SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________
Commission File Number 0-11472
BIOMUNE SYSTEMS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
Nevada 87-0380088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2401 South Foothill Drive
Salt Lake City, Utah 84109-1405
(801) 466-3441
(Address and telephone number of principal executive offices)
Indicate by a 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 22,154,889 as of July 31,
1997.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
No.
----
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 1997 and September 30, 1996 3
Unaudited Condensed Consolidated Statements of
Operations for the three and nine months ended
June 30, 1997 and 1996 5
Unaudited Condensed Consolidated Statements of
Cash Flows for the nine months ended June 30, 1997
and 1996 6
Notes to Unaudited Condensed Consolidated
Financial Statements 8
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION 18
2
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PART I - ITEM 1
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,346,017 $ 4,192,868
Accounts receivable, net 223,362 74,784
Inventories 567,288 556,742
Amounts due from related parties 552,613 15,000
Preferred Stock subscription receivable - 3,500,000
-------------- --------------
Total current assets 3,689,280 8,339,394
Property and equipment, net 390,490 434,205
Other assets, net 445,893 498,403
-------------- --------------
Total assets $ 4,525,663 $ 9,272,002
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
3
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
-------------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, September 30,
1997 1996
-------------- --------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 217,892 $ 351,565
Preferred Stock dividends payable 294,648 91,199
Accrued payroll and payroll taxes 69,921 60,451
Other accrued liabilities 23,132 38,262
Unearned revenue - 84,000
-------------- --------------
Total current liabilities 605,593 625,477
-------------- --------------
Shareholders' equity:
Convertible Preferred Stock:
Series A, 36,050 and 135,589 shares outstanding, 174,630 652,199
respectively
Series B, 0 and 11,058 shares outstanding, - 163,837
respectively
Series C, 3,500 and 5,000 shares outstanding, 2,920,050 4,171,500
respectively
Common Stock, 21,942,045 and 19,877,034 shares
Outstanding, respectively 2,194 1,988
Additional paid-in capital 29,277,757 26,392,477
Deficit accumulated during the development stage (28,792,218) (23,372,299)
Deferred consulting expense (429,616) (246,450)
Related-party receivable from sale or
issuance of Common Stock (116,000) -
Common Stock warrants 883,273 883,273
-------------- --------------
Total shareholders'equity 3,920,070 8,646,525
-------------- --------------
Total liabilities and shareholders' equity $ 4,525,663 $ 9,272,002
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets
4
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended June 30, Ended June 30,
1997 1996 1997 1996
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 237,098 $ 97,486 $ 673,868 $ 338,016
-------------- -------------- -------------- -------------
OPERATING EXPENSES:
Cost of revenues 152,132 64,103 383,987 207,939
Management, consulting
and research fees 610,096 1,111,228 2,103,420 2,778,520
Other general and Administrative 877,899 619,670 2,764,488 2,005,046
-------------- -------------- -------------- -------------
Total operating expenses 1,640,127 1,795,001 5,251,895 4,991,505
-------------- -------------- -------------- -------------
LOSS FROM OPERATIONS (1,403,029) (1,697,515) (4,578,027) (4,653,489)
INTEREST INCOME 55,821 70,498 201,306 220,518
-------------- -------------- -------------- -------------
NET LOSS (1,347,208) (1,627,017) (4,376,721) (4,432,971)
PREFERRED STOCK:
Dividends (103,895) (20,759) (294,648) (72,674)
Redemption premium - - (748,550) -
-------------- -------------- -------------- -------------
NET LOSS APPLICABLE
TO COMMON SHARES $ (1,451,103) $ (1,647,776) $ (5,419,919) $ (4,505,645)
============== ============== ============== =============
NET LOSS PER COMMON
SHARE $ (.07) $ (.08) $ (.26) $ (.24)
============== ============== ============== =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,529,138 19,668,045 21,120,550 18,946,521
============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
5
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30,
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,376,721) $ (4,432,971)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 134,897 130,793
Issuance of Common Stock and warrant
for services (excluding amounts deferred) 608,800 548,246
Amortization of deferred consulting expense 1,121,165 735,572
Loss on disposal of fixed assets - 39,163
Exchange of related-party note receivable - 125,662
Changes in assets and liabilities:
Accounts receivable, net (148,578) (13,875)
Inventories (10,546) 8,662
Other assets 49 (6,249)
Accounts payable and accrued liabilities (148,803) 49,912
Accrued payroll and payroll taxes 9,470 (22,117)
Unearned revenue (84,000) -
-------------- --------------
Net cash used in operating activities (2,894,267) (2,837,202)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (38,721) (392,853)
Net payments from (advances to) related parties (537,613) 68,171
Loans to employees - (25,832)
-------------- --------------
Net cash used in investing activities (576,334) (350,514)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Preferred Stock subscriptions
receivable 3,500,000 -
Redemption of Series C Preferred Stock (2,000,000) -
Proceeds from exercise of Common Stock warrants 123,750 22,500
Proceeds from issuance of Series D Preferred
Stock and related Common Stock warrants,
net of offering costs - 2,555,000
-------------- --------------
Net cash provided by financing activities 1,623,750 2,577,500
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
6
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Nine Months
Ended June 30,
1997 1996
-------------- --------------
<S> <C> <C>
NET DECREASE IN CASH AND CASH
EQUIVALENTS $ (1,846,851) $ ( 610,216)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 4,192,868 5,206,112
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF
THE PERIOD $ 2,346,017 $ 4,595,896
============== ==============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 1997, 15,240 shares of Series A
Preferred Stock and 1,000 shares of Series B Preferred Stock were issued as
payment of accrued Preferred Stock dividends. During the nine months ended
June 30, 1997, the Company accrued preferred stock dividends of $294,648.
During the nine months ended June 30, 1997, 114,779 shares of Series A
Preferred Stock with a recorded value of $553,769 were converted into
344,337 shares of Common Stock and 12,058 shares of Series B Preferred Stock
with a recorded value of $178,837 were converted into 36,174 shares of
Common Stock.
During the nine months ended June 30, 1997, an employee exercised options to
purchase 100,000 shares of Common Stock at $1.16 per share, for which the
Company accepted payment in the form of a note receivable for $116,000.
During the nine months ended June 30, 1996, 92,757 shares of Series A
Preferred Stock with a recorded value of $417,407 were converted into
278,271 shares of Common Stock and 3,200 shares of Series D Preferred Stock
with a recorded value of $2,467,937 were converted into 1,884,419 shares of
Common Stock.
During the nine months ended June 30, 1996, 20,494 shares of Series A
Preferred Stock and 1,000 shares of Series B Preferred Stock were issued as
payment of accrued Preferred Stock dividends.
The accompanying notes are an integral part of these condensed consolidated
statements.
