U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
[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/A
QUARTER ENDED March 31, 1999
TABLE OF CONTENTS
Page
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
<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
----------- ----
ASSETS (Restated) (Restated)
------
<S> <C> <C>
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 1,469,942 1,457,919
Capital lease obligation - long-term portion 153,864 167,380
----------- -----------
Total long-term liabilities 1,623,806 1,625,299
----------- -----------
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 (14,460,772) (13,550,976)
Discount on warrants (469,431) -
Deferred compensation cost - (14,769)
----------- -----------
Total stockholders' equity 694,475 762,295
----------- -----------
Total liabilities and stockholders' equity $ 2,595,652 $ 3,304,953
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements.
-1-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Three Months Ended (February 20,
March 31, 1984) to
------------------ March 31,
1999 1998 1999
---- ---- ----
(Restated) (Restated) (Restated)
<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 357,916 170,146 3,941,383
General and administrative 438,403 505,414 7,753,740
Depreciation 37,107 15,517 352,455
Interest 94,578 436,158 3,305,767
--------- --------- ----------
928,004 1,127,235 15,353,345
--------- --------- ----------
Net Loss $ (909,796) $ (1,097,838) $(14,460,772)
========== ============ ============
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.
-2-
<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>
<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>
<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>
<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 Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ - $ (2,854,076) $ -
Issuance of common stock,
for consulting services $.05 4,750,000 47 237,453 - - -
Issuance of common stock,
exercise of options .08 400,000 4 31,996 - - -
Issuance of common stock,
exercise of options .10 190,000 2 18,998 - - -
Net loss, year ended December 31, 1994 - - - - (440,837) -
------------ ------ ---------- -------- ----------- ---------
Balance, December 31, 1994 241,616,991 2,416 3,704,517 - (3,294,913) -
-
Issuance of common stock,
exercise of options .05 3,333,333 33 166,633 - - -
Issuance of common stock,
exercise of options .08 2,092,850 21 167,407 - - -
Issuance of common stock,
exercise of options .10 2,688,600 27 268,833 - - -
Issuance of common stock,
for consulting services .11 1,150,000 12 126,488 - - -
Issuance of common stock,
for consulting services .14 300,000 3 41,997 - - -
Net loss, year ended December 31, 1995 - - - - (401,884) -
------------ ------ ---------- -------- ----------- ---------
Balance, December 31, 1995 251,181,774 2,512 4,475,875 - (3,696,797) -
------------ ------ ---------- -------- ----------- ---------
</TABLE>
<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 Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
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>
<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 Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $ (4,851,537) $ (473,159)
Issuance of common stock,
exercise of options .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 - - - - - 399,322
Imputed interest on
convertible debenture - - 4,768 - - -
Net loss, year ended
December 31, 1997 - - - - (4,141,729) -
----------- ----- ----------- -------- ----------- --------
Balance, December 31, 1997 277,962,574 2,779 10,512,767 (19,000) (8,993,266) (73,837)
------------ ----- ----------- -------- ----------- --------
</TABLE>
<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 Deferred
Per Paid-In Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
----- ------ ------ ------- ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $(8,993,266) $ (73,837)
Issuance of common stock,
exercise of options .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 - - - - - 59,068
Write off of subscription
receivable - - (19,000) 19,000 - -
Net loss, year ended
December 31, 1998 - - - - (4,557,710) -
----------- ----- ---------- -------- ------------ --------
Balance, December 31, 1998,
as Restated 296,422,907 2,964 14,325,076 - (13,550,976) (14,769)
----------- ----- ---------- -------- ------------ --------
</TABLE>
<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
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1998, as Restated 296,422,907 $ 2,964 $ 14,325,076
Issuance of common stock, securities purchase
agreement .16 4,917,276 49 802,451
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, as restated - - -
- -- --
----------- ------- ------------
Balance, March 31, 1999, as Restated 301,340,183 $ 3,013 $ 15,621,665
=========== ======= ============
<CAPTION>
Deficit
Accumulated
during the Deferred Discount
Development Compensation on
Stage Cost Warrants
----- ---- --------
<S> <C> <C> <C>
Balance, December 31, 1998, as Restated $(13,550,976) $ (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, as restated (909,796) - -
------------- --------- ----------
Balance, March 31, 1999, as Restated $(14,460,772) $ - $ (469,431)
============= ========= ==========
</TABLE>
<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
---- ---- ----
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (909,796) $(1,097,838) $(14,460,772)
----------- ------------ -------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 37,107 15,517 352,455
Amortization of debt issue costs 26,250 153,612 368,185
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture - 210,951 2,388,718
Amortization of discount on warrants 36,730 7,298 327,027
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 18,634 251,771 4,995,491
----------- ------------ -------------
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 condensed financial statements.
