Up to 46,070,901 Shares
ADVANCED VIRAL RESEARCH CORP.
Common Stock
The shareholders named on page 42 are selling up to 46,070,901 shares
of our common stock.
Our common stock is traded on the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board under the symbol "ADVR." On June 2, 2000 the
high and low bid prices for the common stock on the Bulletin Board were $0.4062
and $0.375, respectively.
Investing in our common stock involves substantial risks. See "RISK
FACTORS" beginning on page 4.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
The date of this prospectus is June 12, 2000.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary................................................................................................1
Risk Factors......................................................................................................4
About this Prospectus.............................................................................................8
Where to Find More Information....................................................................................8
Forward-looking Statements May Prove Inaccurate .................................................................8
Market Price of and Dividends on the Common Stock and Related Shareholder Matters.................................9
Capitalization...................................................................................................10
Selected Consolidated Financial Data.............................................................................11
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................................13
Business.........................................................................................................25
Management.......................................................................................................35
Principal Shareholders...........................................................................................41
Selling Shareholders.............................................................................................42
Certain Relationships and Related Transactions...................................................................43
Description of Common Stock......................................................................................43
Use of Proceeds..................................................................................................43
Plan of Distribution.............................................................................................43
Legal Matters....................................................................................................45
Experts..........................................................................................................46
Financial Statements............................................................................................F-1
</TABLE>
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information about the offering and Advanced
Viral Research Corp. which we believe will be most important to you. However,
you should read the entire prospectus for a complete understanding of the
offering and our business.
Advanced Viral Research Corporation
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug with the
trade name Reticulose(TM) (the current formulation of which is now known as and
hereinafter referred to as Product R(TM)) for the treatment of certain viral
diseases such as:
o human immunodeficiency virus, or HIV, including acquired immune
deficiency syndrome, or AIDS;
o hepatitis B and hepatis C, both liver diseases
o human papilloma virus, or HPV, which causes genital warts and may
lead to cervical cancer; and
o rheumatoid arthritis.
Since 1962, when Reticulose was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose to be
marketed in the United States. A forfeiture action was instituted in 1962 by the
FDA against Reticulose, and it was withdrawn from the United States market. The
injunction obtained by the FDA prohibits, among other things, any shipment of
Reticulose, now known as "Product R," until a new drug application, or NDA, is
approved by the FDA. FDA approval of an NDA first requires clinical testing of
Product R in human trials, which cannot be conducted until we first satisfy the
regulatory protocols and the substantial preapproval requirements imposed by the
FDA upon the introduction of any new or unapproved drug product pursuant to a
notice of claimed investigational exemption for a new drug, or IND.
Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either in
vitro (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients outside the United States.
Shalom Z. Hirschman, M.D., our President, has monitored the testing of
Product R and has recently performed analyses of Product R with our laboratory
personnel, which we believe may be used in connection with the FDA approval
process. In addition, we have contracted with GloboMax LLC of Hanover, Maryland
to advise us in our preparation and filing of an IND with the FDA, and to
otherwise assist us through the FDA process with the objective of obtaining full
approval for the manufacture and commercial distribution of Product R in the
United States.
1
<PAGE>
Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701 and 1250 East Hallandale Beach Boulevard, Suite 501, Hallandale,
Florida 33009. Our telephone number in Yonkers, New York is (914) 376-7383 and
our telephone number in Hallandale, Florida is (954) 458-7636 .
<TABLE>
<CAPTION>
The Offering
<S> <C>
Securities offered............................... 46,070,901 shares of common stock. (1)
Shares outstanding............................... 379,429,387 shares of common stock. (2)
Use of proceeds.................................. We will not receive any proceeds from the sale of
common stock by the selling
shareholders. We will receive
the cash proceeds, if any,
from the exercise of stock
options or warrants held by
selling shareholders. See
"Management's Discussion and
Analysis of Financial
Condition and Results of
Operations."
</TABLE>
------------------------
(1) Represents (i) 13,816,357 shares of our common stock, (ii) up to 23,300,000
shares of common stock issuable upon the exercise of certain stock options,
and (iii) up to 8,954,544 shares of common stock issuable upon exercise of
certain warrants.
(2) As of June 2, 2000. Includes shares described in footnote (1) above, but
does not include approximately 34,000,000 shares issuable upon exercise of
certain outstanding options, convertible debentures and warrants that are
not held by the selling shareholders.
2
<PAGE>
SUMMARY FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus.
Summary Statement of Operations Data
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------------------------
3 Months Ended
1995 1996 1997 1998 1999 March 31, 2000
------ ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $27,328 $24,111 $2,278 $656 $10,953 $3,028
Net loss ($401,884) ($1,154,740) ($4,141,729) ($4,557,710) ($6,174,262) $ (2,054,420)
Net loss per common share ($0.00) ($0.00) ($0.02) ($0.02) ($0.02) ($0.01)
Weighted average # of shares 248,002,608 257,645,815 274,534,277 294,809,073 302,361,109 313,819,774
</TABLE>
Summary Balance Sheet Data
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------------------------
As of
1995 1996 1997 1998 1999 March 31, 2000
------ ------ ------ ------ ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Total Assets $796,241 $1,716,800 $4,189,842 $3,304,953 $2,861,574 $ 6,528,950
Long-term liabilities - - $2,384,793 $1,625,299 $4,676,652 $3,228,366
Stockholders' equity per $0.00 $0.01 $0.01 $0.00 $0.00 $0.01
common share
Shares outstanding at year end 251,181,774 267,031,058 277,962,574 296,422,907 303,472,035 347,174,843
</TABLE>
3
<PAGE>
RISK FACTORS
Our securities are highly speculative. You shouldn't purchase them
unless you can afford to lose your entire investment. You should consider very
carefully the following risk factors before you decide to purchase our
securities.
1. Because our shares are 'penny stocks,' you may be unable to resell them
in the secondary market.
A "penny stock" is an equity security with a market price of less than
$5 per share which is not listed on the Nasdaq or a national securities
exchange. Due to the extra risks involved in an investment in penny stocks,
federal securities laws and regulations require broker/dealers who recommend
penny stocks to persons other than their established customers and accredited
investors to make a special written suitability determination for the purchaser,
provide them with a disclosure schedule explaining the penny stock market and
its risks, and receive the purchaser's written agreement to the transaction
prior to the sale. These requirements limit the ability of broker/dealers to
sell penny stocks. Also, because of the extra requirements, many broker/dealers
are unwilling to sell penny stocks at all. As a result, you maybe unable to
resell the stock you buy in this offering and could lose your entire investment.
2. The exercise or conversion of our outstanding convertible securities
could have a significant negative impact on the market price of our
common stock.
As of the date of this prospectus, in addition to the 347,174,843
shares of our common stock currently outstanding, the following securities are
outstanding:
o Stock options to purchase an aggregate of 51,952,280 shares of
common stock at exercise prices ranging from $0.15 to $0.36
o Warrants to purchase an aggregate of 14,247,296 shares of common
stock at prices ranging from $0.199 to $0.864
o Convertible debentures currently estimated to be convertible into
an aggregate of approximately 58,000 shares based on the average
bid and ask price of our common stock on June 2, 2000, which was
$0.39.
If all the outstanding options, warrants, and convertible debentures
were fully exercised and converted, as the case may be, there would be
outstanding approximately an additional 66,255,000 shares of common stock. The
sale or availability for sale of this number of shares of common stock in the
public market could depress the market price of the common stock. Additionally,
the sale or availability for sale of this number of shares may lessen the
likelihood that additional equity financing will be available to us, on
favorable or unfavorable terms.
4
<PAGE>
3. It is unlikely that our company will be able to continue as a going
concern without a significant improvement in our financial condition,
which has constrained our ability to finance necessary research,
development and other operating expenses as needed.
Our independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1999
includes an explanatory paragraph regarding our ability to continue as a going
concern. During the next 12 months, we expect to spend approximately $9,000,000
($4,000,000 of which was raised during the first quarter of fiscal 2000) to
conduct research and development related activities, including approximately
$2,250,000 related to the preparation of the IND for submission to the FDA. We
currently are unable to calculate the amount we will require in additional
funding to complete the FDA approval process, including conducting clinical
trials and filing the NDA application. Our ability to continue operations is
dependent upon our continued sale of our securities for funds to meet our cash
requirements, and as a result our ability to continue as a going concern is
doubtful.
Unless we are able to generate sufficient revenue or raise additional
funds when needed, it is likely that we will be unable to continue our planned
activities, even if we are making progress with our research and development
projects. The longer the duration of the regulatory approval process, the more
unlikely it is that we will be able to raise such funds on favorable terms or at
all, or that any funds raised will be sufficient to complete the FDA approval
process to achieve our goal of commercial distribution in the United States and
elsewhere. Furthermore, there is no guarantee that approval of Product R by the
FDA or any other regulatory authority, or additional financing from the sale of
our securities, will translate into any material change in our financial
condition. The extensive delays and costs of complying with the FDA regulations
makes it unlikely that we will have adequate funds to finance the necessary
clinical studies and related costs.
4. If we do not obtain the FDA's approval to conduct clinical tests of
Product R in the United States, we will not be able to complete its
development and may not be able to sell it anywhere.
Product R is the only product we are developing, We will not be able to
sell it in the United States unless we submit, and the FDA approves, a new drug
application, or NDA. We must conduct clinical trials of Product R in humans
before we submit an NDA. However, we cannot begin clinical trials in the United
States until the FDA approves our notice of claimed investigational exemption
for a new drug, or IND. We have not yet submitted an IND for Product R and we
don't know if or when we will submit one. The FDA will not approve our IND if we
haven't satisfied regulatory protocols and other preapproval requirements
required for the introduction of a new or unapproved drug.
If we submit an IND and the FDA approves it, we won't be able to begin
clinical testing unless we are able to obtain the additional financing we need
in order to conduct the trials. It is also possible that clinical trials, if
conducted, will not prove that Product R is safe or effective in
5
<PAGE>
treating viruses of any kind, in which case we won't be able to submit an NDA
and we won't be able to sell Product R in the United States.
We haven't been able to sell Product R outside the United States
because we don't have a free sales certificate for Product R. A free sales
certificate is a document issued by the country in which a pharmaceutical
product is manufactured, certifying that the country permits the "free sale" of
the product in that country. The Bahamas, where our manufacturing facility is
located, has no procedure in place to issue a free sales certificate for any
therapeutic drug, including Product R. Most countries require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured before allowing the registration of the
product in that country. Because we are unable to obtain a certificate from the
Bahamas, we are not able to meet registration requirements in the countries
which require the certificate, and will be unable to sell Product R in those
countries.
5. We have incurred losses since our inception, have no product revenue,
and expect to incur additional losses in the future.
Although we were formed in 1985, we are still in the development stage.
From inception through December 31, 1999, we had an accumulated deficit of
approximately $19,700,000. We expect that our deficit will continue to increase.
The only product revenues we have ever had are insignificant amounts related to
our distribution of Product R for testing purposes. We do not currently have any
source of product revenue. At this time we have no basis to believe that we will
ever generate operating revenues from the sale of Product R.
6. We depend on patents and proprietary rights, which may offer only
limited protection against potential infringement. If we are unable to
protect our patents and proprietary rights, our business, financial
condition and results of operations will be harmed.
Patent protection and trade secret protection are important to our
business and that our future will depend, in part, on our ability to maintain
trade secret protection, obtain patents and operate without infringing the
proprietary rights of others both in the United States and abroad. Litigation or
other legal proceedings may be necessary to defend against claims of
infringement, to enforce our patents, or to protect our trade secrets, and could
result in substantial cost to us and diversion of our efforts. We currently have
15 patent applications pending with the United States Patent and Trademark
Office (the "PTO") and 17 patent applications pending in other countries
relating to Product R. In the United States, we have one allowed patent and
three issued patents from the PTO.
We also rely on trade secrets, know-how and continuing technological
advancements to protect our proprietary technology. We require all of our
employees, consultants, advisors and collaborators to enter into confidentiality
agreements that prohibit the use or disclosure of information that is deemed
confidential. The agreements also oblige our employees, consultants, advisors
and collaborators to assign to us developments, discoveries and inventions made
by such persons in connection with their work with us. However, these parties
may not honor these agreements and we may not be able to successfully protect
our rights to unpatented trade secrets and
6
<PAGE>
know-how. Others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets and
know-how.
To facilitate development of our proprietary technology base, we may
need to obtain licenses to patents or other proprietary rights from other
parties. If we are unable to obtain such licenses, our product development
efforts may be delayed.
We may collaborate with universities and governmental research
organizations which, as a result, may acquire certain rights to any inventions
or technical information derived from such collaboration.
We may incur substantial costs in asserting any patent rights and in
defending suits against us related to intellectual property rights. Such
disputes could substantially delay our product development or commercialization
activities. The United States Patent and Trademark Office or a private party
could institute an interference proceeding relating to our patents or patent
applications. An opposition or revocation proceeding could be instituted in the
patent offices of foreign jurisdictions. An adverse decision in any such
proceeding could result in the loss of our rights to a patent or invention.
7. Our business could be harmed if we lose the services of the key
personnel upon whom we depend.
Advanced Viral is currently wholly dependent upon the personal efforts
and abilities of our three full-time executive officers, only one of whom,
Bernard Friedland, Chairman of the Board, has any experience in the
pharmaceutical industry. The loss or unavailability to us of the services of
Bernard Friedland or Dr. Hirschman, President and Chief Executive Officer, could
have a material negative impact on our business prospects and any potential
earning capacity, and, therefore, we have obtained "key-man" insurance on the
lives of Mr. Friedland and Dr. Hirschman in the amounts of $400,000 and
$1,000,000, respectively. If our level of operations significantly increase, the
business may depend upon our abilities to attract and hire additional management
and staff employees. It is possible that we will be unable to secure such
additional management and staff when necessary.
8. The voting control held by present management could significantly
impact our business.
As of the date of this prospectus, our current officers and directors
beneficially owned 114,152,133 shares of our common stock, or approximately
32.9% of the shares of common stock deemed outstanding on such date for the
purposes of the percentage calculation, including certain shares underlying
options held by Dr. Hirschman. As there are no cumulative voting rights, current
management, by virtue of their stock ownership, can be expected to influence
substantially the election of our board of directors and thereby continue to
impact substantially our business, affairs and policies.
7
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with
the Securities and Exchange Commission to register the resale of the shares
issued or issuable to the selling shareholders as provided in this prospectus.
As permitted by the Commission's rules, this prospectus does not contain all of
the information you can find in the registration statement or the exhibits to
the registration statement. This prospectus summarizes some of the documents
that are exhibits to the registration statement, and you should refer to the
exhibits for a more complete description of the matters covered by those
documents.
We have not authorized anyone to give any information regarding the
offering of the shares that is different from what is contained in this
prospectus. This prospectus is not an offer to sell or a solicitation of anyone
to whom it would be unlawful to make an offer of solicitation. You should not
assume that the information contained in this prospectus is accurate as of any
time after the date of this prospectus, and neither the mailing of this
prospectus to our shareholders nor the issuance of the shares should create any
implication to the contrary.
WHERE TO FIND MORE INFORMATION
We file annual, quarterly and special reports with the Commission. The
annual reports contain financial information about Advanced Viral that has been
audited and reported on, with an opinion expressed by an independent auditor.
These filings are available on the Commission's website: http://www.sec.gov.
Hard copies are available at the Commission's public reference facilities at the
following addresses:
- 450 Fifth Street, NW, Room 1024, Washington, D.C. 20549;
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois, 60661; and
- 7 World Trade Center, 13th Floor, New York, New York, 10007.
Call the Commission at 1-800-SEC-0330 with questions about its public
reference facilities. To contact us, use the following information:
Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
(914) 376-7383
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. Words such as "expects," "may," "will," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements. These forward-looking statements are
subject to important factors, disclosed in this prospectus, that could cause
actual results to differ materially from such expectations, including those
factors discussed in "Risk Factors."
8
<PAGE>
We will not publicly update or revise any forward-looking statements,
whether because of new information, future events or otherwise. In light of
these risks, uncertainties, and assumptions, the forward-looking events
discussed in the prospectus might not occur.
MARKET PRICE OF AND DIVIDENDS ON THE COMMON
STOCK AND RELATED SHAREHOLDER MATTERS
Common Stock
The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent fiscal years
ended December 31, 1998 and 1999, and for the first quarter and second quarter
of 2000 through June 2, 2000. The high and low bid prices for the periods
indicated reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
<TABLE>
<CAPTION>
Low Bid High Bid
<S> <C> <C>
--- --- ---
1998
First Quarter................................................................$0.18 $0.4375
Second Quarter................................................................0.245 0.46
Third Quarter.................................................................0.16 0.30
Fourth Quarter................................................................0.155 0.23
1999
First Quarter.................................................................0.175 0.35
Second Quarter................................................................0.202 0.322
Third Quarter.................................................................0.1875 0.2344
Fourth Quarter................................................................0.19 0.27
2000
First Quarter.................................................................0.185 1.40
Second Quarter through June 2, 2000...........................................0.3125 0.6875
</TABLE>
Stockholders
The approximate number of holders of record of the Common stock as of
the date of this prospectus is 2,746 inclusive of those brokerage firms and/or
clearing houses holding shares of common stock for their clientele (with each
such brokerage house and/or clearing house being considered as one holder).
Dividend Policy
We have not declared or paid any dividends on our shares of common
stock. We intend to retain future earnings, if any, that may be generated from
our operations to finance our future operations and expansion and do not plan
for the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend
9
<PAGE>
on our results of operations and financial position and such other factors as
our board of directors in its discretion deems relevant.
CAPITALIZATION
The following table sets forth the actual capitalization derived from
our financial statements as of March 31, 2000, and an adjusted capitalization to
reflect the issuance of an additional 46,070,901 common stock pursuant to:
o the issuance of 13,816,357 shares;
o the issuance of 8,954,544 shares upon the full exercise of
certain warrants; and
o the issuance of 23,300,000 shares upon the full exercise of
certain stock options.
