U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
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 June 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)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(Address of principal executive offices)
(954) 458-7636
(Registrant's telephone number, including area code)
----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value
$.00001 per share as of August 11, 1999 was 303,192,035.
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q/A
QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements.......................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................31
PART II
Item 1. Legal Proceedings........................................................................ 32
Item 2. Changes in Securities and Use of Proceeds.................................................32
Item 3. Defaults Upon Senior Securities...........................................................33
Item 4. Submission of Matters to Vote of Security Holders.........................................33
Item 5. Other Information.........................................................................33
Item 6. Exhibits And Reports on Form 8-K..........................................................33
SIGNATURES .............................................................................................34
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
June 30, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
(Restated)
ASSETS
------
Current Assets:
Cash and cash equivalents $ 95,618 $ 924,420
Investments -- 821,047
Inventory 19,729 19,729
Other current assets 45,606 29,818
------------ ------------
Total current assets 160,953 1,795,014
Property and Equipment 1,090,339 1,049,593
Other Assets 496,570 460,346
------------ ------------
Total assets $ 1,747,862 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities $ 505,797 $ 279,024
Current portion of capital lease obligation 39,993 38,335
------------ ------------
Total current liabilities 545,790 317,359
------------ ------------
Long-Term Liabilities:
Convertible debenture, net 1,481,965 1,457,919
Capital lease obligation - long-term portion 146,961 167,380
------------ ------------
Total long-term liabilities 1,628,926 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement -- 600,000
------------ ------------
Deposit on Exercise of Options 30,000 --
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity (Deficit):
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 301,340,183 and 296,422,907
shares issued and outstanding 3,013 2,964
Additional paid-in capital 15,621,665 14,325,076
Deficit accumulated during the development stage (15,636,808) (13,550,976)
Discount on warrants (444,724) --
Deferred compensation cost -- (14,769)
------------ ------------
Total stockholders' equity (deficit) (456,854) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,747,862 $ 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 Six Months Ended 1984) to
June 30, June 30, June 30,
-------- -------- --------
1999 1998 1999 1998 1999
---- ---- ---- ---- ----
(Restated) (Restated) (Restated)
Revenues:
Sales $ 2,191 $ -- $ 4,590 $ -- $ 199,565
Interest 5,680 27,926 21,489 57,223 580,786
Other income -- -- -- 100 120,093
------------- ------------- ------------- ------------- ------------
7,871 27,926 26,079 57,323 900,444
------------- ------------- ------------- ------------- ------------
Costs and Expenses:
Research and development 409,464 210,618 767,380 380,764 4,350,847
General and administrative 498,529 572,845 936,932 1,078,259 8,252,269
Depreciation 58,949 20,823 96,056 36,340 411,404
Interest 216,965 375,556 311,543 811,714 3,522,732
------------- ------------- ------------- ------------- ------------
1,183,907 1,179,842 2,111,911 2,307,077 16,537,252
------------- ------------- ------------- ------------- ------------
Net Loss $ (1,176,036) $ (1,151,916) $ (2,085,832) $ (2,249,754) $(15,636,808)
============= ============= ============= ============= ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.01) $ (0.01) $ (0.01) $ (0.01)
============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 298,881,545 282,767,657 298,881,545 282,767,657
============= ============= ============= =============
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 JUNE 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 JUNE 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 JUNE 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 JUNE 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
Balance, December 31, 1993 236,276,991 $ 2,363 $3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting services $ .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 -- -- -- -- (440,837) --
----------- ----- --------- ------ ---------- ------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
---
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 -- -- -- -- (401,884) --
----------- ----- --------- ------ ---------- ------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (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 JUNE 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
Balance, December 31, 1995 251,181,774 2,512 $4,475,875 $ - $(3,696,797) $ -
Issuance of common stock, exercise of options .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 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
------------ ----- ---------- -------- ------------ ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
------------ ----- ---------- -------- ------------ ---------
See notes to consolidated 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 JUNE 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Subscription Development
Share Shares Amount Capital Receivable Stage
----- ------ ------ ------- ---------- -----
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537)
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 - - - - (4,141,729)
