10-Q 1 g13446e10vq.htm ADVANCED VIRAL RESEARCH CORP. Advanced Viral Research Corp.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2008
OR
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to
Commission File Number 000-18293
ADVANCED VIRAL RESEARCH CORP.
(Exact name of registrant as specified in its charter)
     
Delaware   59-2646820
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
6 Executive Plaza, Ste 283, Yonkers, New York   10701
(Address of principal executive offices)   Zip Code
(914) 376-7383
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).
 
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company x
      (Do not check if a smaller reporting company)  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No x
Indicate the number of shares of the registrant’s Common Stock outstanding as of the close of business on May 14, 2008: 846,227,669
 
 

 


 

TABLE OF CONTENTS
As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” the “Company” and “Advanced Viral” mean Advanced Viral Research Corp. and its subsidiaries (unless the context indicates a different meaning).

 


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
     The condensed consolidated financial statements include the accounts of the Company and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the information in the following unaudited consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
     These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

1


Table of Contents

Advanced Viral Research Corp.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
                 
    March 31,     December 31,  
    2008     2007  
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 698,943     $ 1,450,967  
Prepaid insurance
    48,649       48,361  
Other current assets
    35,498       27,501  
 
           
Total current assets
    783,090       1,526,829  
 
               
Property and Equipment, Net
    20,441       18,307  
Assets Held for Sale
    142,041       112,319  
Intangible Assets
    498,628       500,000  
Other Assets
    231,186       246,993  
 
           
Total assets
  $ 1,675,386     $ 2,404,448  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
 
               
Current Liabilities:
               
Accounts payable
  $ 99,059     $ 83,483  
Accrued liabilities
    141,194       140,127  
 
           
Total current liabilities
    240,253       223,610  
 
           
 
               
Long Term Debt
               
Convertible Debenture — Net of discounts and including accrued interest
    605,906       440,125  
 
           
 
               
Commitments, Contingencies and Subsequent Events
               
 
               
Stockholders’ Equity:
               
Common stock, $0.00001 par value:
               
2,000,000,000 shares authorized, 789,989,218 shares issued and outstanding
    7,900       7,900  
Undesignated preferred stock, $0.00001 par value:
               
50,000,000 shares authorized, no shares issued and outstanding as of March 31, 2007 and December 31, 2007
           
Additional paid-in capital
    78,894,761       78,723,827  
Deficit accumulated during the development stage
    (78,073,434 )     (76,991,014 )
 
           
Total stockholders’ equity
    829,227       1,740,713  
 
           
Total liabilities and stockholders’ equity
  $ 1,675,386     $ 2,404,448  
 
           
See notes to consolidated financial statements.

2


Table of Contents

Advanced Viral Research Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
                         
                    Inception  
                    (February 20,  
    Three Months Ended     1984) to  
    March 31,     March 31,  
    2008     2007     2008  
Revenues
  $     $     $ 231,892  
 
                 
 
                       
Costs and Expenses:
                       
Research and development
    267,098       185,900       25,826,753  
General and administrative
    633,047       624,229       35,199,694  
Cost in connection with settlement of distribution agreement
                687,005  
Depreciation and amortization
    5,028       8,914       4,340,057  
Impairment charge — patent cost
                1,081,085  
 
                 
 
    905,173       819,043       67,134,594  
 
                 
 
                       
Loss from Operations
    (905,173 )     (819,043 )     (66,902,702 )
 
                 
 
                       
Other Income (Expense):
                       
Interest income
    9,140       15,570       1,377,962  
Other income
                120,093  
Interest expense
    (181,943 )     (153,847 )     (10,803,875 )
Severance expense — former directors
                (302,500 )
 
                 
 
    (172,803 )     (138,277 )     (9,608,320 )
 
                 
 
                       
Loss from Continuing Operations
    (1,077,976 )     (957,320 )     (76,511,022 )
(Loss) Income from Discontinued Operations
    (4,444 )     (3,486 )     (1,562,412 )
 
                 
 
                       
Net Loss
  $ (1,082,420 )   $ (960,806 )   $ (78,073,434 )
 
                 
 
                       
Net Loss Per Common Share
                       
Basic and Diluted:
                       
Continuing operations
  $ (0.00 )   $ (0.00 )        
Discontinued operations
    (0.00 )     (0.00 )        
 
                   
Net loss
  $ (0.00 )   $ (0.00 )        
 
                   
 
                       
Weighted Average Number of
                       
Common Shares Outstanding
    789,989,218       696,587,734          
 
                   
See notes to consolidated financial statements.

3


Table of Contents

Advanced Viral Research Corp.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
                         
                    Inception  
                    (February 20,  
    Three Months Ended     1984) to  
    March 31,     March 31,  
    2008     2007     2008  
Cash Flows from Operating Activities:
                       
Net loss
  $ (1,082,420 )   $ (960,806 )   $ (78,073,434 )
 
                 
Adjustments to reconcile net loss to net cash used by operating activities:
                       
Depreciation and amortization
    5,028       8,914       4,950,834  
Impairment charge — patent cost
                  1,081,085  
Gain on sale of fixed assets
                  (111,377 )
Interest accrued on convertible debentures
    36,740             176,437  
Cost in connection with settlement of distribution agreement
                687,005  
Amortization of debt issuance costs
    15,807       13,790       1,520,352  
Amortization of deferred interest costs on beneficial conversion feature of convertible debenture
    53,267       60,929       6,256,987  
Amortization of discount on warrants
    75,775       52,265       2,492,649  
Amortization of discount on warrants — consulting services
                230,249  
Amortization of deferred compensation cost
                760,500  
Issuance of common stock for debenture interest
                237,486  
Issuance of common stock for services
                1,586,000  
Compensation expense for options and warrants
    170,934       45,112       4,849,427  
Changes in operating assets and liabilities:
                       
(Increase) decrease in other current assets
    (16,182 )     (104,555 )     (111,806 )
(Increase) decrease in other assets
                (833,157 )
Increase in accounts payable and accrued liabilities
    16,642       50,482       246,453  
 
                 
Total adjustments
    358,011       126,937       24,019,124  
 
                 
Net cash used by operating activities
    (724,409 )     (833,869 )     (54,054,310 )
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Purchase of investments
                (6,542,979 )
Proceeds from sale of fixed assets
                124,929  
Proceeds from sale of investments
                6,292,979  
Patent costs incurred
                (1,239,119 )
Acquisition of property and equipment
    (27,615 )     (1,535 )     (4,437,681 )
 
                 
Net cash used by investing activities
    (27,615 )     (1,535 )     (5,801,871 )
 
                 
 
                       
Cash Flows from Financing Activities:
                       
