<PAGE>
UNITED STATES
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, 1998
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: As of May 1, 1998, there were
issued and outstanding 5,358,823 shares of the Company's Common Stock.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
<TABLE>
<CAPTION>
No.
- --------------------------------------------------------------
<S> <C>
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets
as of March 31, 1998 and September 30, 1997 3
Unaudited Condensed Consolidated Statements of Operations for
the three and six months ended March 31, 1998 and 1997
and for the period from inception to March 31, 1998 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 1998 and 1997
and for the period from inception to March 31, 1998 5
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 16
</TABLE>
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<PAGE>
PART I - ITEM 1
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
------------------------------------
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(UNAUDITED)
ASSETS
March 31, September 30,
1998 1997
------------ -------------
Current assets:
Cash and cash equivalents $ 495,758 $1,585,099
Interest receivable 50,758 --
Accounts receivable, net 88,130 40,258
Inventories 305,869 342,768
Amounts due from related parties, net 676,587 266,525
Receivable from Volu-Sol, Inc. 390,500 --
Net current assets of discontinued operations -- 79,029
---------- ----------
Total current assets 2,007,602 2,313,679
Property and equipment, net 78,420 96,041
Other assets, net 35,828 39,334
Long-term assets of discontinued operations -- 283,444
---------- ----------
Total assets $2,121,850 $2,732,498
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 87,241 $ 759,915
Preferred Stock dividends payable -- 337,766
Accrued payroll and payroll taxes -- 85,494
Other accrued liabilities 7,575 205,338
---------- ----------
Total current liabilities 94,816 1,388,513
---------- ----------
Shareholders' equity:
Convertible Preferred Stock:
Series A, 38,474 and 34,802 shares outstanding
(liquidation preference of $240,463 and
$217,513), respectively 187,188 168,583
Series B, 449 and 0 shares outstanding
(liquidation preference of $8,419 and $0),
respectively 6,740 --
Series C, 1,719 and 1,683 shares outstanding
(liquidation preference of $2,286,270
and $2,238,390), respectively 2,543,035 2,309,838
Series E, 565 and 0 shares outstanding
(liquidation preference of $751,450 and
$0), respectively 933,929 --
Series F, 1,176,749 and 0 shares outstanding
(liquidation preference of $706,049
and $0), respectively 595,499 --
Common Stock, 5,358,823 and 3,238,813 shares
outstanding, respectively 536 324
Additional paid-in capital 35,758,493 33,633,608
Deficit accumulated during the development stage (38,104,644) (35,480,749)
Common stock warrants 338,500 883,273
Deferred consulting expense (130,850) (69,500)
Stock subscriptions receivable (101,392) (101,392)
---------- ----------
Total shareholders' equity 2,027,034 1,343,985
---------- ----------
Total liabilities and shareholders' equity $2,121,850 $2,732,498
========== ==========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
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<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
------------------------------------
(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,
------------------------------------------ ------------------------------ Inception to
1998 1997 1998 1997 March 31, 1998
--------------------- ------------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES $ 18,852 $ 10,678 $ 70,769 $ 196,083 $ 586,986
------------ ------------ ------------ ------------ -------------
OPERATING EXPENSES:
Cost of revenues 8,388 6,809 39,439 58,331 204,840
Management, consulting
and research fees 364,524 760,659 662,375 1,478,864 18,016,066
Other general and administrative 697,220 673,629 1,308,462 1,538,909 12,601,908
------------ ------------ ------------ ------------ -------------
Total operating expenses 1,070,132 1,441,097 2,010,276 3,076,104 30,822,814
------------ ------------ ------------
LOSS FROM OPERATIONS (1,051,280) (1,430,419) (1,939,507) ( 2,880,021) (30,235,828)
------------ ------------ ------------ ------------ -------------
OTHER INCOME (EXPENSE):
Interest income, net 25,915 70,201 56,737 145,485 823,042
Other, net --- -- --- --- (33,968)
------------ ------------ ------------ ------------ -------------
Total other income, net 25,915 70,201 56,737 145,485 789,074
------------ ------------ ------------ ------------ -------------
NET LOSS FROM CONTINUING
OPERATIONS (1,025,365) (1,360,218) (1,882,770) (2,734,536) (29,446,754)
Gain on disposal of discontinued
Volu-Sol, Inc. -- -- 28,027 --- 28,027
Loss from operations of discontinued
Volu-Sol, Inc. --- (149,808) --- (294,977) (3,219,233)
------------ ------------ ------------ ------------ -------------
NET LOSS (1,025,365) (1,510,026) (1,854,743) (3,029,513) (32,637,960)
Preferred Stock dividends and
accretion of beneficial conversion
feature (732,215) (859,830) (769,152) (940,303) (5,466,684)
------------ ------------ ------------ ------------ -------------
