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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________.
Commission File Number: 33-2262-A
ADVANCED VIRAL RESEARCH CORP.
(Exact name of Registrant as specified in its charter)
Delaware 59-2646820
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1250 East Hallandale Beach Blvd., Suite 501
Hallandale, Florida 33009
(Address of principal executive offices)
(954) 458-7636
(Registrant's telephone number, including area code)
----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, par value $.00001
per share as of May 12, 1999 was 301,340,183.
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q
QUARTER ENDED March 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements.......................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................24
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................31
PART II
Item 1. Legal Proceedings........................................................................ 32
Item 2. Changes in Securities and Use of Proceeds.................................................32
Item 3. Defaults Upon Senior Securities...........................................................33
Item 4. Submission of Matters to Vote of Security Holders.........................................33
Item 5. Other Information.........................................................................33
Item 6. Exhibits And Reports on Form 8-K......................................................... 33
SIGNATURES .............................................................................................34
</TABLE>
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements 1
Consolidated Condensed Balance Sheets,
March 31, 1999 and December 31, 1998 2
Consolidated Condensed Statements of Operations for the
Three Months Ended March 31, 1999 and 1998 and
from Inception (February 20, 1984) to March 31, 1999 3
Consolidated Condensed Statements of Stockholders' Equity
from Inception (February 20, 1984) to March 31, 1999 4
Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998 and from
Inception (February 20, 1984) to March 31, 1999 12
Notes to Consolidated Condensed Financial Statements 13
</TABLE>
1
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
Condensed
from
Audited
Financial
March 31, Statements
1999 December 31,
(Unaudited) 1998
----------- ----
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 990,903 $ 924,420
Investments - 821,047
Inventory 19,729 19,729
Other current assets 41,274 29,818
----------- -----------
Total current assets 1,051,906 1,795,014
Property and Equipment 1,065,969 1,049,593
Other Assets 477,777 460,346
----------- -----------
Total assets $ 2,595,652 $ 3,304,953
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 237,938 $ 279,024
Current portion of capital lease obligation 39,433 38,335
----------- -----------
Total current liabilities 277,371 317,359
=========== ===========
Long-Term Liabilities:
Convertible debenture, net 1,053,275 885,002
Capital lease obligation - long-term portion 153,864 167,380
----------- -----------
Total long-term liabilities 1,207,139 1,052,382
=========== ===========
Deposit on Securities Purchase Agreement - 600,000
----------- -----------
Commitments and Contingencies - -
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 301,340,183 and 296,422,907
shares issued and outstanding 3,013 2,964
Additional paid-in capital 15,621,665 14,325,076
Deficit accumulated during the development stage (14,044,105) (12,978,059)
Discount on warrants (469,431) -
Deferred compensation cost - (14,769)
----------- -----------
Total stockholders' equity 1,111,142 1,335,212
----------- -----------
Total liabilities and stockholders' equity $ 2,595,652 $ 3,304,953
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Three Months Ended 1984) to
March 31, March 31,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Sales $ 2,399 $ - $ 197,374
Interest 15,809 29,297 575,106
Other income - 100 120,093
------------ ------------ ------------
18,208 29,397 892,573
------------ ------------ ------------
Costs and Expenses:
Research and development 82,916 170,146 2,716,383
General and administrative 713,403 505,414 8,978,740
Depreciation and amortization 63,357 176,427 720,640
Interest 224,578 275,248 2,520,915
------------ ------------ ------------
1,084,254 1,127,235 14,936,678
------------ ------------ ------------
Net Loss $ (1,066,046) $ (1,097,838) $(14,044,105)
============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (.00) $ (.00)
============ ============
Weighted Average Number of
Common Shares Outstanding 297,577,226 281,039,791
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount ------------------- Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported - $ 1,000 $ - $ (1,000)
Adjustment for pooling of interests - (1,000) 1,000 -
----------- ------- -------- --------
Balance, inception, as restated - - 1,000 (1,000)
Net loss, period ended December 31, 1984 - - - (17,809)
----------- ------- -------- --------
Balance, December 31, 1984 - - 1,000 (18,809)
Issuance of common stock for cash $.00 113,846,154 1,138 170 -
Net loss, year ended December 31, 1985 - - - (25,459)
----------- ------- -------- --------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .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 condensed financial statements.
4
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount -------------------- Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 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 condensed financial statements.
5
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount -------------------- Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $ .05 11,400 - 420 -
Issuance of common stock, exercise of "C" warrants .08 2,500 - 200 -
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 -
Net loss, year ended December 31, 1991 - - - (249,871)
------------- ------- ----------- -------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 -
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 -
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 -
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 - - - (839,981)
------------- -------- ----------- -------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 -
Issuance of common stock, for consulting services .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 condensed financial statements.
6
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------------- Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <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
----- ----
<S> <C> <C>
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 condensed financial statements.
7
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------------- Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <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
----- ----
<S> <C> <C>
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 condensed financial statements.
8
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------------- Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <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
----------- ------------
<S> <C> <C>
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 condensed financial statements.