Proceeds from exercise of warrants
                  312,000  
Proceeds from issuance of convertible debt
            1,323,800       17,223,188  
Proceeds from sale of securities, net of issuance costs
                43,410,584  
Proceeds from common stock subscribed but not issued
                1,163,900  
Proceeds from exercise of stock options
                  9,000  
Payments under litigation settlement
                (1,050,647 )
Payments under capital lease
                (420,581 )
Payments on note payable
                (111,320 )
Recovery of subscription receivable written off
                19,000  
 
                 
Net cash provided by financing activities
          1,323,800       60,555,124  
 
                 
 
                       
Net Increase (Decrease) in Cash and Cash Equivalents
    (752,024 )     488,396       698,943  
 
                       
Cash and Cash Equivalents, Beginning
    1,450,967       1,042,279        
 
                 
 
                       
Cash and Cash Equivalents, Ending
  $ 698,943     $ 1,530,675     $ 698,943  
 
                 
 
                       
Supplemental Disclosure of Non-Cash Financing Activities:
                       
Cash paid during the period for interest
  $ 354     $ 4,217          
 
                   
See notes to consolidated financial statements.

4


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1.     BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements as of March 31, 2008 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on Form 10-Q and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position as of March 31, 2008 and results of operations and cash flows for the three months ended March 31, 2008 and 2007. All such adjustments are of a normal recurring nature. Certain general and administrative expenses from inception relating to consulting services were reclassified to compensation expense for options and warrants to be consistent with current presentation.
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 audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.
Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements.
NOTE 2.     GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has suffered accumulated net losses of $78,073,434 since inception and is dependent upon registration of AVR118, AVR123 and its other products for sale before it can begin commercial operations. Conducting the clinical trials of AVR118, AVR123 and its other products will require significant cash expenditures. AVR118, AVR123 and any of the Company’s other products may never be approved for commercial distribution by any country. Because the Company’s research and development expenses and clinical trial expenses will be charged against earnings for financial reporting purposes, the Company expects that losses from operations will continue to be incurred for the foreseeable future. The Company’s cash position is inadequate to pay all the costs associated with current operations or the full range of testing and clinical trials required by the FDA. Unless and until AVR118 or the Company’s other products are approved for sale in the United States or another industrially developed country, the Company will be dependent upon the continued sale of its securities, debt or equity financing for funds to meet its cash requirements. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of its products for commercial sale is granted or that any approval will ever be granted. Management anticipates that the Company can continue operations through June 2008 with its current liquid assets, if no stock options or warrants are exercised or additional securities sold. Management is currently seeking equity and debt financing, and exploring the sale of certain assets. If such financing is unavailable, the Company may have to materially limit or suspend operations or liquidate assets.

5


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 2.     GOING CONCERN (Continued)
During the first three months of 2008 the Company did not receive any proceeds from any debt or equity transactions. In 2007 the Company issued convertible debt for which it received net cash proceeds of approximately $2,653,800, as discussed in further detail in Note 7.
It is possible that the results of clinical trials of AVR118, AVR123 or the Company’s other products will not prove that they are safe and effective. It is also possible that the FDA will not approve the sale of any of the Company’s products in the United States if the Company submits a New Drug Application, or NDA, for such product. It is not known at this time how later stage clinical trials will be conducted, if at all. Even if the data show that any of the Company’s products is safe and effective, obtaining approval of the NDA could take years and require financing of amounts not presently available to the Company.
The Company cannot provide assurances that it will acquire additional financial resources to complete all phases of the clinical trials of AVR118 and AVR123 or, if it acquires such resources, that it will do so on commercially reasonable terms, if at all, or that the Company will be able to meet its future contractual obligations. The failure to raise equity or debt financing will negatively impact the Company and its growth plans and its financial condition. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3.     RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING
     Overview
The Company’s lead product is AVR118, a cytoprotective drug composed of a complex mixture of protein and ribonucleic acid components that the Company is developing to alleviate symptoms associated with clinical cachexia such as anorexia and weight loss, as well as other serious complications associated with cancer, HIV-AIDS, chronic heart failure, sepsis and other diseases. AVR123 is a form of AVR118 specially designed for dermatology applications. Based on early pre-clinical data, the Company believes AVR123 has properties and may be used as an adjuvant therapy for the management of wounds and treatment of other dermal conditions.
On December 3, 2007, the Company acquired certain assets from Vincent Gullo and Dallas Hughes through its wholly-owned subsidiary, Triad Biotherapeutics, Inc. (“Triad”), which assets included (i) two chemical compounds, CTK000147 and CTK000168 (now known as AVR147 (proteasome inhibitor) and AVR168 (Eg5 inhibitor), along with all derivatives and analogs thereof (collectively, the “Compounds”); (ii) a library of approximately 8,321 extracts; (iii) a library of microbial strains comprised of approximately 1,663 fungi and approximately 302 actinomycetes; (iv) affinity purification technology (“AFP Technology”); and (v) a U.S. patent for size-exclusion-based extraction of affinity ligands and active compounds from natural samples, as well as other intellectual property and contract rights related to the assets. The Company is currently undertaking limited pre-clinical development of these compounds.

6


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
     NOTE 3.     RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING (Continued)
In November 2004 the Company submitted an Investigational New Drug (IND) application to the FDA. The purpose of the application was to obtain approval from the FDA to begin a clinical study in the United States for AVR118. In December 2004, the FDA notified the Company that the IND application was allowed and that it could proceed with its planned study.
Conducting the clinical trials of each of the Company’s products will require significant cash expenditures and the Company does do not have the funds necessary to complete all phases of clinical trials for AVR118, AVR123 or any other products. Our products may never be approved for commercial distribution by any country. 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 near future. We currently do not have sufficient funds to complete all phases of clinical trials of any of our products which are required to permit the commercial sale of such products.
The Company cannot provide assurances that it will acquire additional financial resources to complete all phases of the clinical trials of AVR118, or, if it acquires such resources, that it will do so on favorable terms. It is possible that the results of clinical trials will not prove that AVR118 is safe and effective. It is also possible that the FDA will not approve the sale of AVR118 in the United States if the Company submits a New Drug Application, or NDA. It is not known at this time how later stage clinical trials will be conducted, if at all. Even if the data show that AVR118 is safe and effective, obtaining approval of the NDA could take years and require financing of amounts not presently available to the Company. If such financing is unavailable, the Company may have to materially limit or suspend operations or liquidate assets.
     Phase II Cancer Study
In June 2007, the Therapeutic Products Division of Health Canada approved the Company’s clinical trial application for the use of AVR118 in cancer patients, pursuant to which the Company commenced a clinical trial in patients with histologically confirmed malignancies who present with clinically demonstrable anorexia or anorexia-cachexia syndrome at Canadian centers which are recognized by the FDA as being fully compliant with U.S. clinical standards. In September 2007, the Company entered into an agreement with McGill University in Montreal, Quebec, Canada to conduct a Phase II open label study to examine the effect of a 4.0 ml subcutaneous dose of AVR118 on weight, appetite, performance status and other measures of quality of life in patients with recurrent advanced malignancies. Under the clinical trial, AVR118 will be administered daily for 28 days. Patients with favorable results may be eligible to continue for a longer period. Enrollment initially will include 14 patients. Pending review of preliminary data, there is a provision to increase enrollment to 30 patients.