The capitalization information set forth in the table below is
qualified by, and should be read in conjunction with, the more detailed
Consolidated Financial Statements and Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Pro Forma
Actual Pro Forma (1) As Adjusted
------ ------------- -----------
<S> <C> <C> <C>
Stockholders' Equity:
Common stock, $0.00001 par value; 1,000,000,000 shares $3,471 $3,607 $3,794
authorized; 347,174,843 shares outstanding Actual; 360,811,200
shares outstanding Pro Forma; 379,429,387 shares outstanding Pro
Forma As Adjusted
Additional paid-in-capital $26,117,514 $29,117,376 $34,889,691
Deficit accumulated during the development stage ($21,779,658) ($21,779,658) ($21,779,658
Discount on Warrants ($1,958,286) ($1,958,286) ($1,958,286)
Total Stockholders' Equity: ($2,383,041) $5,383,039 $11,383,039
</TABLE>
(1) Gives effect to issuance of 13,636,357 shares of common stock pursuant to a
securities purchase agreement dated February 16, 2000.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical financial data as of and for the
years ended December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Selected Statement of Operations Data
Year Ended December 31
--------------------------------------------------------------------------------- 3 Months Ended
1995 1996 1997 1998 1999 March 31, 2000
------ ------ ------ ------ -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 27,328 $ 24,111 $ 2,278 $ 656 $ 10,953 $ 3,028
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 34,931 255,660 817,603 1,659,456 1,745,937 695,075
General and administrative 420,757 983,256 1,681,436 1,420,427 2,244,205 755,423
Depreciation 14,679 18,731 26,288 110,120 230,785 67,760
------------- ------------- ------------- ------------- ------------- -------------
470,367 1,257,647 2,525,327 3,190,003 4,220,927 1,518,258
------------- ------------- ------------- ------------- ------------- -------------
Net Loss from Operations (443,039) (1,233,536) (2,523,049) (3,189,347) (4,209,974) (1,515,230)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest Income 16,155 46,796 111,845 102,043 42,744 24,963
Other 25,000 32,000 7,800 293 -- --
Interest Expense -- -- (1,738,325) (1,470,699) (2,007,032) (564,153)
------------- ------------- ------------- ------------- ------------- -------------
41,155 78,796 (1,618,680) (1,368,363) (1,964,288) (539,190)
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (401,884) $ (1,154,740) $ (4,141,729) $ (4,557,710) $ (6,174,262) $ (2,054,420)
============= ============= ============= ============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ 0.00 $ 0.00 ($ 0.02) ($ 0.02) ($ 0.02) ($ 0.01)
============= ============= ============= ============= ============= =============
Weighted Average Number of
Commons Shares Outstanding 248,002,608 257,645,815 274,534,277 294,809,073 302,361,109 313,819,774
============= ============= ============= ============= ============= =============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Selected Balance Sheet Data
December 31
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Assets:
Current Assets:
Cash and cash equivalents $ 65,230 $ 61,396 $ 236,059 $ 924,420 $ 836,876
Investments 479,000 1,378,841 2,984,902 821,047 --
Inventory 18,091 19,729 19,729 19,729 19,729
Other current assets 12,967 16,081 20,240 29,818 59,734
------------- ------------- ------------- ------------- -------------
Total current assets 575,288 1,476,047 3,260,930 1,795,014 916,339
Property and Equipment 214,494 207,209 485,661 1,049,593 1,375,923
Other Assets 6,459 33,544 443,251 460,346 569,312
------------- ------------- ------------- ------------- -------------
Total Assets $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953 $ 2,861,574
============= ============= ============= ============= =============
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Accounts payable and accrued liabilities $ 14,651 $ 54,474 $ 375,606 $ 279,024 $ 728,872
Current portion of capital lease obligation -- -- -- 38,355 50,315
Current portion of note payable -- -- -- -- 19,035
------------- ------------- ------------- ------------- -------------
Total current liabilities 14,651 54,474 375,606 317,379 798,282
------------- ------------- ------------- ------------- -------------
Long-Term Liabilities:
Common stock to be issued -- -- -- -- --
Convertible debenture, net -- -- 2,384,793 1,457,919 4,446,629
Capital lease obligation-non-current portion -- -- -- 167,380 152,059
Note payable-non-current portion -- -- -- -- 77,964
------------- ------------- ------------- ------------- -------------
Total Long-Term Liabilities -- -- 2,384,793 1,625,299 4,676,652
------------- ------------- ------------- ------------- -------------
Deposit on securities purchase agreement -- -- -- 600,000 --
------------- ------------- ------------- ------------- -------------
Stockholders' Equity (Deficiency):
Common stock, 1,000,000,000 shares of par
value $0.00001 authorized 2,512 2,671 2,779 2,964 3,034
Additional paid-in capital 4,475,875 7,003,351 10,512,767 14,325,076 17,537,333
Subscription receivable -- (19,000) (19,000) -- --
Deficit accumulated during the development (3,696,797) (4,851,537) (8,993,266) (13,550,976) (19,725,238)
stage
Deferred compensation cost -- (473,159) (73,837) (14,769) --
Discount on warrants -- -- -- -- (428,489)
Total Stockholders' Equity (deficiency) 781,590 1,662,636 1,429,443 762,295 (2,613,360)
------------- ------------- ------------- ------------- -------------
Total Liabilities and Stockholders' equity $ 796,241 $ 1,716,800 $ 4,189,842 $ 3,304,953 $ 2,861,574
============= ============= ============= ============= =============
Shares outstanding at period end 251,181,774 267,031,058 277,962,574 296,422,907 303,472,035
============= ============= ============= ============= =============
(RESTUBBED TABLE)
As of March
31, 2000
-----------
Assets:
Current Assets:
Cash and cash equivalents $ 4,094,197
Investments --
Inventory 19,729
Other current assets 167,387
-------------
Total current assets 4,281,313
Property and Equipment 1,673,358
Other Assets 574,279
-------------
Total Assets $ 6,528,950
=============
Liabilities and Stockholders' Equity (Deficiency)
Current Liabilities:
Accounts payable and accrued liabilities $ 846,675
Current portion of capital lease obligation 51,416
Current portion of note payable 19,452
-------------
Total current liabilities 917,543
-------------
Long-Term Liabilities:
Common stock to be issued 3,000,000
Convertible debenture, net 15,000
Capital lease obligation-non-current portion 138,785
Note payable-non-current portion 74,581
-------------
Total Long-Term Liabilities 3,228,366
-------------
Deposit on securities purchase agreement --
-------------
Stockholders' Equity (Deficiency):
Common stock, 1,000,000,000 shares of par
value $0.00001 authorized 3,471
Additional paid-in capital 26,117,514
Subscription receivable --
Deficit accumulated during the development
stage
Deferred compensation cost --
Discount on warrants (1,958,286)
Total Stockholders' Equity (deficiency) 2,383,041
-------------
Total Liabilities and Stockholders' equity $ 6,528,950
=============
Shares outstanding at period end 347,174,843
=============
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
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 this prospectus. 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, 1999.
Overview
Since our inception in July 1985, ADVR has been engaged primarily in
research and development activities. We have not yet generated significant
operating revenues, and as of March 31, 2000 we had incurred a cumulative net
loss of approximately $21,780,000. Our ability to generate substantial operating
revenue depends upon our success in gaining FDA approval for the commercial use
and distribution of Product R (the prior formulation of which was known as
"Reticulose"). All of our research and development efforts have been devoted to
the development of Product R.
In order to commence clinical trials for regulatory approval of Product
R 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 to otherwise assist us
through the FDA process with the objective of obtaining full approval for the
manufacture and commercial distribution of Product R in the United States. The
IND will seek approval to conduct a study testing the effectiveness of Product R
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 Product R and a description of the physical,
chemical and microbiological characteristics of Product R.
We believe that the IND will demonstrate the low rate of adverse
reactions occurring in the use of Product R 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 considering the IND
application, if it is ever filed. FDA approval to begin human clinical trials of
Product R pursuant to an approved IND will require significant cash
expenditures. Furthermore, Product R may never 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
13
<PAGE>
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
For the three month periods ended March 31, 2000 and March 31, 1999, we
incurred losses of approximately $2,054,000 ($0.01 per share) and $910,000
($0.00 per share). Our increased losses were attributable primarily to:
General and Administrative Expense. Our increased losses during the
three months ended March 31, 2000 are principally due to increased general and
administrative expense (approximately $755,000 for the three months ended March
31, 2000 vs. $438,000 for the three months ended March 31, 1999). Included in
the general and administrative expenses are:
o an increase in consulting and professional fees of
approximately $182,000 ($327,000 for the three months
ended March 31, 2000 vs. $145,000 for the three
months ended March 31, 1999) attributable to the
engagement of an investor relations firm and a
consulting agreement with Harbor View Group;
o an increase in payroll and related expenses of
approximately $90,000 ($236,000 for the three months
ended March 31, 2000 vs. $146,000 for the three
months ended March 31, 1999) attributable to
increased employee and officer salaries and the
addition of a Chief Financial Officer position; and
o SEC filing fees of approximately $40,000 for the
three months ended March 31, 2000 vs. $0 filing fees
paid during the three months ended March 31, 1999.
Depreciation Expense. Our increased losses during the three months
ended March 31, 2000 are also due to increased depreciation expense
(approximately $68,000 for the three months ended March 31, 2000 vs. $37,000 for
the three months ended March 31, 1999) due to the purchase of additional
machinery and equipment and leasehold improvements.
Interest Income (Expense). Our increased losses during the three months
ended March 31, 2000 are also due to increased interest expense (approximately
$564,000 for the three months ended March 31, 2000 vs. $95,000 for the three
months ended March 31, 1999). Interest income for the three months ended March
31, 2000 was approximately $25,000 vs $16,000 for the three months ended March
31, 1999. Included in the interest expense are:
o amortization of loan costs and other interest expense
(as reduced by other items previously accrued at year
end) of approximately $57,000 for the three months
ended March 31, 2000 vs. $26,000 for the three months
ended March 31, 1999;
o beneficial conversion feature on certain convertible
debentures of approximately $387,000 for the three
months ended March 31, 2000 vs. $0 for the three
months ended March 31, 1999;
14
<PAGE>
o amortization of discount on certain warrants of
approximately $120,000 for the three months ended
March 31, 2000 vs. $37,000 for the three months ended
March 31, 1999.
Research and Development Expense. Our increased losses during the three
months ended March 31, 2000 are also due to increased research and development
expenses (approximately $695,000 for the three months ended March 31, 2000 vs.
$358,000 for the three months ended March 31, 1999). Included in the research
and development expenses are:
o consulting expenses payable to GloboMax LLC, a firm
assisting us with the preparation and filing of the
IND, of approximately $268,000 for the three months
ended March 31, 2000 vs. $0 for the three months
ended March 31, 1999; and
o expenditures in connection with the drug approval
process in Argentina of approximately $45,000 for the
three months ended March 31, 2000 vs. $0 for the
three months ended March 31, 1999.
Revenues. We had sales of approximately $3,000 for the three months
ended March 31, 2000 vs. $2,000 for the three months ended March 31, 1999. All
sales during these periods were to distributors purchasing Product R for testing
purposes.
Liquidity
As of March 31, 2000, we had current assets of approximately
$4,281,000, compared to approximately $916,000 at December 31, 1999. We had
total assets of approximately $6,529,000 and $2,862,000 at March 31, 2000 and
December 31, 1999, respectively. The increase in current and total assets was
primarily attributable to proceeds received from the sale of securities and the
exercise of outstanding options (please refer to Statement of Stockholders
Equity contained in the Consolidated Condensed Financial Statements and the
related Notes to Consolidated Condensed Financial Statements included in this
prospectus.
On March 31, 2000, we filed a shelf registration for 200 million shares
of our common stock (the "Shelf"), all of which remain available for issuance.
During the three months ended March 31, 2000, we used cash of
approximately $1,168,000 for operating activities, as compared to approximately
$891,000 for the three months ended March 31, 1999. During the three months
ended March 31, 2000, we:
o expended approximately $236,000 for payroll and
related costs during the three months ended March 31,
2000;
o incurred non-cash expenses of approximately $386,900
relating to amortization of deferred interest
associated with the beneficial conversion feature of
the second tranche of the December 1999 convertible
debentures;
15
<PAGE>
o expended approximately$215,000 for professional and
consulting fees during the three months ended March
31, 2000;
o incurred non-cash expenses relating to amortization
of loan costs and discount on warrants relating to
convertible debentures issued in 1998, 1999 and 2000
of approximately $106,000 and $119,900, respectively;
and
o incurred non-cash expenses of approximately $112,000
relating to the issuance of warrants for consulting
services.
During the three months ended March 31, 2000, cash flows provided by
financing activities was primarily due to the proceeds from the sale of
convertible debentures, sale of common stock and exercise of options in 1999 and
2000 of approximately $4,800,000. During the three months ended March 31, 2000,
cash flow used for investing activities were for expenditures of approximately
$365,000 for leasehold improvements and furniture and equipment at our Yonkers,
New York office.
Under the terms of an agreement with RBB Bank, A.G. entered in November
1998 pursuant to which RBB purchased a 7% convertible debenture and related
warrants, we were 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 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 were 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 $16,050 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. The registration statement was declared effective by the Commission
on December 16, 1999. Pursuant to an agreement in January 2000, the purchasers
in this transaction were paid an aggregate cash penalty of $96,300 in connection
with the registration statement.
Under the terms of an agreement with several purchasers entered in June
1999, pursuant to which such purchasers purchased an aggregate of 1,851,852
shares of common stock and warrants to purchase an additional 926,528 shares of
common stock, we were 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 agreement provides that if the registration statement is not
declared effective by the Commission prior to December 3, 1999, we must pay
16
<PAGE>
the purchasers a penalty of $10,000, on a pro rata basis, for each full calendar
month lapsed after such date, and a pro rated amount of said $10,000 based on a
month of 30 or 31 days (as applicable to the month in which the registration
statement is declared effective), provided, however, that total penalties shall
not exceed $20,000 in the aggregate. The registration statement was declared
effective by the Commission on December 29, 1999.
Under the terms of a securities purchase agreement with Focus Investors
LLC dated August 3, 1999 pursuant to which Focus Investors purchased 7%
convertible debentures and related warrants, we were required to file with the
Commission a registration statement to register shares of the common stock
issuable upon conversion of the debentures and upon exercise of the warrants to
allow the purchaser to resell such common stock to the public. The purchase
agreement provides that, if the registration statement is not declared effective
prior to December 1, 1999, or if the number of shares qualified for trading on
the OTC Bulletin Board or reserved for issuance is insufficient for issuance
upon the conversion of the debentures and the exercise of the warrants, or if a
blackout event occurs (as described in the agreement, each of these events
referred to as a "default"), we will be required to pay the purchaser a penalty
for each 30 day period during which a default shall be in effect equal to
$40,000, pro rated for the number of days during each period the defaults were
pending. To the extent the periodic amounts for all default periods exceed
$100,000 in the aggregate, the excess amount shall be paid in shares of common
stock, as set forth in the agreement. The agreement further provides that until
the registration statement has been filed and becomes effective, we will not
file any other registration statement without the written consent of Focus
Investors. The registration statement was declared effective by the Commission
on December 29, 1999.
Under the terms of a securities purchase agreement with Endeavour
Capital Fund S.A. dated December 28, 1999 and related documents thereto pursuant
to which Endeavour purchased 7% convertible debentures and related warrants, we
were required to file with the Commission a registration statement to register
shares of the common stock issuable upon conversion of the debentures (together
with interest on the debentures, which is payable in common stock on conversion)
and upon and upon exercise of the warrants to allow the purchaser to resell such
common stock to the public. The purchase agreement provides that, if the
registration statement is not declared effective prior to April 1, 2000, or if
the purchaser is restricted from making sales of registrable securities covered
by a previously effective registration statement at any time after the effective
date other than during a permitted suspension period (as defined in the
agreement), then, we will be required to pay the purchaser $40,000 (2% of the
purchase price) for each 30-day period of such default (except that, prior to
the initial effectiveness of this registration statement, the amount will be
$30,000 (1.5% of the purchase price) during the first two 30-day periods of such
default). The registration statement was declared effective by the Commission on
January 18, 2000.
In February 2000 pursuant to a securities purchase agreement, we sold
to Harbor View Group and various other purchasers 13,636,357 shares of common
stock, and warrants to purchase an aggregate of 5,454,544 shares of common stock
in a private offering transaction. Under the terms of the agreement, we are
required to use our best efforts to file a registration statement to register
the securities issued or issuable in connection with the agreement by May 31,
2000.
The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 1999,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements states that our ability
17
<PAGE>
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our 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. Although we may not be successful in doing so, we
plan to eliminate or remedy the deficiencies in our financial condition through
the issuance of additional securities for cash.
Capital Resources
We have 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 sales of our securities since February 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Gross Convertible / Conversion Price / Maturity Date /
Date Issued Proceeds Security Issued Exercisable Into Exercise Price Expiration Date
--------------------------------------------------------------------------------------------------------------------
<S> <C> <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 17,577,354 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 10,130,246 shares $0.1363-$.2011 per share Fully converted
----------------------------------------------------------------------------------
Warrants 375,000 shares $0.20 per share October 31, 2008
-----------------------------------------------------------------
375,000 shares $0.24 per share
--------------------------------------------------------------------------------------------------------------------
January 1999 $802,500 Common Stock 4,917,276 shares n/a n/a
----------------------------------------------------------------------------------
Warrants 1,183,394 shares $0.2040 per share December 31, 2003
-----------------------------------------------------------------
1,183,394 shares $0.2448 per share
--------------------------------------------------------------------------------------------------------------------
July 1999 $500,000 Common Stock 1,851,852 shares n/a n/a
----------------------------------------------------------------------------------
Warrants 463,264 shares $0.324 per share June 30, 2004
-----------------------------------------------------------------
463,264 shares $0.378 per share
--------------------------------------------------------------------------------------------------------------------
August 1999 $2,000,000 Debentures 14,348,847 shares $0.1396-$.1438 per share Fully converted
----------------------------------------------------------------------------------
Warrants 1,000,000 shares $0.2461 per share August 3, 2004
--------------------------------------------------------------------------------------------------------------------
December 1999 $2,000,000 Debentures 13,896,090 shares (1) $0.1363-.1929 per share December 31, 2004
and January 2000 ----------------------------------------------------------------------------------
Warrants 210,000 shares $0.19916667 per share December 31, 2002
--------------------------------------------------------------------------------------------------------------------
February 2000 $3,000,000 Common Stock 13,636,957 shares n/a n/a
----------------------------------------------------------------------------------
Warrants 2,727,272 shares $0.275 per share February 28, 2005
-----------------------------------------------------------------
2,727,272 shares $0.33 per share
--------------------------------------------------------------------------------------------------------------------
</TABLE>
----------------------------
(1) Represents 13,842,753 shares of common stock issued in January and February
2000 upon the conversion of $1,985,000 principal amount of the convertible
debentures, plus approximately 53,337 shares issuable upon conversion of the
remaining $15,000 principal amount, excluding interest, assuming an applicable
conversion price of $0.2812, based on the average of the high and low bid price
of our common stock on June 2, 2000.
Securities Issued in 1997
-------------------------
RBB Bank, A.G.: In February 1997 and October 1997, in order to finance
research and development, we sold $1,000,000 and $3,000,000, respectively,
principal amount of our ten-year 7% convertible 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,
18
<PAGE>
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 us under the February 1997
debenture, $330,000, $134,000, $270,000 and $266,000, respectively, of the
principal amount of the February 1997 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 1997 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 us, $120,000, $133,000, $341,250, $750,000, $335,750, $425,000, $275,000
and $620,000, respectively, of the October 1997 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
1997 debenture was fully converted.
In connection with the issuance of the 1997 debentures, we issued to RBB
six warrants to purchase common stock, three of which entitle the holder to
purchase, from February 21, 1997 through February 28, 2007, 178,378 shares of
the common stock, and three of which entitle the holder to purchase, from August
30, 1997 through August 30, 2007, 600,000 shares of the common stock. The
exercise prices of such warrants are $0.288, $0.576, $0.864, $0.20, $0.23 and
$0.27 per warrant share, respectively. Each such 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 such 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 of the date of this
prospectus, none of the warrants have been exercised.
Securities Issued in 1998
-------------------------
RBB Bank, A.G.: In November 1998 we sold $1,500,000 principal amount of our
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. Accrued interest under the convertible 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 convertible 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 convertible
debenture is subject to adjustment and could be materially less or more than the
above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock.
Based on the terms for conversion associated with the convertible
debenture, there is an intrinsic value associated with the beneficial conversion
feature of $625,000. Since conversion can occur immediately upon issuance of the
convertible debenture, this amount was recognized as interest expense in 1998.
On January 19 and March 7, 2000, pursuant to notice by RBB, $1,122,500 and
$377,500 principal amount of the November 1998 debenture was converted into
8,252,746 and 1,877,500 shares of common stock, respectively. As of March 7,
2000, the November 1998 debenture was fully converted.
19
<PAGE>
In connection with the issuance of the convertible debenture, we 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 of the date of this prospectus, none of
these warrants had been exercised.
The fair value of the warrants issued in connection with the convertible
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 amortized in the accompanying consolidated financial statements as
interest expense related to the convertible debenture.
