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 MARCH 31, 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 Identification No.)
incorporation or organization)
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: 21,273,365 as of March 31,
1997.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Page
No.
___
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
March 31, 1997 and September 30, 1996 3
Unaudited Condensed Consolidated Statements of Operations for
the three and six months ended March 31, 1997 and 1996 5
Unaudited Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 1997 and 1996 6
Unaudited Notes to Condensed Consolidated Financial Statements 8
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION 20
</TABLE>
2
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, September 30,
1997 1996
----------- ---------------
Current assets:
Cash and cash equivalents $5,374,516 $4,192,868
Accounts receivable, net 168,963 74,784
Inventories 503,491 556,742
Amounts due from related parties 385,000 15,000
Preferred stock subscription receivable - 3,500,000
---------- ----------
Total current assets 6,431,970 8,339,394
Property and equipment, net 441,893 434,205
Other assets, net 463,454 498,403
---------- ----------
Total assets $7,337,317 $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
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, September 30,
1997 1996
--------------- ------------------
Current liabilities:
Accounts payable and accrued liabilities $ 206,620 $ 351,565
Preferred Stock dividends payable 190,753 91,199
Accrued payroll and payroll taxes 78,211 60,451
Other accrued liabilities - 38,262
Unearned revenue - 84,000
--------------- -------------
Total current liabilities 475,584 625,477
--------------- -------------
Shareholders' equity:
Convertible Preferred Stock:
Series A, 72,110 and 135,589 shares
outstanding, respectively 349,307 652,199
Series B, 0 and 11,058 shares outstanding,
respectively - 163,837
Series C, 5,000 shares outstanding 4,920,050 4,171,500
Common Stock, 21,273,365 and 19,877,034 shares
outstanding, respectively 2,127 1,988
Additional paid-in capital 28,665,865 26,392,477
Deficit accumulated during the development stage (27,341,115) (23,372,299)
Deferred consulting expense (451,774) (246,450)
Related party receivable from sale or issuance of
Common Stock (166,000) -
Common Stock warrants 883,273 883,273
--------------- -------------
Total shareholders' equity 6,861,733 8,646,525
--------------- -------------
Total liabilities and shareholders' equity $ 7,337,317 $ 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 Six Months
Ended March 31, Ended March 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES $ 135,353 $ 124,272 $ 431,520 $ 240,530
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of revenues 100,761 67,164 231,854 143,835
Management, consulting
and research fees 763,809 807,097 1,485,164 1,650,192
Other general and
administrative 851,010 790,876 1,889,501 1,363,312
----------- ----------- ----------- -----------
Total operating expenses 1,715,580 1,665,137 3,606,519 3,157,339
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (1,580,227) (1,540,865) (3,174,999) (2,916,809)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 70,201 82,860 145,486 150,020
Other, net - (39,165) - (39,165)
----------- ----------- ----------- -----------
Total other income, net 70,201 43,695 145,486 110,855
----------- ----------- ----------- -----------
NET LOSS (1,510,026) (1,497,170) (3,029,513) (2,805,954)
PREFERRED STOCK:
Dividends (110,280) (25,165) (190,753) (51,915)
Redemption premium (748,550) - (748,550) -
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON SHARES $(2,368,856) $(1,522,335) $(3,968,816) $(2,857,869)
=========== =========== =========== ===========
NET LOSS PER COMMON SHARE $ (.11) $ (.08) $ (.19) $ (.16)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 21,145,634 18,168,445 20,916,256 17,835,491
=========== =========== =========== ===========
</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 Six Months
Ended March 31,
1997 1996
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,029,513) $ (2,805,954)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 84,771 82,150
Issuance of Common Stock and warrants
for services 538,594 243,822
Amortization of deferred consulting expense 731,930 512,708
Loss on disposal of fixed assets - 39,163
Exchange of related-party note receivable - 125,662
Changes in assets and liabilities:
Accounts receivable, net (94,179) (50,843)
Inventories 53,251 4,716
Other assets (24) (4,683)
Accounts payable and accrued liabilities (183,207) 43,924
Accrued payroll and payroll taxes 17,760 (13,401)
Unearned revenue (84,000) -
------------ ------------
Net cash used in operating activities (1,964,617) (1,822,736)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (57,485) (349,771)
Net payments from (advances to) related parties (420,000) 43,153
Loans to employees - (20,018)
------------ ------------
Net cash used in investing activities (477,485) (326,636)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Preferred Stock subscriptions
receivable 3,500,000 -
Proceeds from exercise of Common Stock warrants 123,750 -
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 3,623,750 2,555,000
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated statements.
6
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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 Six Months
Ended March 31,
1997 1996
----------- ------------
<S> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 1,181,648 $ 405,628
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 4,192,868 5,206,112
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
THE PERIOD $ 5,374,516 $ 5,611,740
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 1997, 78,719 shares of Series A
Preferred Stock with a recorded value of $379,092 were converted into 236,157
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 six months ended March 31, 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 six months ended March 31, 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 six months ended March 31, 1997, the Company recorded a
$748,550 premium to be paid upon the redemption of the Series C Preferred
Stock(see Note 8).
