<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 September 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
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 September 30, 1997 was 277,190,373.
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 SEPTEMBER 30, 1997
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C>
FINANCIAL INFORMATION (UNAUDITED).......................................................................... 1
Consolidated Condensed Balance Sheets, September 30, 1997 and December 31, 1996 ........................... 1
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1996 and
from Inception (February 20, 1984) to September 30, 1997 ................................................ 2
Consolidated Condensed Statements of Stockholders' Equity
from Inception (February 20, 1984) to September 30, 1997 ................................................ 3
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 and from
Inception (February 20, 1984) to September 30, 1997 ..................................................... 7
Notes to Consolidated Condensed Financial Statements ...................................................... 8
Management's Discussion and Analysis or Plan of Operation ................................................. 17
PART II
CHANGES IN SECURITIES, EXHIBITS AND REPORTS ON FORM 8-K.................................................... 22
SIGNATURES ................................................................................................ 24
</TABLE>
<PAGE> 3
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1997
<PAGE> 4
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 231,515 $ 61,396
Investments 955,000 1,378,841
Inventory 19,729 19,729
Other current assets 27,822 16,081
----------- -----------
Total current assets 1,234,066 1,476,047
Property and Equipment 305,637 207,209
Other Assets 133,410 33,544
----------- -----------
Total assets $ 1,673,113 $ 1,716,800
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 67,534 $ 46,674
Customer deposits 7,800 7,800
----------- -----------
Total current liabilities 75,334 54,474
----------- -----------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of
$.00001 par value authorized; 277,190,373 and
267,031,058 shares issued and outstanding 2,771 2,671
Additional paid-in capital 8,751,220 7,003,351
Subscription receivable (19,000) (19,000)
Deficit accumulated in the development stage (7,048,608) (4,851,537)
Deferred compensation costs (88,604) (473,159)
----------- -----------
Total stockholders' equity 1,597,779 1,662,326
----------- -----------
Total liabilities and stockholders' equity $ 1,673,113 $ 1,716,800
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
-1-
<PAGE> 5
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Three Months Ended Nine Months Ended (February 20,
September 30, September 30, 1984) to
------------------- --------------------- September 30,
1997 1996 1997 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ -- $ 674 $ 2,278 $ 15,943 $ 194,319
Interest 28,900 8,966 63,879 27,915 409,288
Other income -- 32,000 -- 32,000 112,000
------------- ------------- ------------- ------------- -------------
28,900 41,640 66,157 75,858 715,607
------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 166,108 104,502 360,781 178,502 1,467,189
General and administrative 547,736 272,203 1,299,897 461,232 5,513,371
Depreciation and amortization 62,605 4,268 124,116 12,803 303,011
Interest 63,400 -- 478,434 -- 480,644
------------- ------------- ------------- ------------- -------------
839,849 380,973 2,263,228 652,537 7,764,215
------------- ------------- ------------- ------------- -------------
Net Loss $ (810,949) $ (339,333) $ (2,197,071) $ (576,679) $ (7,048,608)
============= ============= ============= ============= =============
Net Loss Per Share of
Common Stock $ (.00) $ (.00) $ (.00) $ (.00) $ (.00)
============= ============= ============= ============= =============
Weighted Average Number of
Common Shares Outstanding 271,801,398 259,725,350 271,801,398 259,725,350
============= ============= ============= =============
</TABLE>
See notes to consolidated condensed financial statements.
-2-
<PAGE> 6
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Deficit
------------ 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)
------------ ------ ---------- --------
- - 1,000 (18,809)
Balance, December 31, 1984
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)
------------ ------ ---------- --------
</TABLE>
See notes to consolidated condensed financial statements.