Harbor View Group, Inc., et al.: In December 1998 pursuant to a securities
purchase agreement, we sold to Harbor View Group, Inc. and various other
purchasers 4,917,276 shares of common stock, and warrants to purchase an
aggregate of 2,366,788 shares of common stock, including (x) warrants to
purchase an aggregate of 1,966,788 shares of common stock and (y) a finder's fee
paid to Harbor View 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 the $802,500 purchase price, $600,000 was received on December 31, 1998, and
$202,500 was received in January 1999. The warrants entitle the holders to
purchase an aggregate of 1,183,394 shares of common stock at an exercise price
of $0.2040 per share, and 1,183,394 shares at an exercise price of $0.2448 per
share. The 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 of the date of this prospectus, warrants to
purchase 245,098 shares of common stock had been exercised.
The fair value of the warrants issued as of January 7, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $494,000 ($0.0208 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. This amount is being
amortized to interest expense in the accompanying consolidated financial
statements.
20
<PAGE>
Securities Issued in 1999
-------------------------
Berman, et al.: In July 1999 pursuant to a securities purchase agreement,
we sold 1,851,852 shares of common stock, and warrants to purchase an aggregate
of 925,926 shares of common stock to Michael Berman, Pak-Lin Law and Kwong Wai
Au in a private offering transaction pursuant to Section 4(2) of the Securities
Act, for an aggregate purchase price of $500,000, received in July 1999. The
warrants entitle the holders to purchase 463,264 and 463,264 shares of common
stock at exercise prices of $0.324 and $0.378 per share, respectively. The
warrants are exercisable at any time and from time to time until June 28, 2004.
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 of the date of this prospectus, none of the warrants had been
exercised.
The fair value of the warrants issued as of July 9, 1999, the date of
issuance of the shares in connection with the securities purchase agreement, was
estimated to be $37,000 ($0.04 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 5.75% through the June 30, 2004 expiration date. This amount is being
amortized to interest expense in the accompanying consolidated financial
statements.
Focus Investors LLC: Pursuant to a securities purchase agreement dated
August 3,1999 in a private offering transaction under Section 4(2) of the
Securities Act, we sold to Focus Investors LLC an aggregate of 20 units for an
aggregate gross purchase price of $2 million, each unit consisting of $100,000
principal amount of our ten-year 7% convertible debentures due August 3, 2009,
and series W warrants to purchase 50,000 shares of our common stock exercisable
until August 3, 2004. Accrued interest under the convertible debentures 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 convertible debentures are 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 convertible
debentures is subject to adjustment and could be materially less or more than
the above estimated amount, depending upon the future market price of the common
stock and the potential conversion of accrued interest into shares of common
stock. On January 19, February 17, and March 3, 2000, pursuant to notice by
Focus Investors, $300,000, $900,000, and $800,000 principal amount of the Focus
debentures was converted into 2,178,155, 6,440,725 and 5,729,967 shares of
common stock, respectively. As of March 3, 2000, the debenture was fully
converted.
The exercise price of the series W warrants is $0.2461 per warrant share.
The warrants provide that the holder may elect to receive a reduced number of
shares of common stock on the basis of a cashless exercise; The series W
warrants contain anti-dilution provisions which provide for the adjustment of
the warrant price and warrant shares. As of March 17, 2000, all of the warrants
had been exercised.
The fair value of the warrants issued as of August 3, 1999 in connection
with the securities purchase agreement was estimated to be $52,953 ($0.0526 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
21
<PAGE>
20%, and a risk free interest rate of 5.75% through the June 30, 2004 expiration
date. This amount has been amortized to interest expense in the accompanying
consolidated financial statements.
Endeavour Capital Fund S.A.: Pursuant to a securities purchase agreement
dated December 28, 1999 in a private offering transaction under Section 4(2) of
the Securities Act, we issued the first $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004 to Endeavour Capital Fund S.A. (the "Endeavour Transaction"). In connection
with the sale of the first tranche of debentures, we issued warrants to purchase
100,000 shares of our common stock to Endeavour, and two warrants to purchase
5,000 shares of common stock to Endeavour's legal counsel. Accrued interest
under the convertible debentures is computed at the rate of 7% per annum on the
unpaid principal balance from the date of issuance until the date of interest
payment and is payable on conversion of the debenture or on maturity in common
stock using the same conversion formula. The convertible debentures are
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 convertible debentures is subject to adjustment
and could be materially less or more than the estimated number of shares in this
prospectus, depending upon the future market price of the common stock and the
potential conversion of accrued interest into shares of common stock.
These warrants expire on December 31, 2002 and are exercisable at
$0.19916667 per share. The warrants provide that the holder may elect to receive
a reduced number of shares of common stock on the basis of a cashless exercise.
The warrants contain anti-dilution provisions which provide for the adjustment
of the warrant price and warrant shares. As of the date of this prospectus, none
of these warrants had been exercised.
The fair value of the warrants issued as of December 28, 1999 in
connection with the securities purchase agreement was estimated to be $4,285
($0.0429 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, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
Securities Issued in 2000
-------------------------
Endeavour Capital Fund S.A.: In January 2000, in connection with the
Endeavour Transaction, we issued the second $1,000,000 tranche of $2,000,000 in
aggregate principal amount of our 7% convertible debentures due December 31,
2004, along with warrants to purchase 100,000 shares of our common stock to
Endeavour Capital Fund, S.A. The terms of the second tranche of debentures and
warrants are the identical to the terms of the debentures and warrants issued in
first tranche of the Endeavour Transaction.
The fair value of the second tranche of warrants issued in January 2000
in connection with the securities purchase agreement was estimated to be $13,600
($0.0136 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 90%, and a risk free interest rate of 6% through the
December 31, 2002 expiration date. This amount has been amortized to interest
expense in the accompanying consolidated financial statements.
On January 27, February 22, 23, 24, and 29, 2000 pursuant to notice by
Endeavour Capital Fund, $150,000, $135,000, $715,000, $785,000 and $200,000
principal amount of the Endeavour debentures was
22
<PAGE>
converted into 1,105,435, 988,913, 5,149,035, 5,622,696 and 1,036,674 shares of
common stock, respectively. As of March 27, 2000, $15,000 of the principal
amount of the debenture remained unconverted.
Harbor View Group, Inc. On February 7, 2000 pursuant to a consulting
agreement with Harbor View Group, we issued to Harbor View warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share, and warrants to
purchase 1,750,000 shares at an exercise price of $0.26 per share, until
February 28, 2005, in exchange for consulting services provided or to be
provided to us. Each warrant contains anti-dilution provisions which provide for
the adjustment of warrant price and warrant shares. As of the date of this
prospectus, none of these warrants had been exercised.
The fair value of the warrants is estimated to be $200,249 ($.057 per
warrant) based upon a financial analysis of the terms of the warrant using the
Black-Sholes Pricing Model with the following assumptions: expected volatility
of 90%; a risk free interest rate of 6% and an expected holding period of eleven
months (the term of the consulting agreement). We have determined that $89,045
of the fair value relates to past services and, accordingly, we have expensed
this portion in the three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and will be amortized over the remaining term
of the agreement.
Harbor View Group, Inc., et al. In February 2000 pursuant to a
securities purchase agreement, we sold to Harbor View Group and various other
purchasers 13,636,357 shares of common stock, and warrants to purchase an
aggregate of 5,454,544 shares of common stock in a private offering transaction
pursuant to Section 4(2) of the Securities Act, for an aggregate purchase price
of $3,000,000. Half of the warrants are exercisable at $0.275 per share, and
half of the warrants are exercisable at $0.33 per share, until February 28,
2005. 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 of the date of this prospectus, none of these
warrants had been exercised.
The fair value of the warrants issued as of February 16, 2000 in
connection with the securities purchase agreement was estimated to be $1,582,734
($0.290 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 90%, and a risk free interest rate of 6% through the
February 28, 2005 expiration date. This amount is being amortized to interest
expense in the accompanying consolidated financial statements.
Projected Expenses
During the next 12 months, we expect to spend approximately $9,000,000,
approximately $4,000,000 of which was raised during the first quarter of fiscal
2000, on research and development related activities, including approximately:
o $4,000,000 for operating expenses;
23
<PAGE>
o $2,250,000 for the submission of the IND for Product R to the
FDA in connection with GloboMax's project management services
for the pre-clinical development and IND submission of Product
R to the FDA, the development of standard operating procedures
and validation protocol for the preparation and manufacture of
Product R, and toxicology studies of Product R;
o $1,500,000 for capital expenditures for leasehold improvements
and equipment at our Yonkers, New York office relating to
additional laboratories and manufacturing and production
facilities for Product R; and
o $1,250,000 for additional personnel.
We anticipate that we can continue operations through September 2000
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 nor additional securities sold. If all of the outstanding stock
options and warrants are exercised, we will receive net proceeds of
approximately $15.0 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 Product R
receives approvals and prospects for sales increase to justify such increased
levels of operation. 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. As such, recent trading levels may not be
sustained nor may any additional options or warrants be exercised. If less than
40% 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 anticipate that we will be required to sell additional securities to
obtain the funds necessary to further our research and development activities.
We are currently seeking debt financing, licensing agreements, joint ventures
and other sources of financing, but the likelihood of obtaining such financing
on favorable terms is uncertain. 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. Because of the large
uncertainties involved in the FDA approval process for commercial drug use on
humans, it is possible that we may never be able to sell Product R commercially.
Year 2000 Compliance
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures.
We developed a compliance assurance process to address this concern. A
project team performed a detailed assessment of all internal computer systems
and developed and implemented plans to correct any problems.
24
<PAGE>
Year 2000 problems could affect our research and development,
financial, administrative and communication operations. Systems critical to our
business which were identified as non-Year 2000 compliant were either replaced
or corrected through programming modifications. In addition, the project team
looked at Year 2000 readiness from other aspects of our business. We remediated
and replaced systems as needed and have been successfully testing and verifying
our modifications. In addition to our in-house efforts, we have asked vendors,
major customers, service suppliers, communications providers and banks whose
systems failures potentially could have a significant impact on our operations
to verify their Year 2000 readiness. To date, we have not encountered any
significant effects related to the Year 2000 and we do not anticipate that any
unforeseen Year 2000 problems will have a material effect on our results of
operations or financial condition.
External and internal costs specifically associated with modifying
internal use software for Year 2000 compliance were expensed as incurred and
will not have a material impact on our consolidated financial position, results
of operations or cash flows.
The above expectations are subject to uncertainties. For example, if we
were unsuccessful in identifying or fixing all Year 2000 problems in our
critical operations, or if we are affected by the inability of certain vendors
or suppliers to continue operations due to such a problem, our results of
operations or financial condition could be materially impacted.
BUSINESS
Overview
Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug with the
trade name Reticulose(TM). Under the Federal Food, Drug, and Cosmetic Act, as
amended in 1962, the Food and Drug Administration, or FDA, classified Reticulose
as a "new drug" requiring FDA approval prior to any sale in the United States.
Reticulose (the current formulation of which is now known as and hereinafter
referred to as Product R(TM) ) has not been approved for sale or use by the FDA
or any foreign government body, and thus we have not as yet commenced any
commercial operations. We are dependent on registration and/or approval by
applicable regulatory authorities of Product R in order to commence commercial
operations.
Our operations over the last five years have been limited principally
to engaging in research, in vitro testing and analysis of Product R in the
United States, and engaging others to perform testing and analysis of Product R
on human patients overseas. The FDA has not approved human clinical trials for
Product R in the United States. We may be required, in the absence of grants or
other subsidies, to bear the expenses of the first phase of human clinical
trials to the extent the FDA permits human clinical trials to occur. We do not
know what the actual cost of such trials would be. If we need additional
financing to fund such human clinical trials, it may not be available to us,
which may force us to reduce our operations.
25
<PAGE>
Government Regulation
The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as Product R, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit a new
drug application, or NDA, to the FDA. No action can be taken to market Product
R, or any therapeutic drug product, in the United States until an NDA has been
approved by the FDA.
The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or in vitro testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.
In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: phase I clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; phase II clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and phase III
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.
An investigator's brochure must be included in the IND and the IND must
commit the sponsor to obtain initial and continual review and approval of the
clinical investigation. A section describing the composition, manufacture and
control of the drug substance and the drug product is included in the IND.
Sufficient information is required to be submitted to assure the proper
identification, quality, purity and strength of the investigational drug. A
description of the drug substance, including its physical, chemical, and
biological characteristics, must also be included in the IND. The general method
of preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or in vitro tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible in some limited circumstances to use
well documented clinical experience as a substitute for other pre-clinical work.
After the FDA approves the IND, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.
26
<PAGE>
When all clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the manufacturer, a manufacturer may submit an NDA
to the FDA. An NDA must be approved by the FDA covering the drug before its
manufacturer can commence commercial distribution of the drug. The NDA contains
a section describing the clinical investigations of the drug which section
includes, among other things, the following: a description and analysis of each
clinical pharmacology study of the drug; a description and analysis of each
controlled clinical study pertinent to a proposed use of the drug; a description
of each uncontrolled clinical study including a summary of the results and a
brief statement explaining why the study is classified as uncontrolled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
study and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.
Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the availability of the drug products made from the substance. NDA's contain
lists of all components used in the manufacture of the drug product and a
statement of the specifications and analytical methods for each component. Also
included are studies of the toxicological actions of the drug as they relate to
the drug's intended uses.
The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.
On September 20, 1984, Bernard Friedland, our former President and
current Chairman of the Board, as sponsor, submitted to the FDA an IND to
conduct a study testing the effectiveness of Product R on human subjects with
AIDS, as well as certain other viruses. The FDA has issued four letters of
deficiency with regard to the IND. In a letter dated November 29, 1984, the FDA
indicated, among other deficiencies noted, that the publications submitted with
the IND and relating to the effectiveness of Product R on virus related diseases
will not be accepted in support of the safety of Product R unless we could
establish that the proposed formulation of Product R is the same as the
formulation of Product R referenced in those publications. In addition, the FDA
required, among other things, that an IND application include relevant
information on the chemistry, laboratory and animal controls to assure the
integrity of the dosage form and that safety information be provided for the
initial study proposed to be conducted on humans. The FDA also required that the
information assure the proper identification, quality, purity and strength of
Product R and a description of the
27
<PAGE>
physical, chemical and microbiological characteristics of Product R. On
September 11, 1987, we received a further deficiency letter from the FDA,
stating that no data had been submitted supporting in vitro anti-HIV activity or
any criterion for a biological response modifier.
On March 6, 1992, we submitted an amendment to the IND which attempted
to address the FDA's concerns. In response to the March 1992 submission, we
received a third deficiency letter from the FDA dated July 27, 1992, which
provided detailed comments with respect to chemistry, toxicology, microbiology
and clinical areas requiring further studies and action on our part. In June
1995, we received further correspondence from the FDA which stated, among other
things, that our prior submissions to the FDA did not provide an adequate
response to the FDA's earlier request for preclinical information and
accordingly our IND was "inactivated."
We have not formally responded to the 1992 deficiency letters or the
1995 deficiency letter, nor have any of the studies cited in those letters been
undertaken. In February 1998, we contracted with GloboMax LLC of Hanover,
Maryland to advise and assist us in our preparation of a new IND to be filed
with the FDA, and to otherwise guide us through the FDA process with the
objective of obtaining full approval for Product R in the United States. During
the year ended December 31, 1999, GloboMax continued its project management
services for the pre-clinical development and IND submission of Product R to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of Product R. Expenses paid during 1999
relating to the GloboMax agreement were approximately $200,000. Pursuant to the
agreement with GloboMax, we are obligated to pay for services on an hourly
basis, at prescribed rates.
We currently do not have the resources necessary to complete the FDA
approval process. We may allocate certain proceeds from the exercise of
currently outstanding options and warrants for the purpose of filing a new IND
with the FDA, however, such proceeds, if any, will not be sufficient to improve
our financial condition to any great degree. It is possible that the new IND for
clinical tests of Product R on humans, if submitted, will not be approved by the
FDA for human clinical trials on AIDS or other diseases, and that any tests
previously conducted or to be conducted will not satisfy FDA requirements. It is
also possible that the results of such human clinical trials, if performed, will
not prove that Product R is safe or effective in the treatment of AIDS or other
diseases, or that the FDA will not approve the sale of Product R in the United
States if we submitted a proper NDA. It is not known at this time how extensive
the phase II and phase III clinical trials will be, if they are conducted. The
data generated may not show that the drug Product R is safe and effective, and
even if the data shows that Product R is safe and effective, obtaining approval
of the NDA could take years and require financing of amounts not presently
available to us.
In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of Product R for a considerable period
of time and impose costly procedures upon our activities. The extent of
potentially adverse government regulations which might arise from future
legislation or administrative action cannot be predicted. Whether or not FDA
approval has been obtained for a product, approval of the product by comparable
regulatory authorities of foreign countries must be obtained prior to marketing
the product in those countries. The approval process may be more or less
rigorous from country to country, and the time required for approval may be
longer or shorter than that required in the United
28
<PAGE>
States. Clinical studies conducted outside of any country may not be accepted by
such country, and the approval of any pharmaceutical or diagnostic product in
one country does not assure that such product will be approved in another
country. Accordingly, until registration is granted, if ever, in the United
States or another developed or developing country, we do not expect that we will
be able to generate material sales revenue. We received a grant of authority
from the Bahamian Port Authority, an authorized division of the Bahamian
Government, on October 15, 1992 confirming the right of our subsidiary, Advance
Viral Research, Ltd., a Bahamian corporation, to carry on the manufacture and
export sale of ethical pharmaceutical products.
See "--Marketing And Sales."
Research, Development And Testing
For the period from inception (February 20, 1984) through March 31,
2000 we expended approximately $6.0 million on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. In 1995, we retained Shalom
Hirschman as our President. As President, Dr. Hirschman established our research
facility in Yonkers, New York, monitored the testing of Product R and recently
performed analyses of Product R with our scientific personnel, which analyses we
believe may be used in connection with the FDA approval process. We currently
are funding research and testing to:
o determine the safety of the topical use of Product R on animals
and cultured human cells;
o assess the effectiveness of the topical application of Product R
on HPV and certain cancer causing proteins of HPV. Recent
laboratory testing has indicated that Product R may inhibit the
expression of a protein of HPV which causes cervical cancer;
o study the effects of Product R in inhibiting the mutation of the
AIDS virus in humans;
o assess the effectiveness of the topical application of Product R
for the treatment of persons diagnosed with herpes
labialis/genital infections;
o compare the results of treatment of persons diagnosed with AIDS
taking a three drug cocktail and Product R with those taking a
three drug cocktail and a placebo;
o determine the effectiveness of Product R for the treatment of
rheumatoid arthritis in humans;
o study the effects of Product R in inhibiting the production of a
key cancer-causing protein (E-7 protein) of the human papilloma
virus (HPV). The E-7 protein is associated with the development of
cervical cancer in women infected with cancer causing subtypes of
HPV; and
o study the effects of Product R in inhibiting the production of key
cellular receptors for HIV (CCR5 and CXCR4 receptors). The CCR5
and CXCR4 receptors are two of the cell receptors used by the AIDS
virus, HIV, to attach to its target cell and initiate infection.
Our studies detailing the results of the above research and testing may
not positively impact the FDA's decision to approve a new IND for Product R or
approve the marketing, sales or distribution of Product R
29
<PAGE>
within the United States, and as a result may not improve our chances of gaining
approval for the marketing, sales or distribution of Product R anywhere in the
world.