9
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Common Stock
Amount ------------------- Additional
Per Paid-In Subscription
Share Shares Amount Capital Receivable
----- ------ ------ ------- ----------
<S> <C> <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 -
Beneficial conversion feature, November debenture 625,000
Warrant costs, November debenture 48,094
Amortization of deferred compensation cost - - - -
Write off of subscription receivable - - (19,000) 19,000
Net loss, year ended December 31, 1998 - - - -
----------- ------- ------------ ---------
Balance, December 31, 1998 296,422,907 2,964 14,325,076 -
----------- ------- ------------ ---------
(restubbed table)
Deficit
Accumulated
during the Deferred
Development Compensation
Stage Cost
----- ----
<S> <C> <C>
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 - -
Beneficial conversion feature, November debenture
Warrant costs, November debenture
Amortization of deferred compensation cost - 59,068
Write off of subscription receivable - -
Net loss, year ended December 31, 1998 (3,984,793) -
------------ -----------
Balance, December 31, 1998 912,978,059) (14,769)
------------ -----------
</TABLE>
See notes to consolidated condensed financial statements.
10
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Deficit
Common Stock Accumulated
Amount -------------------- Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $(12,978,059)
Issuance of common stock, securities purchase .16 4,917,276 49 802,451 -
agreement
Warrants Costs, securities purchase agreement - - 494,138 -
Amortization of warrant costs, securities purchase - - - -
agreement
Amortization of deferred compensation cost - - - -
Net loss, three months ended March 31, 1999 - - - (1,066,046)
----------- ------- ------------ --------------
Balance, March 31, 1998 301,340,183 $ 3,013 $ 15,621,665 $ (14,044,105
=========== ======= ============ ==============
(restubbed table)
Deferred Discount
Compensation on
Cost Warrants
---- --------
<S> <C> <C>
Balance, December 31, 1998 $ (14,769) $ -
Issuance of common stock, securities purchase - -
agreement
Warrants Costs, securities purchase agreement - (494,138)
Amortization of warrant costs, securities purchase - 24,707
agreement
Amortization of deferred compensation cost 14,769 -
Net loss, three months ended March 31, 1999 - -
----------- --------
Balance, March 31, 1998 $ - $(469,431)
=========== =========
</TABLE>
See notes to consolidated condensed financial statements.
11
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
Three Months Ended (February 20,
March 31, 1984) to
-------- March 31,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (1,066,046) $ (1,097,838) $ (14,044,105)
------------- ------------ -------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization of loan costs 63,357 176,427 720,640
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 156,250 210,951 2,262,348
Amortization of discount on warrants 36,730 - 36,730
Amortization of deferred compensation cost 14,769 14,767 760,500
Issuance of common stock for services - - 1,437,500
Other - - (1,607)
Changes in Operating Assets and Liabilities:
Increase in other current assets (11,456) (9,744) (41,274)
Increase in inventory - - (19,729)
Increase in other assets (43,680) (33,267) (820,422)
Increase (decrease) in accounts payable and
accrued liabilities (41,086) (107,363) 244,138
------------- ------------ -------------
Total adjustments 174,884 251,771 4,578,824
------------- ------------ -------------
Net cash used by operating activities (891,162) (846,067) (9,465,281)
------------- ------------ -------------
Cash Flows from Investing Activities:
Purchase of investments - (94,000) (6,292,979)
Proceeds from sale of investments 821,047 2,512,902 6,292,979
Expenditures for property and equipment (53,484) (108,613) (1,197,084)
Proceeds from sale of property and equipment - - 1,200
------------- ------------ -------------
Net cash provided (used) by investing activities 767,563 2,310,289 (1,195,884)
------------- ------------ -------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt - - 5,500,000
Proceeds from sale of securities, net of issuance costs 202,500 35,400 6,181,088
Payments under capital lease (12,418) - (29,020)
------------- ------------ -------------
Net cash provided by financing activities 190,082 35,400 11,652,068
------------- ------------ -------------
Net Increase in Cash and Cash Equivalents 66,483 1,499,622 990,903
Cash and Cash Equivalents, Beginning 924,420 236,059 -
------------- ------------ -------------
Cash and Cash Equivalents, Ending $ 990,903 $ 1,735,681 $ 990,903
============= ============ =============
</TABLE>
See notes to consolidated condensed financial statements.
12
<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 March 31, 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and reflect all
adjustments which, in the opinion of management, are necessary for
a fair presentation of financial position as of March 31, 1999 and
results of operations for the three months ended March 31, 1999 and
1998 and cash flows for the three months ended March 31, 1999 and
1998. All such adjustments are of a normal recurring nature. The
results of operations for interim periods are not necessarily
indicative of the results to be expected for a full year. The
statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December
31, 1998.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at March 31, 1999 have been prepared in conformity with
generally accepted accounting principles which contemplate the
continuance of the Company as a going concern. The Company has
suffered losses from operations during its operating history. The
Company is dependent upon registration of Reticulose for sale
before it can begin commercial operations. The Company's cash
position may be inadequate to pay all the costs associated with the
full range of testing and clinical trials required by the FDA.
Unless and until Reticulose is approved for sale in the United
States or another industrially developed country, the Company may
be dependent upon the continued sale of its securities and debt
financing for funds to meet its cash requirements. Management
intends to continue to sell the Company's securities in an attempt
to mitigate the effects of its cash position; however, no assurance
can be given that equity or debt financing, if and when required,
will be available. In the event that such equity or debt financing
is not available, in order to continue operations, management
anticipates that they will have to defer their salaries. During
1999 and 1998, the Company obtained equity and debt financing and
may seek additional financing as the need arises. No assurance can
be given that the Company will be able to sustain its operations
until FDA approval is granted or that any approval will ever be
granted. The Company expects to submit an application for approval
with the FDA during July 1999. 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.