------------ ------ ----------- -------- -----------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266)
------------ ------ ----------- -------- -----------
Deferred
Compensation
Cost
----
Balance, December 31, 1996 $(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 -
---------
Balance, December 31, 1997 (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 JUNE 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
Balance, December 31, 1997 277,962,574 $2,779 $10,512,767 $(19,000) $ (8,993,266) $(73,837)
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 - - - - - 59,068
Write off of subscription receivable - - (19,000) 19,000 - -
Net loss, year ended December 31, 1998 - - - - (4,557,710) -
----------- ------ ----------- ------- ------------ --------
Balance, December 31, 1998, as Restated 296,422,907 2,964 14,325,076 - (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 JUNE 30, 1999
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred Discount
Per Paid-In Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
----- ------ ------ ------- ----- ---- --------
Balance, December 31, 1998, as Restated 296,422,907 $ 2,964 $ 14,325,076 $(13,550,976) $ (14,769) $ -
Issuance of common stock, securities purchase .16 4,917,276 49 802,451 - - -
agreement
Warrants Costs, securities purchase agreement - - 494,138 - - (494,138)
Amortization of warrant costs, securities purchase
agreement - - - - - 49,414
Amortization of deferred compensation cost - - - - 14,769 -
Net loss, six months ended June 30, 1999, as restated - - - (2,085,832) - -
----------- ------- ------------ ------------ --------- ---------
Balance, June 30, 1999, As Restated 301,340,183 $ 3,013 $ 15,621,665 $(15,636,808) $ - $(444,724)
=========== ======= ============ ============ ========= =========
See notes to consolidated condensed financial statements.
-10-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Six Months Ended (February 20,
June 30, 1984) to
--------------------------- June 30,
1999 1998 1999
---- ---- ----
(Restated) (Restated) (Restated)
Cash Flows from Operating Activities:
Net loss $(2,085,832) $(2,249,754) $(15,636,808)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 96,056 36,340 411,404
Amortization of debt issue costs 52,500 221,227 394,435
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture -- 210,951 2,388,718
Amortization of discount on warrants 73,460 284,256 363,757
Amortization of deferred compensation cost 14,769 29,534 760,500
Issuance of common stock for services -- -- 1,437,500
Other -- -- (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (15,787) (3,382) (45,606)
Increase in inventory -- -- (19,729)
Increase in other assets (88,724) (63,393) (865,465)
Increase (decrease) in accounts payable and
accrued liabilities 226,773 (100,199) 511,997
----------- ----------- ------------
Total adjustments 359,047 615,334 5,335,904
----------- ----------- ------------
Net cash used by operating activities (1,726,785) (1,634,420) (10,300,904)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,700,902 6,292,979
Expenditures for property and equipment (136,803) (303,577) (1,280,403)
Proceeds from sale of property and equipment -- -- 1,200
----------- ----------- ------------
Net cash provided (used) by investing activities 684,244 2,303,325 (1,279,203)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- -- 5,500,000
Proceeds from deposit on exercise of options 30,000 -- 30,000
Proceeds from sale of securities, net of issuance costs 202,500 225,400 6,181,088
Payments under capital lease (18,761) -- (35,363)
----------- ----------- ------------
Net cash provided by financing activities 213,739 225,400 11,675,725
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (828,802) 894,305 95,618
Cash and Cash Equivalents, Beginning 924,420 236,059 --
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 95,618 $ 1,130,364 $ 95,618
=========== =========== ============
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 June 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 June 30, 1999 and
results of operations for the three months and the six months
ended June 30, 1999 and 1998 and cash flows for the six months
ended June 30, 1999 and 1998. 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 June 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 does not presently have a patent for Reticulose but
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
June 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 June 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
June 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 June 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 June 30, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
In April 1999, the Company advanced $47,750 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 June 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 June 30, 1999, the Company has advanced
approximately $10,000 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 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 June 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 June 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 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 do not receive on or prior to December 31, 1997,
funding of $3,000,000 from sources other than traditional
institutional/bank debt financing or proceeds from the purchase by
Dr. Hirschman of the Company's securities, including, without
limitation, the exercise of Dr. Hirschman of outstanding stock
options. Pursuant to the Employment Agreement, Dr. Hirschman is
entitled to receive an annual base salary of $325,000, 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 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 June 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 June 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 $110,000 in services to Globomax through June 30,
1999.
