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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-2646820
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK 10701
------------------------------------------------ ----------
Address of principal executive offices) Zip Code
(914) 376-7383
----------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). [ ] Yes [X] No
The number of shares outstanding of the issuer's common stock, par
value $0.00001 per share as of May 14, 2003 was 474,042,609.
ADVANCED VIRAL RESEARCH CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION (UNAUDITED).......................................................................1
Item 1. Financial Statements (Unaudited)....................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............36
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........................................46
Item 4. Controls And Procedures............................................................................46
PART II. OTHER INFORMATION......................................................................................46
Item 1. Legal Proceedings..................................................................................46
Item 2. Changes in Securities and Use of Proceeds..........................................................47
Item 3. Defaults upon Senior Securities....................................................................47
Item 4. Submission of Matters to Vote of Security Holders..................................................47
Item 5. Other Information..................................................................................48
Item 6. Exhibits and Reports on Form 8-K...................................................................48
SIGNATURES.......................................................................................................49
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002.........................................50
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash and cash equivalents $ 511,121 $ 1,475,755
Prepaid insurance 104,837 86,368
Assets held for sale 162,539 172,601
Other current assets 68,837 35,527
------------ ------------
Total current assets 847,334 1,770,251
Property and Equipment, Net 2,006,377 2,244,118
Other Assets 1,011,067 931,660
------------ ------------
Total assets $ 3,864,778 $ 4,946,029
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Litigation settlement $ 1,098,812 $ --
Accounts payable 711,047 417,061
Accrued liabilities 177,913 137,646
Current portion of capital lease obligation 71,245 104,719
Current portion of note payable 23,451 25,165
------------ ------------
Total current liabilities 2,082,468 684,591
------------ ------------
Long-Term Debt:
Convertible debenture, net 1,184,765 1,658,231
Capital lease obligation -- 5,834
Note payable -- 4,879
------------ ------------
Total long-term debt 1,184,765 1,668,944
------------ ------------
Common Stock Subscribed but not Issued -- 883,900
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
------------ ------------
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 474,042,609 and 455,523,990 shares issued
and outstanding 4,740 4,555
Additional paid-in capital 56,130,347 57,530,605
Deficit accumulated during the development stage (52,887,259) (51,137,805)
Discount on warrants (2,650,283) (4,688,761)
------------ ------------
Total stockholders' equity 597,545 1,708,594
------------ ------------
Total liabilities and stockholders' equity $ 3,864,778 $ 4,946,029
============ ============
See notes to consolidated financial statements.
1
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Inception
Three Months Ended (February 20,
March 31, 1984) to
-------------------------------- March 31,
2003 2002 2003
------------- ------------- -------------
Revenues $ -- $ -- $ 231,892
------------- ------------- -------------
Costs and Expenses:
Research and development 457,910 1,661,173 18,773,326
General and administrative 863,202 691,071 18,457,679
Compensation and other expense for
options and warrants -- -- 3,558,872
Depreciation 237,740 228,097 2,404,929
------------- ------------- -------------
1,558,852 2,580,341 43,194,806
------------- ------------- -------------
Loss from Operations (1,558,852) (2,580,341) (42,962,914)
------------- ------------- -------------
Other Income (Expense):
Interest income 6,189 2,071 907,624
Other income -- -- 120,093
Interest expense (187,139) (252,802) (9,062,717)
Severance expense - former directors -- -- (302,500)
------------- ------------- -------------
(180,950) (250,731) (8,337,500)
------------- ------------- -------------
Loss from Continuing Operations (1,739,802) (2,831,072) (51,300,414)
Loss from Discontinued Operations (9,652) (42,436) (1,586,845)
------------- ------------- -------------
Net Loss $ (1,749,454) $ (2,873,508) $ (52,887,259)
============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.00) $ (0.01)
Discontinued operations (0.00) (0.00)
------------- -------------
Net loss $ (0.00) $ (0.01)
============= =============
Weighted Average Number of
Common Shares Outstanding 469,468,368 406,815,381
============= =============
See notes to consolidated financial statements.
2
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ----------- ----------- ----------- -----------
Balance, inception (February 20, 1984) as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
----------- ----------- ----------- -----------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- ----------- ----------- -----------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $0.00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
----------- ----------- ----------- -----------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 0.01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
----------- ----------- ----------- -----------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ----------- ----------- -----------
See notes to consolidated financial statements.
3
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ----------- ------ ----------- -----------
Balance, December 31, 1986 154,666,014 $1,547 $ 307,534 $ (203,942)
Issuance of common stock, exercise of "A" warrants $0.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, year ended December 31, 1987 -- -- -- (258,663)
----------- ------ ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
----------- ------ ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
----------- ------ ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption
offer on "B" warrants 0.05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ------ ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ------ ----------- -----------
See notes to consolidated financial statements.
4
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
---------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
--------- ----------- ------ ---------- -----------
Balance, December 31, 1990 200,299,882 $2,003 $1,845,992 $(1,200,915)
Issuance of common stock, exercise of "B" warrants $ 0.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants 0.08 2,500 -- 200 --
Issuance of common stock, exercise of underwriter warrants 0.12 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
----------- ------ ---------- -----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing 0.04 10,000,000 100 404,900 --
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
----------- ------ ---------- -----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
----------- ------ ---------- -----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ------ ---------- -----------
See notes to consolidated financial statements.
5
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------ Accumulated Deferred
Amount Additional during the Compen-
Per Paid-In Subscription Development sation
Share Shares Amount Capital Receivable Stage Cost
------- ----------- ------ ---------- --------- ----------- --------
Balance, December 31, 1993 236,276,991 $2,363 $3,416,070 $ -- $(2,854,076) $ --
Issuance of common stock, for consulting services $0.05 4,750,000 47 237,453 -- -- --
Issuance of common stock, exercise of options 0.08 400,000 4 31,996 -- -- --
Issuance of common stock, exercise of options 0.10 190,000 2 18,998 -- -- --
Net loss, year ended December 31, 1994 -- -- -- -- (440,837) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
-----
Issuance of common stock, exercise of options 0.05 3,333,333 33 166,633 -- -- --
Issuance of common stock, exercise of options 0.08 2,092,850 21 167,407 -- -- --
Issuance of common stock, exercise of options 0.10 2,688,600 27 268,833 -- -- --
Issuance of common stock, for consulting services 0.11 1,150,000 12 126,488 -- -- --
Issuance of common stock, for consulting services 0.14 300,000 3 41,997 -- -- --
Net loss, year ended December 31, 1995 -- -- -- -- (401,884) --
----------- ------ ---------- ----- ----------- -----
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -- (3,696,797) --
----------- ------ ---------- ----- ----------- -----
See notes to consolidated financial statements.
6
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------------------------------------ Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
--------------- ------------ ---------- ---------- ----------- ----------- ---------
Balance, December 31, 1995 251,181,774 $ 2,512 $4,475,875 $ -- $(3,696,797) $ --
Issuance of common stock,
exercise of options $ 0.05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options 0.08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options 0.10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options 0.11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options 0.12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options 0.18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options 0.19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options 0.20 473,500 5 94,695 -- -- --
Issuance of common stock,
for services rendered 0.50 350,000 3 174,997 -- -- --
Options granted -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- (19,000) -- --
Net loss, year ended
December 31, 1996 -- -- -- -- (1,154,740) --
------------ ---------- ---------- ----------- ----------- ---------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
------------ ---------- ---------- ----------- ----------- ---------
See notes to consolidated financial statements.
7
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------ ----------- ------------ ----------- ---------
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351 $(19,000) $(4,851,537) $(473,159)
Issuance of common stock,
exercise of options $ 0.08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt 0.20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt 0.15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt 0.12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt 0.15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt 0.16 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered 0.41 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered 0.24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- 1,350,000 -- -- --
Warrant costs, February debenture -- -- 37,242 -- -- --
Warrant costs, October debenture -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- 399,322
Imputed interest on convertible
debenture -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- -- -- (4,141,729) --
----------- ------ ----------- -------- ----------- ---------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
----------- ------ ----------- -------- ----------- ---------
See notes to consolidated financial statements.
8
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
---------------------------- Accumulated
Amount Additional during the Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ----------- ------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 277,962,574 $2,779 $ 10,512,767 $(19,000) $ (8,993,266) $(73,837)
Issuance of common stock,
exercise of options $0.12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options 0.14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options 0.16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options 0.20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options 0.26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt 0.13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt 0.14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt 0.15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt 0.18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt 0.19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt 0.22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt 0.23 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered 0.21 100,000 1 20,999 -- -- --
Beneficial conversion feature,
November debenture -- -- 625,000 -- -- --
Warrant costs, November debenture -- -- 48,094 -- -- --
Amortization of deferred compensation cost -- -- -- -- -- 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 296,422,907 2,964 14,325,076 -- (13,550,976) (14,769)
----------- ------ ------------ -------- ------------ --------
See notes to consolidated financial statements.
9
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
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 296,422,907 $2,964 $14,325,076 $(13,550,976) $(14,769) $ --
Issuance of common stock,
securities purchase agreement $ 0.16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase agreement 0.27 1,851,852 18 499,982 -- -- --
Issuance of common stock,
for services rendered 0.22 100,000 1 21,999 -- -- --
Issuance of common stock,
for services rendered 0.25 180,000 2 44,998 -- -- --
Beneficial conversion feature,
August debenture -- -- 687,500 -- -- --
Beneficial conversion feature,
December debenture -- -- 357,143 -- -- --
Warrant costs, securities
purchase agreement -- -- 494,138 -- -- (494,138)
Warrant costs, securities
purchase agreement -- -- 37,025 -- -- (37,025)
Warrant costs, August debenture -- -- 52,592 -- -- --
Warrant costs, December debenture -- -- 4,285 -- -- --
Amortization of warrant costs,
securities purchase agreement -- -- -- -- -- 102,674
Amortization of deferred
compensation cost -- -- -- -- 14,769 --
Credit arising from modification
of option terms -- -- 210,144 -- -- --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262) -- --
----------- ------ ----------- ------------ -------- ---------
Balance, December 31, 1999 303,472,035 3,034 17,537,333 (19,725,238) -- (428,489)
----------- ------ ----------- ------------ -------- ---------
See notes to consolidated financial statements.
10
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
--------------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------------- ----------- -------- ------------ ------------ -----------
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,537,333 $(19,725,238) $ (428,489)
Issuance of common stock,
exercise of options $ 0.1400 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock,
exercise of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock,
exercise of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock,
exercise of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock,
exercise of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock,
exercise of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock,
exercise of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock,
exercise of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock, cashless
exercise of warrants 563,597 6 326,153 -- --
Issuance of common stock, services
rendered 0.4650 100,000 1 46,499 -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- (326,159) -- --
Beneficial conversion feature,
January Debenture -- -- 386,909 -- --
Warrant costs, consulting agreement -- -- 200,249 -- --
Warrant costs, January Debenture -- -- 13,600 -- --
Warrant costs, private placement -- -- 3,346,414 -- (3,346,414)
Recovery of subscription receivable
previously written off -- -- 19,000 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 544,163
Credit arising from modification
of option terms -- -- 1,901,927 -- --
Net loss, year ended
December 31, 2000 -- -- -- (9,354,664) --
----------- -------- ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 3,802 39,969,373 (29,079,902) (3,230,740)
----------- -------- ------------ ------------ -----------
See notes to consolidated financial statements.