NET LOSS APPLICABLE TO
COMMON SHARES $ (1,757,580) $ (2,369,856) $ (2,623,895) $ (3,969,816) $ (38,104,644)
------------ ------------ ------------ ------------ -------------
NET INCOME (LOSS) PER
COMMON SHARE (basic and diluted)
Continuing operations $(0.36) $ (1.05) $ (0.65) $ (1.76)
Discontinued operations -- (0.07) 0.01 (0.14)
------------ ------------ ------------ ------------
Net loss per common share $(0.36) $ (1.12) $ (0.64) $ (1.90)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,875,723 2,114,563 4,074,427 2,091,626
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
------------------------------------
(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,
------------------------------------------- Inception to
1998 1997 March 31, 1998
-------------------- --------------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,854,743) $(3,029,513) $(32,637,960)
Adjustments to reconcile net loss to net cash
used in operating activities:
Interest expense recognized on grant of options -- -- 250,000
Interest income imputed on note receivable (33,562) -- (351,011)
Interest expense paid by transfer of -- -- 45,347
non-monetary asset
Interest expense imputed on note payable -- -- 18,456
Issuance of long-term debt for services -- -- 43,477
Gain on disposal of Volu-Sol, Inc. (28,027) -- (28,027)
Depreciation and amortization 21,127 84,771 1,015,521
Write-down of technology -- -- 582,709
Issuance of stock, options and warrants for 524,491 538,594 7,854,956
services
Amortization of deferred consulting expense 386,234 731,930 4,323,240
Cancellation of stock issued to consultants (50,000) -- (50,000)
Loss on disposal of property and equipment -- -- 69,043
Reduction in related-party note receivable 24,671 -- 190,331
Changes in assets and liabilities:
Accounts receivable, net (47,872) (94,179) (94,083)
Prepaid expense -- -- 5,350
Inventories 36,899 53,251 (317,716)
Other assets -- (24) (34,570)
Accounts payable and accrued liabilities (460,939) (183,207) 676,580
Accrued payroll and payroll taxes (85,494) 17,760 41,404
Unearned revenue -- (84,000) --
----------- ----------- ------------
Net cash used in operating activities (1,567,215) (1,964,617) (18,391,953)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distribution of Volu-Sol, Inc. cash (337,691) -- (337,691)
Proceeds from sale of technology -- -- 580,000
Investment in technology -- -- (150,000)
Cash acquired in non-monetary asset acquisition -- -- 7,187
Purchase of property and equipment -- (57,485) (736,820)
Proceeds from sale of equipment -- -- 70,551
Net (advances to) repayments from related parties (451,929) (420,000) (884,116)
Payments received on notes receivable -- -- 799,628
Issuance of notes receivable -- -- (224,317)
----------- ----------- ------------
Net cash used in investing activities (789,620) (477,485) (875,578)
----------- ----------- ------------
The accompanying notes are an integral part of these condensed consolidated
statements.
</TABLE>
-5-
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
------------------------------------
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
For the Six Months Inception to
Ended March 31, March 31, 1998
---------------------------------- --------------
1998 1997
----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Volu-Sol financing activities $ -- $ -- $ 320,555
Proceeds from issuance of common stock 206,303 -- 3,636,271
Proceeds from issuance of Series A and B preferred
stock -- -- 10,500,000
Proceeds from issuance of Series C and D preferred
stock and warrants -- 3,623,750 8,000,000
Offering costs for Series A and B preferred stock -- -- (1,050,000)
Offering costs for Series C and D preferred stock -- -- (945,000)
Proceeds from issuance of Series E and Series F
preferred stock 873,500 -- 873,500
Offering costs for Series E and Series F preferred
stock (150,000) -- (150,000)
Proceeds from issuance of warrants -- -- 10,000
Redemption of Series C preferred stock -- -- (2,000,000)
Proceeds from issuance of long-term debt -- -- 6,075
Increase in amounts due to related parties -- -- 1,394,752
Principal payments on notes payable -- -- (412,864)
Cash settlement for shares of common stock -- -- (420,000)
----------- ----------- ------------
Net cash provided by financing activities 929,803 3,623,750 19,763,289
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,427,032) $ 1,181,648 495,758
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 1,922,790 4,192,868 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF
THE PERIOD $ 495,758 $ 5,374,516 $ 495,758
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
-6-
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
------------------------------------
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended March 31, 1998 and 1997, 1,996 and 78,719 shares of
Series A Preferred Stock with a recorded value of $9,721 and $379,092 were
converted into 599 and 23,616 shares of Common Stock.
During the six months ended March 31, 1998, 239 shares of Series C Preferred
Stock with a recorded value of $312,729 were converted into 537,314 shares of
Common Stock.
