UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
As of July 31, 1998, 1998, there were issued and outstanding 10,410,890 shares
of the Company's Common Stock.
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TABLE OF CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1997 3
Unaudited Condensed Consolidated Statements of Operations for
the three and nine months ended June 30, 1998 and 1997 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION 18
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PART I ITEM 1 - FINANCIAL STATEMENTS
BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<S> <C> <C>
ASSETS
June 30, September 30,
1998 1997
------------- -------------
Current assets:
Cash and cash equivalents $ 54,909 $ 1,585,099
Interest receivable 28,593 --
Accounts receivable, net 591,755 40,258
Inventories 713,397 342,768
Amounts due from related parties, net 333,744 266,525
Receivable from Volu-Sol, Inc. 276,140 --
Other current assets 79,520 --
Net current assets of discontinued operations -- 79,029
------------ ------------
Total current assets 2,078,058 2,313,679
Property and equipment, net 77,400 96,041
Other assets, net 41,146 39,334
Long-term assets of discontinued operations -- 283,444
Goodwill, net 979,966 --
Long-term note receivable from related party 500,000 --
------------ ------------
Total assets $ 3,676,570 $ 2,732,498
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, September 30,
1998 1997
------------ ------------
Current liabilities:
Cash overdraft $ 144,636 $ --
Accounts payable 460,923 759,915
Preferred Stock dividends payable -- 337,766
Accrued liabilities 257,324 290,832
Loan payable 620,141 --
------------ ------------
Total current liabilities $ 1,483,024 $ 1,388,513
------------ ------------
Shareholders' equity:
Convertible Preferred Stock:
Series A, 38,474 and 34,802 shares outstanding (liquidation preference
of $244,525 and $217,513), respectively 190,429 168,583
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 $21,280 and $2,238,390), respectively 21,964 2,309,838
Series E, 565 and 0 shares outstanding (liquidation preference of
$765,575 and $0), respectively 1,003,998 --
Series F, 1,176,749 and 0 shares outstanding (liquidation preference of
$718,049 and $0), respectively 668,699 --
Common Stock, 10,410,890 and 3,238,813 shares outstanding, respectively 1,041 324
Additional paid-in capital 38,483,888 33,633,608
Accumulated deficit (38,396,521) (35,480,749)
Common stock warrants 338,500 883,273
Deferred consulting expense (70,000) (69,500)
Stock subscriptions receivable (55,192) (101,392)
------------ ------------
Total shareholders' equity 2,193,546 1,343,985
------------ ------------
Total liabilities and shareholders' equity $ 3,676,570 $ 2,732,498
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For the Three For the Nine
Months Ended Months Ended
June 30, June 30,
----------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES $ 1,372,751 $ 103,804 $ 1,443,520 $ 305,137
OPERATING EXPENSES:
Cost of revenues 753,591 51,906 793,029 82,117
Management, consulting and research fees 120,313 523,310 782,687 1,897,141
Other general and administrative 538,926 791,059 1,847,389 2,468,410
Amortization of goodwill 101,638 -- 101,638 --
------------ ------------ ------------ ------------
Total operating expenses 1,514,468 1,366,275 3,524,743 4,447,668
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (141,717) (1,262,471) (2,081,223) (4,142,531)
OTHER INCOME (EXPENSE):
Interest income, net 54,144 55,821 110,881 201,306
Other, net -- -- -- --
------------ ------------ ------------ ------------
Total other income, net 54,144 55,821 110,881 201,306
------------ ------------ ------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (87,573) (1,206,650) (1,970,342) (3,941,225)
Gain on disposal of discontinued Volu-Sol, Inc. -- -- 28,027 --
Loss from operations of discontinued Volu-Sol, Inc. -- (140,558) -- (435,496)
------------ ------------ ------------ ------------
NET LOSS (87,573) (1,347,208) (1,942,315) (4,376,721)
Preferred Stock dividends and accretion of beneficial
conversion feature (204,303) (103,895) (973,455) (1,043,198)
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON SHARES $ (291,876) $(1,451,103) $(2,915,770) $(5,419,919)
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE (basic and diluted)
Continuing operations $ (0.05) $ (0.60) $ (0.57) $ (2.36)
Discontinued operations $ -- $ (0.07) $ .01 $ (0.21)
------------ ------------ ------------ ------------