<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. Certain amounts in the 1998 financial statements have
been reclassified to conform to 1999 presentation. 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. These factors raise
substantial doubt about the Company's ability to continue as a going
concern. The Company expects to submit an application for approval with
the FDA during July 1999. 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.
-12-
<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 has two patents for the use of Reticulose as a treatment. The
Company currently has 32 patent applications pending with the U.S.
Patent Office. The Company can give no assurance that other companies,
having greater economic resources, will not be successful in developing
a similar product. There can be no assurance that such patents, if
obtained, will be enforceable.
TESTING AGREEMENTS
Plata Partners Limited Partnership
On March 20, 1992, the Company entered into an agreement with Plata
Partners Limited Partnership ("Plata") pursuant to which Plata agreed
to perform a demonstration in the Domincan Republic in accordance with
a certain agreed upon protocol (the "Protocol") to assess the efficacy
of a treatment using Reticulose incorporated in the Protocol against
AIDS (the "Plata Agreement"). Plata covered all costs and expenses
associated with the demonstration.
Pursuant to the Plata Agreement, the Company authorized the issuance to
Plata of 5,000,000 shares of common stock and options to purchase an
additional 5,000,000 shares at $.08 per share through July 9, 1994 (the
"Plata Options") and 5,000,000 shares at $.10 per share through July 9,
1994 (the "Additional Plata Options"). Pursuant to several amendments,
the Plata Options and the Additional Plata Options are exercisable
through 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.
-13-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement
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.
-14-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
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.
-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)
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.
-16-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS
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.
-17-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
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.
-18-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AGREEMENTS (Continued)
Cohen Agreements
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.
-19-
<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.
-20-
<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.
-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 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 recorded as
interest expense in 1998.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(Restated) (Restated)
<S> <C> <C>
Unpaid principal balance of November debenture $1,500,000 $1,500,000
Less unamortized discount and deferred interest 30,058 42,081
--------- ---------
Convertible debenture, net $1,469,942 $1,457,919
========= =========
</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.
NOTE 5. RESTATEMENT
The accompanying financial statements for the three months ended march
31, 1999 have been restated to reduce interest expense for amortization
of the beneficial conversion feature associated with the November
debenture, which has been expensed in its entirety in the December 31,
1998 financial statements, as restated. The effect of the restatement
was to decrease net loss for the three months ended March 31, 1999 by
$156,250 ($.00 per share).
-22-
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 5. RESTATEMENT (Continued)
Additionally, $275,000 of expenses related to facilities and laboratory
technician costs associated with the New York facility were
reclassified from general and administrative to research and
development expense. This reclassification had no effect upon net loss
for the period ended March 31, 1999.
The accompanying financial statements for the three months ended March
31, 1999 and 1998 have been restated to reclassify $26,250 and
$160,910, respectively, of amortization of debt issue costs from
depreciation and amortization to interest expense. This
reclassification had no effect upon net loss for the period ended March
31, 1999 and 1998.
The effect of the changes on the financial statements are as follows:
<TABLE>
<CAPTION>
March 31, 1999
--------------
As
Previously As
Reported Restatement Restated
-------- ----------- --------
<S> <C> <C> <C>
Convertible Debenture, net $ 1,053,275 $ 416,667 $ 1,469,942
============= ========= ============
Deficit accumulated during the development
stage $ (14,044,105) $( 416,667) $ (14,460,772)
============= ========== ============
Research and development $ 82,916 $ 275,000 $ 357,916
============= ========= ============
General and administrative $ 713,403 $ (275,000) $ 438,403
============= ========= ============
Depreciation and Amortization $ 63,357 $( 26,250) $ 37,107
============= ========= ============
Interest expense $ 224,578 $ (130,000 $ 94,578
============= ========= ============
Net loss $ (1,066,046) $ (156,250) $ ( 909,796)
============= ========= ============
<CAPTION>
March 31, 1998
--------------
<S> <C> <C> <C>
Interest expense $ 275,248 $ 160,910 $ 436,158
============= ========= ============
Depreciation and Amortization $ 176,427 $ (160,910) $ 15,517
============= ========= ============
</TABLE>
-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 Condensed Financial Statements and the related Notes to
Consolidated Condensed Financial Statements included in Item 1 of this Quarterly
Report on Form 10-Q/A. 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/A for the year ended December 31, 1998. Certain amounts in the 1998
financial statements have been reclassified to conform to 1999 presentation.