Patents
We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We have currently pending 15 patent applications with the United States
Patent and Trademark Office (the "PTO") relating to Product R and 17 foreign
patent applications. In the United States, we have one patent allowed and three
have been issued by the PTO. As patent applications in the United States are
maintained in secrecy until patents issue and as publication of discoveries in
the scientific or patent literature often lag behind the actual discoveries, we
cannot be certain that we were the first to make the inventions covered by each
of our pending patent applications or that we were the first to file patent
applications for such inventions. Furthermore, the patent positions of
biotechnology and pharmaceutical companies are highly uncertain and involve
complex legal and factual questions, and, therefore, the breadth of claims
allowed in biotechnology and pharmaceutical patents or their enforceability
cannot be predicted. We cannot be sure that any additional patents will issue
from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad. In the absence of adequate patent protection, our
business may be adversely affected by competitors who develop comparable
technology or products. Moreover, pursuant to the terms of the Uruguay Round
Agreements Act, patents filed on or after June 8, 1995 have a term of twenty
years from the date of such filing, irrespective of the period of time it may
take for such patent to ultimately issue. This may shorten the period of patent
protection afforded to our products as patent applications in the
biopharmaceutical sector often take considerable time to issue. Under the Drug
Price Competition and Patent Term Restoration Act of 1984 (the "Patent Act"), a
sponsor may obtain marketing exclusivity for a period of time following FDA
approval of certain drug applications, regardless of patent status, if the drug
is a new chemical entity or if new clinical studies were used to support the
marketing application for the drug. Pursuant to the FDA Modernization Act of
1997, the period of exclusivity can be extended if the applicant performs
certain studies in pediatric patients. This marketing exclusivity prevents a
third party from obtaining FDA approval for a similar or identical drug under an
Abbreviated New Drug Application ("ANDA") or a "505(b)(2)" New Drug Application.
The statute also allows a patent owner to obtain an extension of applicable
patent terms for a period equal to one-half the period of time elapsed between
the filing of an IND and the filing of the corresponding NDA plus the period of
time between the filing of the NDA and FDA approval, with a five year maximum
patent extension. We cannot be sure that we will be able to take advantage of
either the patent term extension or marketing exclusivity provisions of this
law.
In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements
30
<PAGE>
or that our proprietary information or intellectual property will be protected
thereby or that others will not independently develop substantially equivalent
proprietary information or intellectual property.
The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with Product R. Therefore, Product R and any other drug candidates may give rise
to claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.
Marketing And Sales
Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. As of the date of this
prospectus, our efforts or the efforts of our representatives have produced no
material benefits to us regarding our ability to have Product R sold
commercially anywhere in the world. We have entered into exclusive distribution
agreements with five separate entities granting exclusive rights to distribute
Product R in the countries of China, Japan, Hong Kong, Macao, Taiwan, Mexico,
Channel Islands, Isle of Man, British West Indies, Jamaica, Haiti, Bermuda,
Belize, Saudi Arabia, Argentina, Bolivia, Paraguay, Uruguay, Brazil and Chile.
Pursuant to these agreements, the distributors are obligated to cause Product R
to be approved for commercial sale in such countries and upon such approval, to
purchase from us certain minimum quantities of Product R to maintain the
exclusive distribution rights. Our marketing plans for Product R are still
dependent upon registration of Product R for sale in various jurisdictions where
our distributors are seeking approvals.
To date we have received no information that would lead us to believe
that we will be positioned to sell Product R commercially anywhere in the world
in the immediate future, and it is possible that none of our distributors will
ever secure registration of Product R. The only application for registration of
Product R which has been filed as of the date hereof is an application
requesting that Product R be permitted to be sold in Argentina, which was filed
in March 1998. In this March 1998 filing, DCT, S.R.L., our distribution agent in
Argentina, received an investigational new drug identification number from the
National Administration for Drug, Food and Medical Technology in Argentina, or
ANMAT. This allowed DCT to begin pre-clinical studies on our behalf with Product
R which have since been concluded. In February 2000, DCT received approval from
the ANMAT to proceed further with Phase I clinical trials in Argentina for
Product R. We are currently evaluating the costs and time necessary to proceed
with Phase I clinical trials in Argentina. In
31
<PAGE>
addition, DCT must apply for approval from the ANMAT to proceed with Phases II
and III clinical trials before Product R is approved for sale in Argentina. The
costs and time necessary to complete such trials cannot be predicted at this
time.
We initially targeted our sales and marketing efforts to those
countries where Product R was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes simplex
and herpes zoster. Those countries included Singapore, Hong Kong, Malaysia,
Taiwan, the Philippines and Malta. Registration of Product R will be required in
such countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. The registration of Product
R for sale in these countries has been frustrated due to our inability to obtain
the registration and approval to sell Product R in the Bahamas, the country of
origin, and a general lack of published data on the effectiveness of Product R.
Until Product R is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, we will not generate any material sales of Product R.
For the years ended December 31, 1999, 1998 and 1997, we reported no commercial
sales except limited sales for testing purposes. Product R is not legally
available for commercial sale anywhere in the world, except for testing
purposes. See "--Research, Development and Testing."
By letter dated February 13, 1996, our subsidiary in the Bahamas,
Advance Viral Research, Ltd., was notified that the National Economic Council of
the Bahamas had refused our subsidiary's request for a "free sales certificate"
for Product R. A free sales certificate is a document typically issued by a
country in which a pharmaceutical product is manufactured which certifies that
such country permits the "free sale" of such product in such country. Most
countries require that, before allowing the registration of a pharmaceutical
product for use in that country, it must at least be registered and certified
for free sale in the country in which it is manufactured. However, the Bahamas
has no procedures currently in place to issue a free sales certificate for any
therapeutic drug, including Product R. If we do not obtain a free sales
certificate or other equivalent document from the Bahamas or another country, or
if we do not receive FDA approval, it is possible that we will not be able to
meet registration requirements in the countries which require that a
pharmaceutical product be at least registered and certified for free sale in the
country in which it is manufactured. Currently, we intend to manufacture Product
R in Argentina, where we are seeking regulatory approval and therefore does not
need a free sale certificate for Argentina.
We are currently in the planning stages for the reconfiguration of our
New York research facilities to enable us to manufacture and produce Product R
if and when the FDA approves Product R for distribution and sale in the United
States.
Competition
The pharmaceutical drug industry is highly competitive and rapidly
changing. If we ever successfully develop Product R, it will compete with
numerous existing therapies. In addition, many companies are pursuing novel
drugs that target the same diseases we are targeting with Product R. We believe
that a significant number of drugs are currently under development and will
become available in the future for the treatment of HIV, HPV, hepatitis and
other viruses. We anticipate that we will face intense and increasing
competition as new products enter the market and advanced technologies become
available. Our competitors' products may be more effective, or more effectively
marketed and sold, than Product R. Competitive products
32
<PAGE>
may render Product R obsolete or noncompetitive before we can recover the
expenses of developing and commercializing Product R. Furthermore, the
development of a cure or new treatment methods for the diseases we are targeting
could render Product R noncompetitive, obsolete or uneconomical. Many of our
competitors:
o have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products,
o have extensive experience in preclinical testing and clinical
trials, obtaining regulatory approvals and manufacturing and
marketing pharmaceutical products,
o have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.
A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Product R should be added to such cocktails in order
to enhance their effectiveness. Among the companies with significant commercial
presence in the AIDS market are Glaxo Wellcome, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma. In
addition, Glaxo Wellcome, in collaboration with Biochem Pharma, is pursuing
development of Lamivudine, a nucleoside analogue to treat hepatitis B infection.
This compound was recently approved for marketing in the United States, China
and several other countries and represents significant potential competition for
Product R as a treatment for hepatitis B.
Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. Product R, if approved for commercial sale by the FDA, would
also compete with surgical, chemical, and other methods of treating HPV.
Products developed by our competitors or advances in other methods of the
treatment of HPV may have a negative impact on the commercial viability of
Product R.
Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed phase III trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for Product R as a treatment for rheumatoid arthritis.
Three antiviral products are presently sold in the United States for
the treatment of recurrent genital herpes: Zovirax(R) (manufactured by Glaxo
Wellcome Inc.) which contains acyclovir and is administered orally, topically,
or intravenously, Famvir(R) (manufactured by SmithKline Beecham Pharmaceuticals)
which contains famcyclovir and is administered orally, and Valtrex(R)
(manufactured by Glaxo Wellcome, Inc.) which
33
<PAGE>
contains valacyclovir and is also administered orally. These products represent
significant competition for Product R as a treatment for genital herpes.
Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.
If we successfully develop and obtain approval for Product R, we will
face competition based on the safety and effectiveness of Product R, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely
affect our business. If and when we obtain FDA approval for Product R, we expect
to compete primarily on the basis of product performance and price with a number
of pharmaceutical companies, both in the United States and abroad.
Employees
We have 25 full-time employees, consisting of our four executive
officers, 18 employees involved in research, and three administrative employees.
Dr. Hirschman, our President and Chief Executive Officer and a director, Bernard
Friedland, our Chairman of the Board and a director, William Bregman, our
Secretary, Treasurer and a director, and Alan V. Gallantar, our Chief Financial
Officer, each devote all of their business time to our day-to-day business
operations. Additionally, we may hire, as and when needed, and as available,
such sales and technical support staff and consultants for specific projects on
a contract basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
Property
We lease approximately 16,650 square feet for executive offices,
including research laboratory space, at 200 Corporate Boulevard South, Yonkers,
New York from an unaffiliated third party (the "Yonkers Lease"). The term of the
Yonkers Lease is five years through April 2005 and our annual rental obligation
under the Yonkers Lease is approximately $260,000.
We currently maintain corporate offices at 1250 East Hallandale Beach
Boulevard, Hallandale, Florida 33009, pursuant to a three year lease agreement,
at approximately $14,000 annually. The Bahamian manufacturing facility, which
was acquired on December 16, 1987, is located in Freeport, Bahamas and consists
of a 29,242 square foot site containing a one-story concrete building of
approximately 7,300 square feet and is equipped for all phases of the testing,
production, and packaging of Product R. The Bahamian facility is currently being
used to store and produce inventory for testing purposes.
34
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our directors and executive officers and further information concerning
them are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C>
Shalom Z. Hirschman, M.D. 63 President, Chief Executive Officer, Chief
Scientific Officer, Director
Bernard Friedland 74 Chairman of the Board of Directors
William Bregman 78 Vice President, Secretary, Treasurer,
Director
Louis J. Silver 71 Director
Alan V. Gallantar 42 Chief Financial Officer
</TABLE>
Shalom Z. Hirschman, M.D., President, Chief Executive Officer and a
director since October 1996, was Director of the Division of Infectious Diseases
and Professor of Medicine at Mount Sinai School of Medicine, New York, New York,
from May 1969 until October 1996.
Bernard Friedland, Chairman of the Board since May 1987, director since
July 1985 and President and Chief Executive Officer from September 1985 until
October 1996, was employed by Key, Inc. for 30 years, until March 1, 1986, in
the Research and Development and Quality Assurance Departments in
Pharmaceuticals, Pharmacology, and Cancer antimetabolites, and has been the
President and CEO of our subsidiary, Advance Viral Research, Ltd. since 1984.
William Bregman, director since July 1985 and Secretary-Treasurer since
September 1985, was Vice President from September 1985 until May 1987 and Vice
President and Treasurer of our subsidiary, Advance Viral Research, Ltd., from
August 1984 until the present.
Louis J. Silver, director since May 1992, has been self-employed as a
free-lance accountant and auditor since 1985. Mr. Silver previously served as a
member of the board of directors during the periods from May 1987 to July 1987.
Alan V. Gallantar, Chief Financial Officer since October 1999, was
treasurer and controller from March1998 to September 1999 of AMBI Inc., a
nutraceutical company, senior vice president and chief financial officer from
1992 to 1997 of Bradley Pharmaceuticals, Inc., a pharmaceutical manufacturer,
and vice president and divisional controller from 1989 to 1991 for PaineWebber
Incorporated. From 1985 to 1989, Mr. Gallantar was second vice president at The
Chase Manhattan Bank, N.A., and from 1983 to 1985, was a senior accountant at
Philip Morris, Incorporated. From 1979 to 1983, Mr. Gallantar was a senior
accountant in the audit department of Deloitte & Touche.
35
<PAGE>
Bernard Friedland and William Bregman may be deemed a "parent" and
"promoter" as those terms as defined in the rules and regulations promulgated
under the Securities Act. Directors are elected to serve until the next annual
meeting of stockholders and until their successors have been elected and have
qualified.
Director Compensation
The arrangement for director compensation is $150 for each meeting of
the board of directors attended, which has not in fact been paid within at least
the last three years.
Executive Officer Compensation
Other than Dr. Hirschman, our President and Chief Executive Officer,
none of our directors, officers or employees received salary and bonus exceeding
in the aggregate $100,000 in the years ended December 31, 1999, 1998 or 1997.
The following table provides certain summary information concerning compensation
paid or accrued by our company to or on behalf of the named executive officer
for the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
------------------------------------------------------------------------------------------------------------------------------------
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary (1) Bonus Compensation (2) Options/SARs (3) Compensation (4)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D., 1999 $325,000 $ 0 $ 34,738 -- $4,316
President, Chief Executive
Officer and Chief Scientific
Officer since October 1996 1998 $325,000 $ 0 $ 12,288 23,000,000 $4,316
and consultant from May 24,
1995 until October 1996. 1997 $325,000 $43,000 $ 14,604 -- $3,956
------------------------------------------------------------------------------------------------------------------------------------
Alan V. Gallantar, Chief 1999 $43,750 $ 0 $ 1,500 4,547,880 --
Financial Officer since
October 1999.
1998 -- -- -- -- --
1997 -- -- -- -- --
</TABLE>
--------------------------------
1. Dr. Hirschman's salary increased for the year 2000 to $361,000. Mr.
Gallantar was hired in October 1999 and therefore his salary reflects only
three months of his $175,000 annual salary.
2. Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums we paid on his behalf, and aggregate incremental cost to us of Dr.
Hirschman's automobile lease, gas, oil, repairs and maintenance. Other
Annual Compensation for Mr. Gallantar includes an automobile allowance of
$500 per month.
3. Includes all options granted during fiscal years shown. No stock
appreciation rights were granted with any options.
4. The dollar value of insurance premiums paid by, or on behalf of, us with
respect to term life insurance for the benefit of Dr. Hirschman.
In February 1998, we granted Dr. Hirschman options to acquire
23,000,000 shares of common stock, which are currently exerciseable at $.27 per
share through February 17, 2008. In October 1999, we granted Mr. Gallantar
options to acquire 4,547,880 shares of common stock, exercisable in one third
increments on October 1, 2000, 2001, and 2002, until October 1, 2009. No other
stock options were granted to the named executive officers during 1999. Other
than Dr. Hirschman's and Mr. Gallantar's stock options, we currently have
outstanding:
36
<PAGE>
o Warrants to purchase 14,247,296 shares of common stock at exercise
prices ranging from $0.199 to $0.864 per warrant share; and
o Options to acquire 51,952,280 shares of the common stock at
exercise prices ranging from $0.14 to $0.36 per option share, none
of which are beneficially owned by our directors, officers or
employees.
The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 1999 held by the named executive officers. No options were exercised during
the year ended December 31, 1999 by the named executive officers.
<TABLE>
<CAPTION>
Aggregated Option Exercises in
Last Fiscal Year And Year-end Option Values
-------------------------------------------
Number of Securities Value of Unexercised In-the-
Shares Underlying Unexercised Money Options at
Acquired on Value Options at Fiscal Year-End Fiscal Year-End
Name Exercise (#) Realized (1) Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, M.D. 0 N/A 16,100,000 / 23,000,000 $0 / $0 (2)(3)
Alan V. Gallantar 0 N/A 0 / 4,547,880 $0 / $0 (2)(4)
</TABLE>
--------------------------------
(1) The difference between the average of the high and low bid prices per share
of the common stock as reported by the Bulletin Board on the date of
exercise, and the exercise or base price.
(2) The difference between the average of the high and low bid prices per share
of the common stock as reported by the Bulletin Board on December 31, 1999,
$0.125, and the exercise or base price of in-the-money stock options.
(3) As of December 31, 1999, Dr. Hirschman held options to purchase 4,100,000
shares of common stock at $0.18 per share, 4,000,000; shares of common
stock at $0.19 per share; 4,000,000 shares of common stock at $0.27 per
share; and 4,000,000 shares of common stock at $0.36 per share, all of
which are currently exercisable. In addition, Dr. Hirschman held options to
purchase 23,000,000 shares of common stock at $0.27 per share which are
exercisable through February 17, 2008.
(4) As of December 31, 1999, Mr. Gallantar held options to purchase 4,547,880
shares of common stock at $0.24255 per share, which are exercisable in
increments of 1,515,960 on October 1, 2000, 2001 and 2002.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Hirschman Employment Agreement
Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between ADVR and Dr. Hirschman, we employ Dr. Hirschman on a full
business time basis as our President, Chief Executive Officer, Chief Scientific
Officer and Chairman of our Scientific Advisory Board, with duties including
supervising our day-to-day operations, including management of scientific,
medical, financial, regulatory and corporate matters, establishing appropriate
laboratory, executive and other facilities on our behalf, and raising additional
capital on our behalf. The agreement includes an agreement that Dr. Hirschman
will be nominated as a director for the duration of Dr. Hirschman's employment
with us under the agreement, and voting agreements regarding the election of
Messrs. Friedland, Bregman and Dr. Hirschman as directors.
See "Principal Stockholders."
Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice
37
<PAGE>
at least two years in advance that such one year automatic extension shall be
vitiated. If the agreement is terminated by us for cause, we may cancel all
unvested stock options, benefits under stock bonus plans and stock appreciation
rights ("SARs") granted to Dr. Hirschman. If the agreement is terminated by Dr.
Hirschman for cause, we are required to pay to Dr. Hirschman his annual salary
and employee benefits through the remainder of the then current term.
Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:
o take such action as may be necessary to permit Dr. Hirschman to be
entitled to participate in stock option, stock bonus or similar
plans (including plans for SARs) as are established by us;
o lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price not
in excess of $40,000, and pay for all gas, oil, repairs and
maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;
o reimburse Dr. Hirschman for all of his proven expenses incurred in
and about the course of his employment that are deductible under
the current tax law, including, among other expenses, his license
fees, membership dues in professional organizations, subscriptions
to professional journals, necessary travel, hotel and
entertainment expenses incurred in connection with overnight,
out-of- town trips that contribute to the benefit of us in the
reasonable determination of Dr. Hirschman, and all other expenses
that may be pre-approved by our board of directors; and
o provide not less than four weeks paid vacation annually and such
paid sick or other leave as we provide to all of our employees.
The agreement also provides for the payment of $100,000 to Dr.
Hirschman on the date an IND number is obtained from and approved by the FDA so
that human research may be conducted using Product R; or the execution of an
agreement relating to co-marketing pursuant to which one or more third parties
commit to make payments to us of at least $15 million.
The agreement further provides that Dr. Hirschman is not authorized,
without the express written consent of the board of directors and other than in
the ordinary course of business, to pledge the credit of ADVR or any of our
other employees, to bind us, to release or discharge any debt due us unless we
have received payment in full, or to dispose (as collateral or otherwise) of all
or substantially all of our assets.
Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.
38
<PAGE>
Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998 grant
to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.
Gallantar Employment Agreement
ADVR entered into an Employment Agreement dated as of October 1, 1999
with Alan V. Gallantar, pursuant to which Mr. Gallantar is employed as our Chief
Financial Officer on a full business time basis. Under the agreement, the term
of Mr. Gallantar's employment continues until October 1, 2002. If the agreement
is terminated by us for cause, Mr. Gallantar will have no accrued right to
receive any bonus for the year in which his employment is terminated, all
unvested stock options will be cancelled, and any vested stock options will
terminate 90 days after the effective date of termination. If the agreement is
terminated by ADVR not for cause, we are required to pay to Mr. Gallantar all
accrued and unpaid compensation, and all stock options granted as of the date of
the agreement shall become 100% vested. Upon such termination not for cause, all
options which became vested as a result of this provision may be exercised by
Mr. Gallantar until 90 days after the effective date of termination. If Mr.