13
<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
have a material adverse effect on the Company.
Lack of Patent Protection
The Company does not presently have a patent for Reticulose but the
Company currently has three 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 December 31,
1999 at an exercise price of $.15 and $.17, respectively. As of
March 31, 1999, there are outstanding Plata Options to acquire
683,300 shares at $.15 per share and Additional Plata Options to
acquire 108,100 shares at an exercise price of $.17 per share.
Through March 31, 1999, the Company has received approximately
$1,332,000 pursuant to the issuance of approximately 9.2 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
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
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 December 31,
1999 at an exercise price of $.21 per share. As of March 31, 1999,
473,500 shares of common stock were issued pursuant to the exercise
of these options for an aggregate exercise price of approximately
$95,000.
In June 1994, DCT SRL and the Company entered into an exclusive
distribution agreement whereby the Company granted to DCT, subject
to certain conditions, the exclusive right to market and sell
Reticulose in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
In April 1996, the Company entered into an agreement with DCT (the
HIV-HPV Agreement") whereby the Company agreed to provide to DCT or
its assignees, up to $600,000 to cover the costs of a double blind
placebo controlled study in approximately 150 patients to assess
the efficacy of Reticulose for the treatment of persons diagnosed
with the HIV virus (AIDS) and HPV (the "HIV-HPV Study").
Subsequently, the Company has agreed to advance additional funds
towards such study.
In connection with the HIV-HPV Agreement, the Company advanced
approximately $665,000 which is accounted for as research and
development expense. The amounts have been used to cover expenses
associated with clinical activities of the HIV-HPV Study.
15
<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)
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Reticulose being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii) DCT receives
financing to cover the costs of the HIV-HPV Study, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the HIV-HPV Study.
In October 1997, the Company entered into two agreements with DCT,
whereby the Company agreed to provide DCT or its assignees, up to
$220,000 and $341,000 to cover the costs of double blind placebo
controlled studies in approximately 360 and 240 patients,
respectively to assess the efficacy of the topical application of
Reticulose for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
In connection with the Herpes Study and the HPV Topical Study
(collectively, the "Studies"), the Company has advanced
approximately $58,000 and $132,000, respectively. Such expenses are
accounted for as research and development expense. The amounts
expended have been used to cover expenses associated with
pre-clinical activities. Neither the Herpes Study nor the HPV
Topical Study has commenced.
Both Agreements with DCT provide that (i) in the event the data
from the Studies are used in connection with Reticulose being
approved for commercial sale anywhere within the territory granted
under the DCT Exclusive Distribution Agreement or (ii), DCT
receives financing to cover the costs of the Studies, then DCT is
obligated to reimburse the Company for all amounts expended in
connection with the Studies.
In February 1998, the Company entered into an agreement with DCT
(the "Concurrent Agreement") whereby the Company agreed to provide
DCT or its assignees, up to $413,000 to cover the costs of a study
in 65 patients to compare the results of treatment of patients with
AIDS taking a three drug cocktail and Reticulose with those taking
a three drug cocktail and a placebo. As of March 31, 1999, the
Company has advanced approximately $50,000 for such study which has
been accounted for as research and development expense.
In May 1998, the Company entered into an agreement with DCT (the
"Rheumatoid Arthritis Agreement") whereby the Company agreed to
provide DCT or its assignees, up to $95,000 to cover the costs of a
controlled study in 30 patients to determine the efficacy of
Reticulose for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$75,000 which has been accounted for as research and development
expense.
16
<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 March 31, 1999, 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) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of March 31, 1999, the Company has
expended approximately $390,000 to cover the costs of the Barbados
Study.
In July 1998, the Company authorized expenditures of up to $45,000
to study the effects of Reticulose in inhibiting the mutation of
the AIDS virus. As of March 31, 1999, the Company has advanced
approximately $11,000 for such study which has been accounted for
as research and development expense.
National Cancer Institute Agreement
In March 1997, the Company entered into a Material Transfer
Agreement - Cooperative Research and Development Agreement with the
National Cancer Institute ("NCI") of the National Institutes of
Health. Under the terms of the Agreement, NCI researchers and the
Company will collaborate to elucidate the molecular mechanism by
which Reticulose affects the transcription of the gamma interferon
gene. This agreement was extended for an additional one year term
through March 3, 1999 to investigate the anti-tumor activity of
Reticulose using kidney tumor model systems. In addition, NCI was
to study the effects of Reticulose on inflammation associated with
rheumatoid arthritis.
Topical Safety Study
During 1998, the Company paid approximately $200,000 for a safety
study conducted in the United States for the topical use of
Reticulose.
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
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 March 31, 1999, 900,000
shares have been issued upon exercise of these options for cash
consideration of $162,000 under this Agreement.