7
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and 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 following disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments)
that, in the opinion of management, are necessary to present fairly the
financial position and results of operations of the Company for the periods
presented. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996. Results for the nine months
ended June 30, 1997 are not necessarily indicative of the results to be
achieved for the entire fiscal year ended September 30, 1997.
(2) POTENTIAL SPIN-OFF OF VOLU-SOL, INC.
On February 25, 1997, the board of directors approved, subject to
finalization and execution of a separation and distribution agreement, the
spin-off of its wholly owned subsidiary, Volu-Sol, Inc., to the Common
shareholders of record as of March 5, 1997. The spin-off is expected to
occur during the Company's 1997 fourth fiscal quarter. The shareholders are
expected to receive one share of Volu-Sol, Inc. common stock for every ten
shares of Biomune Systems, Inc. common stock owned. The Company intends to
account for the spin-off as discontinued operations once the separation and
distribution agreement has been finalized.
(3) NET LOSS PER COMMON SHARE
Net loss per common share is computed based on the weighted average number
of common shares outstanding during the periods presented. Convertible
Preferred Stock, warrants and options outstanding were not included in the
computations because any assumption of conversion would be anti-dilutive,
thereby decreasing net loss per common share. Preferred Stock dividends and
the redemption premium increase the net loss applicable to common shares for
purposes of computing the net loss per common share.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This
statement is effective for periods ending after December 15, 1997 and early
application is prohibited. SFAS No. 128 will require that the Company
present basic earnings per share and diluted earnings per share data to
replace the current earnings per share information. All prior period
earnings per share data must be restated. SFAS No. 128 provides new
guidelines expected to simplify the computation of diluted earnings per
share. Management believes that this statement will not have a material
impact on the Company's reported net loss per common share when adopted.
(4) PREFERRED STOCK AND COMMON STOCK TRANSACTIONS
On April 2, 1997, the Company redeemed 1,500 shares of Series C Preferred
Stock for $2,000,000. The redemption price was $748,550 greater than the
carrying amount of the preferred stock. This excess over the carrying
amount of the Series C Preferred Stock was calculated and paid in accordance
with the redemption
8
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provisions of the Series C Preferred Stock terms and conditions, and has
been reflected as an increase in the net loss applicable to common shares
in the statement of operations for the nine months ended June 30, 1997.
For the nine months ended June 30, 1997, 114,779 shares of Series A
Preferred Stock with a recorded value of $553,769 were converted into
344,337 shares of Common Stock and 12,058 shares of Series B Preferred Stock
with a recorded value of $178,837 were converted into 36,174 shares of
Common Stock. During the nine months ended June 30, 1997, the Company
accrued dividends on its outstanding Series A, Series B and Series C
Preferred Stock of $17,908, $6,740 and $270,000, respectively. Preferred
Stock dividends are payable in either additional shares of Preferred Stock
or in cash, at the Board of Directors' option. During the nine months ended
June 30, 1997, dividends on Series A and B Preferred Stock accrued as of
September 30, 1996 totaling $91,199 were paid by issuing 15,240 shares of
Series A Preferred Stock and 1,000 shares of Series B Preferred Stock.
During the nine months ended June 30, 1997, the Company issued 1,529,500
shares of Common Stock for services rendered or to be rendered to the
Company and recorded expense of $1,662,131 associated with those shares. Of
this expense, $1,304,331 was initially deferred and will be recognized over
the term of the related consulting agreements. The Company also has
deferred consulting expense related to shares issued under consulting
agreements entered into prior to September 30, 1996 as well as from stock
warrants issued during fiscal 1996. These deferred amounts are being
recognized over the terms of the agreements as services are provided. Total
amortization of these deferred consulting expenses was $1,121,165 for the
nine months ended June 30, 1997.
On December 4, 1996, James J. Dalton, the Vice Chairman of the Board and
Senior Vice President of Investor Relations, exercised options to purchase
100,000 shares of Common Stock at $1.16 per share, for which the Company
accepted payment in the form of a note receivable for $116,000. This note
bears interest at 7%, is full recourse in nature and is due on demand. This
note receivable is classified as a reduction in shareholders' equity in the
accompanying financial statements (see Note 6).
During the nine months ended June 30, 1997, existing options for 55,000
shares of Common Stock were exercised at $2.25 per share for total proceeds
of $123,750.
(5) STOCK OPTIONS AND WARRANTS
During the nine months ended June 30, 1997, the Company granted options to
employees to purchase a total of 532,500 shares of Common Stock. Of these
options, 447,500 have an exercise price of $1.16 per share and 85,000 have
an exercise price of $.69 per share, which prices represented the average of
the closing bid and ask prices of the Company's Common Stock on the grant
date. The Company also amended stock option agreements to adjust the
exercise price of all outstanding options held by employees and directors,
aggregating 2,214,419 options, to $1.16 per share, which price represented
the average of the closing bid and ask prices of the Company's Common Stock
at that date.
During the nine months ended June 30, 1997, the Company granted warrants to
consultants to purchase a total of 500,000 shares of Common Stock at
exercise prices ranging from $.63 to $1.25. The Company recognized total
expense of $251,000 in connection with the issuance of these warrants.
(6) RELATED-PARTY TRANSACTIONS
During the nine months ended June 30, 1997, the Company loaned $30,000 to
Genesis Investment Corporation, an entity owned by shareholders of the
Company, and $50,000 to Daliz Associates, a shareholder of and a consultant
to the Company. These loans were made in consideration for the termination
of agreements the Company had previously entered into with each of those
entities, are non-interest bearing, short-term in
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duration, and are secured by shares of the Company's Common Stock owned by
the entities. The loan to Genesis Investment Corporation was repaid prior
to June 30, 1997. The Daliz Associates loan was repaid in August 1997.
During the nine months ended June 30, 1997, the Company loaned $385,000 to
PB Financial, an entity owned by a shareholder of the Company. The loan is
due on demand, is unsecured and bears an annual interest rate of 10 percent.
During the nine months ended June 30, 1997, the Company loaned $100,000 to
Pediapharm Corporation, an entity owned by a shareholder of the Company.
The loan is due on September 13, 1997, is unsecured (but personally
guaranteed by the owner-shareholder) and bears an annual interest rate of 10
percent.
Effective April 1, 1997, the Company entered into a one-year consulting
agreement with Milton G. Adair, the former President and a director of the
Company, whereby Mr. Adair has agreed to provide consulting services, in
exchange for a monthly fee of $5,000.
(7) CONSULTING AGREEMENTS
Paramount Marketing Corp
On October 23, 1996, the Company entered into a consulting agreement with
Paramount Marketing Corp. ("Paramount"), whereby Paramount was issued a total
of 108,000 shares of the Company's Common Stock in exchange for consulting
services to be provided through September 30, 1997. Paramount is assisting
the Company in developing marketing strategies. The shares have "piggy back"
registration rights. The Company recorded consulting expense of $125,280 of
which $31,320 is deferred as of June 30, 1997 and will be recognized over
the remaining term of the agreement.