11
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
-------- ----------- -------- ------------ ------------ -----------
Balance, December 31, 2000 380,214,618 $ 3,802 $ 39,969,373 $(29,079,902) $(3,230,740)
Issuance of common stock,
exercise of options $ 0.2700 40,000 1 10,799 -- --
Issuance of common stock,
exercise of options 0.3600 20,000 1 7,199 -- --
Issuance of common stock, cashless
exercise of warrants 76,411 1 77,491 -- --
Issuance of common stock, for
services rendered 0.3500 100,000 1 34,999 -- --
Sale of common stock, for cash 0.1500 6,666,667 66 999,933 -- --
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904 -- --
Cashless exercise of warrants -- -- (77,491) -- --
Warrant costs, private placement -- -- 168,442 -- (168,442)
Warrant costs, private equity line of credit -- -- 1,019,153 -- (1,019,153)
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 985,705
Credit arising from modification of option terms -- -- 691,404 -- --
Net loss, year ended December 31, 2001 -- -- -- (11,715,568) --
-------- ----------- -------- ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 $ 4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
======== =========== ======== ============ ============ ===========
See notes to consolidated financial statements.
12
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------ ----------- ------ ------------ ------------ -----------
Balance, December 31, 2001 403,296,863 $4,033 $ 47,666,141 $(40,795,470) $(3,432,630)
Sale of common stock, for cash $0.1109 17,486,491 175 1,938,813 -- --
Sale of common stock, for cash 0.1400 22,532,001 225 2,840,575 -- --
Sale of common stock, for cash 0.1500 9,999,999 100 1,499,900 -- --
Issuance of common stock,
conversion of debt 0.1100 909,091 9 99,991 -- --
Issuance of common stock,
conversion of debt 0.1539 1,299,545 13 199,987 -- --
Warrant costs, termination agreement -- -- 190,757 -- --
Warrant costs, issued with sale of
common stock, for cash -- -- 2,358,033 -- (2,358,033)
Expenses of stock issuance -- -- (50,160) -- --
Warrants granted for consulting services -- -- 386,677 -- --
Credit arising from modification
of option terms -- -- 177,963 -- --
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 1,101,902
Beneficial conversion feature, May debenture -- -- 55,413 -- --
Beneficial conversion feature, July debentures -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- (10,342,335) --
----------- ------ ------------ ------------ -----------
Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761)
=========== ====== ============ ============ ===========
See notes to consolidated financial statements.
13
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2003
Common Stock Deficit
------------------------------------ Accumulated
Amount Additional during the Discount
Per Paid-In Development on
Share Shares Amount Capital Stage Warrants
------------ ----------- ------ ------------ ------------ -----------
Balance, December 31, 2002 455,523,990 $4,555 $ 57,530,605 $(51,137,805) $(4,688,761)
Sale of common stock, for cash $ 0.0800 13,750,000 137 1,099,863
Issuance of common stock,
conversion of debt 0.1000 4,105,754 41 410,685 -- --
Issuance of common stock,
conversion of debt 0.1818 562,865 6 102,323 -- --
Issuance of common stock,
for services rendered 0.0790 100,000 1 7,899
Warrant costs, issued with sale
of common stock, for cash -- -- 102,700 -- (102,700)
Expenses of stock issuance -- -- (52,227) -- 36,385
Amortization of warrant costs,
securities purchase agreements -- -- -- -- 354,430
Litigation settlement - warrants
cancelled-original issue
discount reversed (1,974,094) 1,974,094
Litigation settlement -
amortization reversed (223,731)
Litigation settlement --
cash and stock (1,097,407)
Net loss, Three Months
Ended March 31, 2003 -- -- -- (1,749,454) --
----------- ------ ------------ ------------ -----------
Balance, March 31, 2003
(unaudited) 474,042,609 $4,740 $ 56,130,347 $(52,887,259) $(2,650,283)
=========== ====== ============ ============ ===========
See notes to consolidated financial statements.
14
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inception
Three Months Ended (February 20,
March 31, 1984) to
--------------------------- March 31,
2003 2002 2003
----------- ----------- ------------
Cash Flows from Operating Activities:
Net loss $(1,749,454) $(2,873,508) $(52,887,259)
----------- ----------- ------------
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation 241,701 233,309 2,680,364
Amortization of debt issuance costs 12,854 4,185 841,491
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 24,794 -- 3,980,191
Amortization of discount on warrants 130,699 241,807 3,498,248
Amortization of deferred compensation cost -- -- 760,500
Issuance of common stock for debenture interest 14,795 -- 134,432
Issuance of common stock for services -- -- 1,586,000
Compensation expense for options and warrants -- -- 3,558,872
Changes in operating assets and liabilities:
Increase in other current assets (50,607) (41,748) (195,918)
Increase in other assets (92,261) (54,876) (1,727,450)
Increase (decrease) in accounts payable and accrued liabilities 334,252 (80,015) 895,159
----------- ----------- ------------
Total adjustments 616,227 302,662 16,011,889
----------- ----------- ------------
Net cash used by operating activities (1,133,227) (2,570,846) (36,875,370)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- -- 6,292,979
Disposal (Acquisition) of property and equipment 4,929 (42,835) (4,318,455)
----------- ----------- ------------
Net cash provided (used) by investing activities 4,929 (42,835) (4,318,455)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt -- 1,500,000 11,500,000
Proceeds from sale of securities, net of issuance costs 1,093,465 -- 30,623,151
Proceeds from common stock subscribed but not issued (883,900) -- --
Payments under capital lease (39,308) (45,622) (349,336)
Payments on note payable (6,593) (5,793) (87,869)
Recovery of subscription receivable written off -- -- 19,000
----------- ----------- ------------
Net cash provided by financing activities 163,664 1,448,585 41,704,946
----------- ----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents (964,634) (1,165,096) 511,121
Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 --
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 511,121 $ 334,713 $ 511,121
=========== =========== ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the period for interest $ 6,810 $ 3,997
=========== ===========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
A capital lease obligation of approximately $140,000 was incurred
during 2002 to finance the purchase of new equipment.
See notes to consolidated financial statements.
15
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements at March
31 2003 have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial
information on Form 10-Q and reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the
financial position as of March 31 2003 and results of operations for
the three months ended March 31, 2003 and 2002 and cash flows for the
three months ended March 31, 2003 and 2002. All such adjustments are of
a normal recurring nature. Certain general and administrative expenses
from inception relating to consulting services were reclassified to
compensation expense for options and warrants to be consistent with
current presentation. The Company has discontinued allocating certain
of its general and administrative expenses to research and development.
This change, effective in the first quarter ending March 31, 2003, was
necessary to reflect current operating costs relating to the Company's
Yonkers, New York facility which are recorded as general and
administrative expenses in line with the Company's operations in New
York and no longer allocated to research and development expense. The
Company's Chief Scientific Officer, who is also Chief Executive
Officer, allocates approximately 30% of his time to oversight of the
Company's clinical trials and therefore this percentage of his total
compensation has been allocated to research and development expense
with the balance allocated to general and administrative expense. The
results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year. The
statements should be read in conjunction with the audited consolidated
financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
NOTE 2. GOING CONCERN
As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $52,887,259 since inception and is
dependent upon registration of Product R for sale before it can begin
commercial operations. The Company's cash position is inadequate to pay
all the costs associated with operations and the full range of testing
and clinical trials required by the FDA. Unless and until Product R is
approved for sale in the United States or another industrially
developed country, the Company will be dependent upon the continued
sale of its securities, debt or equity financing for funds to meet its
cash requirements. The foregoing issues raise substantial doubt about
the Company's ability to continue as a going concern.
Management intends to continue to sell the Company's securities in an
attempt to meet its cash flow requirements; however, no assurance can
be given that equity or debt financing, if and when required, will be
available.
16
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES
GENERAL
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sales of the Company's product. The Company has not as
yet received any notice of claim from such parties.
PRODUCT LIABILITY
The Company is unaware of any claims or threatened claims since Product
R was initially marketed in the 1940's; however, one study noted
adverse reactions from highly concentrated doses in guinea pigs.
Therefore, the Company could be subjected to claims for adverse
reactions resulting from the use of Product R. In the event any claims
for substantial amounts were successful, they could have a material
adverse effect on the Company's financial condition and on the
marketability of Product R. During November 2002, the Company secured
$3,000,000 of product liability coverage at a cost of approximately
$24,000 per annum. In addition, during October 2002, the Company
secured $3,000,000 in liability coverage for each of the three clinical
trials in Israel at a cost of approximately $16,000. There can be no
assurance that the Company will be able to secure additional insurance
in adequate amounts or at reasonable premiums if it determined to do
so. Should the Company be unable to secure additional product liability
insurance, the risk of loss to the Company in the event of claims would
be greatly increased and could have a material adverse effect on the
Company.
LACK OF PATENT PROTECTION
The Company has nine issued U.S. patents, some covering the composition
of Product R and others covering various uses of Product R. In
addition, the Company has two issued Australian patents covering the
use of Product R. Additionally, the Company has 14 pending U.S. patent
applications and 17 pending foreign patent applications. The Company
can give no assurance that other companies, having greater economic
resources, will not be successful in developing a similar product.
There can be no assurance that issued patents as well as patents that
may result from pending applications will be enforceable.
STATUS OF FDA FILINGS
On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) to begin Phase I clinical trials of Product R as a topical
treatment for genital warts caused by human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the Company's IND
application for Product R to begin Phase I clinical trials. On April
12, 2002, the Company successfully completed Phase 1 trials. Phase 2
trials are pivotal clinical investigations designed to establish the
efficacy and safety of Product R. Currently, the Company does not have
sufficient funds available to pursue the Phase 2 clinical trials of
Product R as a topical treatment for genital warts caused by HPV
infection.
17
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS
In November 2002 the Company began testing injectable Product R in the
following clinical trials in Israel:
o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
THERAPY FOR AIDS. These patients have failed highly active
anti-retroviral therapy (HAART), remain on HAART, and require
salvage therapy. The Company believes that Product R may have
three major beneficial effects in patients with AIDS. First,
its therapeutic effects on body wasting (cachexia) seen in
patients with AIDS. Second, the mitigation of the toxicity of
drugs included in HAART regimens for the treatment of AIDS.
Third, the synergistic activity with drugs used in HAART
regimens to suppress the replication of HIV and increase the
CD4 and CD8 cell counts in patients with AIDS. The Company
believes that Product R may prove to be an important "enabler"
drug in the treatment of AIDS.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND
LYMPHOMA. Included are patients with acute lymphocytic
leukemia, multiple Myeloma, Hodgkin's disease and
non-Hodgkin's lymphoma.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS.
Included are patients with solid tumors such as colonic, lung,
breast, stomach and kidney cancers.
The Company's objective for the three Israeli trials is to determine
the safety, tolerance and metabolic characteristics of Product R.
Although there can be no assurances, the Company anticipates that the
clinical trials in Israel will help facilitate the planned
investigational new drug (IND) application process for injectable
Product R with the FDA.