Gallantar elects to terminate this agreement as a result of a change in control,
he will be paid his base salary for the remaining term of the agreement, and all
stock options granted on the date of the agreement will become 100% vested and
exercisable until 90 days after the effective date of termination. If Mr.
Gallantar elects to terminate this agreement for any other reason, he will be
paid all unaccrued and unpaid base salary, and he will have the right to
exercise any vested stock until 90 days after the effective date of termination.
All payments made to Mr. Gallantar in connection with the termination of the
agreement are subject to reduction to the extent they exceed 2.99 times the
"base amount" as determined under Section 280G of the Internal Revenue Code of
1986.
Pursuant to the agreement, Mr. Gallantar will receive an annual salary
of $175,000 for the first year of the agreement; $200,000 for the second year of
the agreement; and $225,000 for the third year of the agreement. For each year
of the agreement, Mr. Gallantar is entitled to a cash bonus of between 10% and
50% of his base salary, based on certain targets and the discretion of the board
of directors. As of the date of the agreement, Mr. Gallantar received options to
purchase an aggregate of 4,547,880 shares of our common stock. The options
expire on October 1, 2009, and are exercisable in three increments of 1,515,960
on the October 1, 2000, 2001 and 2002, respectively. The agreement further
provides that:
o Mr. Gallantar and his family are entitled to receive the same
benefits generally given to other senior executives of ADVR.
o Mr. Gallantar is entitled to 15 working days of vacation during
the first year and 20 days of vacation during each year
thereafter, subject to certain exceptions.
o Mr. Gallantar will receive a non-accountable automobile allowance
of $500 per month, provided however, that he is be responsible for
all costs of acquiring and maintaining the automobile.
39
<PAGE>
o We will reimburse Mr. Gallantar for certain professional license
and membership fees up to a maximum of $5,000 per year in the
aggregate, and all other expenses incurred in the performance of
his duties with the prior approval of the Chief Executive Officer.
o If Mr. Gallantar relocates his primary residence to Westchester
County, New York, or New York City prior to the second anniversary
of the agreement, we will pay reasonable moving, legal and
brokerage fees or costs incurred by him in connection with such
relocation up to a maximum of $15,000.
The agreement provides that Mr. Gallantar is not authorized, without
the express written consent of the board of directors and other than in the
ordinary course of business, to pledge the credit of ADVR, to bind us under any
note, mortgage or other monetary obligation, to release or discharge any debt
due us unless we have received payment in full, or to dispose (as collateral or
otherwise) of a substantial amount of our assets. Furthermore, Mr. Gallantar
agreed that he will assign to us all intellectual property rights developed by
him which result from the knowledge he acquired while performing his duties
under the agreement. Finally, he has agreed that he will not, directly or
indirectly, compete with us for five years after termination of his employment
or solicit our employees to leave our employ for one year after termination.
40
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of the date of this prospectus for
(i) each stockholder who is known by us to own beneficially more than 5% of our
common stock, (ii) each director and executive officer, and (iii) all of our
directors and named executive officers as a group. Except as otherwise
indicated, we believe, based on information furnished by the persons named in
this table that such persons have voting and investment power with respect to
all shares of common stock beneficially owned by them, subject to community
property laws, where applicable.
<TABLE>
<CAPTION>
Shares of Common Stock
Name and Address of Beneficial Owner Beneficially Owned (1) Percent Owned
------------------------------------ ---------------------- -------------
<S> <C> <C>
Shalom Z. Hirschman, M.D. 39,100,000 (2)(3) 10.1%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
Bernard Friedland 39,246,730 (3)(4) 11.3%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
William Bregman 35,705,403 (3)(5) 10.3%
c/o Advanced Viral Research Corp.
1250 East Hallandale Beach Blvd.
Hallandale, FL 33009
Louis J. Silver 100,000 0.03%
5110 S.W. 127th Place
Miami, FL 33175
Alan V. Gallantar 0 0.0%
c/o Advanced Viral Research Corp.
200 Corporate Boulevard South
Yonkers, New York 10701
All officers & directors (5 persons) 114,303,133 (2) 32.9%
</TABLE>
--------------------------------
(1) The persons named in this table have sole voting power with respect to all
shares shown as beneficially owned by them, except as indicated in other
footnotes to this table. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
common stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days from the date hereof,
are deemed outstanding. According to American Stock Transfer & Trust
Company, the transfer agent for the common stock, 347,174,843 shares of the
common stock were outstanding as of the close of business as of the date
hereof.
(2) Includes shares which may be acquired pursuant to options to purchase
common stock exercisable within 60 days from the date hereof.
(3) The Hirschman employment agreement provides that Messrs. Friedland and
Bregman, during the term of Dr. Hirschman's employment under that
agreement, shall vote all shares of the common stock owned or voted by them
in favor of Dr. Hirschman as a director of ADVR. That agreement, however,
does not restrict or otherwise limit their right to sell their shares to
third parties without restriction. The Hirschman employment agreement also
provides that Dr. Hirschman, during that term, shall take no action which
shall preclude Messrs. Friedland and Bregman from being nominees as
directors of ADVR and that Dr. Hirschman shall vote all shares of the
common stock owned or voted by him in favor of Messrs. Friedland and
Bregman as directors of ADVR. See "-- Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."
(4) Includes 1,000,000 shares of the common stock owned by Mr. Friedland and
Beth Friedland, his daughter, as joint tenants;) 20,000,000 shares owned by
Mr. Friedland and Shirley Friedland, his spouse, as joint tenants; and
500,000 shares owned the B&SD Friedland Foundation, a not-for-profit
foundation controlled by Mr. Friedland. Does not include 15,000 shares
owned by Shirley Friedland as to which Mr. Friedland disclaims beneficial
ownership.
(5) Includes 22,594,864 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 110,000 shares owned by Carol Bregman,
his daughter; 113,000 shares owned by Janet Berlin, his daughter; 110,000
shares owned by Forest Berlin, his grandson; and 110,000 shares owned by
Jessica Berlin, his granddaughter.
41
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the common stock as of the date of this prospectus by
each of the selling shareholders assuming the full exercise of certain warrants
and stock options. Unless otherwise indicated below, to our knowledge all
persons listed below have sole voting and investment power with respect to the
shares of common stock, except to the extent authority is shared by spouses
under applicable law. The information included below is based upon information
provided by the selling shareholders. Because the selling shareholders may offer
all, some or none of their shares, no definitive estimate as to the number of
shares that will be held by the selling shareholders after such offering can be
provided and the following table has been prepared on the assumption that all
shares offered under this prospectus will be sold.
<TABLE>
<CAPTION>
Shares Owned Shares Owned
Position with or Before Offering (1)(2) Shares Being After Offering (3)
Selling Shareholder Relationship to ADVR Number % Sold in Offering(2) Number %
------------------- -------------------- ------ -- ------------------- ------ --
<S> <C> <C> <C> <C> <C> <C>
Shalom Z. Hirschman, MD 4 CEO, Director 39,100,000 10.22% 23,000,000 16,100,000 4.43%
Angelo Chinnicci 5 Consultant 300,000 0.09% 300,000 0 *
Harbor View Group, Inc. 6,7a Consultant 10,076,559 2.88% 9,386,363 690,196 *
Michael A. Berman 7b Investor 2,025,253 * 636,363 1,388,890 *
Cardinal Color Inc. 7c Investor 590,909 * 590,909 0 *
Merry Contillo 7c Investor 477,273 * 477,273 0 *
Joseph Deglomina 7c Investor 477,273 * 477,273 0 *
Michael Duong 7b Investor 636,363 * 636,363 0 *
Joseph Feshbach 7b Investor 1,126,559 * 636,363 490,196 *
Gerry Goodrich 7b Investor 636,363 * 636,363 0 *
Bice Grobstein 7b Investor 522,727 * 522,727 0 *
Russell Kuhn 7d Investor 1,640,352 * 1,272,726 367,626 *
Byron Lassin 7e Investor 954,546 * 954,546 0 *
Steve Levitt 7d Investor 1,272,726 * 1,272,726 0 *
Frederick P. Lutz 7b Investor 636,363 * 636,363 0 *
Victor Sherman 7d Investor 1,640,352 * 1,272,726 367,626 *
Kevin Sossin 7f Investor 795,454 * 795,454 0 *
Wedar Biotech Corp. 7e Investor 954,546 * 954,546 0 *
Myron Weiner 7b Investor 1,003,989 * 636,363 367,626 *
John Zimmerman 7f Investor 1,255,012 * 795,454 459,558 *
Bratskier Public Relations Public Relations Firm 180,000 * 180,000 0 *
--------- --- --------- --------- ---
Selling Shareholders Total 66,302,619 16.15% 46,070,901 20,131,718 5.33%
</TABLE>
-------------------------------
* Less than 1%
1. As required by regulations of the Commission, the number of shares shown as
beneficially owned include shares which can be purchased within 60 days
from the date hereof. The actual number of shares of common stock
beneficially owned is subject to adjustment and could be materially more or
less than the estimated amount indicated depending upon factors which
cannot be predicted by us at this time, including, among others, the market
price of the common stock.
2. Assumes the full exercise of the warrants and stock options.
3. Assumes that all of the shares are sold by the selling shareholders and no
additional shares of common stock are acquired.
4. Represents options to purchase 23,000,000 at $0.27 per share, 4,100,000
shares at $0.18 per share , 4,000,000 shares at $0.19 per share, 4,000,000
shares at $0.27 per share, and 4,000,000 shares at $0.36 per share.
5. Represents options to purchase 300,000 at $0.30 per share.
6. Includes the 3,500,000 shares of common stock underlying certain warrants,
50% of which are exerciseable at $0.21 and 50% of which are exercisable at
$0.26 per warrant share.
7. Includes the following number of shares of common stock underlying certain
warrants: (a) 1,681,818 shares; (b) 181,818 shares; (c) 136,364 shares; (d)
363,636 shares; (e) 272,728 shares; and (f) 227,272 shares, 50% of which
are exerciseable at $0.275 and 50% of which are exercisable at $0.33 per
warrant share.
42
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the past three fiscal years, there were no material transactions
between Advanced Viral and any of our officers or directors which involved
$60,000 or more.
DESCRIPTION OF COMMON STOCK
As of the date of this prospectus, our Certificate of Incorporation
authorize us to issue 1,000,000,000 shares of common stock, par value $0.00001
per share. As of May 26, 2000, there were outstanding 360,010,747 shares of
common stock, all of which are fully paid for and non-assessable. The holders of
common stock:
o have equal ratable rights to dividends from funds legally
available therefore, when, as and if declared by our board of
directors;
o entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
o do not have preemptive, subscription, or conversion rights and
there are no redemption or sinking fund provisions applicable
thereto; and
o are entitled to one noncumulative vote per share on all matters
which stockholders may vote on at all meetings of stockholders.
American Stock Transfer & Trust Company is our transfer agent and
registrar, and is located in Brooklyn, New York.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling shareholders. We will receive the cash proceeds, if any, from the
exercise of any of the warrants held by the selling shareholders.
PLAN OF DISTRIBUTION
Sales of the shares may be made from time to time by the selling
shareholders, or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on the OTC
Bulletin Board, in another over-the-counter market, on a national securities
exchange (any of which may involve crosses and block transactions) or other
market on which our common stock may be listed at the time of sale, including
the American Stock Exchange, in privately negotiated transactions or otherwise
or in a combination of such transactions at prices and at terms then prevailing
or at prices related to the then current market price, or at privately
negotiated prices or at fixed prices that may be changed. In addition, any
shares covered by this prospectus which qualify for sale pursuant to Section
4(l) of the Securities Act or Rule 144 promulgated thereunder may be sold under
such provisions rather than pursuant to this prospectus. We will
43
<PAGE>
also receive the cash proceeds, if any, from the exercise of any of the warrants
held by the selling shareholders. Without limiting the generality of the
foregoing, the shares may be sold in one or more of the following types of
transactions:
o a block trade in which the broker-dealer so engaged will attempt
to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
o purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus;
o an exchange distribution in accordance with the rules of such
exchange;
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
o face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by
the selling shareholders may arrange for other brokers or dealers
to participate in the resales.
Such broker-dealers, if any, may receive compensation in the form of
discounts, concessions or commissions from the selling shareholder and/or the
purchasers of the shares of common stock for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both (which compensation, as a
particular broker-dealer, might be in excess of customary commissions).
In connection with distributions of the shares or otherwise, the
selling shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the shares registered hereunder in the course of hedging the positions they
assume with selling shareholders. The selling shareholders may also sell shares
short and deliver the shares to close out such short positions. The selling
shareholders may also enter into option, swaps, derivatives or other
transactions with broker-dealers which require the delivery to the broker-dealer
of the shares registered hereunder, which the broker-dealer may resell pursuant
to this prospectus. The selling shareholders may also pledge the shares
registered hereunder to a broker or dealer and upon a default, the broker or
dealer may effect sales of the pledged shares pursuant to this prospectus.
From time to time the selling shareholders may be engaged in short
sales, short sales against the box, puts and calls and other hedging
transactions in our securities, and may sell and deliver the shares in
connection with such transactions or in settlement of securities loans. These
transactions may be entered into with broker-dealers or other financial
institutions. In addition, from time to time, a selling shareholder may pledge
its shares pursuant to the margin provisions of its customer agreements with its
broker-dealer. Upon delivery of the shares or a default by a selling
shareholder, the broker-dealer or financial institution may offer and sell the
pledged shares from time to time.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from selling shareholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be 'underwriters' within the
44
<PAGE>
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the
selling shareholders, or any other broker-dealer, is acting as principal or
agent for the selling shareholders, the compensation to be received by
underwriters who may be selected by the selling shareholders, or any
broker-dealer, acting as principal or agent for the selling shareholders and the
compensation to be received by other broker-dealers, if the compensation of such
other broker-dealers is in excess of usual and customary commissions, will, to
the extent required, be set forth in a supplement to this prospectus. Any dealer
or broker participating in any distribution of the shares may be required to
deliver a copy of this prospectus, including the prospectus supplement, if any,
to any person who purchases any of the shares from or through such dealer or
broker.
We have advised the selling shareholders that during such time as they
may be engaged in a distribution of the shares included in this prospectus they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any selling shareholders, any
affiliated purchasers and any broker-dealer or other person who participates in
such distribution from bidding for or purchasing, or attempting to induce any
person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the common stock.
It is anticipated that the selling shareholders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time under this prospectus, such sales, or the
possibility of such sales, may have a depressive effect on the market price of
our common stock. None of the selling shareholders have entered into any
agreements regarding the sales of the shares being registered.
We have agreed to bear all expenses of registration of the shares of
common stock offered by the selling shareholders for resale, other than any
commissions, discounts, concessions or other fees, if any, payable to
broker-dealers in connection with any sale of the shares of common stock, which
will be borne by the selling shareholder selling those shares or by the
purchasers of such shares.
We have agreed to indemnify each selling shareholder or their
transferees or assignees against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments to which such
selling shareholder or its pledgees, donees, transferees or other successors in
interest may be required to make in respect thereof.
LEGAL MATTERS
The validity of the shares offered in this prospectus will be passed
upon for Advanced Viral by Berman Wolfe Rennert Vogel & Mandler, P.A.,
NationsBank Tower, 35th Floor, 100 Southeast Second Street, Miami, Florida
33131.
45
<PAGE>
EXPERTS
The Consolidated Financial Statements of Advanced Viral Research Corp.
included in this prospectus and in the registration statement except as they
pertain to periods unaudited, have been audited by Rachlin Cohen & Holtz, LLP,
independent certified public accountants, for the periods indicated in their
report appearing elsewhere in this prospectus, and are included in this
prospectus in reliance upon the report of such firm given upon the authority of
such firm as experts in accounting and auditing.
[This Space Intentionally Left Blank]
46
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
<S> <C>
Report of Independent Certified Public Accountants.........................................................F-1
Consolidated Financial Statements Years Ended 1999, 1998 and 1997
Balance Sheets, December 31, 1999 and 1998............................................................F-2
Statements of Operations for the Years Ended December 31, 1999, 1998
and 1997 and from Inception (February 20, 1984) to December 31, 1999..............................F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to
December 31, 1999.................................................................................F-4
Statements of Cash Flows for the Years Ended December 31, 1999, 1998
and 1997 and from Inception (February 20, 1984) to December 31, 1999..............................F-12
Notes to Consolidated Financial Statements............................................................F-13
Consolidated Financial Statements Three Months Ended March 31, 2000
Balance Sheets, March 31, 2000 and December 31, 1999..................................................F-38
Statements of Operations for the Three Months Ended March 31, 2000
and 1999 and from Inception (February 20, 1984) to March 31, 2000.................................F-39
Statements of Stockholders' Equity from Inception (February 20, 1984)
to March 31, 2000.................................................................................F-40
Statements of Cash Flows for the Three Months Ended March 31, 2000
and 1999 and from Inception (February 20, 1984) to March 31, 2000.................................F-49
Notes to Consolidated Condensed Financial Statements..................................................F-50
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York
We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficiency) and cash flows for each of the years in the three year period ended
December 31, 1999 and for the period from inception (February 20, 1984) to
December 31, 1999. These consolidated financial statements are the
responsibility of the management of the Company. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 1999 and 1998
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 1999 and for the period from
inception (February 20, 1984) to December 31, 1999 in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations and is dependent upon the continued sale of its securities or
obtaining debt financing for funds to meet its cash requirements. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans with regard to these matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ LLP
Miami, Florida
January 26, 2000, except for the fourth paragraph of Note 12, as to which the
date is March 9, 2000
F-1
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 836,876 $ 924,420
Investments -- 821,047
Inventory 19,729 19,729
Other current assets 59,734 29,818
------------ ------------
Total current assets 916,339 1,795,014
Property and Equipment 1,375,923 1,049,593
Other Assets 569,312 460,346
------------ ------------
Total assets $ 2,861,574 $ 3,304,953
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 728,872 $ 279,024
Current portion of capital lease obligation 50,315 38,335
Current portion of note payable 19,095 --
------------ ------------
Total current liabilities 798,282 317,359
------------ ------------
Long-Term Debt:
Convertible debenture, net 4,446,629 1,457,919
Capital lease obligation - long-term portion 152,059 167,380
Note payable - long-term portion 77,964 --
------------ ------------
Total long-term debt 4,676,652 1,625,299
------------ ------------
Deposit on Securities Purchase Agreement -- 600,000
------------ ------------
Commitments, Contingencies and Subsequent Events -- --
Stockholders' Equity (Deficiency):
Common stock; 1,000,000,000 shares of $.00001
par value authorized, 303,472,035 and 296,422,907
shares issued and outstanding 3,034 2,964
Additional paid-in capital 17,537,333 14,325,076
Deficit accumulated during the development stage (19,725,238) (13,550,976)
Deferred compensation cost -- (14,769)
Discount on warrants (428,489) --
------------ ------------
Total stockholders' equity (deficiency) (2,613,360) 762,295
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 2,861,574 $ 3,304,953
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $ 10,953 $ 656 $ 2,278 $ 205,928
Interest and dividends 42,744 102,043 111,845 602,041
Other income -- 293 7,800 120,093
------------ ------------ ------------ ------------
53,697 102,992 121,923 928,062
------------ ------------ ------------ ------------
Costs and Expenses:
Research and development 1,745,937 1,659,456 817,603 5,329,404
General and administrative 2,244,205 1,420,427 1,681,436 9,559,452
Depreciation 230,785 110,120 26,288 546,223
Interest 2,007,032 1,470,699 1,738,325 5,218,221
------------ ------------ ------------ ------------
6,227,959 4,660,702 4,263,652 20,653,300
------------ ------------ ------------ ------------
Net Loss $ (6,174,262) $ (4,557,710) $ (4,141,729) $(19,725,238)
============ ============ ============ ============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (0.02) $ (0.02) $ (0.02)
============ ============ ============
Weighted Average Number of
Common Shares Outstanding 302,361,109 294,809,073 274,534,277
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C>
Balance, inception (February 20, 1984) as previously reported -- $ 1,000 $ -- $ (1,000)
Adjustment for pooling of interests -- (1,000) 1,000 --
----------- ----------- ----------- -----------
Balance, inception, as restated -- -- 1,000 (1,000)
Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- ----------- ----------- -----------
Balance, December 31, 1984 -- -- 1,000 (18,809)
Issuance of common stock for cash $ .00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 -- -- -- (25,459)
----------- ----------- ----------- -----------
Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)
Issuance of common stock - public offering .01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants .03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 -- -- -- (159,674)
----------- ----------- ----------- -----------
Balance, December 31, 1986 154,666,014 1,547 307,534 (203,942)
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <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, year ended December 31, 1987 -- -- -- (258,663)
----------- ----------- ----------- -----------
Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)
Net loss, year ended December 31, 1988 -- -- -- (199,690)
----------- ----------- ----------- -----------
Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)
Net loss, year ended December 31, 1989 -- -- -- (270,753)
----------- ----------- ----------- -----------
Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)
Issuance of common stock, expiration of redemption .05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ----------- ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock Deficit
------------ Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
Issuance of common stock, exercise of "B" warrants $.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants .08 2,500 -- 200 --
Issuance of common stock, exercise of underwriters warrants .012 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- (249,871)
------------ ------- ------------ ------------
Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)
Issuance of common stock, for testing .0405 10,000,000 100 404,900 --
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants .05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants .08 5,244,220 52 419,487 --
Expenses of stock issuance (7,792)
Net loss, year ended December 31, 1992 -- -- -- (839,981)
------------ ------- ------------ ------------
Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)
Issuance of common stock, for consulting services .055 500,000 5 27,495 --
Issuance of common stock, for consulting services .03 3,500,000 35 104,965 --
Issuance of common stock, for testing .035 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- (563,309)
------------ ------- ------------ ------------
Balance, December 31, 1993 236,276,991 2,363 3,416,070 (2,854,076)
------------ ------- ------------ ------------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<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
----------- ------ -----------
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C> <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 financial statements.