-3-
<PAGE> 7
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Deficit
-------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C>
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 .05 6,729,850 67 336,475 -
"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)
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> 8
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-in Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Costs
----- ------ ------ ------- ---------- ----- -----------
<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> 9
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the Deferred
Per Paid-in Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Costs
<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 0.08 3,333,333 33 247,633 - - -
Issuance of common stock; conversion of debt 0.15 894,526 9 133,991 - - -
Issuance of common stock; conversion of debt 0.20 1,648,352 16 329,984 - - -
Issuance of common stock; conversion of debt 0.12 2,323,580 23 269,977 - - -
Issuance of common stock; conversion of debt 0.15 1,809,524 18 265,982 - - -
Issuance of common stock; exchange for services 0.41 50,000 - 20,500 - - -
Issuance of common stock; exchange for services 0.24 100,000 1 23,999 - - -
Beneficial conversion feature - - 413,793 - - -
Warrant costs - - 37,242 - - -
Amortization of deferred compensation costs - - - - - 384,555
Imputed interest on convertible debenture - - 4,768 - - -
Net loss period ended September 30, 1997 - - - - (2,197,071) -
------------ ------ ----------- --------- ----------- ---------
Balance, September 30, 1997 277,190,373 $2,771 $ 8,751,220 $(19,000) $(7,048,608) $ (88,604)
============ ====== =========== ======== =========== =========
</TABLE>
See notes to consolidated condensed financial statements.
-6-
<PAGE> 10
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Inception
Nine Months Ended (February 20,
September 30, 1984) to
-------------------- September 30,
1997 1996 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $(2,197,071) $ (576,679) $ (7,048,608)
------------ ----------- --------------
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 161,358 12,803 340,253
Amortization of deferred interest cost on
beneficial conversion feature of convertible
debenture 413,793 - 413,793
Amortization of deferred compensation costs 384,555 - 671,896
Loss on sale of property and equipment 1,425 - 1,425
Issuance of common stock for services 44,500 175,000 1,416,500
Imputed interest on convertible debenture 4,768 - 4,768
(Increase) decrease in other current assets (11,741) 4,193 (27,822)
Increase in inventory - (1,638) (19,729)
Increase in other assets (225,151) - (258,695)
Increase in accounts payable
and accrued liabilities 20,860 3,871 73,734
------------ ----------- --------------
Total adjustments 794,367 194,229 2,616,123
------------ ----------- --------------
Net cash used by operating activities (1,402,704) (382,450) (4,432,485)
------------ ----------- --------------
Cash Flows from Investing Activities:
Purchase of investments (857,000) (754,641) (2,583,256)
Proceeds from sale of investments 1,280,841 - 1,628,256
Expenditures for property and equipment (118,884) (3,690) (503,388)
Proceeds from sale of property and equipment 1,200 - 1,200
------------ ----------- --------------
Net cash provided (used) by investing activities 306,157 (758,331) (1,457,188)
------------ ----------- --------------
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 1,531,435 5,121,188
------------ ----------- --------------
Net cash provided by financing activities 1,266,666 1,531,435 6,121,188
------------ ----------- --------------
Net Increase in Cash and Cash Equivalents 170,119 390,654 231,515
Cash and Cash Equivalents, Beginning 61,396 65,230 -
------------ ----------- --------------
Cash and Cash Equivalents, Ending $ 231,515 $ 455,884 $ 231,515
============ =========== ==============
Supplemental Schedule of Non Cash Financing Activities:
During the quarter ended September 30, 1997, $536,000
of the convertible debenture was converted into
4,133,104 shares of the Company's common stock
</TABLE>
See notes to consolidated condensed financial statements.
-7-
<PAGE> 11
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements at September 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 September 30,
1997 and results of operations for the three months and nine months
ended September 30, 1997 and 1996 and cash flows for the nine
months ended September 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 September 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. 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> 12
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
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> 13
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
TESTING AGREEMENTS
Research and development costs are expensed as incurred by the
Company.
The only sales generated by the Company have been sales of
RETICULOSE for testing purposes. Sales are recorded by the Company
when such test products are shipped to customers.
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 September 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
September 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, at the Company's expense, 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> 14
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
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 September 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 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 $269,000, of which $132,000 was advanced during the
three month period ended September 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 and approval
for the commencement of the HIV-HPV Study.