The Company's 12-month agreement formalized in April 2001 with the
Selikoff Center in Israel to develop clinical trials in Israel using
Product R has concluded. The Company paid $242,000 under this
agreement.
In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the three clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the three clinical trials including establishing a network
of scientists to perform said study/trial and initiate recruitment of
patients and (3) perform the studies/trials and evaluate the results.
Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000. $825,000 has been paid
through March 31, 2003, of which $199,000 was paid during the first
quarter of 2003. It is anticipated that these trials will
support future FDA applications.
18
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
STATUS OF ISRAEL CLINICAL TRIALS (Continued)
In the fourth quarter of 2002, the Company entered into various
agreements supporting the clinical trials in Israel aggregating
approximately $1,000,000 to be paid over a twelve-month period. These
services include the monitoring and auditing of the clinical sites,
hospital support and laboratory testing. Approximately $76,000 has been
paid through March 31, 2003, of which $53,000 was paid during the first
quarter of 2003.
In March 2003, the Company commenced discussions and began to draft
protocols to expand the ongoing Israeli clinical trials of Product R
for the treatment of AIDS patients (who have failed HAART and remain on
HAART therapy) into late Phase II blinded, controlled clinical trials.
On July 8, 2002, the Company extended an agreement with the Weizmann
Institute of Science and Yeda its developmental arm in Israel, to
conduct research on the effects of Product R on the immune system,
especially on T lymphocytes. In addition, scientists will explore the
effects of Product R in animal models. Under its provisions the study
period is extended for another twelve months to July 7, 2003. Total
costs incurred in connection with this research are expected to be
$138,000, of which payments of $40,000 each were made in July 2002 and
November 2002.
CONSULTING AND EMPLOYMENT AGREEMENTS
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of March 31,
2003, 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
19
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
to purchase 5,000,000 shares exercisable at any time and from time to
time commencing March 24, 1996 and ending February 17, 2008 at an
exercise price of $0.19 per share; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing March
24, 1997 and ending February 17, 2008 at an exercise price of $0.27 per
share; and (iii) options to purchase 5,000,000 shares exercisable at
any time and from time to time commencing March 24, 1998 and ending
February 17, 2008 at an exercise price of $0.36 per share. In addition,
the Company has agreed to cause the shares underlying these options to
be registered so long as there is no cost to the Company.
Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable.
Effective December 31, 2001, the remaining unexercised $0.27 and $0.36
options, which had been extended to December 31, 2001, were further
extended to June 30, 2002 at exercise prices of $0.28 and $0.37,
respectively. As a result of this modification of the option terms, the
fair value of the options was estimated to be $6,158 based on a
financial analysis of the terms of the options using the Black-Scholes
pricing model with the following assumptions: expected volatility of
80%; risk free interest rate of 5%. This amount has been charged to
compensation expense for options and warrants during the year ended
December 31, 2001. Effective June 30, 2002, the remaining unexercised
$0.27 and $0.36 options were extended to December 31, 2002. As a result
of this modification of the option terms, the fair value of the options
was estimated to be $3,895 based on a financial analysis of the terms
of the options using the Black-Scholes pricing model with the following
assumptions: expected volatility of 117%; risk free interest rate of
1.7%. This amount has been charged to compensation expense for options
and warrants during the quarter ended June 30, 2002.
In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002,
provided, however, the Agreement is extended automatically by one year,
each year, unless notice of termination has been given by either Dr.
Hirschman or the Company. In July 2002, the Company notified Dr.
Hirschman that the Agreement will not be extended subsequent to
December 31, 2004. The Agreement provides for Dr. Hirschman to receive
an annual base salary of $361,000 (effective January 1, 2000), use of
an automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment and for the payment
of $100,000 to Dr. Hirschman on the earlier to occur of (i) the date an
IND number is obtained from and approved by the FDA so that human
research may be conducted using Product R; or (ii) the execution of
20
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
HIRSCHMAN AGREEMENT (Continued)
an agreement relating to co-marketing pursuant to which one or more
third parties commit to make payments to the Company of at least $15
million. On September 4, 2001, the Company received an IND number from
the FDA. Therefore, of the $100,000 described above, $25,000 was paid
as of December 31, 2001 with an additional $25,000 paid through
September 30, 2002. No further payments have been made to date. The
Agreement also provides for previously issued options to acquire
23,000,000 shares of common stock at $0.27 per option share to be
immediately vested as of the date of this agreement and are exercisable
until February 17, 2008. The fair value of these options was estimated
to be $5,328,441 ($0.2317 per option share) based upon a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 80%; a
risk free interest rate of 6% and an expected life of 32 months. The
Company is recognizing the $5,328,441 fair value of the options as
compensation expense on a pro-forma basis over the 32 month service
period (the term of the employment agreement).
OTHER EMPLOYEES
In connection with the employment of its Chief Financial Officer, the
Company granted Alan Gallantar options to purchase an aggregate of
4,547,880 shares of the Company's common stock. Such options have a
term of ten years commencing October 1, 1999 through September 30, 2009
and have an exercise price of $0.24255 per share. These options are
fully vested.
The fair value of these options was estimated to be $376,126 ($0.0827
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk free interest rate of
6% and an expected life of ten years. The Company has recognized the
$376,126 fair value of the options as compensation expense on a
pro-forma basis over a three year service period.
On January 3 and December 29, 2000, the Company issued to certain other
employees stock options to acquire an aggregate of 430,000 and 716,000
shares of common stock at an exercise price of $0.21 and $0.33 per
share, respectively. These options expire on January 2, 2010 and
December 29, 2010, respectively, and vest in 20% increments at the end
of each year for five years. The fair value of the these options was
estimated to be $42,342 ($0.1721 per option share) and $117,893
($0.2788 per option share), respectively, based upon a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 80%; a
risk free interest rate of 6%; an expected life of ten years; and a
termination rate of 10%. The Company will recognize the fair value of
the options as compensation expense on a pro-forma basis over a one
year service period (the term of the employment agreements).
21
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
OTHER EMPLOYEES (Continued)
In May 2002, the Company granted to certain of its employees options to
purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk free interest rate of
4.38%; an expected life of approximately 10 years. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis over approximately 10 years (the term of the options).
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS
MEMBERS OF ADVISORY BOARDS
In May 2002, the Company granted to members of its Scientific Advisory
Board and Business Advisory Board options to purchase an aggregate of
2,250,000 shares of common stock at an exercise price of $0.12 per
share, which options are exercisable 25% immediately, 25% on June 20,
2002, 25% on September 20, 2002 and 25% on December 20, 2002 through
May 5, 2010. The fair value of the options was estimated to be $246,822
($0.1097 per option) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 115%; a risk free interest rate of
4.88% and an expected holding period of eight years. This amount was
charged to compensation expense for options and warrants during the
quarter ended June 30, 2002. The Business Advisory Board was dissolved
during December 2002.
In September 2002, the Company granted to Sidney Pestka, M.D., a member
of the Scientific Advisory Board, options to purchase 250,000 shares of
common stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18.
2003 and 25% on June 18, 2003 through September 17, 2010. The fair
value of the options was estimated to be $30,462 ($0.1218 per option)
based upon a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 127%; a risk free interest rate of 4.38% and an expected
holding period of eight years. This amount was charged to compensation
and other expense for options and warrants during the quarter ended
September 30, 2002. In December 2002, the Company granted to members of
its Scientific Advisory Board options to purchase an additional
1,500,000 shares of common stock at an exercise price of $0.075 per
share, which options are exercisable 25% on March 20, 2003, 25% on June
20, 2003, 25% on September 20, 2003 and 25% on December 20, 2003
through December 20, 2010. The fair value of the options was estimated
to be $109,393 ($0.0729 per option) based upon a financial analysis of
the terms of the
22
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
MEMBERS OF ADVISORY BOARDS (Continued)
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 114%; a risk free interest rate of
4.14% and an expected holding period of eight years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002.
BOARD OF DIRECTORS
In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to certain Members of the
Board of Directors and various committees of the Board of Directors.
The exercise price was $0.12 per share exercisable 25% immediately, 25%
on June 20, 2002, 25% on September 20, 2002 and 25% on December 20,
2002 through May 5, 2010. The fair value of the these options was
estimated to be $455,249 ($0.1097 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
115%; a risk free interest rate of 4.88% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over an eight year period
(the term of the options).
In June 2002, the Company granted to Roy S. Walzer, a member of the
Board of Directors and member of various committees of the Board,
options to purchase 528,800 shares of common stock at an exercise price
of $0.295 per share, which options are exercisable 25% immediately, 25%
on September 10, 2002, 25% on December 10, 2002 and 25% on March 10,
2003 through June 9, 2010. The fair value of the these options was
estimated to be $140,608 ($0.2659 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
115%; a risk free interest rate of 4.88% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over an eight year period
(the term of the options).
In July 2002, the Company granted to Paul Bishop, a member of the Board
of Directors, options to purchase 238,356 shares of common stock at an
exercise price of $0.17 per share, which options are exercisable 25%
immediately, 25% on October 29, 2002, 25% on January 29, 2003 and 25%
on April 29, 2003 through July 28, 2010. The fair value of the these
options was estimated to be $38,509 ($0.1616 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 133%; a risk free interest rate of 4.38% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation costs on a pro-forma basis over an eight year
period (the term of the options).
23
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
In September 2002, the Company granted to Richard Kent, a member of the
Board of Directors, and member of various committees of the Board
options to purchase 241,096 shares of common stock at an exercise price
of $0.14 per share, which options are exercisable 25% immediately, 25%
on December 24, 2002, 25% on March 24, 2003 and 25% on June 24 2003
through September 23, 2010. The fair value of the these options was
estimated to be $29,377 ($0.1218 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
127%; a risk free interest rate of 4.38% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis over an eight-year period
(the term of the options). During February 2003, Richard S. Kent
resigned from the Company's Board of Directors. Under the terms of his
option agreements he is entitled to exercise options to purchase
394,437 shares of the Company's common stock until February 2006.
In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share are exercisable
25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
and 25% on December 20, 2003 through December 20, 2010. The fair value
of the options was estimated to be $773,042 ($0.0729 per option) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 114%; a risk free interest rate of 4.14% and an expected
holding period of eight years. The Company will recognize the fair
value of the options as compensation costs on a pro forma basis over an
eight-year period (the term of the options).
Financial reporting of the options granted to Hirschman, Gallantar,
other employees and Members of the Board of Directors and committees of
the Board of Directors has been prepared pursuant to the Company's
policy of following APB No. 25, and related interpretations.
Accordingly, the following pro-forma financial information is presented
to reflect amortization of the fair value of the options.
24
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)
BOARD OF DIRECTORS (Continued)
Three Months
Ended March 31,
---------------------------
2003 2002
----------- -----------
Net loss as reported $(1,749,454) $(2,873,508)
Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects (45,998) (564,188)
----------- -----------
Pro forma net loss $(1,795,452) $(3,437,696)
=========== ===========
Earnings per share - basic and diluted:
As reported ($ 0.00) ($ 0.01)
=========== ===========
Pro forma ($ 0.00) ($ 0.01)
=========== ===========
There were no other options outstanding that would require pro forma
presentation.
