31, 2001 where funds of approximately
$5,783,000 were provided by the sale of common stock offset by principal
payments of approximately $80,000 on equipment obligations.
During the year ended December 31, 2002, cash flow used by investing
activities were used for expenditures of approximately $268,000 for leasehold
improvements and research and laboratory equipment at our Yonkers, New York
facility.
44
The following table shows total contractual payment obligations as of
December 31, 2002.
TOTAL CONTRACTUAL OBLIGATIONS TABLE:
PAYMENTS DUE BY PERIOD
--------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ----------------------------- ---------- --------- ---------- --------- ---------
Long-Term Debt Obligations $1,688,275 $ 25,165 $1,663,110 $ 0 $ 0
Capital Lease Obligations $ 110,553 $ 104,719 $ 5,834 $ 0 $ 0
Operating Lease Obligations $ 703,000 $ 299,000 $ 404,000 $ 0 $ 0
Purchase Obligations $ 0 $ 0 $ 0 $ 0 $ 0
Other Long-Term Liabilities $ 0 $ 0 $ 0 $ 0 $ 0
Reflected on the Registrant's
Balance Sheet under GAAP
Total $2,501,828 $ 428,884 $2,072,944 $ 0 $ 0
CAPITAL RESOURCES
We have and continue to be dependent upon the proceeds from the
continued sale of securities for the funds required to continue operations at
present levels and to fund further research and development activities. The
following table summarizes sales of our securities over the last two years.
PURCHASE PRICE/
CONVERSION
GROSS CONVERTIBLE/ PRICE/ EXPIRATION
DATE ISSUED PROCEEDS SECURITY ISSUED EXERCISABLE INTO EXERCISE PRICE DATE
- ------------ ----------- --------------------- ---------------------------- ---------------- -----------
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 $ 562,000 Common stock 7,337,500 shares $0.08 per share n/a
2003
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 (7) $0.091 per share 4/2008
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 debenture 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
Jan 2004 $ 1,000,000 Convertible debenture 12,500,000 shares (8) 1/2009
Jan 2004 $ 325,000 Common stock 2,166,666 shares $0.15 per share n/a
Warrants 931,666 shares $0.19 per share 1/2009
Feb 2004 $ 3,000,000 Common stock 30,000,000 shares $0.10 per share
Warrants 15,000,000 shares $0.20 per share 2/2007
Feb 2004 n/a Warrants 5,000,000 $0.16 per share 2/2009
- ---------------
45
(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 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.
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 million 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 million 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 February 10, 2004, principal and
interest on the debentures in the amount of $1,665,466 had been converted into
14,260,468 shares of our common stock.
On September 10, 2002, we issued and sold an aggregate of 21,500,000
shares of our common stock pursuant to a securities purchase agreement with the
investors listed below for total proceeds of approximately $3,010,000, or $0.14
per share, along with warrants to purchase 16,125,000 shares of our common stock
at an exercise price of $0.25 per share, subject to adjustment, as described
below, in a private offering transaction pursuant to Section 4(2) of the
Securities Act.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
- ------------------------------- -------------- ---------- ----------
SDS Merchant Fund, LP $ 900,000 6,428,571 4,821,429
Stonestreet Limited Partnership 750,000 5,357,143 4,017,857
01144 Ltd. 100,000 714,286 535,714
Bristol Investment Fund Ltd. 400,000 2,857,143 2,142,857
Alpha Capital 500,000 3,571,429 2,678,571
Xmark Fund, Ltd. 154,000 1,100,000 825,000
Xmark Fund, L.P. 56,000 400,000 300,000
RIG MicroCap Fund LP 100,000 714,286 535,714
Richard Melnick 50,000 357,143 267,857
------------ ---------- ----------
$ 3,010,000 21,500,000 16,125,000
In addition, pursuant to a placement agent agreement with H.C.
Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and
issued to HCW 1,032,000 shares of our common stock. An adjustment provision in
the warrants provided that at 60 and 120 trading days following the original
issue date of the warrants, a certain number of
46
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 of an aggregate (i) approximately $98,095 and (ii) warrants
to purchase 1,246,500 shares of our common stock. All of the aforementioned
warrants are exercisable at $0.12 per share commencing six months after the
closing date of the agreement, for a period of five years. As of the date
hereof, none of such warrants had been exercised.
INVESTOR NAME PURCHASE PRICE SHARES WARRANTS
- --------------------------- -------------- ---------- ----------
Frank Vigliarolo $ 50,000 625,000 375,000
Keith Leonard $ 50,000 625,000 375,000
Edward & Linda Gorkes $ 200,000 2,500,000 1,500,000
Russell Kuhn (Parkside) $ 100,000 1,250,000 750,000
Larry Pomerantz $ 50,000 625,000 375,000
Michael Berman $ 50,000 625,000 375,000
Ira Kent $ 8,000 100,000 60,000
Frederick Cohen $ 8,000 100,000 60,000
Gerald Director $ 8,000 100,000 60,000
Allen & Barbara Ross $ 8,000 100,000 60,000
Alan Halpert $ 16,000 200,000 120,000
Leonard Cohen $ 24,000 300,000 180,000
Barry L. Johnston TR $ 24,000 300,000 180,000
Todd & Lynda Cohen $ 40,000 500,000 300,000
Henry E. & Dixie Cartwright $ 40,000 500,000 300,000
Benjamin H. Kirsch $ 150,000 1,875,000 1,125,000
Gene Cartwright $ 60,000 750,000 450,000
Beth & Elliot Bauer $ 74,000 925,000 555,000
Gerald Smallberg $ 16,000 200,000 120,000
Leonard Cohen $ 32,000 400,000 240,000
David Sass $ 50,000 625,000 375,000
Beth and Elliot Bauer $ 42,000 525,000 315,000
Larry Pomerantz $ 50,000 625,000 375,000
Frank Smith $ 25,000 312,500 187,500
Russell & Jean Kuhn $ 25,000 312,500 187,500
Charles & Janet Ernst $ 25,000 312,500 187,500
Dorothy Christofides $ 32,000 400,000 240,000
Edward & Linda Gorkes $ 50,000 625,000 375,000
Pomerantz Trust $ 30,000 375,000 225,000
Russell Kuhn $ 50,000 625,000 375,000
Frederick Lutz $ 25,000 312,500 187,500
Dean Skillman $ 50,000 625,000 375,000
Harbor View Group $ 25,000 312,500 187,500
Phillip Brennan $ 25,000 312,500 187,500
47
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 2007, for an aggregate purchase price of $25,000. In connection with the
transaction, we paid a finders' fee to Harbor View Group consisting of warrants
to purchase 15,625 shares of our common stock at an exercise price per share of
$0.12 until April 2004.
On April 28, 2003, we entered into an Equity Line of Credit Agreement
with Cornell in a private offering transaction pursuant to Section 4(2) of the
Securities Act. The equity line agreement provides, generally, that Cornell has
committed to purchase up to $50 million of our common stock over a three-year
period, with the timing and amount of such purchases, if any, at our discretion,
provided, however, that the maximum amount of each advance is $500,000, and the
date of each advance shall be no less than six trading days after our
notification to Cornell of its obligation to purchase shares. Any shares of
common stock sold under the equity line will be priced at the lowest closing bid
price of our common stock during the five consecutive trading days following our
notification to Cornell requesting an advance under the equity line. In
addition, at the time of each advance, we are obligated to pay Cornell a fee
equal to five percent (5%) of the amount of each advance. However, Cornell's
obligation to purchase and our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
price we set on the advance notice date, the minimum acceptable price, which may
not be set any closer than 7.5% percent below the closing bid price of the
common stock the day prior to the date we notify Cornell of its obligation to
purchase shares. In addition, there are certain other conditions applicable to
our ability to draw down on the equity line including the filing and
effectiveness of a registration statement registering the resale of all shares
of common stock that may be issued to Cornell under the equity line and our
adherence with certain covenants. There can be no assurance of the amount of
proceeds we will receive, if any, under the equity line of credit with Cornell.
For its services as placement agent, Katalyst Securities LLC received 107,527
shares of our common stock, which was valued at $10,000. Katalyst Securities may
be deemed to be an underwriter in connection with the sale of common stock under
the Equity Line of Credit.
On April 28, 2003 we entered into a securities purchase agreement with
Cornell Capital, in a private offering transaction pursuant to Section 4(2) of
the Securities Act, to sell up to $2,500,000 of our 5% convertible debentures,
due April 28, 2008, $1 million of which was purchased on April 28, 2003;
$500,000 of which was purchased on July 18, 2003; and $1 million of which was
purchased on January 8, 2004. 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. 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 million 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 million shares of our common stock exercisable for 5 years at an
exercise price of $0.091. The warrant became exercisable on October 28, 2003.
48
49
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 million
of our 5% secured convertible debentures, due July 17, 2008. Pursuant to the
agreement, Cornell Capital received a 10% discount to the purchase price of the
convertible debentures purchased. The convertible debentures are secured by the
assets of Advanced Viral until 50 days after the effectiveness of the
registration statement of which this prospectus is a part. Pursuant to the terms
of the agreement, commencing October 18, 2003, Cornell Capital may convert the
debenture plus accrued interest, (which may be taken at Cornell Capital's option
in cash or common stock), in shares of our common stock at a conversion price
equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of
our common stock for the four trading days immediately preceding the conversion
date. No more than $600,000 may be converted in any thirty-day period. 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 million
shares of our stock for every $100,000 redeemed. The warrant shall be
exercisable on a cash basis and have an exercisable price of the higher of 110%
of the closing bid price of our common stock on the closing date or $0.08. The
warrant shall have "piggy back" registration rights and shall survive for 5
years from the closing date.
Our obligations under the convertible debentures and the April and July
Agreements were secured by a first priority security interest in substantially
all of its assets. Pursuant to the agreements, this security interest terminates
upon Advanced Viral receiving $3 million of capital in any form other than
through the issuance of free-trading shares of our common stock from sources
other than Cornell Capital.
As of September 30, 2003, principal on the Cornell convertible
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 January 13, 2003, Cornell converted
$700,000 principal amount plus interest of $51,000 on the convertible debentures
into 9,387,500 shares of common stock at a conversion price of $0.08 per share.
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.
50
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
Harbor View 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 Levitt $ 25,000 500,000 250,000
Barry & Marci Mainzer $ 15,000 300,000 150,000
Gerald S. Schuster $ 40,000 800,000 400,000
Roberta Schwartz $ 25,000 500,000 250,000
Avraham Sibony $ 50,000 1,000,000 500,000
Alice Smith $ 25,000 500,000 250,000
R. Frank Smith, Jr. $ 5,000 100,000 50,000
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, custodian for Cameron 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
In January 2004, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 2,166,666 shares of our common stock and warrants to purchase up to
758,334 shares of our common stock, for an aggregate purchase price of $325,000,
or $0.15 per share, pursuant to securities purchase agreements with certain
purchasers. In connection with the agreements, we paid finders' fees to Harbor
View Group consisting in the aggregate of (i) approximately $26,000 and (ii)
warrants to purchase 173,333 shares of our common stock. All of the
aforementioned warrants are exercisable at $0.19 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
- -------------------- -------------- --------- --------
Dorothy Christofides 45,000 300,000 105,000
Steven Levitt 50,000 333,333 116,667
Xiao Yuan Tang 150,000 1,000,000 350,000
Frank Viglianolo 80,000 533,333 186,667
-------- --------- --------
TOTAL $325,000 2,166,666 758,334
On February 3, 2004, we entered into an agreement with James Dicke II
and his son James Dicke III, whereby we agreed to sell an aggregate of 120
million shares of our common stock and warrants to purchase 15 million shares of
our common stock for an aggregate purchase price of $12 million. Pursuant to the
agreement, the funding shall take place in four equal stages of $3 million each,
once every 90 days with the first $3 million funding having occurred on February
5, 2004. There are no conditions precedent to the investors' obligation to
close other than the accuracy of our representations and warrants and our
compliance with the agreement. The warrants have an exercise price of $0.20 per
share and are exercisable at any time through February 2, 2007. In addition, we
granted demand and piggyback registration rights to the investors for the shares
issued or issuable in connection with the transaction pursuant. James F. Dicke
II is the Chairman and CEO of Crown Equipment Corporation and a former member of
our Board of Directors.
On February 9, 2004, we entered into a termination and release
agreement with DCT, S.R.L. and certain of its affiliates pursuant to which
pursuant to which a distribution agreement and various testing agreements with
DCT, along with any and all distribution rights and rights to royalties or fees
thereunder, were terminated. In addition, the agreement provides that any and
all intellectual property rights relating to the terminated agreements were the
property of Advanced Viral, and
51
the parties released each other from claims relating thereto. In consideration,
we agreed to pay DCT $60,000 and granted warrants to purchase an aggregate of 5
million shares of our common stock to certain of DCT's affiliates at an exercise
price of $0.16 for a period of five years. In addition the recipients of the
warrants agreed not to sell more than an aggregate of 2 million shares of our
common stock in any six-month period for a period of five years.
WARRANT
WARRANT HOLDER SHARES
- --------------- ---------
Cesar Blumtritt 1,880,000
Alfredo Velez 2,400,000
Bruce Knef 200,000
David Duffy 300,000
Arthur Hawkins 150,000
Mayer Gattegno 70,000
OUTSTANDING SECURITIES
As of the date of this prospectus, in addition to the 589,633,458
shares of our common stock currently outstanding, we have: (i) outstanding stock
options to purchase an aggregate of approximately 146.7 million shares of common
stock at exercise prices ranging from $0.052 to $0.36, of which approximately
99.2 million are currently exercisable; (ii) outstanding warrants to purchase an
aggregate of approximately 93.1 million shares of common stock at prices ranging
from $0.091 to $1.00, all of which warrants are currently exercisable; (iii)
approximately 16.5 million shares of common stock underlying certain outstanding
convertible debentures; and (iv) an aggregate of 90 million shares to be sold in
three fundings by November 3, 2004 pursuant to a securities purchase agreement.
The foregoing does not include shares issuable pursuant to the Equity Line of
Credit Agreement with Cornell Capital.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $53.5 million,
and we would have approximately 935.8 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of the common
stock. Additionally, the sale or availability for sale of this number of shares
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 anticipate that we can continue operations for the next 12 months
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 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' 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
52
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. In February 2004, we entered into an agreement with
James Dicke II and his son James Dicke III, whereby we agreed to sell an
aggregate of 120 million shares of our common stock and warrants to purchase 15
million shares of our common stock for an aggregate purchase price of $12
million. Pursuant to the agreement, the funding shall take place in four equal
stages of $3 million each, once every 90 days with the first $3 million funding
having occurred on February 5, 2004. We anticipate that we can continue
operations for the next 12 months with our current liquid assets, if none of our
outstanding options or warrants are exercised or additional securities sold.
CRITICAL ACCOUNTING POLICIES
OTHER ASSETS
Patent development costs are capitalized as incurred. Such costs will
be amortized over the life of the patent, commencing at the time AVR118 is
marketed. Loan costs include fees paid in connection with the February 2001
private equity line of credit agreement and are being amortized over the life of
the agreement.
STOCK-BASED COMPENSATION
Advanced Viral has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, in accounting for its employee stock options rather
than the alternative fair value accounting allowed by SFAS No. 123, Accounting
for Stock-Based Compensation. APB No. 25 provides that the compensation expense
relative to Advanced Viral's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro-forma disclosure of the impact of
applying the fair value method of SFAS No. 123. Advanced Viral follows SFAS No.
123 in accounting for stock options issued to non-employees.
RECENT ACCOUNTING PRONOUNCEMENTS
During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 will not have any impact on our
operating results or financial position as we do not have any derivative
instruments that are affected by SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity." SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 did not have any impact on our operating
results or financial position as we do not have any financial instruments with
characteristics of both liabilities and equity that are not already classified
as liabilities.
53
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
accounting for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. Advanced Viral is not a guarantor
under any significant guarantees and thus this interpretation is not expected to
have a significant effect on Advanced Viral's financial position or results of
operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS 123.
The standard provides additional transition guidance for companies that
voluntarily elect to adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. SFAS 148 does not change the provisions of SFAS 123
that permits entities to continue to apply the intrinsic value method of APB 25,
Accounting for Stock Issued to Employees. As Advanced Viral continues to follow
APB 25, its accounting for stock-based compensation will not change as a result
of SFAS 148. SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are effective
immediately and have been included in Advanced Viral's consolidated financial
statements. The new interim disclosure provisions will be effective in the first
quarter of 2003.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. Advanced Viral does not
expect the adoption of this standard to have any impact on its financial
position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 is effective for fiscal years beginning after May 15,
2002. Advanced Viral has not determined the impact that SFAS 145 will have, if
any, on its financial statements.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 supersedes Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30, Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
for the disposal of a segment of a business. SFAS 144 retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. Advanced Viral adopted SFAS 144 on January 1, 2002.
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets which replace Accounting
Principles Board Opinion Nos. 16, Business Combinations and 17, Intangible
Assets, respectively. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001,
and that the use of the pooling-of-interests method be prohibited. SFAS No. 142
changes the accounting for goodwill from an amortization method to an
impairment-only method. Amortization of goodwill, including goodwill recorded in
past business combinations, will cease upon adoption of SFAS No. 142, which
Advanced Viral will be required to adopt on January 1, 2002. After December 31,
2001, goodwill can only be written down upon impairment discovered during annual
tests for fair value, or discovered during tests taken when certain triggering
events occur. Advanced Viral adopted SFAS 142 on January 1, 2002 and there was
no impact on the results of operations or financial position of Advanced Viral.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation - an Interpretation of APB Opinion No. 25 (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues,
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequences of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. Advanced Viral
adopted FIN 44 in the third quarter of 2000 and there was no material impact on
Advanced Viral's results of operations or financial position.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of SFAS No. 133 an Amendment of SFAS No. 133,
54
which deferred the effective date to all fiscal quarters of all fiscal years
beginning after June 15, 2000. Historically, Advanced Viral has not entered into
derivatives contracts to hedge existing risks or for speculative purposes.
Adoption of the new standard on January 1, 2001 had no effect on the financial
statements.
CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS
There have been no changes to, or disagreements with, our accountants,
Rachlin Cohen & Holtz LLP, during the past two fiscal years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Advanced Viral does not own any securities or instruments subject to
market risk for which disclosure is required.
MANAGEMENT
DIRECTORS AND OFFICERS
Our directors and executive officers, their respective ages, and their
positions held with us are as follows:
NAME AGE POSITION
- ---- --- --------
Elma S. Hawkins, Ph.D. 47 President, Chief Executive Officer, Director *
Eli Wilner 48 President, Chief Executive Officer, Secretary and Chairman of the Board *
Alan V. Gallantar 45 Chief Financial Officer and Treasurer
David Seligman 64 Director
Nancy J. Van Sant 53 Director
Roy S. Walzer 55 Director
- ---------------------------------
* Effective February 18, 2004, Dr. Hawkins will succeed Mr. Wilner as President
and Chief Executive Officer of Advanced Viral.
The following is certain summary information with respect to the
directors and executive officers of Advanced Viral. There are no family
relationships between or among the directors, executive officers or any other
person. None of Advanced Viral's directors or executive officers is a director
of any company that files reports with the SEC. None of the Advanced Viral's
directors have been involved in any bankruptcy or criminal proceeding (excluding
traffic or other minor offenses), nor has been enjoined from engaging in any
business.
Dr. Elma Hawkins, who will be our President and Chief Executive Officer
commencing February 18, 2004 and has been a member of our Board of Directors and
Executive Management Committee since December 9, 2003, was Vice Chairman of
Antigenics Inc., a publicly traded biotechnology company from 1996 to February
2004. Prior to joining Antigenics in 1996 as Chief Operating Officer, Dr.
Hawkins served in a number of senior positions with Genzyme Corporation and its
affiliates, including Director of Corporate Development and Director of Clinical
and Regulatory Affairs. Dr. Hawkins has also held positions in preclinical and
clinical research at Warner-Lambert/Parke-Davis and at the Center for the Study
of Drug Development at Tufts Medical School. Dr. Hawkins holds a Ph.D. in
medicinal chemistry from the University of Alabama and an M.B.A. from Boston
University.
Eli Wilner, our Secretary and Chairman of the Board of Directors, has
been a director since December 2001, Chairman of the Board since May 2002 and
President and Chief Executive Officer from August 2003 to February 2004. He is
the founder and CEO of Eli Wilner & Company, a New York City art gallery
established in 1983, and is also a leading frame dealer, restorer, collector and
published author. Mr. Wilner was a Bryant Fellows Member of the Metropolitan
Museum of Art in New York City from 1990 to 2000 and since 1990 has been a
member of the Forum and Director's Circle
55
of the National Museum of American Art in Washington, D.C. Mr. Wilner is a
graduate of Brandeis University, where he received his B.A. in Fine Arts in
1976, and Hunter College, where he received his M.A. in 1978.
Alan V. Gallantar has been Chief Financial Officer since October 1999
and Treasurer since December 2001. Mr. Gallantar was treasurer and controller
from 1998 to 1999 of AMBI, Inc., a nutraceutical company, senior vice president
and chief financial officer from 1992 to 1997 of Bradley Pharmaceuticals, Inc.,
a pharmaceutical manufacturer, and vice president and divisional controller from
1989 to 1991 for PaineWebber Incorporated. From 1985 to 1989, Mr. Gallantar was
second vice president at The Chase Manhattan Bank, N.A., and from 1983 to 1985,
was a senior accountant at Philip Morris Incorporated. From 1979 to 1983, Mr.
Gallantar was a senior accountant in the audit department of Deloitte & Touche.
David Seligman, a director since December 2001, is a partner and
founder of the Law Office of David Seligman, established in 1995. Since 1997,
Mr. Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan,
Griffinger and Vecchione, a New Jersey based law firm. Mr. Seligman has over
thirty years of legal experience in the pharmaceutical industry, twenty-five of
which were spent supervising the activities of law department attorneys and
outside counsel. From 1989 to 1995, Mr. Seligman was Associate Vice President
and responsible for the general legal activities of various divisions of
Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York and New Jersey
State Bar Associations, and is a member of the board and Greenbrook
Pharmaceuticals, LLC. Mr. Seligman graduated from Columbia University, College
of Pharmacy (B.S.) in 1959, Fordham University School of Law (J.D.) in 1962, and
New York University School of Law (L.L.M.) in 1966.
Nancy J. Van Sant, Esq., a director since May 2002, has been a director
of the Miami, Florida law firm of Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A. and/or its predecessors since 1992. From 1977
through 1990, Ms. Van Sant was an attorney with the SEC serving as Regional
Trial Counsel and Chief of the Branch of Investigations and Enforcement.
Roy S. Walzer was appointed to the Board of Directors in June 2002.
Since 1987, Mr. Walzer has been the President of the private investment firms
Litchfield Partners, Ltd. and the Managing Partner of Litchfield Partners I
since 1999, which firms invest in pharmaceuticals, biotech and technology
companies. Prior to founding Litchfield Partners, Mr. Walzer served as Executive
Vice President and General Counsel with Sealy Connecticut from 1976 to 1986.
Shalom Z. Hirschman, M.D. resigned in August 2003 from his position as
our President, Chief Executive Officer and Chief Scientific Officer and a
director of Advanced Viral, which positions he had held since October 1996, in
order to devote his full efforts to his position as our Chief Scientist with
responsibilities assigned by the Board. Dr. Hirschman was Director of the
Division of Infectious Diseases and Professor of Medicine at Mount Sinai School
of Medicine, New York, New York, from May 1969 until October 1996. Dr. Hirschman
has been responsible for bringing our principal product, AVR118, into human
clinical trials.
ELECTION OF DIRECTORS AND OFFICERS
Directors are elected at each annual meeting of stockholders and hold
office until the next succeeding annual meeting and the election and
qualification of their respective successors. Officers are elected annually by
the Board of Directors and hold office at the discretion of the Board of
Directors. Advanced Viral's By-Laws permit the Board of Directors to fill any
vacancy and such director may serve until the next annual meeting of
stockholders and the due election and qualification of his successor.
56
MEETINGS OF THE BOARD OF DIRECTORS
During our fiscal year ended December 31, 2002, our Board of Directors
held 20 meetings. All members of the Board of Directors attended at least 75% of
such meetings. Advanced Viral does not pay directors for their attendance at
meetings, but may revisit this position in the future.
RESIGNATIONS OF MEMBERS OF THE BOARD OF DIRECTORS
Richard Kent, M.D. and Shalom Z. Hirschman, M.D. resigned as members of
our Board of Directors in February 2003 and August 2003, respectively
COMMITTEES OF THE BOARD OF DIRECTORS
Advanced Viral's Board of Directors has an Executive Management
Committee, Audit Committee and Compensation Committee. The Board of Directors
does not have a standing Nominating Committee.
