U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
(Exact name of Registrant as specified in its charter)
Delaware 59-2646820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(Address of principal executive offices)
(954) 458-7636
(Registrant's telephone number, including area code)
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.00001
per share as of November 10, 1998 was 296,422,907.
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION (UNAUDITED) Page
- ------- --------------------------------- ----
Item 1. Financial Statements
Consolidated Condensed Balance Sheets,
September 30, 1998 and December 31, 1997...............................................1
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1998 and 1997 and
from Inception (February 20, 1984) to September 30, 1998 ..............................2
Consolidated Condensed Statement of Stockholders' Equity
from Inception (February 20, 1984) to September 30, 1998 ..............................3
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 and from
Inception (February 20, 1984) to September 30, 1998 ..................................10
Notes to Consolidated Condensed Financial Statements .....................................11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................22
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................25
Item 2. Changes in Securities and Use of Proceeds.....................................................25
Item 3. Defaults Upon Senior Securities...............................................................26
Item 4. Submission of Matters to Vote of Security Holders.............................................26
Item 5. Other Information.............................................................................26
Item 6. Exhibits And Reports on Form 8-K............................................................. 26
SIGNATURES .................................................................................................27
</TABLE>
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
September 30, Statements
1998 December 31,
(Unaudited) 1997
----------- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 485,041 $ 236,059
Investments 188,000 2,984,902
Inventory 19,729 19,729
Other current assets 23,837 20,240
----------- -----------
Total current assets 716,607 3,260,930
Property and Equipment 734,477 485,661
Other Assets 328,683 443,251
----------- -----------
Total assets $ 1,779,767 $ 4,189,842
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 266,447 $ 375,606
----------- -----------
Total current liabilities 266,447 375,606
----------- -----------
Convertible Debenture, Net - 2,384,793
----------- -----------
Commitments and Contingencies - -
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value authorized,
296,422,907 and 277,962,574 shares issued and outstanding 2,964 2,779
Additional paid-in capital 13,651,982 10,512,767
Subscription receivable - (19,000)
Deficit accumulated during the development stage (12,112,090) (8,993,266)
Deferred compensation cost (29,536) (73,837)
----------- -----------
Total stockholders' equity 1,513,320 1,429,443
----------- -----------
Total liabilities and stockholders' equity $ 1,779,767 $ 4,189,842
=========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Three Months Ended Nine Months Ended 1984) to
September 30, September 30, September 30,
------------- ------------- -------------
1998 1997 1998 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 656 $ - $ 656 $ 2,278 $ 194,975
Interest 22,310 28,900 79,533 63,879 536,787
Other income - - 100 - 119,900
------------ ----------- ------------ ------------ ------------
22,966 28,900 80,289 66,157 851,662
------------ ----------- ------------ ------------ ------------
Costs and Expenses:
Research and development 230,326 166,108 611,090 360,781 2,535,101
General and administrative 633,273 547,736 1,711,532 1,299,897 7,606,442
Depreciation and amortization 28,437 62,605 570,260 124,116 880,102
Interest - 63,400 306,231 478,434 1,942,107
------------ ----------- ------------ ------------ ------------
892,036 839,849 3,199,113 2,263,228 12,963,752
------------ ----------- ------------ ------------ ------------
Net Loss $ (869,070) $ (810,949) $ (3,118,824) $ (2,197,071) $(12,112,090)
============ =========== ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (.00) $ (.00) $ (.00) $ (.00) $ (.00)
============ =========== ============ ============ ============
Weighted Average Number of
Common Shares Outstanding 290,194,958 271,801,398 290,194,958 271,801,398
============ =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <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 .01 40,000,000 400 399,600 -
Issuance of underwriter's warrants - - 100 -
Expenses of public offering - - (117,923) -
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 -
Net loss, year ended December 31, 1986 - - - (159,674)
----------- -------- -------- -----------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- -------- -------- -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C>
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 .05 6,729,850 67 336,475 -
offer on "B" warrants
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 financial statements.
