<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
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 small business issuer as specified in its charter)
Delaware 59-2646820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1250 East Hallandale Beach Blvd., Suite 501, Hallandale, Florida 33009
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (954) 458-7636
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No
The number of shares outstanding of the issuer's classes of common stock as of
June 30, 1997 was 272,957,269.
Traditional Small Business Disclosure Format (check one)
Yes [X] No
<PAGE> 2
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-QSB
QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
PART I
FINANCIAL INFORMATION (UNAUDITED)
<S> <C>
Consolidated Condensed Balance Sheets, June 30, 1997 and December 31, 1996 1
Consolidated Condensed Statements of Operations for the Three and Six Months Ended
June 30, 1997 and 1996 and from Inception (February 20, 1984) to June 30, 1997 2
Consolidated Condensed Statements of Stockholders' Equity from Inception
(February 20, 1984) to June 30, 1997 3-6
Consolidated Condensed Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996 and from Inception (February 20, 1984) to June 30, 1997 7
Notes to Consolidated Condensed Financial Statements 8-16
Management's Discussion and Analysis or Plan of Operation 17-20
PART II
CHANGES IN SECURITIES, EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
</TABLE>
<PAGE> 3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 418,217 $ 61,396
Investments 1,327,226 1,378,841
Inventory 19,729 19,729
Other current assets 33,646 16,081
----------- -----------
Total current assets 1,798,818 1,476,047
Property and Equipment 286,161 207,209
Other Assets 187,625 33,544
----------- -----------
Total assets $ 2,272,604 $ 1,716,800
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 113,121 $ 46,674
Customer deposits 7,800 7,800
----------- -----------
Total current liabilities 120,921 54,474
----------- -----------
Convertible Debenture, Net 500,000 --
----------- -----------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of
$.00001 par value authorized; 272,957,269 and
267,031,058 shares issued and outstanding 2,729 2,671
Additional paid-in capital 7,772,701 7,003,351
Subscription receivable (19,000) (19,000)
Deficit accumulated in the development stage (5,823,866) (4,851,537)
Deferred compensation cost (280,881) (473,159)
----------- -----------
Total stockholders' equity 1,651,683 1,662,326
----------- -----------
Total liabilities and stockholders' equity $ 2,272,604 $ 1,716,800
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
-1-
<PAGE> 4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Three Months Ended Six Months Ended 1984) to
June 30, June 30, June 30,
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 1,975 $ 7,584 $ 2,278 $ 15,269 $ 194,319
Interest 20,369 15,726 34,979 18,949 380,388
Other income -- -- -- -- 112,000
------------- ------------- ------------- ------------- -------------
22,344 23,310 37,257 34,218 686,707
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 124,459 73,840 194,673 74,000 1,301,081
General and administrative 425,176 114,552 752,161 189,029 4,965,635
Depreciation and amortization 55,792 4,865 61,511 8,535 240,406
Interest 931 -- 1,241 -- 3,451
------------- ------------- ------------- ------------- -------------
606,358 193,257 1,009,586 271,564 6,510,573
------------- ------------- ------------- ------------- -------------
Net Loss $ (584,014) $ (169,947) $ (972,329) $ (237,346) $ (5,823,866)
============= ============= ============= ============= =============
Net Loss Per Share of
Common Stock $ (.00) $ (.00) $ (.00) $ (.00) $ (.00)
============= ============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 269,261,569 255,859,904 269,261,569 255,859,904
============= ============= ============= ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
-2-
<PAGE> 5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984)
as previously reported -- $1,000 $ -- (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
----------- ------ ----------- -------------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- ------ ----------- ------------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $.00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
----------- ------ ----------- ------------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering 40,000,000 400 399,600 --
Issuance of underwriter's warrants .01 -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
----------- ------ ----------- ------------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
Issuance of common stock, exercise of "A" warrants $.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- (11,357) --
Acquisition of subsidiary for cash -- -- (46,000) --
Cancellation of debt due to stockholders -- -- 86,565 --
Net loss, period ended December 31, 1987 -- -- -- (258,663)
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
----------- ------ ----------- ------------
Net loss, year ended December 31, 1989 -- -- -- (270,753
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
----------- ------ ----------- ------------
Issuance of common stock, expiration of redemption
offer on "B" warrants .05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ------ ----------- ------------
Balance, December 31, 1990 200,299,882 $2,003 $ 1,845,992 $ (1,200,915)
----------- ------ ----------- ------------
</TABLE>
See notes to consolidated condensed financial statements.
-3-
<PAGE> 6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
----------- ----- --------- ----------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
----------- ----- --------- ----------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
----------- ----- --------- ----------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
----------- ----- --------- ----------
</TABLE>
See notes to consolidated condensed financial statements.
