U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
-----------------------------
(Exact name of Registrant as specified in its charter)
Delaware 59-2646820
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 Corporate Boulevard South, Yonkers, New York 10701
------------------------------------------------------
(Address of principal executive offices)
(914) 376-7383
--------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value
$.00001 per share as of May 12, 2000 was 359,965,747.
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED).......................................................................1
Item 1. Financial Statements........................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................29
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................41
PART II. OTHER INFORMATION......................................................................................42
Item 1. Legal Proceedings..........................................................................42
Item 2. Changes in Securities and Use of Proceeds..................................................42
Item 3. Defaults Upon Senior Securities............................................................42
Item 4. Submission of Matters to Vote of Security Holders..........................................42
Item 5. Other Information..........................................................................42
Item 6. Exhibits and Reports on Form 8-K...........................................................43
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
Statements
March 31, December 31,
2000 1999
---- ----
(Unaudited)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 4,094,197 $ 836,876
Inventory 19,729 19,729
Other current assets 167,387 59,734
------------ ------------
Total current assets 4,281,313 916,339
Property and Equipment 1,673,358 1,375,923
Other Assets 574,279 569,312
------------ ------------
Total assets $ 6,528,950 $ 2,861,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 846,675 $ 728,872
Current portion of capital lease obligation 51,416 50,315
Current portion of note payable 19,452 19,095
------------ ------------
Total current liabilities 917,543 798,282
------------ ------------
Long-Term Liabilities:
Common stock to be issued 3,000,000 --
Convertible debenture, net 15,000 4,446,629
Capital lease obligation - non-current portion 138,785 152,059
Note payable - non-current portion 74,581 77,964
------------ ------------
Total long-term liabilities 3,228,366 4,676,652
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 347,174,843 and 303,472,035
shares issued and outstanding 3,471 3,034
Additional paid-in capital 26,117,514 17,537,333
Deficit accumulated during the development stage (21,779,658) (19,725,238)
Discount on warrants (1,958,286) (428,489)
------------ ------------
Total stockholders' equity (deficiency) 2,383,041 (2,613,360)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 6,528,950 $ 2,861,574
============ ============
See notes to consolidated condensed financial statements.
1
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Inception
Three Months Ended (February 20,
March 31, 1984) to
--------- March 31,
2000 1999 2000
---- ---- ----
Revenues $ 3,028 $ 2,399 $ 208,956
------------- ------------- -------------
Costs and Expenses:
Research and development 695,075 357,916 6,024,479
General and administrative 755,423 438,403 10,314,875
Depreciation 67,760 37,107 613,983
------------- ------------- -------------
1,518,258 833,426 16,953,337
------------- ------------- -------------
Net Loss from Operations (1,515,230) (831,027) (16,744,381)
------------- ------------- -------------
Other Income (Expense):
Interest income 24,963 15,809 627,004
Other income -- -- 120,093
Interest expense (564,153) (94,578) (5,782,374)
------------- ------------- -------------
(539,190) (78,769) (5,035,277)
------------- ------------- -------------
Net Loss $ (2,054,420) $ (909,796) $ (21,779,658)
============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (.01) $ (.00)
============= =============
Weighted Average Number of
Common Shares Outstanding 313,819,774 297,577,226
============= =============
See notes to consolidated condensed financial statements.
2
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Deficit
Common Stock 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 $ .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 .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 .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 condensed financial statements.
3
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Deficit
Common Stock 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 $ .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, period 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 .05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .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 condensed financial statements.
4
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Deficit
Common Stock 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 $ .05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants .08 2,500 -- 200 --
Issuance of common stock, exercise of underwriters warrants .012 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 .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants .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 .055 500,000 5 27,495 --
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 --
Issuance of common stock, for testing .035 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 condensed financial statements.
5
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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 $ .05 4,750,000 47 237,453 --
Issuance of common stock, exercise of options .08 400,000 4 31,996 --
Issuance of common stock, exercise of options .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 .05 3,333,333 33 166,633 --
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 --
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 --
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 --
Issuance of common stock, for consulting services .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 --
----------- --------- ----------- ----------
(RESTUBBED TABLE)
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 condensed financial statements.
6
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Common Stock
Amount ------------ Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ --
Issuance of common stock, exercise of options $ .05 3,333,334 33 166,634 --
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 --
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 --
Issuance of common stock, exercise of options .11 170,000 2 18,698 --
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 --
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 --
Issuance of common stock, exercise of options .19 500,000 5 94,995 --
Issuance of common stock, exercise of options .20 473,500 5 94,695 --
Issuance of common stock, for services rendered .50 350,000 3 174,997 --
Options granted -- -- 760,500 --
Subscription receivable -- -- -- (19,000)
Net loss, year ended December 31, 1996 -- -- -- --
----------- ---------- ------------ ------------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000)
----------- ---------- ------------ ------------
(RESTUBBED TABLE)
Deficit
Accumulated
during the Deferred
Development Compensation
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 -- --
Net loss, year ended December 31, 1996 (1,154,740) --
------------ ---------
Balance, December 31, 1996 (4,851,537) (473,159)
------------ ---------
See notes to consolidated condensed financial statements.
7
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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 $ .08 3,333,333 33 247,633 --
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984 --
Issuance of common stock, conversion of debt .15 894,526 9 133,991 --
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977 --
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982 --
Issuance of common stock, conversion of debt .16 772,201 8 119,992 --
Issuance of common stock, for services rendered .41 50,000 -- 20,500 --
Issuance of common stock, for services rendered .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)
----------- ------------ ------------ ------------
(RESTUBBED TABLE)
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 condensed financial statements.
8
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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 $ .12 295,000 3 35,397 --
Issuance of common stock, exercise of options .14 500,000 5 69,995 --
Issuance of common stock, exercise of options .16 450,000 5 71,995 --
Issuance of common stock, exercise of options .20 10,000 -- 2,000 --
Issuance of common stock, exercise of options .26 300,000 3 77,997 --
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 --
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 --
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 --
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 --
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 --
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 --
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 --
Issuance of common stock, for services rendered .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 --
----------- -------- ------------ ----------
(RESTUBBED TABLE)
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 condensed financial statements.
9
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Deficit
Common Stock 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 $ .16 4,917,276 49 802,451 --
Issuance of common stock, securities purchase agreement .27 1,851,852 18 499,982 --
Issuance of common stock, for services rendered .22 100,000 1 21,999 --
Issuance of common stock, for services rendered .25 180,000 2 44,998 --
Beneficial conversion feature, August debenture -- -- 687,500 --
Beneficial conversion feature, December debenture -- -- 357,143 --
Warrant costs, securities purchase agreement -- -- 494,138 --
Warrant costs, securities purchase agreement -- -- 37,025 --
Warrant costs, August debenture -- -- 52,592 --
Warrant costs, December debenture -- -- 4,285 --
Amortization of warrant costs, securities purchase agreement -- -- -- --
Amortization of deferred compensation cost -- -- -- --
Compensation expense related to modification of existing options -- -- 210,144 --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262)
----------- --------- ------------ ------------
Balance, December 31, 1999 303,472,035 3,034 $ 17,537,333 $(19,725,238)
=========== ========= ============ ============
(RESTUBBED TABLE)
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 -- --
Warrant costs, securities purchase agreement -- (494,138)
Warrant costs, securities purchase agreement -- (37,025)
Warrant costs, August debenture -- --
Warrant costs, December debenture -- --
Amortization of warrant costs, securities purchase agreement -- 102,674
Amortization of deferred compensation cost 14,769 --
Compensation expense related to modification of existing options -- --
Net loss, year ended December 31, 1999 -- --
------------ ----------
Balance, December 31, 1999 $ -- $(428,489)
============ ==========
See notes to consolidated condensed financial statements.