F-7
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<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 -- -- --
Net loss, year ended December 31, 1996 -- -- --
----------- ------- -----------
Balance, December 31, 1996 267,031,058 2,671 7,003,351
----------- ------- -----------
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C> <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 (19,000) -- --
Net loss, year ended December 31, 1996 -- (1,154,740) --
-------- ----------- ---------
Balance, December 31, 1996 (19,000) (4,851,537) (473,159)
-------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 267,031,058 $2,671 $ 7,003,351
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
----------- ------ -----------
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $(19,000) $(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 (19,000) (8,993,266) (73,837)
-------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 277,962,574 $2,779 $ 10,512,767
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)
Net loss, year ended December 31, 1998 -- -- --
------------ ------ ------------
Balance, December 31, 1998 296,422,907 2,964 14,325,076
------------ ------ ------------
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred
Subscription Development Compensation
Receivable Stage Cost
---------- ----- ----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $(19,000) $ (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 19,000 -- --
Net loss, year ended December 31, 1998 -- (4,557,710) --
-------- ------------ --------
Balance, December 31, 1998 -- (13,550,976) (14,769)
-------- ------------ --------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
Common Stock
------------
Amount Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 296,422,907 $2,964 $ 14,325,076
Issuance of common stock, securities purchase agreement .16 4,917,276 49 802,451
Issuance of common stock, securities purchase agreement .27 1,851,852 18 499,982
Issuance of common stock, for services rendered .22 100,000 1 21,999
Issuance of common stock, for services rendered .25 180,000 2 44,998
Beneficial conversion feature, August debenture -- -- 687,500
Beneficial conversion feature, December debenture -- -- 357,143
Warrant costs, securities purchase agreement -- -- 494,138
Warrant costs, securities purchase agreement -- -- 37,025
Warrant costs, August debenture -- -- 52,592
Warrant costs, December debenture -- -- 4,285
Amortization of warrant costs, securities purchase agreement -- -- --
Amortization of deferred compensation cost -- -- --
Compensation expense related to modification of existing options -- -- 210,144
Net loss, year ended December 31, 1999 -- -- --
------------ ------ ------------
Balance, December 31, 1999 303,472,035 3,034 $ 17,537,333
============ ====== ============
</TABLE>
[RESTUBBED TABLE]
<TABLE>
<CAPTION>
Deficit
Accumulated
during the Deferred Discount
Development Compensation on
Stage Cost Warrants
----- ---- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $(13,550,976) $(14,769) $ --
Issuance of common stock, securities purchase agreement -- -- --
Issuance of common stock, securities purchase agreement -- -- --
Issuance of common stock, for services rendered -- -- --
Issuance of common stock, for services rendered -- -- --
Beneficial conversion feature, August debenture -- -- --
Beneficial conversion feature, December debenture -- -- --
Warrant costs, securities purchase agreement -- -- (494,138)
Warrant costs, securities purchase agreement -- -- (37,025)
Warrant costs, August debenture -- -- --
Warrant costs, December debenture -- -- --
Amortization of warrant costs, securities purchase agreement -- -- 102,674
Amortization of deferred compensation cost -- 14,769 --
Compensation expense related to modification of existing options -- -- --
Net loss, year ended December 31, 1999 (6,174,262) -- --
------------ ------- ----------
Balance, December 31, 1999 $(19,725,238) $ -- $ (428,489)
============ ======= ==========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(February 20,
Year Ended December 31, 1984) to
----------------------- December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (6,174,262) $ (4,557,710) $ (4,141,729) $(19,725,238)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 230,785 110,120 26,288 546,133
Amortization of debt issue costs 331,250 229,978 111,957 673,185
Amortization of deferred interest cost on beneficial
conversion feature 1,044,643 835,951 1,552,842 3,433,361
Amortization of discount on warrants 148,262 290,297 -- 438,559
Amortization of deferred compensation cost 14,769 59,068 399,322 760,500
Issuance of common stock for services 67,000 21,000 44,500 1,504,500
Compensation expense related to modification of existing options 210,144 -- -- 210,144
Other -- -- (1,607) (1,607)
Changes in operating assets and liabilities:
Increase in other current assets (29,917) (9,608) (4,159) (59,735)
Increase in inventory -- -- -- (19,729)
Increase in other assets (440,216) (247,072) (496,126) (1,216,958)
Increase (decrease) in accounts payable and
accrued liabilities 449,848 (96,582) 328,932 735,072
------------ ------------ ------------ ------------
Total adjustments 2,026,568 1,193,152 1,961,949 7,003,425
------------ ------------ ------------ ------------
Net cash used by operating activities (4,147,694) (3,364,558) (2,179,780) (12,721,813)
------------ ------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- (915,047) (3,651,676) (6,292,979)
Proceeds from sale of investments 821,047 3,078,902 2,045,615 6,292,979
Acquisition of property and equipment (407,150) (451,734) (307,362) (1,550,750)
Proceeds from sale of property and equipment -- -- 1,200 1,200
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities 413,897 1,712,121 (1,912,223) (1,549,550)
------------ ------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 3,000,000 1,500,000 4,000,000 8,500,000
Proceeds from deposit on securities purchase agreement -- 600,000 -- 600,000
Proceeds from sale of securities, net of issuance costs 702,500 257,400 266,666 6,081,088
Payments under capital lease (41,986) (16,602) -- (58,588)
Payments on note payable (14,261) -- -- (14,261)
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,646,253 2,340,798 4,266,666 15,108,239
------------ ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (87,544) 688,361 174,663 836,876
Cash and Cash Equivalents, Beginning 924,420 236,059 61,396 --
------------ ------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 836,876 $ 924,420 $ 236,059 $ 836,876
============ ============ ============ ============
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 118,870 $ 6,042 $ --
============ ============ ============
</TABLE>
During 1999, the Company purchased equipment under a capital lease totaling
$38,645 and under an installment note payable totaling $111,320.
See notes to consolidated financial statements.
F-12
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the
purpose of manufacturing and marketing a pharmaceutical product
named Reticulose (the current formulation of which is now known as
and hereinafter referred to as "Product R"). While the Company has
had limited sales of this product, primarily for research purposes,
the success of the Company will be dependent upon obtaining certain
regulatory approval for its pharmaceutical product, Product R, to
commence commercial operations.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research,
Ltd. (LTD), a Bahamian Corporation. All significant intercompany
accounts have been eliminated.
Development Stage Enterprise
As described above, the Company was incorporated on July 31, 1985,
and, since that time, has been primarily involved in organizational
activities, research and development activities, and raising
capital. Planned operations, as described above, have not commenced
to any significant extent. Accordingly, the Company is considered
to be in the development stage, and the accompanying consolidated
financial statements represent those of a development stage
enterprise.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid investments (money fund),
with original maturities of three months or less.
Investments
At December 31, 1999, investments consist of a money fund, which is
reported at its fair value. At December 31, 1998, investments
consisted of U.S. Government discount notes classified as "held to
maturity" and are carried at amortized cost, which approximates
fair value.
F-13
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method, over the estimated useful lives of
the assets. Gain or loss on disposition of assets is recognized
currently. Maintenance and repairs are charged to expense as
incurred. Major replacements and betterments are capitalized and
depreciated over the remaining useful lives of the assets.
Research and Development
Research and development costs are expensed as incurred by the
Company.
Income Taxes
The Company accounts for its income taxes using Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes, which requires recognition of deferred tax
liabilities and assets for expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.
Estimated Fair Value Of Financial Instruments
The information set forth below provides disclosure of the
estimated fair value of the Company's financial instruments
presented in accordance with the requirements of Statement of
Financial Accounting Standards (SFAS) No. 107. Fair value estimates
discussed herein are based upon certain market assumptions and
pertinent information available to management as of December 31,
1999 and 1998. Since the reported fair values of financial
instruments are based upon a variety of factors, they may not
represent actual values that could have been realized as of
December 31, 1999 and 1998 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial
instruments include cash, a money fund, U.S. government
obligations, accounts payable and the convertible debentures. Fair
values were assumed to approximate carrying values for these
financial instruments since they are short-term in nature and their
carrying amounts approximate fair values or they are receivable or
payable on demand.
F-14
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Estimated Fair Value Of Financial Instruments (Continued)
At December 31, 1998, the fair value of non-current investments,
primarily U.S. government obligations, have been estimated using
quoted market prices. The differences between the estimated fair
value and the carrying value of non-current and current debt
instruments were considered immaterial in relation to the Company's
financial position.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At
various times during the year, the Company has cash balances in
excess of federally insured limits. The Company maintains its cash,
which consists primarily of demand deposits, with high quality
financial institutions, which the Company believes limits risk.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No.
25), and related interpretations, in accounting for its employee
stock options rather than the alternative fair value accounting
allowed by SFAS No. 123, Accounting for Stock-Based Compensation.
APB No. 25 provides that the compensation expense relative to the
Company's employee stock options is measured based on the intrinsic
value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro-forma disclosure of
the impact of applying the fair value method of SFAS No. 123.
The Company follows SFAS No. 123 in accounting for stock options
issued to non-employees.
Net Loss Per Common Share
The Company computes loss per share in accordance with SFAS No.
128, Earnings Per Share, which was adopted in 1997. This standard
requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the diluted earnings per share computation.
Net loss per common share (basic and diluted) is based on the net
loss divided by the weighted average number of common shares
outstanding during the year.
The Company's potentially issuable shares of common stock pursuant
to outstanding stock options are excluded from the Company's
diluted computation, as their effect would be anti-dilutive.
F-15
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
The limited sales generated by the Company have consisted of sales
of Product R for testing and other purposes. The Company records
sales when the product is shipped to customers.
Reclassifications
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to 1999 presentation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ
from actual results.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 133 requires companies to recognize all
derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of the gain
or loss recognition on the hedging derivative with the recognition
of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the
earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss
is recognized in income in the period of change. On June 30, 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 133 as amended by SFAS No. 137 is
effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives
contracts to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new
standard on January 1, 2000 to affect its financial statements.
F-16
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated financial statements 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 history. The
Company is dependent upon registration of Product R 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
Product R 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.
During 1999 and 1998, the Company was successful in obtaining equity
and debt financing aggregating approximately $3,700,000 and $2,400,000,
respectively. 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, or that the Company will be successful
in the efforts to obtain equity or debt financing. 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 in the near future, and plans to continue to seek additional
equity and debt financing as the need arises. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
NOTE 3. ACQUISITION
Two of the principal stockholders of the Company acquired LTD, a
Bahamian Corporation with pharmaceutical manufacturing and warehousing
facilities, on February 20, 1984. The acquisition is a combination of
two entities under common control and has been accounted for in a
manner similar to a pooling of interests. In 1986, the Company acquired
from LTD exclusive rights to manufacture and market Reticulose
(currently referred to as Product R) worldwide, except within the
Bahamas, for $50,000. The Company also purchased inventory of Product R
from LTD for $45,000 and was obligated to pay $3 per ampule of Product
R for the initial 100,000 ampules purchased and $2 per ampule for
purchases exceeding 100,000 ampules. On December 16, 1987, the Company
acquired the controlling beneficial interest in 99.6% of the common
stock of LTD through an appropriate trust agreement to satisfy the
rules of the Bahamian Government, from two of the principal
stockholders of the Company. Both stockholders concurrently canceled
$86,565 of indebtedness due them from LTD.
F-17
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Estimated Useful
Lives (Years) 1999 1998
------------- ---- ----
<S> <C> <C> <C>
Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 483,865 324,083
Machinery and equipment 5 1,400,880 1,003,768
------------ ----------
1,919,295 1,362,401
Less accumulated depreciation 543,372 312,808
------------ ----------
$ 1,375,923 $1,049,593
============ ==========
</TABLE>
The Company maintains certain property and equipment in Freeport,
Bahamas. This property and equipment amounted to $385,087 as of
December 31, 1999 and $370,028 as of December 31, 1998 including
$17,623 expended in 1987 to purchase a land lease expiring in 2068.
Included with machinery and equipment is $38,645 and $222,318 of
equipment purchased under capital leases during 1999 and 1998,
respectively. Depreciation expense for equipment under the capital
leases was approximately $47,040 and $12,000 in 1999 and 1998,
respectively. These amounts are included above.
NOTE 5. OTHER ASSETS
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Patent development costs $517,816 $344,319
Loan costs, net of accumulated amortization of $341,395 - 96,250
Other 51,496 19,777
-------- --------
$569,312 $460,346
======== ========
</TABLE>
Patent development costs are capitalized as incurred. Loan costs relate
to fees paid in connection with the issuance of convertible debentures
(Note 8) and are amortized over the life of the debenture or until
conversion.
NOTE 6. SECURITIES PURCHASE AGREEMENTS
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
F-18
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
balance from the date of issuance until the date of interest
payment. The Debentures were convertible, at the option of the
holder, into shares of Common Stock pursuant to specified formulas.
On April 22, 1997, June 6, 1997, July 3, 1997 and August 20, 1997,
pursuant to notice by the holder, RBB, to the Company under the
February Debenture, $330,000, $134,000, $270,000 and $266,000,
respectively, of the principal amount of the February Debenture was
converted into 1,648,352, 894,526, 2,323,580 and 1,809,524 shares
of the Common Stock, respectively. As of August 20, 1997, the
February Debenture was fully converted. On December 9, 1997,
January 7, 1998, January 14, 1998, February 19, 1998, February 23,
1998, March 31, 1998, May 4, 1998 and May 5, 1998, pursuant to
notice by the holder, RBB, to the Company, $120,000, $133,000,
$341,250, $750,000, $335,750, $425,000, $275,000 and $620,000,
respectively, of the October Debenture was converted into 772,201,
1,017,011, 2,512,887, 5,114,218, 1,498,884, 1,870,869, 1,491,485
and 3,299,979 Common Stock, respectively. As of May 5, 1998, the
October Debenture was fully converted.
In connection with the issuance of the February Debenture, the
Company issued to RBB three warrants (the "February Warrants") to
purchase common stock, each such February Warrant entitling the
holder to purchase, from February 21, 1997 through February 28,
2007, 178,378 shares of common stock. The exercise price of the
three February Warrants was $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 was $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.
F-19
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
Based on the terms for conversion associated with the October
Debenture, there was 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 was 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.
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 is $.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 was an intrinsic value associated with the
beneficial conversion feature of $625,000. This amount has been
recorded as interest expense in 1998.
In August 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to issue an aggregate of 20 units, each unit consisting
of $100,000 principal amount of the Company's 7% convertible
debenture (the "August Debenture") due August 3, 2009 to Focus
Investors LLC ("Focus"). Accrued interest under
F-20
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
the August Debenture is payable semi-annually, computed at the rate
of 7% on the unpaid principal balance from the date of issuance
until the date of the interest payment. No payment of the principal
of the August Debenture may be made prior to the maturity date
without the consent of the holder. The August Debenture is
convertible, at the option of the holder, into shares of common
stock.
In connection with the issuance of the August Debenture, the
Company issued to Focus one warrant (the "August Warrant") to
purchase Common Stock, such August Warrant entitling the holder to
purchase 1,000,000 shares of the Common Stock at any time and from
time to time through August 3, 2004. The exercise price of the
August Warrant is $.2461 per warrant share. The fair value of the
August Warrants was estimated to be $52,593 ($.0526 per warrant
share) based upon a financial analysis of the terms of the warrant
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 five years. This amount
is being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the August
Debenture, there was an intrinsic value associated with the
beneficial conversion feature of $687,500. This amount has been
recorded as interest expense in 1999.
In December 1999, in order to finance further research and
development, the Company entered into a securities purchase
agreement to sell $2,000,000 principal amount of the Company's 7%
convertible debenture (the December Debenture) due December 28,
2009 to Endeavour Capital ("Endeavour"). Accrued interest under the
December Debenture is payable semi-annually, computed at the rate
of 7% on the unpaid principal balance from the date of issuance
until the date of the interest payment. No payment of the principal
of the December Debenture may be made prior to the maturity date
without the consent of the holder. The December Debenture is
convertible, at the option of the holder, into shares of common
stock.
During 1999, $1,000,000 of these debentures were sold. The
remaining $1,000,000 was not available until the shares underlying
the first $1,000,000 were registered. Such registration statement
was declared effective in January 2000 and the remaining $1,000,000
transaction was consummated. See Subsequent Event, Note 12.
F-21
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
Convertible Debentures (Continued)
In connection with the issuance of the December Debenture, the
Company issued to Endeavour warrants (the December Warrants) to
purchase Common Stock, such December Warrant entitling the holder
to purchase 100,000 shares of the Common Stock at any time and from
time to time through December 31, 2002. The exercise price of the
December Warrant is $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant
share) based upon a financial analysis of the terms of the warrant
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 three years. This amount is
being amortized to interest expense in the accompanying
consolidated financial statements.
