<PAGE>
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 DECEMBER 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO
_____________
Commission File Number 0-11472
BIOMUNE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Nevada 87-0380088
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 South Foothill Drive
Salt Lake City, Utah 84109-1405
(801) 466-3441
(Address and telephone number of principal executive offices)
Indicate by a check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: As of February 1, 1998, there
were issued and outstanding 3,345,957 shares of the Company's Common Stock.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
No.
-----
<S> <C>
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1997.................... 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended December 31, 1997 and 1996....... 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended December 31, 1997 and 1996....... 5
Notes to Unaudited Condensed Consolidated Financial
Statements.................................................. 7
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
PART II. OTHER INFORMATION...................................... 15
</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
<TABLE>
<CAPTION>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 281,969 $1,585,099
Interest receivable 30,558 --
Accounts receivable, net 85,005 40,258
Inventories 311,171 342,768
Amounts due from related parties 615,158 266,525
Advances to related party 150,000 --
Net current assets of discontinued operations -- 79,029
---------- ----------
Total current assets 1,473,861 2,313,679
Property and equipment, net 86,221 96,041
Other assets, net 37,581 39,334
Long-term assets of discontinued operations -- 283,444
---------- ----------
Total assets $1,597,663 $2,732,498
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 419,382 $ 759,915
Preferred Stock dividends payable 374,703 337,766
Accrued payroll and payroll taxes 40,431 85,494
Other accrued liabilities 82,869 205,338
------------ ------------
Total current liabilities 917,385 1,388,513
------------ ------------
Shareholders' equity:
Convertible Preferred Stock:
Series A, 34,802 shares outstanding 168,585 168,583
Series B, 0 shares outstanding -- --
Series C, 1,683 shares outstanding 2,309,838 2,309,838
Common Stock, 3,566,724 and 3,238,813 shares
outstanding, respectively 357 324
Additional paid-in capital 34,417,704 33,633,608
Deficit accumulated during the development stage (36,347,064) (35,480,749)
Deferred consulting expense (106,250) ( 69,500)
Common Stock warrants 338,500 883,273
Stock subscriptions receivable ( 101,392) (101,392)
------------ ------------
Total shareholders' equity 680,278 1,343,985
------------ ------------
Total liabilities and shareholders' equity $ 1,597,663 $ 2,732,498
============ ============
</TABLE>
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 Inception to
Ended December 31, December 31, 1997
--------------------------- ------------------
1997 1996
------------ -------------
<S> <C> <C> <C>
REVENUES $ 51,917 $ 185,405 $ 568,134
---------- ----------- ------------
OPERATING EXPENSES:
Cost of revenues 36,551 51,522 201,952
Management, consulting
and research fees 422,210 718,205 17,775,901
Other general and administrative 481,383 865,282 11,774,828
---------- ----------- ------------
Total operating expenses 940,144 1,635,009 29,752,681
---------- ----------- ------------
LOSS FROM OPERATIONS (888,227) (1,449,604) (29,184,547)
---------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest income, net 30,822 75,285 797,126
Other, net -- -- (33,968)
---------- ----------- ------------
Total other income, net 30,822 75,285 763,158
---------- ----------- ------------
NET LOSS FROM CONTINUING
OPERATIONS (857,405) (1,374,319) (28,421,389)
Gain on disposal of discontinued Volu-Sol, Inc. 28,027 -- 28,027
Loss from operations of discontinued
Volu-Sol, Inc. -- (145,171) (3,219,233)
---------- ----------- ------------
NET LOSS (829,378) (1,519,490) (31,612,595)
Preferred Stock dividends and accretion of
beneficial conversion feature (36,937) (80,473) (4,734,469)
---------- ----------- ------------
NET LOSS APPLICABLE TO
COMMON SHARES $ (866,315) $(1,599,963) $(36,347,064)
========== =========== ============
NET LOSS PER COMMON SHARE
(basic and diluted) $(0.26) $(0.77)
========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 3,303,129 2,069,187
</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 Three months
Ended December 31,
--------------------------- Inception to
1997 1996 December 31, 1997
------------ ------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (829,378) $(1,519,490) $( 31,612,595)
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 -- -- (317,449)
Interest expense paid by transfer of non-monetary asset -- -- 45,347
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 11,572 36,988 1,005,966
Write-down of technology -- -- 582,712
Issuance of Common Stock, options and warrants for services 199,359 214,078 7,529,821
Amortization of deferred consulting expense 53,250 431,750 3,990,256
Cancellation of stock issued to consultants (50,000) -- (50,000)
Loss on disposal of fixed assets -- -- 69,043
Exchange of related-party note receivable 24, 671 -- 190,331
Changes in assets and liabilities:
Accounts receivable, net (44,747) (62,702) (90,958)
Prepaid expense -- -- 5,350
Interest receivable (13,362) -- (13,362)
Inventories 31,597 84,397 (323,018)
Advances to related party (150,000) -- (150,000)
Other assets -- (130,534) (34,570)
Accounts payable and accrued liabilities (463,002) 1,554 679,517