Specifically, certain expenses were reclassified from general and administrative
to research and development expense and from depreciation and amortization to
interest expense. In addition, the beneficial conversion feature associated with
the debenture issued in connection with the Securities Purchase Agreement dated
November 16, 1998 between Advanced Viral and RBB Bank has been charged to
interest expense in its entirety as of November 16, 1998, rather than being
amortized.
OVERVIEW
Since our inception in July 1985, Advanced Viral Research Corp. has
been engaged primarily in research and development activities. We have not yet
generated significant operating revenues, and as of March 31, 1999 we had
incurred a cumulative net loss of $14,460,772. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of Reticulose. All of our 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, we must submit an Investigational New Drug
application (IND) with the FDA. Filings with foreign regulatory agencies are
required to continue or begin new clinical trials outside the United States. We
have recently contracted with GloboMax LLC of Hanover, Maryland to assist us in
our preparation and filing of the IND with the FDA, and otherwise to assist us
through the FDA process with the objective of obtaining full approval for the
manufacture and commercial distribution of Reticulose in the United States. The
IND will seek approval to conduct a study testing the effectiveness of
Reticulose on human subjects with AIDS and other diseases. In the IND we intend
to include, among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be conducted
on humans; and
o information assuring the identification, quality and purity of
Reticulose and a description of the physical, chemical and
microbiological characteristics of Reticulose.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Reticulose as a treatment of AIDS and other
diseases, however, it is impossible to determine if or how much of the data from
any ongoing studies will be considered useful by the FDA in
24
<PAGE>
considering the IND application, if we are financially able to file the IND. FDA
approval to begin human clinical trials of Reticulose pursuant to an approved
IND will require significant cash expenditures, the amount of which is not
currently determinable. Furthermore, we are unable to assess the probability of
whether Reticulose will ever be approved for commercial distribution by any
country.
We plan to continue to provide funding for testing programs in our
laboratory and at selected universities, medical schools, laboratories and
hospitals, but the amount of research that will be conducted at those
institutions will depend upon our financial status. Because our research and
development expenses and clinical trial expenses will be charged against
earnings for financial reporting purposes, we expect that losses from operations
will continue to be incurred for the foreseeable future.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and 1998
For the three month periods ended March 31, 1999 and March 31, 1998, we
incurred losses of $909,796 ($0.00 per share) and $1,097,838 ($0.00 per share),
respectively.
General and Administrative Expense. Our decreased losses during the
three months ended March 31, 1999 are due in part to decreased general and
administrative expense ($438,403 for the three months ended March 31, 1999 vs.
$505,414 for the three months ended March 31, 1998).
Depreciation Expense. We had increased depreciation expense for the
three months ended March 31, 1999 of $37,107 for the three months ended March
31, 1999 vs. $15,517 for the three months ended March 31, 1998.
Interest Expense. Our decreased losses during the three months ended
March 31, 1999 are also due to decreased interest expense ($94,578 for the three
months ended March 31, 1999 vs. $436,158 for the three months ended March 31,
1998), resulting primarily from:
o beneficial conversion feature on certain convertible debentures of
$0 for the three months ended March 31, 1999 vs.approximately
$211,000 for the three months ended March 31, 1998;
o interest expense associated with certain convertible debentures of
approximately $26,250 for the three months ended March 31, 1999
vs. $65,000 for the three months ended March 31, 1998;
o amortization of discount on certain warrants of approximately
$36,000 for the three months ended March 31, 1999 vs. $0 for the
three months ended March 31, 1998; and
o amortization of loan costs of approximately $26,250 for the three
months ended March 31, 1999 vs. $153,000 for the three months
ended March 31, 1998.
25
<PAGE>
Research and Development Expense. We had increased research and
development expense of $357,916 for the three months ended March 31, 1999 vs.
$170,146 for the three months ended March 31, 1998, in connection with increased
research and development activity in general, along with a shift from the use of
external to internal personnel and testing, including the employment of
additional research professionals; and rent and operating costs associated with
the Yonkers, New York laboratory.
Sales. We had sales of $2,399 for the three months ended March 31,
1999, vs. no sales for the three months ended March 31, 1998. All sales during
this period were to distributors purchasing Reticulose for testing purposes.