Based on the terms for conversion associated with the December
Debenture, there was an intrinsic value associated with the
beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
A summary of the outstanding convertible debentures is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $ 1,500,000 $ 1,500,000
Unpaid principal balance of August debenture 2,000,000 --
Unpaid principal balance of December debenture 1,000,000 --
----------- -----------
4,500,000 1,500,000
Less unamortized discount 53,371 42,081
----------- -----------
Convertible debentures, net $ 4,446,629 $ 1,457,919
=========== ===========
</TABLE>
Other
In January 1999, pursuant to a securities purchase agreement dated
December 1998, 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.
F-22
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6. SECURITIES PURCHASE AGREEMENTS (Continued)
Other (Continued)
Included in interest expense for the year ended December 31, 1999
is $256,000, which may be payable by the Company as additional
financing costs related to the effective date of a registration
statement covering the resale of certain securities sold by the
Company.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase
price of $500,000. These proceeds were received in July 1999. Such
agreement also provides for the issuance of warrants to purchase an
aggregate of 925,926 shares of common stock at any time until June
30, 2004. The fair value of these warrants was estimated to be
$37,000 ($.04 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 five
years. This amount is being amortized to interest expense.
NOTE 7. NOTE PAYABLE
During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
property and calls for monthly installments of $2,476 at 12% per annum
for 60 months, commencing in March 1999 and expiring in February 2004.
The aggregate maturities of the installment purchase agreement for each
of the five years subsequent to December 31, 1999 are as follows:
Year ending December 31:
2000 $19,095
2001 19,517
2002 26,246
2003 27,321
2004 4,880
-------
97,059
Less current portion 19,095
-------
Note payable - long-term portion $77,964
=======
F-23
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES
GENERAL
Potential Claim for Royalties
The Company may be subject to claims from certain third parties for
royalties due on sale of Product R. The Company has not as yet
received any notice of claim from such parties.
Product Liability
The Company could be subjected to claims for adverse reactions
resulting from the use of Product R. Although the Company is
unaware of any such claims or threatened claims since Product R 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 Product R. As of the date hereof, the Company
does not have product liability insurance for Product R. 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 has three issued patents and one allowed patent for the
use of Product R. The Company currently has 15 patent applications
pending with the U.S. Patent Office and 17 foreign patent
applications. 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 Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R incorporated in
the Protocol against AIDS (the "Plata Agreement"). Plata covered
all costs and expenses associated with the demonstration.
F-24
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Plata Partners Limited Partnership (Continued)
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 June 30, 2000
at an exercise price of $.15 and $.17, respectively. As of December
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. The fair
value of these options are estimated to be $32,925 ($.0348 per
option share) based upon a financial analysis of the terms of the
options using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided.
Through December 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.
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 Product R 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.
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, Dr. Flichman delivered the Written
Report 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 June 30, 2000 at an
exercise price of $.21 per share. The fair value of these options
are estimated to be $1,788 ($.0012 per option share) based
F-25
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
upon a financial analysis of the terms of the options using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 20%; risk free interest rate of 6%. This amount has
been charged to compensation expense at December 31, 1999 as it
related to services previously provided. As of December 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
Product R 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 Product R 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.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Product R 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
Product R for the treatment of persons diagnosed with Herpes
Labialis/Genital Infections (the "Herpes Study") and HPV (the "HPV
Topical Study").
F-26
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Argentine Agreement (Continued)
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 Product R 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 Product R with those taking a
three drug cocktail and a placebo. As of December 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
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$85,000, which has been accounted for as research and development
expense.
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of December 31, 1999, the Company has advanced
approximately $50,000 for such study, which has been accounted for
as research and development expense.
As of December 31, 1999, the Company advanced approximately
$236,000 for expenses in connection with the drug approval process
in Argentina.
F-27
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
TESTING AGREEMENTS (Continued)
Barbados Study
A double blind study assessing the efficacy of the Company's drug
Product R in 43 human patients diagnosed with HIV (AIDS) has been
conducted at the Queen Elizabeth Hospital, Bridgetown, Barbados
(the "Barbados Study"). As of December 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 Product R in inhibiting the mutation of the
AIDS virus. As of December 31, 1999, the Company has advanced
approximately $15,000 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 Product R 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
Product R using kidney tumor model systems. In addition, NCI was to
study the effects of Product R 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 Product
R.
CONSULTING AND EMPLOYMENT 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.
F-28
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Hirschman Agreement (Continued)
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. As of December 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 (exercisable
until March 23, 2001) 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
(exercisable until March 23, 2001) 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 (exercisable until March 23, 2001) 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 December 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.
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) which are
exercisable until March 23, 2001.
On October 14, 1996, the Company and Dr. Hirschman entered into an
agreement (the "Employment Agreement") whereby Dr. Hirschman has
agreed to serve as the President and Chief Executive Officer of the
Company for a period of three years, subject to earlier termination
by either party, either for cause as defined in and in accordance
with the provisions of the Employment Agreement, or if the Company
does not receive on or prior to
F-29
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Hirschman Agreement (Continued)
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 (increased
to $361,000 as of January 1, 2000), 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.
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 June 30, 2000), 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"). The fair value of
these options are
F-30
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Cohen Agreements (Continued)
estimated to be $59,030 ($.0347 per option share) based upon a
financial analysis of the terms of the options using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 20%; risk free interest rate of 6%. This amount has
been charged to compensation expense at December 31, 1999 as it
related to services previously provided. As of December 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.
The fair value of these options was estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options 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 three years
(the term of the employment agreement).
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 December 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 June 30, 2000 at an option price of
$.14. The fair value of these options are estimated to be $116,101
($.0541 per option share) based upon a financial analysis of the
terms of the options using the Black-Sholes Pricing Model with the
following assumptions: expected volatility of 20%; risk free
interest rate of 6%. This amount has been charged to compensation
expense at December 31, 1999 as it related to services previously
provided.
F-31
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
GloboMax Agreement
On January 18, 1999, the Company entered into a consulting
agreement with Globomax LLC to provide services at hourly rates
established by the contract to the Company's Investigational New
Drug application submission and to perform all work that is
necessary to obtain FDA approval. The contract was extended by
mutual consent of both parties. The Company has incurred
approximately $203,000 in services to GloboMax through December 31,
1999.
Gallantar Agreement
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial 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 agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options are estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options 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 three years
(the term of the employment agreement).
Financial reporting of these options has been done pursuant to the
Company's policy of following APB No. 25, and related
interpretations, in accounting for its employee stock options.
Accordingly, the following pro forma financial information is
presented to reflect amortization of the fair value of the options.
As
Reported
December 31, Pro forma As
1999 Adjustment Adjusted
---- ---------- --------
Net loss $(6,174,262) $(31,344) $(6,205,606)
=========== ======= ==========
Net loss per share $(0.02) $(0.00) $(0.02)
====== ====== ======
F-32
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Gallantar Agreement (Continued)
There were no other options outstanding that would require pro
forma presentation in 1997 or 1998.
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 Product R 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 Product R to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Product R 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. The Company has made no sales under
the distribution agreements other than for testing purposes.
Other
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
offices in Yonkers, New York (the "build-out"). The Company anticipates
that the total expenses associated with the build-out would be
approximately $400,000, of which $155,000 has been incurred as of
December 31, 1999.
GENERAL
Capital Leases
During 1998, the Company entered into a purchase lease agreement
for equipment totaling $222,318. The lease calls for monthly
payments of $4,529 for 60 months commencing on September 1998 and
expiring on July 2003. Additionally, during 1999, the Company
entered into a purchase lease agreement for equipment totaling
$38,645. The lease calls for monthly payments of $965 for 48 months
commencing in August 1999 and expiring in July 2003. Future minimum
capital lease payments and the net present value of the future
minimum lease payments at December 31, 1999 are as follows:
F-33
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Capital Leases (Continued)
Year ending December 31:
2000 $ 65,928
2001 65,928
2002 65,928
2003 38,458
--------
Total minimum lease payments 236,242
Less amount representing interest (33,868)
--------
Present value of net minimum lease payments 202,374
Current maturities (50,315)
--------
$152,059
========
Operating Leases
Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $14,000 annually. The Company has three options to
renew for an additional one year per option. Management has
exercised its option for the year 2000.
On December 30, 1998, the Company executed an amendment to its
existing lease dated April 1997 for the laboratory facilities in
Yonkers, New York. The lease on the additional space is effective
May 1, 1999. The new lease adds 10,550 square feet (for a total of
16,650 square feet) and extends its term until April 2005.
Annual rent on the original lease is approximately $85,000. Rent
for the additional facilities is approximately $175,000. Total
rental commitment for the laboratory facilities will be $260,000.
The Company leased an automobile in November 1999 for 36 months at
$711 per month.
Total lease expense for the years ended December 31, 1999, 1998 and
1997 amounted to $191,974, $121,477 and $76,351, respectively.
F-34
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 8. COMMITMENTS AND CONTINGENCIES (Continued)
GENERAL (Continued)
Operating Leases (Continued)
Future minimum lease commitments as of December 31, 1999 are as
follows:
Year ending December 31:
2000 $ 282,500
2001 268,500
2002 288,000
2003 290,000
2004 290,000
Thereafter 290,000
----------
Total $1,709,000
==========
NOTE 9. STOCKHOLDERS' EQUITY
During 1998, the Company issued 18,460,333 shares of common stock for
an aggregate consideration of $3,158,400. The amounts were comprised of
the issuance of common stock pursuant to the exercise of stock options
of 1,555,000 shares for $257,400 and the issuance of common stock in
exchange for consulting services of 100,000 shares for consideration of
$21,000 and the issuance of common stock upon conversion of debt of
16,805,333 shares for $2,880,000.
During 1999, the Company issued 7,049,128 shares of common stock for an
aggregate consideration of $1,369,500. The amounts were comprised of
the issuance of common stock for cash of 6,769,128 shares for
$1,302,500 and issuance of common stock in exchange for consulting
services of 280,000 shares for consideration of $67,000.
NOTE 10. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes. SFAS No. 109 is an asset and liability approach for computing
deferred income taxes.
As of December 31, 1999 and 1998, the Company had a net operating loss
carryforward for Federal income tax reporting purposes amounting to
approximately $14,600,000 and $9,700,000, which expire in varying
amounts to 2019.
F-35
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10. INCOME TAXES (Continued)
The Company presently has temporary differences between financial
reporting and income tax reporting relating to interest expense on the
beneficial conversion feature of the convertible debt, depreciation and
patent costs. The components of the deferred tax asset as of December
31, 1999 and 1998 were as follows:
1999 1998
---- ----
Benefit of net operating loss carryforwards $4,850,000 $3,300,000
Less valuation allowance 4,850,000 3,300,000
---------- ---------
Net deferred tax asset $ -- $ --
=========== ==========
As of December 31, 1999, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $4,850,000 has been established.
NOTE 11. STOCK OPTIONS
As more fully described in Note 8 to these consolidated financial
statements, the Company granted stock options in exchange for testing
and consulting services. In accordance with SFAS 123, Accounting for
Stock-Based Compensation (effective for options granted after December
15, 1995), the Company recognized compensation cost based on the fair
value at the grant dates. The compensation cost is amortized over the
shorter of the service period or the life of the option. The deferred
compensation cost is reported as a component of stockholders' equity.
At December 31, 1999 and 1998, there were approximately 7,600,000
option shares outstanding with a weighted average exercise price of
$0.195 per share.
On January 3, 2000, the Company issued to employees stock options to
acquire an aggregate of 430,000 shares of common stock at an exercise
price of $0.21 per share. These options expire on January 2, 2010 and
vest in 20% increments at the end of each year for five years.
NOTE 12. SUBSEQUENT FINANCINGS
On January 19, 2000, pursuant to the August 31, 1999 convertible
debenture, the investors exercised their right to convert $300,000 of
the $2,000,000 debenture outstanding into 2,178,155 shares of common
stock.
On January 19, 2000, pursuant to the November 1998 convertible
debenture, the investors exercised their right to convert $1,122,500 of
the $1,500,000 debenture outstanding into 8,252,746 shares of common
stock.
In addition, on January 25, 2000, pursuant to the December 28, 1999
securities purchase agreement, the Company received an additional
$1,000,000 structured through the convertible debenture. Therefore, the
convertible debenture under this agreement is $2,000,000 as of January
25, 2000.
F-36
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12. SUBSEQUENT FINANCINGS (Continued)
Pursuant to a securities purchase agreement dated February 16, 2000,
the Company received on March 9, 2000, $3,000,000 in exchange for
13,636,357 shares of common stock and warrants to purchase
approximately 5,454,544 shares of common stock.
The pro forma effects of these transactions on the 1999 balance sheet,
are summarized as follows:
<TABLE>
<CAPTION>
Pro forma
Historical Adjustment Pro forma
---------- ---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Current Assets $916,000 (b) $1,000,000 $4,916,000
(c) 3,000,000
Property and Equipment 1,376,000 - 1,376,000
Other Assets 570,000 - 570,000
--------- -------------- ----------
$2,862,000 $ 4,000,000 $ 6,862,000
========== ============== ===========
Current Liabilities $798,000 - $ 798,000
Long-Term Debt 4,677,000 (a) $(1,423,000)
(b) 1,000,000 4,254,000
Stockholders' Equity (Deficiency) (2,613,000) (a) 1,423,000
(b) 3,000,000 1,810,000
--------- -----------
$2,862,000 $4,000,000 $ 6,862,000
========= ========== ===========
</TABLE>
(a) Assuming conversion of convertible debentures into common stock
(b) Assuming issuance of additional $1,000,000 convertible debenture
(c) Assuming issuance of new $3,000,000 securities purchase agreement
F-37
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
Condensed
from
Audited
Financial
Statements
March 31, December 31,
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents $ 4,094,197 $ 836,876
Inventory 19,729 19,729
Other current assets 167,387 59,734
------------ ------------
Total current assets 4,281,313 916,339
Property and Equipment 1,673,358 1,375,923
Other Assets 574,279 569,312
------------ ------------
Total assets $ 6,528,950 $ 2,861,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 846,675 $ 728,872
Current portion of capital lease obligation 51,416 50,315
Current portion of note payable 19,452 19,095
------------ ------------
Total current liabilities 917,543 798,282
------------ ------------
Long-Term Liabilities:
Common stock to be issued 3,000,000 --
Convertible debenture, net 15,000 4,446,629
Capital lease obligation - non-current portion 138,785 152,059
Note payable - non-current portion 74,581 77,964
------------ ------------
Total long-term liabilities 3,228,366 4,676,652
------------ ------------
Commitments and Contingencies -- --
Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 347,174,843 and 303,472,035
shares issued and outstanding 3,471 3,034
Additional paid-in capital 26,117,514 17,537,333
Deficit accumulated during the development stage (21,779,658) (19,725,238)
Discount on warrants (1,958,286) (428,489)
------------ ------------
Total stockholders' equity (deficiency) 2,383,041 (2,613,360)
------------ ------------
Total liabilities and stockholders' equity (deficiency) $ 6,528,950 $ 2,861,574
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-38
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
Inception
Three Months Ended (February 20,
March 31, 1984) to
--------- March 31,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Revenues $ 3,028 $ 2,399 $ 208,956
------------- ------------- -------------
Costs and Expenses:
Research and development 695,075 357,916 6,024,479
General and administrative 755,423 438,403 10,314,875
Depreciation 67,760 37,107 613,983
------------- ------------- -------------
1,518,258 833,426 16,953,337
------------- ------------- -------------
Net Loss from Operations (1,515,230) (831,027) (16,744,381)
------------- ------------- -------------
Other Income (Expense):
Interest income 24,963 15,809 627,004
Other income -- -- 120,093
Interest expense (564,153) (94,578) (5,782,374)
------------- ------------- -------------
(539,190) (78,769) (5,035,277)
------------- ------------- -------------
Net Loss $ (2,054,420) $ (909,796) $ (21,779,658)
============= ============= =============
Net Loss Per Share of Common
Stock - Basic and Diluted $ (.01) $ (.00)
============= =============
Weighted Average Number of
Common Shares Outstanding 313,819,774 297,577,226
============= =============
</TABLE>
See notes to consolidated condensed financial statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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.
F-40
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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
offer on "B" warrants .05 6,729,850 67 336,475 --
Issuance of common stock, exercise of "B" warrants .05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants .08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
----------- ----------- ----------- -----------
Balance, December 31, 1990 200,299,882 2,003 1,845,992 (1,200,915)
----------- ----------- ----------- -----------
</TABLE>
See notes to consolidated condensed financial statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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.
F-42
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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.
F-43
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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.
F-44
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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
Stage Cost
----- ----
<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.
F-45
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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 (4,557,710) --
------------ ---------
Balance, December 31, 1998 (13,550,976) (14,769)
------------ ---------
</TABLE>
See notes to consolidated condensed financial statements.
F-46
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
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 $(13,550,976)
Issuance of common stock, securities purchase agreement $ .16 4,917,276 49 802,451 --
Issuance of common stock, securities purchase agreement .27 1,851,852 18 499,982 --
Issuance of common stock, for services rendered .22 100,000 1 21,999 --
Issuance of common stock, for services rendered .25 180,000 2 44,998 --
Beneficial conversion feature, August debenture -- -- 687,500 --
Beneficial conversion feature, December debenture -- -- 357,143 --
Warrant costs, securities purchase agreement -- -- 494,138 --
Warrant costs, securities purchase agreement -- -- 37,025 --
Warrant costs, August debenture -- -- 52,592 --
Warrant costs, December debenture -- -- 4,285 --
Amortization of warrant costs, securities purchase agreement -- -- -- --
Amortization of deferred compensation cost -- -- -- --
Compensation expense related to modification of existing options -- -- 210,144 --
Net loss, year ended December 31, 1999 -- -- -- (6,174,262)
----------- --------- ------------ ------------
Balance, December 31, 1999 303,472,035 3,034 $ 17,537,333 $(19,725,238)
=========== ========= ============ ============
(RESTUBBED TABLE)
Deferred Discount
Compensation on
Cost Warrants
---- --------
<S> <C> <C>
Balance, December 31, 1998 $ (14,769) $ --
Issuance of common stock, securities purchase agreement -- --
Issuance of common stock, securities purchase agreement -- --
Issuance of common stock, for services rendered -- --
Issuance of common stock, for services rendered -- --
Beneficial conversion feature, August debenture -- --
Beneficial conversion feature, December debenture -- --
Warrant costs, securities purchase agreement -- (494,138)
Warrant costs, securities purchase agreement -- (37,025)
Warrant costs, August debenture -- --
Warrant costs, December debenture -- --
Amortization of warrant costs, securities purchase agreement -- 102,674
Amortization of deferred compensation cost 14,769 --
Compensation expense related to modification of existing options -- --
Net loss, year ended December 31, 1999 -- --
------------ ----------
Balance, December 31, 1999 $ -- $(428,489)
============ ==========
</TABLE>
See notes to consolidated condensed financial statements.