10
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,537,333
Issuance of common stock, exercise of options $ .14 600,000 6 83,994
Issuance of common stock, exercise of options .15 1,600,000 16 239,984
Issuance of common stock, exercise of options .16 500,000 5 79,995
Issuance of common stock, exercise of options .21 792,500 8 166,417
Issuance of common stock, exercise of options .36 60,000 1 21,599
Issuance of common stock, exercise of warrants .20 122,549 1 24,999
Issuance of common stock, exercise of warrants .24 122,549 1 29,999
Issuance of common stock, exercise of warrants .25 1,000,000 10 246,090
Issuance of common stock, conversion of debt .14 35,467,682 355 4,907,146
Issuance of common stock, conversion of debt .19 1,036,674 10 199,990
Issuance of common stock, conversion of debt .20 1,887,500 19 377,481
Issuance of common stock, cashless exercise of warrants 513,354 5 305,754
Cashless exercise of warrants -- -- (305,759)
Beneficial conversion feature, January debenture -- -- 386,909
Warrant costs, consulting agreement -- -- 200,249
Warrant costs, January debenture -- -- 13,600
Warrant costs, private placement -- -- 1,582,734
Recovery of subscription receivable previously written off -- -- 19,000
Amortization of warrant costs, securities purchase agreements -- -- --
Net loss, three months ended March 31, 2000 -- -- --
----------- --------- ------------
Balance, March 31, 2000 347,174,843 $ 3,471 $ 26,117,514
=========== ========= ============
(RESTUBBED TABLE)
Deficit
Accumulated
during the Discount
Development on
Stage Warrants
----- --------
Balance, December 31, 1999 $(19,725,238) $ (428,489)
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, 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 -- --
Cashless exercise of warrants -- --
Beneficial conversion feature, January debenture -- --
Warrant costs, consulting agreement -- --
Warrant costs, January debenture -- --
Warrant costs, private placement -- (1,582,734)
Recovery of subscription receivable previously written off -- --
Amortization of warrant costs, securities purchase agreements -- 52,937
Net loss, three months ended March 31, 2000 (2,054,420) --
------------ -----------
Balance, March 31, 2000 $(21,779,658) $(1,958,286)
============ ===========
See notes to consolidated condensed financial statements.
11
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Three Months Ended (February 20,
March 31, 1984) to
-------------------- March 31,
2000 1999 2000
---- ---- ----
Cash Flows from Operating Activities:
Net loss $ (2,054,420) $ (909,796) $(21,779,658)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 67,760 37,107 613,893
Amortization of debt issue costs 106,030 26,250 779,215
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 386,909 -- 3,820,270
Amortization of discount on warrants 119,908 36,730 558,467
Amortization of deferred compensation cost -- 14,769 760,500
Issuance of common stock for services -- -- 1,504,500
Compensation expense related to modification of
existing options -- -- 210,144
Realization of prepaid consulting fees 111,545 -- 111,545
Other -- -- (1,607)
Changes in Operating Assets and Liabilities:
Increase in inventory -- -- (19,729)
Increase in other current assets (18,953) (11,456) (78,688)
Increase in other assets (4,967) (43,680) (1,221,925)
Increase (decrease) in accounts payable and
accrued liabilities 117,803 (41,086) 852,875
------------ ------------ ------------
Total adjustments 886,035 18,634 7,889,460
------------ ------------ ------------
Net cash used by operating activities (1,168,385) (891,162) (13,890,198)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- 821,047 6,292,979
Expenditures for property and equipment (365,195) (53,484) (1,915,945)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities (365,195) 767,563 (1,914,745)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,000,000 -- 9,500,000
Proceeds from deposit on securities purchase agreement -- -- 600,000
Proceeds from deposit on common stock to be issued,
private placement 3,000,000 -- 3,000,000
Proceeds from sale of securities, net of issuance costs 787,100 202,500 6,868,188
Payments under capital lease (12,173) (12,418) (70,761)
Payments on note payable (3,026) -- (17,287)
Recovery of subscription receivable written off 19,000 -- 19,000
------------ ------------ ------------
Net cash provided by financing activities 4,790,901 190,082 19,899,140
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 3,257,321 66,483 4,094,197
Cash and Cash Equivalents, Beginning 836,876 924,420 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 4,094,197 $ 990,903 $ 4,094,197
============ ============ ============
See notes to consolidated condensed financial statements.
12
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at March 31, 2000 have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of March 31, 2000 and
results of operations and cash flows for the three months ended
March 31, 2000 and 1999. All such adjustments are of a normal
recurring nature. The results of operations for interim periods are
not necessarily indicative of the results to be expected for a full
year. Certain amounts in the 1999 financial statements have been
reclassified to conform to 2000 presentation. The statements should
be read in conjunction with the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at March 31, 2000 have been prepared in conformity with
generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has
suffered losses from operations during its operating history. The
Company 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 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 may be
dependent upon the continued sale of its securities and debt
financing for funds to meet its cash requirements. Management
intends to continue to sell the Company's securities in an attempt
to mitigate the effects of its cash position; however, no assurance
can be given that equity or debt financing, if and when required,
will be available. In the event that such equity or debt financing
is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. During
2000 and 1999, the Company obtained equity and debt financing and
may seek additional financing as the need arises. No assurance can
be given that the Company will be able to sustain its operations
until FDA approval is granted or that any approval will ever be
granted. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company expects to
submit an application for approval with the FDA in the near future.
The consolidated condensed financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
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.
13
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of Product R. Although the Company is
unaware of any such claims or threatened claims since Product R was
initially marketed in the 1940's, one study noted adverse reactions
from highly concentrated doses in guinea pigs. 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. As of the date hereof, the Company
does not have product liability insurance for Product R. There can
be no assurance that the Company will be able to secure such
insurance in adequate amounts, at reasonable premiums if it
determined to do so. Should the Company be unable to secure such
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 three issued patents and one allowed patent for the
use of Product R. The Company currently has 15 patent applications
pending with the U.S. Patent Office and 17 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.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through June 30, 2000
at an exercise price of $.15 and $.17, respectively. The fair value
of these options are estimated to be $32,925 ($.0348 per option
share) based upon a financial analysis of the terms of the options
using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided. As
14
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Plata Partners Limited Partnership
of March 31, 2000, there are outstanding Plata Options to acquire
83,300 shares at $.15 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.17 per share.
Through March 31, 2000, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
Argentine Agreement
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug Product R on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50.