7


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
     NOTE 3.     RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING (Continued)
On October 3, 2007, the Company enrolled the first patient in the McGill University clinical study. To date, eight patients have enrolled in the study. Of the eight patients enrolled in the study, two have completed the course of treatment, two are being treated, one has withdrawn from the study and three have not yet begun treatment. Of the two patients who completed the course of treatment, both elected to continue treatment for a longer period. Recruitment of patients for the study is ongoing. The agreement with McGill provides that the Company will pay $5,000 CDN (approximately $5,100 USD) per patient enrolled in the study. Total costs incurred through March 31, 2008 relating to this study at McGill University were approximately $44,000.
     Wound Healing and Phase II Dermatological Study
In April 2006, the Company commenced a study at the University of Miami to preliminarily test the efficacy of applying a topical version of AVR118 (AVR123), to wounds in pigs. A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR123 accelerates the rate at which wounds heal. Although preliminary, the Company believed that further study was merited. Based on the results from the August 2006 report from the University of Miami, the Company filed an amendment with the FDA to our existing IND to expand the use of AVR123 to include a Phase II dermatological study involving topical therapy. The Company believes these applications could potentially be used to treat a wide variety of common dermatologic conditions, such as micro-dermabrasion.
In January 2007, the Company began the Phase II dermatological study using a topically applied spray of AVR123 as a wound healing agent. The Phase II dermatological study involves patients with common skin problems ranging from acne scars to surgical wounds, and will study how AVR123’s ability to promote tissue repair and regeneration can be put to use in the clinical setting, and analyze the efficacy of AVR123 as a topical therapy. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR123. While there can be no assurances, preliminary findings from the study show that topical treatment with AVR123 appears to have clinical activity in reducing inflammation and redness associated with surgical incisions or dermatologic dermabrasion. The first cohort of patients examined underwent dermabrasion for the treatment of severe acne. Following the procedure, AVR123 was applied directly to one half of the inflamed facial tissue. The other half of the face remained untreated. A preliminary examination of five patients demonstrated visible improvement on the treated side of their face. The treated area showed less inflammation as well as a reduction in the redness and swelling of acne lesions. The second cohort of patients examined underwent plastic surgery that resulted in a minimum of two bilateral surgical incisions. AVR123 was applied topically to one wound and the second wound served as an untreated control. In early results from two patients, one patient demonstrated a decrease in inflammation on the treated side. No material progress has been made in the dermatological study since the second quarter of 2007 due to the illness and subsequent death of the principal investigator in August 2007. The Company is in discussions with a new principal investigator to continue the study. Total costs incurred through March 31, 2008 relating to this study were approximately $45,000.

8


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
     NOTE 3.     RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING (Continued)
     Phase I Study on Type 2 Diabetes
In October 2005 the Company initiated a Phase I, double blind, placebo controlled, randomized, single center, safety study with AVR118 in subjects with Type 2 diabetes in the United States. Approximately 30 patients were to be entered in the study, the primary objective of which was to explore the effect of a 4.0 ml dose of AVR118 given subcutaneously on blood glucose in subjects with Type 2 diabetes who are on sulfonylureas and/or metformin, as compared to subjects not receiving AVR118. Sulfonylureas and metformin are commonly used drugs to control Type 2 diabetes. Additional objectives of this study were to explore the potential for AVR118 in decreasing blood glucose in patients with Type 2 diabetes.
In February 2006, the Company amended the protocol for the Phase I diabetes study to include an additional 12 patients at a dose of 1.0 ml of AVR118 given subcutaneously. The purpose of this study was to determine if a lower dose would produce a more pronounced effect on blood glucose levels. In May 2006, the Company completed enrollment of the first 30 patients on the 4.0 ml dosage portion of the study. In June 2006, the Company terminated further accrual of the patients on the 1.0 ml dosage after three patients had been accrued. Following an interim analysis of the 30 patients treated with the 4.0 ml dose as well as the additional three patients treated with the 1.0 ml dose, the Company concluded that: (i) AVR118 can be given safely to patients with Type 2 diabetes, and (ii) in contrast to previous reports, AVR118 had no apparent effects on blood glucose levels in patients receiving oral hypoglycemic therapies, and no demonstrable effect on blood chemistry, hematology, weight gain or lean body mass in Type 2 diabetes patients. The total cost incurred through March 31, 2008 relating to this Phase I study was approximately $500,000.

9


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4.     STOCK-BASED COMPENSATION
     Stock Incentive Plan
The Advanced Viral Research Corp. 2007 Stock Incentive Plan (the “2007 Plan”) was approved by the Company’s stockholders at a special meeting of stockholders on March 21, 2007. The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonuses and restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to employees, including officers, non-employee directors and consultants options to purchase common shares of the company at an exercise or stock price based on the market value of the shares on the date of grant. A maximum aggregate of 100,000,000 shares of common stock may be issued pursuant to stock options, rights or awards granted under the 2007 Plan. The 2007 Plan will terminate in March 2017 unless it is terminated earlier in accordance with the terms thereof.
On May 14, 2007, the Company granted stock options to purchase an aggregate of 10,675,000 shares of its common stock under the 2007 Plan at an exercise price of $0.05 for a period of five years to members of the Board of Directors in consideration for their service on the Board. In addition, on May 14 2007, in connection with the new employment agreement with Mr. Elliston, the Company’s President and Chief Executive Officer, the Company granted Mr. Elliston stock options to purchase an aggregate of 40,000,000 shares of common stock under the 2007 Plan at exercise prices ranging from $0.05 to $0.08 for a period of five years from the vesting date.
     Stock Options Granted to Officers, Directors, Advisory Boards and Employees
From time to time, the Company has granted options to purchase common stock to officers, various members of the Board of Directors, Advisory Boards and employees for their services. The following is a summary of those options that have been recently granted.
                 
            Weighted Average  
    Total Options     Exercise Price  
Outstanding at January 1, 2008
    163,233,283     $ 0.1336  
Granted
           
Exercised
           
Forfeited
    (655,000 )     (0.1071 )
Expired unexercised
    (52,821,603 )     (0.2227 )
 
           
 
               
Outstanding at March 31, 2008
    109,756,680     $ 0.0909  
 
           
Options exercisable at March 31, 2008
    76,523,347     $ 0.0990  
 
           
During the first three months of 2008, the Company recorded stock-based compensation in the amount of $170,934 compared with $45,112 for the first three months of 2007, substantially all of which pertained to options granted to the Company’s officers and directors during 2007 and 2004. At March 31, 2008 there was approximately $910,000 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.1 years.