EXECUTIVE MANAGEMENT COMMITTEE. The Executive Management Committee has
been delegated the authority to oversee the strategic management of Advanced
Viral. Eli Wilner, David Seligman, Roy Walzer and Elma Hawkins serve as members
of the Executive Management Committee.
AUDIT COMMITTEE. The Audit Committee is responsible for nominating
Advanced Viral's independent accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with Advanced Viral's
independent accountants, and reviewing the financial statements, audit practices
and internal controls of Advanced Viral. The current members of the Audit
Committee are David Seligman and Roy A. Walzer. During 2002, the Audit Committee
held one meeting.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of Advanced
Viral to the Board of Directors. The current members of the Compensation
Committee are Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors currently consists
of Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer. During the last
fiscal year, no interlocking relationship existed between Advanced Viral's Board
of Directors or Compensation Committee and the board of directors or
compensation committee of any other company.
AUDIT COMMITTEE REPORT
The Audit Committee for the last fiscal year consisted of three
non-employee Directors. The Board of Directors has determined that none of the
members of the Audit Committee has a relationship to Advanced Viral that may
interfere with his independence from Advanced Viral and its management.
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing financial
reports and other financial information provided by Advanced Viral to any
governmental body or the public, Advanced Viral's systems of internal controls
regarding finance, accounting, legal compliance and ethics that management and
the Board of Directors have established, and Advanced Viral's auditing,
accounting and financial processes generally. The Audit Committee annually
recommends to the Board of Directors the appointment of a firm of independent
auditors to audit the financial statements of Advanced Viral and meets with such
personnel of Advanced Viral to review the scope and the results of the annual
audit, the amount of audit fees, Advanced Viral's internal accounting controls,
Advanced Viral's financial statements contained in Advanced Viral's Annual
Report to Stockholders and other related matters.
The Audit Committee has reviewed and discussed with management the
financial statements for fiscal year 2002 audited by Rachlin Cohen, Advanced
Viral's independent auditors. The Audit Committee has discussed with Rachlin
Cohen various matters related to the financial statements, including those
matters required to be discussed by SAS 61 (Codification
57
of Statements on Auditing Standards, AU Section 380). The Audit Committee has
also received the written disclosures and the letter from Rachlin Cohen required
by Independence Standards Board Standard No. 1 (Independence Standards Board
Standard No. 1, Independence Discussions with Audit Committees), and has
discussed with the firm its independence. Based upon such review and discussions
the Audit Committee recommended to the Board of Directors that the audited
financial statements be included in Advanced Viral's Annual Report on Form 10-K
for the fiscal year ending December, Long Term 2002 for filing with the
Compensation Awards Securities and Exchange Commission.
The report of the Audit Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this prospectus or
registration statement into any filing under the Securities Act of 1933 or under
the Securities Exchange Act of 1934, except to the extent that the filing
specifically incorporates this information by reference, and shall not otherwise
be deemed filed under such Acts.
EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS
The following table summarizes all compensation awarded to, earned by
or paid to (a) our Chief Executive Officer and (b) our other executive officers
whose total salary and bonus exceeded $100,000 (together, the "Named Executive
Officers") for services rendered in all capacities to us during the years
indicated.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION (2) OPTIONS/SARS(3) COMPENSATION(4)
- --------------------------- ---- -------- -------- ---------------- --------------- ---------------
Shalom Z. Hirschman, MD, Chairman 2002 $361,000 $25,000 $26,800 $ 17,865
December 2001 to May 2002, President, Chief 2001 $361,000 $25,000 $30,192 --- $ 21,270
Executive Officer and Chief Scientific Officer 2000 $361,000 $0 $30,775 --- $ 4,540
from October 1996 to August 2003 and
consultant from May 24, 1995 until October
1996
Alan V. Gallantar, Chief Financial Officer 2002 $223,000 $22,500 $ 6,000 -- --
since October 1999; Treasurer since 2001 $225,000 $25,000 $ 6,000 -- --
December 2001 2000 $200,000 $25,000 $21,000 -- --
William Bregman, Secretary and director from 2002 n/a n/a n/a n/a n/a
1985 until December 2001, treasurer from 2001 $ 70,000 -- -- -- $150,000(5)
1985 to 1999. 2000 $ 60,000 -- -- -- $ 2,500 (4)
Bernard Friedland, Chairman of Advanced 2002 n/a n/a n/a n/a n/a
Viral and President of subsidiary Advance 2001 $ 70,000 -- -- -- $150,000(5)
Viral Research Ltd. from 1985 to December 2000 $ 60,000 -- -- -- $ 1,800(4)
2001
- -------------------------
(1) With respect to Dr. Hirschman, represents portion of bonus paid to Dr.
Hirschman pursuant to the terms of his employment agreement in
connection with the IND number granted by the FDA. The remaining
$50,000 due has been accrued as of December 31, 2002.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate
incremental cost to Advanced Viral of Dr. Hirschman's automobile lease,
gas, oil, repairs and maintenance. Other Annual Compensation for Mr.
Gallantar includes an automobile allowance of $500 per month and
allowance for moving expenses of approximately $15,000.
(3) Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
(4) Represents the dollar value of insurance premiums paid by or on behalf
of Advanced Viral with respect to term life insurance for the benefit
of the Named Executive Officers.
(5) Represents payments made to Messrs. Bregman and Friedland pursuant to
the terms of the severance agreements discussed below.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2002 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2002 by the Named Executive Officers.
58
AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES ACQUIRED AT FISCAL YEAR-END AT FISCAL YEAR-END
NAME ON EXERCISE (#) VALUE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- ----------------- ------------------------- -------------------------
Shalom Z. Hirschman, M.D. 0 N/A 39,100,000/ 0 $0 / $0(2)(3)
Alan V. Gallantar 0 N/A 4,547,880 / 0 $0 / $0(2)(4)
William Bregman 0 N/A 0 / 0 $0 / $0
Bernard Friedland 0 N/A 0 / 0 $0 / $0
- ----------------------
(1) Based on the difference between the average of the high and low bid
prices per share of the common stock as reported by the Bulletin Board
on the date of exercise, and the exercise or base price.
(2) Based on the difference between the average of the closing bid and ask
prices per share of the common stock as reported by the Bulletin Board
on December 31, 2002, $0.08, and the exercise or base price of
in-the-money stock options.
(3) As of December 31, 2002, Dr. Hirschman held options to purchase
4,100,000 shares of common stock at $0.18 per share; 4,000,000 shares
of common stock at $0.19 per share; 4,000,000 shares of common stock at
$0.27 per share; 4,000,000 shares of common stock at $0.36 per share,
and 23,000,000 shares of common stock at $0.27, all of which are
currently exercisable.
(4) As of December 31, 2002, Mr. Gallantar held options to purchase
4,547,880 shares of common stock at $0.24255 per share, all of which
were exercisable as of such date.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
HAWKINS EMPLOYMENT AGREEMENT
Pursuant to an Employment Agreement dated February 10, 2004, we engaged
Elma S. Hawkins, Ph.D. to be our President and Chief Executive Officer on a full
time basis commencing February 18, 2004 until February 2006 unless terminated
earlier as provided in the agreement. The initial term may be extended for
successive one (1) year periods unless either party gives the other thirty (30)
days prior written notice of its intent not to renew prior to the expiration of
the then current term. Dr. Hawkins shall receive a base salary of $350,000 per
year, and shall be eligible to receive an annual cash bonus of up to 50% of her
then base salary based on certain performance objectives in the sole discretion
of the Board of Directors. In addition, Advanced Viral agreed to pay Dr. Hawkins
a signing bonus of $50,000. The agreement also entitles Dr. Hawkins and her
dependents to participate in all incentive, savings and retirement plans,
practices, policies and programs applicable generally to other executives of
Advanced Viral and their families. The agreement further provides that:
- We shall pay the dues of such professional associations and
societies of which Dr. Hawkins is a member in furtherance of her
duties.
- We shall reimburse Dr. Hawkins for reasonable expenses relating
to professional licenses, entertainment, travel, and similar
items in accordance with the policies, practices and procedures
of Advanced Viral.
- We shall furnish Employee with an automobile and pay all expenses
related to such automobile for use in the performance of her
duties, or, at our discretion provide, at our expense, car
transportation between New York City and our Yonkers, New York
headquarters.
- Dr. Hawkins will be entitled to four (4) weeks paid vacation
annually or such other time as authorized by the Board of
Directors during which time her compensation shall be paid in
full. Vacation Days unused in any calendar year may not be
accumulated and carried forward and used in future years.
If the agreement is terminated by us for cause, or Dr. Hawkins
voluntarily resigns, becomes disabled or dies, then Dr. Hawkins or her estate
shall be entitled to her base salary earned through the date of termination,
accrued vacation, and all
59
applicable reimbursements due. If the agreement is terminated for other reasons
by either party, Dr. Hawkins shall be entitled to, in one lump sum payment, that
amount which is equivalent to her base salary paid for the fiscal year
immediately prior to her termination, and all applicable reimbursements due.
Payment of the lump sum severance benefit is conditioned upon the release by Dr.
Hawkins of Advanced Viral, to the maximum extent permitted by law, from any and
all claims she may have against us that relate to or arise out of her employment
or termination of employment.
Pursuant to the agreement, Dr. Hawkins received an option to purchase
40 million shares of our common stock for five years. The option vests in
increments of 666,667 on a monthly basis, and is exercisable at four different
prices, as follows: (i) $0.12 for the first 8 million option shares; (ii) $0.129
for the next 8 million option shares; (iii) $0.139 for the next 8 million option
shares and (iv) $0.160 for the last 8 million option shares. If Dr. Hawkins is
terminated for cause or if she voluntarily resigns without cause, the option
shall expire for all option shares which have as of such date not become
exercisable but shall survive with respect to option shares that have become
exercisable as of such date, (the "Surviving Options"), provided, however,
notwithstanding anything contained herein to the contrary, she shall have 90
days to exercise the Surviving Options. the option shall immediately expire and
she shall forfeit all rights to acquire the option shares. Upon the termination
of Dr. Hawkins' employment for other reasons, the option shall immediately
become exercisable for that number of option shares equal to the number of
option shares which would have been subject to exercise by Dr. Hawkins during
the then current term of the employment agreement (without giving effect to any
extensions thereof).
HIRSCHMAN EMPLOYMENT AGREEMENT
On August 27, 2003, Shalom Z. Hirschman, M.D. resigned as an officer
and director of Advanced Viral upon the terms and conditions of a Third Amended
and Restated Employment Agreement dated August 27, 2003. The resignation of Dr.
Hirschman was not due to any disagreement with Advanced Viral on any matter
relating to Advanced Viral's operations, policies or practices.
Pursuant to a Third Amended and Restated Employment Agreement dated as
of August 26, 2003 between Advanced Viral and Dr. Hirschman, we employ Dr.
Hirschman on a full business time basis as our as our Chief Science Officer.
Pursuant to the agreement, the term of Dr. Hirschman's employment continues
until December 31, 2004 unless sooner terminated pursuant to the agreement. If
the agreement is terminated by us for cause, all unvested stock options granted
to Dr. Hirschman expire within 90 days of such termination date. If the
agreement is terminated by Dr. Hirschman for good reason, we are required to pay
to Dr. Hirschman his annual salary and employee benefits through the term of the
agreement. Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy for at least $1
million, with a beneficiary to be designated by Dr. Hirschman. The agreement
further provides that we shall:
- lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price
not in excess of $40,000, and pay for all gas, oil, repairs and
maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;
- reimburse Dr. Hirschman for all of his proven expenses incurred
in and about the course of his employment that are deductible
under the current tax law, including, among other expenses (i)
his license fees, membership dues in professional organizations,
subscriptions to two professional journals, not to exceed $1,200;
(ii) necessary travel, hotel and entertainment expenses incurred
in connection with overnight, out-of-town trips that contribute
to the benefit of Advanced Viral and as requested by the board of
directors, and all other expenses that may be pre-approved by our
board of directors; and
- provide not less than four weeks paid vacation annually and such
paid sick or other leave as we provide to all of our employees.
The agreement also provides for the payment of $50,000 to Dr. Hirschman
provided (i) we receive new financing or a capital investment of not less than
$1,500,000, and (ii) Dr. Hirschman is terminated other than for cause. The
agreement further contains certain confidentiality and non-compete provisions,
ratifies his currently outstanding stock options, and obligates us to use our
best efforts to cause shares underlying the options to be registered or to have
the registration of such shares to continue to be effective in order that the
shares may be resold without a restrictive legend.
60
SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and
James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.
In connection with their resignation, we paid $150,000 in one lump sum
to each of Messrs. Bregman and Friedland, and $2,500 to Mr. Silver. In addition,
the Severance Agreements provided as follows:
- That Messrs. Bregman and Friedland had the combined right until
November 29, 2003 to appoint one additional member to the Board
of Directors of Advanced Viral reasonably acceptable to Advanced
Viral, so long as both Messrs. Bregman and Friedland own shares
of Advanced Viral. The Bregman/Friedland designee, if elected,
shall serve on Advanced Viral's Board of Directors until his
successor is duly elected and qualified, and may be removed as a
member of the Board of Directors of Advanced Viral, with or
without cause, by the affirmative vote of the members of Advanced
Viral's then Board of Directors at any time following the date
which is the earlier to occur of: (i) November 29, 2003 or (ii)
the complete divestiture of both Messrs. Bregman's and
Friedland's ownership in Advanced Viral.
- All agreements regarding the voting or disposition of shares of
common stock of Advanced Viral held by each of Messrs. Bregman
and Friedland are terminated.
- Advanced Viral shall have a right of first refusal to purchase
shares of common stock owned by Messrs. Bregman and Friedland
upon the receipt by Messrs. Bregman or Friedland, as the case may
be, of a bona fide offer from an unrelated third party to
purchase such shares in an "on-the-market" or "off-the-market"
transaction, upon the terms set forth in the Severance
Agreements.
- With respect to the election of directors and compensation
packages for directors of Advanced Viral, each of Messrs. Bregman
and Friedland granted Advanced Viral an irrevocable proxy to vote
all the shares of its common stock they beneficially own at any
annual, special or adjourned meeting of the stockholders of
Advanced Viral until the earlier to occur of November 29, 2003
or, as to those shares sold, the date of the sale of such shares
by Messrs. Bregman or Friedland, as the case may be, to one or
more unrelated third parties in a bona fide sale after Messrs.
Bregman or Friedland, as the case may be, shall have first
complied with Advanced Viral's right of first refusal described
in the Severance Agreements.
- Advanced Viral agreed, to the fullest extent permitted by
Delaware law and its charter documents, to indemnify each of
Messrs. Bregman, Friedland and Silver for all amounts (including
reasonable attorneys' fees) incurred or paid in connection with
any action, proceeding, suit or investigation arising out of or
relating to their performance of services for Advanced Viral.
- Advanced Viral agreed to continue the directors' and officers'
liability insurance for each of Messrs. Bregman, Friedland and
Silver until November 29, 2007.
In connection with satisfying our financial obligations to our retiring
directors under the Severance Agreements, we obtained a loan for $200,000 from
our Chief Financial Officer, Alan Gallantar, as evidenced by a Demand Promissory
Note dated December 14, 2001 (the "Note"). We were obligated to repay the Note
upon our receipt of proceeds upon the consummation of new financing. The Note
was repaid in full on December 17, 2001.
ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(k))
Advanced Viral has adopted a 401(k) plan that allows eligible employees
to contribute up to 20% of their salary, subject to annual limits, which were
$10,500 in 2001. We match 50% of the first 6% of the employee contributions with
our common stock and may from time to time, at our discretion, make additional
contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions. At December 31, 2002 we
accrued $40,675 to fund the 401k plan representing our match for the plan year
2002. We intend to purchase our common stock in the open market at prevailing
market prices to satisfy our 2002 matching contribution obligations. In March
2003, we amended the terms of the 401(k) plan to terminate our obligation to
make matching contributions.
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COMPARATIVE STOCK PERFORMANCE
SEC rules require that a line graph performance presentation be
provided comparing cumulative total stockholder return with a performance
indicator of a broad market index and a nationally recognized industry index.
The graph and table set forth below compare the cumulative total stockholder
return on Advanced Viral's Common Stock for 1997 through 2002 with the Dow Jones
Pharmaceuticals Index and the Dow Jones Equity Market Index for the same period.
The graph and table assume an investment of $100 in the Common Stock and each
index on December 31, 1996 and the reinvestment of all dividends, if any.
5-YEAR CUMULATIVE TOTAL RETURN
12/97 12/98 12/99 12/00 12/01 12/02
------ ------ ------ ------ ------ ------
Advanced Viral Research Corp. 100.00 109.61 98.70 168.83 137.66 41.56
Dow Jones Pharmaceuticals 100.00 124.90 153.28 139.07 122.50 95.45
Dow Jones Equity Market 100.00 148.67 133.94 185.78 155.22 123.59
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG ADVANCED VIRAL RESH CORP., THE DOW JONES US TOTAL MARKET INDEX
AND THE DOW JONES US PHARMACEUTICALS INDEX
[LINE GRAPH]
* $100 invested on 12/31/97 in stock or index-
including reinvestment of dividends.
Fiscal year ending December 31.
62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the common
shares of Advanced Viral owned as of February 10, 2004: (i) by each person who
beneficially owns more than 5% of the common shares, (ii) by each of our
directors, (iii) by each of our Named Executive Officers identified in the
Summary Compensation Table above and (iv) by all directors and executive
officers of Advanced Viral as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to such
common shares.
PERCENT
BENEFICIALLY
NAME OF BENEFICIAL OWNER NUMBER OF SHARES OWNED(1)
- ------------------------ ---------------- --------
Elma S. Hawkins, Ph.D. (2) 1,333,333 *
Eli Wilner (3) 25,076,667 4.1%
Alan V. Gallantar (4) 4,547,880 *
David Seligman (5) 7,825,000 1.3%
Nancy J. Van Sant (5) 5,250,000 *
Roy Walzer (5) 6,653,800 1.1%
Shalom Z. Hirschman, M.D. (6) 39,100,000 6.2%
William Bregman (7) 37,621,988 6.4%
James F. Dicke II (8) 34,382,686 5.8%
Cornell Capital Partners (9) 58,525,943 9.5%
---------- ---
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (6 PERSONS) 50,686,680 7.9%
- -------------------------------
* Less than 1%
(1) The applicable percentage ownership is based on 589,633,458, shares
outstanding as of February 10, 2004, together with securities exercisable
or convertible into shares of common stock within 60 days thereof.
(2) Represents shares that may be acquired pursuant to currently exercisable
stock options. Dr. Hawkins will be the President and Chief Executive
Officer of Advanced Viral Research Corp. commencing February 18, 2004.
(3) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 22,416,667 shares that may be acquired pursuant
to currently exercisable stock options; (iii) 362,500 shares beneficially
owned by his wife Barbara Ann Brennan; and (iv) 50,000 shares beneficially
owned by his step-daughter Celia Conaway. Mr. Wilner is the Secretary and
Chairman of the Board of Directors of Advanced Viral Research Corp., and is
the President and Chief Executive Officer of Advanced Viral Research Corp.
until February 18, 2004.
(4) Represents shares that may be acquired pursuant to currently exercisable
stock options. Mr. Gallantar is the CFO and Treasurer of Advanced Viral
Research Corp.
(5) Represents shares that may be acquired pursuant to currently exercisable
stock options. The persons listed are Directors of Advanced Viral Research
Corp.
(6) Represents 39,100,000 shares that may be acquired pursuant to currently
exercisable options to purchase common stock.
(7) Includes 21,758,614 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 70,000 shares owned by Carol Bregman,
his daughter; 215,000 shares owned by Forest Berlin, his grandson; and
215,000 shares owned by Jessica Berlin, his granddaughter.
(8) Includes (i) 7,500,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 700,000 shares that may be acquired pursuant to
currently exercisable stock options; (iii) approximately 2,000,000 shares
issuable pursuant to convertible debentures. Excludes an aggregate of 45
million shares issuable in three fundings from May to November 2004
pursuant to a securities purchase agreement. Mr. Dicke II disclaims
beneficial ownership of stock owned by his son, James F. Dicke III. Mr.
Dicke II is a former Director of Advanced Viral Research Corp.
(9) Includes approximately 12.5 million shares issuable pursuant to outstanding
convertible debentures and 15 million shares issuable pursuant to
outstanding warrants with an exercise price of $0.091.
63
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have granted stock options to certain of our executive officers, as
described under the caption "Executive Compensation." We have entered into
severance agreements with certain of our former officers and directors as
described under the caption "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements."
In November 2002, we retained Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A., a law firm of which Ms. Van Sant is a partner,
to provide legal services in connection with certain legal proceedings. For the
fiscal year ended December 2002 we were billed and paid $69,115. Since January
2003, we were billed $321,513 and have paid $319,003 to date.
In April 2003, Advanced Viral entered into a six-month consulting
agreement with Robert Nowinski, Ph.D., which agreement terminated in October
2003. Pursuant to the agreement, Mr. Nowinski acted as a consultant to the Board
of Directors and advised Advanced Viral in the areas of fund raising, strategic
partnerships and operations. Pursuant to the consulting agreement, Mr. Nowinski
received approximately $22,500 monthly, which amount was increased in July 2003
from $15,700. In addition, Mr. Nowinski received 5% in cash and 5% in warrants
of any net proceeds received by Advanced Viral from the sale by Advanced Viral
of Advanced Viral's securities during the period of time Mr. Nowinski was a
consultant to Advanced Viral.
Article 9 of our Certificate of Incorporation contains the following
provision with respect to indemnification of directors and officers:
"The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person, who has ceased
to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the Delaware
General Corporation Law ("DGCL").
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article 11, which
provides:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit."
The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.
Pursuant to the foregoing, we currently maintain directors and officers
insurance coverage. We may be required to indemnify certain officers and
directors against liabilities that arise by reason of their status or service as
officers or directors. In certain circumstances, we may be required to advance
the expenses an officer or director incurs in legal proceedings. We believe that
the provisions in our Certificate of Incorporation are necessary to attract and
retain qualified persons as directors and officers.
We believe that all of the above transactions were conducted at "arm's
length," representing what we believe to be fair market value for those
services.
64
DESCRIPTION OF SECURITIES
Our Certificate of Incorporation authorizes us to issue 1,000,000,000
shares of common stock, par value $0.00001 per share. As of February 10, 2004,
there were outstanding 589,633,458 shares of common stock, all of which are
fully paid for and non-assessable. The holders of common stock (i) have equal
ratable rights to dividends from funds legally available therefore, when, as and
if declared by our board of directors; (ii) are entitled to share ratably in all
of our assets available for distribution to holders of common stock upon
liquidation, dissolution or winding up of our affairs; (iii) do not have
preemptive, subscription, or conversion rights and there are no redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
noncumulative vote per share on all matters which stockholders may vote on at
all meetings of stockholders.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, located in Brooklyn, New York. The transfer agent's
phone number is 718-921-8120.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law ("DGCL"), we have
included in Article 9 of our Certificate of Incorporation the following with
respect to indemnification of directors and officers:
"The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person, who has ceased
to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."
Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL.
Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article 11, which
provides:
"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit."
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of Advanced Viral pursuant to the foregoing provisions, or otherwise,
Advanced Viral has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
65
HOW TO GET MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other documents with the Securities and Exchange Commission. You may read and
copy any document we file at the SEC's public reference room at Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, D.C. 20549. You should call
1-800-SEC-0330 for more information on the operation of the Public Reference
Room. The SEC maintains an Internet site at http://www.sec.gov where certain
information regarding issuers, including Advanced Viral, may be found. Our Web
site is http://www.adviral.com.
This prospectus is part of a registration statement that we filed with
the SEC. The registration statement contains more information than this
prospectus regarding Advanced Viral and its common stock, including certain
exhibits and schedules. You can get a copy of the registration statement from
the SEC at the address listed above or from its Internet site, www.sec.gov.