During the six months ended March 31, 1998, 100 shares of Series C Preferred
Stock with a recorded value of $100,000 were exchanged for 166,667 shares of
Series F Preferred Stock.
During the six months ended March 31, 1998, 93,580 shares of Common Stock were
issued to employees in exchange for a reduction of accrued vacation totaling
$54,500.
During the six months ended March 31, 1998, 5,668 shares of Series A Preferred
Stock, 449 shares of Series B Preferred Stock, 375 shares of Series C Preferred
Stock, 11 shares of Series E Preferred Stock and 10,082 shares of Series F
preferred Stock were issued as payment of accrued Preferred Stock dividends.
During the six months ended March 31, 1998, 150,000 shares of Common Stock were
issued to ADP Management as settlement of accrued liabilities totaling $75,000.
During the six months ended March 31, 1998, 280 shares of Series E Preferred
Stock were issued to satisfy accounts payable of $280,000.
During the six months ended March 31, 1998, the Company recorded accretion of
$271,264 and $408,819 related to the issuance of Series C and Series E Preferred
Stock, respectively.
During the six months ended March 31, 1997, 12,058 shares of Series B Preferred
Stock with a recorded value of $178,837 were converted into 3,617 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 accretion of
$748,550 related to the redemption of Series C Preferred Stock.
The accompanying notes are an integral part of these condensed consolidated
statements.
-7-
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
(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. Operating results for the three and six
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ending September 30, 1998. It is suggested that
these condensed consolidated 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, 1997, as amended.
(2) DIVESTITURE OF VOLU-SOL, INC.
-----------------------------
On October 1, 1997, the Company divested itself of its wholly owned subsidiary,
Volu-Sol, Inc. The Common Stock of Volu-Sol, Inc. was distributed pro rata to
the Company's shareholders of record as of March 5, 1997. The operations of
Volu-Sol, Inc. are reflected herein as discontinued operations. (See note 11)
(3) NET LOSS PER COMMON SHARE
-------------------------
Basic net income (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per common
share ("Diluted EPS") reflects the potential dilution that could occur if stock
options or other contracts to issue Common Stock including convertible Preferred
Stock were exercised or converted into Common Stock. The computation of Diluted
EPS does not assume exercise or conversion of securities that would have an
anti-dilutive effect on net income per common share. Because the Company has
incurred a loss for the periods presented, no exercises or conversions have been
considered as they would be anti-dilutive, thereby decreasing the net loss
applicable to common shares.
At March 31, 1998, there were outstanding options and warrants to purchase
676,529 shares of Common Stock and there were 1,217,956 shares of Preferred
Stock convertible into approximately 4,995,000 shares of Common Stock, neither
of which are included in the computation of Diluted EPS because they would be
anti-dilutive.
(4) COMMON STOCK TRANSACTIONS
-------------------------
During the six months ended March 31, 1998, the Company issued 928,000 shares of
Common Stock for services rendered or to be rendered to the Company and recorded
expense of $522,584 associated with those shares. Of this expense, $447,584 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,
1997. These deferred amounts are being recognized over the terms of the
agreements as services are provided. Total amortization of these deferred
consulting expenses was $386,234 for the six months ended March 31, 1998.
During the six months ended March 31, 1998, accrued vacation payable to two
officers totaling $54,500 was settled by issuing 93,580 shares of Common Stock
valued at the market price on the date of issuance. In addition, accrued
liabilities of $75,000 owed to ADP Management for office expenses and rent were
settled by issuing 150,000 shares of Common Stock.
-8-
<PAGE>
(5) STOCK OPTIONS AND WARRANTS
--------------------------
As of December 16, 1997, the Company offered all holders of options and warrants
a one-time opportunity to exercise their options or warrants, as the case may
be, until February 28, 1998 at a price of $.50 per share. Option and warrant
holders who declined to exercise their outstanding options or warrants prior to
such date retained their options or warrants, without any change in the
previously stated exercise terms and price. For the six months ended March 31,
1998, as a result of this exchange offer, the Company recorded compensation
expense of $449,490 related to options held by employees and directors. During
the six months ended March 31, 1998, option holders exercised their rights to
purchase 412,606 shares of Common Stock at $0.50 per share and the Company
received $206,303 in cash.
During the six months ended March 31, 1998, warrants to purchase 147,059 shares
of Common Stock expired. As a result, $544,773 was reclassified from the
caption "Common Stock Warrants" to the caption "Additional Paid-in Capital."
(6) RELATED-PARTY TRANSACTIONS
--------------------------
From March 5, 1997 through September 30, 1997, the Company made loans to Volu-
Sol, Inc. (then a wholly owned subsidiary of the Company) totaling $390,500.