-4-
<PAGE> 7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Deferred
Amount Additional during the Compen-
Per Paid-In Subscription Development sation
Share Shares Amount Capital Receivable Stage Cost
---- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ (2,854,076) -
Issuance of common stock, for consulting services $ .05 4,750,000 47 237,453 - -
Issuance of common stock, exercise of options .08 400,000 4 31,996 - -
Issuance of common stock, exercise of options .10 190,000 2 18,998 - -
Net loss, year ended December 31, 1994 - - - (440,837) -
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 - - -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 - - -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 - - -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 - - -
Issuance of common stock, for consulting services .14 300,000 3 41,997 - - -
Net loss, year ended December 31, 1995 - - - - (401,884) -
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
Issuance of common stock, exercise of options .05 3,333,334 33 166,634 - - -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 - - -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 - - -
Issuance of common stock, exercise of options .11 170,000 2 18,698 - - -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 - - -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 - - -
Issuance of common stock, exercise of options .19 500,000 5 94,995 - - -
Issuance of common stock, exercise of options .20 473,500 5 94,695 - - -
Issuance of common stock, for services rendered .50 350,000 3 174,997 - - -
Options granted - - 760,500 - - (473,159)
Subscription receivable - - - (19,000) - -
Net loss, year ended December 31, 1996 - - - - (1,154,740) -
----------- ----- --------- ------- ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000) (4,851,537) (473,159)
----------- ----- --------- ------- ---------- --------
</TABLE>
See notes to consolidated condensed financial statements.
-5-
<PAGE> 8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated Deferred
Amount ------------ Additional during the Compen-
Per Paid-In Subscription Development sation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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 0.080 3,333,333 33 247,633 - - -
Issuance of common stock; conversion of debt 0.150 894,526 9 133,991 - - -
Issuance of common stock; conversion of debt 0.200 1,648,352 16 329,984 - - -
Issuance of common stock; exchange for services 0.410 50,000 - 20,500 - - -
Warrant costs - - 37,242 - - -
Amortization of deferred compensation costs - - - - - 192,278
Net loss period ended June 30, 1997 - - - - (972,329) -
----------- -------- ----------- -------- ----------- ---------
Balance, June 30, 1997 272,957,269 $ 2,729 $ 7,772,701 $(19,000) $(5,823,866) $(280,881)
=========== ======== =========== ======== =========== =========
</TABLE>
See notes to consolidated condensed financial statements.
-6-
<PAGE> 9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
Six Months Ended (February 20,
June 30, 1984) to
June 30,
1997 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(972,329) $(237,346) $(5,823,866)
--------- --------- -----------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 62,752 8,535 241,647
Amortization of deferred compensation cost 192,278 -- 479,619
Loss on sale of property and equipment 1,425 -- 1,425
Issuance of common stock for services 20,500 -- 1,392,500
(Increase) decrease in other current assets (17,565) 4,739 (52,646)
Increase in inventory -- (1,638) (19,729)
Increase in other assets (224,295) -- (238,839)
Increase (decrease) in accounts payable
and accrued liabilities 66,447 2,640 119,321
-----------
Total adjustments 101,542 14,276 1,923,298
--------- --------- -----------
Net cash used by operating activities (870,787) (223,070) (3,900,568)
--------- --------- -----------
Cash Flows from Investing Activities:
Purchase of investments (665,000) (649,980) (2,391,256)
Proceeds from sale of investments 716,615 -- 1,064,030
Expenditures for property and equipment (91,873) (519) (476,377)
Proceeds from sale of property and equipment 1,200 -- 1,200
--------- -----------
Net cash provided (used) by investing activities (39,058) (650,499) (1,802,403)
--------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debenture 1,000,000 -- 1,000,000
Proceeds from sale of securities, net of issuance costs 266,666 1,373,734 5,121,188
--------- --------- -----------
Net cash provided by financing activities 1,266,666 1,373,734 6,121,188
--------- --------- -----------
Net Increase in Cash and Cash Equivalents 356,821 500,165 418,217
Cash and Cash Equivalents, Beginning 61,396 65,230 --
--------- --------- -----------
Cash and Cash Equivalents, Ending $ 418,217 $ 565,395 $ 418,217
========= ========= ===========
Supplemental Schedule of Non Cash Financing Activities:
During the quarter ended June 30, 1997, $464,000 of the
convertible debenture was converted into 2,542,878
shares of the Company's common stock
</TABLE>
See notes to consolidated condensed financial statements.
-7-
<PAGE> 10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
at June 30, 1997 have been prepared in accordance with generally
accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and reflect all adjustments
which, in the opinion of management, are necessary for a fair
presentation of financial position as of June 30, 1997 and results of
operations for the three months and six months ended June 30, 1997 and
1996 and cash flows for the six months ended June 30, 1997 and 1996.
All such adjustments are of a normal recurring nature. The results of
operations for interim periods are not necessarily indicative of the
results to be expected for a full year. The statements should be read
in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.