Medifin Incorporated
On October 23, 1996, the Company entered into a consulting agreement with
Medifin Incorporated ("Medifin"), whereby Medifin was issued a total of
300,000 shares of the Company's Common Stock in exchange for consulting
services to be provided through September 30, 1997. Medifin is assisting
the Company in developing marketing strategies. The shares have "piggy back"
registration rights. The Company recorded consulting expense of $348,000 of
which $87,000 is deferred as of June 30, 1997 and will be recognized over
the remaining term of the consulting agreement.
J.R. Axelrod and Company
On October 23, 1996, the Company entered into a consulting agreement with
J.R. Axelrod and Company ("Axelrod"), whereby Axelrod was issued a total of
180,000 shares of the Company's Common Stock in exchange for consulting
services, consisting primarily of investment advisory services, to be
provided through September 30, 1997. The shares have "piggy back"
registration rights. The Company recorded consulting expense of $208,800 of
which $52,200 is deferred as of June 30, 1997 and will be recognized over
the remaining term of the consulting agreement.
Consolidated General Ltd.
On October 23, 1996, the Company entered into a consulting agreement with
Consolidated General Ltd. ("Consolidated"), whereby Consolidated was issued a
total of 200,000 shares of the Company's Common Stock in exchange for
consulting services, consisting primarily of investment advisory and
investment banking services, to be provided through October 23, 1997. The
shares have "piggy back" registration rights. The
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Company recorded consulting expense of $232,000 of which $58,000 is deferred
as of June 30, 1997 and will be recognized over the remaining term of the
consulting agreement.
AAM Group, Inc.
Effective November 1, 1996, the Company entered into a four-month agreement
with AAM Group, Inc. ("AAM") whereby AAM provided consulting services,
consisting primarily of introducing the Company to potential business
partners, in exchange for 30,000 shares of the Company's registered Common
Stock. The Company recorded consulting expense of $72,300 during the nine
months ended June 30, 1997 related to this agreement.
Effective April 1, 1997, the Company entered into a one year agreement with
AAM whereby AAM will provide consulting services, consisting primarily of
introducing the Company to potential business partners, in exchange for
150,000 shares of the Company's registered Common Stock. The Company
recorded consulting expense of $93,750 of which $70,313 is deferred as of
June 30, 1997.
Larry Horowitz
On May 30, 1997, the Company entered into a consulting agreement with Larry
Horowitz ("Horowitz"), whereby Horowitz was issued a total of 200,000 shares
of the Company's Common Stock and options to purchase 300,000 shares of the
Company's Common Stock at an exercise price of $.63 per share. Horowitz is
to provide consulting services, consisting primarily of introducing the
Company to potential business partners, through January 31, 1998. The
shares have "piggy back" registration rights. The Company recorded
consulting expense of $224,200 of which $130,783 is deferred as of June 30,
1997 and will be recognized over the remaining term of the consulting
agreement.
(8) SUBSEQUENT EVENTS
Rockwood Investments, Inc.
On July 9, 1997, the Company entered into an agreement by which it purchased
an option to acquire all of the issued and outstanding shares of the capital
stock of Rockwood Investments, Inc. ("Rockwood"), a California corporation.
Under the terms of the option agreement, the Company has the right to
acquire the capital stock of Rockwood for $5,000,000 in cash any time during
the one-year term of the agreement. The Company has agreed to make
nonrefundable quarterly option payments of $105,000 during the term of
agreement which will be credited against the $5,000,000 purchase price, if
the acquisition is consummated. The Company has the right to terminate the
option agreement at any time.
On July 9, 1997, the Company entered into a consulting agreement with Andela
Group, Inc. ("Andela"), a California corporation, for consulting services to
be provided by Ira E. Ritter ("Ritter"), the sole shareholder of Andela and
Rockwood. Under the consulting agreement, Ritter was named President of
Biomune effective July 9, 1997. Andela will receive a monthly consulting
fee of $15,000 during the one-year term of the consulting agreement. If
Rockwood is acquired by the Company, Ritter will become an employee of the
Company at an annual salary of $200,000 as well as be granted options to
acquire 3,000,000 shares of the Company's common stock at a price of $.40
per share. The Company has also agreed to pay Ritter a royalty of five
percent of the gross revenues of certain products and new business generated
through his efforts.
Series C Preferred Stock
In July 1997, the Board of Directors of the Company approved a resolution to
amend the Designation of Rights and Preferences of the Company's Series C 8%
Cumulative Convertible Non-Voting Preferred Stock. The Rights and
Preferences were amended to: (i) adjust the conversion factor applicable to
such shares to an
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amount equal to the lesser of 42 percent of the market price of the
underlying common shares or $.60 per share; (ii) limit the ability of the
holders of the Series C shares to convert the shares to Common Stock for a
period of six months; (iii) adjust the redemption price of the preferred
shares and (iv) expressly permit the Company to undertake future financing
without restriction or limitation.
In August 1997, 965.22 shares of Series C Preferred Stock were converted
into 3,546,218 shares of the Company's Common Stock.
12
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PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information includes forward-looking statements, the
realization of which may be affected by certain important factors discussed
below.
OVERVIEW
Biomune Systems, Inc. and subsidiaries (collectively, the "Company") is a
development stage nutraceutical and biopharmaceutical company that is
engaged in the business of research, development, production and marketing
of nutraceutical food supplements and biologic pharmaceutical products
derived from the Biomune Whey Protein Technology (the "BWPT"). The BWPT is
also known by the trademark "PROMUNE(TM) ". The Company is conducting its
nutraceutical operations through its wholly owned subsidiary Optim
Nutrition, Inc. ("Optim Nutrition"), while the pharmaceutical product
research and development is being conducted directly by Biomune Systems,
Inc. ("Biomune"). Nutraceutical products are food supplements that are
derived from a food base and marketed as a beneficial source of nutrients to
promote good health in humans. The Company's primary emphasis and focus to
date has been on commercializing one or more nutraceutical products and on
the research and development of biologic pharmaceutical products, with the
goal of commercializing one or more pharmaceutical products. The Center for
Biologics Evaluation and Research at the United States Food and Drug
Administration (the "FDA") has notified companies doing research in the
biologics area that such companies should conduct additional studies on
their products to identify which component is responsible for the biological
activity of their product, to the extent such data was not developed during
preclinical investigations. Because the FDA strongly encourages companies
to provide such data in order to support their potency claims, the Company
is currently in the process of compiling this data for submission to the FDA
and will continue with the clinical trials on its BWPT-301(TM) and BWPT-302(TM)
product candidates. Although the FDA's request has resulted and will
continue to result in delays in completing the necessary clinical trials on
BWPT-301(TM) and BWPT-302(TM), the Company views that request as routine. The
Company cannot predict when the additional research will be completed and
there can be no assurance that the data required by the FDA will be obtained
through such research or that the FDA will accept all of the data produced
by such research. The Company is proceeding as planned with the marketing
and commercialization of OPTIMUNE(TM), its first nutraceutical product, as well
as MAXIMUNE(TM) and Jump(TM), the Company's second and third pharmaceutical
products.