10


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4.     STOCK-BASED COMPENSATION (Continued)
No stock options were granted or exercised during the three months ended March 31, 2008 or March 31, 2007.
The weighted-average remaining contractual terms of outstanding stock options and exercisable stock options at March 31, 2008 was 5.4 years and 5.3 years, respectively. The aggregate intrinsic value of outstanding stock options and exercisable stock options at March 31, 2008 was approximately $0.
NOTE 5.     COMMITMENTS AND CONTINGENCIES
     Potential Claim for Royalties
The Company may be subject to claims from certain third parties for royalties due on sale of AVR118. The Company has not as yet received any notice of claim from such parties.
     Lack of Patent Protection
The Company has determined that the cost to apply for and maintain patents in third world countries is not justified. The Company’s strategy is to concentrate its efforts in the United States, Europe, Japan, Canada, Australia and in some cases China which represents over 90% of the world’s pharmaceutical markets. Patent costs are expensed when incurred and therefore the cost of abandoned patents and patent applications has no effect on the financial statements. The Company presently holds 14 United States patents, and one patent each for Australia, Canada, China, Europe, Israel and Mexico. In addition, the Company has six patent applications pending with the U.S. Patent and Trademark Office and 26 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.

11


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 6.     SECURITIES PURCHASE AGREEMENTS
The Company is in the development stage and, as a development stage company, has devoted significant time and resources to capital raising activities since its inception. Substantially all cash used by the Company thus far and continuing into the foreseeable future has been and is expected to be the result of the sale of its securities, debt or equity.
In 2007, the Company received net proceeds of $2,653,800 in connection with the sale to YA Global Investments, L.P. (formerly known as Cornell Capital Partners, L.P.) (“YA Global”) of an aggregate of $3,000,000 principal amount of its 9% convertible debentures. In connection with the issuance of the convertible debentures, we issued to YA Global (i) warrants to purchase an aggregate of 48,076,923 shares of common stock through January 1, 2012 at an exercise price of $0.0312 per share, of which warrants to purchase 10,000,000 shares were exercised in May 2007; (ii) warrants to purchase an aggregate of 24,038,462 shares of common stock through July 24, 2012 at an exercise price equal to $0.0312 per share; and (iii) warrants to purchase 76,335,878 shares of common stock through July 24, 2012 at an exercise price of $0.0262 per share, all of which warrants were subsequently adjusted in accordance with certain anti-dilution provisions as a result of the December 2007 acquisition described in Note 3.
As of March 31, 2008, YA Global had converted an aggregate of $1,400,000 of the Company’s convertible debentures issued in January and February 2007 for a total of 70,689,620 shares of the Company’s common stock, at conversion prices ranging from $0.0126 to $.0312. In addition, YA Global exercised warrants to purchase 10,000,000 shares of the Company’s common stock at an exercise price of $0.0312 for $312,000. The remaining warrants to purchase 38,076,923 shares of common stock at $0.0312 per share were subsequently adjusted to 60,304,568 warrants exercisable at $0.0197 per share in accordance with the warrant anti-dilution provisions as a result of the December 2007 acquisition described in Note 3 above.
The following is a summary of the Company’s convertible debentures that were outstanding as of March 31, 2008, net of discounts, including accrued interest.
                                                 
    Debenture     Discounts     Debentures     Discounts              
Date of Issuance   Issued     Recorded     Converted     Amortized     Interest     Total  
January/February 2007
  $ 1,500,000     $ (1,375,748 )   $ (1,400,000 )   $ 1,322,249     $ 83,598     $ 130,099  
July 2007
    1,500,000       (1,439,306 )           322,277       92,836       475,807  
 
                                   
Total
  $ 3,000,000     $ (2,815,054 )   $ (1,400,000 )   $ 1,644,526     $ 176,434     $ 605,906  
 
                                   

12


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7.     SECURITIES PURCHASE AGREEMENTS (Continued)
Subsequent to March 31, 2008, YA Global converted a portion of the principal and interest on the Company’s convertible debentures, as follows:
    On April 2, 2008, YA Global converted the remaining unpaid principal ($100,000) and interest ($83,651) accrued on the convertible debentures issued in February 2007 for a total of 21,354,730 shares of the Company’s common stock at a conversion price of $0.0086.
 
    On April 29, 2008, YA Global converted $200,000 of the Company’s Series A Convertible Debentures issued in July 2007 for a total of 23,255,814 shares of the Company’s common stock at a conversion price of $0.0086.
 
    On May 12, 2008, YA Global converted $100,000 of the Company’s Series A Convertible Debentures issued in July 2007 for a total of 11,627,907 shares of the Company’s common stock at a conversion price of $0.0086.
     Private Equity Line of Credit
On April 28, 2003, the Company entered into an equity line of credit with Cornell Capital Partners LP for a period of three years. The equity line of credit expired, unused, on April 28, 2006. All of the warrants to purchase 15,000,000 shares of the Company’s common stock issued in connection with the equity line of credit expired unexercised as of April 28, 2008.

13


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7.     SECURITIES PURCHASE AGREEMENTS (Continued)
     Warrants
From time to time, the Company has issued warrants to purchase common stock to various parties as part of a stock purchase agreement or a settlement. The following is a summary of those warrants that have been issued:
                 
            Weighted Average  
    Warrants     Exercise Price  
Outstanding at December 31, 2007
    243,707,845     $ 0.035  
Granted
             
Exercised
             
Expired unexercised
    (2,238,000 )   $ 0.12  
 
           
Outstanding at March 31, 2008
    241,469,845     $ 0.036  
 
           
 
               
Warrants exercisable at March 31, 2008
    241,469,845     $ 0.036  
 
           

14


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7.     DISCONTINUED OPERATIONS
During 2002, the Board of Directors approved a plan to sell Advance Viral Research, Ltd., the Company’s Bahamian subsidiary. SFAS No. 144 requires the operating results of any assets with their own identifiable cash flows that are disposed of or held for sale to be removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented were reclassified as discontinued operations. The following table details the amounts reclassified to discontinued operations:
                         
                    Inception  
    Three Months     (February 20, 1984)  
    Ended March 31,     to March 31,  
    2008     2007     2008  
Revenues
  $     $     $  
 
                 
Costs and Expenses:
                       
General and administrative
    4,444       3,486       1,385,695  
Depreciation
                316,737  
 
                 
 
    4,444       3,486       1,702432  
 
                 
Other Income
                140,020  
 
                 
Loss from discontinued operations
    ($4,444 )     ($3,486 )     ($1,562,412 )
 
                 
NOTE 8.     RECENT ACCOUNTING PRONOUNCEMENTS
In March 2008, the FASB issued Statement No. 161 “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”) to enhance disclosures about an entity’s derivative and hedging activities. SFAS 161 is effective for all financial statements issued in fiscal years and interim periods beginning after November 15, 2008 and early application is encouraged. SFAS 161 also encourages but does not require comparative disclosures for earlier periods at initial adoption. As the Company does not currently engage in derivative transactions or hedging activities, the Company does not anticipate any significant financial statement disclosure impact as a result of its evaluation of SFAS 161.
In December 2007 the FASB issued 141R, “Business Combinations” (“SFAS 141R”) which requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair value as of the date. SFAS 141R requires, among other things, that in a business combination achieved in stages (sometimes referred to as a “step acquisition”), that the acquirer recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with this Statement).