Net loss per common share $ (0.05) $ (0.67) $ (0.56) $ (2.57)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,491,560 2,152,914 5,253,475 2,112,055
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
For the Nine Months Ended June 30,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,942,316) $ (4,376,721)
Adjustments to reconcile net loss to net cash used in operating activities:
Interest income imputed on note receivable (66,479) --
Gain on disposal of Volu-Sol, Inc. (28,027) --
Depreciation and amortization 83,355 134,897
Issuance of stock, options and warrants for services 561,526 608,800
Amortization of deferred consulting expense 447,084 1,121,165
Cancellation of stock issued to consultants (50,000) --
Reduction in related-party note receivable 24,671 --
Changes in assets and liabilities:
Accounts receivable, net 31,431 --
Other current assets 40,983 (148,578)
Inventories 68,834 (10,546)
Other assets (7,071) 49
Cash overdraft (6,869) --
Accounts payable and accrued liabilities (1,199,091) (139,333)
Unearned revenue -- (84,000)
------------- -------------
Net cash used in operating activities (2,041,969) (2,894,267)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distribution of Volu-Sol, Inc. cash (337,691)
Purchase of property and equipment (3,721) (38,721)
Net (advances to) repayments from related parties (804,644) (537,613)
Increase in goodwill (83,000) --
------------- -------------
Net cash used in investing activities (1,229,056) (576,334)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 427,141 --
Proceeds from issuance of common stock 206,303 --
Payments received on notes receivable from stock sales 46,200 --
Proceeds from issuance of Series C and D preferred stock and warrants -- 3,500,000
Proceeds from issuance of Series E and Series F preferred stock 873,500 --
Offering costs for Series E and Series F preferred stock (150,000) --
Proceeds from issuance of warrants -- 123,750
Redemption of Series C preferred stock -- (2,000,000)
------------ -------------
Net cash provided by financing activities 1,403,144 1,623,750
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,867,881) (1,846,851)
------------ -------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 1,922,790 4,192,868
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 54,909 $ 2,346,017
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the nine months ended June 30, 1998 and 1997, 0 and 114,779 shares of
Series A Preferred Stock with a recorded value of $0 and $553,769 were converted
into 0 and 344,337 shares of Common Stock.
During the nine months ended June 30, 1998, 1,800,000 shares of Series C
Preferred Stock with a recorded value of $2,688,864 were converted into
5,000,000 shares of Common Stock.
During the nine months ended June 30, 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 nine months ended June 30, 1998, 100,647 shares of Common Stock were
issued to employees in exchange for a reduction of accrued vacation totaling
$59,136.
During the nine months ended June 30, 1998, 6,318 shares of Series A Preferred
Stock, 449 shares of Series B Preferred Stock, 472.3 shares of Series C
Preferred Stock, 23 shares of Series E Preferred Stock and 32,082 shares of
Series F preferred Stock were issued as payment of accrued Preferred Stock
dividends.
During the nine months ended June 30, 1998, 150,000 shares of Common Stock were
issued to ADP Management as settlement of accrued liabilities totaling $75,000.
During the nine months ended June 30, 1998, 280 shares of Series E Preferred
Stock were issued to satisfy accounts payable of $280,000.
During the nine months ended June 30, 1998, 50,000 shares of Series E Preferred
Stock and 100,000 shares of Series F Preferred Stock with a recorded value of
$50,000 and $60,000, respectively, were issued in exchange for consulting
services provided.
During the nine months ended June 30, 1998, the Company recorded accretion of
$341,737 and $416,828 related to the issuance of Series C and Series E Preferred
Stock, respectively.
During the nine months ended June 30, 1997, 12,058 shares of Series B Preferred
Stock with a recorded value of $178,837 were converted into 36,174 shares of
Common Stock.
During the nine months ended June 30, 1997,15,240 shares of Series A Preferred
Stock and 1,000 shares of Series B Preferred Stock were issued as payment of
accrued Preferred Stock dividends.
During the nine months ended June 30, 1997, an employee exercised options to
purchase 100,000 shares of Common Stock at $1.16 per share, for which the
Company accepted payment in the form of a note receivable for $116,000.