In March 1996, the Company entered into an addendum to the
consulting agreement with Dr. Hirschman whereby Dr. Hirschman
agreed to provide consulting services to the Company through May
2000 (the "Addendum"). Pursuant to the Addendum, the Company
granted to Dr. Hirschman and his designees options to purchase an
aggregate of 15,000,000 shares of the Company's common stock for a
three year period pursuant to the following schedule: (i) options
to purchase 5,000,000 shares exercisable at any time and from time
to time commencing March 24, 1996 and ending March 23, 2009 at an
exercise price of $.19 per share, of which options to acquire
500,000 shares were assigned by Dr. Hirschman to Richard Rubin,
consultant to Dr. Hirschman; (ii) options to purchase 5,000,000
shares exercisable at any time and from time to time commencing
March 24, 1997 and ending March 23, 2009 at an exercise price of
$.27 per share, of which options to acquire 500,000 shares were
assigned by Dr. Hirschman to Richard Rubin, consultant to Dr.
Hirschman; and (iii) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24,
1998 and ending March 23, 2009 at an exercise price of $.36 per
share, of which options to acquire 500,000 shares were assigned by
Dr. Hirschman to Richard Rubin, consultant to Dr. Hirschman. In
addition, the Company has agreed to cause the shares underlying
these options to be registered so long as there is no cost to the
Company. As of March 31, 1999, 500,000 shares of common stock were
issued pursuant to the exercise of stock options by Richard Rubin.
Mr. Rubin has, from time to time in the past, advised the Company
on matters unrelated to his consultation with Dr. Hirschman.
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)
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.
19
<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 December 31, 1999), the option to acquire
3,000,000 shares of common stock of the Company at an exercise
price of $.09 per share (which exercise price has been increased to
$.16 per share) (the "September 1992 Cohen Options"). As of March
31, 1999, 1,300,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $156,000.
In February 1993, the Company entered into a second consulting
agreement with Mr. Cohen (the "February 1993 Cohen Agreement") for
a three year term commencing on March 1, 1993. The February 1993
Cohen Agreement provides that Mr. Cohen provide financing business
consulting services concerning the operations of the business of
the Company and possible strategic transactions in exchange for the
Company issuing to Mr. Cohen 3,500,000 shares of common stock (the
"February 1993 Cohen Shares"), 1,500,000 shares of which Mr. Cohen
has informed the Company he has assigned to certain other persons
not affiliated with the Company or any of its officers or
directors.
In July 1994, in consideration for services related to the
introduction, negotiation and execution of a distribution agreement
the Company issued: (i) to Mr. Cohen, an additional 2,500,000
shares (the "April 1994 Cohen Shares") and (ii) to each of Elliot
Bauer and Lee Rizzuto, 625,000 shares (the "Bauer and Rizzuto
Shares") as well as options to acquire an additional 5,000,000
shares each at $.10 per share exercisable through May 1, 1996 (the
"Bauer and Rizzuto Options"). Through March 31, 1999, 2,855,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $285,500. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through December 31, 1999 at an option
price of $.14.
20
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS
The Company currently is a party to separate agreements with five
different entities (the "Entities"), whereby the Company has granted
exclusive rights to distribute Reticulose in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil, Chile, Channel Islands, The Isle of Man, British West
Indies, Jamaica, Haiti, Bermuda, Belize and Saudi Arabia. Pursuant to
these agreements, distributors are obligated to cause Reticulose to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Reticulose
to maintain the exclusive distribution rights. Leonard Cohen, a former
consultant to the Company, has informed the Company that he is an
affiliate of two of these entities. To date, the Company has recorded
revenue classified as other income for the sale of territorial rights
under the distribution agreements. 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 1998, 300,000
shares of common stock were issued pursuant to exercise of these
options for an aggregate exercise price of $78,000.
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.
21
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the February Debenture, the Company
issued to RBB three warrants (the "February Warrants") to purchase
common stock, each such February Warrant entitling the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378
shares of common stock. The exercise price of the three February
Warrants are $0.288, $0.576 and $0.864 per warrant share, respectively.
The fair value of the February Warrants was estimated to be $37,000
($.021 per warrant) based upon a financial analysis of the terms of the
warrants using the Black Sholes Pricing Model. This amount has been
reflected in the accompanying financial statements as interest expense
related to the convertible February Debenture. Based on the terms for
conversion associated with the February Debenture, there was an
intrinsic value associated with the beneficial conversion feature of
$413,793. This amount has been fully amortized to interest expense with
a corresponding credit to additional paid-in capital.
In connection with the issuance of the October Debenture, the Company
issued to RBB three warrants (the "October Warrants") to purchase
Common Stock, each such October Warrant entitling the holder to
purchase, from the date of grant through August 30, 2007, 600,000
shares of the Common Stock. The exercise price of the three October
Warrants are $0.20, $0.23 and $0.27 per warrant share, respectively.
The fair value of the three October Warrants was established to be
$106,571 ($.178 per warrant), $97,912 ($.163 per warrant) and $87,472
($.146 per warrant), respectively, based upon a financial analysis of
the terms of the warrants using the Black Sholes Pricing Model. This
amount has been reflected in the accompanying financial statements as a
discount on the convertible debenture, with a corresponding credit to
additional paid-in capital, and is being amortized over the expected
term of the notes which at December 31, 1997 was 120 months. In May
1998, the remaining unamortized discount of $276,957 was amortized upon
full conversion of the October Debenture.