15


Table of Contents

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 8.     RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
SFAS 141R also requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which in most types of business combinations will result in measuring goodwill as the excess of the consideration transferred plus the fair value of any non-controlling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets acquired. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect that the adoption of SFAS 141R will have a material impact on its financial statements.
In December 2007, the FASB issues SFAS 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS 160”), This Statement changes the way the consolidated income statement is presented. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. Currently, net income attributable to the non-controlling interest generally is reported as an expense or other deduction in arriving at consolidated net income. It also is often presented in combination with other financial statement amounts. SFAS 160 results in more transparent reporting of the net income attributable to the non-controlling interest. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company does not believe SFAS 160 will have a material impact on its financial statements.
In February 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company adopted SFAS No. 159 on January 1, 2008 and there was no impact on the consolidated financial statements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. Management believes the adoption of this pronouncement on January 1, 2008 did not have a material impact on the Company’s consolidated financial statements.

16


Table of Contents

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes to Condensed Consolidated Financial Statements of Advanced Viral Research Corp. included in Item 1 of this Quarterly Report on Form 10-Q. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007.
     As used in this report, the terms “we,” “us,” “our,” the “Company” and “Advanced Viral” mean Advanced Viral Research Corp. and its subsidiaries (unless the context indicates a different meaning).
OVERVIEW
     Advanced Viral Research Corp., a Delaware corporation incorporated in July 1985, is a biopharmaceutical company focused on the discovery, development and commercialization of small molecule therapeutics that address medical needs for various degenerative conditions. We currently believe our products may be useful:
    for the treatment of systemic symptoms such as cachexia (body wasting), loss of appetite and lethargy experienced by patients with advanced malignant cancer, HIV-AIDS, cardiovascular disease, sepsis, viral infections and other diseases;
 
    as an aid in wound healing;
 
    as an anti-inflammatory in conditions such as rheumatoid arthritis; and
 
    as a palliative agent to minimize certain toxicities associated with chemo or immunotherapies.
     Since our incorporation in July 1985, we have been engaged primarily in research and development activities. We have never generated material operating revenue, and as of March 31, 2008, we had incurred a cumulative net loss of approximately $78,073,000. Our ability to generate operating revenue depends upon our success in gaining approval for the commercial use and distribution of AVR118 from the Food and Drug Administration (FDA).
     Our offices are located at 200 Corporate Boulevard South, Yonkers, New York 10701. Our telephone number is (914) 376-7383. We have also established a website: www.adviral.com. Information contained on our website is not a part of this report.
Recent Acquisition
     Pursuant to an Asset Purchase Agreement dated December 3, 2007, we acquired certain assets from Vincent Gullo and Dallas Hughes through our wholly-owned subsidiary, Triad Biotherapeutics, Inc. (“Triad”), which assets included (i) two chemical compounds, CTK000147 (proteasome inhibitor) and CTK000168 (Eg5 inhibitor) (now known as AVR147 and AVR168, respectively), along with all derivatives and analogs thereof (collectively, the “Compounds”); (ii) a library of approximately 8,321 extracts; (iii) a library of microbial strains comprised of approximately 1,663 fungi and approximately 302 actinomycetes; (iv) affinity purification technology (“AFP Technology”); and (v) a U.S. patent for size-exclusion-based extraction of affinity ligands and active compounds from natural samples, as well as other intellectual property and contract rights related to the assets. The consideration for the foregoing assets was $250,000 in

17


Table of Contents

cash and 12,711,864 shares of our common stock valued at $250,000. Additional consideration is payable to Messrs. Gullo and Hughes upon the satisfaction of certain conditions precedent, as follows:
    $250,000 in cash and $250,000 in common stock upon the Company or any of its affiliates (i) confirming through in vivo studies in mice that either or both of the Compounds or any structural analog thereof is safe and effective; (ii) closing on a financing (or a series of financing over a three year period) generating at least $12 million of proceeds; and (iii) filing or causing to be filed a U.S. patent application on either of the Compounds or structural analog thereof.
 
    $250,000 in cash upon the first IND pertaining to either AVR147, AVR168 or a structural analog thereof being approved or allowed by the FDA.
 
    $500,000 in cash upon the first approval by the FDA for commercial sale of either AVR147, AVR168 or a structural analog thereof.
 
    5% of the value of any cash, cash equivalents and securities received from third parties in consideration of the sale or license of any of the Compounds and structural analogs.
     Pursuant to the asset purchase agreement, if, at any time, we propose to file a registration statement under the Securities Act of 1933 for purposes of a public offering of our securities, Messrs. Gullo and Hughes have been granted the right to include in any such registration statement all or any part of the securities acquired by them under the asset purchase agreement.
     The asset purchase agreement included customary representations, warranties, covenants and indemnities by the respective parties, which were qualified by disclosure schedules and are subject to the materiality standards set forth in the purchase agreement, which may differ from what may be considered to be material by investors. The parties’ respective indemnity obligations are subject to the cumulative amount of the damages actually incurred by such indemnitee exceeding $50,000 and the aggregate amount of damages recoverable by Advanced Viral is limited to that portion of the purchase price actually received by the sellers, with the sellers having the right to pay all or any portion of the indemnification amounts with stock received in consideration for the acquired assets.
     In connection with the closing of the transactions under the purchase agreement, our Board of Directors appointed Vincent Gullo, PhD as our Chief Scientific Officer, and Dallas Hughes, PhD as our Vice President, Research.
Research and Development
     The costs relating to our research and development efforts for the years 2002 to 2007 and the three months ended March 31, 2008 and March 31, 2007 are presented below. Since the first quarter of 2007, our expenditures for research and development have increased significantly over each subsequent quarter (from $186,000 as of March 31, 2007 to $267,000 as of March 31, 2008), primarily due to increased salary expenses associated with the appointment of Vincent Gullo, PhD as our Chief Scientific Officer, and Dallas Hughes, PhD as our Vice President, Research.