66
ADVANCED VIRAL RESEARCH CORP.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-1
Consolidated Financial Statements Years Ended 2002, 2001 and 2000
Balance Sheets, December 31, 2002 and 2001 F-2
Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 and from Inception
(February 20, 1984) to December 31, 2002 F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to December 31, 2002 F-4
Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 and from Inception
(February 20, 1984) to December 31, 2002 F-15
Notes to Consolidated Financial Statements F-16 - F-45
Balance Sheets, for the Nine Months Ended September 30, 2003 and the Year Ended December 31, 2002 F-46
Statements of Operations for the Three and Nine Months Ended September 30, 2003 and 2002 and from
Inception (February 20, 1984) to September 30, 2003 F-47
Statements of Stockholders' Equity from Inception (February 20, 1984) to September 30, 2003 F-48
Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002 and from Inception
(February 20, 1984) to September 30, 2003 F-62
Notes to Consolidated Condensed Financial Statements F-61 - F-87
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
2002 and for the period from inception (February 20, 1984) to December 31, 2002.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2002 and for the period from
inception (February 20, 1984) to December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered accumulated losses from
operations since its inception and its cash position may be inadequate to fund
the full range of testing required by the FDA in order to approve Product R for
sale. These issues raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 3 to the Company's financial statements, errors in the
valuation of certain options and warrants which resulted in an overstatement of
previously reported expenses for the years ended December 31, 2002, 2001 and
2000 were discovered by the Company's management. Accordingly, the financial
statements for the years ended December 31, 2002, 2001 and 2000 have been
restated to correctly reflect the valuations of such options and warrants.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
February 21, 2003
Except for Note 3, as to which the date is December 18, 2003
F-1
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
(Restated) (Restated)
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,475,755 $ 1,499,809
Prepaid insurance 86,368 51,702
Assets held for sale 172,601 188,999
Other current assets 35,527 11,460
------------ ------------
Total current assets 1,770,251 1,751,970
Property and Equipment, Net 2,244,118 2,818,045
Other Assets 931,660 878,776
------------ ------------
Total assets $ 4,946,029 $ 5,448,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 417,061 $ 1,620,150
Accrued liabilities 137,646 223,556
Current portion of capital lease obligation 104,719 64,197
Current portion of note payable 25,165 24,246
------------ ------------
Total current liabilities 684,591 1,932,149
------------ ------------
Long-Term Debt:
Convertible debenture, net 1,610,499 -
Capital lease obligation 5,834 42,370
Note payable 4,879 32,198
------------ ------------
Total long-term debt 1,621,212 74,568
------------ ------------
Common Stock Subscribed but not Issued 883,900 -
------------ ------------
Commitments, Contingencies and Subsequent Events - -
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 455,523,990 and 403,296,863 shares issued
and outstanding 4,555 4,033
Additional paid-in capital 51,141,177 43,877,955
Deficit accumulated during the development stage (49,098,231) (39,777,166)
Discount on warrants (291,175) (662,748)
------------ ------------
Total stockholders' equity 1,756,326 3,442,074
------------ ------------
Total liabilities and stockholders' equity $ 4,946,029 $ 5,448,791
============ ============
See notes to consolidated financial statements.
F-2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
2002 2001 2000 2002
---- ---- ---- ----
(Restated) (Restated) (Restated)
------------- ------------- -------------
Revenues $ - $ 17,601 $ 8,363 $ 231,892
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 4,439,592 5,150,869 3,192,551 18,315,416
General and administrative 2,654,296 4,063,022 2,413,601 17,594,477
Compensation and other expense for
options and warrants 883,762 1,048,108 1,901,927 3,558,872
Depreciation 977,746 511,216 346,227 1,873,125
------------- ------------- ------------- -------------
8,955,396 10,773,215 7,854,306 41,341,890
------------- ------------- ------------- -------------
Loss from Operations (8,955,396) (10,755,614) (7,845,943) (41,109,998)
------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 113,812 161,832 901,435
Other income - - - 120,093
Interest expense (192,174) 116,849 (908,220) (7,130,068)
Severance expense - former directors - (302,500) - (302,500)
------------- ------------- ------------- -------------
(164,515) (71,839) (746,388) (6,411,040)
------------- ------------- ------------- -------------
Loss from Continuing Operations (9,119,911) (10,827,453) (8,592,331) (47,521,038)
Loss from Discontinued Operations (201,154) (259,114) (223,861) (1,577,193)
------------- ------------- ------------- -------------
Net Loss $ (9,321,065) $ (11,086,567) $ (8,816,192) $ (49,098,231)
============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.02) $ (0.03) $ (0.02)
Discontinued operations (0.00) (0.00) (0.00)
------------- ------------- -------------
Net loss $ (0.02) $ (0.03) $ (0.02)
============= ============= =============
Weighted Average Number of
Common Shares Outstanding 439,009,322 389,435,324 362,549,690
============= ============= =============
See notes to consolidated financial statements.
F-3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- ------------
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
Adjustment for pooling of interests - (1,000) 1,000 -
----------- -------- ---------- ---------
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- -------- ---------- ---------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $0.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- -------- ---------- ---------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 0.01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- -------- ---------- ---------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- -------- ---------- ---------
See notes to consolidated financial statements.
F-4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ---------- ------------
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $ 0.03 38,622,618 386 1,158,321 -
Expenses of stock issuance - - (11,357) -
Acquisition of subsidiary for cash - - (46,000) -
Cancellation of debt due to stockholders - - 86,565 -
Net loss, year ended December 31, 1987 - - - (258,663)
----------- ----------- ---------- ----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 - - - (199,690)
----------- ----------- ---------- ----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 - - - (270,753)
----------- ----------- ---------- ----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption
offer on "B" warrants 0.05 6,729,850 67 336,475 -
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 -
Issuance of common stock, exercise of "C" warrants 0.08 12,900 - 1,032 -
Net loss, year ended December 31, 1990 - - - (267,867)
----------- ----------- ---------- ----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ----------- ---------- ----------
See notes to consolidated financial statements.
F-5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ 0.05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants 0.08 2,500 - 200 -
Issuance of common stock, exercise of underwriter warrants 0.12 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
----------- ---------- ----------- ------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing 0.04 10,000,000 100 404,900 -
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
----------- ---------- ----------- ------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 -
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 -
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
----------- ---------- ----------- ------------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ---------- ----------- ------------
See notes to consolidated financial statements.
F-6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ----------- -----------
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ --
Issuance of common stock, for consulting services $ 0.05 4,750,000 47 237,453 --
Issuance of common stock, exercise of options 0.08 400,000 4 31,996 --
Issuance of common stock, exercise of options 0.10 190,000 2 18,998 --
Net loss, year ended December 31, 1994 -- -- -- --
----------- ------- ----------- ---------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 --
Issuance of common stock, exercise of options 0.05 3,333,333 33 166,633 --
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407 --
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833 --
Issuance of common stock, for consulting services 0.11 1,150,000 12 126,488 --
Issuance of common stock, for consulting services 0.14 300,000 3 41,997 --
Net loss, year ended December 31, 1995 -- -- -- --
----------- ------- ----------- ---------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 --
----------- ------- ----------- ---------
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
------------- ------------
Balance, December 31, 1993 $ (2,854,076) $ --
Issuance of common stock, for consulting services -- --
Issuance of common stock, exercise of options -- --
Issuance of common stock, exercise of options -- --
Net loss, year ended December 31, 1994 (440,837) --
------------ -----
Balance, December 31, 1994 (3,294,913) --
Issuance of common stock, exercise of options -- --
Issuance of common stock, exercise of options -- --
Issuance of common stock, exercise of options -- --
Issuance of common stock, for consulting services -- --
Issuance of common stock, for consulting services -- --
Net loss, year ended December 31, 1995 (401,884) --
------------ -----
Balance, December 31, 1995 (3,696,797) --
------------ -----
See notes to consolidated financial statements.
F-7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ----------- ------------ ------------ ------------
Balance, December 31, 1995 251,181,774 $2,512 $ 4,475,875 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options $0.05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options 0.08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options 0.10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options 0.11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options 0.12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options 0.18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options 0.19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options 0.20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered 0.50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
----------- ------ ----------- -------- ----------- ----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ------ ----------- -------- ----------- ----------
See notes to consolidated financial statements.
F-8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ----------- ------------
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000)
Issuance of common stock, exercise of options $ 0.08 3,333,333 33 247,633 -
Issuance of common stock, conversion of debt 0.20 1,648,352 16 329,984 -
Issuance of common stock, conversion of debt 0.15 894,526 9 133,991 -
Issuance of common stock, conversion of debt 0.12 2,323,580 23 269,977 -
Issuance of common stock, conversion of debt 0.15 1,809,524 18 265,982 -
Issuance of common stock, conversion of debt 0.16 772,201 8 119,992 -
Issuance of common stock, for services rendered 0.41 50,000 - 20,500 -
Issuance of common stock, for services rendered 0.24 100,000 1 23,999 -
Beneficial conversion feature, February debenture - - 413,793 -
Beneficial conversion feature, October debenture - - 1,350,000 -
Warrant costs, February debenture - - 37,242 -
Warrant costs, October debenture - - 291,555 -
Amortization of deferred compensation cost - - - -
Imputed interest on convertible debenture - - 4,768 -
Net loss, year ended December 31, 1997 - - - -
----------- ------ ----------- --------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000)
----------- ------ ----------- --------
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
------------ ------------
Balance, December 31, 1996 $(4,851,537) $(473,159)
Issuance of common stock, exercise of options - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, February debenture - -
Beneficial conversion feature, October debenture - -
Warrant costs, February debenture - -
Warrant costs, October debenture - -
Amortization of deferred compensation cost - 399,322
Imputed interest on convertible debenture - -
Net loss, year ended December 31, 1997 (4,141,729) -
----------- ---------
Balance, December 31, 1997 (8,993,266) (73,837)
----------- ---------
See notes to consolidated financial statements.
F-9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock
------------
Amount Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------- ---------- ------------
Balance, December 31, 1997 277,962,574 $ 2,779 $10,512,767 $(19,000)
Issuance of common stock, exercise of options $ 0.12 295,000 3 35,397 -
Issuance of common stock, exercise of options 0.14 500,000 5 69,995 -
Issuance of common stock, exercise of options 0.16 450,000 5 71,995 -
Issuance of common stock, exercise of options 0.20 10,000 - 2,000 -
Issuance of common stock, exercise of options 0.26 300,000 3 77,997 -
Issuance of common stock, conversion of debt 0.13 1,017,011 10 132,990 -
Issuance of common stock, conversion of debt 0.14 2,512,887 25 341,225 -
Issuance of common stock, conversion of debt 0.15 5,114,218 51 749,949 -
Issuance of common stock, conversion of debt 0.18 1,491,485 15 274,985 -
Issuance of common stock, conversion of debt 0.19 3,299,979 33 619,967 -
Issuance of common stock, conversion of debt 0.22 1,498,884 15 335,735 -
Issuance of common stock, conversion of debt 0.23 1,870,869 19 424,981 -
Issuance of common stock, for services rendered 0.21 100,000 1 20,999 -
Beneficial conversion feature, November debenture - - 625,000 -
Warrant costs, November debenture - - 48,094 -
Amortization of deferred compensation cost - - - -
Write off of subscription receivable - - (19,000) 19,000
Net loss, year ended December 31, 1998 - - - -
----------- ------- ----------- --------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -
----------- ------- ----------- --------
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
------------ ------------
Balance, December 31, 1997 $ (8,993,266) $(73,837)
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, November debenture - -
Warrant costs, November debenture - -
Amortization of deferred compensation cost - 59,068
Write off of subscription receivable - -
Net loss, year ended December 31, 1998 (4,557,710) -
------------ --------
Balance, December 31, 1998 (13,550,976) (14,769)
------------ --------
See notes to consolidated financial statements.
F-10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, December 31, 1998 296,422,907 $2,964 $ 14,325,076 $(13,550,976)
Issuance of common stock, securities purchase agreement $ 0.16 4,917,276 49 802,451 -
Issuance of common stock, securities purchase agreement 0.27 1,851,852 18 499,982 -
Issuance of common stock, for services rendered 0.22 100,000 1 21,999 -
Issuance of common stock, for services rendered 0.25 180,000 2 44,998 -
Beneficial conversion feature, August debenture - - 950,036 -
Beneficial conversion feature, December debenture - - 361,410 -
Amortization of warrant costs, convertible debentures - - 300 -
Warrant costs, related to convertible debentures -
Warrant costs, August debenture - - 49,964 -
Warrant costs, December debenture - - 4,267 -
Amortization of warrant costs, securities purchase agreement - - -
Amortization of deferred compensation cost - - (14,769) -
Credit arising from modification of option terms - - 210,144 -
Net loss, year ended December 31, 1999 - - - (6,323,431)
----------- ------ ------------ ------------
Balance, December 31, 1999 (Restated) 303,472,035 3,034 17,255,858 (19,874,407)
----------- ------ ------------ ------------
Deferred Discount
Compensation on
Cost Warrants
---- --------
Balance, December 31, 1998 $(14,769) $ -
Issuance of common stock, securities purchase agreement - -
Issuance of common stock, securities purchase agreement - -
Issuance of common stock, for services rendered - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, August debenture - -
Beneficial conversion feature, December debenture - -
Amortization of warrant costs, convertible debentures - (300)
Warrant costs, related to convertible debentures - 2,455
Warrant costs, August debenture - -
Warrant costs, December debenture - -
Amortization of warrant costs, securities purchase agreement - -
Amortization of deferred compensation cost 14,769 -
Credit arising from modification of option terms - -
Net loss, year ended December 31, 1999 - -
-------- -------
Balance, December 31, 1999 (Restated) - 2,155
-------- -------
See notes to consolidated financial statements.
F-11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ------ ------ ------- ----- --------
Balance, December 31, 1999 (Restated) 303,472,035 $3,034 $17,255,858 $(19,874,407) $ 2,155
Issuance of common stock, exercise of options $0.1400 600,000 6 83,994 -- --
Issuance of common stock, exercise of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock, exercise of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock, exercise of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock, exercise of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock, exercise of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock, exercise of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock, exercise of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock, exercise of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock, exercise of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock, exercise of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock, exercise of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock, conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock, conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock, conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock, conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock, cashless exercise of warrants 563,597 6 326,153 -- --
Issuance of common stock, services rendered 0.4650 100,000 1 46,499 -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- (326,159) -- --
Beneficial conversion feature, January Debenture -- -- 395,236 -- --
Warrant costs, consulting agreement -- -- 200,249 -- --
Warrant costs, January Debenture -- -- 13,418 -- --
Warrant costs, related to convertible debentures -- -- (2,454)
Recovery of subscription receivable previously written off -- -- 19,000 -- --
Credit arising from modification of option terms -- -- 1,901,927 -- --
Net loss, year ended December 31, 2000 -- -- -- (8,816,192) --
----------- ------ ----------- ------------ -------
Balance, December 31, 2000 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
----------- ------ ----------- ------------ -------
See notes to consolidated financial statements.
F-12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ------ ------ ------- ----- --------
Balance, December 31, 2000 (Restated) 380,214,618 3,802 36,349,629 (28,690,599) (299)
Issuance of common stock, exercise of options $ 0.2700 40,000 1 10,799 -- --
Issuance of common stock, exercise of options 0.3600 20,000 1 7,199 -- --
Issuance of common stock, cashless exercise of warrants 76,411 1 77,491 -- --
Issuance of common stock, for services rendered 0.3500 100,000 1 34,999 -- --
Sale of common stock, for cash 0.1500 6,666,667 66 999,933 -- --
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904 -- --
Warrant costs, private equity line of credit 1,019,153 (1,019,043)
Amortization of warrant costs, equity line of credit 356,594
Cashless exercise of warrants -- -- (77,491) -- --
Credit arising from modification of option terms -- -- 691,404 -- --
Net loss, year ended December 31, 2001 -- -- -- (11,086,567) --
----------- ------ ----------- ------------- -----------
Balance, December 31, 2001 (Restated) 403,296,863 $4,033 $43,877,955 $ (39,777,166) $ (662,748)
=========== ====== =========== ============= ===========
See notes to consolidated financial statements.
F-13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002
Common Stock Deficit
------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
----- ------ ------ ------- ----- --------
Balance, December 31, 2001 (Restated) 403,296,863 4,033 43,877,955 (39,777,166) (662,748)
Sale of common stock, for cash $ 0.1109 17,486,491 175 1,938,813 -- --
Sale of common stock, for cash 0.1400 22,532,001 225 2,840,575 -- --
Sale of common stock, for cash 0.1500 9,999,999 100 1,499,900 -- --
Issuance of common stock, conversion of debt 0.1100 909,091 9 99,991 -- --
Issuance of common stock, conversion of debt 0.1539 1,299,545 13 199,987 -- --
Warrant costs, termination agreement -- -- 190,757 -- --
Warrant costs, issued with sale of common stock, for cash -- -- 36,086 -- --
Expenses of stock issuance -- -- (50,160) -- (36,087)
Warrants granted for consulting services -- -- 107,382 -- --
Credit arising from modification of option terms -- -- 177,963 -- --
Amortization of warrant costs, equity line of credit -- -- -- -- 407,660
Beneficial conversion feature, May debenture -- -- 55,413 -- --
Beneficial conversion feature, July debentures -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- (9,321,065) --
----------- ------ ------------ ------------ ---------
Balance, December 31, 2002 (Restated) 455,523,990 $4,555 $ 51,141,177 $(49,098,231) $(291,175)
=========== ====== ============ ============ =========
See notes to consolidated financial statements.
F-14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
2002 2001 2000 2002
---- ---- ---- -------------
(Restated) (Restated) (Restated)
------------ ------------ ------------
Cash Flows from Operating Activities:
Net loss $ (9,321,065) $(11,086,567) $ (8,816,192) $(49,098,231)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 997,874 532,264 362,392 2,438,663
Amortization of debt issuance costs 34,078 15,344 106,030 828,637
Amortization of deferred interest cost on beneficial - - - -
conversion feature of convertible debenture 89,001 - 395,236 4,182,795
Amortization of discount on warrants 407,660 356,704 64,335 1,164,392
Amortization of discount on warrants - consulting
services - - 230,249 230,249
Amortization of deferred compensation cost - - - 760,500
Issuance of common stock for debenture interest 43,425 - 76,212 119,637
Issuance of common stock for services - 35,000 46,500 1,586,000
Compensation expense for options and warrants 476,102 691,404 1,901,927 3,264,808
Changes in operating assets and liabilities: - - - -
Increase in other current assets (52,155) (28,358) (5,063) (145,311)
Decrease in inventory - 19,729 - -
Increase in other assets (86,962) (53,232) (278,037) (1,635,189)
Increase (decrease) in accounts
payable and accrued liabilities (1,288,999) 940,745 174,089 560,907
------------ ------------ ------------ ------------
Total adjustments 620,024 2,509,600 3,073,870 13,356,088
------------ ------------ ------------ ------------
Net cash used by operating activities (8,701,041) (8,576,967) (5,742,322) (35,742,143)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments - - - (6,292,979)
Proceeds from sale of investments - - - 6,292,979
Acquisition of property and equipment (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Net cash used by investing activities (267,715) (1,588,648) (917,471) (4,323,384)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 - 1,000,000 11,500,000
Proceeds from sale of securities, net of issuance costs 6,229,628 5,783,000 10,835,970 29,529,686
Proceeds from common stock subscribed but not issued 883,900 - - 883,900
Payments under capital lease (142,426) (58,690) (50,324) (310,028)
Payments on note payable (26,400) (21,519) (19,096) (81,276)
Recovery of subscription receivable written off - - 19,000 19,000
------------ ----------- ------------ ------------
Net cash provided by financing activities 8,944,702 5,702,791 11,785,550 41,541,282
------------ ----------- ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (24,054) (4,462,824) 5,125,757 1,475,755
Cash and Cash Equivalents, Beginning 1,499,809 5,962,633 836,876 -
------------ ----------- ------------ ------------
Cash and Cash Equivalents, Ending $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 1,475,755
============ =========== ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 25,669 $ 20,556 $ 36,681
============ =========== ============
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
F-15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the purpose
of manufacturing and marketing a pharmaceutical product initially
named Reticulose, the current formulation of which is now known as and
hereinafter referred to as "Product R." The success of the Company
will be dependent upon obtaining certain regulatory approval for its
pharmaceutical product, Product R, to commence commercial operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research, Ltd.
(LTD), a Bahamian Corporation. LTD is presented in the financial
statements under "Discontinued Operations" (See Notes 5 and 15). All
significant intercompany accounts have been eliminated.
DEVELOPMENT STAGE ENTERPRISE
As described above, the Company was incorporated on July 31, 1985,
and, since that time, has been primarily involved in organizational
activities, research and development activities, and raising capital.
Planned operations, as described above, have not commenced to any
significant extent. Accordingly, the Company is considered to be in
the development stage, and the accompanying consolidated financial
statements represent those of a development stage enterprise.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments (primarily a
money market fund), with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized currently.
Maintenance and repairs are charged to expense as incurred. Major
replacements and betterments are capitalized and depreciated over the
remaining useful lives of the assets.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred by the
Company. Internal research and development services that the Company
contracts out are expensed as incurred by the Company. The Company
does not conduct research and development for third parties. Research
and development costs may include consultants, Israel studies, U.S.
studies at universities, laboratory gases, gloves and apparel, and
travel.
F-16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT (Continued)
An allocation of rent, utilities, payroll, payroll taxes (except CEO
salary, payroll taxes) and telephone were allocated to research and
development at 80% of actual costs with 20% of actual costs allocated
to general and administrative through December 31, 2002. Approximately
50% of the salary and payroll taxes through December 31, 2002 for Dr.
Hirschman, the Company's Chief Executive Officer and Chief Scientific
Officer, were allocated to research and development expense.
In November 2002, the Company reduced its staff from 33 employees to 10
and limited its research and development efforts to the studies being
performed in Israel. As a result, beginning in January 2003 and going
forward, the Company discontinued allocating the above expenses to
research and development expense with the exception of 30% of the
salary and payroll taxes of Dr. Hirschman, which were allocated to
research and development.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company regularly evaluates its long-lived assets for indicators of
possible impairment, whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the
use of the asset and its eventual disposition are less than its
carrying amount.
OTHER ASSETS
Patent development costs are capitalized as incurred. Such costs will
be amortized over the life of the patent, commencing at the time
Product R is marketed. Loan costs include fees paid in connection with
the February 2001 private equity line of credit agreement and are being
amortized over the life of the agreement (see Note 7).
INCOME TAXES
The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which
requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.
F-17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated
fair value of the Company's financial instruments presented in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 2002 and 2001. Since the
reported fair values of financial instruments are based upon a variety
of factors, they may not represent actual values that could have been
realized as of December 31, 2002 and 2001 or that will be realized in
the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, a money market fund and accounts payable. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short-term in nature and their carrying
amounts approximate fair values or they are receivable or payable on
demand.
CONCENTRATIONS OF CREDIT RISk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At various
times during the year, the Company had cash balances in excess of
federally insured limits. The Company maintains its cash, which
consists primarily of demand deposits, with high quality financial
institutions, which the Company believes limits this risk.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
123, Accounting for Stock-Based Compensation. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in accounting
for stock options issued to non-employees.
No stock-based employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
F-18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (Continued)
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------------------
2002 2002 2001 2001 2000 2000
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
- ----------------------------------------------------------------------------------------------------------------------------------
Net loss $(10,342,335) $ (9,321,065) $(11,715,568) $(11,086,567) $ (9,354,664) $ (8,816,192)
- ---------------------------------------------------------------------------------------------------------------------------------
Deduct: total stock-based
compensation expense
determined under fair
value based method for all
awards, net of related tax effects (2,016,132) (724,048) (2,374,643) (154,034) (1,799,827) (5,453,816)
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma net loss $(12,358,467) $(10,045,113) $(14,090,211) $(11,240,601) $(11,154,491) $(14,270,008)
- ---------------------------------------------------------------------------------------------------------------------------------
Loss per share - basic and diluted
- ----------------------------------------------------------------------------------------------------------------------------------
As reported $ (0.02) $ (0.02) $ (0.03) $ (0.03) $ (0.03) $ (0.02)
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma $ (0.03) $ (0.02) $ (0.04) $ (0.03) $ (0.03) $ (0.04)
- ---------------------------------------------------------------------------------------------------------------------------------
There are no other options outstanding that would require pro forma
presentation.
NET LOSS PER COMMON SHARE
The Company computes loss per share in accordance with SFAS No. 128,
Earnings Per Share. This standard requires dual presentation of basic
and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted earnings
per share computation.
Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding
during the year. The Company's potentially issuable shares of common
stock pursuant to outstanding stock options and warrants are excluded
from the Company's diluted computation, as their effect would be
anti-dilutive.
REVENUE RECOGNITION
The limited sales generated by the Company have consisted of sales of
Product R for testing and other purposes. The Company records sales
when the product is shipped to customers. There were no sales for the
year ended December 31, 2002.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from
actual results.
RECLASSIFICATIONS
Certain amounts in the financial statements have been reclassified to
conform to 2002 presentation.