These loans bear an annual interest rate of ten percent and are due on demand.
Accrued but unpaid interest income on these loans totaled $32,395 as of March
31, 1998 and is included in interest receivable in the accompanying March 31,
1998 balance sheet. Subsequent to March 31, 1998, Volu-Sol paid the Company
$150,000 related to these loans.
During the six months ended March 31, 1998, the Company entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick, the Company's Chief Executive Officer and Chairman of the Board.
Under this arrangement, the Company advanced $150,000 to MK Financial, Inc. for
fees and commissions related to investment banking services to be performed.
Subsequent to December 31, 1997, MK Financial, Inc. assisted the Company in
raising additional capital through the issuance of Preferred Stock and the
$150,000 advance was offset against the gross proceeds received by the Company.
During the quarter ended March 31, 1998, the Company made loans to James Dalton
(a former Director of the Company) totaling $50,000 which remain outstanding.
These loans bear an annual interest rate of seven percent and are due on demand.
Accrued but unpaid interest income on these loans totaled $318 as of March 31,
1998.
During the quarter ended March 31, 1998, the Company made loans to Wilford W.
Kirton (a shareholder of the Company) totaling $50,000 which remain outstanding.
These loans bear an annual interest rate of ten percent and are due on demand.
Accrued but unpaid interest income on these loans totaled $449 as of March 31,
1998.
(7) CONSULTING AGREEMENTS
---------------------
David Pomerantz
Effective October 1, 1997, the Company entered into a consulting agreement with
David Pomerantz, whereby Mr. Pomerantz was issued a total of 180,000 shares of
the Company's Common Stock in exchange for consulting services, consisting
primarily of investor relations services, to be provided through September 30,
1998. The Company recorded consulting expense of $90,000 of which $45,000 is
deferred as of March 31, 1998 and will be recognized over the remaining term of
the consulting agreement.
Robert Pomerantz
On December 16, 1997, the Company entered into a consulting agreement with
Robert Pomerantz, whereby Mr. Pomerantz was issued a total of 40,000 restricted
shares of the Company's Common Stock in exchange for consulting services
consisting primary of investor relation services, to be provided through
December 31, 1998. The Company recorded consulting expenses of $20,000 of which
$15,000 is deferred as of March 31, 1998 and will be recognized over the
remaining term of the consulting agreement.
-9-
<PAGE>
Christopher D. Illick
On December 16, 1997, the Company entered into a consulting agreement with
Christopher D. Illick, a director of the Company, whereby Mr. Illick was issued
a total of 150,000 shares of the Company's Common Stock in exchange for
consulting services as a member of the Board of Directors, to be provided
through December 31, 1998. The Company recorded consulting expense of $75,000
of which $56,250 is deferred as of March 31, 1998 and will be recognized over
the remaining term of the consulting agreement.
(8) PREFERRED STOCK TRANSACTIONS
----------------------------
During the six months ended March 31, 1998, the Company accrued dividends on its
outstanding Series A, Series B, Series C, Series E and Series F Preferred of
$6,482, $0, $65,418, $11,060 and $6,049, respectively. Preferred Stock
dividends are payable in either additional shares of Preferred Stock or in cash,
at the option of the Company. During the six months ended March 31, 1998,
dividends on Preferred Stock were paid by issuing 5,669 shares of Series A
Preferred, 449 shares of Series B Preferred, 274.5 shares of Series C Preferred,
11 shares of Series E Preferred and 176,749 shares of Series F Preferred.
In December 1997, the Board of Directors authorized the creation of a series of
the Company's Preferred Stock designated as "Series E 8% Cumulative Convertible
Non-Voting Preferred Stock" (the "Series E Preferred"), consisting of 30,000
shares of the authorized and unissued shares of the Company's Preferred Stock,
$0.0001 par value per share. The holders of shares of Series E Preferred are
entitled to receive an annual dividend from the Company's assets legally
available therefor, prior and in preference to any declaration or payment of any
dividend on the Common Stock of the Company, at the rate of $80.00 per share.
Dividends will be paid either in cash or in additional shares of Series E
Preferred at the discretion of the Board of Directors of the Company. Each
share of Series E Preferred may be converted into the number of shares of the
Company's Common Stock determined by dividing $1,000 plus any accrued and unpaid
dividends by an amount equal to the Market Price of the Common Stock less 42%,
subject to the Company's right of redemption. The holders of Series E Preferred
are also entitled to certain rights and preferences upon liquidation. During
the six months ended March 31, 1998, 273.5 shares of Series E Preferred were
sold for $273,500 in cash. In addition, 280 shares of Series E Preferred were
issued to satisfy accounts payable of $280,000.