-19-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
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.
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.
-20-
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 connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants are $0.288, $0.576 and $0.864 per warrant
share, respectively. The fair value of the February Warrants was
estimated to be $37,000 ($.021 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Sholes
Pricing Model. This amount has been reflected in the accompanying
financial statements as interest expense related to the
convertible February Debenture. Based on the terms for conversion
associated with the February Debenture, there was an intrinsic
value associated with the beneficial conversion feature of
$413,793. This amount has been fully amortized to interest expense
with a corresponding credit to additional paid-in capital.
In connection with the issuance of the October Debenture, the
Company issued to RBB three warrants (the "October Warrants") to
purchase Common Stock, each such October Warrant entitling the
holder to purchase, from the date of grant through August 30,
2007, 600,000 shares of the Common Stock. The exercise price of
the three October Warrants are $0.20, $0.23 and $0.27 per warrant
share, respectively. The fair value of the three October Warrants
was established to be $106,571 ($.178 per warrant), $97,912 ($.163
per warrant) and $87,472 ($.146 per warrant), respectively, based
upon a financial analysis of the terms of the warrants using the
Black-Sholes Pricing Model. This amount has been reflected in the
accompanying financial statements as a discount on the convertible
debenture, with a corresponding credit to additional paid-in
capital, and is being amortized over the expected term of the
notes which at December 31, 1997 was 120 months. In May 1998, the
remaining unamortized discount of $276,957 was amortized upon full
conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the
beneficial conversion feature of $1,350,000. This amount has been
treated as deferred interest expense and recorded as a reduction
of the convertible debenture liability with a corresponding credit
to additional paid-in capital and has been amortized to interest
expense over the period from October 8, 1997 (date of debenture)
to February 24, 1998 (date the debenture is fully convertible).
The interest expense relative to this item was $210,951 for 1998
and $1,139,049 for 1997.
In November 1998, in order to finance further research and
development, the Company sold 1,500,000 principal amount of its
ten year 7% Convertible Debenture (the "November Debenture") due
October 31, 2008, to RBB. Accrued interest under the November
Debenture is payable semi-annually, computed at the rate of 7% per
annum on the unpaid principal balance from the date of the
issuance of the November Debenture until the date of interest
payment. The November Debenture may be prepaid by the Company
before maturity, in whole or in part, without premium or penalty,
if the Company gives the holder of the Debenture notice not less
than 30 days before the date fixed for prepayment in that notice.
The November Debenture is convertible, at the option of the
holder, into shares of common stock.
-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)
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.
June 30, December 31,
1999 1998
---- ----
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Less unamortized discount and deferred interest 18,035 42,081
----------- -----------
Convertible debenture, net $1,481,965 $1,457,919
=========== ===========
On August 3, 1999, 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 and warrants to purchase 50,000 shares of the Company's
common stock. The 7% convertible debenture is due August 3, 2009
and the warrants are exercisable through August 3, 2004.
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.
-22-
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. SECURITIES PURCHASE AGREEMENTS (Continued)
Other (Continued)
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 will be amortized to interest expense.
