U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
-------------------------
(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 November 12, 1999 was 303,292,035.
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q/A
QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements........................................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 26
Item 3. Quantitative and Qualitative Disclosures about Market Risk..................... 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 37
Item 2. Changes in Securities and Use of Proceeds...................................... 37
Item 3. Defaults Upon Senior Securities................................................ 37
Item 4. Submission of Matters to Vote of Security Holders.............................. 37
Item 5. Other Information.............................................................. 37
Item 6. Exhibits and Reports on Form 8-K............................................... 39
SIGNATURES....................................................................................... 39
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
September 30, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
ASSETS
------
Current Assets:
Cash and cash equivalents $ 1,308,378 $ 924,420
Investments -- 821,047
Inventory 19,729 19,729
Other current assets 35,839 29,818
------------ ------------
Total current assets 1,363,946 1,795,014
Property and Equipment 1,093,548 1,049,593
Other Assets 563,276 460,346
------------ ------------
Total assets $ 3,020,770 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities $ 582,321 $ 279,024
Current portion of capital lease obligation 40,849 38,335
------------ ------------
Total current liabilities 623,170 317,359
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 3,442,273 1,457,919
Capital lease obligation - long-term portion 136,422 167,380
------------ ------------
Total long-term liabilities 3,578,695 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement -- 600,000
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity (Deficit):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 303,292,035 and 296,422,907
shares issued and outstanding 3,032 2,964
Additional paid-in capital 16,920,763 14,325,076
Deficit accumulated during the development stage (17,649,843) (13,550,976)
Discount on warrants (455,047) --
Deferred compensation cost -- (14,769)
------------ ------------
Total stockholders' equity (deficit) (1,181,095) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 3,020,770 $ 3,304,953
============ ============
See notes to consolidated condensed financial statements.
-1-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Inception
(February 20,
Three Months Ended Nine Months Ended 1984) to
September 30, September 30, September 30,
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
(Restated) (Restated) (Restated) (Restated)
Revenues:
Sales $ 1,928 $ 656 $ 6,517 $ 656 $ 201,493
Interest 6,461 22,310 27,951 79,533 587,247
Other income -- -- -- 100 120,093
------------ ------------ ------------ ------------ ------------
8,389 22,966 34,468 80,289 908,833
------------ ------------ ------------ ------------ ------------
Costs and Expenses:
Research and development 426,552 499,045 1,192,190 1,234,915 4,777,399
General and administrative 605,917 364,554 1,544,592 1,087,707 8,858,186
Depreciation 53,152 28,437 149,208 64,777 464,556
Interest 935,803 -- 1,247,345 811,714 4,458,535
------------ ------------ ------------ ------------ ------------
2,021,424 892,036 4,133,335 3,199,113 18,558,676
------------ ------------ ------------ ------------ ------------
Net Loss $ (2,013,035) $ (869,070) $ (4,098,867) $ (3,118,824) $(17,649,843)
============ ============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.00) $(0.01) $ (0.01)
============ ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 300,598,827 290,194,958 300,598,827 290,194,958
============ ============ ============ ============
See notes to consolidated condensed financial statements.
-2-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, inception (February 20, 1984) as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
----------- ----------- ----------- -----------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- ----------- ----------- -----------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $.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' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $.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' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .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' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
Balance, December 31, 1993 236,276,991 $2,363 $ 3,416,070
Issuance of common stock, for consulting services $.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
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
Balance, December 31, 1993 $ - $(2,854,076) $ -
Issuance of common stock, for consulting services -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Net loss, year ended December 31, 1994 -- (440,837) --
--- ----------- ---
Balance, December 31, 1994 -- (3,294,913) --
---
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for consulting services -- -- --
Issuance of common stock, for consulting services -- -- --
Net loss, year ended December 31, 1995 -- (401,884) --
--- ----------- ---
Balance, December 31, 1995 -- (3,696,797) --
--- ----------- ---
See notes to consolidated condensed financial statements.