NOTE 2. COMMITMENTS AND CONTINGENCIES
GOING CONCERN
The accompanying unaudited consolidated condensed financial statements
at June 30, 1997 have been prepared in conformity with generally
accepted accounting principles which contemplate the continuance of
the Company as a going concern. The Company has suffered losses from
operations during its operating history. The Company is dependent upon
registration of RETICULOSE for sale before it can begin commercial
operations. The Company's cash position may be inadequate to pay all
the costs associated with the full range of testing and clinical
trials required by the FDA. Management does not anticipate
registration or other approval of RETICULOSE in the near future in the
United States. Unless and until RETICULOSE is approved for sale, the
Company may be dependent upon the continued sale of its securities for
funds to meet its cash requirements. Management intends to continue to
sell the Company's securities in an attempt to mitigate the effects of
its cash position; however, no assurance can be given that such equity
financing, if and when required, will be available. In the event that
such equity financing is not available, in order to continue
operations, management anticipates that they will have to defer their
salaries. In addition, the Company may seek additional debt financing.
No assurance can be given that the Company will be able to sustain its
operations until approval is granted or that any approval will ever be
granted. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the
recoverability and classification of recorded assets and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
POTENTIAL CLAIM FOR ROYALTIES
The Company may be subject to claims from certain third parties for
royalties due on sale of RETICULOSE. The Company has not as yet
received any notice of claim from such parties.
-8-
<PAGE> 11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
POTENTIAL LOSS OF BAHAMIAN RIGHTS
RETICULOSE is manufactured by Advance Viral Research, Limited (LTD) in
facilities located in Freeport, Grand Bahama Island. LTD has a license
to manufacture pharmaceutical products for export from The Grand
Bahama Port Authority, Limited. LTD's counsel was advised in August
1988 by the Ministry of Health of the Government of the Bahamas that a
license from the Ministry of Health is required for the manufacture of
pharmaceuticals in the Freeport area of Grand Bahama Island. LTD has
received an opinion of its counsel in the Bahamas that the license
from The Grand Bahama Port Authority, Limited is valid for the
manufacture, export and sale by LTD of ethical pharmaceutical products
in the Freeport area of Grand Bahama Island. No proceedings have been
instituted or threatened by the Ministry of Health. If such
proceedings are instituted, LTD intends to defend them vigorously. No
assurance can be given that LTD would successfully defend such claim.
PRODUCT LIABILITY
The Company could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is unaware
of any such claims or threatened claims since RETICULOSE was initially
marketed in the 1940's, one study noted adverse reactions from highly
concentrated doses in guinea pigs. In the event any claims for
substantial amounts were successful, they could have a material
adverse effect on the Company's financial condition and on the
marketability of RETICULOSE. As of the date hereof, the Company does
not have product liability insurance for RETICULOSE. There can be no
assurance that the Company will be able to secure such insurance in
adequate amounts, at reasonable premiums if it determined to do so.
Should the Company be unable to secure such product liability
insurance, the risk of loss to the Company in the event of claims
would be greatly increased and could materially adversely affect the
Company.
LACK OF PATENT PROTECTION
The Company does not presently have a patent for RETICULOSE but the
Company is currently applying for patents for RETICULOSE as a
treatment for certain diseases. 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 the Company will obtain such patents or if obtained that they
will be enforceable.
-9-
<PAGE> 12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS
PLATA PARTNERS LIMITED PARTNERSHIP
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata agreed
to perform a demonstration in the Domincan Republic in accordance with
a certain agreed upon protocol (the "Protocol") to assess the efficacy
of a treatment using RETICULOSE incorporated in the Protocol against
AIDS (the "Plata Agreement"). Plata covered all costs and expenses
associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the issuance
to Plata of 5,000,000 shares of common stock and options to purchase
an additional 5,000,000 shares at $.08 per share through July 9, 1994
(the "Plata Options") and 5,000,000 shares at $.10 per share through
July 9, 1994. Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through December 31, 1997
at an exercise price of $.12 and $.14, respectively. As of June 30,
1997, there are outstanding Plata Options to acquire 813,000 shares at
an exercise price of $.12 per share and Additional Plata Options to
acquire 858,100 shares at an exercise price of $.14 per share. Through
June 30, 1997, the Company has received approximately $670,000
pursuant to the issuance of approximately 7.7 million shares in
connection with the exercise of the Plata Options and the Additional
Plata Options.
TRM MANAGEMENT CORP. ("TRM")
In August 1991, the Company entered into an agreement with TRM,
whereby TRM performed a controlled open clinical trial test in Haiti
(the "Haiti Tests"), using RETICULOSE (the "TRM Agreement"). According
to the TRM Agreement, the purpose of the Haiti Tests was to assess the
effectiveness of RETICULOSE against the Hepatitis "A" virus and
Hepatitis "B" virus in accordance with and in compliance with a
certain Hepatitis Open Label Clinical Trial Protocol developed by TRM.
At the conclusion of the Haiti Tests, TRM was required to prepare a
paper describing the methods and results of testing, the form and
substance of which shall be appropriate for publication by recognized
scientific journals ("Results Paper"). The Results Paper was published
in the December 1992 issue of the Journal of the Royal Society of
Health.