In December 1997, the Board of Directors authorized the creation of a series of
the Company's Preferred Stock designated as "Series F 8% Cumulative Convertible
Non-Voting Preferred Stock" (the "Series F Preferred"), consisting of 7,000,000
shares of the authorized and unissued shares of the Company's Preferred Stock,
$0.0001 par value per share. The holders of shares of Series F Preferred are
entitled to receive an annual dividend from the Company's assets legally
available therefor, prior and in preference to any declaration or payment of any
dividend on the Common Stock of the Company, at the rate of $0.048 per share.
Dividends will be paid either in cash or in additional shares of Series F
Preferred at the discretion of the Board of Directors of the Company. Each
share of Series F Preferred may be converted into one share of the Company's
Common Stock, subject to the Company's right of redemption. The holders of
Series F Preferred also have certain preferences upon liquidation, subject to
rights of senior series of Preferred Stock. During the six months ended March
31, 1998, 1,000,000 shares of Series F Preferred were sold for $600,000 in cash.
In addition, 166,667 shares of Series F Preferred were exchanged for 100 shares
of Series C Preferred.
During the six months ended March 31, 1998, the Company recorded accretion of
$271,264 and $408,819 related to the issuance of Series C Preferred Stock and
Series E Preferred Stock, respectively.
(9) 1997 ROCKWOOD TRANSACTION
-------------------------
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 (the
"Agreement"). Under the terms of the Agreement, as amended, the Company had the
right to acquire the capital stock of Rockwood for $5,960,000 at any time during
the one-year option term of the Agreement. Of this purchase price $460,000 was
to be paid from Rockwood operating profits for the period October 1997 through
January 1998. The purchase price was to be reduced by the difference between
$4,000,000 and actual sales of Rockwood, if less than $4,000,000 for the twelve
months preceding the closing. The Company agreed to make nonrefundable
quarterly option
-10-
<PAGE>
payments of $105,000 during the term of the Agreement which would be credited
against the purchase price if the acquisition were consummated. The Company had
the right to terminate the Agreement at any time.
On July 9, 1997, the Company entered into a consulting agreement with Andela
Group, Inc. ("Andela") 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
was to receive a monthly consulting fee of $15,000 during the one-year term of
the agreement. During fiscal year 1997, the Company paid Andela $45,000 for the
services of Ritter. During the quarter ended December 31, 1997, this agreement
was canceled and the Company paid an additional $45,000. In addition, Rockwood
and certain of its employees performed marketing and other business services for
the Company for which the Company incurred costs of approximately $440,000
during fiscal year 1997 and $150,000 during the first quarter of fiscal year
1998. Of these amounts, $169,900 relates to the issuance of 400,000 shares of
common stock in fiscal year 1997. The Company agreed to pay Ritter a royalty of
five percent of gross revenues for the sales and distribution of certain
products through his efforts.
After the Company exercised its option in October 1997 to acquire Rockwood, the
Company withdrew from the transaction and terminated the Agreement. A primary
factor in the Company's decision to terminate the Agreement was the significant
dilution that would result to the Company's existing shareholders in light of
the decline in the market price of the Company's common stock between the time
the Agreement was executed and the planned closing date. Under the terms of the
Agreement, Ritter retained all cash payments made to him or Rockwood or their
affiliates prior to the date of termination. Rockwood agreed to continue to
distribute the Company's products under the terms of certain agreements entered
into in connection with the proposed purchase. As a result of the termination
of the Agreement, Ritter was replaced as the Company's President by David G.
Derrick, who served as the Company's President prior to the execution of the
Agreement. (See Note 11.)
(10) RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the 1997 fiscal quarter financial
statements quarter to conform with current quarter presentation.
(11) SUBSEQUENT EVENTS
-----------------
Divestiture Related Matter
- --------------------------
The Company established a record date and ex-dividend date for the divestiture
of Volu-Sol, Inc. of March 5, 1997. Notwithstanding the Company's announcement
of the record and ex-dividend date and the dissemination of an information
statement containing disclosure of such record and ex-dividend date, Nasdaq
erroneously announced an ex-dividend date of February 17, 1998. This has
resulted in confusion on the part of some stockholders, brokerage houses and
clearing houses who mistakenly believed they, or their clients, were entitled to
receive Volu-Sol Common Stock, despite the fact that they were not holders of
record as of the March 5, 1997 date announced by the Company. The Company has no
intention of changing the originally announced record and ex-dividend date or
causing Volu-Sol to issue additional shares of its stock as a result of this
error. Notwithstanding the Company's expectations concerning the resolution of
this matter, there is no assurance that Nasdaq will in fact rescind its ex-
dividend date and there is no date certain by which a decision will be made in
the matter.