F-19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantee of Indebtedness of Others. FIN 45 requires
that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that
guarantee. FIN 45's provisions for initial recognition and measurement
should be applied on a prospective basis to guarantees issued or
modified after December 31, 2002. The guarantor's previous accounting
for guarantees that were issued before the date of FIN 45's initial
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The
disclosure requirements are effective for financial statements of both
interim and annual periods that end after December 15, 2002. The
Company is not a guarantor under any significant guarantees and thus
this interpretation is not expected to have a significant effect on the
Company's financial position or results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of
SFAS 123. The standard provides additional transition guidance for
companies that elect to voluntarily adopt the accounting provisions of
SFAS 123, Accounting for Stock-Based Compensation. SFAS 148 does not
change the provisions of SFAS 123 that permits entities to continue to
apply the intrinsic value method of APB 25, Accounting for Stock Issued
to Employees. As the Company continues to follow APB 25, its accounting
for stock-based compensation will not change as a result of SFAS 148.
SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are
effective immediately and have been included in Note 10 of the
Company's consolidated financial statements. The new interim disclosure
provisions will be effective in the first quarter of 2003.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The
Company does not expect the adoption of this standard to have any
impact on its financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS 145 is effective for fiscal years beginning
after May 15, 2002. The Company has not determined the impact that SFAS
145 will have, if any, on its financial statements.
In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 supersedes Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of APB Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business. SFAS 144 retains the requirement in Opinion No.
30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of
F-20
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
or is classified as held for sale. The Company adopted SFAS 144 on
January 1, 2002 (see Notes 5 and 15).
In July 2001, the FASB issued SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets which replace
Accounting Principles Board Opinion Nos. 16, Business Combinations and
17, Intangible Assets, respectively. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and that the use of the
pooling-of-interests method be prohibited. SFAS No. 142 changes the
accounting for goodwill from an amortization method to an
impairment-only method. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of
SFAS No. 142, which the Company will be required to adopt on January 1,
2002. After December 31, 2001, goodwill can only be written down upon
impairment discovered during annual tests for fair value, or discovered
during tests taken when certain triggering events occur. The Company
adopted SFAS 142 on January 1, 2002 and there was no impact on the
results of operations or financial position of the Company.
In March 2000, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation - an Interpretation of APB Opinion No. 25
(FIN 44). FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the
accounting consequences of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44
was effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occurred after either December 15, 1998 or January
12, 2000. The Company adopted FIN 44 in the third quarter of 2000 and
there was no material impact on the Company's results of operations or
financial position.
In June 1999, the Financial Accounting Standards Board issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133 an Amendment of SFAS No.
133, which deferred the effective date to all fiscal quarters of all
fiscal years beginning after June 15, 2000. Historically, the Company
has not entered into derivatives contracts to hedge existing risks or
for speculative purposes. Adoption of the new standard on January 1,
2001 had no effect on the financial statements.
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $49,098,231 since inception and is
dependent upon registration of Product R for sale before it can begin
commercial operations. The Company's cash position may be inadequate to
pay all the costs associated with operations and the full range of
testing and clinical trials required by the FDA. Unless and until
Product R is approved for sale in the United States or another
industrially developed country, the Company will be dependent upon the
continued sale
F-21
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. GOING CONCERN (Continued)
of its securities, debt or equity financing for funds to meet its cash
requirements. The foregoing issues raise substantial doubt about the
Company's ability to continue as a going concern.
Management intends to continue to sell the Company's securities in an
attempt to meet its cash flow requirements; however, no assurance can
be given that equity or debt financing, if and when required, will be
available.
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS
The accompanying financial statements for the years ended December 31,
2002, 2001 and 2000 have been restated to reflect changes in accounting
for warrants issued in connection with equity transactions as well as
options issued to the Board of Directors and employees (on a pro-forma
basis only) and its Advisory Board. The restatement resulted in income
which reduced the previously reported net loss for 2002, 2001 and 2000
by approximately $1,021,000 and $629,000, and $538,000, respectively.
Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. For the year ended
December 31, 2000, the net loss per share from operations was reduced
by $0.01 to ($0.02) from ($0.03). The Company's deficit accumulated
during the development stage was reduced by $2,039,574, $1,018,304, and
$389,303 at December 31, 2002, 2001 and 2000, respectively. The
restatement did not impact the Company's net cash in investing and
financing activities and net cash used in operating activities remained
unchanged However, certain components within operating activities
consisting of amortization of deferred interest cost, discount on
warrants and compensation expense for options and warrants, were
restated.
AS OF DECEMBER 31, 2002 AS OF DECEMBER 31, 2001
----------------------------------------- ----------------------------------------
AS REPORTED ADJUSTMENTS RESTATED AS REPORTED ADJUSTMENTS RESTATED
----------- ----------- ----------- ----------- ----------- --------
ASSETS
Current Assets 1,770,251 - 1,770,251 1,751,970 - 1,751,970
Property and Equipment, Net 2,244,118 - 2,244,118 2,818,045 - 2,818,045
Other Assets 931,660 - 931,660 878,776 - 878,776
----------- ----------- ----------- ----------- ----------- -----------
Total assets 4,946,029 - 4,946,029 5,448,791 - 5,448,791
=========== ----------- =========== =========== ----------- ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 684,591 - 684,591 1,932,149 - 1,932,149
Long-Term Debt:
Convertible debenture, net 1,658,231 (47,732) 1,610,499 - - -
Capital lease obligation 5,834 - 5,834 42,370 - 42,370
Note payable 4,879 - 4,879 32,198 - 32,198
----------- ----------- ----------- ----------- ----------- -----------
Total long-term debt 1,668,944 (47,732) 1,621,212 74,568 - 74,568
----------- ----------- ----------- ----------- ----------- -----------
Common Stock Subscribed but not Issued 883,900 - 883,900 - - -
----------- ----------- ----------- ----------- ----------- -----------
Stockholders' Equity:
Common stock 4,555 - 4,555 4,033 - 4,033
Additional paid-in capital 57,530,605 (6,389,428) 51,141,177 47,666,141 (3,788,186) 43,877,955
Deficit accumulated during the
development stage (51,137,805) 2,039,574 (49,098,231) (40,795,470) 1,018,304 (39,777,166)
Discount on warrants (4,688,761) 4,397,586 (291,175) (3,432,630) 2,769,882 (662,748)
----------- ----------- ----------- ----------- ----------- -----------
Total stockholders' equity 1,708,594 47,732 1,756,326 3,442,074 - 3,442,074
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
Equity 4,946,029 - 4,946,029 5,448,791 - 5,448,791
=========== ----------- =========== =========== ----------- ===========
F-22
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
2002 2001
------------------------------------------- --------------------------------------------
AS REPORTED ADJUSTMENTS RESTATED AS REPORTED ADJUSTMENTS RESTATED
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ - $ - $ - $ 17,601 $ - $ 17,601
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 4,439,592 - 4,439,592 5,150,869 - 5,150,869
General and administrative 2,654,296 - 2,654,296 4,063,022 - 4,063,022
Compensation and other
expense for options and
warrants 755,397 128,365 883,762 691,404 356,704 1,048,108
Depreciation 977,746 - 977,746 511,216 - 511,216
------------- ------------- ------------- ------------- ------------- -------------
8,827,031 128,365 8,955,396 10,416,511 356,704 10,773,215
------------- ------------- ------------- ------------- ------------- -------------
Loss from Operations (8,827,031) (128,365) (8,955,396) (10,398,910) (356,704)- (10,755,614)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 - 27,659 113,812 - 113,812
Other income
Interest expense (1,341,809) 1,149,635 (192,174) (868,856) 985,705 116,849
Severance expense -
former directors - - - (302,500) - (302,500)
------------- ------------- ------------- ------------- ------------- -------------
(1,314,150) 1,149,635 (164,515) (1,057,544) 985,705 (71,839)
------------- ------------- ------------- ------------- ------------- -------------
Loss from Continuing Operations (10,141,181) 1,021,270 (9,119,911) (11,456,454) 629,001 (10,827,453)
Loss from Discontinued Operations (201,154) - (201,154) (259,114) - (259,114)
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (10,342,335) $ 1,021,270 $ (9,321,065) $ (11,715,568) $ 629,001 $ (11,086,567)
============= ============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations (0.02) (0.02) (0.03) (0.03)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
Net loss (0.02) (0.02) (0.03) (0.03)
Weighted Average Number
of Common Shares
Outstanding 439,009,322 439,009,322 389,435,324 389,435,324
2000
-----------------------------------------
AS REPORTED ADJUSTMENTS RESTATED
------------- ----------- -----------
Revenues $ 8,363 $ - $ 8,363
------------- ----------- -----------
Costs and Expenses:
Research and development 3,192,551 - 3,192,551
General and administrative 2,413,601 - 2,413,601
Compensation and other
expense for options and
warrants 1,901,927 - 1,901,927
Depreciation 346,227 - 346,227
------------- ----------- -----------
7,854,306 - 7,854,306
------------- ----------- -----------
Loss from Operations (7,845,943) - (7,845,943)
------------- ----------- -----------
Other Income (Expense):
Interest income 161,832 - 161,832
Other income
Interest expense (1,446,692) 538,472 (908,220)
Severance expense -
former directors - - -
------------- ----------- -----------
(1,284,860) 538,472 (746,388)
------------- ----------- -----------
Loss from Continuing Operations (9,130,803) 538,472 (8,592,331)
Loss from Discontinued Operations (223,861) - (223,861)
------------- ----------- -----------
Net Loss $ (9,354,664) $ 538,472 $(8,816,192)
============= =========== ===========
Net Loss Per Common Share
Basic and Diluted:
Continuing operations (0.03) (0.02)
Discontinued operations (0.00) (0.00)
Net loss (0.03) (0.02)
Weighted Average Number
of Common Shares
Outstanding 362,549,690 362,549,690
NOTE 4. PROPERTY AND EQUIPMENT
Estimated Useful Lives (Years) 2002 2001
------------------------------ ---- ----
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 1,410,165 1,233,524
Machinery and equipment 5 3,394,431 3,170,759
---------- ----------
4,839,146 4,438,833
Less accumulated depreciation 2,433,185 1,438,250
---------- ----------
2,405,961 3,000,583
Less property and equipment included in assets held for sale, net (Note 5) 161,843 182,538
---------- ----------
$2,244,118 $2,818,045
========== ==========
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $429,782 as of
December 31, 2002 and $433,119 as of December 31, 2001. Included with
machinery and equipment is equipment purchased under capital leases of
$135,537 during 2002. Depreciation expense for equipment under the
capital leases was approximately $27,488, $10,368 and $7,729 in 2002,
2001 and 2000, respectively. These amounts are included above.
F-23
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. OTHER ASSETS
2002 2001
---- ----
Patent development costs $897,385 $765,388
Loan costs, net of accumulated amortization of $828,637
and $794,559 34,275 68,353
Other 6,461 51,496
-------- --------
938,121 885,237
Less other assets included in assets held for sale, net (Note 5) 6,461 6,461
-------- --------
$931,660 $878,776
======== ========
NOTE 6. ASSETS HELD FOR SALE
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. The
facility being sold produced topical Product R which is no longer
being produced by the Company. As required under SFAS 144, the net
book values of the assets (LTD had no liabilities as of December 31,
2002 other than an inter-company payable that has been eliminated)
have been reflected on the balance sheet as held for sale and the
operations have been included in discontinued operations for the years
ended December 31, 2002, 2001 and 2000 (see Note 15).
Although no formal contract has been executed, management believes
that the estimated selling price less estimated cost to sell exceeds
the net book value of LTD and therefore there is no impairment loss
charged to discontinued operations.
NOTE 7. ACCRUED LIABILITIES
Accrued bonus $ 50,000 $100,000
Accrued 401k contribution 40,675 32,717
Accrued payroll 35,157 81,181
Other 11,814 9,658
-------- --------
$137,646 $223,556
======== ========
NOTE 8. NOTE PAYABLE
During 1999, the Company entered into an installment purchase
agreement for equipment totaling $123,600. The agreement is
collateralized by the equipment and calls for monthly installments of
$2,476, including interest at 12% per annum, with a final installment
in February 2004.
The aggregate maturities of the installment purchase agreement are as
follows:
Year ending December 31:
2003 $ 25,165
2004 4,879
--------
30,044
Less current portion 25,165
--------
Note payable - long-term portion $ 4,879
========
F-24
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection
with the issuance of several convertible debentures sold during the
years 1997 to 2000, which debentures have all been fully converted. As
of December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $.199 to $.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its
5% convertible debentures at par in several private placements. Under
the terms of each 5% convertible debenture, 20% of the original issue
is convertible on the original date of issue at a price equal to the
closing bid price quoted on the OTC Bulletin Board on the trading day
immediately preceding the original issue date (except for the
Rushing/Simoni issuance detailed below which had an initial conversion
price of $0.11 per share). Thereafter, 20% of the principal balance
may be converted at six-month intervals at a conversion price equal to
the higher of (i) 90% of the average closing bid price for the five
trading days prior to the conversion date (the "Market Price"); or
(ii) ten cents ($0.10) which amount is subject to certain adjustments.
The convertible debentures, including interest accrued thereon, are
payable by Advanced Viral in shares of common stock and mature two
years from the date of issuance. The shares issued upon conversion of
the debentures cannot be sold or transferred for a period of one year
from the applicable vesting date of the convertible portion of the
debentures. The Company issued its 5% convertible debentures as
follows:
- On May 30, 2002, the Company sold to O. Frank Rushing and
Justine Simoni, as joint tenants, $500,000 principal amount
of its 5% convertible debenture. Based on the terms for
conversion associated with this debenture, there was an
intrinsic value associated with the beneficial conversion
feature, which was recorded as deferred interest expense and
is presented as a discount on the convertible debenture. On
June 3, 2002, these investors converted the first 20%
($100,000) into 909,091 shares of common stock at a
conversion price of $0.11 per share. In January 2003, the
holder converted the second 20% ($100,000 plus interest of
$3,041) into 1,030,411 shares of common stock at a
conversion price of $.10 per share.
- On July 3, 2002, the Company sold to James F. Dicke II, who
was then a member of its Board of Directors, $1,000,000
principal amount of its 5% convertible debenture. Based on
the terms for conversion associated with this debenture,
there was an intrinsic value associated with the beneficial
conversion feature which was recorded as deferred interest
expense and is presented as a discount on the convertible
debenture. On July 3, 2002, Mr. Dicke converted the first
20% of the debenture ($200,000) for 1,299,545 shares of
common stock at a conversion price of $0.1539 per share. .
In January 2003, the holder converted the second 20%
($200,000 plus interest of $5,041) of the debenture into
2,050,411 shares of common stock at a conversion price of
$.10 per share.
F-25
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
- On July 15, 2002, the Company sold to Peter Lunder $500,000
principal amount of the Company's 5% convertible debenture.
Based on the terms for conversion associated with this
debenture, there was an intrinsic value associated with the
beneficial conversion feature, which was recorded as
deferred interest expense and is presented as a discount on
the convertible debenture. In January 2003, the holder
converted 40% ($200,000 plus interest of $4,822) of the
debenture into 1,587,797 shares of common stock, the first
20% of which was converted at a conversion price of $.1818
per share, and the second 20% of which was converted at a
conversion price of $.10 per share.
STOCK PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
December 31, 2002, warrants to purchase approximately 16.5 million
shares of the Company's common stock relating to these securities
purchase agreements were outstanding with expiration dates through
2006.
During the quarter ended March 31, 2002, under several stock purchase
agreements, the Company sold an aggregate of 9,999,999 shares of its
common stock at $0.15 per share, for cash consideration of $1,500,000.
On April 12, 2002, pursuant to stock purchase agreements with various
institutional investors, the Company issued 17,486,491 shares of its
common stock at a market price of $0.11089 per share and received net
proceeds of approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities
purchase agreement with certain institutional investors for total
proceeds of approximately $3,010,000, or $0.14 per share, along with
warrants to purchase 16,125,000 shares of the Company's common stock
at an exercise price of $0.25 per share, subject to adjustment, as
described below. In addition, pursuant to a placement agent agreement
with H. C. Wainwright & Co., Inc. ("HCW"), the Company paid HCW a
placement fee of $150,500 cash and issued to HCW 1,032,000 shares of
its common stock. An adjustment provision in the warrants provides
that 60 trading days following the original issue date of the warrants
(the "First Determination Date"), a certain number of warrants shall
become exercisable at $0.001. The number of shares for which the
warrants are exercisable at $0.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the volume
weighted average price ("VWAP") of the Company's common stock for the
60 trading days preceding the First Determination Date and (ii)
21,500,000. Upon 120 trading days following the original issue date of
the warrants (the "Second Determination Date"), a certain number of
remaining warrants shall become exercisable at $0.001. The number of
shares for which the Warrants are exercisable at $.001 per share is
equal to the positive difference, if any, between (i) $3,010,000
divided by the VWAP of the Company's common stock for the 60 trading
days preceding the
F-26
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
STOCK PURCHASE AGREEMENTS (Continued)
Second Determination Date and (ii) 21,500,000. No adjustment will be
made in the event that the VWAP for the 60 trading day period
preceding the applicable determination date is $0.14 or greater (see
Note 13).
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of
common stock at an exercise price of $0.12 per share until December
2007. In connection with these agreements, finders fees of
approximately $50,000 were paid in December 2002 and 627,000 warrants
were issued during January 2003.
On December 23, 2002 the Company received an additional $40,000 from
various investors representing 500,000 shares of common stock or $0.08
per share. These shares of common stock were issued during January
2003 along with warrants dated January 2003 to purchase 300,000 shares
of common stock at an exercise price of $0.12 per share until January
2008. In connection with this transaction the Company paid a finders
fee of $2,400 during January 2003 and issued warrants to purchase
30,000 shares of common stock with an exercise price of $.12 for a
period of five years.
PRIVATE EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell Capital Partners, LP, an institutional
investor, to sell up to $50,000,000 of the Company's common stock.
Under such agreement, the Company may exercise "put options" to sell
shares for certain prices based on certain average trading prices.
Upon signing this agreement, the Company issued to its placement
agent, May Davis Group, Inc., and certain investors, Class A warrants
to purchase an aggregate of 5,000,000 shares of common stock at an
exercise price of $1.00 per share, exercisable in part or whole until
February 9, 2006, and Class B warrants to purchase an aggregate of
5,000,000 shares of common stock at an exercise price equal to the
greater of $1.00 or 110% of the bid price on the applicable advance
date. Such Class B warrants are exercisable pro rata with respect to
the number of warrant shares as determined by the fraction of the
advance payable on that date as the numerator and $20,000,000 as the
denominator multiplied by 5,000,000, until sixty months from the date
of issuance. The Company has not issued any shares under this equity
line, which expired in August 2003. The Class B Warrants have expired
by their terms. There is no financial statement impact for the Class B
Warrants issued under this equity line. The fair value of the Class A
warrants was estimated to be $1,019,153 ($0.204 per warrant) based
upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 80%; a risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to
compensation and other expense for options and warrants over the life
of the equity line of credit (30 months) in the accompanying financial
statements.
F-27
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)
SUBSEQUENT FINANCINGS - STOCK PURCHASE AGREEMENTS
During January 2003, pursuant to a Stock Purchase Agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a negotiated price of $0.08 per share, for a total purchase price
of $124,000 along with warrants to purchase 930,000 shares of common
stock at an exercise price of $0.12 per share until January 2008. In
connection with this transaction the Company paid a finders fee of
$7,440 during January 2003 and issued warrants to purchase 93,000
shares of common stock with an exercise price of $.12 for a period of
five years.
During March 2003, pursuant to a Stock Purchase Agreement with various
investors, the Company issued 1,250,000 shares of common stock at a
negotiated price of $0.08 per share, for a total purchase price of
$100,000 along with warrants to purchase 750,000 shares of common
stock at an exercise price of $0.12 per share through March 2007. In
connection with this transaction the Company paid a finders fee of
$6,000 during March 2003 and issued warrants to purchase 75,000 shares
of common stock with an exercise price of $.12 for a period of five
years.
SUMMARY OF WARRANT ACTIVITY
A summary of warrants issued and outstanding in connection with
convertible debentures and equity transactions as discussed above is
presented below. Upon exercise, warrants are convertible into an equal
number of the Company's .00001 par value common stock. The warrants
are exercisable immediately, with one exception, 5,000,000 Class B
warrants issued in 2001.
2002 2001 2000
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- --------------- ---------- ----------------
Outstanding at beginning of year 33,597,172 .555 24,476,498 .353 8,088,450 .264
Granted 24,022,000 .042 10,735,000 .0967 17,011,044 .392
Exercised 0 0 (181,818) .275 (622,996) .247
Forfeited (500,600) .20 (1,432,508) .234 0 0
Outstanding at end of year 57,118,572 .342 33,597,172 .555 24,476,498 .353
Warrants exercisable at year-end 52,118,572 .279 28,597,172 .533 24,476,498 .353
The following table summarizes information about fixed stock warrants
outstanding at December 31, 2002:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
.00001 16,125,000 9/02 .00001 16,125,000 .00001
.12 -.18 7,897,000 5/02 -12/02 .1276 7,897,000 .1276
.19 -.27 7,753,102 8/97 - 1/00 .2311 7,753,102 .2311
.28 -.41 6,195,214 8/97 - 2/00 .3101 6,195,214 .3101
.42 - 61 8,969,878 2/97 - 7/01 .5211 8,969,878 .5211
.62 -.92 178,378 2/97 .864 178,378 .864
..93 - 1.38 5,000,000 2/01 1.00 5,000,000 1.00
..93 - 1.38 5,000,000 N/A
F-28
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. COMMON STOCK SUBSCRIBED BUT NOT ISSUED
Represents cash received during December 2002 pursuant to several
private placements of securities with various investors ($876,000) for
10,950,000 shares of common stock at a negotiated price of $0.08 per
share. These shares of common stock were issued during January 2003.
In addition, 100,000 shares of common stock were issued during January
2003 pursuant to an employment agreement. The value of these shares on
the date of issue was $7,900, which was recorded as compensation
expense.
NOTE 11. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of Product R. The Company has not as yet
received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since
Product R was initially marketed in the 1940's; however, one study
noted adverse reactions from highly concentrated doses in guinea pigs.
Therefore, the Company could be subjected to claims for adverse
reactions resulting from the use of Product R. In the event any claims
for substantial amounts were successful, they could have a material
adverse effect on the Company's financial condition and on the
marketability of Product R. During November 2002, the Company secured
$3,000,000 of product liability coverage at a cost of approximately
$24,000 per annum. In addition, during October 2002, the Company
secured $3,000,000 in liability coverage for each of the three
clinical trials in Israel at a cost of approximately $16,000. There
can be no assurance that the
PRODUCT LIABILITY
Company will be able to secure additional insurance in adequate
amounts or at reasonable premiums if it determined to do so. Should
the Company be unable to secure additional product liability
insurance, the risk of loss to the Company in the event of claims
would be greatly increased and could have a material adverse effect on
the Company.
LACK OF PATENT PROTECTION
The Company has 10 issued U.S. patents, two issued Australian patents
and one granted China patent for the use of Product R. The Company
currently has 10 patent applications pending with the U.S. Patent
Office and 15 foreign patent applications. The Company can give no
assurance that other companies, having greater economic resources,
will not be successful in developing a similar product. There can be
no assurance that such patents, if obtained, will be enforceable.
F-29
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. The
Company has commenced these clinical trials. The Phase I initial
trials are placebo controlled, open label, dose escalation safety
studies in healthy volunteers. These studies are being conducted in
the United States under the supervision of GloboMax, LLC. On April 12,
2002, the Company successfully completed Phase 1 trials. Phase 2
trials are pivotal clinical investigations designed to establish the
efficacy and safety of Product R. Currently, the Company does not have
sufficient funds available to pursue the Phase 2 clinical trials of
Product R as a topical treatment for genital warts caused by HPV
infection.
STATUS OF ISRAEL CLINICAL TRIALS
In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following clinical trials using injectable Product R,
which began during November 2002:
- Phase I/Phase Ii Study in Cachectic Patients Needing Salvage
Therapy for aids. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and
require salvage therapy. The Company believes that Product R
may have three major beneficial effects in patients with
AIDS:
- First, its therapeutic effects on body
wasting (cachexia) seen in patients with
AIDS:
- Second, the mitigation of the toxicity of
drugs included in HAART regimens for the
treatment of AIDS:
- Third, the synergistic activity with drugs
used in HAART regimens to suppress the
replication of HIV and increase the CD4 and
CD8 cell counts in patients with AIDS:
The Company believes that Product R may prove to be an
important "enabler" drug in the treatment of AIDS.
- Phase I Study in Cachectic Patients with Leukemia and
Lymphoma. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
- Phase I Study in Cachectic Patients with Solid Tumors.