Nutraceutical Products
Based upon the results of and the information obtained from clinical trials
and other studies involving the Company's Promune(TM) technology and BWPT-
301 , the Company, through Optim Nutrition, developed and began marketing
OPTIMUNE(TM) in July 1996, and is now marketing that product in the United
States and certain regions of Africa. OPTIMUNE(TM), which is based on the
BWPT, is being marketed to nutritionally-stressed individuals with immune-
compromised conditions as a product to improve immune function and assist
with weight gain and the maintenance of a healthy weight. Optim Nutrition
generated limited revenues from the sale of OPTIMUNE(TM) during the first nine
months of fiscal year 1997. Optim Nutrition is conducting nutritional
studies on OPTIMUNE(TM) at various sites for its effect against chronic weight
loss in immune compromised humans. A study at two sites in the San
Francisco bay area (St. Francis Memorial Hospital and the East Bay AIDS
Clinic) has been completed. Twenty-nine subjects out of 35 completed the
six week study. Overall patient weight for all 29 subjects increased an
average 1.5 pounds during the study. Body weight increased for 22 patients
(75.9%), decreased for five patients (17.2%) and remained constant for two
patients (6.9%). In total, 83% of the individuals in the study either
gained weight or maintained the weight they had upon entry into the study.
Gaining and maintaining weight were both considered advantageous by the
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Company because the patient population had a history of losing weight, and
were each at least 10% below their ideal body weight prior to entering the
study. Out of the 22 patients who gained weight, the average increase was
3.5 pounds, with the highest gain being 13 pounds. A quality of life
profile was taken at the conclusion of the study, and 83% of the subjects
reported feeling better. In addition, the investigators believed that 87%
of the subjects had improvement over the course of the six week study. Out
of the 22 patients who gained weight, 13 gained body cell mass (muscle),
with an average increase of 1.45 pounds, with the highest gain being 7.1
pounds. In addition, Dr. Donald P. Kotler at St. Lukes-Roosevelt Hospital
Center in New York City, New York is studying the metabolic activity in
people with AIDS. Other sites located in California, Florida, New York and
Oklahoma have begun less rigorous studies. These studies are designed to
yield anecdotal corroborating data of the previous studies and to provide
new data that may encourage the Company to engage in additional expanded
rigorous studies and to introduce potential customers to OPTIMUNE(TM). There
can be no assurance that this or any other nutraceutical study will be
successful or will be successfully completed in a timely manner.
While FDA approval is not required to commence the marketing and sale of
nutraceutical products, in order to make broad and non-specific claims
regarding the benefits of using a particular nutraceutical product, studies
must be conducted to substantiate those claims. In addition, the Company's
products must be appropriately labeled in accordance with the Dietary
Supplement Health and Education Act of 1994 (the "Dietary Supplement Act").
At any time subsequent to a company's commencement of marketing of a
nutraceutical product, both the FDA and the United States Federal Trade
Commission (the "FTC") have the right to review the accuracy of the product
claims being made by requiring the production of the study results. A
company marketing nutraceutical products cannot make claims such as the
ability of a product to cure a particular disease. Rather, claims must be
broadly made and may not be made with respect to diagnoses, treatment, cure,
mitigation or prevention of a specific disease.
Pharmaceutical Products
The Company also believes that the BWPT may be utilized to develop
pharmaceutical products to treat various gastrointestinal and infectious
diseases in humans. The Company has filed Investigational New Drug
Applications ("IND") with the FDA, the United States government agency that
regulates drugs for humans, on two biological pharmaceutical candidates
developed from the BWPT: (a) BWPT-301(TM), which the Company believes may
prevent and/or treat cryptosporidiosis, a gastrointestinal disease caused by
the cryptosporidium parvum microorganism that causes acute and severe
diarrhea in humans, and (b) BWPT-302(TM), which the Company believes may be
used in the treatment of infection by the life-threatening bacteria coli,
strain 0157:H7 ("E. coli, strain 0157:H7"), a disease that causes severe
bloody diarrhea, and in children, a hemolytic uremic syndrome associated
with a high risk of permanent kidney damage. At the FDA's request, the
Company is currently conducting additional clinical studies on BWPT-301(TM) in
order to identify which component is responsible for the distinctive
biological activity in that product candidate. The FDA has told the Company
that an important aspect of the licensure process is the evaluation of the
potency of the product and the test or tests that are used to assess
potency. "Potency" refers to the specific ability of a product to effect a
given result. The Company anticipates continuing its Phase II clinical
trials on its BWPT-301(TM) product candidate upon the completion of the potency
studies currently being conducted, and now anticipates that those Phase II
clinical trials will be completed in approximately 1998. Assuming those
Phase II clinical trials are successful, the Company anticipates that it
will commence Phase III clinical trials on BWPT-301(TM) possibly as early as
mid-1999. In addition, the Company had concluded its Phase I clinical
trials on its BWPT-302(TM) product candidate and, after the analysis of the
data from those trials, is planning to commence a Phase I/II clinical trial
in approximately mid-1998 to continue gathering data on the safety and
tolerance of that product and to begin evaluating the efficacy of BWPT-302(TM).
The Company has generated no revenues from the sale of any biological
pharmaceutical drug candidate to date and does not anticipate any revenues
from any pharmaceutical product until approximately 1999 at the earliest.
14
<PAGE>
Based on the results of Phase I and Phase II clinical trials that were
conducted using the Company's BWPT-301(TM) product candidate, the Company
believes that products developed based on the BWPT may be successful in
improving and promoting gastrointestinal health, especially in: (i) people
who are HIV positive or have AIDS; (ii) immune-compromised patients such as
those undergoing high-dose antibiotic or chemotherapy treatment and (iii)
post-surgical and chronic care patients. Some of the other diseases or
microbial infections that the Company believes may be preventable and/or
treatable include certain infectious bacteria known to be enteric pathogens
(including, for example, Helicobacter pylori, Clostridium difficile,
Campylobacter jejuni, Yersinia enterocolitica and Staphylococcus aureus, and
possibly certain non-infectious immunologically-based syndromes, diseases
and other conditions (including, for example, certain cancers, such as
prostate cancer, arthritis, irritable bowel syndrome and acne).