4
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------ Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <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 .03 3,500,000 35 104,965 -
Issuance of common stock, for testing .035 5,000,000 50 174,950 -
Net loss, year ended December 31, 1993 - - - (563,309)
------------- --------- ----------- ------------
Balance, December 31, 1993 $ 236,276,991 $ 2,363 $ 3,416,070 $ (2,854,076)
------------- --------- ----------- ------------
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -
Issuance of common stock, for consulting services $ .05 4,750,000 47 237,453 -
Issuance of common stock, exercise of options .08 400,000 4 31,996 -
Issuance of common stock, exercise of options .10 190,000 2 18,998 -
Net loss, year ended December 31, 1994 - - - -
------------ ------- ------------ ----
Balance, December 31, 1994 241,616,991 2,416 3,704,517 -
-
Issuance of common stock, exercise of options .05 3,333,333 33 166,633 -
Issuance of common stock, exercise of options .08 2,092,850 21 167,407 -
Issuance of common stock, exercise of options .10 2,688,600 27 268,833 -
Issuance of common stock, for consulting services .11 1,150,000 12 126,488 -
Issuance of common stock, for consulting services .14 300,000 3 41,997 -
Net loss, year ended December 31, 1995 - - - -
-- -- -- --
Balance, December 31, 1995 251,181,774 2,512 4,475,875 -
------------ ------ ---------- --
(RESTUBBED TABLE)
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
----- ----
Balance, December 31, 1993 $ (2,854,076) $ -
Issuance of common stock, for consulting services - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Net loss, year ended December 31, 1994 (440,837) -
------------- ----
Balance, December 31, 1994 (3,294,913) -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, for consulting services - -
Issuance of common stock, for consulting services - -
Net loss, year ended December 31, 1995 (401,884) -
------------- ----
Balance, December 31, 1995 (3,696,797) -
------------- ----
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -
Issuance of common stock, exercise of options .05 3,333,334 33 166,634 -
Issuance of common stock, exercise of options .08 1,158,850 12 92,696 -
Issuance of common stock, exercise of options .10 7,163,600 72 716,288 -
Issuance of common stock, exercise of options .11 170,000 2 18,698 -
Issuance of common stock, exercise of options .12 1,300,000 13 155,987 -
Issuance of common stock, exercise of options .18 1,400,000 14 251,986 -
Issuance of common stock, exercise of options .19 500,000 5 94,995 -
Issuance of common stock, exercise of options .20 473,500 5 94,695 -
Issuance of common stock, for services rendered .50 350,000 3 174,997 -
Options granted - - 760,500 -
Subscription receivable - - - (19,000)
Net loss, year ended December 31, 1996 - - - -
------------ ------ ---------- --------
Balance, December 31, 1996 267,031,058 2,671 7,003,351 (19,000)
------------ ------ ---------- --------
(RESTUBBED TABLE)
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
----- ----
Balance, December 31, 1995 $ (3,696,797) $ -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, for services rendered - -
Options granted - (473,159)
Subscription receivable - -
Net loss, year ended December 31, 1996 (1,154,740) -
------------- ---------
Balance, December 31, 1996 (4,851,537) (473,159)
------------- ---------
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000)
Issuance of common stock, exercise of options .08 3,333,333 33 247,633 -
Issuance of common stock, conversion of debt .20 1,648,352 16 329,984 -
Issuance of common stock, conversion of debt .15 894,526 9 133,991 -
Issuance of common stock, conversion of debt .12 2,323,580 23 269,977 -
Issuance of common stock, conversion of debt .15 1,809,524 18 265,982 -
Issuance of common stock, conversion of debt .16 772,201 8 119,992 -
Issuance of common stock, for services rendered .41 50,000 - 20,500 -
Issuance of common stock, for services rendered .24 100,000 1 23,999 -
Beneficial conversion feature, February debenture - - 413,793 -
Beneficial conversion feature, October debenture - - 1,350,000 -
Warrant costs, February debenture - - 37,242 -
Warrant costs, October debenture - - 291,555 -
Amortization of deferred compensation cost - - - -
Imputed interest on convertible debenture - - 4,768 -
Net loss, year ended December 31, 1997 - - - -
----------- ------ ----------- ---------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000)
----------- ------ ----------- ---------
(RESTUBBED TABLE)
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
----- ----
Balance, December 31, 1996 $ (4,851,537) $ (473,159)
Issuance of common stock, exercise of options - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Issuance of common stock, for services rendered - -
Beneficial conversion feature, February debenture - -
Beneficial conversion feature, October debenture - -
Warrant costs, February debenture - -
Warrant costs, October debenture - -
Amortization of deferred compensation cost - 399,322
Imputed interest on convertible debenture - -
Net loss, year ended December 31, 1997 (4,141,729) -
----------- -----------
Balance, December 31, 1997 (8,993,266) (73,837)
----------- -----------
</TABLE>
See notes to consolidated financial statements.