Included are patients with solid tumors such as colonic,
lung, breast, stomach and kidney cancers.
F-30
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of Product R.
Although there can be no assurances, the Company anticipate that the
clinical trials in Israel will help facilitate the planned
investigational new drug (IND) application process for injectable
Product R with the FDA.
In April 2001, the Company formalized a 12 month agreement with
Selikoff Center in Israel to develop clinical trials in Israel using
Product R. It is anticipated that these trials will support future FDA
applications. As of December 31, 2002, the Company paid $242,000 for
such research.
In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the 3 clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the 3 clinical trials including establishing a network of
scientists to perform said study/trial and initiate recruitment of
patients and (3) perform the studies/trials and evaluate the results.
Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $625,000 has
been paid through December 31, 2002.
In the fourth quarter of 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve-month period. These
services include the monitoring and auditing of the clinical sites,
hospital support and laboratory testing.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of Product R
for the treatment of AIDS patients (who have failed HAART and remain
on HAART therapy) into late Phase II blinded, controlled clinical
trials.
On July 8, 2002, the Company extended an agreement with the Weizmann
Institute of Science and Yeda its developmental arm in Israel, to
conduct research on the effects of Product R on the immune system,
especially on T lymphocytes. In addition, scientists will explore the
effects of Product R in animal models. Under its provisions the study
period is extended for another twelve months to July 7, 2003. Total
costs incurred in connection with this research are expected to be
$138,000, of which payments of $40,000 were made in July 2002 and
November 2002.
F-31
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the
option to acquire 5,000,000 shares of the Company's common stock for a
period of three years as per the vesting schedule as referred to in
the agreement, at a purchase price of $0.18 per share. As of December
31, 2002, 900,000 shares have been issued upon exercise of these
options for cash consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1996 and ending March 1999 at an exercise price of $0.19 per share;
(ii) options to purchase 5,000,000 shares exercisable at any time and
from time to time commencing March 24, 1997 and ending March 1999 at
an exercise price of $0.27 per share; and (iii) options to purchase
5,000,000 shares exercisable at any time and from time to time
commencing March 24, 1998 and ending March 1999 at an exercise price
of $0.36 per share. In addition, the Company has agreed to cause the
shares underlying these options to be registered so long as there is
no cost to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable, except for 75,000 at $0.27 and 75,000 at
$0.36. During March 2001 these options were extended until December
2001. As a result of this modification of the option terms, the fair
value of the option was estimated to be $23,291 based on a financial
analysis of the terms of the option using the Black-Scholes pricing
model with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount was recorded in March 2001.
These options were further extended in December 2001 until June 2002.
As a result of this modification of the option terms, the fair value
of the options was estimated to be $6,158 based on a financial
analysis of the terms of the options using the Black-Scholes pricing
model with the following assumptions: expected volatility of 80%; risk
free interest rate of 5%. This amount was recorded in December 2001.
These options were further extended in June 2002 until December 2002,
and the exercise prices were increased to $0.28 and $0.37,
respectively. This amount was recorded in June 2002. As a result of
this modification of
F-32
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
the option terms, the fair value of the options was estimated to be
$3,078 based on a financial analysis of the terms of the options using
the Black-Scholes pricing model with the following assumptions:
expected volatility of 80%; risk free interest rate of 5%.
From October 1996 to August 2003, Dr. Hirschman was the Chief
Executive Officer of the Company. In February 1998, the Company
granted to Dr. Hirschman options to purchase 23,000,000 shares of the
Company's common stock at an exercise price of $0.27 from time to time
until February 2008. These options vested upon the Company's filing an
IND application with the FDA. In February 1998, the Company extended
the expiration date of the following options previously granted to Dr.
Hirschman from March 1999 to February 2008: (i) options to purchase
4,100,000 shares at $0.18 per share; (ii) options to purchase
4,000,000 shares at $0.19 per share; (iii) options to purchase
4,000,000 shares at $0.27 per share; and (iv) options to purchase
4,000,000 shares at $0.36 per share.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement.
Pursuant to this Agreement, Dr. Hirschman was employed to serve as
Chief Executive Officer and President of the Company until December
31, 2002, provided, however, the Agreement is extended automatically
by one year, each year, unless notice of termination has been given by
either Dr. Hirschman or the Company. In July 2002, the Company
notified Dr. Hirschman that the Agreement will not be extended
subsequent to December 31, 2004. The Agreement provides for Dr.
Hirschman to receive an annual base salary of $361,000 (effective
January 1, 2000), use of an automobile, major medical, disability,
dental and term life insurance benefits for the term of his employment
and for the payment of $100,000 to Dr. Hirschman on the earlier to
occur of (i) the date an IND number is obtained from and approved by
the FDA so that human research may be conducted using Product R; or
(ii) the execution of an agreement relating to co-marketing pursuant
to which one or more third parties commit to make payments to the
Company of at least $15 million. On September 4, 2001, the Company
received an IND number from the FDA. Therefore, of the $100,000
described above, $25,000 was paid as of December 31, 2001 with an
additional $25,000 paid through December 31, 2002.
The Agreement also provides for previously issued options to acquire
23,000,000 shares of common stock at $0.27 per option share to be
immediately vested as of the date of this agreement and are
exercisable until February 17, 2008. The fair value of these options
was estimated to be $5,328,000 based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 80%; a risk free
interest rate of 6% and an expected life of 32 months. The Company has
recognized the $5,328,441 fair value of the options as compensation
expense on a pro-forma basis in May 2000 based upon the vesting terms
of the employment agreement.
F-33
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES
In connection with the employment of its Chief Financial Officer, the
Company granted Alan Gallantar options to purchase an aggregate of
4,547,880 shares of the Company's common stock. Such options have a
term of ten years commencing October 1, 1999 through September 30,
2009 and have an exercise price of $0.24255 per share. These options
are fully vested.
The fair value of these options was estimated to be $376,126 ($0.0827
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate of
6% and an expected life of ten years.
On January 3 and December 29, 2000, the Company issued to certain
other employees stock options to acquire an aggregate of 430,000 and
716,000 shares of common stock at an exercise price of $0.21 and $0.33
per share, respectively. These options expire on January 2, 2010 and
December 29, 2010, respectively, and vest in 20% increments at the end
of each year for five years. The fair value of the these options was
estimated to be $42,342 ($0.1721 per option share) and $117,893
($0.2788 per option share), respectively, based upon a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 80%; a
risk free interest rate of 6%; an expected life of ten years; and a
termination rate of 10%.
In May 2002, the Company granted to certain of its employees options
to purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five-year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38%; an expected life of approximately 10 years. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis over approximately 5 years (the vesting period of the
options).
F-34
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
The Company values these options based upon a measurement date
consistent with the vesting schedule of the options.
In May 2002, the Company granted to members of its of the Scientific
Advisory Board and Business Advisory Board options to purchase an
aggregate of 2,250,000 shares of common stock at an exercise price of
$0.12 per share, which options are exercisable 25% immediately, 25% on
June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002
through May 5, 2010. The fair value of the options was estimated to be
$246,822 ($0.1097 per option) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 115%; a risk free
interest rate of 4.88% and an expected holding period of eight years.
This amount was charged to compensation expense for options and
warrants during the year ended December 31, 2002. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis recognizing 25% of the fair value over each vesting
period. The Business Advisory Board was dissolved during December
2002.
In September 2002, the Company granted to Sidney Pestka, M.D., a
member of the Scientific Advisory Board, options to purchase 250,000
shares of common stock at an exercise price of $0.14 per share, which
options are exercisable 25% immediately, 25% on December 18, 2002, 25%
on March 18, 2003 and 25% on June 18, 2003 through September 17, 2010.
Compensation expense for the year ended December 31, 2002 was $6,438.
The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis recognizing 25% of the fair
value over each vesting period.
In December 2002, the Company granted to members of its Scientific
Advisory Board options to purchase an additional 1,500,000 shares of
common stock at an exercise price of $0.075 per share, which options
are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on
September 20, 2003 and 25% on December 20, 2003 through December 20,
2010. Because the options did not begin to vest until March 2003,
there was no compensation expense for the year ended December 31,
2002. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis recognizing 25% of the fair
value over each vesting period.
BOARD OF DIRECTORS
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to certain Members of
the Board of Directors and various committees of the Board of
Directors. The exercise price was $0.12 per share exercisable 25%
immediately, 25% on June 20, 2002, 25% on September 20, 2002 and 25%
on December 20, 2002 through May 5, 2010. The fair value of the these
options was estimated to be $455,249 ($0.1097 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation expense on a pro-forma basis recognizing 25%
of the fair value over each vesting period.
F-35
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
In June 2002, the Company granted to Roy S. Walzer, upon his becoming
a member of the Board of Directors and member of various committees of
the Board, options to purchase 528,800 shares of common stock at an
exercise price of $0.295 per share, which options are exercisable 25%
immediately, 25% on September 10, 2002, 25% on December 10, 2002 and
25% on March 10, 2003 through June 9, 2010. The fair value of the
these options was estimated to be $140,608 ($0.2659 per option share)
based upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation expense on a pro-forma basis recognizing 25%
of the fair value over each vesting period.
In July 2002, the Company granted to Paul Bishop, upon his becoming a
member of the Board of Directors, options to purchase 238,356 shares
of common stock at an exercise price of $0.17 per share,) which
options are exercisable 25% immediately, 25% on October 29, 2002, 25%
on January 29, 2003 and 25% on April 29, 2003 through July 28, 2010.
The fair value of the these options was estimated to be $38,509
($0.1616 per option share) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 133%; a risk free
interest rate of 4.38% and an expected life of eight years. The
Company will recognize the fair value of the options as compensation
expense on a pro-forma basis recognizing 25% of the fair value over
each vesting period.
In September 2002, the Company granted to Richard Kent, upon his
becoming a member of the Board of Directors, and member of various
committees of the Board, options to purchase 241,096 shares of common
stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 24, 2002, 25% on March
24, 2003 and 25% on June 24, 2003 through September 23, 2010. The fair
value of the these options was estimated to be $29,377 ($0.1218 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 127%; a risk free interest rate of
4.38% and an expected life of eight years. The Company will recognize
the fair value of the options as compensation expense on a pro-forma
basis recognizing 25% of the fair value over each vesting period.
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years. The Company will recognize the fair
value of the options as compensation expense on a pro-forma basis
recognizing 25% of the fair value over each vesting period.
F-36
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.
There were no other options outstanding that would require pro forma
presentation.
On November 4, 2002, Paul Bishop resigned from the Company's Board of
Directors. Under the terms of his option agreement he is entitled to
exercise options to purchase 119,178 shares of the Company's common
stock until November 3, 2005.
On November 4, 2002, James F. Dicke, II resigned from the Company's
Board of Directors. Under the terms of his option agreement, he is
entitled to exercise options to purchase 600,000 shares of the
Company's common stock until November 3, 2005.
On November 6, 2002, Jozef Straus resigned from the Company's Business
Advisory Board. Under the terms of his option agreement he is entitled
to exercise options to purchase 187,500 shares of the Company's common
stock until November 5, 2005.
During February 2003, Richard S. Kent resigned from the Company's
Board of Directors. Under the terms of his option agreements he is
entitled to exercise options to purchase 394,437 shares of the
Company's common stock until February 2006.
Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.
SUMMARY OF STOCK OPTIONS
The fair value of each option is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 2001, and 2002, respectively:
divided yield of 0.0% percent for all years; expected volatility of
80%, N/A, and 113% to 133%, risk-free interest rates of 6%, N/A, and
4-6% and expected lives of 10, N/A, and 8 to 10 years. A summary of
the status of the Company's fixed stock options as of December 31,
2002, 2001 and 2000, and changes during the years ending on those
dates is presented below:
2002 2001 2000
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year 51,056,380 .2557 51,426,380 .2560 55,438,880 .265
Granted 19,782,252 .10 100,000 .31 1,146,000 .2818
Exercised -- -- (60,000) .30 (5,158,500) .27
Forfeited (7,005,205) -- (410,000) -- --
Outstanding at end of year 63,833,427 .2122 51,056,380 .2557 51,426,380 .2560
Options exercisable at year-end 50,473,879 .2433 48,518,420 .2553 48,394,460 .2568
Weighted-average fair value of
options granted during the year .10 .31 .2818
F-37
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
SUMMARY OF STOCK OPTIONS (Continued)
The following table summarizes information about stock options
outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
- --------------- ------------ ---------------- ---------------- ----------- ----------------
.08 - .12 17,937,500 9.5 years .093 5,837,500 .12
.13 - .18 4,865,096 5.5 years .1754 4,345,548 .1777
.19 - .27 35,832,880 5.4 years .2571 35,661,880 .2573
.28 - .36 5,197,951 5.6 years .3485 4,628,951 .3519
Financial reporting of the options granted to Hirschman, Gallantar,
other employees and members of the Board of Directors and committees
of the Board of Directors has been prepared pursuant to the Company's
policy of following APB No. 25 and related interpretations.
Accordingly, the following pro-forma financial information is
presented to reflect amortization of the fair value of the options.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
2002 2002 2001 2001 2000 2000
---- ---- ---- ---- ---- ----
REPORTED RESTATED REPORTED RESTATED AS REPORTED RESTATED
------------ ------------ ------------ ------------ ------------ ------------
Net loss $(10,342,335) $ (9,321,065) $(11,715,568) $(11,086,567) $ (9,354,664) $ (8,816,192)
Deduct: total stock-based
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (2,016,132) (724,048) (2,374,643) (154,034) (1,799,827) (5,453,816)
Pro forma net loss $(12,358,467) $(10,045,113) $(14,090,211) $(11,240,601) $(11,154,491) $(14,270,008)
Loss per share - basic and
diluted
As reported $ (0.02) $ (0.02) $ (0.03) $ (0.03) $ (0.03) $ (0.02)
Pro forma $ (0.03) $ (0.02) $ (0.04) $ (0.03) $ (0.03) $ (0.04)
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with GloboMax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for Product R. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002.
F-38
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HARBOR VIEW AGREEMENT
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share and
warrants to purchase 1,750,000 shares at an exercise price of $0.26
per share until February 28, 2005. The fair value of the warrants was
estimated to be $200,249 ($0.057 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). This amount was
amortized to consulting expense during the year ended December 31,
2000.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from
January 2002 to May 2002, the Company granted to Harbor View warrants
to purchase 1,000,000 shares of the Company's common stock at an
exercise price of $0.18 per share. The warrants are exercisable in
whole or in part at any time and from time to time prior to May 30,
2008. The fair value of the warrants was estimated to be $190,757
($0.1908 per warrant) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38% and an expected holding period of six years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities, whereby the Company has granted exclusive rights
to distribute Product R in the countries of Canada, China, Japan,
Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil and Chile. Pursuant to these agreements, distributors
are obligated to cause Product R to be approved for commercial sale in
such countries and, upon such approval, to purchase from the Company
certain minimum quantities of Product R to maintain the exclusive
distribution rights. Leonard Cohen, a former consultant to the
Company, has informed the Company that he is an affiliate of two of
these entities. To date, the Company has recorded revenue classified
as other income for the sale of territorial rights under the
distribution agreements. The Company has made no sales under the
distribution agreements other than for testing purposes.
F-39
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York
facilities, of which the entire amount has been incurred as of
December 31, 2001. During 2002, additional costs were incurred to
complete leasehold improvements for research and development purposes
of approximately $222,000, which has not been paid at December 31,
2002.
SOFTWARE ACQUISITION
During 2001, the Company contracted with a software vendor at a cost
of approximately $500,000 to acquire and install an SAP system for
accounting, administrative and production control. As of December 31,
2001, the entire cost was incurred and was capitalized as an
additional element of cost of the computer equipment.
LEASES
CAPITAL LEASES
During 1998, the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments of
$4,529 for 60 months commencing on September 1998 and expiring on July
2003. During 1999, the Company entered into a purchase lease agreement
for equipment totaling $38,645. The lease calls for monthly payments
of $965 for 48 months commencing in August 1999 and expiring in July
2003. During 2000, the Company entered into a purchase lease agreement
for equipment totaling $13,197. The lease calls for monthly payments
of $447 for 36 months commencing in January 2001 and expiring in
December 2003. During 2002, the Company entered into a purchase lease
agreement for equipment totaling $146,672. The lease calls for monthly
payments of $5,903 for 24 months commencing in February 2002 and
expiring in January 2004.
Future minimum capital lease payments and the net present value of the
future minimum lease payments at December 31, 2002 are as follows:
Year ending December 31:
2003 $ 108,764
2004 5,903
------------
Total minimum lease payments 114,667
Less amount representing interest 4,114
------------
Net present value of future minimum lease payments 110,553
Less current maturities 104,719
------------
$ 5,834
============
F-40
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)
LEASES (Continued)
OPERATING LEASES
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $17,000 annually. The Company has three options to renew
for an additional one year per option. Management has exercised its
second option for the year 2001. Effective December 2001, the Company
closed its Florida office.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective May
1, 1999. The new lease adds 10,550 square feet (for a total of 16,650
square feet) and extends its term until April 2005. Annual rent on the
original lease is approximately $85,000. Rent for the additional
facilities is approximately $175,000. Total rental commitment for the
Yonkers facilities will be $260,000 until May 1, 2002 at which time it
will increase to approximately $290,000.
The Company leased an automobile in November 1999 for 39 months at
$711 per month expiring in January 2003. The Company entered into a
new 39 month lease for $716 per month, starting in February 2003 and
expiring in April 2006.
Total lease expense for the years ended December 31, 2002, 2001 and
2000 amounted to $298,763, $263,609 and $296,064, respectively.
Future minimum lease commitments as of December 31, 2002 are as
follows:
Year ending December 31:
2003 $ 299,000
2004 299,000
2005 105,000
---------
Total $ 703,000
=========
NOTE 12. SEVERANCE AGREEMENTS
On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of the Company upon the
terms and conditions of separate severance agreements. The
resignations were not due to any disagreement with the Company or any
matter relating to the Company's operations, policies or practices.
In connection with their resignation, the Company paid $150,000 to
each of Messrs. Bregman and Friedland and $2,500 to Mr. Silver. In
connection with the severance agreements, the Company obtained a loan
in the amount of $200,000 from the Company's Chief Financial Officer,
as evidenced by a demand promissory note. The note was repaid on
December 17, 2001.
F-41
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 13. LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price
of Advanced Viral stock." The Company alleges that the defendants
sought to "guarantee they would be issued significantly more shares of
ADVR common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company is seeking a judgment
for damages, interest and costs.
The complaint names SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in
Canada; and Bristol Investment Fund, LTD., whose principal place of
business is in Grand Cayman, Cayman Islands, among others. The
complaint claims that the "defendants have each, at times acting
individually, and at times acting in concert with at least one or more
of each other," engaged in practices that violate sections of the
Florida Securities and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a
resident of Miami-Dade County, Florida, and one of the largest
shareholders of the Company. The complaint alleges that Mr. Bregman
suffered losses of approximately $3.9 million as a result of the stock
manipulation scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,002 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charges the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G.,
Bristol Investment Fund, Ltd. and Stonestreet Limited Partnership (the
"Alpha Plaintiffs") filed separate lawsuits in the U.S. District Court
for the Southern District of New York. The suits sought a preliminary
injunction and other relief for breach of contract. The District Court
entered an order on February 11, 2003 upon a motion of the Alpha
Plaintiffs, that required that (i) the Company deliver to the Alpha
Plaintiffs the shares of Company common stock issuable upon exercise
of the warrants; (ii) the Alpha Plaintiffs post a bond of either
$100,000 or the market value of the warrant shares, whichever is
higher for each group of warrants as of the first and second
determination dates; and (iii) all the proceeds from the sale of the
warrant shares be placed in escrow pending final resolution of the
litigation. Within ten days of the entry of the order, the Company
moved to alter/amend the judgment and/or reconsideration of the
Court's order requesting relief from the Court's order. The Court
denied this motion and ordered the Company to immediately deliver the
warrant shares to the Alpha Plaintiffs upon their payment of the
exercise price and posting of a bond, without further delay and no
later than April 8, 2003. The Company has appealed the order denying
the motion for reconsideration. The Company continues to consider and
pursue all of its options relating to the litigation, including
resolution through settlement.
F-42
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 14. STOCKHOLDERS' EQUITY
During 2001, the Company issued 23,082,245 shares of common stock for
an aggregate consideration of $5,895,491. The amounts were comprised
of the issuance of 22,845,834 shares of common stock for cash of
$5,765,000, issuance of 60,000 shares common stock pursuant to the
exercise of options for $18,000, issuance of 76,411 shares of common
stock pursuant to the cashless exercise of warrants for $77,491 and
issuance of 100,000 shares of common stock in exchange for services
for $35,000.
During 2002, Company issued 52,227,127 shares of common stock for an
aggregate consideration of $6,529,608. The amounts were comprised of
the issuance of 50,018,491 shares of common stock for cash of
$6,229,608 and issuance of 2,208,636 shares of common stock upon
conversion of $300,000 of convertible debentures.
During 2002, 2001 and 2000, additional paid-in-capital was recorded of
$177,963, $691,404 and $1,901,927, respectively. A summary of these
modifications to equity instruments is set forth below:
SUMMARY OF MODIFICATIONS TO EQUITY INSTRUMENTS
BLACK-SCHOLES ORIGINAL ORIGINAL NEW NEW
YEAR GRANTEE CALCULATION OPTION SHARES EXERCISE PRICE EXPIRATION DATE EXERCISE PRICE EXPIRATION DATE
- ---- ------- -------------- ------------- -------------- ----------------- -------------- ---------------
2000 DCT $ 166,860 734,000 $ 0.21 7/1/2000 $ 0.22 12/31/2000
2000 DCT $ 108,429 744,000 $ 0.22 12/31/2000 $ 0.24 12/31/2001
2000 Leonard Cohen $ 55,023 200,000 $ 0.16 7/1/2000 $ 0.17 12/31/2000
2000 Leonard Cohen $ 17,311 100,000 $ 0.17 12/31/2000 $ 0.19 12/31/2001
2000 Elliott Bauer $ 953,885 3,349,500 $ 0.14 7/1/2000 $ 0.16 12/31/2000
2000 Elliott Bauer $ 600,419 3,349,500 $ 0.16 12/31/2000 $ 0.18 12/31/2001
-------------- ---------
$ 1,901,927 8,477,000
2001 Richard Rubin $ 25,595 144,000 $ 0.27 3/23/2001 $ 0.27 12/31/2001
2001 Richard Rubin $ 38,518 290,000 $ 0.36 3/23/2001 $ 0.36 12/31/2001
2001 Elliott Bauer $ 13,330 75,000 $ 0.27 3/23/2001 $ 0.27 12/31/2001
2001 Elliott Bauer $ 9,961 75,000 $ 0.36 3/23/2001 $ 0.36 12/31/2001
2001 Henry Kamioner $ 115,291 500,000 $ 0.19 3/23/2001 $ 0.19 12/31/2001
2001 Henry Kamioner $ 88,870 500,000 $ 0.27 3/23/2001 $ 0.27 12/31/2001
2001 Henry Kamioner $ 66,410 500,000 $ 0.36 3/23/2001 $ 0.36 12/31/2001
2001 Elliott Bauer $ 318,359 3,349,500 $ 0.18 12/31/2001 $ 0.19 6/30/2002
2001 Elliott Bauer $ 3,958 75,000 $ 0.27 12/31/2001 $ 0.28 6/30/2002
2001 Elliott Bauer $ 2,200 75,000 $ 0.36 12/31/2001 $ 0.37 6/30/2002
2001 Leonard Cohen $ 8,912 100,000 $ 0.19 12/31/2001 $ 0.20 6/30/2002
-------------- ---------
$ 691,404 5,683,500
2002 Bauer $ 174,068 3,349,500 $ 0.19 6/30/2002 $ 0.19 12/31/2002
2002 Bauer $ 2,372 75,000 $ 0.28 6/30/2002 $ 0.28 12/31/2002
2002 Bauer $ 1,523 75,000 $ 0.37 6/30/2002 $ 0.37 12/31/2002
-------------- ---------
$ 177,963 3,499,500
F-43
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 15. INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. SFAS No. 109 is an asset and liability approach for
computing deferred income taxes.
As of December 31, 2002 and 2001, the Company had net operating loss
carryforwards for Federal income tax reporting purposes amounting to
approximately $39,400,000 and $31,600,000, which expire in varying
amounts to 2021.
The Company presently has temporary differences between financial
reporting and income tax reporting relating to the amortization of
warrant costs, compensation expense for the extension of options,
depreciation and patent costs.