1998 Rockwood Transactions
- --------------------------
In anticipation of a possible business transaction involving the acquisition of
a controlling interest in Rockwood by the Company, the Company loaned Rockwood
$350,000 during the quarter ended March 31, 1998 and subsequently loaned
Rockwood an additional $450,000. These loans are payable upon demand and
secured by certain assets of Rockwood, including its accounts receivable and
inventory. If no purchase is closed, the amounts loaned to Rockwood will be
repaid within 18 months, together with interest at the prime rate as established
by a bank.
-11-
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto appearing
elsewhere in this Quarterly Report on Form 10-Q.
GENERAL
The Company believes that in the future its results of operations could be
impacted by factors such as the availability of cash from financing activities
with which to fund its operations, the results of the Company's research and
development efforts and the clinical trials on BWPT-301, BWPT-302 and any other
future pharmaceutical drug candidates based on or derived from the Company's
technology, as well as market acceptance of the Company's nutraceutical products
(particularly Optimune, the Company's first nutraceutical product) and
pharmaceutical drug candidates, increased competitive pressures, changes in raw
material sources and costs, and adverse changes in general economic conditions
in any of the countries in which the Company conducts or is able to conduct
business under the license with PTI. The Company's ability to develop and market
nutraceutical products and pharmaceutical drugs will have a significant and
direct impact on the Company's results of operations. The Company believes that
the majority of its anticipated future revenues will come from new nutraceutical
products and pharmaceutical drugs. The Company cannot determine the ultimate
effect that new nutraceutical products and pharmaceutical drugs will have on
revenues, earnings or the price of the Company's Common Stock .
Due to factors noted above and elsewhere in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's future
earnings and stock price may be subject to significant volatility, particularly
on a quarterly basis. Any shortfall in revenues, earnings or greater than
projected losses from the levels anticipated by securities analysts could have
an immediate and significant effect on the trading price of the Company's Common
Stock in any given period. Additionally, the Company may not learn of such
shortfalls or increased losses until late in a fiscal quarter, which could
result in an even more immediate and adverse effect on the trading price of the
Company's Common Stock.
The Company's primary focus and efforts have been on commercializing the
Biomune nutraceutical products. In addition, the Company has two active IND's on
file with the FDA on BWPT-301 for the treatment of cryptosporidiosis in people
with AIDS and on BWPT-302 for the treatment of E. coli, strain 0157:H7. There
is no established date on which a decision of the FDA is expected to be made.
The Company believes that its technology is now sufficiently developed that any
future research and development efforts will be made only to the extent funding
is made available from joint venture partners, strategic alliances, private or
governmental grants or other third-party funding, for which the Company
currently has no prospects.
The Company anticipates that it will incur significant losses during fiscal
1998 as a direct result of: (a) marketing costs associated with the Company's
on-going efforts to market the Biomune nutraceutical products; (b) maintaining
general and administrative expenses at present levels to facilitate the
Company's financing efforts, its search for and, if possible, negotiations with
potential joint venture partners or other sources of private or governmental
funding; (c) minimal levels of research and development costs associated with
identifying additional nutraceutical products; and (d) costs associated with
identifying and pursuing acquisitions of new nutraceutical products.
The Company is currently focusing its resources and efforts on (a) the
commercialization of the Biomune nutraceutical products and (b) the development
of one or more additional nutraceutical products based on the technology.
-12-
<PAGE>
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1998
with the Three Months Ended March 31, 1997
During the three months ended March 31, 1998, the Company had revenues of
$18,852 compared to $10,678 for the comparable three month period ended March
31, 1997. The increase in sales is due to an international order of the
Company's nutraceutical products.
Cost of sales were $8,388 for the three months ended March 31, 1998
compared to cost of sales of $6,809 for the same period in 1997. The overall
gross margin for the quarter in 1998 was 56 percent of revenues, compared to 36
percent for the comparable quarter in 1997. The increase in gross margin is due
to the higher margins on international sales. The Company anticipates that
margins will remain the same through fiscal year 1998.
Management, consulting and research fees were $364,524 for the three months
ended March 31, 1998, as compared to $760,659 for the three months ended March
31, 1997. General and administrative expenses increased from $673,629 for the
three months ended March 31, 1997 to $697,220 for the three months ended March
31, 1998. The decrease in management, consulting and research expenses is due
to the Company's efforts to reduce overhead costs. The increase in general
and administrative expenses is due to (1) a decrease in expenditures related to
efforts to reduce overhead costs and a reduction in the number of employees
offset by (2) compensation expense of approximately $450,000 related to options
issued to employees and directors.
Interest income was $25,915 for the three months ended March 31, 1998 and
resulted from the investment of the Company's cash proceeds from the sale of
Series C Preferred Stock. Interest income is decreasing because the Company has
less cash to invest in interest bearing accounts.