Interest income was $15,809 for the three months ended March 31, 1999, vs.
$29,297 for the three months ended March 31, 1998. There can be no assurance
that Reticulose will ever be sold for commercial distribution anywhere in the
world.
LIQUIDITY
Assets. 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.
Liabilities. As of March 31, 1999 and December 31, 1998, we had current
liabilities of $277,371 and $317,359, respectively. As of March 31, 1999 and
December 31, 1998, we had total long term liabilities of $1,623,806 and
$1,625,299 at March 31, 1999 and December 31, 1998, respectively.
Cash Flow. During the three months ended March 31, 1999, we 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, we:
o incurred non-cash expenses of approximately $115,000, primarily
relating to depreciation ($37,000), amortization of loan costs
($26,250) and discount on warrants ($37,000);
o expended approximately $352,000 for payroll and related costs;
o expended approximately $145,000 in professional and consulting
fees incurred in connection with the IND for Reticulose, certain
financing arrangements and financial reporting obligations;
o expended approximately $170,000 for research expenses incurred by
third parties in connection with the testing of Reticulose in
Argentina and Barbados; and
o expended approximately $32,000 in laboratory supplies.
During the three months ended March 31, 1999, cash flows provided by
investing and
26
<PAGE>
financing 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 ($202,000). In addition, we expended
approximately $53,000 for additions to machinery and equipment at our Yonkers,
New York office and the manufacturing plant in Freeport, Bahamas;
As of March 31, 1999, we had expended the following amounts for
research and development in connection with the following ongoing studies being
conducted abroad:
o $50,000 has been advanced to DCT in connection with a study being
conducted in Argentina by DCT on 65 patients to compare the
results of treatment of AIDS patients using a three-drug cocktail
and ReticuloseJ versus AIDS patients taking a three-drug cocktail
and a placebo, pursuant to an agreement entered in February 1998.
o $85,000 has been advanced to DCT to cover the costs of a
controlled study in 30 patients to determine the effectiveness of
ReticuloseJ for the treatment of rheumatoid arthritis in humans,
pursuant to an agreement entered in May 1998.
o $50,000 has been advanced to DCT to study the effects of
ReticuloseJ in inhibiting the mutation of the AIDS virus on
patients in Argentina, pursuant to an agreement entered in July
1998.
Projected Expenses
During 1999, we expect to spend approximately $1,000,000 on research
and development related activities, including:
o approximately $300,000 in the preparation of the IND;
o approximately $325,000 in connection with laboratory research,
equipment, supplies and electronics;
o approximately $300,000 in overseas research of Reticulose; and
o approximately $75,000 in preparing the manufacturing facility in
the Bahamas for FDA inspection and in accordance with good
manufacturing practices standards.
Management anticipates that we will be required to sell additional
securities to obtain the funds necessary to further our research and development
activities.
Under the terms of an agreement with RBB entered in November 1998
pursuant to which RBB purchased a 7% convertible debenture and related warrants,
we are required to file with the Commission a registration statement to register
shares of the common stock issuable upon conversion of the convertible debenture
and upon exercise of the related warrants to allow the investors to resell such
common stock to the public. Because the registration statement was not declared
effective by the Commission on or before April 13, 1999, the RBB agreement
provides that we pay RBB a penalty equal to the sum of (x) $30,000 and (y)
$1,500 for each day lapsed after such
27
<PAGE>
date, until the registration statement is declared effective by the Commission,
provided, however, that total penalties shall not exceed $100,000 in the
aggregate. As of the date hereof, RBB has not requested payment of the penalty,
and we are negotiating with RBB to have the penalty waived.
Under the terms of an agreement with several purchasers entered in
December 1998, pursuant to which such purchasers purchased an aggregate of
4,917,276 shares of common stock and warrants to purchase an additional
2,366,788 shares of common stock, we are 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. Because the registration statement was not declared
effective by the Commission on or before May 21, 1999, the agreement provides
that we pay a penalty of $30,000 for each full calendar month or portion thereof
lapsed after such date, until the registration statement is declared effective,
provided, however, that total penalties shall not exceed $100,000 in the
aggregate. As of the date hereof, the agent for the purchasers has not requested
payment of the penalty, and we are negotiating with such agent to have the
penalty waived.