The components of the deferred tax asset as of December 31, 2002 and
2001 were as follows:
2002 2002 2001 2001
-------- -------- -------- --------
Reported Restated Reported Restated
-------- -------- -------- --------
Benefit of net operating loss carryforwards $13,634,000 $13,379,340 $11,730,000 $10,727,340
Less valuation allowance 13,634,000 13,379,340 11,730,000 10,727,340
----------- ----------- ----------- -----------
Net deferred tax asset $ - $ - $ - $ -
=========== =========== =========== ===========
As of December 31, 2002 and 2001, sufficient uncertainty exists
regarding the realizability of these operating loss carryforwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a
three year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carryforwards. The
Company's utilization of its tax benefit carryforwards may be further
restricted in the event of future changes in the ownership of the
Company from the exercise of options and warrants or other future
issuances of common stock.
F-44
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 16. DISCONTINUED OPERATIONS
SFAS No. 144 requires the operating results of any assets with their
own identifiable cash flows that are disposed of or held for sale to
be removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented must also be reclassified as discontinued
operations. See Note 1 and Note 5 for more detail regarding the planed
sale of LTD and classification as held for sale during 2002. The
following table details the amounts reclassified to discontinued
operations:
Inception
(February 20,
1984) to
Year Ended December 31, December 31,
----------------------- -------------
2002 2001 2000 2002
---- ---- ---- ----
Revenues $ - $ - $ - $ -
--------- ----------- ----------- -------------
Costs and Expenses:
General and administrative 181,348 238,311 207,941 1,310,350
Depreciation 20,062 21,048 16,165 271,498
--------- ----------- ----------- -------------
201,410 259,359 224,106 1,581,848
--------- ----------- ----------- -------------
Loss from Operations (201,410) (259,359) (224,106) (1,581,848)
Other Income 256 245 245 4,655
--------- ----------- ----------- -------------
Discontinued operations $(201,154) $ (259,114) $ (223,861) $ (1,577,193)
========= =========== =========== =============
NOTE 17. 401(K) PLAN
In December 1999, the Company adopted a 401(k) plan that allows
eligible employees to contribute up to 20% of their salary, subject to
annual limits imposed by the Internal Revenue Service. The Company
matches 50% of the first 6% of the employee contributions in common
stock and may, at its discretion, make additional contributions based
upon earnings. In March 2001, the Company funded the 401(k) plan with
$23,757 to enable the 401(k) plan to purchase shares of common stock
on the open market to contribute to the 401(k) plan for the employer
match for the year ended December 31, 2001. At December 31, 2002 the
Company accrued $40,675 to fund the 401k plan representing the
Company's match for the plan year 2002. The Company intends to
purchase common stock in the open market at prevailing market prices
to satisfy its 2002 matching contribution obligations. In March 2003,
the Company amended the terms of the Company's 401(k) plan to
terminate the obligation to make matching contributions.
F-45
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.
F-46
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.
F-47
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
----------- ----- ------- --------
Adjustment for pooling of interests - (1,000) 1,000 -
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- ----- ------- --------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $ 0.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- ----- ------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 0.01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- ----- ------- --------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ----- ------- --------
See notes to consolidated financial statements.
F-48
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.
F-49
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------------ ------- ----------- ------------
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $0.05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants 0.08 2,500 - 200 -
Issuance of common stock, exercise of underwriter warrants 0.12 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
------------ ------- ----------- ------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing 0.04 10,000,000 100 404,900 -
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 -
Expenses of stock issuance - - (7,792) -
Net loss, year ended December 31, 1992 - - - (839,981)
------------ ------- ----------- ------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 -
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 -
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
------------ ------- ----------- ------------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------- ----------- ------------
See notes to consolidated financial statements.
F-50
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
------ ----------- ------ -----------
Balance, December 31, 1993 236,276,991 $2,363 $ 3,416,070
Issuance of common stock, for consulting services $0.05 4,750,000 47 237,453
Issuance of common stock, exercise of options 0.08 400,000 4 31,996
Issuance of common stock, exercise of options 0.10 190,000 2 18,998
Net loss, year ended December 31, 1994 - - -
----------- ----- ---------
Balance, December 31, 1994 241,616,991 2,416 3,704,517
Issuance of common stock, exercise of options 0.05 3,333,333 33 166,633
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833
Issuance of common stock, for consulting services 0.11 1,150,000 12 126,488
Issuance of common stock, for consulting services 0.14 300,000 3 41,997
Net loss, year ended December 31, 1995 - - -
----------- ----- ---------
Balance, December 31, 1995 251,181,774 2,512 4,475,875
----------- ----- ---------
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
------------ ------------ ------------
Balance, December 31, 1993 $ - $ (2,854,076) $ -
Issuance of common stock, for consulting services - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Net loss, year ended December 31, 1994 - (440,837) -
--- ------------ ----
Balance, December 31, 1994 - (3,294,913) -
-
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, for consulting services - - -
Issuance of common stock, for consulting services - - -
Net loss, year ended December 31, 1995 - (401,884) -
--- ------------ ----
Balance, December 31, 1995 - (3,696,797) -
--- ------------ ----
See notes to consolidated financial statements.
F-51
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
------ ----------- -------- -----------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875
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
Subscription receivable - - -
Net loss, year ended December 31, 1996 - - -
----------- ----- ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
----------- ----- ---------
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
------------ ------------ ------------
Balance, December 31, 1995 $ - $ (3,696,797) $ -
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, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, exercise of options - - -
Issuance of common stock, for services rendered - - -
Options granted - - (473,159)
Subscription receivable (19,000) - -
Net loss, year ended December 31, 1996 - (1,154,740) -
------- ---------- --------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
------- ---------- --------
See notes to consolidated financial statements.
F-52
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
------- ----------- ------- -----------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351
Issuance of common stock, exercise of options $ 0.08 3,333,333 33 247,633
Issuance of common stock, conversion of debt 0.20 1,648,352 16 329,984
Issuance of common stock, conversion of debt 0.15 894,526 9 133,991
Issuance of common stock, conversion of debt 0.12 2,323,580 23 269,977
Issuance of common stock, conversion of debt 0.15 1,809,524 18 265,982
Issuance of common stock, conversion of debt 0.16 772,201 8 119,992
Issuance of common stock, for services rendered 0.41 50,000 - 20,500
Issuance of common stock, for services rendered 0.24 100,000 1 23,999
Beneficial conversion feature, February debenture - - 413,793
Beneficial conversion feature, October debenture - - 1,350,000
Warrant costs, February debenture - - 37,242
Warrant costs, October debenture - - 291,555
Amortization of deferred compensation cost - - -
Imputed interest on convertible debenture - - 4,768
Net loss, year ended December 31, 1997 - - -
----------- ----- ----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767
----------- ----- ----------
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
------------ ------------ ------------
Balance, December 31, 1996 $ (19,000) $ (4,851,537) $ (473,159)
Issuance of common stock, exercise of options - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, conversion of debt - - -
Issuance of common stock, for services rendered - - -
Issuance of common stock, for services rendered - - -
Beneficial conversion feature, February debenture - - -
Beneficial conversion feature, October debenture - - -
Warrant costs, February debenture - - -
Warrant costs, October debenture - - -
Amortization of deferred compensation cost - - 399,322
Imputed interest on convertible debenture - - -
Net loss, year ended December 31, 1997 - (4,141,729) -
------- ---------- -------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
------- ---------- -------
See notes to consolidated financial statements.
F-53
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
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.
F-54
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
------- ----------- ------- ------------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076
Issuance of common stock, securities purchase agreement $ 0.16 4,917,276 49 802,451
Issuance of common stock, securities purchase agreement 0.27 1,851,852 18 499,982
Issuance of common stock, for services rendered 0.22 100,000 1 21,999
Issuance of common stock, for services rendered 0.25 180,000 2 44,998
Beneficial conversion feature, August debenture - - 950,036
Beneficial conversion feature, December debenture - - 361,410
Amortization of warrant costs, convertible debentures - - 300
Warrant costs, related to convertible debentures - -
Warrant costs, August debenture - - 49,964
Warrant costs, December debenture - - 4,267
Amortization of warrant costs, securities purchase agreement - - -
Amortization of deferred compensation cost - - (14,769)
Credit arising from modification of option terms - - 210,144
Net loss, year ended December 31, 1999 - - -
----------- ----- ----------
Balance, December 31, 1999 (Restated) 303,472,035 3,034 17,255,858
----------- ----- ----------
Deficit
Accumulated
during the Deferred Discount
Subscription Development on
Receivable Stage Warrant
------------- ------------ ---------
Balance, December 31, 1998 $ (13,550,976) $ (14,769) $ -
Issuance of common stock, securities purchase agreement - - -
Issuance of common stock, securities purchase agreement - - -
Issuance of common stock, for services rendered - - -
Issuance of common stock, for services rendered - - -
Beneficial conversion feature, August debenture - - -
Beneficial conversion feature, December debenture - - -
Amortization of warrant costs, convertible debentures - - (300)
Warrant costs, related to convertible debentures 2,455
Warrant costs, August debenture - - -
Warrant costs, December debenture - - -
Amortization of warrant costs, securities purchase agreement - -
Amortization of deferred compensation cost - 14,769 -
Credit arising from modification of option terms - - -
Net loss, year ended December 31, 1999 (6,323,431) - -
----------- ---------- -----
Balance, December 31, 1999 (Restated) (19,874,407) - 2,155
----------- ---------- -----
See notes to consolidated financial statements.
F-55
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
-------- ----------- ------- ------------
Balance, December 31, 1999 (Restated) 303,472,035 $ 3,034 $ 17,255,858
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 - - -
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 - - -
----------- ----- ----------
Balance, December 31, 2000 (Restated) 380,214,618 3,802 36,349,629
----------- ----- ----------
Deficit
Accumulated
during the Discount
Development on
Stage Warrants
----- --------
Balance, December 31, 1999 (Restated) $ (19,874,407) $ 2,155
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, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of warrants - -
Issuance of common stock, exercise of warrants - -
Issuance of common stock, exercise of warrants - -
Issuance of common stock, exercise of warrants - -
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, cashless exercise of warrants - -
Issuance of common stock, services rendered - -
Private placement of common stock - -
Private placement of common stock - -
Private placement of common stock - -
Cashless exercise of warrants - -
Beneficial conversion feature, January Debenture - -
Warrant costs, consulting agreement - -
Warrant costs, January Debenture - -
Warrant costs, related to convertible debentures - (2,454)
Recovery of subscription receivable previously written off - -
Credit arising from modification of option terms - -
Net loss, year ended December 31, 2000 (8,816,192) -
----------- ----
Balance, December 31, 2000 (Restated) (28,690,599) (299)
----------- ----
See notes to consolidated financial statements.
F-56
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
-------- ------------ ------- ------------
Balance, December 31, 2000 (Restated) 380,214,618 3,802 36,349,629
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, equity line of credit
Cashless exercise of warrants - - (77,491)
Credit arising from modification of option terms - - 691,404
Net loss, year ended December 31, 2001 - - -
----------- ------- ------------
Balance, December 31, 2001 (Restated) 403,296,863 $ 4,033 $ 43,877,955
----------- ------- ------------
Deficit
Accumulated
during the Discount
Development on
Stage Warrants
------------ ---------
Balance, December 31, 2000 (Restated) (28,690,599) (299)
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, cashless exercise of warrants - -
Issuance of common stock, for services rendered - -
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Warrant costs, private equity line of credit (1,019,043)
Amortization of warrant costs, equity line of credit 356,594
Cashless exercise of warrants - -
Credit arising from modification of option terms - -
Net loss, year ended December 31, 2001 (11,086,567) -
------------ -----------
Balance, December 31, 2001 (Restated) $(39,777,166) $ (662,748)
============ ===========
See notes to consolidated financial statements.
F-57
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
-------- ----------- -------- ------------
Balance, December 31, 2001 (Restated) 403,296,863 4,033 43,877,955
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)
Warrants granted for consulting services - - 107,382
Credit arising from modification of option terms - - 177,963
Amortization of warrant costs, equity line of credit - - -
Beneficial conversion feature, May debenture - - 55,413
Beneficial conversion feature, July debentures - - 166,515
Net loss, year ended December 31, 2002 - - -
----------- ------- ------------
Balance, December 31, 2002 (Restated) 455,523,990 $ 4,555 $ 51,141,177
----------- ------- ------------
Deficit
Accumulated
during the Discount
Development on
Stage Warrants
------------ ----------
Balance, December 31, 2001 (Restated) (39,777,166) (662,748)
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Warrant costs, termination agreement - -
Warrant costs, issued with sale of common stock, for cash - -
Expenses of stock issuance - (36,087)
Warrants granted for consulting services - -
Credit arising from modification of option terms - -
Amortization of warrant costs, equity line of credit - 407,660
Beneficial conversion feature, May debenture - -
Beneficial conversion feature, July debentures - -
Net loss, year ended December 31, 2002 (9,321,065) -
------------ ----------
Balance, December 31, 2002 (Restated) $(49,098,231) $ (291,175)
------------ ----------
See notes to consolidated financial statements.
F-58
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 2003
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
-------- ----------- ------- -----------
Balance, December 31, 2002 (Restated) 455,523,990 4,555 51,141,177
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
Expenses of stock issuance - - (199,989)
Amortization of warrant costs, related to convertible debenture - - -
Amortization of warrant costs, equity line of credit
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 - - -
----------- ------- -----------
Balance, September 30, 2003 (Restated) 522,918,079 $ 5,229 $55,678,190
----------- ------- -----------
Deficit
Accumulated
during the Discount
Development on
Stage Warrants
------------ ----------
Balance, December 31, 2002 (Restated) (49,098,231) (291,175)
Sale of common stock, for cash - -
Sale of common stock, for cash - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Issuance of common stock, for services rendered - -
Warrant costs, issued with issue of convertible debenture - (517,141)
Expenses of stock issuance - 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 - -
Litigation settlement stock - -
Options issued for services rendered - -
Beneficial conversion feature, April debenture - -
Beneficial conversion feature, July debenture - -
Net loss, Nine Months Ended September 30, 2003 (5,601,913) -
------------ ----------
Balance, September 30, 2003 (Restated) $(54,700,144) $ (189,618)
------------ ----------
See notes to consolidated financial statements.
F-59
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.
F-60
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements at
September 30, 2003 have been prepared in accordance with accounting
principles generally accepted in the United States for interim
financial information on Form 10-Q and reflect all adjustments which,
in the opinion of management, are necessary for a fair presentation of
the financial position as of September 30, 2003 and results of
operations for the three and nine months ended September 30, 2003 and
2002 and cash flows for the nine months ended September 30, 2003 and
2002. All such adjustments are of a normal recurring nature. Certain
general and administrative expenses from inception relating to
consulting services were reclassified to compensation expense for
options and warrants to be consistent with current presentation. The
Company has discontinued allocating the majority of its general and
administrative expenses to research and development, since, subsequent
to December 31, 2002, the Company reduced its research and development
activities to include only research performed in Israel. Therefore, the
Company's allocation to research and development includes only those
direct expenses relating to the research and development activities in
Israel and 30% of salaries and payroll taxes for the Company's Chief
Scientist, who oversees the clinical trials in Israel and spends
approximately 30% of his time in these initiatives. This change was
necessary to reflect current operating costs relating to the Company's
Yonkers, New York facility. The results of operations for interim
periods are not necessarily indicative of the results to be expected
for a full year. The statements should be read in conjunction with the
audited consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 will not have any
impact on the Company's operating results or financial position as the
Company does not have any derivative instruments that are affected by
SFAS 149 at this time.
During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have any impact on the Company's
operating results or financial position as the Company does not have
any financial instruments with characteristics of both liabilities and
equity that are not already classified as liabilities.
F-61
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.
F-62
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
============ ============ ============
F-63
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
============ ============ ============ ============
F-64
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)
THREE MONTHS ENDED SEPTEMBER 30, 2002 NINE MONTHS ENDED SEPTEMBER 30, 2002
------------------------------------- --------------------------------------
AS REPORTED ADJUSTMENTS RESTATED AS REPORTED ADJUSTMENTS RESTATED
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ - $ - $ - $ - $ - $ -
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 978,658 - 978,658 3,517,924 - 3,517,924
General and administrative 708,133 - 708,133 2,058,352 - 2,058,352
Compensation and other expense
for options and warrants 30,462 (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
============= ============= ============= =============
F-65
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sales of the Company's product. The Company has not as
yet received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since AVR118
was initially marketed in the 1940's; however, one study noted adverse
reactions from highly concentrated doses in guinea pigs. Therefore, the
Company could be subjected to claims for adverse reactions resulting
from the use of AVR118. In the event any claims for substantial amounts
were successful, they could have a material adverse effect on the
Company's financial condition and on the marketability of AVR118.
During November 2002, the Company secured $3,000,000 of product
liability coverage at a cost of approximately $24,000 per annum. In
addition, during October 2002, the Company secured $3,000,000 in
liability coverage for each of the three clinical trials in Israel at a
cost of approximately $16,000. There can be no assurance that the
Company will be able to secure additional insurance in adequate amounts
or at reasonable premiums if it determined to do so. Should the Company
be unable to secure additional product liability insurance, the risk of
loss to the Company in the event of claims would be greatly increased
and could have a material adverse effect on the Company.
LACK OF PATENT PROTECTION
The Company has eight issued U.S. patents, some covering the
composition of AVR118 and others covering various uses of the AVR118.
The Company has nine pending U.S. patent applications, among which two
have been allowed. The Company has seventeen pending foreign patent
applications. In addition, the Company has two issued Australian
patents and one issued Chinese patent covering several uses of AVR118.
During April 2002, under the terms of a settlement agreement entered as
part of a final judgment on March 25, 2002, the Company was assigned
all rights, title and interest in two issued U.S. patents pertaining to
Reticulose(R) technology. As patent applications in the United States
are maintained in secrecy until published or patents are issued, and as
publication of discoveries in the scientific or patent literature often
lag behind the actual discoveries, the Company cannot be certain that
the Company were the first to make the inventions covered by each of
its pending patent applications or that the Company were the first to
file patent applications for such inventions. Furthermore, the patent
positions of biotechnology and pharmaceutical companies are highly
uncertain and involve complex legal and factual questions, and,
therefore, the breadth of claims allowed in biotechnology and
pharmaceutical patents or their enforceability cannot be predicted. The
Company cannot be sure that any additional patents will issue from any
of its
F-66
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
LACK OF PATENT PROTECTION (Continued)
patent applications or, should any patents issue, that the Company will
be provided with adequate protection against potentially competitive
products. Furthermore, the Company cannot be sure that should patents
issue, they will be of commercial value to us, or that private parties,
including competitors, will not successfully challenge its patents or
circumvent its patent position in the United States or abroad.
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of AVR118 as a topical treatment
for genital warts caused by human papilloma virus (HPV) infection. In
September 2001, the FDA cleared the Company's IND application for
AVR118 to begin Phase I clinical trials. On April 12, 2002, the Company
successfully completed Phase 1 trials. Phase 2 trials are pivotal
clinical investigations designed to establish the efficacy and safety
of AVR118. Currently, the Company does not have sufficient funds
available to pursue the Phase 2 clinical trials of AVR118 as a topical
treatment for genital warts caused by HPV infection.
STATUS OF ISRAEL CLINICAL TRIALS
In November 2002 the Company began testing injectable AVR118 in the
following clinical trials in Israel:
- 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.
F-67
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
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.
F-68
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
The Company currently has one ongoing Phase I/II study in Israel of
AVR118 for cachectic patients with AIDS. Out of 30 total patients
contemplated under the protocol for this study, 15 patients are
enrolled, all of whom have completed the first dose of AVR118 required
under the study. The estimated completion date of this study is the
second quarter of 2004. It is uncertain at this time when cash inflows
will result from this study. The completion of the study is dependent
upon funds available for research and development and the availability
of patients meeting the prescribed protocol and the ability of Israel
and its hospitals to meet the requirements of the protocol. From
inception of all the clinical studies in Israel the Company have
expended approximately $1,550,000. The cost to complete the Phase I/II
study in Israel of AVR118 for cachectic patients with AIDS for the
additional 15 patients (for a total of 30) is estimated to be $300,000.
In July 2003 the agreement entered in July 2002 with the Weizmann
Institute of Science and Yeda, its developmental arm in Israel, to
conduct research on the effects of AVR118 on the immune system, expired
in accordance with its terms, and upon such termination the Company
retained all rights to the research performed under the agreement.
Total costs incurred in connection with this research are expected to
be $138,000, of which payments of $40,000 were made in each of July
2002 and November 2002, and an additional $10,000 was paid in October
2003. Final payment has not been made pending receipt, review and
approval of the final report. The Company has expensed $120,000 since
inception of the contract through September 30, 2003.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of September 30,
2003, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.
F-69
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1996
and ending March 1999 at an exercise price of $0.19 per share; (ii)
options to purchase 5,000,000 shares exercisable at any time and from
time to time commencing March 24, 1997 and ending March 1999 at an
exercise price of $0.27 per share; and (iii) options to purchase
5,000,000 shares exercisable at any time and from time to time
commencing March 24, 1998 and ending March 1999 at an exercise price of
$0.36 per share. In addition, the Company has agreed to cause the
shares underlying these options to be registered so long as there is no
cost to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
From October 1996 to August 2003, Dr. Hirschman was the Chief Executive
Officer of the Company. In February 1998, the Company granted to Dr.
Hirschman options to purchase 23,000,000 shares of the Company's common
stock at an exercise price of $0.27 from time to time until February
2008. These options vested upon the Company's filing an IND application
with the FDA. In February 1998, the Company extended the expiration
date of the following options previously granted to Dr. Hirschman from
March 1999 to February 2008: (i) options to purchase 4,100,000 shares
at $0.18 per share; (ii) options to purchase 4,000,000 shares at $0.19
per share; (iii) options to purchase 4,000,000 shares at $0.27 per
share; and (iv) options to purchase 4,000,000 shares at $0.36 per
share.
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
F-70
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
(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.
F-71
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (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
F-72
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.
F-73
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (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.
F-74
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years. 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.
F-75
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND
ADVISORY BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
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.
F-76
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
HARBOR VIEW AGREEMENTS
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share and warrants
to purchase 1,750,000 shares at an exercise price of $0.26 per share
until February 28, 2005. The fair value of the warrants was estimated
to be $200,249 ($0.057 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 90%; a risk free
interest rate of 6% and an expected holding period of eleven months
(the term of the consulting agreement). This amount was amortized to
consulting expense during the year ended December 31, 2000.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the quarter ended
June 30, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities whereby the Company has granted exclusive rights to
distribute AVR118 in the countries of Canada, China, Japan, Macao, Hong
Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil and
Chile. Pursuant to these agreements, distributors are obligated to
cause AVR118 to be approved for commercial sale in such countries and,
upon such approval, to purchase from the Company certain minimum
quantities of AVR118 to maintain the exclusive distribution rights.
Leonard Cohen, a former consultant to the Company, has informed the
Company that he is an affiliate of two of these entities. To date, the
Company has recorded revenue classified as other income for the sale of
territorial rights under the distribution agreements. The Company has
made no sales under the distribution agreements other than for testing
purposes.
F-77
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000 and were paid during 2003.
SETTLED LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleged that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company sought a judgment for
damages, interest and costs.
The complaint named SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claimed
that the "defendants had each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida and one of the largest shareholders of
the Company. The complaint alleged that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $0.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,000 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charged the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
F-78
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. COMMITMENTS AND CONTINGENCIES (Continued)
SETTLED LITIGATION (Continued)
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits against the Company in the U.S.
District Court for the Southern District of New York. The suits sought
a preliminary injunction and other relief for breach of contract. The
District Court entered an order on February 11, 2003 upon a motion of
the Alpha Plaintiffs, that required that (i) the Company deliver to the
Alpha Plaintiffs the shares of Company common stock issuable upon
exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of
either $100,000 or the market value of the warrant shares, whichever is
higher for each group of warrants as of the first and second
determination dates; and (iii) all the proceeds from the sale of the
warrant shares be placed in escrow pending final resolution of the
litigation. Within ten days of the entry of the order, the Company
moved to alter/amend the judgment and/or reconsideration of the Court's
order requesting relief from the Court's order. The Court denied this
motion and ordered the Company to immediately deliver the warrant
shares to the Alpha Plaintiffs upon their payment of the exercise price
and posting of a bond, without further delay and no later than April 8,
2003. The Company appealed the order denying the motion for
reconsideration.
During May 2003, the Company entered into a settlement and mutual
release agreements with the parties involved in both the Florida and
New York litigation, which, among other things, dismissed the lawsuits
with prejudice. Pursuant to the agreements, in exchange for release by
the parties to the lawsuits of their rights to exercise the warrants
issued in the September 2002 financing, the Company issued an aggregate
of 947,000 shares of common stock and agreed to pay an aggregate of
$1,047,891 to such parties was paid as of September 30, 2003.