Based on the terms for conversion associated with the October
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $1,350,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture liability with a corresponding credit to
additional paid-in capital and has been amortized to interest expense
over the period from October 8, 1997 (date of debenture) to February
24, 1998 (date the debenture is fully convertible). The interest
expense relative to this item was $210,951 for 1998 and $1,139,049 for
1997.
In November 1998, in order to finance further research and development,
the Company sold 1,500,000 principal amount of its ten year 7%
Convertible Debenture (the "November Debenture") due October 31, 2008,
to RBB. Accrued interest under the November Debenture is payable
semi-annually, computed at the rate of 7% per annum on the unpaid
principal balance from the date of the issuance of the November
Debenture until the date of interest payment. The November Debenture
may be prepaid by the Company before maturity, in whole or in part,
without premium or penalty, if the Company gives the holder of the
Debenture notice not less than 30 days before the date fixed for
prepayment in that notice. The November Debenture is convertible, at
the option of the holder, into shares of common stock.
22
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
In connection with the issuance of the November Debenture, the Company
issued to RBB two warrants (the "November Warrants") to purchase Common
Stock, each such November Warrant entitling the holder to purchase
375,000 shares of the Common Stock at any time and from time to time
through October 31, 2008. The exercise price of the two November
Warrants are $.20 and $.24 per warrant share, respectively. The fair
value of the November warrants was estimated to be $48,000 ($.064 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; a risk free interest rate of 5.75% and an
expected holding period of one year. This amount is being amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the November
Debenture, there is an intrinsic value associated with the beneficial
conversion feature of $625,000. This amount has been treated as
deferred interest expense and recorded as a reduction of the
convertible debenture with a corresponding credit to additional paid-in
capital and is being amortized to interest expense over a one year
period beginning November 16, 1998 (date of debenture), based on
management's expectation of when complete conversion will occur. The
interest expense relative to this item was $156,250 for the three
months ended March 31, 1999 and $52,083 for 1998.
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, December 31,
1999 1998
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Less unamortized discount and deferred interest 446,725 614,998
---------- ----------
Convertible debenture, net $1,053,275 $ 885,002
========= ==========
</TABLE>
NOTE 4. SECURITIES PURCHASE AGREEMENT
In January 1999, pursuant to a securities purchase agreement, the
Company issued 4,917,276 shares of its common stock for an aggregate
purchase price of $802,500. Such agreement also provided for the
issuance of four warrants to purchase a total of 2,366,788 shares of
common stock at prices ranging from $.204 to $.2448 per share at any
time until December 31, 2003. The fair value of these warrants was
estimated to be $494,138 ($.209 per warrant) based upon a financial
analysis of the terms of the warrants using the Black-Sholes Pricing
Model with the following assumptions: expected volatility of 20%; a
risk free interest rate of 6% and an expected holding period of five
years. This amount is being amortized to interest expense in the
accompanying consolidated financial statements.
23
<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-K for the year ended December 31, 1998 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.
OVERVIEW
Since its inception in July 1985, The Company has been engaged
primarily in research and development activities. The Company has not yet
generated significant operating revenues, and as of March 31, 1999 the Company
had incurred a cumulative net loss of $14,044,105. The Company's ability to
generate substantial operating revenue depends upon its success in gaining FDA
approval for the commercial use and distribution of Reticulose. All of the
Company's research and development efforts have been devoted to the development
of Reticulose.
In order to commence clinical trials for regulatory approval of
Reticulose in the United States, it will be necessary for the Company to prepare
and file a new Notice of Claimed Investigational Exemption for a New Drug
("IND") with the FDA. Filings with foreign regulatory agencies will be required
to continue or begin new clinical trials overseas. AVR has recently contracted
with GloboMax LLC of Hanover, Maryland to advise AVR in its preparation of the
new IND, and to otherwise assist AVR through the FDA process with the objective
of obtaining full approval for Reticulose in the United States. The Company
presently intends to submit a new IND to the FDA seeking approval to conduct a
study testing the efficacy of Reticulose on human subjects with AIDS, as well as
other diseases, which the Company believes will address the deficiencies noted
in the FDA's prior correspondence to the Company regarding Reticulose. In the
new IND, the Company presently intends, among other things, (i) to include
relevant information on the chemistry, laboratory and animal controls to assure
the integrity of the dosage form; (ii) to include safety information for the
initial study proposed to be conducted on humans; (iii) to include information
assuring the proper identification, quality and purity of Reticulose and a
description of the physical, chemical and microbiological characteristics of
Reticulose; and (iv) to submit data supporting in vitro anti-HIV activity, or
other criterion for a biological response modifier. The FDA will make its own
evaluation of the clinical trial data and there is no assurance that the FDA
will approve the Company's IND. It is impossible to determine whether the data
from any ongoing studies will be able to be used by the Company in connection
with the new IND or if the new IND will ever be approved by the FDA. FDA
approval to begin human clinical trials of Reticulose will require significant
cash expenditures, the amount of which is not currently determinable. Further,
there can be no assurance that Reticulose will ever be approved for commercial
distribution by any country.