The Company has a variety of studies and clinical trials on its
pharmaceutical products underway and planned, although the timing of certain
of those studies will be delayed as the Company continues to focus its
efforts on OPTIMUNE(TM) and other possible nutraceutical products. These
studies include efforts to further the basic knowledge about the BWPT and to
fully characterize the activities of the Base Product and parameters for
formulation and use. At least one study is expected to address
pharmacokinetics. Studies at universities and hospital sites are testing
for various activities against selected disease organisms. Several human
clinical trials have been completed to test the safety and tolerance of the
BWPT. Other clinical trials are assessing dose ranges and effects. Still
others will measure the efficacy of BWPT-301(TM) against cryptosporidiosis in
people who are also infected with HIV virus or have AIDS. Additional
clinical trials are anticipated to be undertaken in the future to conclude
the dose ranging considerations and prepare for the clinical trials that
will assess the efficacy of BWPT-302(TM) against E. coli, strain 0157:H7.
Additional studies on E. coli, strain 0157:H7, are also anticipated for the
future.
Other Products and Technology
Through the Company's wholly owned subsidiary, Volu-Sol, Inc. ("Volu-Sol") ,
the Company is engaged in the manufacture and distribution of medical
diagnostic stains and related equipment. On February 25, 1997, the board of
directors approved, subject to finalization and execution of a separation
and distribution agreement, the spin-off of Volu-Sol to the shareholders of
record of the Company's Common Stock as of March 5, 1997. The spin-off is
expected to occur during the fourth quarter of calendar year 1997. The
shareholders are expected to receive one share of Volu-Sol, Inc. common
stock for every ten shares of Biomune Inc.'s common stock owned. The
Company intends to account for the spin-off as discontinued operations once
a definitive separation and distribution agreement can be finalized.
The spin-off of Volu-Sol is designed to separate the Company's interests in
the medical diagnostic stain and reagent business from its nutritional,
pharmaceutical and nutraceutical research, development, marketing and
distribution businesses. The medical diagnostic stain and reagent business
conducted by Volu-Sol uses a distinct distribution network from that
employed by Biomune for its nutraceutical products. The separation of the
two businesses will permit each entity to focus on its primary markets
without concern for the objectives of or distractions caused by the business
needs and activities of the other entity. The separation of the business
activities will allow investors in the Company to evaluate the merits and
outlooks of the Company's research and development, nutritional supplements
and pharmaceutical/nutraceutical activities from the medical diagnostic
stain business conducted by Volu-Sol. Management believes, although there
is no assurance, that by separating the Company from Volu-Sol and allowing
the market to establish a separate valuation for Volu-Sol, the spin-off
should result in an increase in the long-term value of the Company's
shareholders' current investment in Volu-Sol. The spin-off would also give
current and potential investors the opportunity to direct future investment
to their specific area of interest, or to continue to retain an interest in
both entities. The separate market valuation for Volu-Sol should also
enhance Volu-Sol's ability to attract, motivate and retain high quality
employees by designing effective incentive-based compensation programs based
solely on Volu-Sol's performance. Finally, as part of the Company's
organization, Volu-Sol is one of several business
15
<PAGE>
activities competing for allocation of the Company's financial resources. As
a separate public company, however, Volu-Sol would be able to issue its own
securities and seek to raise capital and effect acquisitions using its own
securities and other resources. Following the spin-off, the Company will not
own any interest in Volu-Sol. It is expected that Volu-Sol will be required
to obtain equity or debt financing to sustain its operations following the
spin-off. There can be no assurance that it will be successful in obtaining
such financing.
The Company owns the right to certain medical waste technologies, which
consist of: (i) a device for the sterilization and decontamination of
medical devices and wastes; (ii) a bioremediation process to detoxify and
degrade hazardous substances and (iii) a device and process for the safe
treatment of used medical stains. During fiscal year 1996, the Company
granted a license to a third party, Biomed Patent Development L.L.C., to use
the technology related to the medical sterilization and decontamination
device in return for certain royalties.
All forward-looking statements contained herein are deemed by the Company to
be covered by and to qualify for the safe harbor protection provided by the
Private Securities Litigation Reform Act of 1995 and Section 27A of the
Securities Act of 1933, as amended (the "Act"). For purposes of this report,
words or phrases such as "will likely result," "expects," "intends," "will
continue," "is anticipated," "estimates," "projects," and similar expressions
are intended to identify forward-looking statements within the meaning of
the Act. Investors and prospective investors in the Company should
understand that several factors could cause actual results to differ
materially from those projected herein. Investors and prospective investors
are referred to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1996 for a more detailed discussion of the factors that
could cause actual results to differ. These forward-looking statements
include plans and objectives of management for future operations, including
plans and objectives relating to the products and the future economic
performance of the Company and its subsidiaries, Optim Nutrition and Volu-
Sol. The forward-looking statements and associated risks set forth herein
relate to: (i) the commercialization of OPTIMUNE(TM) or any other nutraceutical
product by Optim Nutrition; (ii) the Company's current plans to spin-off
Volu-Sol; (iii) the total research and development, general and
administrative and other direct costs associated with obtaining final FDA
approval on BWPT-301(TM) and BWPT-302(TM); (iv) the dollar amount to be expended
during fiscal years 1997 and 1998 on the BWPT-301(TM) and BWPT-302(TM); (v) the
estimated date of receipt of final FDA approval on BWPT-301(TM) and BWPT-302(TM)
(vi) the estimated commencement date of Phase III clinical trials and the
completion of those clinical trials on BWPT-301(TM); and (vii) the Company
having sufficient cash to fund its projected operations and budgeted
research and development for the next twelve months. The forward-looking
statements included herein are based on current expectations that involve a
number of risks and uncertainties. These forward-looking statements are
based on assumptions, among others, (a) that the efficacy of BWPT-301(TM) will
be established during the ongoing Phase II clinical trials and the
contemplated Phase III clinical trials; (b) that the Company will be able to
successfully undertake and complete clinical trials on BWPT-302(TM); (c) that
the Company will be able to continue to market and successfully
commercialize OPTIMUNE(TM); (d) that the Company will be able to successfully
develop and commercialize the BWPT; (e) that the Company will need to
conduct additional Phase II clinical trials on BWPT-301(TM) and may need to
conduct clinical trials that are different from those that have been
conducted to date or that are currently contemplated by the Company; and (f)
that the Company will be able to timely and properly quantify and analyze
the data derived from its on going clinical trials on its pharmaceutical
product candidates and the studies on its nutraceutical product candidates.