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $0.199 to $0.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 5%
convertible debentures at par in private placements. Under the terms of
each 5% convertible debenture, 20% of the original issue is convertible
on the original date of issue at a price equal to the closing bid price
quoted on the OTC Bulletin Board on the trading day immediately
preceding the original issue date (except for the Rushing/Simoni
issuance detailed below which had an initial conversion price of $0.11
per share). Thereafter, 20% of the principal balance may be converted
at six-month intervals at a conversion price equal to the higher of (i)
90% of the average closing bid price for the five trading days prior to
the conversion date (the "Market Price"); or (ii) ten cents ($0.10)
which
F-79
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS
amount is subject to certain adjustments. The convertible debentures,
including interest accrued thereon, are payable by Advanced Viral in
shares of common stock and mature two years from the date of issuance.
The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date
of the convertible portion of the debentures. The Company issued its 5%
convertible debentures as follows:
- 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.
F-80
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
- On April 28, 2003 and July 18, 2003 the Company entered into
separate securities purchase agreements with Cornell (i) to sell up
to $2,500,000 of the Company's 5% convertible debentures, due April
28, 2008, $1,000,000 of which was purchased on April 28, 2003;
$500,000 of which was purchased on July 18, 2003; and $1,000,000 of
convertible debentures will be purchased within 20 business days
from the date the registration statement is declared effective by
the SEC (the "April Agreement"); and (ii) whereby the Company sold
to Cornell an additional $1,000,000 of the Company's 5% convertible
debentures due July 18, 2008 for gross cash consideration of $1
million (the "July Agreement"). Interest is payable in cash or
common stock at the option of Cornell. The Company received net
proceeds of $1,312,500 and $869,486 for the April and July
debentures respectively. On September 10, 2003, Cornell converted
$600,000 principal amount of the convertible debenture into
14,150,943 shares of the Company's common stock at a conversion
price of $0.0424 per share. On November 6, 2003, Cornell converted
$600,000 principal amount of the convertible debentures into
12,500,000 shares of common stock at a conversion price of $0.048
per share.
Pursuant to the April Agreement and the July Agreement, Cornell or its
assignees receive cash compensation equal to 10% of the gross proceeds
of the convertible debentures purchased by Cornell, along with warrants
to purchase an aggregate of 15,000,000 shares of common stock at an
exercise price of $0.091 commencing on October 28, 2003 through April
28, 2008. In the event the closing bid price of common stock on the
date the Company's registration statement is declared effective by the
SEC is less than $0.10, then under the April Agreement, the Company
have the right to redeem the last $1,000,000 convertible debenture at
the face amount of the convertible debenture within 10 days of the
effectiveness of the registration statement. Pursuant to the terms of
the April Agreement, commencing July 27, 2003, and in the case of the
July Agreement, commencing October 18, 2003, Cornell may convert the
debenture plus accrued interest, (which may be taken at Cornell's
option in cash or common stock), in shares of common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of common stock for the four trading days
immediately preceding the conversion date. No more than $600,000 may be
converted in any thirty-day period under both the April and July
Agreements Subject to certain exceptions, at its option, the Company
may redeem a portion or the entire outstanding debenture at a price
equal to 115% of the amount redeemed plus accrued interest and Cornell
will receive a warrant to purchase 1,000,000 shares of common stock for
every $100,000 redeemed. The warrant shall be exercisable on a cash
basis and have an exercisable price of the higher of 110% of the
closing bid price of common stock on the closing date or $0.08. The
warrant shall have "piggy back" registration rights and shall survive
for 5 years from the closing date.
F-81
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
The Company's obligations under the convertible debentures and the
April and July Agreements are secured by a first priority security
interest in substantially all of its assets. This security interest
expires upon the earlier to occur of (i) the fiftieth (50th) day
following the effectiveness of the registration statement covering the
resale of the shares underlying the convertible debentures; (ii) the
date the Company receive, three million dollars ($3,000,000) of
capital, in any form other than through the issuance of free-trading
shares of the Company's common stock, from sources other than Cornell;
or (iii) the satisfaction of the Company's obligations under the April
and July Agreements, the convertible debentures and the ancillary
documents entered into thereby.
The legal expenses associated with these transactions were
approximately $73,000 and were paid as of September 2003.
SECURITIES PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
March 31, 2003, warrants to purchase approximately 16.5 million shares
of the Company's common stock relating to these securities purchase
agreements were outstanding with expiration dates through 2006.
During the quarter ended March 31, 2002, under several securities
purchase agreements, the Company sold an aggregate of 9,999,999 shares
of its common stock at $0.15 per share, for cash consideration of
$1,500,000.
F-82
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On April 12, 2002, pursuant to securities purchase agreements with
various institutional investors, the Company issued 17,486,491 shares
of its common stock at a market price of $0.11089 per share and
received net proceeds of approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's common stock at an exercise
price of $0.25 per share, subject to adjustment, as described below. In
addition, pursuant to a placement agent agreement with H. C. Wainwright
& Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that at 60 and 120
trading days following the original issue date of the Warrants, a
certain number of warrants shall become exercisable at $0.001. The
number of shares for which the warrants are exercisable at $0.001 per
share is equal to the positive difference, if any, between (i)
$3,010,000 divided by the volume weighted average price ("VWAP") of the
Company's common stock for the 60 trading days preceding the First
Determination Date and (ii) 21,500,000; provided however, that no
adjustment will be made in the event that the VWAP for the 60 trading
day period preceding the applicable determination date is $0.14 or
greater. In December 2002, the Company filed suite against certain of
the investors in connection with the warrant repricing provisions of
the agreement (see Note 4 "SETTLED LITIGATION"). During May 2003, the
Company entered into a settlement and mutual release agreements with
the parties involved in both the Florida and New York litigation,
which, among other things, dismissed the lawsuits with prejudice.
Pursuant to the agreements, in exchange for release by the parties to
the lawsuits of their rights to exercise the warrants issued in the
September 2002 financing, the Company issued an aggregate of 947,000
shares of common stock and agreed to pay an aggregate of $1,047,891 to
such parties, of which $25,000 was paid as of March 31, 2003, $701,463
was paid subsequent to quarter end, and of which $321,428 shall be paid
in five equal monthly installments until September 2003. The Company
recorded a settlement of litigation liability at March 31, 2003 of
$1,098,812 which represents cash to be paid to litigants of $1,022,891
and 947,000 shares of common stock to be issued at $0.08 per share
totaling $75,921. (See Note 4 "SETTLED LITIGATION").
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total gross
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, the Company paid finders' fees to
Harbor View and AVIX consisting of (i) approximately $50,000 and (ii)
warrants to purchase
F-83
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
627,000 shares of the Company common stock at an exercise price of
$0.12 per share through December 2007.
On December 23, 2002, the Company entered into a securities purchase
agreement pursuant to which the Company sold to various investors
500,000 shares of common stock at $0.08 per share, for an aggregate
purchase price of $40,000. These shares of common stock were issued
during January 2003 along with warrants dated January 2003 to purchase
300,000 shares of common stock at an exercise price of $0.12 per share
until January 2008. In connection with this transaction the Company
paid finders' fees to AVIX consisting of (i) $2,400 and (ii) warrants
to purchase 30,000 shares of common stock at an exercise price per
share of $0.12 until January 2008.
During January 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a price of $0.08 per share, for a total purchase price of $124,000,
along with warrants to purchase 930,000 shares of common stock at an
exercise price of $0.12 per share until January 2008. In connection
with this transaction the Company paid a finders' fee to AVIX
consisting of (i) $7,440 and (ii) issued warrants to purchase 93,000
shares of common stock at an exercise price per share of $0.12 until
January 2008.
During March 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,250,000 shares of common stock
at $0.08 per share, for a total purchase price of $100,000, along with
warrants to purchase 750,000 shares of common stock at an exercise
price of $0.12 per share through March 2008. In connection with this
transaction the Company paid finders' fees to Harbor View consisting of
(i) $6,000 and (ii) warrants to purchase 75,000 shares of common stock
at an exercise price per share of $0.12 until March 2006.
In April and May 2003, pursuant to securities purchase agreements with
various investors, the Company sold 3,900,000 shares of common stock at
a price of $0.08 per share and issued warrants to purchase 2,340,000
shares of common stock at an exercise price per share of $0.12 through
April and May 2008, for an aggregate purchase price $312,000. In
connection with this transaction, the Company paid a finders' fee to
Harbor View consisting of (i) $18,720 and (ii) warrants to purchase
234,000 shares of common stock at an exercise price per share of $0.12
through April 2008.
On April 11, 2003, pursuant to a securities purchase agreement with
James F. Dicke II, a former member of the Company's Board of Directors,
the Company sold 3,125,000 shares of common stock at $0.08 per share
for a total purchase price of $250,000, along with warrants to purchase
1,875,000 shares of common stock at an exercise price per share of
$0.12 through April 2008.
F-84
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section
4(2) of the Securities Act, the Company sold 312,500 shares of common
stock and warrants to purchase 187,500 shares of common stock at an
exercise price of $0.12 per share through April 2008, for an aggregate
purchase price of $25,000. In connection with the transaction, the
Company paid a finders' fee to Diego Vallone consisting of warrants to
purchase 15,625 shares of common stock at an exercise price per share
of $0.12 until April 2008.
In June 2003, pursuant to a securities purchase agreement with an
investor, the Company sold 1,562,500 shares of common stock at $0.08
per share for a total purchase price of $125,000, along with warrants
to purchase 937,500 shares of common stock at an exercise price per
share of $0.12 through June 2008. In July in connection with this
transaction, the Company paid finders' fees to Avix, Inc. and Robert
Nowinski consisting of an aggregate of $13,375 and warrants to purchase
171,875 shares of common stock at an exercise price per share of $0.12
through June 2008.
In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, the Company authorized
the issuance of and sold 21,620,000 shares of common stock and warrants
to purchase up to 10,810,000 shares of common stock, for an aggregate
purchase price of $1,081,000, or $0.05 per share, pursuant to
securities purchase agreements with 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
F-85
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. SECURITIES PURCHASE AGREEMENTS (Continued)
EQUITY LINE OF CREDIT (Continued)
5,000,000 until sixty (60) months from the date of issuance. As of
September 30, 2003, the Company has not drawn on the equity line of
credit. The Company has not issued any shares under this equity line,
which expired in August 2003. The Class B Warrants have expired by
their terms. There is no financial statement impact for the Class 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.
F-86
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 6. DISCONTINUED OPERATIONS
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. SFAS No.
144 requires the operating results of any assets with their own
identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented was reclassified as discontinued
operations. The following table details the amounts reclassified to
discontinued operations:
INCEPTION
(FEBRUARY 20,
THREE MONTHS NINE MONTHS 1984) TO
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------- -------------
2003 2002 2003 2002 2003
---- ---- ---- ---- ----
Revenues $ - $ - $ - $ - $ -
------- -------- -------- --------- -----------
Costs and Expenses:
General and administrative 2,284 37,317 10,714 113,853 1,321,064
Depreciation 3,961 5,037 11,882 15,461 283,380
------- -------- -------- --------- -----------
6,245 42,354 22,596 129,314 1,604,444
------- -------- -------- --------- -----------
Loss from Operations (6,245) (42,354) (22,596) (129,314) (1,604,444)
------- -------- -------- --------- -----------
Other Income - 256 - 256 4,655
------- -------- -------- --------- -----------
Discontinued operations $(6,245) $(42,098) $(22,596) $(129,058) $(1,599,789)
------- -------- -------- --------- -----------
F-87
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS ABOUT ADVANCED VIRAL RESEARCH CORP.
EXCEPT THE INFORMATION OR REPRESENTATIONS CONTAINED IN THIS PROSPECTUS. YOU
SHOULD NOT RELY ON ANY ADDITIONAL INFORMATION OR REPRESENTATIONS IF MADE.
PROSPECTUS
262,519,658 SHARES OF COMMON STOCK
ADVANCED VIRAL RESEARCH CORP.
FEBRUARY __, 2004
This prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy any securities:
[ ] except the common stock offered by this prospectus;
[ ] in any jurisdiction in which the offer or solicitation is not
authorized;
[ ] in any jurisdiction where the dealer or other salesperson is not
qualified to make the offer or solicitation;
[ ] to any person to whom it is unlawful to make the offer or
solicitation; or
[ ] to any person who is not a United States resident or who is outside
the jurisdiction of the United States.
The delivery of this prospectus or any accompanying sale does not imply that:
[ ] there have been no changes in the affairs of Advanced Viral USA, Inc.
after the date of this prospectus; or
[ ] the information contained in this prospectus is correct after the date
of this prospectus.
Until _________, 2004, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. Advanced Viral will pay all expenses in connection with this
offering.
Securities and Exchange Commission Registration Fee $ 5,189
Printing and Engraving Expenses $10,000
Accounting Fees and Expenses $ 5,000
Legal Fees and Expenses $15,000
Miscellaneous $ 2,500
-------
TOTAL $37,689
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Certificate of Incorporation include an indemnification provision
under which we have agreed to indemnify directors and officers of Advanced Viral
from and against certain claims arising from or related to future acts or
omissions as a director or officer of Advanced Viral. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of Advanced Viral pursuant to the
foregoing, or otherwise, Advanced Viral has been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to our securities issued or sold
within the past three years which were not registered under the Securities Act.
No underwriters were employed with respect to the sale of any of the securities
listed below. Except as noted below, each of these transactions was completed
without registration of the respective securities under the Securities Act in
reliance upon the exemptions provided by Section 4(2) of the Securities Act and
the rules and regulations promulgated thereunder on the basis that such
transactions did not involve a public offering. The purchasers were
sophisticated with access to the kind of information registration would provide
and such purchasers acquired such securities without a view toward the
distribution thereof.
1. In January 2000, pursuant to the securities purchase agreement
with Endeavour Capital Fund, S.A. discussed above, we issued the second $1
million traunche of $2 million in aggregate principal amount of our 7%
convertible debentures due December 31, 2004 to Endeavour Capital Fund, S.A.
2. In February 2000 pursuant to a consulting agreement with
Harbor View Group, we issued to Harbor View warrants to purchase 1,750,000
shares at an exercise price of $0.21 per share, and warrants to purchase
1,750,000 shares at an exercise price of $0.26 per share, until February 28,
2005, in exchange for consulting services provided or to be provided to us.
3. In February 2000 pursuant to a securities purchase agreement,
we sold to Harbor View Group and various other purchasers 13,636,357 shares of
common stock, and warrants to purchase an aggregate of 5,454,544 shares of
common stock for an aggregate purchase price of $3 million. Half of the warrants
are exercisable at $0.275 per share, and half of the warrants are exercisable at
$0.33 per share, until February 28, 2005.
II-1
4. In May 2000, we granted Louis Silver, a director stock options
to acquire 100,000 shares of common stock, exercisable at $0.25 per share, until
May 31, 2002. Mr. Silver is an "accredited investor" as defined in Rule 501(a)
under the Securities Act.
5. On September 18, 2000 we entered into a private equity line of
credit agreement with Spinneret Financial Systems, Inc., who assigned their
rights to GMF Holdings, Inc., for the right to put shares of our common stock to
the investor from time to time to raise up to $20 million, subject to certain
conditions and restrictions. This agreement and all agreements contemplated in
connection with such agreement was terminated by mutual agreement of the parties
on January 22, 2001.
6. From November 2000 through March 2001, pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,427,500 shares of common stock, and warrants to purchase an
aggregate of 8,056,500 shares of common stock for an aggregate purchase price of
$5,371,000. Half of the warrants are exercisable at $0.48 per share, and half of
the warrants are exercisable at $0.56 per share, until November 8, 2005.
7. During the year 2000, we issued approximately 38.4 million
shares in connection with the conversion of debentures; approximately 1.2
million shares upon the exercise of warrants; and approximately 5.2 million
shares upon exercise of options.
8. We entered into an equity line of credit agreement dated
February 9, 2001 with Cornell Capital Partners, LP. Pursuant to the equity line
of credit agreement, subject to the satisfaction of certain conditions, Cornell
Capital, an "accredited investor" as defined in Rule 501(a) under the Securities
Act, may sell and issue, from time to time, up to an aggregate of $50 million of
its common stock. In connection with the equity line of credit, we issued to the
placement agent, May Davis Group, Inc., which introduced Cornell Capital to us,
and certain other investors Class A Warrants to purchase in the aggregate 5
million shares of our common stock at an exercise price per share equal to
$1.00, exercisable in part or in whole at any time until February 9, 2006, and
Class B Warrants to purchase in the aggregate 5 million shares of our common
stock at an exercise price equal to the greater of $1.00 or 110% of the bid
price of the common stock on the applicable advance date under the private
equity line of credit agreement. The Class B Warrant is exercisable pro rata on
or after each advance date with respect to that number of warrant shares equal
to the product obtained by multiplying 5 million by a fraction, the numerator of
which is the amount of the advance payable on the applicable advance date and
the denominator of which is $50 million, until sixty months from the date of
issuance.
9. In June 2001 we issued 60,000 shares of our common stock
pursuant to the exercise of certain options.
10. On July 27, 2001, pursuant to a securities purchase agreement
with various purchasers, we authorized the issuance and sale of up to 1,225,000
shares of our common stock and warrants to purchase an aggregate of 735,000
shares of common stock in a private offering transaction pursuant to Section
4(2) of the Securities Act for a purchase price of $0.40 per share, for an
aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which
provide for the adjustment of warrant price and warrant shares. As of the date
hereof, none of the warrants had been exercised.
11. During the year 2001, we issued approximately 76,000 shares
upon the cashless exercise of warrants, and 60,000 shares upon exercise of
options.
12. During the second quarter of 2002, we issued to certain three
investors an aggregate of $2 million principal amount of our 5% convertible
debentures at par in several private placements. Under the terms of each 5%
convertible debenture, 20% of the original issue is convertible on the original
date of issue at a price equal to the closing bid price quoted on the OTC
Bulletin Board on the preceding trading day (except for $500,000 of the
debentures which had an initial conversion price of $0.11 per share).
Thereafter, 20% of the principal balance may be converted at six-month intervals
at a conversion price equal to the higher of (i) 90% of the average closing bid
price for the five trading days prior to the conversion date; or (ii) ten cents
($0.10) which amount is subject to certain adjustments. The convertible
debentures, including interest accrued thereon, are payable by Advanced Viral in
shares of common stock and mature two years from the date of issuance. The
shares issued upon conversion of the debentures cannot be sold or transferred
for a period of one year from the applicable vesting date of the convertible
portion of the debentures.
13. On September 10, 2002, we issued and sold an aggregate of
21,500,000 shares of our common stock pursuant to a securities purchase
agreement with certain investors for total proceeds of approximately $3,010,000,
or $0.14 per share, along with warrants to purchase 16,125,000 shares of our
common stock at an exercise price of $0.25 per share, subject to adjustment, as
described below. In addition, pursuant to a placement agent agreement with H. C.
Wainwright &
II-2
Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and issued to
HCW 1,032,000 shares of our common stock. An adjustment provision in the
Warrants provides that 60 trading days following the original issue date of the
Warrants (the "First Determination Date"), a certain number of Warrants shall
become exercisable at $.001. The number of shares for which the Warrants are
exercisable at $.001 per share is equal to the positive difference, if any,
between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of
our common stock for the 60 trading days preceding the First Determination Date
and (ii) 21,500,000. Upon 120 trading days following the original issue date of
the Warrants (the "Second Determination Date"), a certain number of remaining
Warrants shall become exercisable at $.001. The number of shares for which the
Warrants are exercisable at $.001 per share is equal to the positive difference,
if any, between (i) $3,010,000 divided by the VWAP of our common stock for the
60 trading days preceding the Second Determination Date and (ii) 21,500,000. No
adjustment will be made in the event that the VWAP for the 60 trading day period
preceding the applicable determination date is $.14 or greater. In December 2002
we filed suit against certain of the investors in connection with the warrant
repricing provisions of the agreement, and during May 2003, we entered into
settlement and mutual release agreements with the parties involved in both the
Florida and New York litigation, which, among other things, dismissed the
lawsuits with prejudice, and Alpha Capital separately dismissed its lawsuit with
prejudice. Pursuant to the agreements, in exchange for release by the parties to
the lawsuits and certain parties to the September 2002 financing of their right
to exercise the warrants issued in the September 2002 financing, we issued an
aggregate of 947,000 shares of our common stock and agreed to pay an aggregate
of $1,047,891 to such parties, of which $790,748 has been paid to date, and of
which $321,428 shall be paid in five equal monthly installments until September
2003. 680,000 of the shares issued may not be resold until September 2003.
14. From December 2002 through June 2003, pursuant to securities
purchase agreements with various purchasers, we authorized the issuance of and
sold 22,650,000 shares of our common stock and warrants to purchase up to
13,590,000 shares of our common stock at $0.08 per share, for an aggregate
purchase price of $1,812,000. In connection with the agreement, we paid finders'
fees to Harbor View Group, AVIX, Inc. and Robert Nowinski consisting of (i)
approximately $98,095 and (ii) warrants to purchase an aggregate of 1,246,500
shares of our common stock. All of the aforementioned warrants are exercisable
at $0.12 per share commencing six months after the closing date of the
agreement, for a period of five years.
15. On April 28, 2003 we entered into a securities purchase
agreement with an Cornell Capital to sell up to $2,500,000 of our 5% convertible
debentures due April 28, 2008, $1 million of which was purchased on April 28,
2003; $500,000 of which was purchased on July 18, 2003; and $1 million 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 million
shares of our common stock at an exercise price of $0.091 commencing on October
28, 2003 through April 28, 2008. Pursuant to the terms of the agreement,
commencing July 27, 2003, Cornell Capital may convert the debenture plus accrued
interest, (which may be taken at investor's option in cash or common stock), in
shares of our common stock at a conversion price equal to the lesser of (a)
$0.08 or (b) 80% of the lowest closing bid price of our common stock for the
four trading days immediately preceding the conversion date. No more than
$600,000 may be converted in any thirty-day period of any of the convertible
debentures held by Cornell Capital. Advance Viral has redemption rights. If
Advanced Viral exercises certain of these redemption rights, Advanced Viral may
redeem a portion or the entire outstanding debenture at a price equal to 115% of
the amount redeemed plus accrued interest and investor will receive a warrant to
purchase 1 million shares of our stock for every $100,000 redeemed. The warrant
shall be exercisable on a cash basis and have an exercisable price of the higher
of 110% of the closing bid price of our common stock on the closing date or
$0.08. The warrant shall have "piggy back" registration rights and shall survive
for 5 years from the closing date.
16. On April 28, 2003, we entered into an equity line of credit
agreement with Cornell. The equity line agreement provides, generally, that
Cornell has committed to purchase up to $50 million of our common stock over a
three-year period, with the timing and amount of such purchases, if any, at our
discretion, provided, however, that the maximum amount of each advance is
$500,000, and the date of each advance shall be no less than six trading days
after our notification to Cornell of its obligation to purchase shares. Any
shares of common stock sold under the equity line will be priced at the lowest
closing bid price of our common stock during the five consecutive trading days
following our notification to Cornell requesting an advance under the equity
line. In addition, at the time of each advance, we are obligated to pay Cornell
a fee equal to five percent (5%) of the amount of each advance. However,
Cornell's obligation to purchase and our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
price we set on the advance notice date, the minimum acceptable price, which may
not be set any closer than 7.5% percent below the closing bid price of the
common stock the day prior to the date we notify Cornell of its obligation to
purchase shares. In addition, there are certain other conditions applicable to
our ability to draw down on the equity line including the filing and
effectiveness of a registration statement registering the resale of all shares
of common stock that may be issued to
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Cornell under the equity line and our adherence with certain covenants. There
can be no assurance of the amount of proceeds we will receive, if any, under the
equity line of credit with Cornell. In connection with this agreement, we issued
107,527 shares of our common stock to Katalyst LLC in consideration for its
exclusive placement agent services.