8
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Common Stock
Amount ------------ Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000)
Issuance of common stock, exercise of options .12 295,000 3 35,397 -
Issuance of common stock, exercise of options .14 500,000 5 69,995 -
Issuance of common stock, exercise of options .16 450,000 5 71,995 -
Issuance of common stock, exercise of options .20 10,000 - 2,000 -
Issuance of common stock, exercise of options .26 300,000 3 77,997 -
Issuance of common stock, conversion of debt .13 1,017,011 10 132,990 -
Issuance of common stock, conversion of debt .14 2,512,887 25 341,225 -
Issuance of common stock, conversion of debt .15 5,114,218 51 749,949 -
Issuance of common stock, conversion of debt .18 1,491,485 15 274,985 -
Issuance of common stock, conversion of debt .19 3,299,979 33 619,967 -
Issuance of common stock, conversion of debt .22 1,498,884 15 335,735 -
Issuance of common stock, conversion of debt .23 1,870,869 19 424,981 -
Issuance of common stock, for services rendered .21 100,000 1 20,999 -
Amortization of deferred compensation cost - - - -
Write off of subscription receivable - - (19,000) 19,000
Net loss, nine months ended September 30, 1998 - - - -
------------ ------- ------------ ---------
Balance, September 30, 1998 296,422,907 $ 2,964 $ 13,651,982 $ -
============ ======= ============ =========
(RESTUBBED TABLE)
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
----- ----
Balance, December 31, 1997 $ (8,993,266) $ (73,837)
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, exercise of options - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, conversion of debt - -
Issuance of common stock, for services rendered - -
Amortization of deferred compensation cost - 44,301
Write off of subscription receivable - -
Net loss, nine months ended September 30, 1998 (3,118,824) -
------------- ----------
Balance, September 30, 1998 $ (12,112,090) $ (29,536)
============= ==========
</TABLE>
See notes to consolidated financial statements.
9
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
Nine Months Ended (February 20,
September 30, 1984) to
September 30,
1998 1997 1998
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(3,118,824) $(2,197,071) $(12,112,090)
----------- ----------- ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 570,260 161,358 887,400
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 210,951 413,793 1,763,793
Amortization of deferred compensation cost 44,301 384,555 730,964
Loss on sale of property and equipment - 1,425 1,425
Issuance of common stock for services 21,000 44,500 1,437,500
Imputed interest on convertible debenture - 4,768 4,768
Changes in Operating Assets and Liabilities:
Increase in other current assets (3,597) (11,741) (23,837)
Increase in inventory - - (19,729)
Increase in other assets (106,658) (225,151) (636,328)
Increase (decrease) in accounts
payable and accrued liabilities (109,159) 20,860 272,647
Decrease in customers deposits - - (7,800)
----------- ----------- ------------
Total adjustments 627,098 794,367 4,410,803
----------- ----------- ------------
Net cash used by operating activities (2,491,726) (1,402,704) (7,701,287)
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchase of investments (94,000) (857,000) (5,471,932)
Proceeds from sale of investments 2,890,902 1,280,841 5,283,932
Expenditures for property and equipment (313,594) (118,884) (1,005,460)
Proceeds from sale of property and equipment - 1,200 1,200
----------- ----------- ------------
Net cash provided (used) by investing activities 2,483,308 306,157 (1,192,260)
----------- ----------- ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt - 1,000,000 4,000,000
Proceeds from sale of securities, net of issuance costs 257,400 266,666 5,378,588
----------- ----------- ------------
Net cash provided by financing activities 257,400 1,266,666 9,378,588
----------- ----------- ------------
Net Increase in Cash and Cash Equivalents 248,982 170,119 485,041
Cash and Cash Equivalents, Beginning 236,059 61,396 -
----------- ----------- ------------
Cash and Cash Equivalents, Ending $ 485,041 $ 231,515 $ 485,041
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
10
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at September 30, 1998 have been prepared in accordance
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of September 30, 1998
and results of operations for the three months and the nine months
ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997. 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, 1997.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at September 30, 1998 have been prepared in conformity
with generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company, which
is still in its development stage, 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 in the United States or another industrially
developed country, the Company may be dependent upon the continued
sale of its securities and debt financing for funds to meet its
cash requirements. Management intends to continue to sell the
Company's securities in an attempt to mitigate the effects of its
cash position; however, no assurance can be given that equity or
debt financing, if and when required, will be available. In the
event that such equity or debt financing is not available, in order
to continue operations, management anticipates that they will have
to defer their salaries. During 1997, the Company obtained debt
financing and may seek additional debt financing if the need
arises. Additional debt financing is expected during November 1998.