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, the Written Report was delivered by
Dr. Flichman to the Company. Upon delivery of the Written Report to
the Company, the Company delivered to the principals of DCT options
to acquire 2,000,000 shares of the Company's common stock for a
period of one year from the date of the delivery of the Written
Report, at a purchase price of $.20 per share. Pursuant to several
amendments, the DCT options are exercisable through June 30, 2000
at an exercise price of $.21 per share. The fair value of these
options are estimated to be $1,788 ($.0012 per option share) based
on the following assumptions: expected volatility of 20%; risk free
interest rate of 6%. This amount has been charged to compensation
expense at December 31, 1999 as it related to services previously
provided. As of March 31, 2000, 1,266,000 shares of common stock
were issued pursuant to the exercise of these options for an
aggregate exercise price of approximately $261,425.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
Product R in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
15
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of Product R for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study. In connection with the HIV-HPV Agreement, the
Company advanced approximately $665,000 which is accounted for as
research and development expense. The amounts have been used to
cover expenses associated with clinical activities of the HIV-HPV
Study.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Product R being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
Product R for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $132,000, respectively. Such expenses are
accounted for as research and development expense. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with Product R being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and Product R with those taking a
three drug cocktail and a
16
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
placebo. As of March 31, 2000, the Company has advanced
approximately $50,000 for such study which has been accounted for
as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$85,000 which has been accounted for as research and development
expense.
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of March 31, 2000, the Company has advanced
approximately $50,000 for such study which has been accounted for
as research and development expense.
As of March 31, 2000, the Company advanced approximately $281,000
for expenses in connection with the drug approval process in
Argentina.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
Product R in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of March 31, 2000, the Company has
expended approximately $390,000 to cover the costs of the Barbados
Study.
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of March 31, 2000, the Company has advanced
approximately $15,000 for such study which has been accounted for
as research and development expense.
17
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. 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 $.18 per
share. As of March 31, 2000, 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 23, 2009 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares (exercisable until March 23, 2001) were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman; (ii)
options to purchase 5,000,000 shares exercisable at any time and
from time to time commencing March 24, 1997 and ending March 23,
2009 at an exercise price of $.27 per share, of which options to
acquire 500,000 shares (exercisable until March 23, 2001) were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; 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 23, 2009 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares (exercisable
until March 23, 2001) were assigned by Dr. Hirschman to Richard
Rubin, consultant to Dr. Hirschman. 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. As of March
31, 2000, 560,000 shares of common stock were issued pursuant to
the exercise of stock options by Richard Rubin. Mr. Rubin has, from
time to time in the past, advised the Company on matters unrelated
to his consultation with Dr. Hirschman.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options
and 75,000 of his $0.36 options to Elliot Bauer, an individual who
also received and exercised shares and options as a result of the
"Cohen Agreements".
18
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Hirschman Agreement (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $.19, 500,000 at $.27, and 500,000 at $.36), which are
exercisable until March 23, 2001.
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
do not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000 (increased to $361,000 as of January
1, 2000), use of an automobile, major medical, term life,
disability and dental insurance benefits for the term of his
employment. The Employment Agreement further provides that Dr.
Hirschman shall be nominated by the Company to serve as a member of
the Company's Board of Directors and that Bernard Friedland and
William Bregman will vote in favor of Dr. Hirschman as a director
of the Company, for the duration of Dr. Hirschman's employment, and
since October 1996, Dr. Hirschman has served as a member of the
Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
19
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Cohen Agreements
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through June 30, 2000), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per share (which exercise price has been increased to $.16 per
share) (the "September 1992 Cohen Options"). The fair value of
these options are estimated to be $59,030 ($.0347 per option share)
based upon a financial analysis of the terms of the options using
the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. As of March 31,
2000, 2,800,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $386,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). Through March 31, 2000, 3,455,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $240,000. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through June 30, 2000 at an option
20
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Cohen Agreements (Continued)
price of $.14. The fair value of these options are estimated to be
$116,101 ($.0541 per option share) based upon a financial analysis
of the terms of the options using the Black-Sholes Pricing Model
with the following assumptions: expected volatility of 20%; risk
free interest rate of 6%. This amount has been charged to
compensation expense at December 31, 1999 as it related to services
previously provided.
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. The contract was extended by
mutual consent of both parties. The Company has incurred
approximately $471,000 in services to GloboMax through March 31,
2000.
Gallantar Agreement
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial Officer of the Company for a period of
three years, subject to earlier termination by either party, either
for cause as defined in and in accordance with the provisions of
the agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. 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 and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options are estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; a risk free
interest rate of 6% and an expected holding period of three years
(the term of the employment agreement).
21
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Gallantar Agreement (Continued)
Financial reporting of these options has been done pursuant to the
Company's policy of following APB No. 25, and related
interpretations, in accounting for its employee stock options.
Accordingly, the following pro forma financial information is
presented to reflect amortization of the fair value of the options.
As
Reported Pro forma As
March 31,2000 Adjustment Adjusted
------------- ---------- --------
Net loss $(2,054,420) $(31,344) $(2,085,764)
=========== ======== ===========
Net loss per share $(0.01) $(0.00) $(0.01)
====== ====== ======
There were no other options outstanding that would require pro
forma presentation.
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 is estimated to be $200,249 ($.057 per warrant) based upon
a financial analysis of the terms of the warrants using the
Black-Sholes 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).
The Company has determined that $89,045 of the fair value relates
to past services and, accordingly, has expensed this portion in the
three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and will be amortized over the
remaining term of the agreement.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Product R in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
22
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS (Continued)
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. 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.
OTHER
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
offices in Yonkers, New York (the "build-out"). The Company anticipates
that the total expenses associated with the build-out would be
approximately $400,000, of which $386,000 has been incurred as of March
31, 2000.
NOTE 3. CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively,
principal amount of its ten-year 7% Convertible Debentures (the
"February Debenture" and the "October Debenture", collectively, the
"Debentures") due February 28, 2007 and August 30, 2007, respectively,
to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
pursuant to Regulation S under the Securities Act of 1933, as amended.
Accrued interest under the Debentures was payable semi-annually,
computed at the rate of 7% per annum on the unpaid principal balance
from the date of issuance until the date of interest payment. The
Debentures were convertible, at the option of the holder, into shares
of Common Stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000,
$134,000, $270,000 and $266,000, respectively, of the principal amount
of the February Debenture was converted into 1,648,352, 894,526,
2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
August 20, 1997, the February Debenture was fully converted. On
December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
the October Debenture was fully converted.
23
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase
common stock, each such February Warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February Warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black-Sholes Pricing Model. This amount has been
reflected in the accompanying financial statements as interest expense
related to the convertible February Debenture. Based on the terms for
conversion associated with the February Debenture, there was an
intrinsic value associated with the beneficial conversion feature of
$413,793. This amount has been fully amortized to interest expense with
a corresponding credit to additional paid-in capital.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October Warrants") to purchase
Common Stock, each such October Warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
Warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October Warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black-Sholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized over the expected
term of the notes, which at December 31, 1997 was 120 months. In May
1998, the remaining unamortized discount of $276,957 was amortized upon
full conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture liability with a corresponding credit to
additional paid-in capital and has been amortized to interest expense
over the period from October 8, 1997 (date of debenture) to February
24, 1998 (date the debenture is fully convertible). The interest
expense relative to this item was $210,951 for 1998 and $1,139,049 for
1997.
In November 1998, in order to finance further research and development,
the Company sold 1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the November
Debenture until the date of interest payment. The November Debenture
may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the
Debenture notice not less than 30 days before the date fixed for
prepayment in that notice. The November Debenture is convertible, at
the option of the holder, into shares of common stock.
24
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
On January 19, 2000 and March 7, 2000 pursuant to notice by the holder,
RBB, to the Company under the November Debenture, $1,122,500 and
$377,500, respectively, of the principal amount of the November
Debenture was converted into 8,252,746 and 1,887,500 shares of the
common stock, respectively. As of March 7, 2000, the November Debenture
was fully converted.