Assumptions relating to the foregoing involve judgments with respect to,
among other things, future economic, competitive and market conditions,
future business decisions, and the results of the clinical trials and
product studies, and the time and money required to successfully complete
those clinical trials and studies, all of which are difficult or impossible
to predict accurately and many of which are beyond the control of the
Company and its management. Although the Company believes that the
assumptions could prove inaccurate and, therefore, there is and can be no
assurance that the results contemplated in any such forward-looking
statement will be realized. This is particularly true given the dynamic
nature of the process in which the Company is involved with respect to
16
<PAGE>
OPTIMUNE(TM) , BWPT-301(TM) and BWPT-302(TM) . Budgeting and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revision. Based on actual experience and
business developments, the impact of which may cause the Company to alter
its marketing, capital expenditure plans or other budgets, the Company's
results of operations could be adversely impacted. In light of the
significant uncertainties inherent in the forward-looking statement included
herein, the inclusion of any such statements should not be regarded as a
representation by the Company or any other person that the objectives or
plans of the Company or of either of its subsidiaries will be achieved.
Results of Operations
Comparison of the three months ended June 30, 1997 with the three months
ended June 30, 1996
During the three months ended June 30, 1997, the Company had revenues of
$237,098 compared to $97,486 for the comparable three month period ended
June 30, 1996. Of the total revenues generated for the three months ended
June 30, 1997, $133,294 was from Volu-Sol and $103,804 was from Optim
Nutrition. All of the revenues generated for the three months ended June
30, 1996 were derived from Volu-Sol. The increase in Volu-Sol sales is due
to the introduction of a staining instrument, slightly offset by a decrease
in stain sales.
Cost of revenues for Volu-Sol was $85,435 and cost of revenues for Optim
Nutrition was $66,697 for the three months ended June 30, 1997 compared to
cost of sales of $64,103 for Volu-Sol for the same period in 1996.
Management, consulting and research fees were $610,096 for the three months
ended June 30, 1997, as compared to $1,111,228 for the three months ended
June 30, 1996. This decrease was primarily due to a decrease in the use of
outside consultants. General and administrative expenses increased from
$619,670 for the three months ended June 30, 1996 to $877,899 for the three
months ended June 30, 1997 primarily due to the Company's efforts to further
develop and market OPTIMUNE(TM).
Interest income was $55,821 for the three months ended June 30, 1997 and
resulted from the investment of the Company's cash proceeds from the sale of
Series C Preferred Stock.
As a result of the above events, the net loss applicable to common shares
decreased from $1,647,776 for the three months ended June 30, 1996 to
$1,451,103 for the three months ended June 30, 1997.
Comparison of the nine months ended June 30, 1997 with the nine months ended
June 30, 1996
During the nine months ended June 30, 1997, the Company had revenues of
$673,868 compared to $338,016 for the comparable nine month period ended
June 30, 1996. Of the total revenues generated during the nine months ended
June 30, 1997, $368,731 were from Volu-Sol, $260,137 were from Optim
Nutrition and $45,000 were from royalties received from the license of the
medical sterilization and decontamination proprietary rights. All of the
revenues generated for the nine months ended June 30, 1996 were derived from
Volu-Sol.
Cost of revenues for Volu-Sol was $258,958 and cost of revenues for Optim
Nutrition was $125,029 for the nine months ended June 30, 1997 compared to
cost of sales of $207,939 for Volu-Sol for the same period in 1996.
Management, consulting and research fees were $2,103,420 for the nine months
ended June 30, 1997, as compared to $2,778,520 for the nine months ended
June 30, 1996. This decrease resulted from a decrease in the use of outside
consultants and from two individuals who were consultants during the nine
months ended June 30, 1996 who were hired as employees for fiscal 1997. The
payroll costs of these employees are currently included in general and
administrative expenses. General and administrative expenses increased from
$2,005,046 for the nine months ended June 30, 1996 to $2,764,488 for the
nine months ended June 30, 1997
17
<PAGE>
as a result of new employees who were previously consultants and the Company's
continued efforts to further develop and market OPTIMUNE(TM).
Interest income was $201,306 for the nine months ended June 30, 1997 and
resulted from the investment of the Company's cash proceeds from the sale of
Series C Preferred Stock.
The net loss applicable to common shares increased from $4,505,645 for the
nine months ended June 30, 1996 to $5,419,919 for the nine months ended June
30, 1997. The increase in the net loss applicable to common shares was
attributable to the increased level of activity in developing and marketing
OPTIMUNE(TM), the increase in preferred stock dividends and the $748,550
premium paid upon the redemption of certain shares of Series C Preferred
Stock. The Company expects to incur a net loss for fiscal year 1997. While
the Company is not at this time able to forecast the expected net loss for
fiscal 1997, that net loss could exceed the net loss incurred for fiscal
1996. The factors that will dictate the size of the Company's net loss for
fiscal 1997 include the cost of further developing the BWPT, required
expenditures for clinical trials on BWPT-301(TM), required expenditures for the
clinical trials on BWPT-302(TM), required expenditures for the nutritional
studies on OPTIMUNE(TM) and the associated development and marketing costs
related to OPTIMUNE(TM).
Liquidity and Capital Resources
The Company is currently unable to finance its operations from its cash
flows from operating activities. Substantial funds and time will be
required to complete clinical trials on BWPT-301(TM) (assuming efficacy is
established during the Phase II clinical trials), to undertake and complete
the necessary clinical trials on BWPT-302(TM), (assuming efficacy is
established during the clinical trials), to obtain regulatory approval for
and to commercialize products derived from the BWPT and to achieve
profitability in Optim Nutrition's operations by marketing and selling
OPTIMUNE(TM). Because revenue-generating activities are not in place at
significant levels and because the Company will require significant capital
to accomplish the objectives set forth above, additional equity and/or debt
funding will be required, although such funding may not be available or may
not be available on terms acceptable to the Company.
As of June 30, 1997, the Company had current assets of $3,689,280 and
working capital of $3,083,687 as compared to current assets of $8,339,394
and working capital of $7,713,917 as of September 30, 1996. This decrease
in the Company's current assets and working capital was primarily due to the
net loss for the nine months ended June 30, 1997 and the Company's
redemption of 1,500 shares of Series C Preferred Stock for $2,000,000.
During the nine months ended June 30, 1997, the Company's operating
activities used $2,894,267 of cash compared with $2,837,202 of cash used for
operating activities during the same nine month period in 1996.
Management intends to continue the development of its BWPT, including
products in both the nutraceutical and pharmaceutical markets. The Company
currently estimates that the additional research and development, general
and administrative and other direct costs associated with reaching the stage
of obtaining final FDA approval on BWPT-301(TM) in treating cryptosporidiosis
in people with AIDS, in the aggregate, will approximate $13 to $15 million,
some of which will be paid in cash and some of which likely will be paid in
shares of the Company's Common Stock or securities convertible into shares
of the Company's Common Stock. As of June 30, 1997, approximately $13.2
million had been spent on BWPT-301(TM). An estimated $200,000 to $400,000
will be expended during the next twelve months as clinical trials on BWPT-
301 continue. Final FDA approval on BWPT-301(TM) is currently estimated to
be received as early as late calendar 1999.