During the nine months ended June 30, 1997, the Company recorded accretion of
$748,550 related to the redemption of Series C Preferred Stock.
On April 1, 1998, the Company purchased 52% of the outstanding common stock of
Rockwood Companies, LLC (Rockwood) in a purchase transaction. The Company
recorded net assets from the acquisition as follows:
Accounts receivable 582,928
Inventory 439,463
Prepaids and other 120,503
Property and equipment, net 9,946
Goodwill 832,754
Cash overdraft (151,505)
Accounts payable (768,163)
Accrued expenses (507,926)
Notes payable (193,000)
---------
Net Investment --
=========
6
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BIOMUNE SYSTEMS, INC. AND SUBSIDIARY
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 nine months ended
June 30, 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 June 30, 1998, there were outstanding options and warrants to purchase
876,529 shares of Common Stock and there were 1,339,000 shares of Preferred
Stock convertible into approximately 3,205,000 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 nine months ended June 30, 1998, the Company issued 973,000 shares of
Common Stock for services rendered or to be rendered to the Company and recorded
expense of $554,984 associated with those shares. Of this expense, $479,984 was
7
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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 $409,984 for the nine months ended June 30, 1998.
During the nine months ended June 30, 1998, accrued vacation payable to two
officers totaling $58,539 was settled by issuing 100,007 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.
(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 nine months ended June 30,
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 nine months ended June 30, 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 nine months ended June 30, 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 $4,602 as of
June 30, 1998 and is included in interest receivable in the accompanying June
30, 1998 balance sheet.
8
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During the nine months ended June 30, 1998, the Company entered into an
investment banking arrangement with MK Financial, Inc., an entity owned by David
G. Derrick, the Company's former 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 June 30, 1998, the Company made loans to James Dalton
(a former Director of the Company) totaling $105,192 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 $1,615 as of June 30,
1998.
During the quarter ended June 30, 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 $1,568 as of June 30,
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 $22,500 is
deferred as of June 30, 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
$10,000 is deferred as of June 30, 1998 and will be recognized over the
remaining term of the consulting agreement.
9
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Christopher D. Illick
On December 16, 1997, the Company entered into a consulting agreement with
Christopher D. Illick, Chairman of the board of directors 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 $37,500 is deferred as of June 30, 1998 and will be
recognized over the remaining term of the consulting agreement.
(8) PREFERRED STOCK TRANSACTIONS
During the nine months ended June 30, 1998, the Company accrued dividends on its
outstanding Series A, Series B, Series C, Series E and Series F Preferred of
$9,723 $0, $162,798, $23,120 and $19,854, respectively. Preferred Stock
dividends are payable in either additional shares of Preferred Stock or in cash,
at the option of the Company. During the nine months ended June 30, 1998,
dividends on Preferred Stock were paid by issuing 6,317 shares of Series A
Preferred, 449 shares of Series B Preferred, 162.8 shares of Series C Preferred,
23.1 shares of Series E Preferred and 33,090 shares of Series F Preferred.
During the nine months ended June 30, 1998, the Company issued 50,000 shares of
Series E Preferred Stock and 100,000 shares of Series F Preferred Stock with a
recorded value of $50,000 and $60,000, respectively, for consulting services
related to the Rockwood transaction.
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
10
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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
nine months ended June 30, 1998, 273.5 shares of Series E Preferred were sold
for $273,500 in cash. In addition, 280.0 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 nine months ended June 30, 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 nine months ended June 30, 1998, the Company recorded accretion of
$341,737 and $416,828 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") for $5,960,000. Of this purchase price $460,000 was to be paid from
Rockwood operating profits for the period October 1997 through January 1998. The
Company also agreed to make nonrefundable quarterly option 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. 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
11
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products through his efforts.
The Company withdrew from the transaction and terminated the Agreement in
January 1998. (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) TRANSACTIONS
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. Pursuant to the
agreement entered into by the Company and Volu-Sol at the time of the spin-off,
Volu-Sol has agreed to issue an additional 3,115,436 shares of its common stock
to cover the Nasdaq due bill date and shares issuable in connection with the
conversion of Biomune Preferred Stock after March 5, 1997, all as part of the
spin-off.