-11-
<PAGE> 15
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
ARGENTINE AGREEMENT
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 $49,000 and $88,000, 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.
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 September 30,
1997, the Company has expended approximately $303,000 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").
NATIONAL CANCER INSTITUTE AGREEMENT
In February 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute (the "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.
-12-
<PAGE> 16
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
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 September 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 September 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> 17
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
HIRSCHMAN AGREEMENT
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 September 30, 1997, 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
-14-
<PAGE> 18
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENTS
COHEN AGREEMENTS
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 September 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. 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.
-15-
<PAGE> 19
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES
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.
The assured incremental yield on the Debenture was measured based
on the date of issuance of the security and amortized to interest
expense over the conversion period which ended on May 29, 1997
which was the first date full conversion could occur. The interest
expense relating to this measurement was $4,768.
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.
During the quarter ended September 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 $.1162 per share and to convert $266,000 of the principal
amount of the debenture into 1,809,524 shares of the Company's
common stock at a conversion price of $.1470 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 28, 2007, 178,378 shares of
common stock. The exercise price of the three 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 ($0.21 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 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 October 1997, the Company obtained additional financing of
$3,000,000 in the form of 7% convertible debentures to finance
research and development.
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 will be
treated as deferred interest expense and recorded as a reduction of
the convertible debenture liability with a corresponding credit to
additional paid-in capital. The deferred interest will be amortized
to interest expense over the period from October 8, 1997 (date of
debenture) to February 24, 1998 (date the debenture is fully
convertible).
-16-
<PAGE> 20
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 September 30, 1997 and September 30,
1996, the Company incurred losses of $810,949 ($0.00 per share) and $339,333
($0.00 per share). For the nine month periods ended September 30, 1997 and
September 30, 1996, the Company incurred losses of $2,197,071 and $576,679. 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 ($237,500 for the nine months ended September 30, 1997 vs. $0 for the
nine months ended September 30, 1996); interest charges as a result of the
beneficial conversion feature associated with the convertible debenture
($413,793 for the nine months ended September 30, 1997 vs. $0 for the nine
months ended September 30, 1996); increased research and development expense
(approximately $361,000 for the nine months ended September 30, 1997 vs.
approximately $179,000 for the nine months ended September 30, 1996); the
opening and maintenance costs of the Company's Yonkers, New York office
(approximately $100,000 for the nine months ended September 30, 1997 vs. $0 for
the nine months ended September 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 $385,000 for the nine months ended September 30,
1997 vs. $0 for the nine months ended September 30, 1996). Administrative
expenses and the lack of sales revenues also contribute to the Company's losses.
There were sales of $0 and $674 respectively, during the three month
periods ended September 30, 1997 and September 30, 1996 and $2,278 and $15,943
during the nine months ended September 30, 1997 and September 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 nine months
ended September 30, 1997. All sales during these periods resulted from
distributors purchasing RETICULOSE for testing purposes. Interest income was
$28,900 and $8,966 for the three month periods ended September 30, 1997 and
September 30, 1996 and $63,879 and $27,915 for the nine month periods ended
September 30, 1997 and September 30, 1996.
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.
17
<PAGE> 21
Liquidity
As of September 30, 1997, and December 31, 1996, the Company had
current liquid assets (cash and cash equivalents and investments) of $1,186,515
and $1,440,237, respectively. As of September 30, 1997, and December 31, 1996,
the Company had total assets of $1,673,113 and $1,716,800. The decrease in
liquid assets and total assets was primarily attributable to the increased
expenditures for research and development and increased general and
administrative expenses (including rent and payroll). See "--Capital Resources."
During the nine month period ended September 30, 1997, the Company
expended approximately $120,000 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.
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.