Accrued payroll and payroll taxes (45,063) -- 81,835
Unearned revenue -- (84,000) --
----------- ----------- -------------
Net cash used in operating activities (1,303,130) (1,027,959) (18,127,868)
----------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
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 -- (57,486) (736,820)
Proceeds from sale of equipment -- -- 70,551
Net (advances) repayments from related parties (337,691) (72,500) (769,878)
Payments received on notes receivable -- -- 799,628
Issuance of notes receivable -- -- (224,317)
----------- ----------- -------------
Net cash used in investing activities (337,691) (129,986) (423,649)
----------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- -- 3,429,968
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)
Redemption of Series C preferred stock -- -- (2,000,000)
Issuance of preferred stock by Volu-Sol, Inc. -- -- 320,555
Proceeds from issuance of long-term debt -- -- 6,075
Proceeds from issuance of warrants -- -- 10,000
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 $ $ 3,623,750 $ 18,833,486
----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
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<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
----------------------------------- Inception to
1997 1996 December 31, 1997
------------- -------------------- -----------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $(1,640,821) $2,465,805 $281,969
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 1,922,790 4,192,868 --
----------- ---------- --------
CASH AND CASH EQUIVALENTS AT END OF
THE PERIOD $ 281,969 $6,658,673 $281,969
=========== ========== ========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
-----------------------------------------------------------------------
During the three months ended December 31, 1996, 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 three months ended December 31, 1996, 15,240 shares of Series A
Preferred Stock and 1,000 shares of Series B Preferred Stock were issued as
payment of dividends.
During the three months ended December 31, 1996, 65,426 shares of Series A
Preferred Stock with a recorded value of $314,699 were converted into 196,278
shares of Common Stock.
The accompanying notes are an integral part of these condensed
consolidated statements.
-6-
<PAGE>
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
--------------------------------------
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
(1) PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------
The accompanying condensed consolidated financial statements have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the following
disclosures are adequate to make the information presented not misleading.
These condensed financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods presented. Operating results for the three months ended
December 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending September 30, 1998. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 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., to the Common stockholders of record as of March 5, 1997. 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.
(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 December 31, 1997, there were outstanding options and warrants to purchase
1,095,135 shares of Common Stock and there were 36,485 shares of Preferred Stock
convertible into a minimum of 2,815,441 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 three months ended December 31, 1997, the Company issued 330,000
shares of Common Stock for services rendered or to be rendered to the Company
and recorded expense of $165,000 associated with those shares. Of this expense,
$67,500 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 $53,250 for the three months ended December 31,
1997.
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<PAGE>
Subsequent to December 31, 1997, accrued vacation payable to two officers
totaling $38,572 was settled by issuing 77,144 shares of Common Stock. 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 exchange their options or warrants, as the case may
be, for options or warrants exercisable until February 28, 1998 at a price of
$.50 per share. Option and warrant holders who decline to exchange their
outstanding options or warrants and exercise the replacement warrants will
retain their existing options or warrants, without any change in the previously
stated exercise terms and price. For the three months ended December 31, 1997,
as a result of this exchange offer, the Company recorded compensation expense of
$124,359 related to options held by employees and directors.
During the three months ended December 31, 1997, 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."
Subsequent to December 31, 1997, an option holder exercised his right to
purchase 412,457 shares of Common Stock at $0.50 per share and the Company
received $206,229 in cash.
(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
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 $22,381 as of December 31, 1997.
During the quarter ended December 31, 1997, 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.
(7) CONSULTING AGREEMENTS
---------------------
David Pomerantz
On December 16, 1997, the Company entered into a consulting agreement with David
Pomerantz ("Pomerantz"), whereby 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 $67,500 is
deferred as of December 31, 1997 and will be recognized over the remaining term
of the consulting agreement.