GLOBOMAX AGREEMENT
On January 18, 1999, the Company entered into a consulting agreement
with Globomax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for Product R. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002. Globomax is no longer providing services or
representing the Company.
HARBOR VIEW AGREEMENTS
On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share and warrants
to purchase 1,750,000 shares at an exercise price of $0.26 per share
until February 28, 2005. The fair value of the warrants was estimated
to be
25
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
HARBOR VIEW AGREEMENTS (Continued)
$200,249 ($0.057 per warrant) based upon a financial analysis of the
terms of the warrants using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 90%; a risk free interest
rate of 6% and an expected holding period of eleven months (the term of
the consulting agreement). This amount was amortized to consulting
expense during the year ended December 31, 2000.
In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the quarter ended
June 30, 2002.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities whereby the Company has granted exclusive rights to
distribute Product R in the countries of Canada, China, Japan, Macao,
Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
Brazil and Chile. Pursuant to these agreements, distributors are
obligated to cause Product R to be approved for commercial sale in such
countries and, upon such approval, to purchase from the Company certain
minimum quantities of Product R to maintain the exclusive distribution
rights. Leonard Cohen, a former consultant to the Company, has informed
the Company that he is an affiliate of two of these entities. To date,
the Company has recorded revenue classified as other income for the
sale of territorial rights under the distribution agreements. The
Company has made no sales under the distribution agreements other than
for testing purposes.
CONSTRUCTION COMMITMENT
In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000, of which $93,000 has been paid at March 31, 2003. Additional
payments are scheduled through August 2003.
26
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION
In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleged that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company sought a judgment for
damages, interest and costs.
The complaint named SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claimed
that the "defendants had each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of the largest shareholders of
the Company. The complaint alleged that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme.
The suit is related to an agreement, announced September 9, 2002,
pursuant to which the Company issued and sold to certain investors
21,500,000 shares of its common stock for total gross proceeds of
$3,010,000, or $0.14 per share. The Company also issued warrants to
purchase an aggregate of 16,125,000 shares of the Company's common
stock, which were covered by provisions that allowed for an adjustment
of the warrant exercise price. The complaint charged the defendants
with manipulating the share price to take favorable advantage of these
warrant pricing provisions.
Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits against the Company in the U.S.
District Court for the Southern District of New York. The suits sought
a preliminary injunction and other relief for breach of contract. The
District Court entered an order on February 11, 2003 upon a motion of
the Alpha Plaintiffs, that required that (i) the Company deliver to the
Alpha Plaintiffs the shares of Company common stock issuable upon
exercise of the warrants; (ii) the Alpha Plaintiffs post a bond of
either $100,000 or the market value of the warrant shares, whichever is
higher for each group of warrants as of the first and second
determination dates; and (iii) all the proceeds from the sale of the
warrant shares be placed in escrow pending final resolution of the
litigation. Within ten days of the entry of the order, the Company
moved to alter/amend the judgment and/or reconsideration of the Court's
order requesting relief from the Court's order. The Court denied this
motion and ordered the Company to immediately deliver the warrant
shares to the Alpha Plaintiffs upon their payment of the exercise price
and posting of a bond, without further delay and no later than April 8,
2003. The Company appealed the order denying the motion for
reconsideration.
27
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3. COMMITMENTS AND CONTINGENCIES (Continued)
LITIGATION (Continued)
During May 2003, the Company entered into settlement and mutual release
agreements with the parties involved in both the Florida and New York
litigation, which, among other things, dismissed the lawsuits with
prejudice, and Alpha Capital separately dismissed its lawsuit with
prejudice. Pursuant to the agreements, in exchange for release by the
parties to the lawsuits and certain parties to the September financing
of their rights to exercise the warrants issued in the September 2002
financing, we issued an aggregate of 947,000 shares of our common stock
and agreed to pay an aggregate of $1,047,891 to such parties, of which
$25,000 was paid as of March 31, 2003, $701,463 was paid subsequent to
quarter end, and of which $321,428 shall be paid in five equal monthly
installments until September 2003.
NOTE 4. SECURITIES PURCHASE AGREEMENTS
CONVERTIBLE DEBENTURES AND WARRANTS
The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2002, warrants to purchase approximately 3.2 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $0.199 to $0.864.
During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 5%
convertible debentures at par in private placements. Under the terms of
each 5% convertible debenture, 20% of the original issue is convertible
on the original date of issue at a price equal to the closing bid price
quoted on the OTC Bulletin Board on the trading day immediately
preceding the original issue date (except for the Rushing/Simoni
issuance detailed below which had an initial conversion price of $0.11
per share). Thereafter, 20% of the principal balance may be converted
at six-month intervals at a conversion price equal to the higher of (i)
90% of the average closing bid price for the five trading days prior to
the conversion date (the "Market Price"); or (ii) ten cents ($0.10)
which amount is subject to certain adjustments. The convertible
debentures, including interest accrued thereon, are payable by Advanced
Viral in shares of common stock and mature two years from the date of
issuance. The shares issued upon conversion of the debentures cannot be
sold or transferred for a period of one year from the applicable
vesting date of the convertible portion of the debentures. The Company
issued its 5% convertible debentures as follows:
28
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
CONVERTIBLE DEBENTURES AND WARRANTS (Continued)
o On May 30, 2002, the Company sold to O. Frank Rushing and Justine
Simoni, as joint tenants, $500,000 principal amount of its 5%
convertible debenture. Based on the terms for conversion associated
with this debenture, there was an intrinsic value associated with
the beneficial conversion feature of approximately $55,000, which
was recorded as deferred interest expense and is presented as a
discount on the convertible debenture. This amount will be amortized
over an expected holding period of two years. Of this amount,
$42,000 has been amortized to interest expense through March 31,
2003. On June 3, 2002, these investors converted the first 20%
($100,000) into 909,091 shares of common stock at a conversion price
of $0.11 per share. In January 2003, the holders converted the
second 20% ($100,000 plus interest of $3,041) into 1,030,411 shares
of common stock at a conversion price of $0.10 per share.
o On July 3, 2002, the Company sold to James F. Dicke II, who was then
a member of its Board of Directors, $1,000,000 principal amount of
its 5% convertible debenture. Based on the terms for conversion
associated with this debenture, there was an intrinsic value
associated with the beneficial conversion feature of approximately
$111,000 which was recorded as deferred interest expense and is
presented as a discount on the convertible debenture. This amount
will be amortized over an expected holding period of two years. Of
this amount, $80,000 has been amortized to interest expense through
March 31, 2003. On July 3, 2002, Mr. Dicke converted the first 20%
of the debenture ($200,000) for 1,299,545 shares of common stock at
a conversion price of $0.1539 per share. In January 2003, Mr. Dicke
converted the second 20% ($200,000 plus interest of $5,041) of the
debenture into 2,050,411 shares of common stock at a conversion
price of $0.10 per share.
o On July 15, 2002, the Company sold to Peter Lunder $500,000
principal amount of the Company's 5% convertible debenture. Based on
the terms for conversion associated with this debenture, there was
an intrinsic value associated with the beneficial conversion feature
of approximately $55,000, which was recorded as deferred interest
expense and is presented as a discount on the convertible debenture.
This amount will be amortized over an expected holding period of two
years. Of this amount, $39,000 has been amortized to interest
expense through March 31, 2003. In January 2003, Mr. Lunder
converted 40% ($200,000 plus interest of $4,822) of the debenture
into 1,587,797 shares of common stock, the first 20% of which was
converted at a conversion price of $0.1818 per share, and the second
20% of which was converted at a conversion price of $0.10 per share.
29
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS
Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
March 31, 2003, warrants to purchase approximately 16.5 million shares
of the Company's common stock relating to these securities purchase
agreements were outstanding with expiration dates through 2006.
During the quarter ended March 31, 2002, under several securities
purchase agreements, the Company sold an aggregate of 9,999,999 shares
of its common stock at $0.15 per share, for cash consideration of
$1,500,000.
On April 12, 2002, pursuant to securities purchase agreements with
various institutional investors, the Company issued 17,486,491 shares
of its common stock at a market price of $0.11089 per share and
received net proceeds of approximately $1,939,000.
On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's common stock at an exercise
price of $0.25 per share, subject to adjustment, as described below. In
addition, pursuant to a placement agent agreement with H. C. Wainwright
& Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that at 60 and 120
trading days following the original issue date of the Warrants, a
certain number of warrants shall become exercisable at $0.001. The
number of shares for which the warrants are exercisable at $0.001 per
share is equal to the positive difference, if any, between (i)
$3,010,000 divided by the volume weighted average price ("VWAP") of the
Company's common stock for the 60 trading days preceding the First
Determination Date and (ii) 21,500,000; provided however, that no
adjustment will be made in the event that the VWAP for the 60 trading
day period preceding the applicable determination date is $0.14 or
greater. In December 2002, the Company filed suite against certain of
the investors in connection with the warrant repricing provisions of
the agreement (see Note 3 "LITIGATION"). During May 2003, the Company
entered into a settlement and mutual release agreements with the
parties involved in both the Florida and New York litigation, which,
among other things, dismissed the lawsuits with prejudice. Pursuant to
the agreements, in exchange for release by the parties to the lawsuits
of their rights to exercise the warrants issued in the September 2002
financing, the Company issued an aggregate of 947,000 shares of common
stock and agreed to pay an aggregate of $1,047,891 to such parties, of
which $25,000 was paid as of March 31, 2003, $701,463 was paid
subsequent to quarter end, and of which $321,428 shall be paid in five
equal monthly installments until September 2003. The Company recorded a
settlement of litigation liability at March 31, 2003 of $1,098,812
which represents cash to be paid to litigants of $1,022,891 and 947,000
shares of common stock to be issued at $0.08 per share totaling
$75,921. (See Note 3 "LITIGATION").
30
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total gross
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, the Company paid finders' fees to
Harbor View and AVIX consisting of (i) approximately $50,000 and (ii)
warrants to purchase 627,000 shares of the Company common stock at an
exercise price of $0.12 per share through December 2007. The fair value
of all warrants issued under this agreement was estimated to be
$368,000 (price per warrant ranging from $0.0485 to $0.0598 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 114%; a risk free interest rate of 3.1% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements.
On December 23, 2002, the Company entered into a securities purchase
agreement pursuant to which the Company sold to various investors
500,000 shares of common stock at $0.08 per share, for an aggregate
purchase price of $40,000. These shares of common stock were issued
during January 2003 along with warrants dated January 2003 to purchase
300,000 shares of common stock at an exercise price of $0.12 per share
until January 2008. The fair value of all warrants issued under this
agreement was estimated to be $16,000 (price per warrant $0.0528 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 114%; a risk free interest rate of 3.1% and an
expected holding period of five years. This amount is being amortized
to interest expense in the accompanying consolidated financial
statements. In connection with this transaction the Company paid
finders' fees to AVIX consisting of (i) $2,400 and (ii) warrants to
purchase 30,000 shares of common stock at an exercise price per share
of $0.12 until January 2008.