1998 Rockwood Transactions
The Company loaned Rockwood $500,000 during the quarter ended June 30, 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. In May 1998, the Company acquired 52% of Rockwood for
$360,000 cash and 3,750,000 shares of Preferred stock of the Company, provided
Rockwood has profits of $750,000 in the next two years. The Company also agreed
to loan Cypress Springs LLC (the owner of the remaining 48% member interest in
Rockwood), a California limited liability company owned by Ritter and, up to
$2,000,000 (including amounts previously loand Rockwood, as indicated above).
12
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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.
13
<PAGE>
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.
Results of Operations
Three Months Ended June 30, 1998 and 1997
During the three months ended June 30, 1998, the Company had revenues
of $1,372,751 compared to $103,804 for the comparable three month period ended
June 30, 1997. The increase in sales is due to the Rockwood acquisition.
Cost of sales were $753,591 for the three months ended June 30, 1998
compared to cost of sales of $51,906 for the same period in 1997. The overall
gross margin for the quarter in 1998 was 45 percent of revenues, compared to 50
percent for the comparable quarter in 1997. The decrease in gross margin is due
to the the products that are sold by the Rockwood subsidiary.
Management, consulting and research fees were $120,313 for the three
months ended June 30, 1998, as compared to $523,310 for the three months ended
June 30, 1997. General and administrative expenses decrease from $791,059 for
the three months ended June 30, 1997 to $538,926 for the three months ended June
30, 1998. The decrease in management, consulting and research expenses is due to
the Company's efforts to reduce overhead costs. The decrease in general and
administrative expenses is due to a decrease in expenditures related to efforts
to reduce overhead costs and a reduction in the number of employees.
Interest income was $54,144 for the three months ended June 30, 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 $1,451,103 for
the three months ended June 30, 1997 to $380,945 for the three months ended June
30, 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, the decrease in management, consulting and
research expenses, and a decrease in general and administrative expenses
previously discussed.
The decrease in the net loss per common share from $(0.67) for the
period ended June 30, 1997 to $(0.07) for the period ended June 30, 1998 is due
to a decrease in expenses, an increase in revenue and gross margin, and an
increase in the weighted average common shares outstanding of 3,338,646.
Nine months Ended June 30, 1998 and 1997
During the nine months ended June 30, 1998, the Company had revenues of
$1,443,520 compared to $305,137 for the comparable six month period ended June
30, 1997. The increase in sales is due to the Rockwood acquisition.
Cost of sales were $793,029 for the nine months ended June 30, 1998
compared to cost of sales of $82,117 for the same period in 1997. The overall
gross margin for 1998 was 45 percent of revenues, compared to 73 percent for the
comparable quarter in 1997. The decrease in gross margin is due to the type of
products the Rockwood subsidiary sells compared to the products sold by the
Company in the early months of the 1997 fiscal year.
14
<PAGE>
Management, consulting and research fees were $782,687 for the nine
months ended June 30, 1998, as compared to $1,897,141 for the nine months ended
June 30, 1997. Research fees were $3,618 for the nine months ended June 30,
1998, compared to $242,283 for the nine months ended June 30, 1997. Such
research fees are included in management, consulting and research fees on the
Statement of Operations. This decrease is due to the Company's decision to
allocate its limited resources to development and commercialization of its
nutraceutical products rather than continuing research and development of
pharmaceuticals at historical levels at this time. General and administrative
expenses decreased from $2,468,410 for the nine months ended June 30, 1997 to
$1,847,389 for the nine months ended June 30, 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 $110,881 for the nine months ended June 30, 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 $(2.57) for the
nine months ended June 30, 1997 to $(0.59) for the nine months ended June 30,
1998. The decrease in the net loss applicable to common shares was attributable
to an increase in revenues, 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.
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 June 30, 1998, the Company had cash and cash equivalents of
$54,909 and working capital of $595,034 as compared to cash and cash equivalents
of $1,585,099 and working capital of $925,166 as of September 30, 1997.
During the nine months ended June 30, 1998, the Company's operating
activities used $2,041,969 of cash, which had previously been provided by the
issuance of shares of Preferred Stock. During the same period in the previous
15
<PAGE>
fiscal year, the Company's operating activities used $2,894,267 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 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!