No assurance can be given that the Company will be able to sustain
its operations until FDA approval is granted or that any approval
will ever be granted. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The
consolidated condensed financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of RETICULOSE. The Company has not as yet
received any notice of claim from such parties.
11
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of RETICULOSE. Although the Company is
unaware of any such claims or threatened claims since RETICULOSE
was initially marketed in the 1940's, one study noted adverse
reactions from highly concentrated doses in guinea pigs. In the
event any claims for substantial amounts were successful, they
could have a material adverse effect on the Company's financial
condition and on the marketability of RETICULOSE. As of the date
hereof, the Company does not have product liability insurance for
RETICULOSE. There can be no assurance that the Company will be able
to secure such insurance in adequate amounts, at reasonable
premiums if it determined to do so. Should the Company be unable to
secure such product liability insurance, the risk of loss to the
Company in the event of claims would be greatly increased and could
materially adversely affect the Company.
Lack of Patent Protection
The Company does not presently have a patent for RETICULOSE but the
Company has two patents for the use of RETICULOSE as a treatment.
The Company currently has 32 patent applications pending with the
U.S. Patent Office. The Company can give no assurance that other
companies, having greater economic resources, will not be
successful in developing a similar product. There can be no
assurance that such patents, if obtained, will be enforceable.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata
agreed to perform a demonstration in the Domincan Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using RETICULOSE incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the
issuance to Plata of 5,000,000 shares of common stock and options
to purchase an additional 5,000,000 shares at $.08 per share
through July 9, 1994 (the "Plata Options") and 5,000,000 shares at
$.10 per share through July 9, 1994 (the "Additional Plata
Options"). Pursuant to several amendments, the Plata Options and
the Additional Plata Options are exercisable through April 30, 1999
at an exercise price of $.14 and $.16, respectively. As of
September 30, 1998, there are outstanding Plata Options to acquire
683,300 shares at $.14 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.16 per share.
Through September 30, 1998, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
12
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement
In April 1996, the Company entered into an agreement (the
"Argentine Agreement") with DCT SRL, an Argentine corporation
unaffiliated with the Company ("DCT") pursuant to which DCT was to
cause a clinical trial to be conducted in two separate hospitals
located in Buenos Aires, Argentina (the "Clinical Trials").
Pursuant to the Argentine Agreement, the Clinical Trials were to be
conducted pursuant to a protocol developed by Juan Carlos Flichman,
M.D. and the purpose of the Clinical Trials was to assess the
efficacy of the Company's drug RETICULOSE on the Human Papilloma
Virus (HPV). The protocol calls for, among other things, a study to
be performed with clinical and laboratory follow-up on 12 male and
female human patients between the ages of 18 and 50. The Clinical
Trials did not include a placebo control group or references to any
other antiviral drug.
Pursuant to the Argentine Agreement, the Company delivered $34,000
to DCT to cover out-of-pocket expenses associated with the Clinical
Trials. The Argentine Agreement further provides that at the
conclusion of the Clinical Trials, DCT shall cause Dr. Flichman to
prepare and deliver a written report to the Company regarding the
methodology and results of the Clinical Trials (the "Written
Report"). In September 1996, the Written Report was delivered by
Dr. Flichman to the Company. Upon delivery of the Written Report to
the Company, the Company delivered to the principals of DCT options
to acquire 2,000,000 shares of the Company's common stock for a
period of one year from the date of the delivery of the Written
Report, at a purchase price of $.20 per share. Pursuant to several
amendments, the DCT options are exercisable through April 30, 1999
at an exercise price of $.21 per share. As of September 30, 1998,
464,000 shares of common stock were issued pursuant to the exercise
of these options for an aggregate exercise price of approximately
$93,000.
Additionally, in April 1998, 10,000 shares were issued in
connection with the exercise of options at $.20 per share.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
RETICULOSE in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of RETICULOSE for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study.
13
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In connection with the HIV-HPV Agreement, the Company has advanced
approximately $665,000 which is accounted for as a research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
The HIV-HPV Agreement provides that (i) in the event the 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.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
RETICULOSE for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $132,500, respectively such expenses are
accounted for as research and development expenses. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with RETICULOSE being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts respectively
expended in connection with the Studies.