During January 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a price of $0.08 per share, for a total purchase price of $124,000,
along with warrants to purchase 930,000 shares of common stock at an
exercise price of $0.12 per share until January 2008. The fair value of
all warrants issued under this agreement was estimated to be $57,000
(price per warrant of $0.0598 to $0.0624 per warrant) based upon a
financial analysis of the terms of the warrants using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
114%; a risk free interest rate of 3.1% and an expected holding period
of five years. This amount is being amortized to interest expense in
the accompanying consolidated financial statements In connection with
this transaction the Company paid a finders' fee to AVIX consisting of
(i) $7,440 and (ii) issued warrants to purchase 93,000 shares of common
stock at an exercise price per share of $0.12 until January 2008.
31
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SECURITIES PURCHASE AGREEMENTS (Continued)
During March 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,250,000 shares of common stock
at $0.08 per share, for a total purchase price of $100,000, along with
warrants to purchase 750,000 shares of common stock at an exercise
price of $0.12 per share through March 2007. The fair value of all
warrants issued under this agreement was estimated to be $46,000 (price
per warrant of $0.0572 to $0.0624 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 114%; a
risk free interest rate of 3.1% and an expected holding period of five
years. In connection with this transaction the Company paid finders'
fees to Harbor View consisting of (i) $6,000 and (ii) warrants to
purchase 75,000 shares of common stock at an exercise price per share
of $0.12 until March 2006.
SUBSEQUENT FINANCINGS - SECURITIES PURCHASE AGREEMENTS AND CONVERTIBLE
DEBENTURE
In April and May 2003, pursuant to securities purchase agreements with
various investors, the Company sold 3,587,500 shares of common stock at
a price of $0.08 per share and issued warrants to purchase 2,152,000
shares of common stock at an exercise price per share of $0.12 through
April and May 2007, for an aggregate purchase price $287,000. In
connection with this transaction, the Company paid a finders' fee to
Harbor View consisting of (i) $17,000 and (ii) warrants to purchase
215,250 shares of common stock at an exercise price per share of $0.12
through April 2007.
On April 11, 2003, pursuant to a securities purchase agreement with
James F. Dicke II, a former member of the Company's Board of Directors,
the Company sold 3,125,000 shares of common stock at $0.08 per share
for a total purchase price of $250,000, along with warrants to purchase
1,875,000 shares of common stock at an exercise price per share of
$0.12 through April 2008.
On April 28, 2003, pursuant to a securities purchase agreement with an
investor, the Company sold 312,500 shares of common stock at $0.08 per
share for a total purchase price of $25,000, along with warrants to
purchase 187,500 shares of common stock at an exercise price per share
of $0.12 through April 2008. In connection with this transaction, the
Company paid a finders' fee consisting of warrants to purchase 15,625
shares of common stock at an exercise price per share of $0.12 per
until April 2004.
32
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
SUBSEQUENT FINANCINGS - SECURITIES PURCHASE AGREEMENTS AND CONVERTIBLE
DEBENTURE (Continued)
On April 28, 2003, the Company entered into a securities purchase
agreement with Cornell Capital Partners, LP, an institutional investor
("Cornell") to sell up to $2,500,000 of 5% convertible debentures, due
April 28, 2008; of which $1,000,000 was purchased on April 28, 2003;
$500,000 of convertible debentures will be purchased within 10 business
days of the filing of the registration statement with the SEC to
register the underlying shares; and $1,000,000 of convertible
debentures will be purchased within 20 business days from the date the
registration statement is declared effective by the SEC. In the event
the closing bid price of the common stock on the date the Company's
registration statement is declared effective by the SEC is less than
$0.10, then the Company shall have the right to redeem the last
$1,000,000 convertible debenture. The redemption price is the face
amount of the convertible debenture. A 10% fee is paid to Cornell on
each sale.
Commencing July 27, 2003, Cornell may convert the debenture plus
accrued interest, (which may be taken at Cornell's option in cash or
common stock), into shares of the Company's common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of the Company's common stock for the 4
trading days immediately preceding the conversion date. Cornell may
convert no greater than $600,000 in any thirty day calendar period.
At the Company's option the Company may redeem a portion or all of the
outstanding debenture at a price equal to 115% of the amount redeemed
plus accrued interest and Cornell will receive a warrant to purchase
1,000,000 shares of the Company's stock for every $100,000 redeemed.
Cornell received a warrant to purchase 15,000,000 shares of our common
stock exercisable for 5 years at an exercise price per share of $0.097.
The warrant is not exercisable prior to October 28, 2003.
The legal expenses associated with this transaction are estimated to be
approximately $50,000 of which $42,500 has been paid as of April 28,
2003.
33
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
EQUITY LINE OF CREDIT
On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell to sell up to $50,000,000 of the Company's
common stock. The line of credit expires August 14, 2003. Under such
agreement, the Company may exercise "put options" to sell shares for
certain prices based on certain average trading prices. Upon signing
this agreement, the Company issued to its placement agent, May Davis
Group, Inc., and certain investors, Class A warrants to purchase an
aggregate of 5,000,000 shares of common stock at an exercise price of
$1.00 per share, exercisable in part or whole until February 9, 2006,
and Class B warrants to purchase an aggregate of 5,000,000 shares of
common stock at an exercise price equal to the greater of $1.00 or 110%
of the bid price on the applicable advance date. Such Class B warrants
are exercisable pro rata with respect to the number of warrant shares
as determined by the fraction of the advance payable on that date as
the numerator and $20,000,000 as the denominator multiplied by
5,000,000 until sixty (60) months from the date of issuance. As of
March 31, 2003, the Company has not drawn on the equity line of credit.
The fair value of the Class A warrants was estimated to be $1,019,153
($0.204 per warrant) based upon a financial analysis of the terms of
the warrants using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk free interest rate of
6% and an expected holding period of five years. This amount is being
amortized to interest expense in the accompanying consolidated
financial statements.
On April 28, 2003, the Company entered into an equity line of credit
agreement with Cornell. The equity line agreement provides, generally,
that Cornell has committed to purchase up to $50 million of the
Company's common stock over a three-year period, with the timing and
amount of such purchases, if any, at the Company's discretion,
provided, however, that the maximum amount of each advance is
$500,000, and the date of each advance shall be no less than six
trading days after the Company's notification to Cornell of their
obligation to purchase shares. Any shares of common stock sold under
the equity line will be priced at the lowest closing bid price of our
common stock during the five consecutive trading days following the
Company's notification to Cornell requesting an advance under the
equity line. In addition, at the time of each advance, the Company is
obligated to pay Cornell a fee equal to five percent (5%) of the
amount of each advance. However, Cornell's obligation to purchase and
the Company's obligation to sell the common stock is conditioned upon
the per share purchase price being equal to or greater than a price
the Company sets on the advance notice date, the minimum acceptable
price, which may not be set any closer than 7.5% percent below the
closing bid price of the common stock the day prior to the advance
notice date. In addition, there are certain other conditions
applicable to the Company's ability to draw down on the equity line
including the filing and effectiveness of a registration statement
registering the resale of all shares of common stock that may be
issued to Cornell under the equity line and the Company's adherence
with certain covenants. In connection with this agreement, the Company
issued 116,279 shares of our common stock to Katalyst LLC in
consideration for its exclusive placement agent services.
34
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 5. DISCONTINUED OPERATIONS
During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. SFAS No.
144 requires the operating results of any assets with their own
identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented was reclassified as discontinued
operations. The following table details the amounts reclassified to
discontinued operations:
Inception
Three Months (February 20,
Ended March 31, 1984) to
----------------------- March 31,
2003 2002 2003
-------- ----------- -----------
Revenues $ -- $ -- $ --
-------- ----------- -----------
Costs and Expenses:
General and administrative 5,691 37,224 1,316,041
Depreciation 3,961 5,212 275,459
-------- ----------- -----------
9,652 42,436 1,591,500
-------- ----------- -----------
Loss from Operations (9,652) (42,436) (1,591,500)
Other Income -- -- 4,655
-------- ----------- -----------
Discontinued operations $ (9,652) $ (42,436) $(1,586,845)
======== =========== ===========
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the related Notes to Consolidated
Financial Statements of Advanced Viral Research Corp. included in Item 1 of this
Quarterly Report on Form 10-Q. The results of operations for interim periods are
not necessarily indicative of the results to be expected for a full year. The
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in our Annual Report on Form 10-K for
the year ended December 31, 2002.
OVERVIEW
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). The current formulation of Reticulose is currently
known as "Product R." We believe Product R may be employed in the treatment of
certain viral and autoimmune diseases such as:
o Human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
o Human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer;
o Cachexia (body wasting) in patients with solid cancers, leukemias
and lymphomas; and
o Rheumatoid arthritis.
Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND.
Since our inception in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of March 31, 2003 we had incurred a cumulative net loss of
$52,887,259. Our ability to generate substantial operating revenue depends upon
our success in gaining FDA approval for the commercial use and distribution of
Product R. All of our research and development efforts have been devoted to the
development of Product R.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, and since
November 2002 primarily in Israel, either in vitro (outside the living body in
an artificial environment, such as in a test tube), or on animals, and engaging
others to perform testing and analysis of Product R on human patients both
inside and outside the United States. On July 30, 2001, we submitted an IND
application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
1 clinical trials. Our Phase 1 study was performed in the United States on human
volunteers. In March 2002, we completed the Phase 1 trial and submitted to the
FDA the results, which indicated that Product R was safe and well tolerated
dermatologically in all the doses applied in the study. Currently, we do not
have sufficient funds available to pursue the Phase 2 clinical trials of Product
R as a topical treatment for genital warts caused by HPV infection.
36
In November 2002 we began testing injectable Product R in the following
clinical trials in Israel:
o PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY
FOR AIDS. These patients have failed highly active anti-retroviral
therapy (HAART), remain on HAART, and require salvage therapy. We
believe that Product R may have three major beneficial effects in
patients with AIDS. First, its therapeutic effects on body wasting
(cachexia) seen in patients with AIDS. Second, the mitigation of the
toxicity of drugs included in HAART regimens for the treatment of
AIDS. Third, the synergistic activity with drugs used in HAART
regimens to suppress the replication of HIV and increase the CD4 and
CD8 cell counts in patients with AIDS. Thus, we believe that Product
R may prove to be an important "enabler" drug in the treatment of
AIDS.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA.
Included are patients with acute lymphocytic leukemia, multiple
Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.
o PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are
patients with solid tumors such as colonic, lung, breast, stomach
and kidney cancers.
Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable Product R with the FDA.
Our 12-month agreement formalized in April 2001 with the Selikoff
Center in Israel to develop clinical trials in Israel using Product R has
concluded. The amount paid under the agreement was $242,000.
In September 2002, we entered into a contract with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the three clinical studies listed above. Under the terms
of this agreement, EnviroGene will (1) finalize all Israeli government and
hospital approval documents, (2) complete and organize the three clinical trials
including establishing a network of scientists to perform said study/trial and
initiate recruitment of patients and (3) perform the studies/trials and evaluate
the results. Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $825,000 has been paid
through March 31, 2003, and $199,000 was paid during the first quarter of 2003.
It is anticipated that these trials will support future FDA applications.
In the fourth quarter of 2002, we entered into various agreements
supporting the clinical trials in Israel aggregating approximately $1,000,000 to
be paid over a twelve-month period. These services include the monitoring and
auditing of the clinical sites, hospital support and laboratory testing.