18


Table of Contents

COSTS RELATING TO RESEARCH AND DEVELOPMENT EFFORTS
FROM JANUARY 2002 THROUGH MARCH 31, 2008
                                 
    2002-2007     3 Months     3 Months     2002-2008  
    Costs     Ended 2008     Ended 2007     To Date  
COST CATEGORY
                               
Hospital fees
                               
Phase I (topical)
    254,246                   254,246  
Phase I/II AIDS (Israel)
    140,500                   140,500  
Phase I leukemia/lymphoma (Israel)
    19,000                   19,000  
Phase I solid tumor (Israel)
    8,000                   8,000  
Phase 11 cancer study (US)
    115,002                   115,002  
Phase 11 cancer study (Canada)
    34,000       10,000             44,000  
Phase I Diabetes
    250,156                   250,156  
In-vitro
    41,868                   41,868  
Anti-Inflammatory
    7,542                   7,542  
Wound Healing/Dermatological study
    48,587       (3,350 )     3,750       45,237  
Lab fees
    138,292                   138,292  
Insurance cost
    127,137       6,250       6,709       133,387  
 
                       
TOTAL CLINICAL FEES
    1,184,330       12,900       10,459       1,197,230  
 
                       
 
                               
IND preparation/maintenance
    286,209                   286,209  
CRO clinical trial management
                             
Phase I (topical)
    47,527                   47,527  
Phase I/II AIDS (Israel)
    1,441,806             (6,113 )     1,441,806  
Argentina patient experiences
    253,168                   253,168  
Data management & study reports
    932,163                   932,163  
Clinical & Regulatory consulting
    2,388,849       4,500       1,500       2,393,349  
 
                       
TOTAL CLINICAL/REGULATORY OPERATIONS
    5,349,722       4,500       (4,613 )     5,354,222  
 
                       
 
                               
General lab supplies
    1,189,130       7,256       5,659       1,196,386  
Toxicology
    197,135                   197,135  
Contracted R&D
    617,368                   617,368  
Validation
    705,249                   705,249  
Drug preparation and support
    1,982,421                   1,982,421  
Salary & Facility allocations
    8,764,176       242,442       174,395       9,006,618  
R & D Travel Expenses
    37,720                   37,720  
 
                       
TOTAL PRECLINICAL RESEARCH & DEVELOPMENT
    13,493,199       249,698       180,054       13,742,897  
 
                       
 
                               
TOTAL RESEARCH AND DEVELOPMENT
    20,027,251       267,098       185,900       20,294,349  
     Phase II Dermatological Study
     In April 2006, we commenced a study at the University of Miami to preliminarily test the efficacy of applying a topical version of AVR118 (AVR123), to wounds in pigs. A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR123 accelerates the rate at which wounds heal. Although preliminary, we believed that further study was merited. Based on the results from the August 2006 report from the University of Miami, we filed an amendment with the FDA to our existing IND to expand the use of AVR123 to include a Phase II dermatological study involving topical therapy. We believe these applications could potentially be used to treat a wide variety of common dermatologic conditions, such as micro-dermabrasion.
     In January 2007, we began the Phase II dermatological study using a topically applied spray of AVR123 as a wound healing agent. The Phase II dermatological study involves patients with common skin problems ranging from acne scars to surgical wounds, and will study how AVR123’s ability to promote tissue repair and regeneration can be put to use in the clinical setting, and analyze the efficacy of AVR123 as a topical therapy. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR123. While there can be no assurances, preliminary findings from the study show that topical treatment with AVR123 appears to have clinical activity in reducing inflammation and redness associated with surgical incisions or dermatologic dermabrasion. The first cohort of patients examined underwent dermabrasion for the treatment of severe acne. Following the procedure, AVR123 was applied directly to one half of the

19


Table of Contents

inflamed facial tissue. The other half of the face remained untreated. A preliminary examination of five patients demonstrated visible improvement on the treated side of their face. The treated area showed less inflammation as well as a reduction in the redness and swelling of acne lesions. The second cohort of patients examined underwent plastic surgery that resulted in a minimum of two bilateral surgical incisions. AVR123 was applied topically to one wound and the second wound served as an untreated control. In early results from two patients, one patient demonstrated a decrease in inflammation on the treated side. No material progress has been made in the dermatological study since the second quarter of 2007 due to the illness and subsequent death of the principal investigator in August 2007. We are in discussions with a new principal investigator to continue the study. Total costs incurred through March 31, 2008 relating to this study were approximately $45,000.
     Phase II Cancer Study
     In June 2007, the Therapeutic Products Division of Health Canada approved our clinical trial application for the use of AVR118 in cancer patients, which approval permitted us to commence a clinical trial in patients with histologically confirmed malignancies who present with clinically demonstrable anorexia or anorexia-cachexia syndrome at Canadian centers which are recognized by the FDA as being fully compliant with U.S. clinical standards. In September 2007 we entered into an agreement with McGill University in Montreal, Quebec, Canada to conduct a Phase II open label study to examine the effect of a 4.0 ml subcutaneous dose of AVR118 on weight, appetite, performance status and other measures of quality of life in patients with recurrent advanced malignancies. Under the clinical trial, AVR118 will be administered daily for 28 days. Patients with favorable results may be eligible to continue for a longer period. Enrollment initially will include 14 patients. Pending review of preliminary data, there is a provision to increase enrollment to 30 patients.
     On October 3, 2007, we enrolled the first patient in the McGill University clinical study. To date, eight patients have enrolled in the study. Of the eight patients enrolled in the study, two have completed the course of treatment, two are being treated, one has withdrawn from the study and three have not yet begun treatment. Of the two patients who completed the course of treatment, both elected to continue treatment for a longer period. Recruitment of patients for the study is ongoing. The agreement with McGill provides that we will pay $5,000 CDN (approximately $5,100 USD) per patient enrolled in the study. Total costs incurred through March 31, 2008 relating to this study at McGill University were approximately $44,000.
Scientific Advisory Board
     In April2008, we established a new Scientific Advisory Board consisting of James T. D’Olimpio, M.D., FACP and Professor Jürgen Christian Becker, M.D., Ph.D. to advise the Company and our Board of Directors with respect to our efforts to develop and advance our operations. Dr. D’Olimpio is currently Director of Supportive Oncology, Pain and Symptom Management at the North Shore University Hospital in Manhasset, NY. Dr. Jürgen C. Becker is Professor of Dermatology and Immunology at the Julius-Maximilians-University in Würzburg, Germany, and is Deputy Director of the Department of Dermatology at the University of Würzburg.
Going Concern
     The accompanying financial statements have been prepared assuming that we will continue as a going concern. As shown in the accompanying financial statements, we have suffered accumulated net losses of $78,073,434 since inception and are dependent upon registration of AVR118, AVR123 and our other products for sale before it can begin commercial operations. Conducting the clinical trials of AVR118, AVR123 and our other products will require significant cash expenditures. AVR118, AVR123 and any of our other products may never be approved for commercial distribution by any country. 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. Our cash position is inadequate to pay all the costs associated with current operations or the full range of testing and clinical trials required by the FDA. Unless and until AVR118 or our other products are approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements. These conditions raise substantial doubt as to our ability to continue as a going concern.
     It is possible that the results of clinical trials of AVR118, AVR123 or our other products will not prove that they are safe and effective. It is also possible that the FDA will not approve the sale of any of our products in the United States if we submit a New Drug Application, or NDA, for such product. It is not known at this time how later stage clinical trials will be conducted, if at all. Even if the data show that any of our products is safe and effective, obtaining approval of the NDA could take years and require financing of amounts not presently available to us.