In February 1995, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $412,960 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and RETICULOSE with those taking
a three drug cocktail and a placebo. As of September 30, 1998, the
Company has advanced approximately $50,000 for such study which has
been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $94,950 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
RETICULOSE for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$79,200 which has been accounted for as research and development
expenses.
14
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of September 30, 1998, the Company has advanced
approximately $50,000 for such study which has been accounted for
as research and development expense.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
RETICULOSE in 43 human patients diagnosed with HIV (AIDS) is being
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of September 30, 1998, the Company has
expended approximately $365,000 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 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").
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of RETICULOSE in inhibiting the mutation of
the AIDS virus. As of September 30, 1998, the Company has advanced
approximately $5,000 for such study which has been accounted for as
research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which RETICULOSE affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one year term
through March 3, 1999 to investigate the anti-tumor activity of
RETICULOSE using kidney tumor model systems. In addition, NCI will
study the effects of RETICULOSE on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
As of September 30, 1998, the Company advanced approximately
$170,000 for a topical safety study to be conducted in the United
States for the topical use of RETICULOSE for the treatment of HPV
and herpes.
15
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
Hirschman Agreement
In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School
of Medicine, New York, New York and Director of Mt. Sinai's
Division of Infectious Diseases, whereby Dr. Hirschman was to
provide consulting services to the Company through May 1997. The
consulting services included the development and location of
pharmacological and biotechnology companies and assisting the
Company in seeking joint ventures with and financing of companies
in such industries.
In connection with the consulting agreement, the Company issued to
Dr. Hirschman 1,000,000 shares of the Company's common stock and
the option to acquire 5,000,000 shares of the Company's common
stock for a period of three years as per the vesting schedule as
referred to in the agreement, at a purchase price of $.18 per
share. In addition and in connection with entering into the
consulting agreement with Dr. Hirschman, the Company issued to a
person unaffiliated with the Company, 100,000 shares of the
Company's common stock, and an option to acquire for a period of
one year, from June 1, 1995, an additional 500,000 shares at a
purchase price of $.18 per share. As of September 30, 1998, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 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, 1997 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, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of September 30, 1998, 500,000 shares of common stock
were issued pursuant to the exercise of stock options by Richard
Rubin. Mr. Rubin has, from time to time in the past, advised the
Company on matters unrelated to his consultation with Dr.
Hirschman.
16
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Hirschman Agreement (Continued)
In November 1997, Dr. Hirschman assigned to Henry Kamioner, a
consultant to Dr. Hirschman, options to acquire 1,500,000 shares
(500,000 at $19,500,000 at $.27 and 500,000 at $.36).
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
do not receive on or prior to December 31, 1997, funding of
$3,000,000 from sources other than traditional institutional/bank
debt financing or proceeds from the purchase by Dr. Hirschman of
the Company's securities, including, without limitation, the
exercise of Dr. Hirschman of outstanding stock options. Pursuant to
the Employment Agreement, Dr. Hirschman is entitled to receive an
annual base salary of $325,000, use of an automobile, major
medical, term life, disability and dental insurance benefits for
the term of his employment. The Employment Agreement further
provides that Dr. Hirschman shall be nominated by the Company to
serve as a member of the Company's Board of Directors and that
Bernard Friedland and William Bregman will vote in favor of Dr.
Hirschman as a director of the Company, for the duration of Dr.
Hirschman's employment, and since October 1996, Dr. Hirschman has
served as a member of the Company's Board of Directors.
On February 18, 1998, the Board of Directors authorized a $100,000
bonus to Dr. Hirschman and granted options to acquire 23,000,000
shares of stock at $0.27 per option share provided that the Company
is granted FDA approval for testing in the United States.
In July 1998, the Company and Dr. Hirschman entered into an amended
and restated employment agreement which supersedes in its entirety
the original employment agreement of October 1996. Such amendment
and restatement extends the term of the employment agreement to
December 31, 2000. Additionally, the February 1998 Board of
Directors action regarding the $100,000 bonus and the granting of
23,000,000 options (contingent upon the occurrence of certain
events) is included in this employment agreement.
17
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements
In September 1992, the Company entered into a one year consulting
agreement with Leonard Cohen (the "September 1992 Cohen
Agreement"). The September 1992 Cohen Agreement required that Mr.
Cohen provide certain consulting services to the Company in
exchange for the Company's issuing to Mr. Cohen 1,000,000 shares of
common stock (the "September 1992 Cohen Shares"), 500,000 of which
were issuable upon execution of the September 1992 Cohen Agreement
and the remaining 500,000 shares of which were issuable upon Mr.