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise price of the two November
Warrants are $.20 and $.24 per warrant share, respectively. The fair
value of the November warrants was estimated to be $48,000 ($.064 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of one year. This amount has been amortized to
interest expense in the accompanying consolidated condensed financial
statements.
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $625,000. This amount has been recorded as
interest expense in 1998.
In August 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to issue an
aggregate of 20 units, each unit consisting of $100,000 principal
amount of the Company's 7% convertible debenture (the "August
Debenture") due August 3, 2009 to Focus Investors LLC ("Focus").
Accrued interest under the August Debenture is payable semi-annually,
computed at the rate of 7% on the unpaid principal balance from the
date of issuance until the date of the interest payment. No payment of
the principal of the August Debenture may be made prior to the maturity
date without the consent of the holder. The August Debenture is
convertible, at the option of the holder, into shares of common stock.
On January 19, 2000, February 17, 2000 and March 3, 2000 pursuant to
notice by the holder, Focus, to the Company under the August Debenture,
$300,000, $900,000 and $800,000, respectively, of the principal amount
of the August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3, 2000
the November Debenture was fully converted.
In connection with the issuance of the August Debenture, the Company
issued to Focus one warrant (the "August Warrant") to purchase Common
Stock, such August Warrant entitling the holder to purchase 1,000,000
shares of the Common Stock at any time and from time to time through
August 3, 2004. The exercise price of the August Warrant is $.2461 per
warrant share. The fair value of the August Warrants was estimated to
be $52,593 ($.0526 per warrant share) based upon a financial analysis
of the terms of the warrant using the Black-Sholes Pricing Model with
the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of five years.
This amount has been amortized to interest expense in the accompanying
consolidated condensed financial statements.
25
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the August Debenture,
there was an intrinsic value associated with the beneficial conversion
feature of $687,500. This amount has been recorded as interest expense
in 1999.
In December 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to sell
$2,000,000 principal amount of the Company's 7% convertible debenture
(the December Debenture) due December 28, 2009 to Endeavour Capital
("Endeavour"). Accrued interest under the December Debenture is payable
semi-annually, computed at the rate of 7% on the unpaid principal
balance from the date of issuance until the date of the interest
payment. No payment of the principal of the December Debenture may be
made prior to the maturity date without the consent of the holder. The
December Debenture is convertible, at the option of the holder, into
shares of common stock.
During 1999, $1,000,000 of these debentures were sold. The remaining
$1,000,000 was not available until the shares underlying the first
$1,000,000 were registered. Such registration statement was declared
effective in January 2000 and the remaining $1,000,000 transaction was
consummated.
On January 27, 2000, February 22, 2000, February 23, 2000, February 24,
2000 and February 29, 2000 pursuant to notice by the holder, Endeavour,
to the Company under the December Debenture, $150,000, $135,000,
$715,000, $785,000 and $200,000, respectively, of the principal amount
of the December Debenture was converted into 1,105,435, 988,913,
5,149,035, 5,622,696 and 1,036,674 shares of the common stock,
respectively. As of March 31, 2000, $15,000 of the December Debenture
remained outstanding.
In connection with the issuance of the first $1,000,000 of the December
Debenture, the Company issued to Endeavour warrants (the December
Warrants) to purchase Common Stock, such December Warrant entitling the
holder to purchase 100,000 shares of the Common Stock at any time and
from time to time through December 31, 2002. The exercise price of the
December Warrant is $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant share)
based upon a financial analysis of the terms of the warrant using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 20%; a risk free interest rate of 6% and an expected
holding period of three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the first $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrant
entitling the holder to purchase 100,000 shares of the Common Stock at
any time and from time to time through December 31, 2002. The exercise
price of the December
26
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
Warrant is $.20 per warrant share. The fair value of the December
Warrants was estimated to be $13,600 ($.136 per warrant share) based
upon a financial analysis of the terms of the warrant using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 90%; a risk free interest rate of 6% and an expected
holding period of three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the second $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $386,909. This amount has been
recorded as interest expense in 2000.
A summary of the outstanding convertible debentures is as follows:
March 31, December 31,
2000 1999
---- ----
Unpaid principal balance of November debenture $ - $1,500,000
Unpaid principal balance of August debenture - 2,000,000
Unpaid principal balance of December debenture 15,000 1,000,000
------- ----------
15,000 4,500,000
Less unamortized discount - 53,371
------- ----------
Convertible debentures, net $15,000 $4,446,629
======= ==========
NOTE 4. SECURITIES PURCHASE AGREEMENTS
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an aggregate
purchase price of $802,500. Such agreement also provided for the
issuance of four warrants to purchase a total of 2,366,788 shares of
common stock at prices ranging from $.204 to $.2448 per share at any
time until December 31, 2003. The fair value of these warrants was
estimated to be $494,138 ($.209 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Sholes Pricing
Model with the following assumptions: expected volatility of 20%; a
risk free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase price of
$500,000. These proceeds were received in July 1999. Such agreement
also provides for the issuance of warrants to purchase an aggregate of
925,926 shares of common stock at any time until June 30, 2004. The
fair value of these warrants was estimated to be $37,000 ($.04 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of five years. This amount is being amortized
to interest expense.
27
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
Pursuant to a securities purchase agreement with Harbor View Group and
other various purchasers, dated February 16, 2000, the Company received
$3,000,000 on March 9, 2000 in exchange for 13,636,357 shares of common
stock. As of March 31, 2000, these shares had not yet been issued;
accordingly, the $3,000,000 has been reported as a separate line item
("Common stock to be issued") in the long-term liabilities section of
the accompanying consolidated condensed balance sheet.
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%) of
the warrants are exercisable at $0.275 per share and fifty percent
(50%) of the warrants are exercisable at $0.33 per share, until
February 28, 2005. The fair value of these warrants was estimated to be
$1,582,734 ($0.295 and $0.285 per warrant share) based upon a financial
analysis of the terms of the warrant using the Black-Sholes Pricing
Model with the following assumptions; expected volatility of 90%; a
risk free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated condensed financial statements.
28
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction
with the Consolidated Condensed Financial Statements and the related Notes to
Consolidated Condensed Financial Statements included in Item 1 of this Quarterly
Report on Form 10-Q. The results of operations for interim periods are not
necessarily indicative of the results to be expected for a full year. The
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1999.
OVERVIEW
Since our inception in July 1985, ADVR has been engaged primarily in
research and development activities. We have not yet generated significant
operating revenues, and as of March 31, 2000 we had incurred a cumulative net
loss of approximately $21,780,000. Our ability to generate substantial operating
revenue depends upon our success in gaining FDA approval for the commercial use
and distribution of Product R (the prior formulation of which was known as
"Reticulose"). All of our research and development efforts have been devoted to
the development of Product R.