F-47
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Continued)
INCEPTION (FEBRUARY 20, 1984) TO MARCH 31, 2000
Common Stock
Amount ------------ Additional
Per Paid-In
Share Shares Amount Capital
----- ------ ------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1999 303,472,035 $ 3,034 $ 17,537,333
Issuance of common stock, exercise of options $ .14 600,000 6 83,994
Issuance of common stock, exercise of options .15 1,600,000 16 239,984
Issuance of common stock, exercise of options .16 500,000 5 79,995
Issuance of common stock, exercise of options .21 792,500 8 166,417
Issuance of common stock, exercise of options .36 60,000 1 21,599
Issuance of common stock, exercise of warrants .20 122,549 1 24,999
Issuance of common stock, exercise of warrants .24 122,549 1 29,999
Issuance of common stock, exercise of warrants .25 1,000,000 10 246,090
Issuance of common stock, conversion of debt .14 35,467,682 355 4,907,146
Issuance of common stock, conversion of debt .19 1,036,674 10 199,990
Issuance of common stock, conversion of debt .20 1,887,500 19 377,481
Issuance of common stock, cashless exercise of warrants 513,354 5 305,754
Cashless exercise of warrants -- -- (305,759)
Beneficial conversion feature, January debenture -- -- 386,909
Warrant costs, consulting agreement -- -- 200,249
Warrant costs, January debenture -- -- 13,600
Warrant costs, private placement -- -- 1,582,734
Recovery of subscription receivable previously written off -- -- 19,000
Amortization of warrant costs, securities purchase agreements -- -- --
Net loss, three months ended March 31, 2000 -- -- --
----------- --------- ------------
Balance, March 31, 2000 347,174,843 $ 3,471 $ 26,117,514
=========== ========= ============
(RESTUBBED TABLE)
Deficit
Accumulated
during the Discount
Development on
Stage Warrants
----- --------
<S> <C> <C>
Balance, December 31, 1999 $(19,725,238) $ (428,489)
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 warrants -- --
Issuance of common stock, exercise of warrants -- --
Issuance of common stock, exercise of warrants
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, cashless exercise of warrants -- --
Cashless exercise of warrants -- --
Beneficial conversion feature, January debenture -- --
Warrant costs, consulting agreement -- --
Warrant costs, January debenture -- --
Warrant costs, private placement -- (1,582,734)
Recovery of subscription receivable previously written off -- --
Amortization of warrant costs, securities purchase agreements -- 52,937
Net loss, three months ended March 31, 2000 (2,054,420) --
------------ -----------
Balance, March 31, 2000 $(21,779,658) $(1,958,286)
============ ===========
</TABLE>
See notes to consolidated condensed financial statements.
F-48
<PAGE>
<TABLE>
<CAPTION>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Inception
Three Months Ended (February 20,
March 31, 1984) to
-------------------- March 31,
2000 1999 2000
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,054,420) $ (909,796) $(21,779,658)
------------ ------------ ------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 67,760 37,107 613,893
Amortization of debt issue costs 106,030 26,250 779,215
Amortization of deferred interest cost on beneficial
conversion feature of convertible debenture 386,909 -- 3,820,270
Amortization of discount on warrants 119,908 36,730 558,467
Amortization of deferred compensation cost -- 14,769 760,500
Issuance of common stock for services -- -- 1,504,500
Compensation expense related to modification of
existing options -- -- 210,144
Realization of prepaid consulting fees 111,545 -- 111,545
Other -- -- (1,607)
Changes in Operating Assets and Liabilities:
Increase in inventory -- -- (19,729)
Increase in other current assets (18,953) (11,456) (78,688)
Increase in other assets (4,967) (43,680) (1,221,925)
Increase (decrease) in accounts payable and
accrued liabilities 117,803 (41,086) 852,875
------------ ------------ ------------
Total adjustments 886,035 18,634 7,889,460
------------ ------------ ------------
Net cash used by operating activities (1,168,385) (891,162) (13,890,198)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchase of investments -- -- (6,292,979)
Proceeds from sale of investments -- 821,047 6,292,979
Expenditures for property and equipment (365,195) (53,484) (1,915,945)
Proceeds from sale of property and equipment -- -- 1,200
------------ ------------ ------------
Net cash provided (used) by investing activities (365,195) 767,563 (1,914,745)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 1,000,000 -- 9,500,000
Proceeds from deposit on securities purchase agreement -- -- 600,000
Proceeds from deposit on common stock to be issued,
private placement 3,000,000 -- 3,000,000
Proceeds from sale of securities, net of issuance costs 787,100 202,500 6,868,188
Payments under capital lease (12,173) (12,418) (70,761)
Payments on note payable (3,026) -- (17,287)
Recovery of subscription receivable written off 19,000 -- 19,000
------------ ------------ ------------
Net cash provided by financing activities 4,790,901 190,082 19,899,140
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 3,257,321 66,483 4,094,197
Cash and Cash Equivalents, Beginning 836,876 924,420 --
------------ ------------ ------------
Cash and Cash Equivalents, Ending $ 4,094,197 $ 990,903 $ 4,094,197
============ ============ ============
</TABLE>
See notes to consolidated condensed financial statements.
F-49
<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, 2000 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, 2000 and
results of operations and cash flows for the three months ended
March 31, 2000 and 1999. 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 1999 financial statements have been
reclassified to conform to 2000 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, 1999.
NOTE 2. COMMITMENTS AND CONTINGENCIES
Going Concern
The accompanying unaudited consolidated condensed financial
statements at March 31, 2000 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 Product R 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 Product R 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
2000 and 1999, 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 in the near future.
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 Product R. The Company has not as yet
received any notice of claim from such parties.
F-50
<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 Product R. Although the Company is
unaware of any such claims or threatened claims since Product R 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 Product R. As of the date hereof, the Company
does not have product liability insurance for Product R. 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 has three issued patents and one allowed patent for the
use of Product R. The Company currently has 15 patent applications
pending with the U.S. Patent Office and 17 foreign patent
applications. 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 Dominican Republic in
accordance with a certain agreed upon protocol (the "Protocol") to
assess the efficacy of a treatment using Product R 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 June 30, 2000
at an exercise price of $.15 and $.17, respectively. The fair value
of these options are estimated to be $32,925 ($.0348 per option
share) based upon a financial analysis of the terms of the options
using the Black-Sholes Pricing Model with the following
assumptions: expected volatility of 20%; risk free interest rate of
6%. This amount has been charged to compensation expense at
December 31, 1999 as it related to services previously provided. As
F-51
<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)
Plata Partners Limited Partnership
of March 31, 2000, there are outstanding Plata Options to acquire
83,300 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, 2000, the Company has received approximately
$1,422,000 pursuant to the issuance of approximately 9.8 million
shares in connection with the exercise of the Plata Options and the
Additional Plata Options.
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 Product R 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.
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 June 30, 2000
at an exercise price of $.21 per share. The fair value of these
options are estimated to be $1,788 ($.0012 per option share) based
on the following assumptions: expected volatility of 20%; risk free
interest rate of 6%. This amount has been charged to compensation
expense at December 31, 1999 as it related to services previously
provided. As of March 31, 2000, 1,266,000 shares of common stock
were issued pursuant to the exercise of these options for an
aggregate exercise price of approximately $261,425.
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
Product R in Argentina, Bolivia, Paraguay, Uruguay, Brazil, and
Chile (the "DCT Exclusive Distribution Agreement").
F-52
<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 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 Product R 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.
The HIV-HPV Agreement provides that (i) in the event the date from
the HIV-HPV Study is used in connection with Product R 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
Product R 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 Product R 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 Product R with those taking a
three drug cocktail and a
F-53
<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)
placebo. As of March 31, 2000, 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
Product R for the treatment of rheumatoid arthritis in humans. In
connection with this study, the Company has advanced approximately
$85,000 which has been accounted for as research and development
expense.
In July 1998, the Company authorized expenditures of up to $90,000
to study the effects of Product R in inhibiting the mutation of the
AIDS virus. As of March 31, 2000, the Company has advanced
approximately $50,000 for such study which has been accounted for
as research and development expense.
As of March 31, 2000, the Company advanced approximately $281,000
for expenses in connection with the drug approval process in
Argentina.
Barbados Study
A double blind study assessing the efficacy of the Company's drug
Product R 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, 2000, 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 Product R in inhibiting the mutation of the
AIDS virus. As of March 31, 2000, the Company has advanced
approximately $15,000 for such study which has been accounted for
as research and development expense.
F-54
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT 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. As of March 31, 2000, 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 (exercisable until March 23, 2001) 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 (exercisable until March 23, 2001) 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 (exercisable
until March 23, 2001) 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, 2000, 560,000 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.
In March 2000, Mr. Rubin transferred 75,000 of his $0.27 options
and 75,000 of his $0.36 options to Elliot Bauer, an individual who
also received and exercised shares and options as a result of the
"Cohen Agreements".
F-55
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT 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), which are
exercisable until March 23, 2001.
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 (increased to $361,000 as of January
1, 2000), 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.
F-56
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT 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 June 30, 2000), 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"). The fair value of
these options are estimated to be $59,030 ($.0347 per option share)
based upon a financial analysis of the terms of the options using
the Black-Sholes Pricing Model with the following assumptions:
expected volatility of 20%; risk free interest rate of 6%. This
amount has been charged to compensation expense at December 31,
1999 as it related to services previously provided. As of March 31,
2000, 2,800,000 of the September 1992 Cohen Options have been
exercised for cash consideration of $386,000.
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, 2000, 3,455,000
shares were issued pursuant to the exercise of the Bauer and
Rizzuto Options for an aggregate exercise price of $240,000. Mr.
Rizzuto sold all of his shares and all shares underlying his
options. Pursuant to several amendments, the remaining Bauer
options are exercisable through June 30, 2000 at an option
F-57
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Cohen Agreements (Continued)
price of $.14. The fair value of these options are estimated to be
$116,101 ($.0541 per option share) based upon a financial analysis
of the terms of the options using the Black-Sholes Pricing Model
with the following assumptions: expected volatility of 20%; risk
free interest rate of 6%. This amount has been charged to
compensation expense at December 31, 1999 as it related to services
previously provided.
GloboMax Agreement
On January 18, 1999, the Company entered into a consulting
agreement with GloboMax LLC to provide services at hourly rates
established by the contract to the Company's Investigational New
Drug application submission and to perform all work that is
necessary to obtain FDA approval. The contract was extended by
mutual consent of both parties. The Company has incurred
approximately $471,000 in services to GloboMax through March 31,
2000.
Gallantar Agreement
On October 1, 1999, the Company entered into an employment
agreement with Alan Gallantar whereby Mr. Gallantar has agreed to
serve as the Chief Financial 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 agreement, without cause or upon the occurrence of certain
events. Such agreement provides for Mr. Gallantar to receive a base
salary of $175,000, $200,000 and $225,000 annually for each of the
three years of the term of the agreement as well as various
performance based bonuses ranging from 10% to 50% of the base
salary and various other benefits. Additionally, in connection with
such agreement, the Company granted Mr. Gallantar options to
purchase an aggregate of 4,547,880 shares of the Company's common
stock. Such options have a term of ten years and have an exercise
price of $.24255 per share. 1,515,960 options vest on each of the
first, second and third anniversary dates of this employment
agreement.
The fair value of these options are estimated to be $376,126
($.0827 per option share) based upon a financial analysis of the
terms of the options 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 three years
(the term of the employment agreement).
F-58
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)
Gallantar Agreement (Continued)
Financial reporting of these options has been done pursuant to the
Company's policy of following APB No. 25, and related
interpretations, in accounting for its employee stock options.
Accordingly, the following pro forma financial information is
presented to reflect amortization of the fair value of the options.
<TABLE>
<CAPTION>
As
Reported Pro forma As
March 31,2000 Adjustment Adjusted
------------- ---------- --------
<S> <C> <C> <C>
Net loss $(2,054,420) $(31,344) $(2,085,764)
=========== ======== ===========
Net loss per share $(0.01) $(0.00) $(0.01)
====== ====== ======
</TABLE>
There were no other options outstanding that would require pro
forma presentation.
Harbor View Agreement
On February 7, 2000, the Company entered into a consulting
agreement with Harbor View Group, Inc. for past and future
consulting services related to corporate structures, financial
transactions, financial public relations and other matters through
December 31, 2000.
In connection with this agreement, the Company issued warrants to
purchase 1,750,000 shares at an exercise price of $0.21 per share
and warrants to purchase 1,750,000 shares at an exercise price of
$0.26 per share until February 28, 2005. The fair value of the
warrants is estimated to be $200,249 ($.057 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 90%; a risk free interest rate of 6% and an expected
holding period of eleven months (the term of the consulting
agreement).
The Company has determined that $89,045 of the fair value relates
to past services and, accordingly, has expensed this portion in the
three months ended March 31, 2000. The remaining $111,204 is
included in other current assets and will be amortized over the
remaining term of the agreement.
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 Product R in the countries of China,
Japan, Macao, Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
F-59
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 2. COMMITMENTS AND CONTINGENCIES (Continued)
DISTRIBUTION AGREEMENTS (Continued)
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 Product R to be
approved for commercial sale in such countries and upon such approval,
to purchase from the Company certain minimum quantities of Product R 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. The Company has made no sales under
the distribution agreements other than for testing purposes.
OTHER
The Company has entered into an agreement with an unaffiliated third
party to increase the square footage of its corporate and laboratory
offices in Yonkers, New York (the "build-out"). The Company anticipates
that the total expenses associated with the build-out would be
approximately $400,000, of which $386,000 has been incurred as of March
31, 2000.
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.
F-60
<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.
F-61
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
On January 19, 2000 and March 7, 2000 pursuant to notice by the holder,
RBB, to the Company under the November Debenture, $1,122,500 and
$377,500, respectively, of the principal amount of the November
Debenture was converted into 8,252,746 and 1,887,500 shares of the
common stock, respectively. As of March 7, 2000, the November Debenture
was fully converted.
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 has been amortized to
interest expense in the accompanying consolidated condensed 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.
In August 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to issue an
aggregate of 20 units, each unit consisting of $100,000 principal
amount of the Company's 7% convertible debenture (the "August
Debenture") due August 3, 2009 to Focus Investors LLC ("Focus").
Accrued interest under the August Debenture is payable semi-annually,
computed at the rate of 7% on the unpaid principal balance from the
date of issuance until the date of the interest payment. No payment of
the principal of the August Debenture may be made prior to the maturity
date without the consent of the holder. The August Debenture is
convertible, at the option of the holder, into shares of common stock.
On January 19, 2000, February 17, 2000 and March 3, 2000 pursuant to
notice by the holder, Focus, to the Company under the August Debenture,
$300,000, $900,000 and $800,000, respectively, of the principal amount
of the August Debenture was converted into 2,178,155, 6,440,735 and
5,729,967 shares of the common stock, respectively. As of March 3, 2000
the November Debenture was fully converted.
In connection with the issuance of the August Debenture, the Company
issued to Focus one warrant (the "August Warrant") to purchase Common
Stock, such August Warrant entitling the holder to purchase 1,000,000
shares of the Common Stock at any time and from time to time through
August 3, 2004. The exercise price of the August Warrant is $.2461 per
warrant share. The fair value of the August Warrants was estimated to
be $52,593 ($.0526 per warrant share) based upon a financial analysis
of the terms of the warrant 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 five years.
This amount has been amortized to interest expense in the accompanying
consolidated condensed financial statements.
F-62
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
Based on the terms for conversion associated with the August Debenture,
there was an intrinsic value associated with the beneficial conversion
feature of $687,500. This amount has been recorded as interest expense
in 1999.
In December 1999, in order to finance further research and development,
the Company entered into a securities purchase agreement to sell
$2,000,000 principal amount of the Company's 7% convertible debenture
(the December Debenture) due December 28, 2009 to Endeavour Capital
("Endeavour"). Accrued interest under the December Debenture is payable
semi-annually, computed at the rate of 7% on the unpaid principal
balance from the date of issuance until the date of the interest
payment. No payment of the principal of the December Debenture may be
made prior to the maturity date without the consent of the holder. The
December Debenture is convertible, at the option of the holder, into
shares of common stock.
During 1999, $1,000,000 of these debentures were sold. The remaining
$1,000,000 was not available until the shares underlying the first
$1,000,000 were registered. Such registration statement was declared
effective in January 2000 and the remaining $1,000,000 transaction was
consummated.
On January 27, 2000, February 22, 2000, February 23, 2000, February 24,
2000 and February 29, 2000 pursuant to notice by the holder, Endeavour,
to the Company under the December Debenture, $150,000, $135,000,
$715,000, $785,000 and $200,000, respectively, of the principal amount
of the December Debenture was converted into 1,105,435, 988,913,
5,149,035, 5,622,696 and 1,036,674 shares of the common stock,
respectively. As of March 31, 2000, $15,000 of the December Debenture
remained outstanding.
In connection with the issuance of the first $1,000,000 of the December
Debenture, the Company issued to Endeavour warrants (the December
Warrants) to purchase Common Stock, such December Warrant entitling the
holder to purchase 100,000 shares of the Common Stock at any time and
from time to time through December 31, 2002. The exercise price of the
December Warrant is $.19 per warrant share. The fair value of the
December Warrants was estimated to be $4,285 ($.0429 per warrant share)
based upon a financial analysis of the terms of the warrant 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 three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the first $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $357,143. This amount has been
recorded as interest expense in 1999.
In connection with the issuance of the second $1,000,000 of the
December Debenture, the Company issued to Endeavour warrants (the
December Warrants) to purchase Common Stock, such December Warrant
entitling the holder to purchase 100,000 shares of the Common Stock at
any time and from time to time through December 31, 2002. The exercise
price of the December
F-63
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 3. CONVERTIBLE DEBENTURES (Continued)
Warrant is $.20 per warrant share. The fair value of the December
Warrants was estimated to be $13,600 ($.136 per warrant share) based
upon a financial analysis of the terms of the warrant using the
Black-Sholes Pricing Model with the following assumptions: expected
volatility of 90%; a risk free interest rate of 6% and an expected
holding period of three years. This amount has been amortized to
interest expense in the accompanying consolidated financial statements.
Based on the terms for conversion associated with the second $1,000,000
of the December Debenture, there was an intrinsic value associated with
the beneficial conversion feature of $386,909. This amount has been
recorded as interest expense in 2000.
A summary of the outstanding convertible debentures is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Unpaid principal balance of November debenture $ - $1,500,000
Unpaid principal balance of August debenture - 2,000,000
Unpaid principal balance of December debenture 15,000 1,000,000
------- ----------
15,000 4,500,000
Less unamortized discount - 53,371
------- ----------
Convertible debentures, net $15,000 $4,446,629
======= ==========
</TABLE>
NOTE 4. SECURITIES PURCHASE AGREEMENTS
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.
On June 23, 1999, the Company entered into a securities purchase
agreement with certain individuals whereby the Company will issue
1,851,852 shares of its common stock for an aggregate purchase price of
$500,000. These proceeds were received in July 1999. Such agreement
also provides for the issuance of warrants to purchase an aggregate of
925,926 shares of common stock at any time until June 30, 2004. The
fair value of these warrants was estimated to be $37,000 ($.04 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 five years. This amount is being amortized
to interest expense.
F-64
<PAGE>
ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
NOTE 4. SECURITIES PURCHASE AGREEMENTS (Continued)
Pursuant to a securities purchase agreement with Harbor View Group and
other various purchasers, dated February 16, 2000, the Company received
$3,000,000 on March 9, 2000 in exchange for 13,636,357 shares of common
stock. As of March 31, 2000, these shares had not yet been issued;
accordingly, the $3,000,000 has been reported as a separate line item
("Common stock to be issued") in the long-term liabilities section of
the accompanying consolidated condensed balance sheet.
Additionally, in connection with the above described securities
purchase agreement, the Company issued warrants to purchase an
aggregate of 5,454,544 shares of common stock. Fifty percent (50%) of
the warrants are exercisable at $0.275 per share and fifty percent
(50%) of the warrants are exercisable at $0.33 per share, until
February 28, 2005. The fair value of these warrants was estimated to be
$1,582,734 ($0.295 and $0.285 per warrant share) based upon a financial
analysis of the terms of the warrant using the Black-Sholes Pricing
Model with the following assumptions; expected volatility of 90%; 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 condensed financial statements.
F-65
<PAGE>
=====================================================================
ADVANCED VIRAL RESEARCH CORP.
--------------------
PROSPECTUS
--------------------
Up to 46,070,901 Shares
of
Common Stock
June 12, 2000
=====================================================================