(8) PREFERRED STOCK TRANSACTIONS
----------------------------
During the three months ended December 31, 1997, the Company accrued dividends
on its outstanding Series A, Series B and Series C Preferred of $3,277, $0 and
$33,660, respectively. Preferred Stock dividends are payable in either
additional shares of Preferred Stock or in cash, at the Board of Directors'
option. Subsequent to December 31, 1997, dividends on Series A, B and C
Preferred accrued as of December 31, 1997 totaling $374,703, were paid by
issuing 5,023 shares of Series A Preferred, 449 shares of Series B Preferred,
242.7 shares of Series C Preferred and 166,667 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
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<PAGE>
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. Subsequent to December 31, 1997, 23.5 shares of Series E Preferred
were sold for $23,500 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. Subsequent to December 31, 1997,
1,416,667 shares of Series F Preferred were sold for $850,000 in cash.
(9) 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 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 will retain all cash payments made to him or Rockwood or their
affiliates prior to the date of termination. Rockwood will 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 President prior to the execution of the
Agreement.
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<PAGE>
(10) SUBSEQUENT EVENTS AND PRO FORMA BALANCE SHEET INFORMATION
Subsequent to December 31, 1997, the Company retired certain obligations and
issued Common Stock and Preferred Stock (see Notes 4, 5, 6, 7 and 8).
The following unaudited summary pro form balance sheet information gives effect
as of December 31, 1997 to (a) the sale of 23.5 shares of Series E Preferred and
1,416,667 shares of Series F Preferred for aggregate gross proceeds of $873,500
(net proceeds of $723,500 after offering costs of $150,000); (b) the issuance of
280 shares of Series E Preferred and 227,144 shares of Common Stock to satisfy
accounts payable and accrued liabilities totaling $393,572; (c) the exercise of
stock options and warrants to purchase 412,457 shares of Common Stock at $0.50
per share resulting in proceeds to the Company totaling $206,229 and (d) the
payment of Preferred Stock dividends of $374,703 by issuing 5,023,449, 242.7 and
166,667 shares of Series A, Series B, Series C and Series F Preferred,
respectively.
<TABLE>
<CAPTION>
December 31, Pro Forma at
1997 Adjustments December 31, 1997
-------------- ------------- ------------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Total current assets $1,473,861 $ 929,729 $2,403,590
---------- ----------
Total assets 1,597,663 2,527,392
---------- ----------
Total current liabilities 917,385 (768,275) 149,110
---------- ----------
Total shareholders' equity 680,278 1,698,004 2,378,282
---------- ----------
Total liabilities and
shareholders' equity 1,597,663 2,527,392
---------- ----------
</TABLE>
-10-
<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
PRELIMINARY NOTE REGARDING 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(TM), MAXIMUNE(TM) AND
JUMP!(TM) (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 ON BWPT-301(TM); (III) THE ADDITIONAL DOLLAR AMOUNT EXPECTED
TO BE EXPENDED ON THE BWPT-301(TM) AND BWPT-302(TM) CLINICAL TRIALS UNTIL FINAL
FDA APPROVAL HAS BEEN RECEIVED; (IV) THE ESTIMATED DATE OF RECEIPT OF FINAL FDA
APPROVAL ON BWPT-301(TM); (V) THE ESTIMATED COMMENCEMENT DATE OF PHASE III
CLINICAL TRIALS AND THE COMPLETION OF THOSE CLINICAL TRIALS ON BWPT-301(TM); 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(TM) 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(TM); (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(TM) AND MAY NEED TO CONDUCT CLINICAL TRIALS THAT ARE
DIFFERENT FROM THOSE THAT HAVE BEEN CONDUCTED TO DATE OR THAT ARE CURRENTLY
CONTEMPLATED BY THE COMPANY; AND (F) THAT THE COMPANY WILL BE ABLE TO TIMELY AND
PROPERLY QUANTIFY AND ANALYZE THE DATA DERIVED FROM ITS 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(TM) AND
BWPT-302(TM). BUDGETING AND OTHER MANAGEMENT DECISIONS ARE SUBJECTIVE IN MANY
RESPECTS AND THUS SUSCEPTIBLE TO INTERPRETATIONS AND PERIODIC REVISION. BASED ON
ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS, THE IMPACT OF
-11-
<PAGE>
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
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(TM), BWPT-302(TM) and
any other future pharmaceutical drug candidates based on or derived from the
Technology, as well as market acceptance of the Company's nutraceutical products
(and 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 and, to a lesser extent, on seeking approval from
the FDA on BWPT-301(TM) for the treatment of cryptosporidiosis in people with
AIDS and on BWPT-302(TM) for the treatment of E. coli, strain 0157:H7, in
humans.