Approximately $76,000 has been paid through March 31, 2003, of which $53,000 was
paid during the first quarter of 2003.
In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.
On July 8, 2002, we extended an agreement with the Weizmann Institute
of Science and Yeda its developmental arm in Israel, to conduct research on the
effects of Product R on the immune system, especially on T lymphocytes. In
addition, scientists will explore the effects of Product R in animal models.
Under its provisions the study period is extended for another twelve months to
37
July 7, 2003. Total costs incurred in connection with this research are expected
to be $138,000, of which payments of $40,000 were made in each of July 2002 and
November 2002.
Whether we will be able to proceed with clinical trials in Israel for
injectable Product R or anywhere else in the world is dependent upon our ability
to secure sufficient funds. If sufficient funds do not become available, we will
have to curtail our operations by, among other things, limiting our clinical
trials for Product R. We may not be able to raise the funds we currently need to
continue or complete the clinical trials for injectable Product R in Israel.
While we continue to attempt to secure funds through the sale of our securities,
there is no assurance that such funds will be raised on favorable terms, if at
all.
Conducting the clinical trials of Product R will require significant
cash expenditures. Product R may never be approved for commercial distribution
by any country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the
foreseeable future.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Yonkers, New York is (914) 376-7383. We have
also established a website: www.adviral.com. Information contained on our
website is not a part of this report.
RESULTS OF OPERATIONS
For the three months ended March 31, 2003, we incurred losses from
continuing operations of approximately $1,740,000 vs. $2,831,000 for the three
months ended March 31, 2002. Our current losses were attributable primarily to:
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses
decreased in the three months ended March 31, 2003 to approximately $458,000 vs.
approximately $1,661,000 during the three months ended March 31, 2002. We have
reduced our research and development activities to include only research
performed in Israel. As such, allocations for research and development related
expenses such as salaries, benefits, rent and utilities at our headquarters in
Yonkers, New York, which were made for the quarter ended March 31, 2002, were
not made for the quarter ended March 31, 2003, with the exception of our Chief
Scientific Officer, who is also our Chief Executive Officer, who allocates
approximately 30% of his time to oversight of our clinical trials and therefore
approximately $31,000 of his compensation has been allocated to research and
development expense with the balance allocated to general and administrative
expense for the quarter ended March 31, 2003. The decrease in research and
development expenses primarily resulted from:
o allocation of research and development expenditures relating to
salaries and benefits of approximately $31,000 were made for the
three months ended March 31, 2003 vs. approximately $492,000 for
salaries and benefits and approximately $73,000 for rent and
utilities allocated to research and development during the first
quarter ended March 31, 2002;
o expenditures in connection with Product R research in Israel were
$412,000 for the three months ended March 31, 2003 vs. $40,000 for
the three months ended March 31, 2002, which increase was
attributable to payments of approximately $299,000 made to
EnviroGene, $44,000 made to Quintiles Israel Ltd. and $40,000 made
to the Weizmann Institute of Science;
38
o consulting expenses payable to GloboMax LLC in connection with the
preparation and filing with the FDA of the IND for Product R were $0
for the three months ended March 31, 2003 vs. $910,000 for the three
months ended March 31, 2002; and
o expenditures for laboratory supplies were $0 for the three months
ended March 31, 2003 vs. $136,000 for the three months ended March
31, 2002;
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased to approximately $863,000 for the three months ended March 31, 2003
vs. $691,000 for the three months ended March 31, 2002. The increase in general
and administrative expenses primarily resulted from:
o increased professional fees of approximately $295,000 for the three
months ended March 31, 2003 vs. $176,000 for the three months ended
March 31, 2002, which increase was primarily attributable to certain
legal fees for litigation ($193,000 for the three months ended March
31, 2003 vs. $0 for the three months ended March 31, 2002) (See
"Legal Proceedings");
o increased payroll and related expenses of approximately $267,000 for
the three months ended March 31, 2003 vs. $223,000 for the three
months ended March 31, 2002, which increase is attributable to the
allocation of staff from research and development functions.
Currently, salaries and benefits are recorded as general and
administrative expense with the exception of our Chief Scientific
Officer, who is also our Chief Executive Officer, who allocates
approximately 30% of his time to oversight of our clinical trials.
Therefore, approximately $31,000 of his compensation has been
allocated to research and development expense and the balance of
$71,000 has been allocated to general and administrative expense for
the quarter ended March 31, 2003. Payroll and related expenses for
March 31, 2002 before allocation to research and development was
approximately $715,000. Before allocations, payroll and related
expenses decreased to $298,000 for the three months ended March 31,
2003 vs. $715,000 for the three months ended March 31, 2002 due to a
reduction of personnel during 2002 from 35 as of March 31, 2002 to
10 employees as of March 31, 2003;
o increased rent and utility expenses of approximately $104,000 for
the three months ended March 31, 2003 vs. $18,000 for the three
months ended March 31, 2002, which increase is attributable to the
allocation of rent and utilities from research and development
expense to general and administrative expense. Currently, all rent
and utilities expenses are recorded as general and administrative
expense. Rent and utility expenses for March 31, 2002 before
allocation to research and development was approximately $92,000.
DEPRECIATION EXPENSE. Our increased losses are also due to increased
depreciation expense of approximately $238,000 for the three months ended March
31, 2003 vs. $228,000 for the three months ended March 31, 2002, for assets
acquired during 2002 which are depreciated over a full year.
INTEREST INCOME (EXPENSE). Interest income increased approximately
$6,000 for the three months ended March 31, 2003 vs. $2,000 for the three months
ended March 31, 2002 due to increased cash balances invested in money market
accounts.
Our losses during the three months ended March 31, 2003 are also due to
interest expense of approximately $187,000 vs. $253,000 for the three months
ended March 31, 2002. Included in the interest expense are:
o the beneficial conversion feature on certain convertible debentures
of approximately $25,000 for the three months ended March 31, 2003
vs. $0 for the three months ended March 31, 2002;
o interest expense associated with certain convertible debentures of
approximately $15,000 for the three months ended March 31, 2003 vs.
$0 for the three months ended March 31, 2002;
o amortization of discount on certain warrants of approximately
$131,000 for the three months ended March 31, 2003 vs. $242,000 for
the three months ended March 31, 2002; and
39
o amortization of loan costs of approximately $13,000, for the three
months ended March 31, 2003 vs. $4,000 for the three months ended
March 31, 2002.
LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the three months ended March 31, 2003 was approximately $1,740,000 vs.
approximately $2,831,000 for the three months ended March 31, 2002. The decrease
resulted primarily from a reduction in expenses associated with a reduction of
personnel during 2002 from 33 to 10 employees, conclusion of a consulting
contract with Globomax relating to research and development, and concentrating
all research and development activities on clinical trials and research in
Israel.
LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the three months ended March 31, 2003 were approximately $10,000 vs.
approximately $42,000 for the three months ended March 31, 2002, which losses
resulted from our 99% owned Bahamian subsidiary, Advance Viral Research Ltd.
held for sale. During 2002, our Board of Directors approved a plan to sell
Advance Viral Research Ltd. ("AVR Ltd."), our Bahamian subsidiary. The decision
was based upon the completion of construction on our facility in Yonkers, New
York capable of providing all functions previously provided by the Freeport,
Bahamas plant. The assets of AVR Ltd. have been classified on our Consolidated
Balance Sheet at March 31, 2003 and December 31, 2002 as Assets held for Sale.
AVR Ltd. had no liabilities as of March 31, 2003 and December 31, 2002, except
inter-company payables which have been eliminated in consolidation. The
operations for AVR Ltd. have been classified in the Consolidated Statements of
Operations for the period ended March 31, 2003 and 2002 as Loss from
Discontinued Operations.
REVENUES. We had no revenues for the three months ended March 31, 2003
or March 31, 2002.
LIQUIDITY
As of March 31, 2003, we had current assets of approximately $847,000
compared to approximately $1,770,000 as of December 31, 2002. We had total
assets of approximately $3,865,000 and $4,946,000 at March 31, 2003 and December
31, 2002, respectively. The decrease in current and total assets was primarily
attributable to less cash on hand resulting from the use of cash for funding
operating expenditures. As of March 31, 2003, we had current liabilities of
approximately $2,082,000 compared to approximately $685,000 as of December 31,
2002. The increase in current liabilities was primarily attributable to a
litigation settlement of approximately $1,099,000. (See "Legal Proceedings").
During the three months ended March 31, 2003, we used cash of
approximately $1,133,000 for operating activities, as compared to approximately
$2,571,000 during the three months ended March 31, 2002. During the three months
ended March 31, 2003, our expenses included:
o approximately $298,000 for payroll and related costs primarily for
administrative staff, scientific personnel and executive officers;
o approximately $295,000 for other professional and consulting fees,
including $193,000 for legal fees relating to litigation. (See
"Legal Proceedings");
o approximately $91,000 for insurance costs;
o approximately $104,000 for rent and utilities for our Yonkers
facility; and
o approximately $402,000 for expenditures for Product R research in
Israel.
40
During the three months ended March 31, 2003, cash flows provided by
financing activities were from the sale of our securities of approximately
$210,000 offset by principal payments of $46,000 on equipment obligations.
During the three months ended March 31, 2003, cash flow provided by investing
activities reflected the sale of an automobile located at our facility in the
Bahamas.
On February 9, 2001 we entered into an equity line of credit agreement
with Cornell Capital Partners, LP, an institutional investor ("Cornell"). Under
the equity line of credit agreement, we have the right to put shares of our
common stock to Cornell from time to time to raise up to $50,000,000, subject to
certain conditions and restrictions. Under the terms of a registration rights
agreement entered in connection with the equity line of credit, in February 2001
we filed with the Securities and Exchange Commission a registration statement to
register the resale of shares of common stock purchased by Cornell upon the
exercise of each put option and related warrants, which registration statement
was declared effective by the Commission. To date, we have not drawn down on the
equity line of credit.
On April 28, 2003, we entered into an equity line of credit
agreement with Cornell. The equity line agreement provides, generally, that
Cornell has committed to purchase up to $50 million of our common stock over a
three-year period, with the timing and amount of such purchases, if any, at our
discretion, provided, however, that the maximum amount of each advance is
$500,000, and the date of each advance shall be no less than six trading days
after our notification to Cornell of its obligation to purchase shares. Any
shares of common stock sold under the equity line will be priced at the lowest
closing bid price of our common stock during the five consecutive trading days
following our notification to Cornell requesting an advance under the equity
line. In addition, at the time of each advance, we are obligated to pay Cornell
a fee equal to five percent (5%) of the amount of each advance. However,
Cornell's obligation to purchase and our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
price we set on the advance notice date, the minimum acceptable price, which may
not be set any closer than 7.5% percent below the closing bid price of the
common stock the day prior to the date we notify Cornell of its obligation to
purchase shares. In addition, there are certain other conditions applicable to
our ability to draw down on the equity line including the filing and
effectiveness of a registration statement registering the resale of all shares
of common stock that may be issued to Cornell under the equity line and our
adherence with certain covenants. There can be no assurance of the amount of
proceeds we will receive, if any, under the equity line of credit with Cornell.
In connection with this agreement, we issued 116,279 shares of our common stock
to Katalyst LLC in consideration for its exclusive placement agent services.