Cohen completing 50 hours of consulting service to the Company. The
Company issued the first 500,000 shares to Mr. Cohen in October
1992 and the remaining 500,000 shares to Mr. Cohen in February
1993. Further pursuant to the September 1992 Cohen Agreement, the
Company granted to Mr. Cohen the option to acquire, at any time and
from time to time through September 10, 1993 (which date has been
extended through April 30, 1999), the option to acquire 3,000,000
shares of common stock of the Company at an exercise price of $.09
per share (which exercise price has been increased to $.15 per
share) (the "September 1992 Cohen Options"). As of September 30,
1998, 1,300,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). 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 September 30, 1998, 2,855,000 shares were
issued pursuant to the exercise of the Bauer and Rizzuto Options
for an aggregate exercise price of $285,500. Mr. Rizzuto sold all
of his shares and all shares underlying his options. Pursuant to
several amendments, the remaining Bauer options are exercisable
through April 30, 1999 at an option price of $.13. 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.
18
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements (Continued)
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.
Chinnici Agreement
In July 1998, the Company entered into a consulting agreement with
Dr. Angelo A. Chinnici for a term extending to December 31, 2000.
Such agreement calls for Dr. Chinnici to provide assistance in
connection with research, development, production, marketing and
sale of RETICULOSE. Additionally, Dr. Chinnici will testify before
the FDA in connection with an application for approval of
RETICULOSE and will provide detailed clinical reports regarding
patients observed by him. Dr. Chinnici will receive options to
purchase 300,000 shares at an exercise price of $.30 per share. The
options will be exercisable in equal installments on January 1,
1999 and 2000 and December 15, 2000.
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with four
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute RETICULOSE in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause RETICULOSE to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of RETICULOSE
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. No sales have been made by the
Company under the distribution agreements other than for testing
purposes.
Additionally, pursuant to one of the distributions agreements, the
Company granted the distributor the right to acquire 3,000,000 shares
of the Company's common stock at a purchase price of $.25 (which has
been increased to $.26) upon the completion of certain tests and the
publication of a paper with respect to such tests. During May 1998,
300,000 shares of common stock were issued pursuant to exercise of
these options for an aggregate exercise price of $78,000.
19
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively,
principal amount of its ten-year 7% Convertible Debentures (the
"February Debenture" and the "October Debenture", collectively, the
"Debentures") due February 28, 2007 and August 30, 2007, respectively,
to RBB Bank Aktiengesellschaft ("RBB") in offshore transactions
pursuant to Regulation S under the Securities Act of 1933, as amended.
Accrued interest under the Debentures was payable semi-annually,
computed at the rate of 7% per annum on the unpaid principal balance
from the date of issuance until the date of interest payment. The
Debentures were convertible, at the option of the holder, into shares
of Common Stock pursuant to specified formulas. On April 22, 1997, June
6, 1997, July 3, 1997 and August 20, 1997, pursuant to notice by the
holder, RBB, to the Company under the February Debenture, $330,000,
$134,000, $270,000 and $266,000, respectively, of the principal amount
of the February Debenture was converted into 1,648,352, 894,526,
2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
August 20, 1997, the February Debenture was fully converted. On
December 9, 1997, January 7, 1998, January 14, 1998, February 19, 1998,
February 23, 1998, March 31, 1998, May 4, 1998 and May 5, 1998,
pursuant to notice by the holder, RBB, to the Company, $120,000,
$133,000, $341,250, $750,000, $335,750, $425,000, $275,000 and
$620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869,
1,491,485 and 3,299,979 Common Stock, respectively. As of May 5, 1998,
the October Debenture was fully converted.
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase
common stock, each such February Warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February Warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black Sholes Pricing Model. This amount has been
reflected in the accompanying financial statements as interest expense
related to the convertible February Debenture.
Based on the terms for conversion associated with the February
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $413,793. This amount has been fully amortized to
interest expense with a corresponding credit to additional paid-in
capital.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October Warrants") to purchase
Common Stock, each such October Warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
Warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October Warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black Sholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized over the expected
term of the notes which at December 31, 1997 was 120 months. In May
1998, the remaining unamortized discount of $276,957 was amortized upon
full conversion of the October Debenture.