On January 3, 1992, TRM delivered to the Company the Results Paper. In
accordance with the terms of the TRM Agreement, the Company has issued
to the shareholders and certain associated persons of TRM (1) an
aggregate amount of 10,000,000 shares of the Company's common stock
(the "TRM Shares") and (2) an option to acquire, at any time, for a
period of five years from the date of issuance of the option,
10,000,000 shares of the Company's common stock at a purchase price of
$.05 per share (the "TRM Options"). As of December 31, 1996, 6,666,666
shares of common stock were issued pursuant to the exercise of the TRM
Options for an aggregate exercise price of $333,333. In March 1997,
the remaining 3,333,334 shares of common stock were issued pursuant to
the exercise of the TRM options for an aggregate exercise price of
$266,667.
-10-
<PAGE> 13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
ARGENTINE AGREEMENT
In April 1996, the Company entered into an agreement (the "Argentine
Agreement") with DCT SRL, an Argentine corporation unaffiliated with
the Company ("DCT") pursuant to which DCT was to cause a clinical
trial to be conducted in two separate hospitals located in Buenos
Aires, Argentina (the "Clinical Trials"). Pursuant to the Argentine
Agreement, the Clinical Trials were to be conducted pursuant to a
protocol developed by Juan Carlos Flichman, M.D. and the purpose of
the Clinical Trials was to assess the efficacy of the Company's drug
RETICULOSE on the Human Papilloma Virus (HPV). The protocol calls for,
among other things, a study to be performed with clinical and
laboratory follow-up on 20 male and female human patients between the
ages of 18 and 50. The Clinical Trials were not a double-blind study
and did not include a placebo control group or references to any other
antiviral drug.
Pursuant to the Argentine Agreement, the Company paid approximately
$34,000 to DCT to cover out-of-pocket expenses associated with the
Clinical Trials. The Argentine Agreement further provides, that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written Report").
In September 1996, the Written Report was delivered by Dr. Flichman to
the Company. Upon delivery of the Written Report to the Company, the
Company delivered to the principals of DCT options to acquire
2,000,000 shares of the Company's common stock for a period of one
year from the date of the delivery of the Written Report, at a
purchase price of $.20 per share. As of June 30, 1997, 473,500 shares
of common stock were issued pursuant to the exercise of these options
for an aggregate exercise price of approximately $95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject to
certain conditions, the exclusive right to market and sell RETICULOSE
in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and Chile (the "DCT
Exclusive Distribution Agreement").
During the quarter ended June 30, 1997, the Company entered into an
agreement with DCT (the "HIV-HPV Agreement") whereby the Company
agreed to provide to DCT or its assignees, up to $600,000 to cover the
costs of a double blind placebo controlled study in approximately 150
patients to assess the efficacy of Reticulose for the treatment of
persons diagnosed with the HIV virus (AIDS) and HPV (the "HIV-HPV
Study").
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $140,000, of which $100,000 was advanced during the
three month period ended June 30, 1997 and is accounted for as a
research and development expense. The amounts have been used to cover
expenses associated with pre-clinical activities.
-11-
<PAGE> 14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
The HIV-HPV Agreement provides that (i) in the event the data from the
HIV-HPV Study is used in connection with Reticulose being approved for
commercial sale anywhere within the territory granted under the DCT
Exclusive Distribution Agreement or (ii) DCT receives financing to
cover the costs of the HIV-HPV Study, then DCT is obligated to
reimburse the Company for all amounts expended in connection with the
HIV-HPV Study.
BARBADOS STUDY
A double-blind clinical trial using RETICULOSE in the treatment of
AIDS is being conducted at the Queen Elizabeth Hospital, Bridgetown,
Barbados (the "Barbados Study"). As of June 30, 1997, the Company has
expended approximately $275,000 to cover the costs of the Barbados
Study. Based on information received from the coordinators of the
Barbados Study, the Company is uncertain as to the continued costs to
be incurred in connection with the Barbados Study and has not been
informed as to when results from the Barbados Study will be
forthcoming. In December 1996, the Company received from the
coordinators of the Barbados Study, a written summary of preliminary
results of the Barbados Study (the "Written Summary").
-12-
<PAGE> 15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
HIRSCHMAN AGREEMENT
In May 1995, the Company entered into a consulting agreement with
Shalom Z. Hirschman, M.D., then 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 an exercise price of $.18 per share. In addition and
in connection with entering into the consulting agreement with Dr.
Hirschman, the Company issued to a person unaffiliated with the
Company, 100,000 shares of the Company's common stock, and an option
to acquire for a period of one year, from June 1, 1995, an additional
500,000 shares at an exercise price of $.18 per share. As of June 30,
1997, 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
additional consulting services to the Company through May 2000 (the
"Addendum"). Pursuant to the Addendum, the Company granted to Dr.