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) research
costs associated with increased emphasis on completing Phase II and commencing
Phase III clinical studies with respect to BWPT-301(TM), and completing Phase I
and commencing Phase II clinical studies with respect to BWPT-302(TM); (c)
maintaining general and administrative expenses at present levels or increased
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; (d) research and development costs associated
with identifying additional pharmaceutical or nutraceutical products; and (e)
costs associated with identifying and pursuing acquisitions of new nutraceutical
and/or pharmaceutical products.
The Company is currently focusing its resources and efforts on (a) the
commercialization of the Biomune Nutraceutical Products; (b) BWPT-301(TM) for
the treatment of cryptosporidiosis in humans; (c) BWPT-302(TM) for the treatment
of E. coli, strain 0157:H7, in humans; (d) acquisition of new nutraceutical
and/or pharmaceutical products; and (e) the development of one or more
additional nutraceutical products based on the Technology.
-12-
<PAGE>
Results of Operations
- ---------------------
Comparison of the Three Months Ended December 31, 1997
- ------------------------------------------------------
with the Three Months Ended December 31, 1996
- ---------------------------------------------
During the three months ended December 31, 1997, the Company had revenues of
$51,917 compared to $185,405 for the comparable three month period ended
December 31, 1996. The decrease in sales is due to a reduction in international
orders of the Company's nutraceutical products.
Cost of sales were $36,551 for the three months ended December 31, 1997
compared to cost of sales of $51,522 for the same period in 1996. The overall
gross margin for the quarter in 1997 was 30 percent of revenues, compared to 72
percent for the comparable quarter in 1996. 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 $422,210 for the three months
ended December 31, 1997, as compared to $718,205 for the three months ended
December 31, 1996. General and administrative expenses decreased from $865,282
for the three months ended December 31, 1996 to $481,383 for the three months
ended December 31, 1997. 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. As of December 31, 1997, there are four full-time employees and 1
part-time employee.
Interest income was $30,822 for the three months ended December 31, 1997 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 $1,599,963 for the
three months ended December 31, 1996 to $866,315 for the three months ended
December 31 ,1997. The decrease in the net loss applicable to common shares was
attributable to a decrease in preferred stock dividends and the decrease in
management, consulting, research and development and general and administrative
expenses previously discussed.
The decrease in the net loss per common share from $(0.77) for the period
ended December 31, 1996 to $(0.26) for the period ended December 31, 1997 is due
to a decrease in expenses, and an increase in the number of shares outstanding
of approximately 1,234,000.
On October 1, 1997, the Company divested itself of its wholly owned
subsidiary Volu-Sol, Inc., by a pro rata distribution of Volu-Sol, Inc. Common
Stock to the Company's shareholders of record as of March 5, 1997. The Company
recognized a gain of $28,027 on disposal of discontinued Volu-Sol, Inc.
operations as a result of this divestiture.
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(TM) (assuming efficacy is established during the
Phase II clinical trials), to complete the necessary clinical trials on BWPT-
302(TM), to obtain regulatory approval for and commercialize products utilizing
the 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.
As of December 31, 1997, the Company had cash and cash equivalents of $281,969
and working capital of $556,476 as compared to cash and cash equivalents of
$1,585,099 and working capital of $925,166 as of September 30, 1997.
-13-
<PAGE>
Series A Preferred. The Series A Preferred bears a 10% cumulative dividend
payable annually in cash or in additional shares of Series A Preferred, at the
election of the Company's Board of Directors. As of December 31, 1997,
the Company had recorded dividends payable on the Series A Preferred totaling
$3,277, which dividends the Company intends to pay in additional shares of
Series A Preferred.
Series C Preferred. The Series C Preferred bears an 8% cumulative dividend
payable annually in cash or in additional shares of Series C Preferred, at the
election of the Company's Board of Directors. As of December 31, 1997, the
Company had recorded dividends payable on the Series C Preferred totaling
$33,660, which dividends the Company intends to pay in additional shares of
Series C Preferred.
During the three months ended December 31, 1997, the Company's operating
activities used $1,303,130 of cash, which had previously been provided by the
issuance of shares of Series A Preferred, Series B Preferred, Series C Preferred
and Series D Preferred. During the same period in the previous fiscal year, the
Company's operating activities used $1,027,959 of cash, also principally
provided by the raising of capital from the issuance of shares of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred.
Subsequent to December 31, 1997, the Company retired certain obligations and
issued Common Stock and Series E and Series F Preferred (see Note 10 to the
Company's unaudited condensed consolidated financial statements). If these
transactions would have occurred at December 31, 1997, the Company's working
capital and total equity would have increased by approximately $1.7 million.