-6-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875
Issuance of common stock, exercise of options .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 -- -- --
Net loss, year ended December 31, 1996 -- -- --
----------- ----------- -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
----------- ----------- -----------
[RESTUBBED TABLE]
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
Balance, December 31, 1995 $ -- $(3,696,797) $ --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, for services rendered -- -- --
Options granted -- -- (473,159)
Subscription receivable (19,000) -- --
Net loss, year ended December 31, 1996 -- (1,154,740) --
----------- ----------- -----------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
----------- ----------- -----------
See notes to consolidated condensed financial statements.
-7-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351
Issuance of common stock, exercise of options .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
----------- ----------- -----------
[RESTUBBED TABLE]
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
Balance, December 31, 1996 $ (19,000) $(4,851,537) $ (473,159)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, February debenture -- -- --
Beneficial conversion feature, October debenture -- -- --
Warrant costs, February debenture -- -- --
Warrant costs, October debenture -- -- --
Amortization of deferred compensation cost -- -- 399,322
Imputed interest on convertible debenture -- -- --
Net loss, year ended December 31, 1997 -- (4,141,729) --
----------- ----------- -----------
Balance, December 31, 1997 (19,000) (8,993,266) (73,837)
----------- ----------- -----------
See notes to consolidated condensed financial statements.
-8-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767
Issuance of common stock, exercise of options .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)
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
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
Balance, December 31, 1997 $ (19,000) $ (8,993,266) $ (73,837)
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, exercise of options -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, conversion of debt -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost -- -- 59,068
Write off of subscription receivable 19,000 -- --
Net loss, year ended December 31, 1998 -- (4,557,710) --
------------ ------------ ------------
Balance, December 31, 1998 -- (13,550,976) (14,769)
------------ ------------ ------------
See notes to consolidated condensed financial statements.
-9-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1999
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076
Issuance of common stock, securities purchase .16 4,917,276 49 802,451
agreement
Issuance of common stock, securities purchase .27 1,851,852 18 499,982
agreement
Issuance of common stock, for services rendered .22 100,000 1 21,999
Beneficial conversion feature, August debenture -- -- 687,500
Warrant costs, securities purchase agreement -- -- 494,138
Warrant costs, securities purchase agreement -- -- 37,025
Warrant costs, August debenture -- -- 52,592
Amortization of warrant costs, securities purchase
agreement -- -- --
Amortization of deferred compensation cost -- -- --
Net loss, nine months ended September 30, 1999 -- -- --
------------ ------------ ------------
Balance, September 30, 1999 303,292,035 $ 3,032 $ 16,920,763
============ ============ ============
[RESTUBBED TABLE]
Deficit
Accumulated
during the Deferred Discount
Development Compensation on
Stage Cost Warrants
----- ---- --------
Balance, December 31, 1998 $(13,550,976) $ (14,769) $ --
Issuance of common stock, securities purchase -- -- --
agreement
Issuance of common stock, securities purchase -- -- --
agreement
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, August debenture -- -- --
Warrant costs, securities purchase agreement -- -- (494,138)
Warrant costs, securities purchase agreement -- -- (37,025)
Warrant costs, August debenture -- -- --
Amortization of warrant costs, securities purchase
agreement -- -- 76,116
Amortization of deferred compensation cost -- 14,769 --
Net loss, nine months ended September 30, 1999 (4,098,867) -- --
------------ ------------ ------------
Balance, September 30, 1999 $(17,649,843) $ -- $ (455,047)
============ ============ ============
See notes to consolidated condensed financial statements.
-10-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Nine Months Ended (February 20,
September 30, 1984) to
------------- September 30,
-------------
1999 1998 1999
(Restated) (Restated) (Restated)
---------- ---------- ----------
Cash Flows from Operating Activities:
Net loss $ (4,098,867) $ (3,118,824) $(17,649,843)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 149,208 64,777 464,556
Amortization of debt issue costs 128,750 221,227 470,685
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 687,500 210,951 3,076,218
Amortization of discount on warrants 113,062 284,256 403,359
Amortization of deferred compensation cost 14,769 44,301 760,500
Issuance of common stock for services 22,000 21,000 1,459,500
Other -- -- (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (6,021) (3,597) (35,839)
Increase in inventory -- -- (19,729)
Increase in other assets (231,680) (106,658) (1,008,422)
Increase (decrease) in accounts payable and
accrued liabilities 303,297 (109,159) 558,521
------------ ------------ ------------
Total adjustments 1,180,885 627,098 6,127,742
------------ ------------ ------------
Net cash used by operating activities (2,917,982) (2,491,726) (11,522,101)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,890,902 6,292,979
Expenditures for property and equipment (193,163) (313,594) (1,336,763)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities 627,884 2,483,308 (1,335,563)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,000,000 -- 7,500,000
Proceeds from sale of securities, net of issuance costs 702,500 257,400 6,681,088
Payments under capital lease (28,444) -- (45,046)
------------ ------------ ------------
Net cash provided by financing activities 2,674,056 257,400 14,136,042
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 383,958 248,982 1,278,378
Cash and Cash Equivalents, Beginning 924,420 236,059 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 1,308,378 $ 485,041 $ 1,278,378
============ ============ ============
See notes to consolidated condensed financial statements.