Hirschman and his designees options to purchase an aggregate of
15,000,000 shares of the Company's common stock for a three year
period pursuant to the following schedule: (i) options to purchase
5,000,000 shares exercisable at any time and from time to time
commencing March 24, 1996 and ending March 23, 1999 at an exercise
price of $.19 per share, of which options to acquire 500,000 shares
were assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; (ii) options to purchase 5,000,000 shares exercisable at
any time and from time to time commencing March 24, 1998 and ending
March 23, 1999 at an exercise price of $.27 per share, of which
options to acquire 500,000 shares were assigned by Dr. Hirschman to
Richard Rubin, consultant to Dr. Hirschman; and (iii) options to
purchase 5,000,000 shares exercisable at any time and from time to
time commencing March 24, 1998 and ending March 23, 1999 at an
exercise price of $.36 per share, of which options to acquire 500,000
shares were assigned by Dr. Hirschman to Richard Rubin, counsel to Dr.
Hirschman. In addition, the Company has agreed to cause the shares
underlying these options to be registered so long as there is no cost
to the Company. As of June 30, 1997, 500,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his representation of Dr. Hirschman.
-13-
<PAGE> 16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination by
either party, either "for cause," as defined in and in accordance with
the provisions of the Employment Agreement, or if the Company does not
receive, on or prior to December 31, 1997, funding of at least
$3,000,000 from sources other than traditional institutional/bank debt
financing or proceeds from the purchase by Dr. Hirschman of the
Company's securities, including, without limitation, the exercise of
Dr. Hirschman of outstanding stock options. Pursuant to the Employment
Agreement, Dr. Hirschman is entitled to receive an annual base salary
of $325,000, use of an automobile, major medical, term life,
disability and dental insurance benefits for the term of his
employment. The Employment Agreement further provides that Dr.
Hirschman shall be nominated by the Company to serve as a member of
the Company's Board of Directors and that Bernard Friedland and
William Bregman will vote in favor of Dr. Hirschman as a director of
the Company, for the duration of Dr. Hirschman's employment, and since
October 1996, Dr. Hirschman has served as a member of the Company's
Board of Directors.
CONSULTING AGREEMENTS
COHEN AGREEMENTS
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen Agreement")
for a one-year term. The September 1992 Cohen Agreement required that
Mr. Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement and
the remaining 500,000 shares of which were issuable upon Mr. Cohen
completing 50 hours of consulting service to the Company. The Company
issued the first 500,000 shares to Mr. Cohen in October 1992 and the
remaining 500,000 shares to Mr. Cohen in February 1993. Further
pursuant to the September 1992 Cohen Agreement, the Company granted to
Mr. Cohen the option to acquire, at any time and from time to time
through September 10, 1993 (which date has been extended through
December 31, 1997), the option to acquire 3,000,000 shares of common
stock of the Company at an exercise price of $.09 per share (which
exercise price has been increased to $.13 per share) (the "September
1992 Cohen Options"). As of June 30, 1997, 1,300,000 of the September
1992 Cohen Options have been exercised for cash consideration of
$156,000.
-14-
<PAGE> 17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for a
three-year term commencing on March 1, 1993. The February 1993 Cohen
Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of the
Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen has
informed the Company he has assigned to certain other persons not
affiliated with the Company or any of its officers or directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000 shares
(the "April 1994 Cohen Shares") and (ii) to each of Elliot Bauer and
Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto Shares") as well
as options to acquire an additional 5,000,000 shares at $.10 per share
exercisable through May 1, 1996 (the "Bauer and Rizzuto Options"). The
Company has been informed that Messrs. Cohen, Bauer and Rizzuto are
principals of a firm which has been granted certain distribution
rights, which were terminated on May 31, 1995. Through June 30, 1997,
2,855,000 shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. During
the year ended December 31, 1996, approximately 3,000,000 shares of
common stock were issued for cash consideration of $300,000 pursuant
to the exercise of the Bauer and Rizzuto Options. Pursuant to several
amendments, the Bauer and Rizzuto options are exercisable through
December 31, 1997 at an option price of $.11. The Company agreed to
issue to Cohen an additional 300,000 shares in 1995 at a time when the
shares were valued at $.14 per share, in consideration for
expenditures incurred by Mr. Cohen in connection with securing for the
benefit of the Company and the affiliated distributor, the continued
services of a doctor.
The issuance of the September 1992 Cohen Shares, the February 1993
Cohen Shares, the April 1994 Cohen Shares and the Bauer and Rizzuto
Shares have been accounted for as an administrative expense in the
amount of the Company's valuation of such shares as of the issuance
date. During the year ended December 31, 1996, Mr. Cohen was issued
300,000 shares for services rendered. These shares were accounted for
as an administrative expense in the amount of the Company's valuation
of such shares as of the issuance date.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute RETICULOSE in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause RETICULOSE to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of RETICULOSE
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities.
-15-
<PAGE> 18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURE
On February 21, 1997, in order to finance research and development,
the Company sold $1,000,000 principal amount of its ten-year 7%
Convertible Debenture (the "Debenture") due February 28, 2007, to RBB
Bank Aktiengesellschaft ("RBB"). Accrued interest under the Debenture
is payable semi-annually, computed at the rate of 7% per annum on the
unpaid principal balance from February 21, 1997 until the date of
interest payment. The Debenture may be prepaid by the Company before
maturity, in whole or in part, without premium or penalty, if the
Company gives the holder of the Debenture notice not less than 30 days
before the date fixed for prepayment in that notice. The Debenture is
convertible, at the option of the holder, into shares of common stock.
