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OVERVIEW
Since our inception in July 1985, Advanced Viral Research Corp. has been engaged primarily in research and development activities. We have not yet generated significant operating revenues, and as of September 30, 1999 we had incurred a cumulative net loss of $17,649,843. Our ability to generate substantial operating revenue depends upon our success in gaining FDA approval for the commercial use and distribution of Reticulose(TM). All of our research and development efforts have been devoted to the development of Reticulose(TM).
In order to commence clinical trials for regulatory approval of Reticulose(TM) in the United States, we must submit an Investigational New Drug application (IND) with the FDA. Filings with foreign regulatory agencies are
required to continue or begin new clinical trials outside the United States. We have recently contracted with GloboMax LLC of Hanover, Maryland to assist us in our preparation and filing of the IND with the FDA, and otherwise to assist us through the FDA process with the objective of obtaining full approval for the manufacture and commercial distribution of Reticulose(TM) in the United States. The IND will seek approval to conduct a study testing the effectiveness of
Reticulose(TM) on human subjects with AIDS and other diseases. In the IND we intend to include, among other things:
o information on chemistry, laboratory and animal controls;
o safety information for the initial study proposed to be conducted on humans; and
o information assuring the identification, quality and purity of Reticulose(tm) and a description of the physical, chemical and microbiological characteristics of Reticulose(TM).
We believe that the IND will demonstrate the low rate of adverse reactions occurring in the use of Reticulose(TM) 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 we are financially able to file the IND. FDA approval to begin human clinical trials of Reticulose(TM) pursuant to an
approved IND will require significant cash expenditures, the amount of which is
not currently determinable. Furthermore, we are unable to assess the probability of whether Reticulose(TM) will ever be approved for commercial distribution by
any country.
We plan to continue to provide funding for testing programs in our laboratory and at selected universities, medical schools, laboratories and hospitals, but the amount of research that will be conducted at those institutions will depend upon our financial status. Because our research and development expenses and clinical trial expenses will be charged against earnings for financial reporting purposes, we expect that losses from operations will continue to be incurred for the foreseeable future.
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RESULTS OF OPERATIONS
NET LOSS
For the three month periods ended September 30, 1999 and September 30, 1998, we incurred losses of $2,013,035 ($0.01 per share) and $869,070 ($0.00 per
share), respectively. For the nine month periods ended September 30, 1999 and
September 30, 1998, we incurred losses of $4,098,867 ($0.01 per share) and
$3,118,824 ($0.01 per share), respectively.
GENERAL AND ADMINISTRATIVE EXPENSE. Our increased losses during the
three and nine months ended September 30, 1999 are principally due to increased
general and administrative expense ($683,917 and $1,742,592 for the three and
nine months ended September 30, 1999 vs. $364,554 and $1,087,707 for the three
and nine months ended September 30, 1998, respectively). Included in the general and administrative expenses are:
o consulting expenses payable to GloboMax LLC, a firm assisting us with the preparation and filing of the IND, of approximately $65,000 and $175,000 for the three and nine months ended September 30, 1999 vs. no expenses for the three and nine months ended September 30, 1998, respectively;
o contractually imposed finance penalties associated with not having an effective registration statement covering certain securities of approximately $48,000 and $168,000 for the three and nine months ended September 30, 1999 vs. no expenses for the three and nine months ended September 30, 1998, respectively;
o increased professional expenses resulting principally from, among others, legal expenses related to certain financings of $127,000 and $315,000 for the three and nine months ended September 30,
1999 vs. $50,000 and $186,000 for the three and nine months ended September 30, 1998, respectively; and
o increased employee benefit costs of approximately $76,000 and $173,000 for the three and nine months ended September 30, 1999 vs. $41,000 and $106,000 for the three and nine months ended
September 30, 1998, respectively.