24
<PAGE>
In addition to developing clinical trial programs, the Company plans to
continue to provide funding for its laboratory testing programs the Company's
Yonkers, New York laboratories and at other selected laboratories and hospitals
for the purpose of testing the efficacy of Reticulose, but the amount of
research that will be conducted at those institutions will depend upon the
Company's financial status. Because the Company's research and development
expenses and clinical trial expenses will be charged against earnings for
financial reporting purposes, management expects that losses from operations
will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
For the three month periods ended March 31, 1999 and March 31, 1998,
the Company incurred losses of $1,066,046 ($0.00 per share) and $1,097,838
($0.00 per share), respectively. The Company's decreased losses during 1999 are
principally due to increased general and administrative expense ($713,403 for
the three months ended March 31, 1999 vs. $505,414 for the three months ended
March 31, 1998) primarily resulting from the employment of additional research
professionals and rent and operating costs associated with the Yonkers, New York
office and laboratory, offset by decreased amortization of loan costs related to
the Company's convertible debentures (discussed below) included in depreciation
and amortization ($26,250 for the three months ended March 31, 1999 vs. $153,611
for the three months ended March 31, 1998); and decreased research and
development expense (approximately $82,916 for the three months ended March 31,
1999 vs. approximately $170,146 for the three months ended March 31, 1998).
Administrative expenses and the lack of sales revenues also contributed to the
Company's losses.
There were sales of $2,399 and $0, respectively, during the three month
periods ended March 31, 1999 and March 31, 1998. All sales during these periods
resulted from distributors purchasing Reticulose for testing purposes. Interest
income was $15,809 and $29,297 for the three month periods ended March 31, 1999
and March 31, 1998. There can be no assurance that Reticulose will ever be sold
anywhere in the world.
LIQUIDITY
As of March 31, 1999 and December 31, 1998, the Company had current
assets of $1,051,906 and $1,795,014, respectively. The Company had total assets
of $2,595,652 and $3,304,953 at March 31, 1999 and December 31, 1998,
respectively. The decrease in current and total assets was primarily
attributable to the use of investment capital to fund increased operating
expenditures.
During the three months ended March 31, 1999, the Company used cash of
$891,162 for operating activities, as compared to $846,067 for the three months
ended March 31, 1998. During the three months ended March 31, 1999, the Company
(i) incurred non-cash expenses of approximately $256,337 relating to
amortization of loan costs ($63,357), deferred interest on the beneficial
conversion feature ($156,250) relating to the 1998 Debenture (defined below),
and discount on warrants ($36,730); (ii) expended approximately $145,000 in
professional fees; (iii) expended approximately $32,000 in laboratory supplies;
(iv) expended approximately $352,000 for
25
<PAGE>
payroll and related costs; and (v) obtained approximately $202,000 in proceeds
from the sale of securities. During the three months ended March 31, 1999, the
Company expended approximately $53,000 for additions to machinery and equipment
at the Company's Yonkers, New York office.
During the three months ended March 31, 1999, cash flows provided by
investing activities was primarily due to the sales of investments which were
available from the proceeds of the issuance of the convertible debenture in 1998
and shares of common stock in 1999. The Company also acquired property and
equipment for its Yonkers, New York laboratory. See "Capital Resources" for a
discussion of cash flows provided by financing activities.
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 stock options or warrants, it shall be dependent upon
additional debt and/or equity financing, of which there can be no assurance, or
it must reduce expenses or limit operations.
AVR's independent certified public accountants' report on AVR's
consolidated financial statements for the fiscal year ended December 31, 1998
includes an explanatory paragraph regarding AVR's ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements states that AVR's
ability to continue operations is dependent upon its continued sale of its
securities for funds to meet its cash requirements, which factors raise
substantial doubt about AVR's ability to continue as a going concern. Further,
the accountant's report does not include any adjustments that might result from
the outcome of this uncertainty. AVR has no immediate plan to issue any
securities, otherwise than upon the possible exercise of options warrants, or
the conversion of the 1998 Debenture.
CAPITAL RESOURCES
The Company has been dependent upon the proceeds from the continued
sale of securities for the funds required to continue operations at present
levels and to fund further research and development activities. The following
table summarizes the securities sold by the Company since February 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Gross Security Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds Issued Exercisable Into Exercise Price Expiration Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
February 1997 $1,000,000 -------------------------------------------------------------------------------------
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
- ---------------------------------------------------------------------------------------------------------------------
Debenture 17,577,534 shares $0.13-0.23 per share Fully converted
August 1997 $3,000,000 -------------------------------------------------------------------------------------
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
- ---------------------------------------------------------------------------------------------------------------------
November 1998 $1,500,000 Debenture 9,057,971 shares (1) $0.1656 per share (1) October 31, 2008
-------------------------------------------------------------------------------------
Warrants 375,000 shares $0.20 per share
-----------------------------------------------------------------------
375,000 shares $0.24 per share
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Gross Security Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds Issued Exercisable Into Exercise Price Expiration Date
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 1999 $802,500 Shares 4,917,276 n/a n/a
--------------------------------------------------------------------------------------
Warrants 1,183,394 shares $0.2040 per share December 31,
------------------------------------------------- 2003
1,183,394 shares $0.2448 per share
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Assumes the full conversion of the debenture based on the average of the
closing bid and ask prices of the common stock on April 26, 1999, as reported on
the OTC Electronic Bulletin Board ($0.23), and an applicable conversion price of
$0.1656.
Securities Issued in 1997.
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 "1997 Debentures") due February 28,
2007 and August 30, 2007, respectively, to RBB in offshore transactions pursuant
to Regulation S under the Securities Act. Accrued interest under the 1997
Debentures was payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The 1997 Debentures were 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 shares of common
stock, respectively. As of May 5, 1998, the October Debenture was fully
converted.