20
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture liability with a corresponding credit to
additional paid-in capital and has been amortized to interest expense
over the period from October 8, 1997 (date of debenture) to February
24, 1998 (date the debenture is fully convertible). The interest
expense relative to this item was $1,139,049 for 1997 and $210,951
during the quarter ended March 31,1998.
21
<PAGE>
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, the related Notes to Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997 and the Consolidated Condensed
Financial Statements and the related Notes to Consolidated Condensed Financial
Statements included in Item 1 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
For the three month periods ended September 30, 1998 and September 30,
1997, the Company incurred losses of $869,070 ($0.00 per share) and $810,949
($0.00 per share). For the nine month periods ended September 30, 1998 and
September 30, 1997, the Company incurred losses of $3,118,824 ($0.01 per share)
and $2,197,071 ($0.01 per share). The Company's increased losses during 1998 are
principally due to increased general and administrative expense ($1,711,532 for
the nine months ended September 30, 1998 vs. $1,299,897 for the nine months
ended September 30, 1997) primarily resulting from the employment of additional
research professionals and rent and operating costs associated with the Yonkers,
New York office and laboratory; amortization of loan costs related to the
February and October Debentures (discussed below) included in depreciation and
amortization ($221,228 for the nine months ended September 30, 1998 vs. $106,285
for the nine months ended September 30, 1997); and increased research and
development expense ($611,090 for the nine months ended September 30, 1998 vs.
$360,781 for the nine months ended September 30, 1997). Lack of sales revenues
also contributed to the Company's losses.
There were sales of $656 and $0, respectively, during the three month
periods ended September 30, 1998 and September 30, 1997, and $656 and $2,278,
respectively, during the nine month periods ended September 30, 1998 and
September 30, 1997. All sales during these periods resulted from distributors
purchasing RETICULOSE for testing purposes. Interest income was $22,310 and
$28,900 for the three month periods ended September 30, 1998 and September 30,
1997, and $79,533 and $63,879 for the nine month periods ended September 30,
1998 and September 30, 1997.
Although there can be no assurance of the amount of sales, 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 September 30, 1998, and December 31, 1997, the Company had
current liquid assets (cash and cash equivalents and investments) of $673,041
and $3,220,961, respectively. As of September 30, 1998, and December 31, 1997,
the Company had total assets of $1,779,767 and $4,189,842, respectively. The
decrease in liquid assets and total assets was primarily attributable
22
<PAGE>
to the increased expenditures for research and development and increased general
and administrative expenses (including rent and payroll). See "Capital
Resources."
During the nine months ended September 30, 1998, the Company expended
approximately $244,000 for leasehold improvements and furniture and equipment at
the Company's Yonkers, New York office.
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.
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.
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.
In February 1997 and October 1997, in order to finance research and
development, the Company sold $1,000,000 and $3,000,000, respectively, principal
amount of its ten-year 7% Convertible Debentures (the "February Debenture" and
the "October Debenture," collectively, the "Debentures") due February 28, 2007
and August 30, 2007, respectively, to RBB Bank Aktiengesellschaft ("RBB") in
offshore transactions pursuant to Regulation S under the Securities Act of 1933,
as amended. Accrued interest under the Debentures was payable semiannually,
computed at the rate of 7% per annum on the unpaid principal balance from the
date of issuance until the date of interest payment. The Debentures were
convertible, at the option of the holder, into shares of Common Stock pursuant
to specified formulas. On April 22, 1997, June 6, 1997, July 3, 1997 and August
20, 1997, pursuant to notice by the holder, RBB, to the Company under the
23
<PAGE>
February Debenture, $330,000, $134,000, $270,000 and $266,000, respectively, of
the principal amount of the February Debenture was converted into 1,648,352,
894,526, 2,323,580 and 1,809,524 shares of the Common Stock, respectively. As of
August 20, 1997 the February Debenture was fully converted. On December 9, 1997,
January 7, 1998, January 14, 1998, February 19, 1998, February 23, 1998, March
31, 1998, May 4, 1998 and May 5, 1998, pursuant to notice by the holder, RBB, to
the Company, $120,000, $133,000, $341,250, $750,000, $335,750, $425,000,
$275,000 and $620,000, respectively, of the October Debenture was converted into
772,201, 1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869, 1,491,485, and
3,299,979 shares of Common Stock, respectively. As of May 5, 1998, the October
Debenture was fully converted.