-11-
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 September 30, 1999 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 September 30, 1999
and results of operations for the three months and the nine months
ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998. Certain amounts in the
1998 financial statements have been reclassified to conform to 1999
presentation. 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. 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, 1998.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at September 30, 1999 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 Reticulose 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 Reticulose 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
1999 and 1998, 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 Reticulose. The Company has not as yet
received any notice of claim from such parties.
-12-
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 Reticulose. Although the Company is
unaware of any such claims or threatened claims since Reticulose
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 Reticulose. As of the date
hereof, the Company does not have product liability insurance for
Reticulose. 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 patents for the use of Reticulose as a
treatment. The Company currently has 34 patent applications pending
with the U.S. Patent Office. 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 Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Reticulose 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 December 31,
1999 at an exercise price of $.15 and $.17, respectively. As of
September 30, 1999, there are outstanding Plata Options to acquire
683,300 shares at $.15 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.17 per share.
Through September 30, 1999, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
-13-
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
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 Reticulose 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, Dr. Flichman delivered the Written
Report 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 December 31, 1999 at an
exercise price of $.21 per share. As of September 30, 1999, 473,500
shares of common stock were issued pursuant to the exercise of
these options for an aggregate exercise price of approximately
$95,000.
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
Reticulose in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
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 Reticulose 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.
-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)
Argentine Agreement (Continued)
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Reticulose 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
Reticulose 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 Reticulose 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 Reticulose with those taking
a three drug cocktail and a placebo. As of September 30, 1999, 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
Reticulose 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.
-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 July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Reticulose in inhibiting the mutation of
the AIDS virus. As of September 30, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
As of September 30, 1999, the Company advanced $97,750 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
Reticulose in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of September 30, 1999, 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 Reticulose in inhibiting the mutation of
the AIDS virus. As of September 30, 1999, the Company has advanced
approximately $20,000 for such study, which has been accounted for
as research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which Reticulose affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one-year term
through March 3, 1999 to investigate the anti-tumor activity of
Reticulose using kidney tumor model systems. In addition, NCI was
to study the effects of Reticulose on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
Reticulose.
-16-
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. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of September 30, 1999, 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 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 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 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 September 30, 1999, 500,000 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.
-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 (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).
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
does 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, 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.
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
-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)
Cohen Agreements (Continued)
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 December 31, 1999), 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").
As of September 30, 1999, 1,300,000 of the September 1992 Cohen
Options have been exercised for cash consideration of $156,000.
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 September 30, 1999, 2,855,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through December 31, 1999 at an option
price of $.14.
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 AVRC's Ind submission and to perform
all work that is necessary to obtain FDA's approval. The contract
expires on December 31, 1999 but may be extended by mutual written
agreement of both parties. The Company has incurred approximately
$175,000 in services to Globomax through September 30, 1999.
-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)
Galantar 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.
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 Reticulose in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
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 Reticulose to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Reticulose
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 anticipated
that the total expenses associated with the build-out will be
approximately $400,000, of which none has been incurred as of September
30, 1999.
-20-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS
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.
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
-21-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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.
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 is being amortized to interest expense in the
accompanying consolidated 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.
-22-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
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.
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 Warrant 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
is being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the August
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $687,500. This amount has been
recorded as interest expense in the three months ended September
30, 1999.
A summary of the outstanding convertible debentures is as follows:
September 30, December 31,
1999 1998
---- ----
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Unpaid principal balance of August debenture 2,000,000 --
Less unamortized discount 57,727 42,081
----------- -----------
Convertible debenture, net $3,442,273 $1,457,919
========== ==========
-23-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other
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.
