SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 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 small business issuer 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
(Address of principal executive offices) (Zip Code)
(801) 466-3441
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 February 9, 1999, the issuer had issued and outstanding 1,339,762 shares
of common stock, par value $.0001.
-1-
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
No.
1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of December 31, 1998
and September 30, 1998..........................................................................3
Unaudited Condensed Consolidated Statements of Operations for
the three months ended December 31, 1998 and 1997...............................................4
Unaudited Condensed Consolidated Statements of Cash Flows for
the three months ended December 31, 1998 and 1997...............................................5
Notes to Unaudited Condensed Consolidated Financial Statements..................................7
2. Management's Discussion and Analysis or Plan of Operation......................................11
PART II. OTHER INFORMATION..............................................................................13
-2-
PART I
ITEM 1 - Financial Statements
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
Dec. 31, Sep. 30,
1998 1998
-------------- ------------
Current assets:
Cash and cash equivalents $ 668,988 $ 27,701
Receivables, net 1,568,592 2,147,249
Inventories, net 580,123 661,243
Prepaids 154,811 19,032
-------------- -------------
Total current assets 2,972,514 2,855,225
Long-term Receivables, net 1,391,260 1,391,260
Property and equipment, net 146,588 150,544
Investments 660,000 425,000
Intangibles, net 787,999 814,009
Other assets, net 27,988 14,437
-------------- -------------
Total assets $ 5,986,349 $ 5,650,475
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,044,079 $ 798,968
Notes Payable 937,328 1,074,500
-------------- -------------
Total current liabilities 1,981,407 1,873,468
Minority Interest 46,364 31,281
Shareholders' equity:
Preferred stock, $.0001 par value; 50,000,000 shares
authorized 1,360,430 shares and 1,360,430 shares
issued and outstanding respectively 2,612,124 2,573,015
Common stock, $.0001 par value; 500,000,000 shares
authorized 1,339,762 shares and 1,286,662 shares
outstanding respectively 134 128
Additional paid-in capital 39,056,080 39,042,910
Stock subscriptions receivable (55,192) (55,192)
Warrants 338,500 338,500
Deferred compensation and consulting (266,324) (304,862)
Accumulated deficit (37,726,744) (37,848,773)
-------------- -------------
Total shareholders' equity 3,958,578 3,745,726
-------------- -------------
$ 5,986,349 $ 5,650,475
============== =============
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
-3-
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended Dcember 31,
1998 1997
------------ ------------
REVENUES $ 1,161,827 $ 51,917
OPERATING EXPENSES:
Cost of revenues 489,892 36,551
Management, consulting and research fees 199,631 422,210
Other general and administrative 328,405 481,383
------------ ------------
Total operating expenses 1,017,928 940,144
------------ ------------
INCOME (LOSS) FROM OPERATIONS 143,899 (888,227)
OTHER INCOME (EXPENSE):
Interest income, net 41,079 30,822
Minority interest 10,665 --
Other, net
------------ ------------
Total other income, net 30,414 30,822
------------ ------------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 174,313 (857,405)
Gain on disposal of discontinued Volu-Sol, Inc. -- 28,027
------------ ------------
NET INCOME (LOSS) 174,313 (829,378)
Preferred Stock dividends and accretion of
beneficial conversion feature (56,238) (36,937)
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 118,075 $ (866,315)
============ ============
NET INCOME (LOSS) PER COMMON SHARE (basic) $ 0.09 $ (2.62)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,331,104 330,313
(basic)
NET INCOME (LOSS) PER COMMON SHARE (fully diluted) $ 0.05 $ (2.62)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,380,758 330,313
(diluted)
The accompanying notes are an integral part of these condensed consolidated
statements.