In order to commence clinical trials for regulatory approval of Product
R in the United States, we must submit an Investigational New Drug application
(IND) with the FDA. Filings with foreign regulatory agencies are required to
continue or begin new clinical trials outside the United States. We have
recently contracted with GloboMax LLC of Hanover, Maryland to assist us in our
preparation and filing of the IND with the FDA, and to otherwise assist us
through the FDA process with the objective of obtaining full approval for the
manufacture and commercial distribution of Product R in the United States. The
IND will seek approval to conduct a study testing the effectiveness of Product R
on human subjects with AIDS and other diseases. In the IND we intend to include,
among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be
conducted on humans; and
o information assuring the identification, quality and
purity of Product R and a description of the physical,
chemical and microbiological characteristics of Product R.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Product R as a treatment of AIDS and other
diseases, however, it is impossible to determine if or how much of the data from
any ongoing studies will be considered useful by the FDA in considering the IND
application, if it is ever filed. FDA approval to begin human clinical trials of
Product R pursuant to an approved IND will require significant cash
expenditures. Furthermore, Product R may never be approved for commercial
distribution by any country.
29
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that will be conducted at those
institutions will depend upon our financial status. 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.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 2000 and March 31, 1999, we
incurred losses of approximately $2,054,000 ($0.01 per share) and $910,000
($0.00 per share). Our increased losses were attributable primarily to:
General and Administrative Expense. Our increased losses during the
three months ended March 31, 2000 are principally due to increased general and
administrative expense (approximately $755,000 for the three months ended March
31, 2000 vs. $438,000 for the three months ended March 31, 1999). Included in
the general and administrative expenses are:
o an increase in consulting and professional fees of
approximately $182,000 ($327,000 for the three months ended
March 31, 2000 vs. $145,000 for the three months ended March
31, 1999) attributable to the engagement of an investor
relations firm and a consulting agreement with Harbor View
Group;
o an increase in payroll and related expenses of approximately
$90,000 ($236,000 for the three months ended March 31, 2000
vs. $146,000 for the three months ended March 31, 1999)
attributable to increased employee and officer salaries and
the addition of a Chief Financial Officer position; and
o SEC filing fees of approximately $40,000 for the three months
ended March 31, 2000 vs. $0 filing fees paid during the three
months ended March 31, 1999.
Depreciation Expense. Our increased losses during the three months
ended March 31, 2000 are also due to increased depreciation expense
(approximately $68,000 for the three months ended March 31, 2000 vs. $37,000 for
the three months ended March 31, 1999) due to the purchase of additional
machinery and equipment and leasehold improvements.
Interest Income (Expense). Our increased losses during the three months
ended March 31, 2000 are also due to increased interest expense (approximately
$564,000 for the three months ended March 31, 2000 vs. $95,000 for the three
months ended March 31, 1999). Interest income for the three months ended March
31, 2000 was approximately $25,000 vs $16,000 for the three months ended March
31, 1999. Included in the interest expense are:
o amortization of loan costs and other interest expense (as
reduced by other items previously accrued at year end) of
approximately $57,000 for the three months ended March 31,
2000 vs. $26,000 for the three months ended March 31, 1999;
30
o beneficial conversion feature on certain convertible
debentures of approximately $387,000 for the three months
ended March 31, 2000 vs. $0 for the three months ended March
31, 1999;
o amortization of discount on certain warrants of approximately
$120,000 for the three months ended March 31, 2000 vs. $37,000
for the three months ended March 31, 1999.
Research and Development Expense. Our increased losses during the three
months ended March 31, 2000 are also due to an increase in research and
development expenses of approximately $337,000 (approximately $695,000 for the
three months ended March 31, 2000 vs. $358,000 for the three months ended March
31, 1999). Included in the research and development expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting
us with the preparation and filing of the IND, of
approximately $268,000 for the three months ended March 31,
2000 vs. $0 for the three months ended March 31, 1999; and
o expenditures in connection with the drug approval process in
Argentina of approximately $45,000 for the three months ended
March 31, 2000 vs. $0 for the three months ended March 31,
1999.
Revenues. We had sales of approximately $3,000 for the three months
ended March 31, 2000 vs. $2,000 for the three months ended March 31, 1999. All
sales during these periods were to distributors purchasing Product R for testing
purposes.
LIQUIDITY
As of March 31, 2000, we had current assets of approximately
$4,281,000, compared to approximately $916,000 at December 31, 1999. We had
total assets of approximately $6,529,000 and $2,862,000 at March 31, 2000 and
December 31, 1999, respectively. The increase in current and total assets was
primarily attributable to proceeds received from the sale of securities and the
exercise of outstanding options (please refer to Statement of Stockholders
Equity contained in the Consolidated Condensed Financial Statements and the
related Notes to Consolidated Condensed Financial Statements included in Item 1
of this Quarterly Report on Form 10-Q).
On March 31, 2000, we filed a shelf registration for 200 million shares
of our common stock (the "Shelf"), all of which remain available for issuance.
During the three months ended March 31, 2000, we used cash of
approximately $1,168,000 for operating activities, as compared to approximately
$891,000 for the three months ended March 31, 1999. During the three months
ended March 31, 2000, we:
o expended approximately $236,000 for payroll and related costs
during the three months ended March 31, 2000;
31
o incurred non-cash expenses of approximately $387,000 relating
to amortization of deferred interest associated with the
beneficial conversion feature of the second tranche of the
December 1999 convertible debentures;
o expended approximately $215,000 for professional and
consulting fees during the three months ended March 31, 2000;
o incurred non-cash expenses relating to amortization of loan
costs and discount on warrants relating to convertible
debentures issued in 1998, 1999 and 2000 of approximately
$106,000 and $120,000, respectively; and
o incurred non-cash expenses of approximately $112,000 relating
to the issuance of warrants for consulting services.
During the three months ended March 31, 2000, cash flows provided by
financing activities was primarily due to the proceeds from the sale of
convertible debentures, sale of common stock and exercise of options in 1999 and
2000 of approximately $4,800,000. During the three months ended March 31, 2000,
cash flow used for investing activities were for expenditures of approximately
$365,000 for leasehold improvements and furniture and equipment at our Yonkers,
New York office.
Under the terms of an agreement with RBB Bank, A.G. entered in November
1998 pursuant to which RBB purchased a 7% convertible debenture and related
warrants, we were required to file with the Commission a registration statement
to register shares of the common stock issuable upon conversion of the
convertible debenture and upon exercise of the related warrants to allow the
investors to resell such common stock to the public. Because the registration
statement was not declared effective by the Commission on or before April 13,
1999, the RBB agreement provides that we pay RBB a penalty equal to the sum of
(x) $30,000 and (y) $1,500 for each day lapsed after such date, until the
registration statement is declared effective by the Commission, provided,
however, that total penalties shall not exceed $100,000 in the aggregate. As of
the date hereof, RBB has not requested payment of the penalty, and we are
negotiating with RBB to have the penalty waived.
Under the terms of an agreement with several purchasers entered in
December 1998, pursuant to which such purchasers purchased an aggregate of
4,917,276 shares of common stock and warrants to purchase an additional
2,366,788 shares of common stock, we were required to file with the Commission a
registration statement to register the common stock issued under the purchase
agreement, and upon exercise of the warrants to allow the resale of such common
stock to the public. Because the registration statement was not declared
effective by the Commission on or before May 21, 1999, the agreement provides
that we pay a penalty of $16,050 for each full calendar month or portion thereof
lapsed after such date, until the registration statement is declared effective,
provided, however, that total penalties shall not exceed $100,000 in the
aggregate. The registration statement was declared effective by the Commission
on December 16, 1999. Pursuant to an agreement in January 2000, the purchasers
in this transaction were paid an aggregate cash penalty of $96,300 in connection
with the registration statement.