Included in interest expense for the nine month period ended
September 30, 1999 is $168,000, which may be payable by the Company
as additional financing costs related to the effective date of a
registration statement covering the resale of certain securities
sold by the Company.
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.
NOTE 4. RESTATEMENT
The accompanying financial statements for the three and nine months
ended September 30, 1999 have been restated to reclassify $76,250 and
$128,750, respectively, of amortization of debt issue costs from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the three and nine
months ended September 30, 1999.
For the nine months ended September 30, 1998, the financial statements
have been restated to reclassify $221,227 of amortization of debt issue
costs and $7,299 of amortization of discount on warrants from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the nine months
ended September 30, 1998.
The financial statements for the three and nine months ended September
30, 1999 have been restated to reclassify $78,000 and $198,000,
respectively, from general and administrative to interest expense. This
reclassification had no effect upon the net loss for the three and nine
months ended September 30, 1999.
-24-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. RESTATEMENT (Continued)
The effect of the changes on the financial statements are as follows:
As
Previously As
Reported Restatement Restated
-------- ----------- --------
Three Months Ended September 30, 1999
-------------------------------------
General and administrative $ 683,917 $ (78,000) $ 605,917
========== ======== ==========
Depreciation and amortization $ 129,402 $ (76,250) $ 53,152
========== ======== ===========
Interest expense $ 781,553 $154,250 $ 935,803
========== ======= ==========
Nine Months Ended September 30, 1999
------------------------------------
General and administrative $1,742,592 $(198,000) $1,544,592
========= ======== =========
Depreciation and amortization $ 277,958 $(128,750) $ 149,208
========== ======== ============
Interest expense $ 920,595 $ 326,750 $1,247,345
========== ======== =========
Nine Months Ended September 30, 1998
------------------------------------
Depreciation and amortization $ 293,303 $(228,526) $ 64,777
========== ======== ===========
Interest expense $ 583,188 $ 228,526 $ 811,714
========== ======= ==========
-25-
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/A. 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/A for the year ended December 31, 1998. Certain amounts in the 1998
financial statements have been reclassified to conform to 1999 presentation.
Specifically, certain expenses were reclassified from general and administrative
to research and development expense and from depreciation and amortization to
interest expense. In addition, the beneficial conversion feature associated with
the debenture issued in connection with the Securities Purchase Agreement dated
November 16, 1998 between Advanced Viral and RBB Bank has been charged to
interest expense in its entirety as of November 16, 1998, rather than being
amortized.
OVERVIEW
Since our inception in July 1985, Advanced Viral Research Corp. has
been engaged primarily in research and development activities. We have not yet
generated significant operating revenues, and as of September 30, 1999 we had
incurred a cumulative net loss of $17,649,843. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of ReticuloseTM. All of our research and
development efforts have been devoted to the development of ReticuloseTM.
In order to commence clinical trials for regulatory approval of
ReticuloseTM 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 otherwise to assist us
through the FDA process with the objective of obtaining full approval for the
manufacture and commercial distribution of ReticuloseTM in the United States.
The IND will seek approval to conduct a study testing the effectiveness of
ReticuloseTM 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
ReticuloseTM and a description of the physical, chemical and
microbiological characteristics of ReticuloseTM.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of ReticuloseTM 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 we are financially able to file the IND. FDA approval to begin
human clinical trials of ReticuloseTM pursuant to an approved IND will require
significant cash expenditures, the amount of which is not currently
determinable. Furthermore, we are unable to assess the probability of whether
ReticuloseTM will ever be approved for commercial distribution by any country.
26
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
Three and Nine Months Ended September 30, 1999 and 1998
For the three month periods ended September 30, 1999 and September 30,
1998, we incurred losses of $2,013,035 ($0.01 per share) and $869,070 ($0.00 per
share), respectively. For the nine month periods ended September 30, 1999 and
September 30, 1998, we incurred losses of $4,098,867 ($0.01 per share) and
$3,118,824 ($0.01 per share), respectively.