Currently, it is estimated that the additional research and development,
general and administrative and other direct costs associated with reaching
the stage of obtaining final FDA approval on BWPT-302(TM) in treating
18
<PAGE>
E. coli, strain 0157:H7, will approximate $7.5 to $9.5 million, some of
which will be paid in cash and some of which likely will be paid in shares
of the Company's Common Stock. The Company has recently completed initial
Phase I clinical trials and will continue Phase I clinical trials throughout
the remainder of fiscal year 1997. As of June 30, 1997, the Company has spent
approximately $505,000 relating to BWPT-302(TM) and anticipates spending
approximately $100,000 over the next twelve months as clinical trials
continue.
As of June 30, 1997, the Company had spent approximately $1.3 million
developing and marketing OPTIMUNE(TM). In July 1996, the Company introduced
OPTIMUNE(TM), and began marketing efforts through a direct mail program.
During the next twelve months the Company anticipates incurring direct costs
of approximately $200,000 to $400,000 in conducting additional nutritional
studies and entering into the private label and wholesale and retail
markets.
The Company cannot currently predict, however, how much of the above
referenced expenditures will be paid in cash and how much will be paid in
shares of Common Stock. The factors that will impact the actual total
research and development, general and administrative and other direct costs
associated with OPTIMUNE(TM), BWPT-301(TM) and BWPT-302(TM) include the number
of clinical trials or nutritional studies necessary to establish efficacy, the
results of the continuing clinical trials and nutritional studies, possible
changes in the FDA's regulations and approval processes, and general
inflationary factors.
The Company has no credit facility with any lending institution and no
current or long-term debt obligations.
The Company currently estimates that it has sufficient cash to fund its
projected operations and budgeted research and development for the next 12
months. The factors that could cause the forward-looking statement
contained in the immediately proceeding sentence to differ from that
projected include catastrophic unanticipated events, dramatic increases in
research and development costs, the ultimate cost to conduct nutraceutical
studies and the clinical trials on BWPT-301(TM) and BWPT-302(TM).
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings
Sterlin v. Biomune Systems, et al., Case No. 2:95-CV-944G (U.S. District
Court for the District of Utah, Central Division). On April 2, 1997, the
court dismissed with prejudice all claims of the plaintiff against the
Company and the other defendants in the action and assessed the costs of the
litigation against the plaintiff. The final judgment on the court's
decision and order was entered on May 6, 1997. In May 1997, the plaintiff
filed an appeal of the lower court's decision and has requested the U.S.
Court of Appeals for the 10th Circuit to reverse the decision and reinstate
the claims. The Company cannot predict how the appeal will be received and
there is no assurance that the defendants will prevail in such action.
Item 2 - Exhibits and Reports on Form 8-K
(a) Exhibits
3 Amendment to Articles of Incorporation
27 Financial Data Schedule
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOMUNE SYSTEMS, INC.
(Registrant)
Date: August 11, 1997 /s/ David G. Derrick
----------------------------
David G. Derrick, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
Date: August 11, 1997 /s/ Michael G. Acton
------------------------------
Michael G. Acton,
Chief Financial Officer and
Controller (Principal Financial
and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,346,017
<SECURITIES> 0
<RECEIVABLES> 223,362
<ALLOWANCES> 0
<INVENTORY> 567,288
<CURRENT-ASSETS> 3,689,280
<PP&E> 390,490
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,525,663
<CURRENT-LIABILITIES> 605,593
<BONDS> 0
0
3,094,680
<COMMON> 2,194
<OTHER-SE> 337,657
<TOTAL-LIABILITY-AND-EQUITY> 4,525,663
<SALES> 673,868
<TOTAL-REVENUES> 673,868
<CGS> 383,987
<TOTAL-COSTS> 383,987
<OTHER-EXPENSES> 5,251,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,419,919)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,419,919)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,419,919)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
CERTIFICATE OF AMENDMENT TO THE DESIGNATION
OF RIGHTS AND PREFERENCES RELATED TO
SERIES C 8% CUMULATIVE CONVERTIBLE NON-VOTING PREFERRED STOCK
OF BIOMUNE SYSTEMS, INC.
The undersigned, being the President and the Secretary of Biomune
Systems, Inc., a Nevada corporation, do hereby certify and declare as
follows:
1. The name of the Corporation is Biomune Systems, Inc.;
2. Attached hereto as Exhibit "A" and incorporated herein by this
reference is a true and correct copy of the amendment to Sections 5(a),
5(b), and 9 and new Section 11 of the Designation of Rights and Preferences
related to the Series C 8% Cumulative Convertible Non-Voting Preferred Stock
of Biomune Systems, Inc.
3. The amendments described above were adopted by the Corporation's
Board of Directors by Unanimous Written Consent dated July __, 1997,
pursuant to Section 78.315 of the Nevada Private Corporations Act and are
being filed with the Nevada Secretary of State pursuant to Section 78.195
and Section 78.207 of the Nevada Private Corporations Act.
4. The above-referenced amendments were consented to by a majority of
the current holders of a majority of the shares of the Corporation's Series
C 8% Cumulative Convertible Non-Voting Preferred Stock as required by
Section 4 of the Designation of Rights and Preferences related to the Series
C 8% Cumulative Convertible Non-Voting Preferred Stock.
5. The current number of authorized shares and the par value of each
class and series of shares before the amendment is as follows:
(a) Common Stock, $0.0001 par value per share: 500,000,000
(b) Preferred Stock, $0.0001 par value per share: 50,000,000, which
have been designated as follows:
(i) Series A 10% Cumulative Convertible Preferred Stock:
1,075,000
(ii) Series B 10% Cumulative Convertible Non-Voting Preferred
Stock: 1,000,000
(iii) Series C 8% Cumulative Convertible Non-Voting Preferred
Stock: 10,000
(iv) Series D 8% Cumulative Convertible Non-Voting Preferred
Stock: 6,000
6. The number of authorized shares and the par value of each class and
series of shares after the amendment will not change.
7. This Certificate of Amendment shall be effective upon filing with
the Nevada Secretary of State.
<PAGE>
IN WITNESS WHEREOF, we have signed this Certificate of Amendment as of
this__ day of July, 1997.
BIOMUNE SYSTEMS, INC.,
a Nevada corporation
By: /s/
------------------------
David G. Derrick, President
By: /s/
------------------------
Christopher Illick, Secretary
Attested and Verified:
By:/s/
------------------------
Christopher Illick
Its: Secretary
:ss
COUNTY OF SALT LAKE)
On the _ day of July, 1997, David G. Derrick, who, being by me duly
sworn, did say that he is the President of Biomune Systems, Inc., a Nevada
corporation, and that the foregoing instrument was signed on behalf of such
Corporation by authority of its Bylaws and such officer acknowledged to me
that the Corporation executed the same.