In connection with the issuance of the Debentures, the Company issued
to RBB six warrants (the "Warrants") to purchase Common Stock, three of such
Warrants entitling the holder to purchase, from the February 21, 1997 through
February 28, 2007, 178,378 shares of the Common Stock, and three of such
Warrants entitling the holder to purchase, from August 30 through August 30,
2007, 600,000 shares of the Common Stock. The exercise prices of the Warrants
are $0.288, $0.576, $0.864, $0.20, $0.23 and $0.27 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.
Based on the terms for conversion associated with the February
Debenture and the October Debenture, there were intrinsic values associated with
the beneficial conversion feature of $413,793 and $1,350,000, respectively.
These amounts have been fully amortized to interest expense with a corresponding
credit to additional paid-in capital.
In February 1998, the Company entered into that certain Concurrent
Agreement with DCT S.R.L., an Argentine corporation ("DCT"), whereby the Company
agreed to provide DCT or its assignees up to $412,960 to cover the costs of a
study on 65 patients to compare the results of treatment of AIDS patients using
a three-drug cocktail and RETICULOSE versus AIDS patients taking a three-drug
cocktail and a placebo. As of September 30, 1998, the Company has advanced
approximately $50,000 for this study, which has been accounted for as research
and development expense.
In July 1998, the Company authorized the expenditure of up to $135,000
to study the effects of RETICULOSE in inhibiting the mutation of the AIDS virus
on patients in Argentina and Barbados. As of September 30, 1998, the Company had
advanced approximately $55,000 for such studies, which have been accounted for
as research and development expense.
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, the availability of
which funds there can be no assurance.
The Company is currently expending approximately $300,000 per month,
which expenses include salaries, rent, professional fees, license fees and
taxes, research and development, and travel, principally between the Company's
two offices and its Bahamian facility, and anticipates that it can continue
operations for at least two 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
$7,300,000. 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
24
<PAGE>
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 $300,000 per month. The Company is currently seeking debt
financing, licensing agreements, joint ventures and other sources of financing.
There can be no assurance that such additional sources of financing will be
found. 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.
The Company does not have a patent for RETICULOSE, although the Company
has two patents for the use of RETICULOSE as a treatment. In addition, the
Company has filed 32 patent applications with the United States Patent Office.
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.
YEAR 2000 COMPLIANCE
The Securities and Exchange Commission has issued Staff Legal Bulletin
No. 5 (CF/IM) stating that public operating companies should consider whether
they will suffer any anticipated costs, problems or uncertainties as a result of
the "Year 2000" issue, which affects existing computer programs that use only
two digits to identify a year in the date field. The Company anticipates that
its business operations will electronically interact with third parties very
minimally, and the issues raised by Staff Legal Bulletin No. 5 are not
applicable in any material way to its contemplated business or operations.
Additionally, the Company intends that any computer systems that it will
purchase or lease will have already addressed the "Year 2000" issue.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended September 30, 1998, 200,000 options
granted to Plata Partners Limited Partnership (the "Plata Options") were
exercised at $.16 per share for a total of $32,000. In addition, in August 1998,
100,000 shares of Common Stock were issued to Malcolm
25
<PAGE>
Santer, the Company's plant manager in Freeport. Finally, options to acquire
300,000 shares of Common Stock were granted to Angelo Chinnici at an exercise
price of $.30 per share, which options are exercisable in equal installments on
January 1, 1999, 2000 and December 15, 2000. The issuance of these shares was
made in reliance upon Section 4(2) of the Securities Act of 1933 which provides
for exemption for transactions not involving a public offering. With regard to
the Company's reliance upon this exemption from registration, certain inquiries
were made by the Company that such issuances qualified for such exemption.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the three months ended September 30, 1998, no matters were
submitted to a vote of security holders of the Company, through the solicitation
of proxies or otherwise.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
------ -----------
27.1 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
26
<PAGE>
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: November 12, 1998 By: /s/ William Bregman
------------------------------------------
William Bregman,
duly authorized officer and principal
financial and accounting officer
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF ADVANCED
VIRAL RESEARCH CORP. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 485,041
<SECURITIES> 188,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 716,607
<PP&E> 734,477
<DEPRECIATION> 267,466
<TOTAL-ASSETS> 1,779,767
<CURRENT-LIABILITIES> 266,447
<BONDS> 0
0
0
<COMMON> 2,964
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,779,767
<SALES> 0
<TOTAL-REVENUES> 80,289
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,199,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,118,824)
<INCOME-TAX> (3,118,824)
<INCOME-CONTINUING> (3,118,824)
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