NOTE 4. RESTATEMENT
The accompanying financial statements for June 30, 1999 have been
restated to accrue additional financing costs related to the effective
date of a registration statement covering the resale of certain
securities sold by the Company. The effect of the restatement was to
increase the net loss for the three and six months ended June 30, 1999
by $120,000 ($.00 per share).
Additionally, for the three and six months ended June 30, 1999, the
financial statements have been restated to reclassify $26,250 and
$52,500, 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 six
months ended June 30, 1999.
For the three months ended June 30, 1998, the financial statements
have been restated to reclassify $67,616 of amortization of debt issue
costs and $276,957 of amortization of discount on warrants from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the three months
ended June 30, 1998.
For the six months ended June 30, 1998, the financial statements have
been restated to reclassify $221,227 of amortization of debt issue
costs and $284,256 of amortization of discount on warrants from
depreciation and amortization to interest expense. This
reclassification had no effect upon the net loss for the six months
ended June 30, 1998.
-23-
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:
June 30, 1999
-------------
As
Previously As
Reported Restatement Restated
-------- ----------- --------
Accounts payable and accrued liabilities $ 385,797 $ 120,000 $ 505,797
============ ========= ============
Deficit accumulated during the development
Stage $(15,516,808) $(120,000) $(15,636,808)
============ ========= ============
Three Months Ended June 30, 1999
--------------------------------
Depreciation and amortization $ 85,199 $ (26,250) $ 58,949
============ ========= ============
Interest expense $ 70,715 $ 146,250 $ 216,965
============ ========= ============
Net loss $ (1,056,036) $(120,000) $ (1,176,036)
============ ========= ============
Six Months Ended June 30, 1999
------------------------------
Depreciation and amortization $ 148,556 $ (52,500) $ 58,949
============ ========= ============
Interest expense $ 139,043 $ 172,500 $ 311,543
============ ========= ============
Net loss $ (1,965,832) $(120,000) $ (2,085,832)
============ ========= ============
Three Months Ended June 30, 1998
--------------------------------
Depreciation and amortization $ 365,396 $(344,573) $ 20,823
============ ========= ============
Interest expense $ 30,983 $ 344,573 $ 375,556
============ ========= ============
Six Months Ended June 30, 1998
------------------------------
Depreciation and amortization $ 541,823 $(505,483) $ 36,340
============ ========= ============
Interest expense $ 306,231 $ 505,483 $ 811,714
============ ========= ============
-24-
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 June 30, 1999 we had
incurred a cumulative net loss of $15,636,808. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Reticulose. All of our research and
development efforts have been devoted to the development of Reticulose.
In order to commence clinical trials for regulatory approval of Reticulose
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 Reticulose in the United States. The
IND will seek approval to conduct a study testing the effectiveness of
Reticulose 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 informationassuring the identification, quality and purity of Reticulose
and a description of the physical, chemical and microbiological
characteristics of Reticulose.
We believe that the IND will demonstrate the low rate of adverse reactions
occurring in the use of Reticulose 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
-25-
considering the IND application, if we are financially able to file the IND.
FDA approval to begin human clinical trials of Reticulose 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 Reticulose will ever be approved for commercial
distribution by any country.
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 Six Months Ended June 30, 1999 and 1998
For the three month periods ended June 30, 1999 and June 30, 1998, we
incurred losses of $1,176,036 ($0.01 per share) and $1,151,916 ($0.01 per
share), respectively. For the six month periods ended June 30, 1999 and June
30, 1998, we incurred losses of $2,085,832 ($0.01 per share) and $2,249,754
($0.01 per share), respectively.
General and Administrative Expense. Our losses during the three and six
months ended June 30, 1999 are due in part to decreased general and
administrative expense ($498,529 and $936,932 for the three and six months
ended June 30, 1999 vs. $572,845 and $1,078,259 for the three and six months
ended June 30, 1998, respectively).