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
18
<PAGE> 22
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 "February 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
February 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
February 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
February 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 February 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 February Debenture of the Company's
notice of prepayment of the February 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 February 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 February Debenture
by (y) the Applicable Conversion Price; provided, however, that the right to
convert outstanding principal of the February Debenture terminates at the close
of business on the third calendar day preceding the date fixed for prepayment of
the February 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
February 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 February 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
February Debenture is not convertible until April 14, 1997, is convertible only
to the extent of $333,333 from April 15, 1997 through April 29, 1997, is
convertible only to the extent of $666,667 (less any amount previously
converted) from April 30, 1997 through May 29, 1997, and is fully convertible
after May 29, 1997. 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
19
<PAGE> 23
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. As of August 20,
1997 the February Debenture was fully converted.
In connection with the issuance of the February 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.
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.
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 February Debenture, the
Company paid to Interfi the sum of $70,000.
In October 1997, in order to finance further research and development,
the Company sold $3,000,000 principal amount of its ten-year 7% Convertible
Debenture (the "October Debenture") due August 30, 2007, to RBB in an offshore
transaction pursuant to Regulation S under the Securities Act of 1933, as
amended. Accrued interest under the October Debenture is payable semiannually,
computed at the rate of 7% per annum on the unpaid principal balance from the
date of the issuance of the October Debenture until the date of interest
payment. (After default, interest accrues at 10% per annum.) The October
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 October 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 October 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) $0.26 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 October Debenture
shall be the average of the daily closing prices for the five consecutive
trading days ended on the trading day
20
<PAGE> 24
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.
The October Debenture is not convertible until November 26, 1997, is
convertible only to the extent of $750,000 from November 26, 1997 through
December 26, 1997, is convertible only to the extent of $1,500,000 (less any
amounts previously converted) from December 26, 1997 through January 25, 1998
and is convertible only to the extent of $2,250,000 (less any amounts previously
converted) from January 25, 1998 through February 24, 1998 and is fully
convertible after February 24, 1998. In connection with the issuance by the
Company of the October Debenture, the Company paid to Interfi the sum of
$210,000.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "Warrants") to purchase Common Stock, each
such Warrant entitling the holder to purchase, from the date of grant through
August 30, 2007, 600,000 shares of the Common Stock. The exercise prices of the
three Warrants are $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 October
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $1,350,000. This amount will be treated as deferred interest expense
and recorded as a reduction of the convertible debenture liability with a
corresponding credit to additional paid-in capital. The deferred interest will
be amortized to interest expense over the period from October 8, 1997 (date of
debenture) to February 24, 1998 (date the debenture is fully convertible).
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.
The Company is currently expending approximately $260,000 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 12 months with its current liquid assets, including the
proceeds from the sale of the October Debenture, if no Common Stock purchase
options or Warrants are exercised. The Company anticipates employing four
persons to assist in research and development, at an aggregate annual expense of
approximately $250,000. 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
21
<PAGE> 25
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 $260,000 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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 3, 1997 and August 20, 1997, pursuant to notice by RBB to the
Company under the February Debenture, respectively, $270,000 and $266,000 of
principal amount of the February Debenture was converted into 2,323,580 and
1,809,524 shares of Common Stock. In September
22
<PAGE> 26
1997 the Company issued to Malcolm Santer 100,000 shares of Common Stock in
consideration for services rendered. 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
Current Report on Form 8-K dated September 26, 1997 regarding
the sale of the October Debenture.
23
<PAGE> 27
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 13, 1997 By: /s/ William Bregman
--------------------------------------------
William Bregman,
Duly Authorized Officer and Principal
Financial and Accounting Officer
24
<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
THIRD QUARTER 10-QSB OF ADVANCED VIRAL RESEARCH CORP. FOR THE NINE MONTHS ENDED
SEPT. 30, 1997 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-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,186,515
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,234,066
<PP&E> 305,637<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,673,113
<CURRENT-LIABILITIES> 75,334
<BONDS> 0
0
0
<COMMON> 2,771
<OTHER-SE> 1,595,008
<TOTAL-LIABILITY-AND-EQUITY> 1,673,113
<SALES> 0
<TOTAL-REVENUES> 66,157
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,263,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,197,071
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,197,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,197,071
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>PP&E VALUES REPRESENT NET AMOUNTS.
</FN>
</TABLE>