20


Table of Contents

     We cannot provide assurances that we will acquire additional financial resources to complete all phases of the clinical trials of AVR118 and AVR123 or, if we acquire such resources, that we will do so on commercially reasonable terms, if at all, or that we will be able to meet our future contractual obligations. The failure to raise equity or debt financing will negatively impact us, our growth plans and financial condition. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
     No assurance can be given that we will be able to sustain our operations until FDA approval of our products for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets. If such financing is unavailable, we may have to materially limit or suspend operations or liquidate assets.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2008 VS. MARCH 31, 2007.
     For the three months ended March 31, 2008 we incurred losses from continuing operations of $1,078,000 vs. $957,000 for the three months ended March 31, 2007. Our losses were attributable primarily to:
     RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses for the three months ended March 31, 2008 increased 44% to $267,000 compared to $186,000 for the three months ended March 31, 2007. The change in research and development expenses primarily resulted from:
    Research and development expenditures relating to salaries, benefits and facilities were $242,000 vs. $174,000 for the three months ended March 31, 2008 and 2007, respectively. This increase was due to the salary expenses for Stephen Elliston, President and CEO, Vincent Gullo, Chief Scientific Officer and Dallas Hughes, VP Research compared to a salary expense associated with Stephen Elliston, based on his salary from his previous contract. For the three months ended March 31, 2008 and 2007, 68% and 53% of our payroll and related expenses were allocated to research and development expenses, respectively;
 
    Clinical testing fees were $13,000 vs. $10,000 for the three months ended March 31, 2008 and 2007, respectively. The increase for the three month period ended March 31, 2008 vs. 2007 was primarily attributable Phase II cancer/cachexia trial costs at McGill University in Canada; and
 
    Expenses associated with clinical and regulatory activities were $4,500 and ($4,600) for the three months ended March 31, 2008 and 2007, respectively. The increase for the three months ended March 31, 2008 vs. 2007 was primarily attributable to the contracting with a new principal investigator compared to a credit in the first quarter of 2007 from an adjustment of an over-billing from a project in Israel.
     GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased 1% to $633,000 from $624,000 for the three months ended March 31, 2008 and 2007, respectively. The changes in general and administrative expenses primarily resulted from:

21


Table of Contents

    Decreased payroll and related expenses of $115,000 vs. $142,000 for the three months ended March 31, 2008 and 2007, respectively due to the termination of three employees during 2007;
 
    Costs associated with stockholders meetings and proxy statements were $0 for the three months ended March 31, 2008 vs. $94,000 for the three months ended March 31, 2007, respectively, in connection with our stockholder’s meeting held in March 2007;
 
    Increased compensation and other expense for options and warrants of $171,000 vs. $45,000 for the three months ended March 31, 2008 and March 31, 2007, respectively due to stock-based employee compensation cost reflected in general and administrative expense.
 
    Decreased equipment and building repair and maintenance of $5,000 vs. $22,000 for the three months ended March 31, 2008 and March 31, 2007, respectively, relating to the relocation to a smaller facility in January 2008 and the sale of certain equipment in 2007.
     DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense decreased 44% to $5,000 vs. $9,000 for the three months ended March 31, 2008 and 2007, respectively. This decrease for the comparative three month periods was due to assets acquired in prior years that were fully depreciated in 2008 and the determination that certain assets are currently not being used and may be sold.
     OTHER INCOME. Interest income decreased 44% to $9,000 vs. $16,000 for the three months ended March 31, 2008 and 2007, respectively, as a result of decreased cash balances invested in money market accounts. Interest expense increased by 18% to $182,000 in 2008 from $154,000 in 2007. The increase was primarily attributable to increased interest expense associated with convertible debentures, the beneficial conversion feature on the debentures and amortization of warrant costs. Included in interest expense for these periods was:
    amortization of the beneficial conversion feature on convertible debentures of $53,000 vs. $61,000 for the three months ended March 31, 2008 and 2007, respectively;
 
    amortization of warrants relating to the issuance of convertible debentures of $76,000 vs. $52,000 for the three months ended March 31, 2008 and 2007, respectively;
 
    interest expense associated with convertible debentures of $36,000 vs. $26,000 for the three months ended March 31, 2008 and 2007, respectively; and
 
    loan cost associated with convertible debt of $16,000 vs. $14,000 for the three months ended March 31, 2008 and 2007, respectively.
     LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations increased 13% to $1,078,000 vs. $957,000 for the three months ended March 31, 2008 and 2007, respectively. The change for the comparable periods was primarily due to increases in research and development expenses.
     LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations were $4,000 vs. $3,000 for the three months ended March 31, 2008 and 2007, respectively, which losses resulted from our 99% owned Bahamian subsidiary, Advance Viral Research Ltd. held for sale. During 2002, our Board of Directors approved a plan to sell Advance Viral Research Ltd.
     REVENUES. We had no revenues for the three months ended March 31, 2008 and 2007.

22


Table of Contents

LIQUIDITY
     We had current assets of $783,000 as of March 31, 2008 compared to $1,527,000 as of December 31, 2007. We had total assets of $1,675,000 at March 31, 2008 compared to $2,404,000 at December 31, 2007. The decrease in current and total assets was primarily attributable to the use of cash to fund current operations. We had current liabilities of $240,000 as of March 31, 2008, compared to $224,000 as of December 31, 2007. We had long term debt of $606,000 as of March 31, 2008 compared to $440,000 as of December 31, 2007. This debt represents convertible debentures and earned interest of $176,000 offset by deferred discount on the convertible debentures of $1,171,000 relating to the financing with YA Global during the first three months ending March 31, 2008.
     During the three months ended March 31, 2008 we used cash of $724,000 for operating activities, compared to $834,000 during the three months ended March 31, 2007. The decrease in our use of cash was primarily the result of an increase in non-cash compensation costs during the period ended March 31, 2008. During the three months ended March 31, 2008, our expenses included:
    $333,000 for payroll and related costs primarily for administrative staff, scientific personnel and executive officers;
 
    $99,000 for other professional and consulting fees
 
    $25,000 for rent and utilities for our Yonkers facility; and
 
    $44,000 in consulting costs.
 