17. On July 18, 2003 we entered into an additional securities
purchase agreement whereby Cornell Capital purchased $1 million of our 5%
secured convertible debentures, due July 17, 2008. Pursuant to the agreement,
Cornell Capital received a 10% discount to the purchase price of the convertible
debentures purchased. The convertible debentures are secured by the assets of
Advanced Viral until 50 days after the effectiveness of the registration
statement of which this prospectus is a part. Pursuant to the terms of the
agreement, commencing October 18, 2003, Cornell Capital may convert the
debenture plus accrued interest, (which may be taken at Cornell Capital's option
in cash or common stock), in shares of our common stock at a conversion price
equal to the lesser of (a) $0.08 or (b) 80% of the lowest closing bid price of
our common stock for the four trading days immediately preceding the conversion
date. No more than $600,000 may be converted in any thirty-day period for all of
the convertible debentures held by Cornell Capital. Advanced Viral has
redemption rights. If Advanced Viral exercises certain of these redemption
rights, Advanced Viral may redeem a portion or the entire outstanding debenture
at a price equal to 115% of the amount redeemed plus accrued interest and
Cornell Capital will receive warrants to purchase 1 million shares of our stock
for every $100,000 redeemed. The warrant shall be exercisable on a cash basis
and have an exercisable price of the higher of 110% of the closing bid price of
our common stock on the closing date or $0.08. The warrant shall have "piggy
back" registration rights and shall survive for 5 years from the closing date.
18. In September 2003, in connection with a private offering
transaction pursuant to Section 4(2) of the Securities Act, we authorized the
issuance of and sold 21,620,000 shares of our common stock and warrants to
purchase up to 10,810,000 shares of our common stock at $0.05 per share, for an
aggregate purchase price of $1,081,000 pursuant to securities purchase
agreements with the purchasers listed below, in the following amounts. In
connection with the agreements, we paid finders' fees to Harbor View Group,
AVIX, Inc and Robert Nowinski consisting in the aggregate of (i) approximately
$115,667 and (ii) warrants to purchase 2,378,200 shares of our common stock. All
of the aforementioned warrants are exercisable at $0.10 per share commencing six
months after the issuance date, for a period of five years.
19. In January 2004, in connection with a private offering
transaction pursuant to Section 4(2) of the Securities Act, we authorized the
issuance of and sold 2,166,666 shares of our common stock and warrants to
purchase up to 758,334 shares of our common stock, for an aggregate purchase
price of $325,000, or $0.15 per share, pursuant to securities purchase
agreements with certain purchasers. In connection with the agreements, we paid
finders' fees to Harbor View Group consisting in the aggregate of (i)
approximately $26,000 and (ii) warrants to purchase 173,333 shares of our common
stock. All of the aforementioned warrants are exercisable at $0.19 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.
20. On February 3, 2004, we entered into an agreement with James
Dicke II and his son James Dicke III, whereby we agreed to sell an aggregate of
120 million shares of our common stock and warrants to purchase 15 million
shares of our common stock for an aggregate purchase price of $12 million.
Pursuant to the agreement, the funding shall take place in four equal stages of
$3 million each, once every 90 days with the first $3 million funding to occur
February 5, 2004. There are no conditions precedent to the investors' obligation
to close other than the accuracy of our representations and warranties and our
compliance with the agreement. The warrants have an exercise price of $0.20 per
share and are exercisable at any time through February 2, 2007. In addition, we
granted demand and piggyback registration rights to the investors for the shares
issued or issuable in connection with the transaction pursuant. James F. Dicke
II is the Chairman and CEO of Crown Equipment Corporation and a former member of
our Board of Directors.
21. On February 9, 2004, we entered into a termination and release
agreement with DCT, S.R.L. and certain of its affiliates pursuant to which
pursuant to which a distribution agreement and various testing agreements with
DCT, along with any and all distribution rights and rights to royalties or fees
thereunder, were terminated. In addition, the agreement provides that any and
all intellectual property rights relating to the terminated agreements were the
property of Advanced Viral, and the parties released each other from claims
relating thereto. In consideration, we agreed to pay DCT $60,000 and granted
warrants to purchase an aggregate of 5 million shares of our common stock to
certain of DCT's affiliates at an exercise price of $0.16 for a period of five
years. In addition the recipients of the warrants agreed not to sell more than
an aggregate of 2 million shares of our common stock in any six month period for
a period of five years.
Except as otherwise noted, we relied upon the exemption provided in
Section 4(2) of the Securities Act and/or Rule 506 thereunder, which cover
"transactions by an issuer not involving any public offering," to issue
securities discussed above without registration under the Securities Act of
1933. We made a determination in each case that the person to whom the
securities were issued did not need the protection that registration would
afford. The certificates representing the securities issued displayed a
restrictive legend to prevent transfer except in compliance with applicable
laws, and our transfer agent was
II-4
instructed not to permit transfers unless directed to do so by us, after
approval by our legal counsel. We believe that the investors to whom securities
were issued had such knowledge and experience in financial and business matters
as to be capable of evaluating the merits and risks of the prospective
investment. We also believe that the investors had access to the same type of
information as would be contained in a registration statement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT DESCRIPTION
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3.1 Certificate of Incorporation of Advanced Viral Research Corp. ("ADVR"). (2)
3.2 Bylaws of ADVR, as amended. (1)
3.3 Amendment to Certificate of Incorporation of ADVR. (2)
4.1 Specimen Certificate of Common Stock. (1)
4.2 Specimen Warrant Certificate. (1)
4.3 Warrant Agreement between ADVR and American Stock Transfer and Trust Company. (1)
4.4 Forms of Common Stock Options and Agreements granted by ADVR to TRM Management Corp. (5)
4.5 Form of Common Stock Option and Agreement granted by ADVR to Plata Partners Limited Partnership. (12)
4.6 Consulting Agreement, dated September 11, 1992, and Form of Common Stock granted by ADVR to Leonard Cohen. (6)
4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman, MD dated March 24, 1996. (10)
4.8 Securities Purchase Agreement dated November 16, 1998 by and between ADVR and RBB Bank AG. (11)(o)
4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)
4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.20 per share. (11)(o)
4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of common stock at $0.24 per share. (11)(o)
4.12 Securities Purchase Agreement dated December 22, 1998 by and between ADVR and various purchasers. (15)
4.13 Form of Warrant dated December 22, 1998 to purchase shares of common stock of ADVR at $0.2040 per share. (15)
4.14 Form of Warrant dated December 22, 1998 to purchase shares of common stock of ADVR at $0.2448 per share. (15)
4.15 Securities Purchase Agreement dated June 23, 1999 by and between ADVR and various purchasers. (15)
4.16 Form of Warrant dated June 23, 1999 to purchase shares of common stock of ADVR at $0.324 per share. (15)
4.17 Form of Warrant dated June 23, 1999 to purchase shares of common stock of ADVR at $0.378 per share. (15)
4.18 Securities Purchase Agreement dated August 3, 1999 by and between ADVR and Focus Investors, LLC. (15)
4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)
4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of common stock at $0.2461 per share. (15)
4.21 Securities Purchase Agreement dated December 28, 1999 between ADVR and Endeavour Capital Fund S.A. (16)
4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)
4.23 Form of Warrant dated December 28, 1999 to purchase shares of common stock at $0.19916667 per share. (16)
4.24 Form of Warrant dated February 7, 2000 to purchase shares of common stock at $0.21 per share. (17)
4.25 Form of Warrant dated February 7, 2000 to purchase shares of common stock at $0.26 per share. (17)
4.26 Form of Warrant dated February 16, 2000 to purchase shares of common stock at $0.275 per share. (17)
4.27 Form of Warrant dated February 16, 2000 to purchase shares of common stock at $0.33 per share. (17)
4.28 Form of Class A Warrant dated September 18, 2000 to purchase 5 million shares of common stock. (19)
4.29 Form of Class B Warrant dated September 18, 2000 to purchase 5 million shares of common stock. (19)
4.30 Form of Class A Warrant dated February 9, 2001 to purchase 5 million shares of common stock. (21)
II-5
EXHIBIT DESCRIPTION
- ------- -----------
4.31 Form of Class B Warrant dated February 9, 2001 to purchase 5 million shares of common stock. (21)
4.32 Promissory Note and Guaranty in favor of Alan V. Gallantar dated November 29, 2001 by ADVR. (11)(p)
4.33 Form of Warrant dated September 9, 2002 between ADVR and various investors. 11(q)
4.34 5% Convertible Debenture dated April 28, 2003. (27)
4.35 Warrant dated April 28, 2003 to purchase 15 million shares of common stock at an exercise price of $0.091
per share. (27)
4.36 5% Convertible Debenture dated July 18, 2003. (28)
4.37 Warrant dated February 3, 2003 to purchase 7,500,000 shares of common stock at an exercise price of $0.20
per share granted to James F. Dicke II. (11s)
4.38 Warrant dated February 3, 2003 to purchase 7,500,000 shares of common stock at an exercise price of $0.20
per share granted to James F. Dicke III. (11s)
4.39 Form of Warrant dated February 9, 2004 to purchase shares of common stock at an exercise price of $0.16
per share granted to certain affiliates of DCT. (Provided herewith)
4.40 Stock Option Agreement dated February 10, 2004 to purchase 40 million shares of common stock granted to
Elma S. Hawkins. (Provided herewith)
5.1 Opinion and Consent of the law firm of Berman Rennert Vogel & Mandler, P.A. (Provided herewith)
10.1 Declaration of Trust by Bernard Friedland and William Bregman in favor of ADVR dated November 16, 1987. (12)
10.2 Clinical Trials Agreement, dated September 19, 1990, between Clinique Medical Actuel and ADVR. (3)
10.3 Letter, dated March 15, 1991 to ADVR from Health Protection Branch. (3)
10.4 Agreement dated August 20, 1991 between TRM Management Corp. and ADVR. (11)(a)
10.5 Lease dated December 18, 1991 between Bayview Associates, Inc. and ADVR. (4)
10.6 Lease Agreement, dated February 16, 1993 between Stortford Brickell Inc. and ADVR. (7)
10.7 Consulting Agreement dated February 28, 1993 between Leonard Cohen and ADVR. (8)
10.8 Medical Advisor Agreement, dated as of September 14, 1993, between Lionel Resnick, MD and ADVR. (11)(b)
10.9 Agreement, dated November 9, 1993, between Dormer Laboratories Inc. and ADVR. (12)
10.10 Exclusive Distribution Agreement, dated April 25, 1994, between C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(c)
10.11 Exclusive Distribution Agreement, dated as of June 1, 1994, between C.U.R.E. Pharmaceutica Central
Americas Ltd. and ADVR. (11)(d)
10.12 Exclusive Distribution Agreement dated as of June 17, 1994 between DCT S.R.L. and ADVR, as amended. (11)(e)
10.13 Contract, dated as of October 25, 1994 between Commonwealth Pharmaceuticals of the Channel Islands and
ADVR. (11)(f)
10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver. (9)
10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z. Hirschman, MD. (9)
10.16 Exclusive Distribution Agreement, dated as of June 2, 1995, between AVIX International Pharmaceutical
Corp. and ADVR. (12)
10.17 Supplement to Exclusive Distribution Agreement, dated November 2, 1995 with Commonwealth Pharmaceuticals.
(12)
10.18 Exclusive Distributorship & Limited License Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp., Beijing Unistone Pharmaceutical Co., Ltd. and ADVR. (11)(g)
10.19 Modification Agreement, dated December 28, 1995, between AVIX International Pharmaceutical Corp. and
ADVR. (11)(g)
10.20 Agreement dated April 1, 1996, between DCT S.R.L. and ADVR. (11)(h)
10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement between ADVR and Shalom Z. Hirschman, MD.
(10)
10.22 Addendum to Agreement, dated July 11, 1996, between AVIX International Pharmaceutical Corp. and ADVR.
(11)(i)
10.23 Employment Agreement, dated October 17, 1996, between ADVR and Shalom Z. Hirschman, MD. (11)(j)
10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC and ADVR. (12)
10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997 between ADVR and Interfi Capital Group.
(11)(k)
10.26 Material Transfer Agreement-Cooperative Research And Development Agreement, dated March 13, 1997, between
National Institute of Health, Food and Drug Administration and the Centers for Disease Control and
Prevention. (11)(l)
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EXHIBIT DESCRIPTION
- ------- -----------
10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997 between ADVR and RBB Bank AG. (11)(m)
10.28 Copy of Extension to Materials Transfer Agreement-Cooperative Research and Development Agreement, dated
March 4, 1998, between National Institute of Health, Food and Drug Administration and the Centers for
Disease Control and Prevention. (13)
10.29 Amended and Restated Employment Agreement dated July 8, 1998 between ADVR and Shalom Z. Hirschman, MD.
(11)(n)
10.30 Agreement between ADVR and Angelo Chinnici, MD dated July 1, 1999. (14)
10.31 Consulting Agreement between ADVR and GloboMax LLC dated January 18, 1999. (15)
10.32 Registration Rights Agreement dated August 3, 1999 between ADVR Research and Focus Investors LLC. (15)
10.33 Employment Agreement dated October 1, 1999 between ADVR and Alan V. Gallantar. (15)
10.34 Registration Rights Agreement dated December 28, 1999 between ADVR and Endeavour Capital Fund, S.A. (16)
10.35 Consulting Agreement dated February 7, 2000 between ADVR and Harbor View Group, Inc. (17)
10.36 Securities Purchase Agreement dated February 16, 2000 between ADVR and Harbor View Group, Inc. (17)
10.37 Letter Agreement dated November 16, 1999 between ADVR and Bratskeir & Company. (18)
10.38 Amended and Restated Employment Agreement dated May 12, 2000 between ADVR and Shalom Z. Hirschman, MD.
(18)
10.39 Equity Line of Credit Agreement dated as of September 18, 2000 between ADVR and Spinneret Financial
Systems, Inc. (19)
10.40 Registration Rights Agreement dated as of September 18, 2000 between ADVR and Spinneret Financial
Systems, Inc. (19)
10.41 Registration Rights Agreement dated as of September 18, 2000 between ADVR and May Davis Group, Inc. (19)
10.42 Placement Agent Agreement dated September 18, 2000 between ADVR and May Davis Group, Inc. (19)
10.43 Assignment and Assumption Agreement dated December 12, 2000 between Spinneret Financial Systems, Inc. and
GMF Holdings Inc. (20)
10.44 Agreement to Waive Assignment Rights dated December 12, 2000 by GMF Holdings Inc. (20)
10.45 Termination Agreement dated January 22, 2001 between GMF Holdings, Inc., May Davis Group, Inc. and ADVR.
(21)
10.46 Equity Line of Credit Agreement dated as of February 9, 2001 between ADVR and Cornell Capital Partners,
LP. (21)
10.47 Registration Rights Agreement dated as of February 9, 2001 between ADVR and Cornell Capital Partners, LP.
(21)
10.48 Registration Rights Agreement dated as of February 9, 2001 between ADVR and May Davis Group, Inc. (21)
10.49 Placement Agent Agreement dated February 9, 2001 between ADVR and May Davis Group, Inc. (21)
10.50 Agreement dated as of April 2, 2001 between ADVR and Selikoff Center of Ra'Anana, Israel. (22)
10.51 Agreement dated as of January 29, 2001 between ADVR and The Weizmann Institute of Science and Yeda. (22)
10.52 Securities Purchase Agreement dated November 8, 2000 by and between ADVR and various investors. (23)
10.53 Securities Purchase Agreement dated July 27, 2001 by and between ADVR and various investors. (23)
10.54 Severance Agreement dated November 29, 2001 by and between ADVR and William Bregman. (11)(p)
10.55 Severance Agreement dated November 29, 2001 by and between ADVR and Bernard Friedland. (11)(p)
10.56 Severance Agreement dated November 29, 2001 by and between ADVR and Louis Silver. (11)(p)
10.57 Settlement Agreement dated March 20, 2002 by and among ADVR, Immune Modulation Maximum Corporation,
Commonwealth Pharmaceuticals, Ltd, and Charles E. Miller. (24)
10.58 Termination Agreement dated May 30, 2002 between ADVR and Harbor View Group, Inc. (25)
10.59 Securities Purchase Agreement dated May 30, 2002 between ADVR and O. Frank Rushing and Justine Simoni, as
joint tenants. (25)
10.60 Securities Purchase Agreement dated July 3, 2002 between ADVR and James F. Dicke III. (25)
10.61 Securities Purchase Agreement dated July 15, 2002 between ADVR and Peter Lunder. (25)
10.62 Securities Purchase Agreement dated September 9, 2002 between ADVR and various investors. 11(q)
10.63 Registration Rights Agreement dated September 9, 2002 between ADVR and various investors. 11(q)
II-7
EXHIBIT DESCRIPTION
- ------- -----------
10.66 Agreement dated May 1, 2002 (effective September 2002) between Advanced Viral Research Corp. and
EnviroGene LLC. (26)
10.64 Agreement dated October 8, 2002 between Advanced Viral Research Corp. and Quintiles Israel Ltd. (26)
10.65 Securities Purchase Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital
Partners, LP. (27)
10.66 Registration Rights Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital
Partners, LP. (27)
10.67 Equity Line of Credit Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital
Partners, LP. (27)
10.68 Registration Rights Agreement dated as of April 28, 2003 between the Registrant and Cornell Capital
Partners, LP. (27)
10.69 Consulting Agreement dated April 22, 2003 between Registrant and Robert Nowinski, Ph.D. (28)
10.70 Securities Purchase Agreement dated as of July 18, 2003 between the Registrant and Cornell Capital
Partners, LP. (28)
10.71 Investor Registration Rights Agreement dated as of July 18, 2003 between the Registrant and Cornell
Capital Partners, LP. (28)
10.72 Escrow Agreement dated July 18, 2003, between Registrant and Butler Gonzalez, LLP. (28)
10.73 Security agreement dated July 18, 2003 between Registrant and Cornell Capital Partners, L.P. (28)
10.74 Placement Agent Agreement dated April 28, 2003, between Registrant and Katalyst Securities LLC. (28)
10.75 Third Amended and Restated Employment Agreement dated August 27, 2003 between Registrant And Shalom Z.
Hirschman, M.D. (11r)
10.76 First Supplementary Agreement dated July 8, 2002 by and between Registrant and Yeda Research And
Development Company Limited. (28)
10.77 Agreement dated November 19, 2002 by and between Registrant and Kaplan Medical Center. (28)
10.78 Securities Purchase Agreement dated as of February 3, 2003 between the Registrant, James F. Dicke II and
James F. Dicke III. (11s)
10.79 Registration Rights Agreement dated as of February 3, 2003 between the Registrant, James F. Dicke II and
James F. Dicke III. (11s)
10.80 Termination and Release Agreement dated as of February 9, 2004 between the Registrant, DCT and certain
affiliates of DCT. (Provided herewith)
10.81 Employment Agreement dated as of February 10, 2004 between the Registrant and Elma S. Hawkins. (Provided
herewith)
21.1 Subsidiaries of Registrant: Advance Viral Research Ltd., a Bahamian corporation.
23.1 Independent Auditors' Consent. (Provided herewith)
FOOTNOTE NOTES TO INDEX TO EXHIBITS
- -------- --------------------------
1. Documents incorporated by reference herein to certain exhibits
our registration statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on
March 19, 1990.
2. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-18, File No. 33-2262-A,
filed with the Securities and Exchange Commission on February
12, 1989.
3. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
4. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for period ended March 31, 1991.
5. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
6. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-Q for the period ended
September 30, 1992.
7. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
8. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1993.
9. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended June 30, 1995.
10. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-QSB for the period ended March 31, 1996.
11. Incorporated by reference herein to our Current Reports on Form
8-K and exhibits thereto as follows:
11(a) A report on Form 8-K dated January 3, 1992.
II-8
FOOTNOTE NOTES TO INDEX TO EXHIBITS
- -------- --------------------------
11(b) A report on Form 8-K dated September 14, 1993.
11(c) A report on Form 8-K dated April 25, 1994.
11(d) A report on Form 8-K dated June 3, 1994.
11(e) A report on Form 8-K dated June 17, 1994.
11(f) A report on Form 8-K dated October 25, 1994.
11(g) A report on Form 8-K dated December 28, 1995.
11(h) A report on Form 8-K dated April 22, 1996.
11(i) A report on Form 8-K dated July 12, 1996.
11(j) A report on Form 8-K dated October 17, 1996.
11(k) A report on Form 8-K dated February 21, 1997.
11(l) A report on Form 8-K dated March 25, 1997.
11(m) A report on Form 8-K dated September 26, 1997.
11(n) A report on Form 8-K dated July 21, 1998.
11(o) A report on Form 8-K dated November 24, 1998.
11(p) A report on Form 8-K dated December 3, 2001.
11(q) A report on Form 8-K dated September 10, 2002.
11(r) A report on Form 8-K dated August 27, 2003.
11(s) A report on Form 8-K dated February 4, 2004.
12. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996.
13. Documents incorporated by reference herein to certain exhibits
to our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
14. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
15. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-1, as amended, File No.
33-70523, filed with the Securities and Exchange Commission on
January 13, 1999, and Amendment No. 5 thereto, declared
effective on December 15, 1999.
16. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-1, as amended, File No.
333-94529, filed with the Securities and Exchange Commission on
January 12, 2000.
17. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
18. Documents incorporated by reference herein to certain exhibits
to our registration statement on Form S-1, as amended, File No.
333-37974, filed with the Securities and Exchange Commission on
June 6, 2000.
19. Documents incorporated by reference herein to certain exhibits
to Post-effective Amendment No. 1 to our Registration Statement
on Form S-1, as amended, File No. 333-70523, filed with the
Securities and Exchange Commission on September 25, 2000.
20. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-49038,
filed with the Securities and Exchange Commission on October 31,
2000 and amended pursuant to Amendment No. 1 to Form S-1 filed
with the Commission on December 15, 2000.
21. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-55430,
filed with the Securities and Exchange Commission on February
12, 2001 and amended pursuant to Amendment No. 1 to Form S-1
filed with the Commission on February 13, 2000.
22. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 2000.
23. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-62788,
filed with the Securities and Exchange Commission on June 13,
2001 and amended pursuant to Amendment No. 1 to Form S-1 filed
with the Commission on August 23, 2001.
24. Documents incorporated by reference herein to certain exhibits to our
Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
25. Documents incorporated by reference herein to certain exhibits to our
Quarterly Report on Form 10-Q for the period ended June 30, 2002.
26. Documents incorporated by reference herein to certain exhibits
to our Quarterly Report on Form 10-Q for the period ended
September 30, 2002.
27. Document incorporated by reference herein to certain exhibits to our
quarterly report for the period ended March 31, 2003.
II-9
FOOTNOTE NOTES TO INDEX TO EXHIBITS
- -------- --------------------------
28. Documents incorporated by reference herein to certain exhibits
to our Registration Statement on Form S-1, File No. 333-107178,
filed with the Securities and Exchange Commission on July 18,
2003 and amended pursuant to Amendment No. 1 to Form S-1 filed
with the Commission on September 19, 2003, Amendment No. 2 to
Form S-1 filed with the Commission on November 18, 2003,
Amendment No. 3 to Form S-1 filed with the Commission on
December 19, 2003 and declared effective by the Commission on
December 23, 2003.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated August 27, 2003 with respect
to Item 5.
Current Report on Form 8-K dated February 4, 2004 with respect
to Item 5.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made a post-effective amendment to this registration statement to:
(i) To include any prospectus required by
Sections 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any additional or changed
material information on the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities that remain unsold at the end of
the offering.
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment No. 1 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Yonkers, State of New York, on February 12, 2004.
Date: February 12, 2004 ADVANCED VIRAL RESEARCH CORP. (Registrant)
By: /s/ Eli Wilner
--------------------------------------
Eli Wilner
President, Chief Executive Officer,
Chairman
Pursuant to the requirements of the Securities Act of 1933 as amended,
this Registration Statement on Form S-1 has been signed by the following persons
in the capacities and on the dates indicated.
Date: February 12, 2004 By: /s/ Alan V. Gallantar
--------------------------------------
Alan V. Gallantar,
Principal Financial and Accounting
Officer
Date: February 12, 2004 By: /s/ David Seligman
--------------------------------------
David Seligman, Director
Date: February 12, 2004 By: /s/ Nancy Van Sant
--------------------------------------
Nancy Van Sant, Director
Date: February 12, 2004 By: /s/ Roy Walzer
--------------------------------------
Roy Walzer, Director
Date: February 12, 2004 By: /s/ Elma S. Hawkins
--------------------------------------
Elma Hawkins, Director
II-11
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
4.39 Form of Warrant dated February 9, 2004 to purchase shares of common stock at an exercise price of $0.16
per share granted to certain affiliates of DCT.
4.40 Stock Option Agreement dated February 10, 2004 to purchase 40 million shares of common stock granted to
Elma S. Hawkins.
5.1 Opinion and Consent of the law firm of Berman Rennert Vogel & Mandler, P.A.
10.80 Termination and Release Agreement dated as of February 9, 2004 between the Registrant, DCT and certain
affiliates of DCT.
10.81 Employment Agreement dated as of February 10, 2004 between the Registrant and Elma S. Hawkins.
23.1 Independent Auditors' Consent.