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>
February 1997 $1,000,000 Debenture 6,675,982 shares $0.15-0.20 per share Fully converted
Warrants 535,134 shares $0.288-0.864 per share February 28, 2007
August 1997 $3,000,000 Debenture 17,577,534 shares $0.13-0.23 per share Fully converted
Warrants 1,800,000 shares $0.20-0.27 per share August 30, 2007
November 1998 $1,500,000 Debenture 7,018,017 shares (1) $0.2137 per share (1) October 31, 2008
Warrants 375,000 shares $0.20 per share
375,000 shares $0.24 per share
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 May 14, 1999, as reported on
the OTC Electronic Bulletin Board ($0.297), and an applicable conversion price
of $0.2137.
28
<PAGE>
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 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
29
<PAGE>
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 RBB a penalty equal to the sum of (x) $30,000 and (y) $1,500
for each day lapsed after such date, until a 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
30
<PAGE>
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 a 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 we do not obtain FDA or other approvals for Reticulose, we will have
to obtain funds from the exercise of options and warrants, potential grants
and/or additional equity. It is not likely that such funds will be available in
any significant amount, if at all.
We are 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 our two offices and
our Bahamian facility, and anticipate that we can continue operations for at
least nine months with our current liquid assets, including the proceeds from
the recent sale of the convertible debenture and other securities if no stock
options or warrants are exercised. If all of the stock options and warrants are
exercised, we will receive net proceeds of approximately $8.4 million. Those
proceeds will contribute to general and administrative and working capital and
will permit us to substantially increase our 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 we cannot be
certain. 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, we cannot be certain that the recent trading
levels will be sustained or that any additional options or warrants will be
exercised. If less than 25% or none of the outstanding options and warrants are
exercised, and we obtain no other additional financing, in order for us to
achieve the level of operations contemplated by management, management
anticipates that we will have to limit intentions to expand operations beyond
current levels. We are currently seeking debt financing,
31
<PAGE>
licensing agreements, joint ventures and other sources of financing, but the
likelihood of obtaining such financing on favorable terms, if at all, is small.
Furthermore, we cannot predict whether or when any of our distributors will ever
obtain regulatory approvals to test or market Reticulose in any territory and
generate revenue for our company. Management anticipates that they will have to
defer their salaries if financing is not available in order to continue
operations,. 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 large
uncertainties involved in the FDA approval process for commercial drug use on
humans, we cannot predict when or if we will ever be able to sell Reticulose
commercially.
We have three patents for the use of Reticulose as a treatment. In
addition, we have filed 34 patent applications with the united States Patent
Office, including one for Reticulose as a product. We cannot be certain that
other companies, having greater economic resources, will not be successful in
developing a similar product using processes similar to ours. We cannot be
certain that we will obtain such a patent or, if obtained, that it will be
enforceable. We have retained patent counsel for the purpose of pursuing
additional patent protection for Reticulose. However, we are uncertain that any
patents will be granted, or if granted, that such patents will be sustained if
questioned, and, if declared valid, that the patents, in fact, will operate to
protect us from the replication of Reticulose by competitors. We have relied
upon laws protecting proprietary information and trade secrets and upon
confidentiality agreements to protect our rights to Reticulose and the processes
for its manufacture, but we are uncertain as to whether such efforts and
procedures will continue to be successful and protect us from any competition in
the future.
YEAR 2000 COMPLIANCE
The 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 issue poses risks for our information
technology systems.
Our information technology systems are based upon software licenses and
software maintenance agreements with third party software companies. Based upon
our internal assessments and communications with our software vendors, all of
the software we use is Year 2000 compliant software. We have used internal
personnel to test our software systems for Year 2000 compliance and such tests
yielded positive results. We will continue to monitor our Year 2000 readiness.
Also, we do not anticipate difficulty in resolving issues related to imbedded
technology in the equipment provided to us by other manufacturers.
Based on the foregoing, we believe that we 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 our consolidated financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
32
<PAGE>
None.
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.
33
<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 stock 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
(i) Exhibits.
Number Description
------ -----------
27 Financial Data Schedule (for SEC use only)
(j) Reports on Form 8-K.
During the three-month period ending March 31, 1999, no
Current Reports on Form 8-K were filed.
34
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this amended report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ADVANCED VIRAL RESEARCH CORP.
Date: December 9, 1999 By: /s/ Alan V. Gallantar
------------------------------------------
Alan V. Gallantar, Chief Financial Officer
By: /s/ Shalom Z. Hirschman
------------------------------------------
Shalom Z. Hirschman, President and Chief
Executive Officer
35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF ADVANCED
VIRAL RESEARCH CORP. FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
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0
0
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</TABLE>