During the quarter ended June 30, 1997, RBB exercised its right to
convert $330,000 of the principal amount of the Debenture into
1,648,352 shares of the Company's common stock at a conversion price
of $.2002 per share and to convert $134,000 of the principal amount of
the Debenture into 894,526 shares of the Company's common stock at a
conversion price of $.1498.
Subsequent to June 30, 1997, RBB exercised its right to convert
$270,000 of the principal amount of the Debenture into 2,323,580
shares of the Company's common stock at a conversion price of $0.1162
per share.
In connection with the issuance of the Debenture, the Company issued
to RBB three warrants (the "Warrants") to purchase common stock, each
such warrant entitling the holder to purchase, from February 21, 1997
through February 27, 2007, 178,378 shares of common stock. The
exercise prices of the Warrants are $0.288, $0.576 and $0.864 per
warrant share, respectively. The fair value of the Warrants was
estimated to be $37,000 ($.021 per warrant) based upon a financial
analysis of the terms of the Warrants using the Black-Sholls Pricing
Model. This amount has been reflected in the accompanying financial
statements as a discount on the convertible debenture, with a
corresponding credit to additional paid-in capital, and is being
amortized to interest expense over the expected term of the notes (6
months).
-16-
<PAGE> 19
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion of the results of operations and the financial
condition of the Company should be read in conjunction with the Company's
Consolidated Condensed Financial Statements and Notes thereto included elsewhere
in this Report.
RESULTS OF OPERATIONS
For the three month periods ended June 30, 1997 and June 30, 1996, the
Company incurred losses of $584,014 ($0.00 per share) and $169,947 ($0.00 per
share). For the six month periods ended June 30, 1997 and June 30, 1996, the
Company incurred losses of $972,329 and $237,346. The Company's increased losses
during 1997 are principally due to the employment of Shalom Z. Hirschman, M.D.
as President and Chief Executive Officer of the Company ($162,500 for the six
months ended June 30, 1997 vs. $0 for the six months ended June 30, 1996);
increased research and development expense (approximately $195,000 for the six
months ended June 30, 1997 vs. approximately $74,000 for the six months ended
June 30, 1996); the opening and maintenance costs of the Company's Yonkers, New
York office (approximately $60,000 for the six months ended June 30, 1997 vs. $0
for the six months ended June 30, 1996); and the implementation of Statement of
Financial Accounting Standards Board (SFAS) No. 123 "Accounting for Stock-Based
Compensation," which accounts for Common Stock purchase options granted in 1996
(approximately $192,000 for the six months ended June 30, 1997 vs. $0 for the
six months ended June 30, 1996). Administrative expenses and the lack of sales
revenues also contribute to the Company's losses.
-17-
<PAGE> 20
There were sales of $1,975 and $7,584, respectively, during the three
month periods ended June 30, 1997 and June 30, 1996 and $2,278 and $15,269
during the six months ended June 30, 1997 and June 30, 1996. In fiscal year
1996, the Company collected $40,000 for the sale of territorial rights compared
to $0 for the sale of territorial rights during the six months ended June 30,
1997. All sales during these periods resulted from distributors purchasing
RETICULOSE for testing purposes. Interest income was $20,369 and $15,726 for the
three month periods ended June 30, 1997 and June 30, 1996 and $34,979 and
$18,949 for the six month periods ended June 30, 1997 and June 30, 1996.
Although there can be no assurance of the levels, if any, the Company
believes that it will generate sales revenue at least with respect to testing of
RETICULOSE pursuant to its agreements with exclusive distributors from initial
testing in their respective territories. However, there will be no likelihood of
significant sales of RETICULOSE unless and until requisite approvals are
obtained in such territories.
Liquidity
As of June 30, 1997, and December 31, 1996, the Company had current
liquid assets (cash and cash equivalents and investments) of $1,745,443 and
$1,440,237, respectively. As of June 30, 1997, and December 31, 1996, the
Company had total assets of $2,272,604 and $1,716,800. The increase in liquid
assets and total assets was primarily attributable to the exercise of options
and the sale of the Debenture. See "--Capital Resources."
Until RETICULOSE is registered for sale, sales of RETICULOSE
are not expected to generate significant revenues. There can be no assurances
that RETICULOSE will be available for sale or, even if available, that it would
generate significant revenues. FDA approval to begin human clinical trials will
require significant cash expenditures, the amount of which is not currently
determinable. BEFORE SEPTEMBER 1995, THE COMPANY RECEIVED CORRESPONDENCE FROM
THE FOOD AND DRUG ADMINISTRATION OF THE UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES (THE "FDA"), WHICH STATED, AMONG OTHER COMMENTS, THAT THE
COMPANY'S PRIOR SUBMISSIONS TO THE FDA DID NOT PROVIDE AN ADEQUATE RESPONSE TO
THE FDA'S EARLIER REQUEST FOR PRECLINICAL INFORMATION AND ACCORDINGLY THE
COMPANY'S NOTICE OF CLAIMED INVESTIGATIONAL EXEMPTION FOR A NEW DRUG SUBMITTED
TO THE FDA ON SEPTEMBER 20, 1984 WAS "INACTIVATED." The Company has taken no
action with regard to deficiency letters received by it from the FDA.