In connection with the issuance of the 1997 Debentures, the Company
issued to RBB six warrants (the "1997 Warrants") to purchase common stock, three
of such warrants entitling the holder to purchase, from 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, 1997 through August
30, 2007, 600,000 shares of the common stock. The exercise prices of the 1997
Warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and $0.27 per warrant share,
respectively. Each 1997 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 1997 Warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
1997 Warrant contains anti-dilution provisions which provide for the adjustment
of warrant price and warrant shares as more particularly set forth therein. As
of May 14, 1999, none of the 1997 Warrants have
27
<PAGE>
been exercised.
Securities Issued in 1998.
In November 1998 the Company sold $1,500,000 principal amount of its
ten-year 7% convertible debenture due October 31, 2008 to RBB, as agent for the
accounts of certain persons, in an offshore transaction pursuant to Regulation S
under the Securities Act (the "1998 Debenture"). Accrued interest under the 1998
Debenture is payable semiannually, computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment. The 1998 Debenture is convertible, at the option of the holder, into
shares of common stock pursuant to a specified formula. The actual number of
shares of common stock issued or issuable upon conversion of the 1998 Debenture
is subject to adjustment and could be materially less or more than the above
estimated amount, depending upon factors that cannot be predicted by the Company
at this time, including, among others, the future market price of the common
stock.
Based on the terms for conversion associated with the 1998 Debenture,
there is an intrinsic value associated with the beneficial conversion feature of
$625,000. This amount has been treated as deferred interest expense and recorded
as a reduction of the convertible debenture with a corresponding credit to
additional paid-in capital and is being amortized to interest expense over a one
year period beginning November 16, 1998, based on management's expectation of
when complete conversion will occur. The interest expense relative to this item
was $52,083 for 1998.
In connection with the issuance of the 1998 Debenture, the Company
issued to RBB two warrants to purchase common stock , each warrant entitling the
holder to purchase, until October 31, 2008, 375,000 shares of the common stock.
The exercise prices of the two warrants are $0.20 and $0.24 per warrant share,
respectively. Each warrant provides that the holder may elect to receive a
reduced number of shares of common stock on the basis of a cashless exercise;
that number of shares bears the same proportion to the total number shares
issuable under that warrant as the excess of the market value of shares of
common stock over the warrant exercise price bears to that market value. Each
warrant contains anti-dilution provisions which provide for the adjustment of
warrant price and warrant shares as more particularly set forth therein. As of
May 14, 1999, none of such warrants had been exercised.
The fair value of the warrants issued in connection with the 1998
Debenture was estimated to be $48,000 ($0.064 per warrant) based upon a
financial analysis of the terms of such warrants using the Black-Sholes Pricing
Model with the following assumptions: expected volatility of 20%; a risk free
interest rate of 5.75% and an expected holding period of one year. This amount
has been reflected in the accompanying consolidated financial statements as
interest expense related to the 1998 Debenture.
Under the terms of the RBB agreement, the Company is required to file
with the Commission a registration statement to register shares of the common
stock issuable upon conversion of the 1998 Debenture and upon exercise of the
related warrants to allow the investors to resell such common stock to the
public. Because a registration statement was not declared effective by the
Commission on or before April 13, 1999, the Company is obligated under the RBB
agreement to pay
28
<PAGE>
RBB a penalty equal to the sum of (x) $30,000 and (y) $1,500 for each day lapsed
after such date, until this registration statement is declared effective by the
Commission, provided, however, that total penalties shall not exceed $100,000 in
the aggregate.
In January 1999 pursuant to a securities purchase agreement, the
Company sold 4,917,276 shares of common stock, and warrants to purchase an
aggregate of 2,366,788 shares of common stock, including (x) two warrants to
purchase an aggregate of 1,966,788 shares of common stock and (y) a finder's fee
paid to Harborview Group consisting of two warrants to purchase an aggregate
400,000 shares of common stock , in a private offering transaction pursuant to
Section 4(2) of the Securities Act, for an aggregate purchase price of $802,500,
of which $600,000 was received on December 31, 1998, and $202,500 was received
in January 1999. Two of the warrants entitle the holders thereof to purchase
983,394 and 983,394 shares of common stock at exercise prices of $0.2040 and
$0.2448 per share, respectively. The other two warrants entitle the holders
thereof to purchase 200,000 and 200,000 shares of common stock at exercise
prices of $0.2040 and $0.2448 per share, respectively. All four warrants are
exercisable at any time and from time to time until December 31, 2003. Each
warrant provides that the holder may elect to receive a reduced number of shares
of common stock on the basis of a cashless exercise; that number of shares bears
the same proportion to the total number shares issuable under that warrant as
the excess of the market value of shares of common stock over the warrant
exercise price bears to that market value. Each warrant contains anti-dilution
provisions which provide for the adjustment of warrant price and warrant shares
as more particularly set forth therein. As of May 14, 1999, none of such
warrants had been exercised.