General and Administrative Expense. Our increased losses during the
three and nine months ended September 30, 1999 are principally due to increased
general and administrative expense ($605,917 and $1,544,592 for the three and
nine months ended September 30, 1999 vs. $364,554 and $1,087,707 for the three
and nine months ended September 30, 1998, respectively). Included in the general
and administrative expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting us with
the preparation and filing of the IND, of approximately $65,000 and
$175,000 for the three and nine months ended September 30, 1999 vs. no
expenses for the three and nine months ended September 30, 1998,
respectively;
o increased professional expenses resulting principally from, among
others, legal expenses related to certain financings of $127,000 and
$315,000 for the three and nine months ended September 30, 1999 vs.
$50,000 and $186,000 for the three and nine months ended September 30,
1998, respectively; and
o increased employee benefit costs of approximately $76,000 and $173,000
for the three and nine months ended September 30, 1999 vs. $41,000 and
$106,000 for the three and nine months ended September 30, 1998,
respectively.
Depreciation Expense. Our increased losses during the three and nine
months ended September 30, 1999 are also due to increased depreciation expense
($53,152 and $149,208 for the three and nine months ended September 30, 1999 vs.
$28,437 and $64,777 for the three and nine months ended September 30, 1998,
respectively).
Interest Expense. Our increased losses during the three and nine months
ended September 30, 1999 are also due to increased interest expense ($935,803
and $1,247,345 for the three and nine months ended September 30, 1999 vs. $0 and
$811,714 for the three and nine months ended September 30, 1998, respectively).
Included in the interest expense are:
o beneficial conversion feature on certain convertible debentures of
$688,000 and $688,000 for the three and nine months ended September
30, 1999 vs. $0 and $211,000 for the three and nine months ended
September 30, 1998, respectively;
27
o interest expense associated with certain convertible debentures of
approximately $50,000 and $102,000 for the three and nine months ended
September 30, 1999 vs. $0 and $96,000 for the three and nine months
ended September 30, 1998, respectively;
o amortization of discount on certain warrants of approximately $45,000
and $113,000 for the three and nine months ended September 30, 1999
vs. $7,299 and $285,000 for the three and nine months ended September
30, 1998, respectively;
o amortization of loan costs of approximately $76,000 and $128,000 for
the three and nine months ended September 30, 1999 vs. $0 and $221,000
for the three and nine months ended September 30, 1998, respectively;
and
o contractually imposed finance penalties associated with not having an
effective registration statement covering certain securities of
approximately $48,000 and $168,000 for the three and nine months ended
September 30, 1999 vs. no expenses for the three and nine months ended
September 30, 1998, respectively.
Research and Development Expense. Our research and development expenses
have been consistent during the three and nine months ended September 30, 1999,
however, there has been a shift from the use of external to internal personnel
and testing.
Sales. We had sales of $1,928 and $6,517 for the three and nine months
ended September 30, 1999, respectively, vs. $656 and $656 for the three and nine
months ended September 30, 1998, respectively. All sales during these periods
were to distributors purchasing Reticulose for testing purposes. Interest income
was $6,461 and $27,951 for the three and nine months ended September 30, 1999,
respectively, vs. $22,310 and $79,533 for the three and nine months ended
September 30, 1998, respectively. There can be no assurance that Reticulose will
ever be sold for commercial distribution anywhere in the world.
Our net loss, exclusive of costs directly related to costs of financing
and costs related to GloboMax, was approximately $985,000 and $2,574,000 for the
three and nine months ended September 30, 1999 vs.$869,000 and $2,305,000 for
the three and nine months ended September 30, 1998, respectively. This
information is not presented as an alternative to operating results or cash flow
from operations as determined by generally accepted accounting principles
(GAAP), but rather to show that the net loss is consistent with prior
corresponding periods when the variable costs of financing and the Globomax
consulting expenses are excluded. It should not be considered in isolation from
or construed as having greater importance than GAAP operating income or cash
flows from operations as a measure of our performance.
LIQUIDITY
September 30, 1999 vs. December 31, 1998
Assets. As of September 30, 1999 and December 31, 1998, we had current
assets of $1,363,946 and $1,795,014, respectively. We had total assets of
$3,020,770 and $3,304,953 at September 30, 1999 and December 31, 1998,
respectively. The decrease in current and total assets was primarily
attributable to the use of investment capital to fund increased operating
expenditures.