In the event the Ministry of Health of the Government of the Bahamas
attempts to prevent the manufacture of RETICULOSE by the Company's subsidiary
for export from Freeport under its license from The Grand Bahama Port
Authority, Limited, the Company's subsidiary may be required to relocate the
manufacturing facility. Should such relocation become necessary, the Company
currently anticipates being able to obtain a suitable site. The cost of such
relocation, depending upon the site of such relocation, will in any event be
material.
If the Company does not begin to generate revenues from the sale of
RETICULOSE, and if the Company does not receive significant funds from the
exercise of additional options, it shall be dependent upon additional debt
and/or equity financing, of which there can be no assurance, or it must reduce
expenses or further limit operations.
-18-
<PAGE> 21
Capital Resources
The Company in the past has been dependent upon sales of shares of its
Common Stock, $.00001 par value (the "Common Stock"), and upon the exercise of
its warrants issued in the Company's initial public offering in 1986, all of
which have expired and, since the expiration of the warrants, the Company has
been dependent upon the proceeds from the continued exercise of outstanding
options for the funds required to continue operations at present levels and to
fund the planned Research and Development and Clinical Trials and Testing of
RETICULOSE.
On February 21, 1997, in order to finance research and development, the
Company sold $1,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "Debenture") due February 28, 2007, to RBB Bank
Aktiengesellschaft ("RBB") in an offshore transaction pursuant to Regulation S
under the Securities Act of 1933, as amended. Accrued interest under the
Debenture is payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from February 21, 1997 until the date of interest
payment. (After default, interest accrues at 10% per annum.) The Debenture may
be prepaid by the Company before maturity, in whole or in part, without premium
or penalty, if the Company gives the holder of the Debenture notice not less
than 30 days before the date fixed for prepayment in that notice (prepayment
applied first to pay interest and then to principal then outstanding). The
Debenture is convertible, at the option of the holder, into shares of Common
Stock pursuant to the following formula: Upon receipt by the holder of the
Debenture of the Company's notice of prepayment of the Debenture, in whole or in
part, and otherwise in accordance with the schedule stated in the last sentence
of this paragraph, the outstanding principal amount of the Debenture is
convertible into such number of shares of Common Stock as shall equal the
quotient obtained by dividing (x) the principal amount of the Debenture by (y)
the Applicable Conversion Price; provided, however, that the right to convert
outstanding principal of the Debenture terminates at the close of business on
the third calendar day preceding the date fixed for prepayment of the Debenture
in the Company's notice of prepayment, unless the Company defaults in making
such prepayment. For this purpose, the term "Applicable Conversion Price" means
the lesser of (q) $0.3432 and (r) the product obtained by multiplying the
Average Closing Price by 0.70; and the "Average Closing Price" with respect to
any conversion elected to be made by the holder of the Debenture shall be the
average of the daily closing prices for the five consecutive trading days ended
on the trading day immediately preceding the date on which the holder gives the
Company a written notice of the holder's election to convert outstanding
principal of the Debenture. The closing price on any trading day shall be (a) if
the Common Stock is then listed or quoted on either the National Association of
Securities Dealers, Inc.'s OTC Bulletin Board, The Nasdaq SmallCap Market or The
Nasdaq National Market, the reported closing bid price for the Common Stock on
such day or (b) if the Common Stock is listed on either the American Stock
Exchange or New York Stock Exchange, the last reported sales price for the
Common Stock on such exchange on such day. The Debenture is fully convertible,
pursuant to notice by the holder, RBB, to the Company.
Through July 30, 1997 under the Debenture, $734,000 (of which $464,000
was converted as of June 30, 1997) of the principal amount of the Debenture was
converted into 4,866,458 (of which 2,542,878 shares were converted as of June
30, 1997) shares of the Common Stock.
In connection with the issuance of the Debenture, the Company issued to
RBB three warrants (the "Warrants") to purchase Common Stock, each such Warrant
entitling the holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of the Common Stock. The exercise prices of the three
Warrants are $0.288, $0.576 and $0.864 per Warrant share, respectively. Each
Warrant provides that the holder may elect to receive a reduced number of shares
of Common Stock on the basis of a cashless exercise; that number of shares bears
the same proportion to the total number shares issuable under that Warrant as
the excess of the market value of shares of Common Stock over the warrant
exercise price bears to that market value. Each Warrant contains anti-dilution
provisions which provide for the adjustment of Warrant price and Warrant shares
as more particularly set forth therein.
Under an agreement approved by the Board of Directors of the Company in
December 1996, the Company retained Interfi Capital Group, Inc. ("Interfi"), a
firm unaffiliated with the Company, to arrange financing for the Company for a
fee. In connection with issuance by the Company of the Debenture, the Company
paid to Interfi the sum of $70,000 and delivered to Interfi the option to
acquire 111,473 shares at any time and from time to time exercisable through
August 21, 1999 at an exercise price of $.41 per share.