Under the terms of the purchase agreement, the Company is required to
file with the Commission a registration statement to register the common stock
issued under the purchase agreement, and upon exercise of the warrants to allow
the resale of such common stock to the public. The purchase agreement further
provides that, in the event a registration statement is not declared effective
by the Commission on or before May 21, 1999, the Company is required to pay a
penalty of $30,000 for each full calendar month or portion thereof lapsed after
such date, until this registration statement is declared effective, provided,
however, that total penalties shall not exceed $100,000 in the aggregate.
The fair value of the warrants issued as of January 7, 1999, the date
of issuance of the shares underlying the securities purchase agreement in
connection with the aforementioned transaction was estimated to be $494,000
($0.0209 per warrant) based upon a financial analysis of the terms of such
warrants using the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%, and a risk free interest rate of 6% through the
December 31, 2003 expiration date.
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 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
29
<PAGE>
continue operations for at least three months with its current liquid assets,
including the proceeds from the recent sale of the 1998 Debenture and other
securities if no options or warrants are exercised. If all options and warrants
are exercised, the Company will receive net proceeds of approximately $8.4
million. 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. The recent prevailing market
price for shares of common stock has from time to time been above the exercise
prices of certain of the outstanding options and warrants. However, there can be
no assurance that the recent trading levels will be sustained or that any
additional options or warrants will be exercised. In the event that less than
25% or none of the outstanding options and warrants 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. 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
currently has three patents for the use of Reticulose as a treatment. In
addition, the Company has filed 32 patent applications with the United States
Patent and Trademark 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 Year 2000 ("Year 2000") computer issue is the result of computer
programs using a two-digit format, as opposed to a four-digit format to indicate
the year. Such computer programs will be unable to recognize date information
correctly when the year changes to 2000. The Year 2000
30
<PAGE>
issue poses risks for the Company's information technology systems.
The Company's information technology systems are based upon software
licenses and software maintenance agreements with third party software
companies. Based upon the Company's internal assessments and communications with
its software vendors, all of the software utilized by the Company is Year 2000
compliant software. The Company has used internal personnel to test its software
systems for Year 2000 compliance and such tests yielded positive results. The
Company will continue to monitor its Year 2000 readiness. Also, the Company does
not anticipate difficulty in resolving issues related to imbedded technology in
the equipment provided to the Company by other manufacturers.
Based on the foregoing, the Company believes that it will be Year 2000
compliant on a timely basis and that future costs relating to the Year 2000
issue will not have a material impact on the Company's consolidated financial
position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
None.
31
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Sales of Unregistered Securities during the Quarter Ended March 31, 1999
In January 1999, the Registrant issued 4,917,276 shares of common
stock and four warrants to purchase 2,366,788 shares of common stock to 11
investors for an aggregate purchase price of $802,500 pursuant to a Securities
Purchase Agreement dated December 22, 1998. The warrants are exercisable at any
time and from time to time until December 31, 2003. Two of the warrants entitle
the holders thereof to purchase 983,394 and 983,394 shares of common stock at
exercise prices of $0.2040 and $0.2448 per share, respectively. The other two
warrants entitle the holders thereof to purchase 200,000 and 200,000 shares of
common stock at exercise prices of $0.2040 and $0.2448 per share, respectively.
The foregoing transaction did not involve any underwriters,
underwriting discounts or commissions, or any public offering, and the
Registrant believes that such transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereof. The recipients in such transaction represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof, and appropriate legends were affixed
to the share certificates and warrant certificates issued in such transactions.
All recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.
Changes in Securities during the Quarter Ended March 31, 1999
In March 1999, the Registrant amended the terms of certain stock
options as described below:
(a) The Registrant amended the terms of certain stock options granted
to Plata Partners Limited Partnership, whereby the Registrant offered and the
holders of the such options accepted offers to further extend the exercise date
of such options through December 31, 1999 in consideration for an increase in
the exercise price by $0.01 per option share.
(b) The Registrant amended the terms of certain stock options granted
to Leonard Cohen, whereby the Registrant offered and the holders of the such
options accepted offers to further extend the exercise date of such options
through December 31, 1999 in consideration for an increase in the exercise price
by $0.01 per option share.
32
<PAGE>
(c) The Registrant amended the terms of certain stock options granted
to DCT S.R.L., whereby the Registrant extended the exercise date of such options
through December 31, 1999.
(d) The Registrant amended the terms of certain options granted to
Shalom Z. Hirschman, MD, President of the Registrant, whereby the Registrant
extended the exercise date of such options through March 23, 2009.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
During the first quarter ended March 31, 1999, no matters were
submitted to a vote of security holders of the Registrant, through the
solicitation of proxies or otherwise.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
During the three-month period ending March 31, 1999, no
Current Reports on Form 8-K were filed.
33
<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: May 14, 1999 By: /s/ William Bregman
------------------------------------------------
William Bregman,
duly authorized officer and principal financial
and accounting officer
34
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 786623
<NAME> ADVANCED VIRAL RESEARCH CORP.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 990,903
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 19,729
<CURRENT-ASSETS> 1,051,906
<PP&E> 1,065,969
<DEPRECIATION> 349,916
<TOTAL-ASSETS> 2,595,652
<CURRENT-LIABILITIES> 277,371
<BONDS> 0
0
0
<COMMON> 3,013
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,595,652
<SALES> 2,399
<TOTAL-REVENUES> 18,208
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,084,254
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 224,578
<INCOME-PRETAX> (1,066,046)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,066,046)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