Under the terms of an agreement with several purchasers entered in June
1999, pursuant to which such purchasers purchased an aggregate of 1,851,852
shares of common stock and warrants
32
to purchase an additional 926,528 shares of common stock, we were required to
file with the Commission a registration statement to register the common stock
issued under the purchase agreement, and upon exercise of the warrants to allow
the resale of such common stock to the public. The agreement provides that if
the registration statement is not declared effective by the Commission prior to
December 3, 1999, we must pay the purchasers a penalty of $10,000, on a pro rata
basis, for each full calendar month lapsed after such date, and a pro rated
amount of said $10,000 based on a month of 30 or 31 days (as applicable to the
month in which the registration statement is declared effective), provided,
however, that total penalties shall not exceed $20,000 in the aggregate. The
registration statement was declared effective by the Commission on December 29,
1999.
Under the terms of a securities purchase agreement with Focus Investors
LLC dated August 3, 1999 pursuant to which Focus Investors purchased 7%
convertible debentures and related warrants, we were required to file with the
Commission a registration statement to register shares of the common stock
issuable upon conversion of the debentures and upon exercise of the warrants to
allow the purchaser to resell such common stock to the public. The purchase
agreement provides that, if the registration statement is not declared effective
prior to December 1, 1999, or if the number of shares qualified for trading on
the OTC Bulletin Board or reserved for issuance is insufficient for issuance
upon the conversion of the debentures and the exercise of the warrants, or if a
blackout event occurs (as described in the agreement, each of these events
referred to as a "default"), we will be required to pay the purchaser a penalty
for each 30 day period during which a default shall be in effect equal to
$40,000, pro rated for the number of days during each period the defaults were
pending. To the extent the periodic amounts for all default periods exceed
$100,000 in the aggregate, the excess amount shall be paid in shares of common
stock, as set forth in the agreement. The agreement further provides that until
the registration statement has been filed and becomes effective, we will not
file any other registration statement without the written consent of Focus
Investors. The registration statement was declared effective by the Commission
on December 29, 1999.
Under the terms of a securities purchase agreement with Endeavour
Capital Fund S.A. dated December 28, 1999 and related documents thereto pursuant
to which Endeavour purchased 7% convertible debentures and related warrants, we
were required to file with the Commission a registration statement to register
shares of the common stock issuable upon conversion of the debentures (together
with interest on the debentures, which is payable in common stock on conversion)
and upon and upon exercise of the warrants to allow the purchaser to resell such
common stock to the public. The purchase agreement provides that, if the
registration statement is not declared effective prior to April 1, 2000, or if
the purchaser is restricted from making sales of registrable securities covered
by a previously effective registration statement at any time after the effective
date other than during a permitted suspension period (as defined in the
agreement), then, we will be required to pay the purchaser $40,000 (2% of the
purchase price) for each 30-day period of such default (except that, prior to
the initial effectiveness of this registration statement, the amount will be
$30,000 (1.5% of the purchase price) during the first two 30-day periods of such
default). The registration statement was declared effective by the Commission on
January 18, 2000.
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
in a private offering transaction. Under the terms
33
of the agreement, we are required to use our best efforts to file a registration
statement to register the securities issued or issuable in connection with the
agreement by May 31, 2000.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1999,
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
for funds to meet our cash requirements, which raise substantial doubt about our
ability to continue as a going concern. Further, the accountant's report does
not include any adjustments that might result from the outcome of this
uncertainty. Although we may not be successful in doing so, we plan to eliminate
or remedy the deficiencies in our financial condition through the issuance of
additional securities for cash.
CAPITAL RESOURCES
We have been 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 since February 1997.
Gross Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds Security Issued Exercisable Into Exercise Price Expiration Date
- ----------- -------- --------------- ---------------- -------------- ---------------
February 1997 $1,000,000 Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
August 1997 $3,000,000 Debenture 17,577,354 shares $0.13-0.23 per share Fully converted
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
November 1998 $1,500,000 Debenture 10,130,246 shares $0.1363-$.2011 per share Fully converted
Warrants 375,000 shares $0.20 per share October 31, 2008
375,000 shares $0.24 per share
January 1999 $802,500 Common Stock 4,917,276 shares n/a n/a
Warrants 1,183,394 shares $0.2040 per share December 31, 2003
1,183,394 shares $0.2448 per share
July 1999 $500,000 Common Stock 1,851,852 shares n/a n/a
Warrants 463,264 shares $0.324 per share June 30, 2004
463,264 shares $0.378 per share
August 1999 $2,000,000 Debentures 14,348,847 shares $0.1396-$.1438 per share Fully converted
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
December 1999 $2,000,000 Debentures 13,894,193 shares(1) $0.1363-.1929 per share December 31, 2004
and January 2000 Warrants 210,000 shares $0.19916667 per share December 31, 2002
February 2000 $3,000,000 Common Stock 13,636,957 shares n/a n/a
Warrants 2,727,272 shares $0.275 per share February 28, 2005
2,727,272 shares $0.33 per share
- ----------
(1) Represents 13,842,753 shares of common stock issued in January and February
2000 upon the conversion of $1,985,000 principal amount of the convertible
debentures, plus an additional 51,440 shares issuable upon conversion of the
remaining $15,000 principal amount, excluding interest, assuming an applicable
conversion price of $0.2916, based on the average of the high and low bid price
of our common stock on May 9, 2000.
34
Securities Issued in 1997
-------------------------
RBB Bank, A.G.: In February 1997 and October 1997, in order to finance
research and development, we sold $1,000,000 and $3,000,000, respectively,
principal amount of our ten-year 7% convertible debentures due February 28, 2007
and August 30, 2007, respectively, to RBB in offshore transactions pursuant to
Regulation S under the Securities Act. Accrued interest under the 1997
debentures was payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The 1997 debentures were convertible, at the option of the holder, into
shares of common stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the holder,
RBB, to us under the February 1997 debenture, $330,000, $134,000, $270,000 and
$266,000, respectively, of the principal amount of the February 1997 debenture
was converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares of the
common stock, respectively. As of August 20, 1997 the February 1997 debenture
was fully converted. On December 9, 1997, January 7, 1998, January 14, 1998,
February 19, 1998, February 23, 1998, March 31, 1998, May 4, 1998 and May 5,
1998, pursuant to notice by the holder, RBB, to us, $120,000, $133,000,
$341,250, $750,000, $335,750, $425,000, $275,000 and $620,000, respectively, of
the October 1997 debenture was converted into 772,201, 1,017,011, 2,512,887,
5,114,218, 1,498,884, 1,870,869, 1,491,485, and 3,299,979 shares of common
stock, respectively. As of May 5, 1998, the October 1997 debenture was fully
converted.
In connection with the issuance of the 1997 debentures, we issued to
RBB six warrants to purchase common stock, three of which entitle the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378 shares of
the common stock, and three of which entitle the holder to purchase, from August
30, 1997 through August 30, 2007, 600,000 shares of the common stock. The
exercise prices of such warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and
$0.27 per warrant share, respectively. Each such warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion to
the total number shares issuable under such warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
report, none of the warrants have been exercised.