We adopted a 401(k) plan that allows eligible employees to contribute
up to 20% of their salary, subject to annual limits, which were $11,000 in 2002
and $11,000 in 2003. We match 50% of the first 6% of the employee contributions
with our common stock and may from time to time, at our discretion, make
additional contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions. At December 31, 2002 we
accrued $40,675 to fund the 401k plan representing our match for the plan year
2002. We intend to purchase our common stock in the open market at prevailing
market prices to satisfy our 2002 matching contribution obligations. In March
2003, we amended the terms of the 401(k) plan to terminate our obligation to
make matching contributions.
To reduce operating costs, in November 2002 we reduced our personnel
from 33 to 10 employees. This will allow us to focus on the completion of our
clinical studies and maintain the critical functions and scientific personnel to
manage the clinical trials and continue operations. The severance cost for these
employees was approximately $54,000 which was expensed during the fourth quarter
of 2002.
41
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 over the last two years.
......................................................................................................................
PURCHASE PRICE
CONVERTIBLE/ CONVERSION PRICE MATURITY DATE/
DATE ISSUED GROSS PROCEEDS SECURITY ISSUED EXERCISABLE INTO /EXERCISE PRICE EXPIRATION DATE
----------- -------------- --------------- ---------------- ----------------- ---------------
Jul-2001 $1,000,000 common stock 3,125,000 shares $0.32 per share n/a
......................................................................................................................
Jul-2001 $490,000 common stock 1,225,000 shares $0.40 per share n/a
......................................................................................................................
warrants 367,500 shares $0.48 per share 7/27/2006
......................................................................................................................
367,500 shares $0.56 per share
......................................................................................................................
Aug-2001 $600,000 common stock 2,000,000 shares $0.30 per share n/a
......................................................................................................................
Sep-2001 $1,000,000 common stock 6,666,667 shares $0.15 per share n/a
......................................................................................................................
Dec-2001 $2,000,000 common stock 7,407,407 shares $0.27 per share n/a
......................................................................................................................
Dec-2001 $410,000 common stock 1,518,519 shares $0.27 per share n/a
......................................................................................................................
Dec-2001 $200,000 common stock 740,741 shares $0.27 per share n/a
......................................................................................................................
Feb-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
......................................................................................................................
Feb-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
......................................................................................................................
Mar-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
......................................................................................................................
Apr-2002 $1,939,000 common stock 17,486,491 shares $0.11089 per share n/a
......................................................................................................................
May-2002 $500,000 convertible debenture Approx. 4,412,000 shares (1) 5/30/2004
......................................................................................................................
May-2002 consulting warrants 1,000,000 shares $0.18 per share 5/30/2008
services
......................................................................................................................
Jul-2002 $1,000,000 convertible debenture Approx. 9,350,000 shares (2) 7/3/2004
......................................................................................................................
Jul-2002 $500,000 convertible debenture Approx. 4,588,000 shares (3) 7/15/2004
......................................................................................................................
Sep-2002 $3,010,000 common stock 21,500,000 shares (4) $0.14 per share n/a
......................................................................................................................
common stock 947,000 shares (5) $0.08 per share n/a
......................................................................................................................
Dec-2002 & $1,100,000 common stock 13,750,000 shares $0.08 per share n/a
Mar-2003
......................................................................................................................
warrants 9,075,000 shares $0.12 per share 12/2007 - 3/2008
......................................................................................................................
Apr-May 2003 $562,000 common stock 7,025,000 shares $0.08 per share n/a
......................................................................................................................
warrants 4,445,875 shares $0.12 per share 4/2004 - 4/2008
......................................................................................................................
Apr-2003 $1,000,000 convertible debenture Approx. 12,500,000 (6) 4/2008
shares
......................................................................................................................
warrants 15,000,000 shares $0.097 per share 4/2008
(7)
......................................................................................................................
- -------------------------
(1) $0.11 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90%
of the average closing bid price for the five trading days prior to the
conversion date (the "Market Price"); or (ii) ten cents ($0.10) which
amount is subject to certain adjustments.
(2) $0.1539 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90%
of the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(3) $0.1818 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90%
of the Market Price; or (ii) ten cents ($0.10) which amount is subject to
certain adjustments.
(4) Does not include an additional 1,032,000 shares of common stock issued to
H.C. Wainwright & Co. as part of the finder's fee for the transaction.
(5) Represents shares issued in connection with certain settlement and mutual
release agreements entered in May 2003, pursuant to which, among other
things, warrants to purchase 16,125,000 shares of our common stock were
cancelled, we will issue an aggregate of 947,000 shares of our common
stock and agreed to pay an aggregate of $1,047,891 to such parties, of
which $726,463 has been paid to date, and of which $321,428 shall be paid
in five equal monthly installments until September 2003. See "Legal
Proceedings."
(6) The debentures are convertible commencing July 27, 2003 at a conversion
price equal to the lesser of (i) $0.08 or (ii) 80% of the lowest closing
bid price of our common stock for the four trading days immediately
preceding the conversion date. The holder may not convert more than
$600,000 in any thirty-day calendar period.
(7) The warrants are exercisable commencing October 28, 2003.
On March 31, 2000, we filed a shelf registration statement on Form S-3
with the SEC relating to the offering of shares of our common stock to be used
in connection with financings. As of March 31, 2003, we had issued and sold
approximately 59 million shares of our common stock and received gross proceeds
of approximately $11.2 million under the shelf registration statement. The shelf
registration statement is no longer available for our use.
42
On July 27, 2001, pursuant to a securities purchase agreement with
various purchasers, we authorized the issuance of and sold 1,225,000 shares of
our common stock and warrants to purchase an aggregate of 735,000 shares of
common stock in a private offering transaction pursuant to Section 4(2) of the
Securities Act for a purchase price of $0.40 per share, for an aggregate
purchase price of $490,000. Half of the warrants are exercisable at $0.48 per
share, and half of the warrants are exercisable at $0.56 per share, until July
27, 2006. Each warrant contains anti-dilution provisions, which provide for the
adjustment of warrant price and warrant shares. As of the date hereof, none of
the warrants had been exercised.
On May 30, 2002 we entered into an agreement with Harbor View Group,
Inc to terminate a consulting agreement effective as of December 31, 2001. The
consultant continued to perform services after the termination date and as full
compensation we granted warrants to purchase 1,000,000 shares of our common
stock at an exercise price of $0.18 per share. The warrants are exercisable in
whole or in part at any time and from time to time prior to May 30, 2008.
During the second quarter of 2002, we issued to certain investors an
aggregate of $2,000,000 principal amount of our 5% convertible debentures at par
in several private placements. Under the terms of each 5% convertible debenture,
20% of the original issue is convertible on the original date of issue at a
price equal to the closing bid price quoted on the OTC Bulletin Board on the
trading day immediately preceding the original issue date (except for the
$500,000 of the debentures which had an initial conversion price of $0.11 per
share). Thereafter, 20% of the principal balance may be converted at six-month
intervals at a conversion price equal to the higher of (i) 90% of the average
closing bid price for the five trading days prior to the conversion date; or
(ii) ten cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable by
Advanced Viral in shares of common stock and mature two years from the date of
issuance. The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date of the
convertible portion of the debentures. As of March 31, 2003, principal and
interest on the debentures in the amount of $812,904 had been converted into
6,877,255 shares of our common stock.
On September 10, 2002, we issued and sold an aggregate of 21,500,000
shares of our common stock pursuant to a Securities Purchase Agreement with
certain investors for total proceeds of approximately $3,010,000, or $0.14 per
share, along with warrants to purchase 16,125,000 shares of our common stock at
an exercise price of $0.25 per share, subject to adjustment, as described below.
In addition, pursuant to a placement agent agreement with H. C. Wainwright &
Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and issued to
HCW 1,032,000 shares of our common stock. An adjustment provision in the
warrants provided that at 60 and 120 trading days following the original issue
date of the warrants, a certain number of warrants shall become exercisable at
$0.001. The number of shares for which the warrants are exercisable at $0.001
per share is equal to the positive difference, if any, between (i) $3,010,000
divided by the volume weighted average price ("VWAP") of our common stock for
the 60 trading days preceding the applicable determination date and (ii)
21,500,000, provided however, that no adjustment will be made in the event that
the VWAP for the 60 trading day period preceding the applicable determination
date is $0.14 or greater. In December 2002 we filed suit against certain of the
investors in connection with the warrant repricing provisions of the agreement,
and during May 2003, we entered into settlement and mutual release agreements
with the parties involved in both the Florida and New York litigation, which,
among other things, dismissed the lawsuits with prejudice, and Alpha Capital
separately dismissed its lawsuit with prejudice. Pursuant to the agreements, in
exchange for release by the parties to the lawsuits and certain parties to the
September 2002 financing of their right to exercise the warrants issued in the
September 2002 financing, we issued an aggregate of 947,000 shares of our common
stock and agreed to pay an aggregate of $1,047,891 to such parties, of which
$726,463 has been paid to date, and of which $321,428 shall be paid in five
equal monthly installments until September 2003. 680,000 of the shares issued
are subject to a 145-day lock-up agreement. (See "Legal Proceedings").
43
From December 2002 through March 2003, pursuant to securities purchase
agreements with various purchasers, we authorized the issuance of and sold
13,750,000 shares of our common stock and warrants to purchase up to 8,250,000
shares of our common stock at $0.08 per share, for an aggregate purchase price
of $1,100,000. In connection with the agreement, we paid finders' fees to Harbor
View Group and AVIX, Inc consisting of (i) approximately $66,000 and (ii)
warrants to purchase 825,000 shares of our common stock. All of the
aforementioned warrants are exercisable at $0.12 per share commencing six months
after the closing date of the agreement, for a period of five years. As of the
date of this report, none of such warrants had been exercised.
In April and May 2003, pursuant to securities purchase agreements with
various investors, we sold 3,587,500 shares of our common stock at a price of
$0.08 per share and issued warrants to purchase 2,152,500 shares of common stock
at an exercise price per share of $0.12 through April and May 2007, for an
aggregate purchase price $287,000. In connection with this transaction, we will
pay a finders' fee to Harbor View consisting of (i) $17,000 and (ii) warrants to
purchase 215,250 shares of common stock at an exercise price per share of $0.12
through April 2007.
On April 11, 2003 pursuant to a securities purchase agreement with
James F. Dicke II, a former member of our Board of Directors, we sold 3,125,000
shares of common stock and warrants to purchase 1,875,000 shares of common stock
at an exercise price of $0.12 per share through April 2007, for an aggregate
purchase price of $250,000.
On April 28, 2003 pursuant to a securities purchase agreement with an
investor, we sold 312,500 shares of common stock and warrants to purchase
187,500 shares of common stock at an exercise price of $0.12 per share through
April 2007, for an aggregate purchase price of $25,000. In connection with the
transaction, we paid a finders' fee consisting of warrants to purchase 15,625
shares of our common stock at an exercise price per share of $0.12 until April
2004.