During the six months ended March 31, 1996, 47,757 shares of Series A
Preferred Stock with a recorded value of $214,907 were converted into 143,271
shares of Common Stock, and 3,120 shares of Series D Preferred Stock with a
recorded value of $2,406,136 were converted into 1,837,310 shares of Common
Stock.
During the six months ended March 31, 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 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 financial statements be read in conjunction with the 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.
(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 stockholders of record
as of March 5, 1997. The Company intends to seek shareholder approval of the
transaction, although such approval is not required. The spin-off is expected
to occur during the Company's fourth fiscal quarter. The stockholders are
expected to receive one share of Volu-Sol, Inc. common stock for every ten
shares of the Company's common stock owned. The Company intends to account
for the spin-off as discontinued operations once the separation and
distribution agreement has been finalized and once a resolution as to
stockholder approval has been determined.
(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 accretion 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. This statement will
not have a material impact when adopted.
8
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(4) PREFERRED STOCK AND COMMON STOCK TRANSACTIONS
For the six months ended March 31, 1997, 78,719 shares of Series A Preferred
Stock with a recorded value of $379,092 were converted into 236,157 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 six months ended March 31, 1997, the Company accrued dividends on its
outstanding Series A, Series B and Series C Preferred Stock of $14,013, $6,740
and $170,000, respectively. Preferred Stock dividends are payable in either
additional shares of Preferred Stock or in cash, at the option of the Board of
Directors. During the six months ended March 31, 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 six months ended March 31, 1997, the Company issued 969,000 shares
of Common Stock for services rendered or to be rendered to the Company and
recorded expense of $1,317,850 associated with those shares. Of this expense,
$937,254 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 $731,930 for the six months ended March 31, 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.
During the six months ended March 31, 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 six months ended March 31, 1997, the Company granted options to
employees to purchase a total of 447,500 shares of Common Stock at an exercise
price of $1.16 per share, which price represented the average of the closing
bid and ask price 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 price of the Company's Common Stock at that date.
The Company granted warrants to a consultant to purchase a total of 200,000
shares of Common Stock at an exercise price of $2.25. The Company recognized
expense of $158,000 in connection with the grant of these warrants.
(6) RELATED-PARTY TRANSACTIONS
During the six months ended March 31, 1997, the Company loaned $30,000 to
Genesis Investment Corporation, an entity owned by shareholders of the
Company, and $50,000
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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 duration, and are secured by shares of the Company's
Common Stock. The loan to Genesis Investment Corporation was repaid prior to
March 31, 1997. The Daliz Associates loan has been classified as a reduction
in shareholders' equity in the accompanying financial statements.
During the six months ended March 31, 1997, the Company loaned $385,000 to PB
Financial, an entity owned by a shareholder of the Company. The loan is
unsecured, bears an annual interest rate of 10 percent and is due on or before
June 30, 1997.
(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 $62,640 is deferred as of March 31, 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 $174,000 is deferred as of March 31, 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 $104,400 is deferred
as of March 31, 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 Company recorded consulting
expense of $232,000 of which $116,000 is deferred as of March 31, 1997 and
will be recognized over the remaining term of the consulting agreement.
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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 six
months ended March 31, 1997 related to this agreement.
(8) SUBSEQUENT EVENTS
On April 2, 1997, the Company redeemed 1,500 shares of Series C Preferred
Stock for $2,000,000 which was $748,550 greater than the carrying amount of
the preferred stock. The excess over the carrying amount of the Series C
Preferred Stock of $748,550 was calculated and paid in accordance with the
redemption 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 accompanying 1997 statements of operations.
Effective April 1, 1997, the Company entered into a one-year consulting
agreement with Milton G. Adair, the former President of the Company, whereby
Mr. Adair has agreed to provide consulting services, in exchange for a monthly
fee of $5,000.
In April 1997, the Company entered into a consulting agreement with Laidlaw &
Co. ("Laidlaw"), whereby Laidlaw has agreed to provide consulting services,
consisting primarily of financial advisory and investment banking services, in
exchange for a monthly retainer of $10,000 and warrants to purchase 1,000,000
shares of Common Stock at an exercise price of $1.25 per share. The term of
this agreement is for twelve months.
[The remainder of this page is intentionally left blank.]
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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 impacted 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 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 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 it
would like such companies to 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. While a several month delay in the clinical trials on
BWPT-301[TM] and BWPT-302[TM] will result from the FDA's request, the
Company views that request as routine in nature. Moreover, while those
additional studies are being conducted, the Company nevertheless is proceeding
ahead as planned with the marketing and commercialization of OPTIMUNE[TM],
its first nutraceutical product. Management believes that the introduction of
OPTIMUNE[TM] will allow the Company to begin generating cash flow in the
short-term while it continues with the research and development of its
pharmaceutical products.
Nutraceutical Products. Based upon the results of and the information
obtained from clinical trials and other studies involving the Company's
protein whey concentrate (the "Base Product") and BWPT-301[TM], 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 six 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
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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
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 clai
ms 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
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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.