    $82,000 for insurance costs; and
 
    $11,000 for expenditures for AVR118 research;
     During the three months ended March 31, 2008, we used $28,000 for investment activities, compared to $2,000 during the three months ended March 31, 2007 related to leasehold improvements.
     No funds were provided by financing activities for the three months ended March 31, 2008 compared to $1,324,000 provided for the three months ended March 31, 2007 in connection with the issuance and sale of convertible debentures in the aggregate principal amount of $1,500,000. See “Capital Resources.”
     We have no off-balance sheet transactions.
CAPITAL RESOURCES
     We have been and continue to be 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. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of AVR118 for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets. If such financing is unavailable, the Company may have to materially limit or suspend operations or liquidate assets.

23


Table of Contents

Private Placements
     In 2007, we received net proceeds of $2,653,800 in connection with the sale to YA Global of an aggregate of $3,000,000 principal amount of our 9% convertible debentures. In connection with the issuance of the convertible debentures, we issued to YA Global (i) warrants to purchase an aggregate of 48,076,923 shares of common stock through January 1, 2012 at an exercise price of $0.0312 per share, of which warrants to purchase 10,000,000 shares were exercised in May 2007; (ii) warrants to purchase an aggregate of 24,038,462 shares of common stock through July 24, 2012 at an exercise price equal to $0.0312 per share; and (iii) warrants to purchase 76,335,878 shares of common stock through July 24, 2012 at an exercise price of $0.0262 per share. All such warrants were subsequently adjusted in accordance with certain anti-dilution provisions as a result of the December 2007 asset acquisition described above.
     As of March 31, 2008, YA Global had converted an aggregate of $1,400,000 of our convertible debentures issued in January and February 2007 for a total of 70,689,620 shares of the Company’s common stock, at conversion prices ranging from $0.0126 to $.0312. In addition, YA Global exercised warrants to purchase 10,000,000 shares of our common stock at an exercise price of $0.0312 for $312,000.
     In addition, subsequent to March 31, 2008, YA Global converted the remaining unpaid principal ($100,000) and interest ($83,651) accrued on the convertible debentures issued in February 2007 on April 2, 2008 for a total of 21,354,730 shares of our common stock at a conversion price of $0.0086. On April 29, 2008, YA Global converted $200,000 of the Company’s Series A Convertible Debentures issued in July 2007 for a total of 23,255,814 shares of our common stock at a conversion price of $0.0086. On May 12, 2008, YA Global converted $100,000 of the Company’s Series A Convertible Debentures issued in July 2007 for a total of 11,627,907 shares of our common stock at a conversion price of $0.0086.
Outstanding Securities
     In March 2007 we amended and restated our Certificate of Incorporation to (i) increase the number of authorized shares of our common stock to 2 billion shares; (ii) authorize the issuance of up to 50 million shares of blank check preferred stock; and (iii) make certain conforming amendments to the headings, terminology and numbering of the provisions therein.
     In addition to the 846.2 million shares of our common stock outstanding as of May 14, 2008, we have reserved for issuance approximately 380.7 million shares upon the conversion or exercise of currently outstanding convertible debentures, stock options and warrants. If all of the foregoing securities were fully issued, exercised and/or converted, as the case may be, we would receive proceeds of approximately $15.6 million, and we would have approximately 1.2 billion shares of common stock outstanding. 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. Furthermore, the sale or availability for sale of this number of shares could limit the annual amount of net operating loss carryforwards that could be utilized.
Projected Expenses
     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2007 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our cash position is inadequate to pay all the costs associated with current operations or the full range of testing and clinical trials of AVR118 or our other products required by the FDA for commercial approval, and, unless and until AVR118 or our other products are approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements, which raises substantial doubt about our ability to continue as a going concern. Further, the independent registered public accounting firm’s report states that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

24


Table of Contents

     We expect to incur significant expenditures relating to operating expenses and expenses relating to regulatory filings, and clinical trials for AVR118. We currently do not have cash availability to meet our anticipated expenditures. We anticipate that we can continue operations through June 2008 with our current liquid assets, if no stock options or warrants are exercised, nor additional securities sold.
     Any proceeds received from the exercise of outstanding options or warrants will contribute to working capital and increase our budget for research and development and clinical trials and testing, assuming AVR118 receives subsequent approvals to justify such increased levels of operation. The recent prevailing market price for shares of common stock has from time to time been below the exercise prices of certain of our outstanding options or warrants. As such, recent trading levels may not be sustained nor may any additional options or warrants be exercised. If none of the outstanding options or warrants is 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 materially limit or suspend operations or liquidate assets.
     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. To complete the full range of testing necessary to commercially offer AVR118, AVR123 or any other product, we will need substantially more capital. We are uncertain whether debt or equity financing will be readily obtainable or whether it will be on favorable terms. Because of the large uncertainties involved in the FDA approval process for commercial drug use on humans and our lack of access to capital, it is highly probable that we will never be able to sell AVR118, AVR123 or any drug products commercially
ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. Our risk associated with fluctuating interest rates is limited to our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments due to their relatively short term nature. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest income.
ITEM 4T.     CONTROLS AND PROCEDURES
     Under the supervision and with the participation of certain members of our management, including our Chief Executive Officer and Acting Chief Financial Officer, we completed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, we and our management have concluded that, our disclosure controls and procedures at March 31, 2008 were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and are designed to ensure that information required to be disclosed by us in these reports is accumulated and communicated to our management, as appropriate to allow timely decisions regarding required disclosures. During the quarter ended March 31, 2008, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

25


Table of Contents

     Management does not expect that disclosure controls and procedures or internal controls can prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable and not absolute assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. While management believes that its disclosure controls and procedures provide reasonable assurance that fraud can be detected and prevented, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
PART II. OTHER INFORMATION
ITEM 6.     EXHIBITS
     The following exhibits are filed with this Report:
             
    Exhibit   Description
 
    31.1     Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
           
 
    31.2     Certification of Acting Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
           
 
    32.1     Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
           
 
    32.2     Certification of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26


Table of Contents

SIGNATURES
     In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  ADVANCED VIRAL RESEARCH CORP.
 
 
Date: May 14, 2008  /s/ Stephen M. Elliston    
  Stephen M. Elliston  
  President and Chief Executive Officer   
 
         
     
  /s/ Martin Bookman    
  Martin Bookman, Acting Chief Financial Officer  
  (Principal Financial and Accounting Officer)   
 

27