Securities Issued in 1998
-------------------------
RBB Bank, A.G.: In November 1998 we sold $1,500,000 principal amount of
our ten-year 7% convertible debenture due October 31, 2008 to RBB, as agent for
the accounts of certain persons, in an offshore transaction pursuant to
Regulation S under the Securities Act. Accrued interest under the convertible
debenture is payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The convertible debenture is convertible, at the option of the holder,
into shares of common stock pursuant to a specified formula. The actual number
of shares of common stock issued or issuable upon conversion of the convertible
debenture is subject to adjustment and could be materially less or more than the
35
above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion can occur immediately upon issuance of the
convertible debenture, this amount was recognized as interest expense in 1998.
On January 19 and March 7, 2000, pursuant to notice by RBB, $1,122,500
and $377,500 principal amount of the November 1998 debenture was converted into
8,252,746 and 1,877,500 shares of common stock, respectively. As of March 7,
2000, the November 1998 debenture was fully converted.
In connection with the issuance of the convertible debenture, we issued
to RBB two warrants to purchase common stock , each warrant entitling the holder
to purchase, until October 31, 2008, 375,000 shares of the common stock. The
exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares. As of the date of this report, none of these
warrants had been exercised.
The fair value of the warrants issued in connection with the
convertible debenture was estimated to be $48,000 ($0.064 per warrant) based
upon a financial analysis of the terms of such warrants using the Black-Sholes
pricing model with the following assumptions: expected volatility of 20%; a risk
free interest rate of 5.75% and an expected holding period of one year. This
amount has been amortized in the accompanying consolidated financial statements
as interest expense related to the convertible debenture.
Harbor View Group, Inc., et al.: In December 1998 pursuant to a
securities purchase agreement, we sold to Harbor View Group, Inc. and various
other purchasers 4,917,276 shares of common stock, and warrants to purchase an
aggregate of 2,366,788 shares of common stock, including (x) warrants to
purchase an aggregate of 1,966,788 shares of common stock and (y) a finder's fee
paid to Harbor View Group consisting of two warrants to purchase an aggregate
400,000 shares of common stock, in a private offering transaction pursuant to
Section 4(2) of the Securities Act, for an aggregate purchase price of $802,500.
Of the $802,500 purchase price, $600,000 was received on December 31, 1998, and
$202,500 was received in January 1999. The warrants entitle the holders to
purchase an aggregate of 1,183,394 shares of common stock at an exercise price
of $0.2040 per share, and 1,183,394 shares at an exercise price of $0.2448 per
share. The warrants are exercisable at any time and from time to time until
December 31, 2003. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which
36
provide for the adjustment of warrant price and warrant shares. As of the date
of this report, warrants to purchase 245,098 shares of common stock had been
exercised.
The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares in connection with the securities purchase agreement,
was estimated to be $494,000 ($0.0208 per warrant) based upon a financial
analysis of the terms of such warrants using the Black-Sholes Pricing Model with
the following assumptions: expected volatility of 20%, and a risk free interest
rate of 6% through the December 31, 2003 expiration date. This amount is being
amortized to interest expense in the accompanying consolidated financial
statements.
Securities Issued in 1999
-------------------------
Berman, et al.: In July 1999 pursuant to a securities purchase
agreement, we sold 1,851,852 shares of common stock, and warrants to purchase an
aggregate of 925,926 shares of common stock to Michael Berman, Pak-Lin Law and
Kwong Wai Au in a private offering transaction pursuant to Section 4(2) of the
Securities Act, for an aggregate purchase price of $500,000, received in July
1999. The warrants entitle the holders to purchase 463,264 and 463,264 shares of
common stock at exercise prices of $0.324 and $0.378 per share, respectively.
The warrants are exercisable at any time and from time to time until June 28,
2004. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears to that market value. Each warrant
contains anti-dilution provisions which provide for the adjustment of warrant
price and warrant shares. As of the date of this report, none of the warrants
had been exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 per warrant) based upon a financial analysis of
the terms of such warrants using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%, and a risk free interest rate
of 5.75% through the June 30, 2004 expiration date. This amount is being
amortized to interest expense in the accompanying consolidated financial
statements.
Focus Investors LLC: Pursuant to a securities purchase agreement dated
August 3,1999 in a private offering transaction under Section 4(2) of the
Securities Act, we sold to Focus Investors LLC an aggregate of 20 units for an
aggregate gross purchase price of $2 million, each unit consisting of $100,000
principal amount of our ten-year 7% convertible debentures due August 3, 2009,
and series W warrants to purchase 50,000 shares of our common stock exercisable
until August 3, 2004. Accrued interest under the convertible debentures is
payable semiannually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of issuance until the date of interest payment.
The convertible debentures are convertible, at the option of the holder, into
shares of common stock pursuant to a specified formula. The actual number of
shares of common stock issued or issuable upon conversion of the convertible
debentures is subject to adjustment and could be materially less or more than
the above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock. On January 19, February 17, and March 3, 2000, pursuant to notice by
Focus Investors, $300,000,
37
$900,000, and $800,000 principal amount of the Focus debentures was converted
into 2,178,155, 6,440,725 and 5,729,967 shares of common stock, respectively. As
of March 3, 2000, the debenture was fully converted.
The exercise price of the series W warrants is $0.2461 per warrant
share. The warrants provide that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; The series
W warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of March 17, 2000, all of the warrants
had been exercised.
The fair value of the warrants issued as of August 3, 1999 in
connection with the securities purchase agreement was estimated to be $52,953
($0.0526 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 5.75% through the
June 30, 2004 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
Endeavour Capital Fund S.A.: Pursuant to a securities purchase
agreement dated December 28, 1999 in a private offering transaction under
Section 4(2) of the Securities Act, we issued the first $1,000,000 tranche of
$2,000,000 in aggregate principal amount of our 7% convertible debentures due
December 31, 2004 to Endeavour Capital Fund S.A. (the "Endeavour Transaction").
In connection with the sale of the first tranche of debentures, we issued
warrants to purchase 100,000 shares of our common stock to Endeavour, and two
warrants to purchase 5,000 shares of common stock to Endeavour's legal counsel.
Accrued interest under the convertible debentures is computed at the rate of 7%
per annum on the unpaid principal balance from the date of issuance until the
date of interest payment and is payable on conversion of the debenture or on
maturity in common stock using the same conversion formula. The convertible
debentures are convertible, at the option of the holder, into shares of common
stock pursuant to a specified formula. The actual number of shares of common
stock issued or issuable upon conversion of the convertible debentures is
subject to adjustment and could be materially less or more than the estimated
number of shares in this report, depending upon the future market price of the
common stock and the potential conversion of accrued interest into shares of
common stock.
These warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per share. The warrants provide that the holder may elect to receive
a reduced number of shares of common stock on the basis of a cashless exercise.
The warrants contain anti-dilution provisions which provide for the adjustment
of the warrant price and warrant shares. As of the date of this report, none of
these warrants had been exercised.
The fair value of the warrants issued as of December 28, 1999 in
connection with the securities purchase agreement was estimated to be $4,285
($0.0429 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
38
Securities Issued in 2000
-------------------------
Endeavour Capital Fund S.A.: In January 2000, in connection with the
Endeavour Transaction, we issued the second $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004, along with warrants to purchase 100,000 shares of our common stock to
Endeavour Capital Fund, S.A. The terms of the second tranche of debentures and
warrants are the identical to the terms of the debentures and warrants issued in
first tranche of the Endeavour Transaction.