DEPRECIATION AND AMORTIZATION EXPENSE. Our increased losses during the
three and nine months ended September 30, 1999 are also due to increased depreciation and amortization expense ($129,042 and $277,958 for the three and nine months ended September 30, 1999 vs. $28,437 and $293,303 for the three and
nine months ended September 30, 1998, respectively). Included in the depreciation and amortization expenses are:
o amortization of loan costs of approximately $76,000 and $128,000 for the three and nine months ended September 30, 1999 vs. $0 and $221,000 for the three and nine months ended September 30, 1998, respectively; and
o depreciation of approximately $53,000 and $149,000 for the three and nine months ended September 30, 1999 vs. $28,000 and $61,000 for the three and nine months ended September 30, 1998, respectively.
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INTEREST EXPENSE. Our increased losses during the three and nine months
ended September 30, 1999 are also due to increased interest expense ($781,553 and $920,595 for the three and nine months ended September 30, 1999 vs. $0 and $583,188 for the three and nine months ended September 30, 1998, respectively). Included in the interest expenses are:
o beneficial conversion feature on certain convertible debentures of $688,000 for the three and nine months ended September 30, 1999 vs. $0 and $211,000 for the three and nine months ended September 30, 1998, respectively;
o interest expense associated with certain convertible debentures of approximately $50,000 and $102,000 for the three and nine
months ended September 30, 1999 vs. $0 and $96,000 for the three and nine months ended September 30, 1998, respectively; and
o amortization of discount on certain warrants of approximately $45,000 and $113,000 for the three and nine months ended September 30, 1999 vs. $0 and $275,000 for the three and nine months ended September 30, 1998, respectively.
RESEARCH AND DEVELOPMENT EXPENSE. Our research and development expenses have been consistent during the three and nine months ended September 30, 1999, however, there has been a shift from the use of external to internal personnel and testing.
SALES. We had sales of $1,928 and $6,517 for the three and nine months ended September 30, 1999, respectively, vs. $656 and $656 for the three and nine months ended September 30, 1998, respectively. All sales during these periods were to distributors purchasing Reticulose(TM) for testing purposes. Interest income was $6,461 and $27,951 for the three and nine months ended September 30, 1999, respectively, vs. $22,310 and $79,533 for the three and nine months ended September 30, 1998, respectively. There can be no assurance that Reticulose(TM) will ever be sold for commercial distribution anywhere in the world.
Our net loss, exclusive of costs directly related to costs of financing and costs related to Globomax, was approximately $985,000 and $2,574,000 for the three and nine months ended September 30, 1999 vs.$869,000 and $2,305,000 for the three and nine months ended September 30, 1998, respectively. This information is not presented as an alternative to operating results or cash flow from operations as determined by generally accepted accounting principles
(GAAP), but rather to show that the net loss is consistent with prior corresponding periods when the variable costs of financing and the Globomax
consulting expenses are excluded. It should not be considered in isolation from
or construed as having greater importance than GAAP operating income or cash
flows from operations as a measure of our performance.
LIQUIDITY
ASSETS. As of September 30, 1999 and December 31, 1998, we had current assets of $1,363,946 and $1,795,014, respectively. We had total assets of $3,020,770 and $3,304,953 at September 30, 1999 and December 31, 1998,
respectively. The decrease in current and total assets was primarily attributable to the use of investment capital to fund increased operating
expenditures.
LIABILITIES. As of September 30, 1999 and December 31, 1998, we had
current liabilities of $623,170 and $317,359, respectively. The increase in current liabilities was due to a $303,000 increase in payables primarily resulting from our increased costs of financing of $180,000, plus increased
operating expenses. As of September 30, 1999 and December 31, 1998, we had total long term liabilities of $3,578,695 and $1,625,299 at September 30, 1999 and
December 31, 1998, respectively. The increase in total long term liabilities was
primarily attributable to the issuance to Focus Investors, LLC of convertible debentures.