16
<PAGE>
(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 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.
Year 2000 Issues
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. These programs
and databases were developed and designed without considering the impact of the
upcoming millennium. If not corrected, many computer systems may fail or create
erroneous results at the turn of the century. Any of the Company's computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. In addition to computer software, some
machines and devices used by the Company and others may contain embedded
technology that is not Year 2000 compliant, which could result in a malfunction
or failure of such devices.
The Company is in the process of ensuring that its internal computer
systems are Year 2000 compliant. The Company presently believes that with
readily available modifications or upgrades to existing software and conversions
to new software, any Year 2000 issues internally can be mitigated. The Company
intends to use both internal and external resources to reprogram, or replace,
and test its software for Year 2000 modifications. The Company intends to obtain
certificates of compliance from the vendors of such software. Where possible,
the Company will initiate formal communications with its significant suppliers
and vendors to determine the extent to which the Company may be vulnerable to
third parties' failure to remediate their own Year 2000 problems.
The Company relies on third parties to manufacture its products and to
package, label and ship them to customers. If these third parties rely on
computers, software or devices with embedded technologies which are not Year
2000 compliant, they may suffer failures, errors or delays in performing
services for the Company. This would cause serious and perhaps material adverse
effects on the Company, its results of operations and financial condition.
The Company is not presently aware of any Year 2000 issues that have
been encountered by any such third party which could materially affect the
Company's operations. Notwithstanding the foregoing, there can be no assurance
that the Company will not experience operating difficulties as a result of Year
17
<PAGE>
2000 issues, either arising out of internal operations or caused by third-party
service providers, which individually or collectively could have an adverse
effect on business operations or require the Company to incur unanticipated
costs to remedy any problems. The Company has not yet determined the cost of
completing its investigation and any modification or remediation that may be
required to correct Year 2000 issues in its operations.
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 5 - OTHER INFORMATION
Stockholder Proposals for 1999 Annual Meeting
Shareholder proposals submitted pursuant to Rule 14a-8 under the
Securities Exchange Act of 1934, as amended ("Exchange Act"), for inclusion in
the Company's proxy materials for its 1999 Annual Meeting of Shareholders must
be received by the Secretary of the Company at the principal offices of the
Company no later than December 31, 1998.
In addition, in accordance with recent amendments to Rules 14a-4, 14a-5
and 14a-8 under the Exchange Act, written notice of shareholder proposals
submitted outside the procedures of Rule 14a-8 for consideration at the 1999
Annual Meeting of Shareholders must be received by the Company on or before
April 15, 1999 in order to be considered timely for purposes of Rule 14a-4. The
persons designated in the Company's proxy statement and management proxy card
will be granted discretionary authority with respect to any shareholder proposal
with respect to which the Company does not receive timely notice.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On June 19, 1998, the Company filed a current report on Form 8-k to
report its agreement to purchase 52% of Rockwood, a change in the Company's
auditors, and a change of management. This report was amended by a subsequent
Current Report on form 8-K/A on June 29, 1998 and August 18, 1998.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOMUNE SYSTEMS, INC.
(Registrant)
Date: August 19, 1998 /s/ Michael G. Acton
--------------------
Michael G. Acton, Chief Executive Officer
(Principal Executive Officer and Principal
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BIOMUNE
SYSTEMS, INC. JUNE 30, 1998 FINANCIAL STATMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 54,909
<SECURITIES> 0
<RECEIVABLES> 1,810,732
<ALLOWANCES> 80,500
<INVENTORY> 713,397
<CURRENT-ASSETS> 2,078,058
<PP&E> 198,523
<DEPRECIATION> 121,123
<TOTAL-ASSETS> 3,676,570
<CURRENT-LIABILITIES> 1,483,024
<BONDS> 0
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1,891,830
<COMMON> 1,041
<OTHER-SE> 300,675
<TOTAL-LIABILITY-AND-EQUITY> (3,676,570)
<SALES> 1,372,751
<TOTAL-REVENUES> 1,372,751
<CGS> 753,591
<TOTAL-COSTS> 1,514,468
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (87,573)
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<NET-INCOME> (87,573)
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