On April 28, 2003 we entered into a securities purchase agreement with
Cornell to sell up to $2,500,000 of our 5% convertible debentures, due April 28,
2008, of which $1,000,000 was purchased on April 28, 2003; $500,000 of
convertible debentures will be purchased within 10 business days of the filing
of the registration statement with the SEC covering the registration of shares
underlying the convertible debentures; and $1,000,000 of convertible debentures
will be purchased within 20 business days from the date the registration
statement is declared effective by the SEC. Pursuant to the Agreement, Cornell
or its assignees will receive cash compensation equal to 10% of the gross
proceeds of the convertible debentures purchased by Cornell, along with warrants
to purchase an aggregate of 15,000,000 shares of our common stock at an exercise
price of $0.097 commencing on October 28, 2003 through April 28, 2008. In the
event the closing bid price of our common stock on the date our registration
statement is declared effective by the SEC is less than $0.10, then we have the
right to redeem the last $1,000,000 convertible debenture at the face amount of
the convertible debenture within 10 days of the effectiveness of the
registration statement. Pursuant to the terms of the agreement, commencing July
27, 2003, Cornell may convert the debenture plus accrued interest, (which may be
taken at Cornell's option in cash or common stock), in shares of our common
stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of our common stock for the four trading days
immediately preceding the conversion date. No more than $600,000 may be
converted in any thirty-day period. Subject to certain exceptions, at our
option, we may redeem a portion or the entire outstanding debenture at a price
equal to 115% of the amount redeemed plus accrued interest and Cornell will
receive a warrant to purchase 1,000,000 shares of our stock for every $100,000
redeemed. The warrant shall be exercisable on a cash basis and have an
exercisable price of the higher of 110% of the closing bid price of our common
stock on the closing date or $0.08. The warrant shall have "piggy back"
registration rights and shall survive for 5 years from the closing date. In
addition, in connection with the securities purchase agreement, we issued to
Cornell a warrant to purchase 15,000,000 shares of our common stock exercisable
for 5 years at an exercise price of $0.097. The warrant is not exercisable prior
to October 28, 2003.
44
On April 28, 2003, we entered into another equity line of credit
agreement with Cornell. The equity line agreement provides, generally, that
Cornell has committed to purchase up to $50 million of our common stock over a
three-year period, with the timing and amount of such purchases, if any, at our
discretion, provided, however, that the maximum amount of each advance is
$500,000, and the date of each advance shall be no less than six trading days
after our notification to Cornell of its obligation to purchase shares. Any
shares of common stock sold under the equity line will be priced at the lowest
closing bid price of our common stock during the five consecutive trading days
following our notification to Cornell requesting an advance under the equity
line. In addition, at the time of each advance, we are obligated to pay Cornell
a fee equal to five percent (5%) of the amount of each advance. However,
Cornell's obligation to purchase and our obligation to sell our common stock is
conditioned upon the per share purchase price being equal to or greater than a
price we set on the advance notice date, the minimum acceptable price, which may
not be set any closer than 7.5% percent below the closing bid price of the
common stock the day prior to the date we notify Cornell of its obligation to
purchase shares. In addition, there are certain other conditions applicable to
our ability to draw down on the equity line including the filing and
effectiveness of a registration statement registering the resale of all shares
of common stock that may be issued to Cornell under the equity line and our
adherence with certain covenants. There can be no assurance of the amount of
proceeds we will receive, if any, under the equity line of credit with Cornell.
In connection with this agreement, we issued 116,279 shares of our common stock
to Katalyst LLC in consideration for its exclusive placement agent services.
OUTSTANDING SECURITIES
As of May 14, 2003, in addition to the 474,042,609 shares of our common
stock currently outstanding, we have: (i) outstanding stock options to purchase
an aggregate of approximately 65.9 million shares of common stock at exercise
prices ranging from $0.08 to $0.36, of which approximately 57.5 million are
currently exercisable; (ii) outstanding warrants to purchase an aggregate of
approximately 62.7 million shares of common stock at prices ranging from $0.097
to $1.00, of which warrants to purchase 42.7 million shares are currently
exercisable; (iii) approximately 24.5 million shares of common stock underlying
certain outstanding convertible debentures. The foregoing does not include
shares issuable pursuant to the equity line of credit agreements.
If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $34.6 million,
and we would have approximately 627.1 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of the common
stock. Additionally, the sale or availability for sale of this number of shares
may lessen the likelihood that additional equity financing will be available to
us, on favorable or unfavorable terms. Furthermore, the sale or availability for
sale of this number of shares could limit the annual amount of net operating
loss carryforwards that could be utilized.
PROJECTED EXPENSES
During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for Product R. We currently do not have cash available to meet
our anticipated expenditures.
We are currently seeking additional financing. We anticipate that we
can continue operations through May 2003 with our current liquid assets, if none
of our outstanding options or warrants is exercised or additional securities
sold. Any proceeds received from the exercise of outstanding options or warrants
will contribute to working capital and increase our budget for research and
development and clinical trials and testing, assuming Product R receives
subsequent approvals to justify such increased levels of operation. The recent
prevailing market price for shares of common stock has from time to time been
below the exercise prices of certain of our outstanding options or warrants. As
such, recent trading levels may not be sustained nor may any additional options
or warrants be exercised. If none of the outstanding options or warrants is
45
exercised, and we obtain no other additional financing, in order for us to
achieve the level of operations contemplated by management, management
anticipates that we will have to materially limit operations. We anticipate that
we will be required to sell additional securities to obtain the funds necessary
to continue operations and further our research and development activities. We
are currently seeking debt financing, licensing agreements, joint ventures and
other sources of financing, but the likelihood of obtaining such financing on
favorable terms is uncertain. Management is not certain whether, at present,
debt or equity financing will be readily obtainable or whether it will be on
favorable terms. Because of the large uncertainties involved in the FDA approval
process for commercial drug use on humans, it is possible that we will never be
able to sell Product R commercially.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to ensure that
the information we must disclose in our filings with the Securities and Exchange
Commission is recorded, processed, summarized and reported on a timely basis.
Our principal executive officer and principal financial officer have reviewed
and evaluated our disclosure controls and procedures as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") as of a date within 90 days prior to the filing date of
this report (the "Evaluation Date"). Based on such evaluation, such officers
have concluded that, as of the Evaluation Date, our disclosure controls and
procedures are effective in bringing to their attention on a timely basis
material information relating to Advanced Viral required to be included in our
periodic filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes
in our internal controls or in other factors that could significantly affect
these controls subsequent to the Evaluation Date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 2002, we filed suit in the Circuit Court of the 11th
Judicial Circuit of Miami-Dade County Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and "engaged in a
series of manipulative activities to depress the price of Advanced Viral stock."
We alleged that the defendants sought to "guarantee they would be issued
significantly more shares of our common stock" as a result of warrant repricing
provisions of a September 2002 financing agreement. We sought a judgment for
damages, interest and costs.
The complaint named SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein; Knight
Securities, L.P., a limited partnership conducting securities business in
Florida; Stonestreet Limited Partnership located in Canada; and Bristol
Investment Fund, LTD., whose principal place of business is in Grand Cayman,
Cayman Islands, among others. The complaint claimed that the "defendants had
each, at times acting individually, and at times acting in concert with at least
one or more of each other," engaged in practices that violated sections of the
Florida Securities and Investor Protection Act.
Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of our largest shareholders. The
46
complaint alleged that Mr. Bregman suffered losses of approximately $3.9 million
as a result of the stock manipulation scheme. In January 2003, certain of the
defendants removed the case to the U.S. District Court for the Southern District
of Florida.
The suit related to an agreement, announced September 9, 2002, pursuant
to which we issued and sold to certain investors 21,500,000 shares of its common
stock for total gross proceeds of $3,010,000, or $0.14 per share. We also issued
warrants to purchase an aggregate of 16,125,000 shares of our common stock,
which were covered by provisions that allowed for an adjustment of the warrant
exercise price. The complaint charged the defendants with manipulating the share
price to take favorable advantage of these warrant repricing provisions.
Following the initiation of our lawsuit in Florida, three of the
purchasers in the September financing (Alpha Capital, A.G., Bristol Investment
Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha Plaintiffs") filed
separate lawsuits in the U.S. District Court for the Southern District of New
York. The suits sought a preliminary injunction and other relief for breach of
contract. The District Court entered an order on February 11, 2003 upon a motion
of the Alpha Plaintiffs, that required that (i) we deliver to the Alpha
Plaintiffs the shares of our common stock issuable upon exercise of the
warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000 or the market
value of the warrant shares, whichever is higher for each group of warrants as
of the first and second determination dates; and (iii) all the proceeds from the
sale of the warrant shares be placed in escrow pending final resolution of the
litigation. Within ten days of the entry of the order, we moved to alter/amend
the judgment and/or for reconsideration of the Court's order requesting relief
from the Court's order. The Court denied this motion and ordered us to
immediately deliver the warrant shares to the Alpha Plaintiffs upon their
payment of the exercise price and posting of a bond, without further delay and
no later than April 8, 2003. We immediately appealed the order denying the
motion for reconsideration.
During May 2003, we entered into settlement and mutual release
agreements with the parties involved in both the Florida and New York
litigation, which, among other things, dismissed the lawsuits with prejudice,
and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to
the agreements, in exchange for release by the parties to the lawsuits and
certain parties to the September 2002 financing of their rights to exercise the
warrants issued in the September 2002 financing, we issued an aggregate of
947,000 shares of our common stock and agreed to pay an aggregate of $1,047,891
to such parties, of which $726,463 has been paid to date, and of which $321,428
shall be paid in five equal monthly installments until September 2003. 680,000
of the shares issued are subject to a 145-day lock-up agreement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See Part I, Item 2 of this Report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended March 31, 2003, no matters were submitted to a
vote of security holders of the Registrant, through the solicitation of proxies
or otherwise.
47
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following Exhibits are filed with this Report:
EXHIBIT NO. DESCRIPTION
----------- -----------
10.1 Securities Purchase Agreement dated as of
April 28, 2003 between the Registrant and
Cornell Capital Partners, LP.
10.2 5% Convertible Debenture dated April 28,
2003.
10.3 Warrant dated April 28, 2003 to purchase
15,000,000 shares of common stock at an
exercise price of $0.097 per share.
10.4 Registration Rights Agreement dated as of
April 28, 2003 between the Registrant and
Cornell Capital Partners, LP.
10.5 Equity Line of Credit Agreement dated as of
April 28, 2003 between the Registrant and
Cornell Capital Partners, LP.
10.6 Registration Rights Agreement dated as of
April 28, 2003 between the Registrant and
Cornell Capital Partners, LP.
99.1 Certification by Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification by Chief Financial Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K. None
48
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: May 14, 2003 By: /s/ ALAN V. GALLANTAR
-----------------------------------------
Alan V. Gallantar, Chief Financial Officer
(Principal Financial and Accounting
Officer)
By: /s/ SHALOM Z. HIRSCHMAN, M.D.
-----------------------------------------
Shalom Z. Hirschman, President and Chief
Executive Officer
49
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Alan Gallantar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanced Viral Research
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ ALAN GALLANTAR
- -----------------------------------------
Alan Gallantar, Chief Financial Officer
50
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Shalom Z. Hirschman, M.D., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Advanced Viral Research
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ SHALOM Z. HIRSCHMAN, M.D.
- ------------------------------------------------------
Shalom Z. Hirschman, M.D., Chief Executive Officer
51