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CASH FLOW. During the nine months ended September 30, 1999, we used cash of $2,917,982 for operating activities, vs. $2,491,726 during the nine months ended September 30, 1998. During the nine months ended September 30, 1999, we:
o incurred non-cash expenses of approximately $1,093,000, primarily relating to the beneficial conversion feature on certain debentures ($688,000), amortization of loan costs ($128,000), depreciation ($150,000) and discount on warrants ($113,000);
o expended approximately $1,100,000 for payroll and related costs;
o obtained approximately $2,703,000 in proceeds from the sale of securities;
o expended approximately $625,000 in professional and consulting fees, approximately $200,000 of which are consulting fees incurred in connection with the IND for Reticulose TM, and
approximately $200,000 of which relate to legal fees incurred in connection with certain financing arrangements;
o expended approximately $285,000 for research expenses incurred by
third parties in connection with the testing of Reticulose(TM) in
Argentina and Barbados;
o expended approximately $193,000 for additions to machinery and
equipment at our Yonkers, New York office and the manufacturing plant in Freeport, Bahamas;
o expended approximately $143,000 in laboratory supplies; and
o expended approximately $500,000 of additional operating expenses.
During the nine months ended September 30, 1999, cash flows provided by
investing activities were primarily due to the sales of investments which were
available from the proceeds of the issuance of the convertible debenture in 1998 and debentures, warrants and shares of common stock in 1999. See "Capital Resources" for a discussion of cash flows provided by financing activities.
As of September 30, 1999, we had expended the following amounts for research and development in connection with the following ongoing studies being conducted abroad:
o $50,000 has been advanced to DCT in connection with a study being conducted in Argentina by DCT on 65 patients to compare the results of treatment of AIDS patients using a three-drug cocktail and Reticulose(TM) versus AIDS patients taking a three-drug cocktail and a placebo, pursuant to an agreement entered in February 1998.
o $85,000 has been advanced to DCT to cover the costs of a controlled study in 30 patients to determine the effectiveness of Reticulose(TM) for the treatment of rheumatoid arthritis in humans, pursuant to an agreement entered in May 1998.
o $50,000 has been advanced to DCT to study the effects of Reticulose(TM) in inhibiting the mutation of the AIDS virus on patients in Argentina, pursuant to an agreement entered in July 1998.
During the next 12 months, we expect to spend approximately $1,600,000
on research and development related activities, exclusive of payroll and operating expenses to be incurred at our Yonkers, New York laboratory,
including:
o approximately $1,300,000 in the preparation of the IND;
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o approximately $225,000 in overseas research of Reticulose(TM);
and
o approximately $75,000 in preparing the manufacturing facility in the Bahamas for FDA inspection and in accordance with good manufacturing practices and standards.
Additionally, we expect to spend approximately $400,000 for building expansion of our research and development facility in Yonkers, New York. We anticipate that we will be required to sell additional securities to obtain the
funds necessary to further our research and development activities.
Under the terms of an agreement with several purchasers entered in
December 1998, pursuant to which such purchasers purchased an aggregate of
4,917,276 shares of common stock and warrants to purchase an additional 2,366,788 shares of common stock, we are required to file with the Commission a registration statement to register the common stock issued under the purchase agreement, and upon exercise of the warrants to allow the resale of such common stock to the public. Because the registration statement was not declared
effective by the Commission on or before May 21, 1999, the agreement provides that we pay a penalty of $30,000 for each full calendar month or portion thereof lapsed after such date, until the registration statement is declared effective,
provided, however, that total penalties shall not exceed $100,000 in the aggregate. As of the date hereof, the agent for the purchasers has not requested payment of the penalty, and we are negotiating with such agent to have the
penalty waived.
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 are required to file with the Commission a registration statement to register the common stock issued under the purchase agreement, and upon exercise of the warrants to allow the resale of such common stock to the public. The registration statement must be filed on or prior to December 28,
1999. If the registration statement is not declared effective by the Commission
prior to such date, we must pay 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.
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 are 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 filed or declared effective prior to a certain date, 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 Adefault@), 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.
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The independent certified public accountants' report on our consolidated financial statements for the fiscal year ended December 31, 1998,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the Consolidated Financial Statements states that our ability to continue operations is dependent upon the continued sale of our securities 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.
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