The fair value of the second tranche of warrants issued in January 2000
in connection with the securities purchase agreement was estimated to be $13,600
($0.0136 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On January 27, February 22, 23, 24, and 29, 2000 pursuant to notice by
Endeavour Capital Fund, $150,000, $135,000, $715,000, $785,000 and $200,000
principal amount of the Endeavour debentures was converted into 1,105,435,
988,913, 5,149,035, 5,622,696 and 1,036,674 shares of common stock,
respectively. As of March 27, 2000, $15,000 of the principal amount of the
debenture remained unconverted.
Harbor View Group, Inc. On February 7, 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. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
report, none of these warrants had been exercised.
The fair value of the warrants is estimated to be $200,249 ($.057 per
warrant) based upon a financial analysis of the terms of the warrant using the
Black-Sholes 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). We have determined that $89,045
of the fair value relates to past services and, accordingly, we have expensed
this portion in the three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and will be amortized over the remaining term
of the agreement.
Harbor View Group, Inc., et al. 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 in a private offering transaction
pursuant to Section 4(2) of the Securities Act, for an aggregate purchase price
of $3,000,000. Half of the warrants are exercisable at $0.275 per share, and
half of the warrants are exercisable at $0.33 per share, until February 28,
2005. Each warrant provides that the holder may elect to receive a reduced
number of shares of common stock on the basis of a cashless exercise; that
number of shares bears the same proportion to the total number shares issuable
under that warrant as the excess of the market value of shares of common stock
over the warrant exercise price bears
39
to that market value. Each warrant contains anti-dilution provisions which
provide for the adjustment of warrant price and warrant shares. As of the date
of this report, none of these warrants had been exercised.
The fair value of the warrants issued as of February 16, 2000 in
connection with the securities purchase agreement was estimated to be $1,582,734
($0.290 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 90%, and a risk free interest rate of 6% through the
February 28, 2005 expiration date. This amount is being amortized to interest
expense in the accompanying consolidated financial statements.
PROJECTED EXPENSES
During the next 12 months, we expect to spend approximately $9,000,000,
approximately $4,000,000 of which was raised during the first quarter of fiscal
2000, on research and development related activities, including approximately:
o $4,000,000 for operating expenses;
o $2,250,000 for the submission of the IND for Product R to the
FDA in connection with GloboMax's project management services
for the pre-clinical development and IND submission of Product
R to the FDA, the development of standard operating procedures
and validation protocol for the preparation and manufacture of
Product R, and toxicology studies of Product R;
o $1,500,000 for capital expenditures for leasehold improvements
and equipment at our Yonkers, New York office relating to
additional laboratories and manufacturing and production
facilities for Product R; and
o $1,250,000 for additional personnel.
We anticipate that we can continue operations through September 2000
with our current liquid assets, including the proceeds from the recent sale of
the convertible debenture and other securities if no stock options or warrants
are exercised nor additional securities sold. If all of the outstanding stock
options and warrants are exercised, we will receive net proceeds of
approximately $15.0 million. Those proceeds will contribute to general and
administrative and working capital and will permit us to substantially increase
our budget for research and development and clinical trials and testing and to
operate at significantly increased levels of operation, assuming Product R
receives approvals and prospects for sales increase to justify such increased
levels of operation. The recent prevailing market price for shares of common
stock has from time to time been above the exercise prices of certain of the
outstanding options and warrants. As such, recent trading levels may not be
sustained nor may any additional options or warrants be exercised. If less than
40% or none of the outstanding options and warrants are exercised, and we obtain
no other additional financing, in order for us to achieve the level of
operations contemplated by management, management anticipates that we will have
to limit intentions to expand operations beyond current levels.
40
We anticipate that we will be required to sell additional securities to
obtain the funds necessary to further our research and development activities.
We are currently seeking debt financing, licensing agreements, joint ventures
and other sources of financing, but the likelihood of obtaining such financing
on favorable terms is uncertain. Management anticipates that they will have to
defer their salaries if financing is not available in order to continue
operations,. Management does not believe that, at present, debt or equity
financing will be readily obtainable on favorable terms unless and until FDA
approval for phase I clinical testing is granted. Because of the large
uncertainties involved in the FDA approval process for commercial drug use on
humans, it is possible that we may never be able to sell Product R commercially.
YEAR 2000 COMPLIANCE
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
We developed a compliance assurance process to address this concern. A
project team performed a detailed assessment of all internal computer systems
and developed and implemented plans to correct any problems.
Year 2000 problems could affect our research and development,
financial, administrative and communication operations. Systems critical to our
business which were identified as non-Year 2000 compliant were either replaced
or corrected through programming modifications. In addition, the project team
looked at Year 2000 readiness from other aspects of our business. We remediated
and replaced systems as needed and have been successfully testing and verifying
our modifications. In addition to our in-house efforts, we have asked vendors,
major customers, service suppliers, communications providers and banks whose
systems failures potentially could have a significant impact on our operations
to verify their Year 2000 readiness. To date, we have not encountered any
significant effects related to the Year 2000 and we do not anticipate that any
unforeseen Year 2000 problems will have a material effect on our results of
operations or financial condition.
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance were expensed as incurred and
will not have a material impact on our consolidated financial position, results
of operations or cash flows.
The above expectations are subject to uncertainties. For example, if we
were unsuccessful in identifying or fixing all Year 2000 problems in our
critical operations, or if we are affected by the inability of certain vendors
or suppliers to continue operations due to such a problem, our results of
operations or financial condition could be materially impacted.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
None.
41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
Pursuant to a securities purchase agreement dated February 16, 2000 in
a private offering transaction under Section 4(2) of the Securities Act, we sold
to Harbor View Group, Inc. and various other purchasers 13,636,357 shares of
common stock, and warrants to purchase an aggregate of 5,454,544 shares of
common stock for an aggregate purchase price of $3,000,000. Half of the warrants
are exercisable at $0.275 per share, and half of the warrants are exercisable at
$0.33 per share, until February 28, 2005. Each warrant provides that the holder
may elect to receive a reduced number of shares of common stock on the basis of
a cashless exercise; that number of shares bears the same proportion to the
total number shares issuable under that warrant as the excess of the market
value of shares of common stock over the warrant exercise price bears to that
market value. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
report, none of these warrants had been exercised.
The foregoing transaction did not involve any underwriters,
underwriting discounts or commissions, or any public offering, and the
Registrant believes that such transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereof. The recipients in such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and warrant certificates issued in such transactions.
All recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.
During the three months ended March 31, 2000, the following securities
were issued:
o 3,552,500 shares of common stock pursuant to the exercise of
outstanding options at exercise prices ranging from $.14 to $.36 per
share;
o 1,245,098 shares of common stock pursuant to the exercise of
outstanding warrants at exercise prices ranging from $.2040 to $.2461
per share;
o 38,391,856 shares of common stock pursuant to the conversion of
convertible debentures at common stock prices ranging from $.14 to
$.20 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the third quarter ended March 31, 2000, no matters were
submitted to a vote of security holders of the Registrant, through the
solicitation of proxies or otherwise.
Item 5. Other Information
None.
42
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits.
Number Description
27.1 Financial Data Schedule (for SEC use only)
(2) Reports on Form 8-K.
During the three-month period ending March 31, 2000, no Current
Reports on Form 8-K were filed.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: May 12, 2000 By: /s/ Alan V. Gallantar
---------------------
Alan V. Gallantar, Chief Financial Officer
By: /s/ Shalom Z. Hirschman
-----------------------
Shalom Z. Hirschman, President and Chief
Executive Officer
43