Liabilities. As of September 30, 1999 and December 31, 1998, we had
current liabilities of $623,170 and $317,359, respectively. The increase in
current liabilities was due to a $303,000 increase in payables primarily
resulting from our increased costs of financing of $180,000, plus
28
increased operating expenses. As of September 30, 1999 and December 31, 1998, we
had total long term liabilities of $3,578,695 and $1,625,299 at September 30,
1999 and December 31, 1998, respectively. The increase in total long term
liabilities was primarily attributable to the issuance to Focus Investors, LLC
of convertible debentures.
Cash Flow. During the nine months ended September 30, 1999, we used
cash of $2,917,982 for operating activities, vs. $2,491,726 during the nine
months ended September 30, 1998. During the nine months ended September 30,
1999, we:
o incurred non-cash expenses of approximately $1,093,000, primarily
relating to the beneficial conversion feature on certain
debentures ($688,000), depreciation ($150,000), amortization of
loan costs ($128,000) and discount on warrants ($113,000);
o expended approximately $1,100,000 for payroll and related costs;
o expended approximately $625,000 in professional and consulting
fees, approximately $200,000 of which are consulting fees incurred
in connection with the IND for ReticuloseTM, and approximately
$200,000 of which relate to legal fees incurred in connection with
certain financing arrangements;
o expended approximately $285,000 for research expenses incurred by
third parties in connection with the testing of ReticuloseTM in
Argentina and Barbados;
o expended approximately $143,000 in laboratory supplies; and
o expended approximately $500,000 of additional operating expenses.
During the nine months ended September 30, 1999, cash flows provided by
investing and financing activities were primarily due to the sales of
investments which were available from the proceeds of the issuance of the
convertible debenture in 1998 and debentures, warrants and shares of common
stock in 1999 (approximately $2,703,000). In addition, we expended approximately
$193,000 for additions to machinery and equipment at our Yonkers, New York
office and the manufacturing plant in Freeport, Bahamas;
As of September 30, 1999, we had expended the following amounts for
research and development in connection with the following ongoing studies being
conducted abroad:
o $50,000 has been advanced to DCT in connection with a study being
conducted in Argentina by DCT on 65 patients to compare the
results of treatment of AIDS patients using a three-drug cocktail
and Reticulose versus AIDS patients taking a three-drug cocktail
and a placebo, pursuant to an agreement entered in February 1998.
o $85,000 has been advanced to DCT to cover the costs of a
controlled study in 30 patients to determine the effectiveness of
Reticulose for the treatment of rheumatoid arthritis in humans,
pursuant to an agreement entered in May 1998.
o $50,000 has been advanced to DCT to study the effects of
Reticulose in inhibiting the mutation of the AIDS virus on
patients in Argentina, pursuant to an agreement entered in July
1998.
29
Projected Expenses
During the next 12 months, we expect to spend approximately $1,600,000
on research and development related activities, exclusive of payroll and
operating expenses to be incurred at our Yonkers, New York laboratory,
including:
o approximately $1,300,000 in the preparation of the IND;
o approximately $225,000 in overseas research of Reticulose; and
o approximately $75,000 in preparing the manufacturing facility in
the Bahamas for FDA inspection and in accordance with good
manufacturing practices and standards.
Additionally, we expect to spend approximately $400,000 for building expansion
of our research and development facility in Yonkers, New York. We anticipate
that we will be required to sell additional securities to obtain the funds
necessary to further our research and development activities.
Management anticipates that we will be required to sell additional
securities to obtain the funds necessary to further our research and development
activities.
Under the terms of an agreement with RBB entered in November 1998
pursuant to which RBB purchased a 7% convertible debenture and related warrants,
we are 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 are 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 $30,000 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. As of the date hereof, the agent for the purchasers has not requested
payment of the penalty, and we are negotiating with such agent to have the
penalty waived.
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 to purchase an additional 926,528 shares of
common stock, we are 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 registration statement must be filed on or prior to December 28,
1999. If the registration statement is not declared effective by the Commission
prior to such date, we must pay the purchasers
30
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.
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 are 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 filed or declared
effective prior to a certain date, 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 independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1998,
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.