The net loss applicable to common shares decreased from $2,369,856 for the
three months ended March 31, 1997 to $1,757,580 for the three months ended March
31, 1998. The decrease in the net loss applicable to common shares was
attributable to a decrease in Preferred Stock dividends and the accretion of a
beneficial conversion feature and the decrease in management, consulting and
research expenses offset by an increase in general and administrative expenses
previously discussed.
The decrease in the net loss per common share from $(1.12) for the period
ended March 31, 1997 to $(0.36) for the period ended March 31, 1998 is due to a
decrease in expenses, and an increase in the weighted average common shares
outstanding of 2,761,160.
Comparison of the Six Months Ended March 31, 1998
with the Six Months Ended March 31, 1997
During the six months ended March 31, 1998, the Company had revenues of
$70,769 compared to $196,083 for the comparable six month period ended March 31,
1997. The decrease in sales is due to an international order of the Company's
nutraceutical products received during the six months ending March 31, 1997 that
was not repeated in 1998.
Cost of sales were $39,439 for the six months ended March 31, 1998 compared
to cost of sales of $58,331 for the same period in 1997. The overall gross
margin for 1998 was 44 percent of revenues, compared to 70 percent for the
comparable quarter in 1997. The decrease in gross margin is due to the lower
margins on domestic sales. The Company anticipates that margins will remain the
same through fiscal year 1998.
Management, consulting and research fees were $662,375 for the six months
ended March 31, 1998, as compared to $1,478,864 for the six months ended March
31, 1997. Research fees were $3,618 for the six months ended March 31, 1998,
compared to $242,283 for the six months ended March 31, 1997. This decrease is
due to the Company's decision to allocate its limited resources to development
and commercialization of its nutraceutical products
-13-
<PAGE>
rather than continuing research and development of pharmaceuticals at historical
levels at this time. General and administrative expenses decreased from
$1,538,909 for the six months ended March 31, 1997 to $1,308,462 for the six
months ended March 31, 1998. The decrease in both of these expenses is due to
the Company's efforts to reduce overhead costs and a reduction in the number of
employees.
Interest income was $56,737 for the six months ended March 31, 1998 and
resulted from the investment of the Company's cash proceeds from the sale of
Series C Preferred Stock. Interest income is decreasing because the Company has
less cash to invest in interest bearing accounts.
The net loss applicable to common shares decreased from $3,969,816 for the
six months ended March 31, 1997 to $2,623,895 for the six months ended March 31,
1998. The decrease in the net loss applicable to common shares was
attributable to a decrease in preferred stock dividends and the accretion of a
beneficial conversion feature and the decrease in management, consulting and
research expense and general and administrative expenses previously discussed.
The decrease in the net loss per common share from $(1.90) for the period
ended March 31, 1997 to $(0.64) for the period ended March 31, 1998 is due to a
decrease in expenses, and an increase in the weighted average common shares
outstanding of 1,982,801.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been unable to finance its operations from cash flows from
operating activities. Substantial funds and time will be required to
commercialize the Biomune nutraceutical products, to complete Phase II and Phase
III clinical trials on BWPT-301 (assuming efficacy is established during the
Phase II clinical trials), to complete the necessary clinical trials on BWPT-
302, to obtain regulatory approval for and commercialize products utilizing the
Company's technology and to develop and commercialize additional nutraceutical
products based on the technology. Because revenue-generating operating
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 favorable terms. Management
believes that the Company-funded research and development efforts to date have
positioned the Company to pursue future research and development efforts and
clinical trials with joint venture, strategic alliance, government or private
grants or other third-party funding. There can be no assurance that such grants
or funding will be obtained.
As of March 31, 1998, the Company had cash and cash equivalents of $495,758
and working capital of $1,912,786 as compared to cash and cash equivalents of
$1,585,099 and working capital of $925,166 as of September 30, 1997.
During the six months ended March 31, 1998, the Company's operating
activities used $1,567,215 of cash, which had previously been provided by the
issuance of shares of Preferred Stock. During the same period in the previous
fiscal year, the Company's operating activities used $1,964,617 of cash, also
principally provided by the raising of capital from the issuance of shares of
Preferred Stock.
The Company currently estimates that additional research and development,
general and administrative, and other direct costs associated with reaching the
stage of obtaining final FDA approval on BWPT-301 in treating cryptosporidiosis
in people with AIDS will approximate $5 - $7 million. The Company believes that
its technology is now sufficiently developed that any future research and
development efforts will be made only to the extent funding is made available
from joint venture partners, strategic alliances, private or governmental grants
or other third-party funding, for which the Company currently has no prospects.