/s/
NOTARY PUBLIC
My Commission Expires:
<PAGE>
EXHIBIT A
AMENDMENT TO DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES C 8% CUMULATIVE CONVERTIBLE NON-VOTING PREFERRED STOCK
Pursuant to the authority vested in the Board of Directors of Biomune
Systems, Inc., a Nevada corporation (the "Company"), in its Articles of
Incorporation and as permitted by Title 7, Chapter 78 of the Nevada Revised
Statutes, the Company's Board of Directors does hereby amend the Designation
of Rights and Preferences of the Company's Series C 8% Cumulative
Convertible Non-Voting Preferred Stock as follows:
5. Conversion of Series C Preferred Stock. The holders of shares of
Series C Preferred Stock shall have the following conversion rights:
(a) Right to Convert. Subject to the Conversion Limitation set forth
in Section 5(b) below, each share of Series C Preferred Stock
may be converted at the holder's option at any time commencing
on the 41st day after the closing of the private placement
transaction pursuant to which the Series C Preferred Stock was
issued (the "Closing") into the number of shares of the Company's
Common Stock determined by dividing $1,000 plus any accrued and
unpaid regular or special dividends by an amount equal to the
Market Price (as defined below) less 42%. The applicable
denominator in the formula set forth in the foregoing sentence
shall be referred to herein as the "Conversion Factor."
Notwithstanding the foregoing, the Conversion Factor shall not
be greater than $0.60. "Market Price" shall mean the average
closing bid price of the Company's Common Stock for the three
(3) NASDAQ trading days immediately proceeding the applicable
Conversion Date (as defined below), as reported by the National
Association of Securities Dealers Automated Quotation System or
such other inter-dealer system as may list the Company's Common
Stock. Subject to the Conversion Limitation set forth in Section
5(c) below, each conversion shall be effected by the holder
surrendering the certificate(s) for the shares of Series C
Preferred Stock to be converted to the Company with a Conversion
Certificate executed by the holder for not less than $50,000
aggregate conversion amount including any accrued and unpaid
regular and special dividends and accompanied, as required by
the Company, by proper assignment. The date of execution of such
Conversion Certificate and delivery by facsimile to the Company
at (801) 466-3741 shall be defined as the "Conversion Date".
Upon conversion the Company shall use its reasonable best
efforts to deliver certificates evidencing shares of the
Company's Common Stock within five (5) business days of the
Conversion Date. The Company shall use reasonable best efforts
to deliver to the holder certificates evidencing shares of
Series C Preferred Stock within three (3) business days of the
Conversion date or the Closing, as appropriate. In the event of
a merger, consolidation or sale of all or substantially all of
the assets of the Company or a similar business combination
involving the Company, all of the shares of Series C Preferred
Stock, at the option of the holder,
<PAGE>
may be converted into the number of shares of Common Stock into
which the shares of Series C Preferred Stock are convertible at
the time of the closing of such transaction. In the event the
Company shall fail to deliver certificates evidencing shares of
the Company's Common Stock upon any conversion of shares of
Series C Preferred Stock within five (5) business days of the
Conversion Date, the Company shall pay the holder daily
liquidated damages in an amount equal to 1% of the principal
amount of the shares of Series C Preferred Stock converted into
Common Stock for each day beyond said five (5) business days.
(b) Conversion Limitation. Notwithstanding the conversion rights
regarding the Series C Preferred Stock set forth in Section
5(a), above, any single holder (or affiliated holders) may not
at any time hold shares of the Company's Common Stock exceeding
4.9% of the total number of issued and outstanding shares of
Common Stock. Thus, any holder or group of affiliated holders
will only be allowed to convert shares of Series C Preferred
Stock into shares of Common Stock in an amount such that such
holder's ownership of shares of Common Stock does not exceed
4.9% of the total of issued and outstanding shares of Common
Stock. Furthermore, the original holder(s) of the Series C
Preferred Stock shall not, following the effective date of this
provision, convert, sell or otherwise dispose of any shares of
Series C Preferred Stock then held by such holder(s) through
December 31, 1997, or such later period as they may then agree
with the Company; provided, however, that in any given week
during such period, including any extension thereof, such
original holder(s) may, collectively, convert such shares of
Series C Preferred Stock into shares of Common Stock having a
Market Value equal to the greater of (i) $20,000 (through
September 30, 1997), $25,000 (from October 1 through December
31,1997); or (ii) 10% of the total volume of trading in the
Common Stock during the previous week.
9. Redemption. The Company shall have the right to call for redemption
any shares of the Series C Preferred Stock which continue to be held by the
initial holder thereof after July __, 1997, at the option of the Company at
any time following July __, 1997. Notwithstanding what the Market Price or
the Conversion Factor may be at the time, the Company may designate a
different and lower conversion price (the "New Conversion Price") and the
call price for all shares of Series C Preferred Stock called for redemption
by the Company shall be as follows: (a) 125% of the New Conversion Price for
all shares of Series C Preferred Stock called prior to January 1, 1997; (b)
133% of the New Conversion Price for all shares of Series C Preferred Stock
called after January 1, 1997 through May 31, 1997; and (c) 139% of the New
Conversion Price for all shares of Series C Preferred Stock called after May
31, 1997. The Company's call option shall be assignable, in whole or in
part, and shall be exercised in writing with payment to accompany the
exercise notice or to be paid within two (2) business days thereafter. The
Company may select those shares to be redeemed by lot or on a pro rata basis
or by any other method deemed by the Company's Board of Directors to be
equitable (with any necessary adjustments to avoid fractional shares). Any
shares of Series C Preferred Stock for which a written notice of redemption
has been given may be converted into shares of Common Stock at any time
before the close of business on the date fixed for the redemption of such
shares of Series C Preferred Stock. After the date fixed
<PAGE>
for redemption, dividends on shares of Series C Preferred Stock called for
redemption shall cease to accrue, such shares shall no longer be deemed to
be issued and outstanding, and all rights of the holders thereof as
shareholders of the Company shall cease unless the Company defaults on the
payment of the redemption price.
11. Future Financings. Nothing herein shall be deemed in any manner
to impose any restriction or limitation on the Company's ability hereafter
to undertake financings through the public or private offer and sale of the
Company's debt or equity securities of any class; provided, however, that
the Company will not undertake any further distribution of Series C
Preferred Stock or any series of preferred stock or other securities with
rights and preferences that rank senior to the Series C Preferred Stock.
The remaining provisions of the Designation of Rights and Preferences
of the Series C Preferred Stock shall remain unchanged and in full force and
effect.