If the FDA or other approvals are obtained, of which there can be no
assurance, funds must be budgeted by the Company from the exercise of options
and the Warrants, potential grants and/or additional equity, which there is no
assurance will be available.
-19-
<PAGE> 22
The Company is currently expending approximately $150,000 per month,
which expenses include salaries, rent, professional fees, license fees and
taxes, and travel, principally between the Company's headquarters and its
Bahamian facility, and anticipates that it can continue operations for at least
12 months with its current liquid assets, if no Common Stock purchase options or
Warrants are exercised. If all of the outstanding options are exercised, the
Company will receive net proceeds of approximately $6,660,510. Those proceeds
will contribute to general and administrative and working capital and will
permit the Company to substantially increase its budget for research and
development and clinical trials and testing and to operate at significantly
increased levels of operation, assuming RETICULOSE receives approvals and
prospects for sales increase to justify such increased levels of operation, of
which there can be no assurance. However, there can be no assurance that any
additional options will be exercised. The recent prevailing market price for
shares of Common Stock has been above the exercise prices of certain of the
outstanding options. However, there can be no assurance that the recent trading
levels will be sustained or that any additional options will be exercised. In
the event that less than 25% or none of the outstanding options are exercised,
and no other additional financing is obtained by the Company, in order for the
Company to achieve the level of operations contemplated by management,
management anticipates that it will have to limit intentions to expand
operations beyond current levels which involve expenditures of $150,000 per
month. In addition, the Company has in the past sought debt financing, licensing
agreements, joint ventures and other sources of financing, but no such financing
except the Debenture is in place or identified or currently under discussion.
There can be no assurance that any of the Company's distributors will ever
obtain regulatory approvals to test or market RETICULOSE in any territory. In
the event that financing is not available, in order to continue operations,
management anticipates that they will have to defer their salaries. Management
does not believe that, at present, debt or equity financing will be readily
obtainable on favorable terms unless and until FDA approval for Phase I clinical
testing is granted or comparable approval is obtained from another developed or
developing country. Because of the uncertainties involved in the process of
gaining approval for commercial drug use on humans, no assurance can be given
that the Company will be able to sell RETICULOSE. For a discussion of the risk
of relocation of the manufacturing facility of the Company's subsidiary, see "--
Liquidity."
The Company does not have a patent for RETICULOSE, although
applications for United States patents have been filed on behalf of the Company
and others are contemplated to be filed. There can be no assurance that other
companies, having greater economic resources, will not be successful in
developing a similar product using processes similar to those of the Company.
There can be no assurance that the Company will obtain such a patent or, if
obtained, that it will be enforceable. The Company has retained patent counsel
for the purpose of pursuing additional patent protection for RETICULOSE.
However, there is no certainty that patents will be granted, or if granted, that
the patents will be sustained if judicially attacked, and, if declared valid,
that the patents, in fact, will operate to protect the Company from others
copying RETICULOSE. The Company has relied upon laws protecting proprietary
information and trade secrets and upon confidentiality agreements to protect its
rights to RETICULOSE and the processes for its manufacture, but there can be no
assurance that such efforts and procedures will continue to be successful and
protect the Company from any competition in the future.
-20-
<PAGE> 23
PART II. OTHER INFORMATION
Item 2. Changes in Securities
On April 22, 1997, June 6, 1997 and July 3, 1997, pursuant to notice
by RBB to the Company under the Debenture, respectively, $330,000 of principal
amount of the Debenture was converted into 1,648,352 shares of Common Stock;
$134,000 of principal amount of the Debenture was converted into 894,526 shares
of Common Stock; and $270,000 of principal amount of the Debenture was converted
into 2,323,580 shares of the Company's Common Stock. All shares were issued in
reliance upon Section 4(2) and/or 3(b) of the Securities Act of 1933, as
amended.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
(1) Report dated June 17, 1997, including Item 6, regarding:
the resignation from the Company's Board of Directors of
Robert C. Kolodny, M.D. and William Cedale.
No financial statements were filed.
-21-
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: August 13, 1997 By: /s/ William Bregman
-------------------------------
William Bregman,
Duly Authorized Officer
and Principal Financial and
Accounting Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SECOND QUARTER 10-QSB OF ADVANCED VIRAL RESEARCH CORP. FOR THE THREE MONTHS
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,745,443
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,798,818
<PP&E> 286,161<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,272,604
<CURRENT-LIABILITIES> 120,921
<BONDS> 0
0
0
<COMMON> 2,729
<OTHER-SE> 1,648,954
<TOTAL-LIABILITY-AND-EQUITY> 2,272,604
<SALES> 1,975
<TOTAL-REVENUES> 22,344
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 606,358
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (584,014)
<INCOME-TAX> 0
<INCOME-CONTINUING> (584,014)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (584,014)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>PP&E VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