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(TM) 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. Final FDA approval on BWPT-
301(TM) is currently estimated to be received possibly as early as 1999. Phase
II clinical trials on BWPT-301(TM) commenced in November 1994 and are currently
expected to be completed during 1998 (assuming institutional review board
approvals can be timely obtained and patient recruitment can be accomplished on
a timely basis). Assuming efficacy of BWPT-301(TM) is established during the
Phase II clinical trials, the Company currently anticipates commencing Phase III
clinical trials on BWPT-301(TM) sometime in 1998 and currently expects that it
may be able to complete those trials as early as 1999.
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(TM) 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. Final FDA approval on BWPT-
302(TM) is currently estimated to be received possibly as early as 2000. Phase I
clinical trials on BWPT-302(TM) commenced on March 21, 1996.
The Company must continue to raise funds to finance the continued
commercialization of products utilizing the Technology, including BWPT-301(TM),
BWPT-302(TM), the Biomune Nutraceutical Products and any additional
pharmaceutical or nutraceutical products that the Company may develop and
attempt to commercialize.
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
-14-
<PAGE>
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.
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).
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 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the Company's Annual Meeting of Shareholders on October 14, 1997, the
following actions were submitted and approved by vote of the majority of the
issued and outstanding shares of the Company:
(1) Election of directors;
(2) Approval of the Board of Directors' selection of Arthur Andersen LLP, as the
Company's independent public accountants.
A total of 2,146,660 shares (approximately 78%) of the issued and outstanding
shares of the Company were represented by proxy or in person at the meeting.
These shares were voted on the matters described above as follows:
1. For the directors as follows:
<TABLE>
<CAPTION>
# Shares Abstaining/
Name # Shares For # Shares Against Withheld
<S> <C> <C> <C>
David G. Derrick 2,103,799 42,861 40
James J. Dalton 2,104,447 42,213 0
Aaron Gold, D.D. 2,103,547 43,113 0
Charles J. Quantz 2,103,497 43,163 40
Milton G. Adair 2,104,417 42,243 40
Thomas Q. Garvey, III, M.D. 2,104,447 42,213 0
Christopher D. Illick 2,104,447 42,213 40
</TABLE>
2. For the ratification of the Board of Directors' selection of Arthur Andersen
LLP as the independent public accountants of the Company as follows:
<TABLE>
<CAPTION>
# Shares For # Shares Against # Shares Abstaining
<S> <C> <C>
2,121,227 21,739 0
</TABLE>
Broker non-votes were counted as abstentions on matter 2 above.
Subsequent to the date of the meeting, Mr. Dalton and Mr. Adair each resigned
from the Board to pursue other interests. Replacements have not been appointed
to fill these vacancies at this time.
-15-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
--------
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On November 7, 1997, the Company filed a Current Report on Form 8-K to report
a 1-for-10 reverse split of the Company's Common Stock, effective November 10,
1997. On November 10, 1997, the Company filed a Current Report on Form 8-K,
subsequently amended on November 24, 1997 (to adjust for the 1-for-10 reverse
split), to report the Rockwood acquisition. After December 31, 1997, the
Company filed a Current Report on Form 8-K to report that it had withdrawn from
the 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: February 13, 1998 /s/ David G. Derrick
--------------------------------------------------
David G. Derrick, Chief Executive Officer and
Chairman of the Board (Principal Executive Officer)
Date: February 13, 1998 s/ Michael G. Acton
--------------------------------------------------
Michael G. Acton, Chief Financial Officer and
Controller (Principal Financial and Accounting
Officer)
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 281,969
<SECURITIES> 0
<RECEIVABLES> 125,505
<ALLOWANCES> (40,500)
<INVENTORY> 311,171
<CURRENT-ASSETS> 1,473,861
<PP&E> 165,897
<DEPRECIATION> (79,676)
<TOTAL-ASSETS> 1,597,663
<CURRENT-LIABILITIES> 917,385
<BONDS> 0
0
2,478,423
<COMMON> 357
<OTHER-SE> (1,798,502)
<TOTAL-LIABILITY-AND-EQUITY> 1,597,663
<SALES> 51,917
<TOTAL-REVENUES> 51,917
<CGS> 36,551
<TOTAL-COSTS> 36,551
<OTHER-EXPENSES> 903,593
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (857,405)
<INCOME-TAX> 0
<INCOME-CONTINUING> (857,405)
<DISCONTINUED> 28,027
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (829,378)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