Depreciation Expense. We had increased depreciation expense for the three
and six months ended June 30, 1999 of $58,949 and $96,056 for the three and six
months ended June 30, 1999 vs. $20,823 and $36,340 for the three and six months
ended June 30, 1998, respectively. This increase is due principally to
laboratory equipment purchases and improvements to the Yonkers, New York
facility.
Interest Expense. Our losses during the three and six months ended June
30, 1999 are also due to decreased interest expense ($216,965 and $311,543 for
the three and six months ended June 30, 1999 vs. $375,556 and $811,714 for the
three and six months ended June 30, 1998, respectively). Included in the
interest expense are:
o no beneficial conversion feature on certain convertible debentures
for the three and six months ended June 30, 1999 vs. $0 and $210,951
for the three and six months ended June 30, 1998, respectively;
o interest expense associated with certain convertible debentures of
approximately $26,250 and $52,500 for the three and six months ended
June 30, 1999 vs. $31,000 and $96,000 for the three and six months
ended June 30, 1998, respectively;
-26-
o amortization of discount on certain warrants of approximately $37,000
and $73,000 for the three and six months ended June 30, 1999 vs.
$277,000 and $277,000 for the three and six months ended June 30,
1998, respectively;
o amortization of loan costs of approximately $26,250 and $52,500 for
the three and six months ended June 30, 1999 vs. $68,000 and $221,000
for the three and six months ended June 30, 1998, respectively; and
o contractually imposed finance penalties associated with not having an
effective registration statement covering certain securities of
approximately $120,000 and $120,000 for the three and six months
ended June 30, 1999 vs. no expenses for the three and six months
ended June 30, 1998, respectively.
Research and Development Expense. We had increased research and
development expense of $409,464 and $767,380 for the three and six months ended
June 30, 1999 vs. $210,618 and $380,764 for the three and six months ended June
30, 1998, respectively, in connection with increased research and development
activity in general, along with a shift from the use of external to internal
personnel and testing, including the employment of additional research
professionals; and rent and operating costs associated with the Yonkers, New
York laboratory.
Sales. We had sales of $2,191 and $4,590 for the three and six months
ended June 30, 1999, respectively, vs. no sales for the three and six months
ended June 30, 1998, respectively. All sales during these periods were to
distributors purchasing Reticulose for testing purposes. Interest income was
$5,680 and $21,489 for the three and six months ended June 30, 1999,
respectively, vs. $27,926 and $57,233 for the three and six months ended June
30, 1998, respectively. There can be no assurance that Reticulose will ever be
sold for commercial distribution anywhere in the world.
LIQUIDITY
June 30, 1999 vs. December 31, 1998
Assets. As of June 30, 1999 and December 31, 1998, we had current assets
of $160,953 and $1,795,014, respectively. We had total assets of $1,747,862 and
$3,304,953 at June 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 June 30, 1999 and December 31, 1998, we had current
liabilities of $545,790 and $317,359, respectively. The increase in current
liabilities was due to an increase in payables of approximately $227,000
primarily resulting from our increased costs of financing of $130,000, amounts
due to GloboMax of $80,000, and increased operating expenses. As of June 30,
1999 and December 31, 1998, we had total long term liabilities of $1,628,926
and $1,625,299 at June 30, 1999 and December 31, 1998, respectively.
27
Cash Flow. During the six months ended June 30, 1999, we used cash of
$1,726,785 for operating activities, as compared to $1,634,420 for the six
months ended June 30, 1998. During the six months ended June 30, 1999, we:
o incurred non-cash expenses primarily relating to depreciation
($96,000), amortization of loan costs ($52,500) and discount on
warrants ($73,000);
o expended approximately $717,000 for payroll and related costs;
o expended approximately $192,000 for research expenses incurred by
third parties in connection with the testing of Reticulose in
Argentina and Barbados;
o expended approximately $137,000 for additions to machinery and
equipment at our Yonkers, New York office and the manufacturing plant
in Freeport, Bahamas; and
o expended approximately $85,000 in laboratory supplies.