31
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 Security Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds 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 8,865,248 shares $0.1692 per share (1) October 31, 2008
---------------------------------------------------------------------------------
Warrants 375,000 shares $0.20 per share
---------------------------------------------------------------------------------
375,000 shares $0.24 per share
- --------------------------------------------------------------------------------------------------------------------
January 1999 $802,500 Shares 4,917,276 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 Shares 1,851,852 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 11,347,518 $0.1763 per share (1) August 3, 2009
- --------------------------------------------------------------------------------------------------------------------
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
- --------------------------------------------------------------------------------------------------------------------
- ----------------
(1) Assumes the full conversion of the debenture based upon the average of high
and low price of the common stock on November 10, 1999, $0.235, and an
applicable conversion price of $0.1692 for the RBB debenture and $0.1763 for the
Focus debentures.
Securities Issued in 1997.
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,
32
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 November 15, 1999,
none of the warrants had been exercised.
Securities Issued in 1998.
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 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 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 November 15, 1999, none of such 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
33
has been reflected in the accompanying consolidated financial statements as
interest expense related to the convertible debenture.
In December 1998 pursuant to a securities purchase agreement, we sold
4,917,276 shares of common stock, and warrants to purchase an aggregate of
2,366,788 shares of common stock, including (x) two warrants to purchase an
aggregate of 1,966,788 shares of common stock and (y) a finder's fee paid to
Harborview 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
which $600,000 was received on December 31, 1998, and $202,500 was received in
January 1999. Two of the warrants entitle the holders to purchase 983,394 and
983,394 shares of common stock at exercise prices of $0.2040 and $0.2448 per
share, respectively. The other two warrants entitle the holders to purchase
200,000 and 200,000 shares of common stock at exercise prices of $0.2040 and
$0.2448 per share, respectively. All four 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 provide for
the adjustment of warrant price and warrant shares. As of November 15, 1999,
none of such warrants 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.
Securities Issued in 1999.
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 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 November 15, 1999, 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.
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
34
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 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
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.
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 November 15, 1999, none of such
warrants had been exercised.
If we do not obtain FDA or other approvals for Reticulose, we will have
to obtain funds from the exercise of options and warrants, potential grants
and/or additional equity. It is not likely that such funds will be available in
any significant amount, if at all.
We are currently expending approximately $425,000 per month, which
expenses include salaries, rent, professional fees, license fees and taxes,
research and development, and travel, principally between our two offices and
our Bahamian facility, and anticipate that we can continue operations through
fiscal 1999 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
stock options and warrants are exercised, we will receive net proceeds of
approximately $8.4 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 Reticulose
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
25% 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. 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,
if at all, is small. 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 or comparable approval is obtained from another
developed or developing country. Because of the large uncertainties involved in
the FDA approval process for commercial drug use on humans, it is possible that
me may never be able to sell Reticulose commercially.
We have three patents for the use of Reticulose as a treatment. In
addition, we have filed 34 patent applications with the United States Patent
Office, including one for Reticulose as a product. Other companies, having
greater economic resources, may be successful in developing a similar product
using processes similar to our product Reticulose. We may not obtain such a
patent or, if obtained, it may not be enforceable. We have retained patent
counsel for the purpose of pursuing
35
additional patent protection for Reticulose. However, if any patents are
granted, such patents may not be sustained if questioned, and, if declared
valid, such patents, may not operate to protect us from the replication of
Reticulose by competitors. We have relied upon laws protecting proprietary
information and trade secrets and upon confidentiality agreements to protect our
rights to Reticulose and the processes for its manufacture, but such efforts and
procedures may prove unsuccessful and may not protect us from any competition in
the future.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue is the result of computer programs using a
two-digit format, as opposed to a four-digit format to indicate the year. Such
computer programs will be unable to recognize date information correctly when
the year changes to 2000. The Year 2000 issue poses risks for our information
technology systems.
Our information technology systems are based upon software licenses and
software maintenance agreements with third party software companies. Based upon
our internal assessments and communications with our software vendors, all of
the software we use is Year 2000 compliant software. We have used internal
personnel to test our software systems for Year 2000 compliance and such tests
yielded positive results. We will continue to monitor our Year 2000 readiness.