The Company currently estimates that additional research and development,
general and administrative, and other direct costs associated with reaching the
stage of obtaining final FDA approval on BWPT-302 in treating E. coli, strain
0157:H7, will approximate $7 - $9 million, although the Company presently is
unable to fund such amounts independently and anticipates proceeding with such
research and development efforts only to the extent funding is made
-14-
<PAGE>
available from joint venture partners, strategic alliances, private or
governmental grants or other third-party funding, although the Company has no
prospects for such funding at this time.
The Company must continue to raise funds to finance the continued
commercialization of products utilizing its technology, including BWPT-301,
BWPT-302, the Biomune nutraceutical products and any additional pharmaceutical
or nutraceutical products that the Company may develop and attempt to
commercialize. There can be no assurance that such funds will be raised or
obtained.
The Company has not established a credit facility with any lending
institution. The Company has in the past, from time to time, borrowed money from
certain shareholders, but has no formal financing arrangement, agreement or
understanding with any of its shareholders or any other related or unrelated
party to do so in the future.
The unaudited condensed consolidated financial statements of the Company
have been prepared on the assumption that the Company will continue as a going
concern. The Company's product line is limited and it has been necessary to rely
upon financing from the sale of its equity securities to sustain operations.
Additional financing will be required if the Company is to continue as a going
concern. If such additional funding cannot be obtained, the Company may be
required to scale back or discontinue its operations. Even if such additional
financing is available to the Company, there can be no assurance that it will be
on terms favorable to the Company. In any event, such financing will result in
immediate and possibly substantial dilution to existing shareholders.
FORWARD-LOOKING STATEMENTS
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 (the "1995 Act"). Shareholders and
prospective shareholders should understand that several factors govern whether
any forward-looking statement contained herein will be or can be achieved. Any
one of those factors could cause actual results to differ materially from those
projected herein. 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 Biomune and its wholly owned
subsidiary, Optim. The forward-looking statements and associated risks set
forth herein relate to (i) market acceptance of Optimune, Maximune and Jump!
(The "Biomune Nutraceutical Products") and the development of other
nutraceutical products by Optim; (ii) the additional research and development,
general and administrative and other direct costs associated with obtaining
final FDA approval of BWPT-301; (iii) the additional dollar amount expected to
be expended on the BWPT-301 and BWPT-302 clinical trials until final FDA
approval has been received; (iv) the estimated date of receipt of final FDA
approval on BWPT-301; (v) the estimated commencement date of Phase III clinical
trials and the completion of those clinical trials on BWPT-301; and (vi) the
Company having sufficient cash to fund its projected operations and budgeted
research and development for fiscal year 1998. The forward-looking statements
included herein are based on current expectations that involve a number of risks
and uncertainties. The forward-looking statements included herein are based on
assumptions, among others, (a) that the efficacy of BWPT-301 will be established
during the ongoing Phase II clinical trials and the Phase III clinical trials;
(b) that the Company will be able to successfully undertake and complete
clinical trials on BWPT-302; (c) that the Company will be able to successfully
commercialize the Biomune Nutraceutical Products, and successfully develop and
commercialize other nutraceutical products; (d) that the Company will be able to
successfully develop and commercialize the technology; (e) that the Company will
need to conduct additional Phase II clinical trials on bwpt-301 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 clinical trials. 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 the time and money required to successfully complete those trials,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of those assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in any of the forward-
looking statements contained herein will be realized. This is particularly true
given the dynamic nature of the process in which the Company is involved with
respect to BWPT-301 and BWPT-302. Budgeting and
-15-
<PAGE>
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, which may in turn affect
the Company's results of operations. In light of the significant uncertainties
inherent in the forward-looking statements included herein, the inclusion of any
such statement should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
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. The plaintiff has appealed the decision of the District Court
to the United States Court of Appeals for the Tenth Circuit (Denver, Colorado).
The arguments of the parties were made to the Court in March 1998, and a
decision is pending. There is no date established by which the decision of the
Court is expected to be received. While the Company believes that the
allegations made in the Complaint are wholly without merit, and it intends to
vigorously oppose the appeal of the favorable verdict, there can be no assurance
that the Company's defense will be successful. The Company has paid the legal
fees and related expenses associated with the defense of this action on behalf
of the Company and the other named defendants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
In January 1998, the Company filed a Current Report on Form 8-K to
report that it had withdrawn from the 1997 Rockwood Transaction as described
elsewhere in this quarterly report.
-16-
<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: May 12, 1998 /s/ David G. Derrick
-------------------------------------------------------
David G. Derrick, Chief Executive Officer and
Chairman of the Board (Principal Executive Officer)
Date: May 12, 1998 /s/ Michael G. Acton
-------------------------------------------------------
Michael G. Acton, Chief Financial Officer and
Controller (Principal Financial and Accounting Officer)
-17-
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<PERIOD-END> MAR-31-1998
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