During the six months ended June 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 ($232,500). In addition, we expended approximately $390,000 in
professional and consulting fees, approximately $110,000 of which are
consulting fees incurred in connection with the IND for Reticulose, and
approximately $115,000 of which relate to professional fees incurred in
connection with certain financing arrangements and financial reporting;
As of June 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
ReticuloseJ 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 ReticuloseJ
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 ReticuloseJ
in inhibiting the mutation of the AIDS virus on patients in
Argentina, pursuant to an agreement entered in July 1998.
Projected Expenses
During 1999, we expect to spend approximately $1,000,000 on research
and development related activities, including:
28
o approximately $300,000 in the preparation of the IND;
o approximately $325,000 in connection with laboratory research,
equipment, supplies and electronics;
o approximately $300,000 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 standards.
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 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
29
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.
30
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 10,257,673 shares $0.1462 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 13,129,821 $0.1556 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 closing bid
price on August 27, 1999 of $0.2031, and an applicable conversion price of
$0.1462 for the RBB debenture and $0.1523 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
31
convertible, at the option of the holder, into shares of common stock pursuant
to specified formulas. On April 22, 1997, June 6, 1997, July 3, 1997 and August
20, 1997, pursuant to notice by the holder, RBB, to us under the February 1997
debenture, $330,000, $134,000, $270,000 and $266,000, respectively, of the
principal amount of the February 1997 debenture was converted into 1,648,352,
894,526, 2,323,580 and 1,809,524 shares of the common stock, respectively. As
of August 20, 1997 the February 1997 debenture was fully converted. On December
9, 1997, January 7, 1998, January 14, 1998, February 19, 1998, February 23,
1998, March 31, 1998, May 4, 1998 and May 5, 1998, pursuant to notice by the
holder, RBB, to us, $120,000, $133,000, $341,250, $750,000, $335,750, $425,000,
$275,000 and $620,000, respectively, of the October 1997 debenture was
converted into 772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485, and 3,299,979 shares of common stock, respectively. As of May 5,
1998, the October 1997 debenture was fully converted.
In connection with the issuance of the 1997 debentures, we issued to RBB
six warrants to purchase common stock, three of which entitle the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378 shares of
the common stock, and three of which entitle the holder to purchase, from
August 30, 1997 through August 30, 2007, 600,000 shares of the common stock.
The exercise prices of such warrants are $0.288, $0.576, $0.864, $0.20, $0.23
and $0.27 per warrant share, respectively. Each such warrant provides that the
holder may elect to receive a reduced number of shares of common stock on the
basis of a cashless exercise; that number of shares bears the same proportion
to the total number shares issuable under such warrant as the excess of the
market value of shares of common stock over the warrant exercise price bears to
that market value. Each warrant contains anti-dilution provisions which provide
for the adjustment of warrant price and warrant shares. As of August 11, 1999,
none of the warrants have 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 factors that cannot be predicted by us at this
time, including 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,
32
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 August 11, 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
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 August 11, 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
33
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 August 11, 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 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 factors that cannot be predicted by us at this time,
including 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 August 11, 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 $300,000 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
34
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 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,
35
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 June 23, 1999, we
issued 1,851,851 shares of common stock and warrants to purchase 926,528 shares
of common stock to three investors for an aggregate purchase price of $500,000.
The warrants are exercisable at any time and from time to time until June 30,
2004. The warrants entitle the holders thereof to purchase an aggregate of
463,264 and 463,264 shares of common stock at exercise prices of $0.324 and
$0.378 per share, respectively.
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 second quarter ended June 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
None.
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Item 6. Exhibits and Reports on Form 8K
(i) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule (for SEC use only)
(j) Reports on Form 8-K.
During the three-month period ending June 30, 1999, no Current
Reports on Form 8-K were filed.
38
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