Also, we do not anticipate difficulty in resolving issues related to imbedded
technology in the equipment provided to us by other manufacturers.
Based on the foregoing, we believe that we will be Year 2000 compliant
on a timely basis and that future costs relating to the Year 2000 issue will not
have a material impact on our consolidated financial position, results of
operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
None.
36
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 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 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 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 October 15,
1999, none of such 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.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the third quarter ended September 30, 1999, no matters were
submitted to a vote of security holders of the Registrant, through the
solicitation of proxies or otherwise.
Item 5. Other Information
On October 1, 1999, we appointed Alan V. Gallantar as our Chief
Financial Officer. Pursuant to an Employment Agreement dated as of October 1,
1999 between Advanced Viral Research Corp. and Mr. Gallantar, the term of his
employment continues until October 1, 2002. The agreement may be terminated
during the first 90 days of the agreement in our sole discretion, at which time
Mr. Gallantar will be paid a severance of $87,000. If the agreement is
terminated by us for cause, Mr. Gallantar will have no accrued right to receive
any bonus for the year in which his employment is terminated, all unvested stock
options will be cancelled, and any vested stock options will terminate 90 days
after the effective date of termination. If the agreement is terminated by
Advanced Viral not for cause, we are required to pay to Mr. Gallantar all
accrued and unpaid compensation, and all
37
stock options granted as of the date of the agreement shall become 100% vested.
Upon such termination not for cause, all options which became vested as a result
of this provision may be exercised by Mr. Gallantar until 90 days after the
effective date of termination. If Mr. Gallantar elects to terminate this
agreement as a result of a change in control, he will be paid his base salary
for the remaining term of the agreement, and all stock options granted on the
date of the agreement will become 100% vested and exercisable until 90 days
after the effective date of termination. If Mr. Gallantar elects to terminate
this agreement for any other reason, he will be paid all unaccrued and unpaid
base salary, and he will have the right to exercise any vested stock until 90
days after the effective date of termination. All payments made to Mr. Gallantar
in connection with the termination of the agreement are subject to reduction to
the extent they exceed 2.99 times the Abase amount@ as determined under Section
280G of the Internal Revenue Code of 1986.
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement. For each year
of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10% and
50% of his base salary, based on certain targets and the discretion of the board
of directors. As of the date of the agreement, Mr. Gallantar received options to
purchase an aggregate of 4,547,880 shares of our common stock. The options
expire on October 1, 2009, and are exercisable in three increments of 1,515,960
on the October 1, 2000, 2001 and 2002, respectively. The agreement further
provides that:
o Mr. Gallantar will receive a non-accountable automobile allowance of
$500 per month, provided however, that he is be responsible for all
costs of acquiring and maintaining the automobile.
o We will reimburse Mr. Gallantar for certain professional license and
membership fees up to a maximum of $5,000 per year in the aggregate,
and all other expenses incurred in the performance of his duties with
the prior approval of the Chief Executive Officer.
o If Mr. Gallantar relocates his primary residence to Westchester
County, New York, or New York City prior to the second anniversary of
the agreement, we will pay reasonable moving, legal and brokerage fees
or costs incurred by him in connection with such relocation up to a
maximum of $15,000.
The agreement provides that Mr. Gallantar is not authorized, without
the express written consent of the board of directors and other than in the
ordinary course of business, to pledge the credit of Advanced Viral, to bind us
under any note, mortgage or other monetary obligation, to release or discharge
any debt due us unless we have received payment in full, or to dispose (as
collateral or otherwise) of a substantial amount of our assets. Furthermore, Mr.
Gallantar agreed that he will assign to us all intellectual property rights
developed by him which result from the knowledge he acquired while performing
his duties under the agreement. Finally, he has agreed that he will not,
directly or indirectly, compete with us for five years after termination of his
employment or solicit our employees to leave our employ for one year after
termination.
38
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule (for SEC use only)
(2) Reports on Form 8-K.
During the three-month period ending September 30, 1999, 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 amended report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: December 9, 1999 By: /s/ Alan V. Gallantar
--------------------------------------
Alan V. Gallantar,
Chief Financial Officer
By: /s/ Shalom Z. Hirschman
--------------------------------------
Shalom Z. Hirschman,
President and Chief Executive Officer
39