There is no assurance that the Company will ever receive revenues from these
drug candidates or other products in development.
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 studies 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 will 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. 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
14
<PAGE>
stockholders of record of the Company's common stock as of March 5, 1997. The
Company expects to seek shareholder approval of the transaction, although such
approval is not required. The spin-off is expected to occur during fiscal
1997. The stockholders are expected to received one share of Volu-Sol, Inc.
common stock for every ten shares of the Company'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 and once a
resolution as to stockholder approval has been determined.
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 apart 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 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.
The Company owns the right to certain medical waste technologies, which
consist of (a) a device for the sterilization and decontamination of medical
devices and wastes, (b) a bioremediation process to detoxify and degrade
hazardous substances and (c) 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
15
<PAGE>
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 fiscal 1997. 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 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.
16
<PAGE>
Results of Operations
Comparison of the three months ended March 31, 1997 with the three months
ended March 31, 1996
During the three months ended March 31, 1997, the Company had revenues of
$135,353 compared to $124,272 for the comparable three month period ended
March 31, 1996. Of the total revenues generated for the three months ended
March 31, 1997, $124,675 were from Volu-Sol and $10,678 were from Optim
Nutrition. All of the revenues generated for the three months ended March 31,
1996 were derived from Volu-Sol. Cost of sales for Volu-Sol was $93,952 and
cost of sales for Optim Nutrition was $6,809 for the three months ended March
31, 1997 compared to cost of sales of $67,164 for Volu-Sol for the same period
in 1996.
Management, consulting and research fees were $763,809 for the three months
ended March 31, 1997, as compared to $807,097 for the three months ended March
31, 1996. General and administrative expenses increased from $790,876 for the
three months ended March 31, 1996 to $851,010 for the three months ended March
31, 1996 primarily due to the Company's efforts to further develop and market
OPTIMUNE[TM].
Interest income was $70,201 for the three months ended March 31, 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 $1,522,335 for the
three months ended March 31, 1996 to $2,368,856 for the three months ended
March 31 ,1997. The increase in the net loss applicable to common shares was
attributable to the increased preferred stock dividends and the $748,550
premium to be paid upon the redemption of certain shares of Series C Preferred
Stock.
Comparison of the six months ended March 31, 1997 with the six months ended
March 31, 1996
During the six months ended March 31, 1997, the Company had revenues of
$431,520 compared to $240,530 for the comparable six month period ended March
31, 1996. Of the total revenues generated for the six months ended March 31,
1997, $235,437 were from Volu-Sol, $151,083 were from Optim Nutrition and
$45,000 in royalties were received from the license of the medical
sterilization and decontamination device. All of the revenues generated for
the six months ended March 31, 1996 were derived from Volu-Sol. Cost of sales
for Volu-Sol was $173,523 and cost of sales for Optim Nutrition was $58,331
for the six months ended March 31, 1997 compared to cost of sales of $143,835
for Volu-Sol for the same period in 1996.
Management, consulting and research fees were $1,485,164 for the six months
ended March 31, 1997, as compared to $1,650,192 for the six months ended March
31, 1996. This decrease resulted from two individuals who were consultants
during the six months ended March 31, 1996 and 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 $1,363,312 for the six months ended March 31, 1996 to
$1,889,501 for the six months ended March 31, 1997 as a result of new
employees who were previously consultants and the Company's continued efforts
to further develop and market OPTIMUNE[TM].
17
<PAGE>
Interest income was $145,486 for the six months ended March 31, 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 $2,857,869 for the six
months ended March 31, 1996 to $3,968,816 for the six months ended March 31
,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 to be 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 and its management.
As of March 31, 1997, the Company had current assets of $6,431,970 and working
capital of $5,956,386 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 three months ended March 31, 1997.
During the six months ended March 31, 1997, the Company's operating activities
used $1,964,617 of cash compared with $1,822,736 of cash used for operating
activities during the same six month period in 1996. This increase was the
result of increased costs associated with the marketing of OPTIMUNE[TM].
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
$3-$5 million, some of which will be
18
<PAGE>
paid in cash and some of which will be paid in shares of the Company's Common
Stock or securities convertible into shares of the Company's Common Stock. As
of March 31, 1997 approximately $13.1 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[TM] 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 E. coli,
strain 0157:H7, will approximate $7.5-$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 March 31, 1997, the Company has spent approximately
$505,000 relating to BWPT-302[TM] and anticipates spending approximately
$200,000 over the next twelve months as clinical trials continue.
As of March 31, 1997, the Company had spent approximately $1.1 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 $2-$4 million 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 remainder
of fiscal year 1997. 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].
19
<PAGE>
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.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule
[The remainder of this page is intentionally left blank.]
20
<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)
/S/ DAVID G. DERRICK
Date: May 14, 1997 ___________________________
David G. Derrick, Chief Executive
Officer and Chairman of the Board
(Principal Executive Officer)
/S/ MICHAEL G. ACTON
Date: May 14, 1997 ___________________________
Michael G. Acton, Chief Financial
Officer and Controller
(Principal Financial
and Accounting Officer)
21
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