-4-
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
For the Three Months
Ended December 31,
1998 1997
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 174,314 $ (1,519,490)
Adjustments to reconcile net loss to net cash
used in operating activities:
Gain on disposal of Volu-Sol, Inc. -- (28,027)
Depreciation and amortization 35,612 11,572
Issuance of Common Stock, options and warrants for
services -- 199,359
Amortization of deferred consulting expense 38,538 53,520
Cancellation of stock issued to consultants -- (50,000)
Exchange of related-party note receivable -- 24,671
Changes in assets and liabilities:
Accounts receivable, net 648,656 (44,747)
Interest receivable -- (13,362)
Inventories 81,120 31,597
Advances to related party -- 150,000
Prepaid expenses (135,779) --
Other assets (13,551) --
Accounts payable and accrued liabilities 245,112 (463,002)
Minority Interest 15,083 --
Accrued payroll and payroll taxes (45,063)
----------- -----------
Net cash generated (used) in operating activities 1,089,105 (1,303,130)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,646) --
Net (advances) repayments from related parties (70,000) --
Payments received on notes receivable -- (337,691)
Purchase Investments (235,000) --
----------- -----------
Net generated (used) cash in investing activities (310,646) (337,691)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable (137,172) --
----------- -----------
Net cash provided (used) by financing activities (137,172) --
----------- -----------
The accompanying notes are an integral part of these condensed consolidated
statements.
-5-
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Increase (Decrease) in Cash and Cash Equivalents
For the Three Months
Ended December 31,
1998 1997
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS $ 641,287 $(1,640,821)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF THE PERIOD 27,701 1,922,790
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF
THE PERIOD $ 668,988 $ 281,969
=========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended December 31, 1998 the Company paid dividends on
its outstanding preferred stock by issuing additional shares of preferred stock
totaling $52,285.
The Company increased common stock and additional paid in capital and decreased
preferred stock by $17,129 due to the conversion of preferred stock to common
stock.
The Company increased preferred stock and decreased additional paid in capital
by $3,953 due to the preferred stock beneficial conversion feature.
The accompanying notes are an integral part of these condensed consolidated
statements.
-6-
BIOMUNE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements are
unaudited and have been prepared consistent with generally accepted accounting
principles for interim financial information and with the instructions to Form
10- QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. These statements should be read in
conjunction with the audited financial statements and notes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended September 30,
1998. Reference to the Company or Biomune includes Biomune Systems, Inc. and its
subsidiaries, Optim Nutrition, Inc. and Rockwood Companies, LLC.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the Company's financial
position as of December 31, 1998 and the results of operations and cash flows
for the three months ended December 31, 1998 and 1997. The interim financial
statements should be read in conjunction with the following explanatory notes.
The results of operations for the three months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 1999.
(2) DIVESTITURE OF VOLU-SOL, INC.
On October 1, 1997, the Company divested itself of its wholly owned subsidiary
Volu-Sol, Inc., by distributing the common stock of Volu-Sol prorata to the
Company's stockholders of record as of March 5, 1997. The operations of
Volu-Sol, Inc. are reflected herein as discontinued operations during the
affected period.
(3) NET INCOME (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.
At December 31, 1998, there were outstanding options and warrants to purchase
418,881 shares of common stock and there were 1,331,104 shares of preferred
stock outstanding, convertible into a minimum of 774,796 shares of common stock.
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
outstanding, 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
The Company has deferred consulting expense related to shares issued under
consulting agreements entered into prior to September 30, 1998. These deferred
amounts are being recognized over the terms of the agreements as services are
provided. Total amortization of these deferred consulting expenses was $38,538
for the three months ended December 31, 1998.
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.
-7-
(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 retained
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
During the quarter ended December 31, 1998, the Company recorded management fee
income of $225,000 from its Rockwood subsidiary.
As shown on the enclosed balance sheet, related party receivables equal
2,055,215.
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. During the year-ended September 30, 1998, Volu-Sol made a payment of
$150,000 of which $114,351 went to principal and $35,649 as interest. During the
quarter ended December 31, 1998 the Company made additional loans to Volu-Sol
totaling $70,000. These loans bear interest at a rate of 10% per annum and are
due on demand. Accrued but unpaid interest owed to the Company on these loans
totaled $20,159 at December 31, 1998.
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, who was then 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 sale of preferred stock.
This agreement was terminated during the fiscal year ended September 30, 1998.
(7) CONSULTING AGREEMENTS
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 and recognized over the remaining term of the consulting agreement,
which expired on December 31, 1998.
(8) PREFERRED STOCK TRANSACTIONS
During the three months ended December 31, 1998, the Company accrued dividends
on its outstanding Series A, Series E, Series F and Series J Preferred stock of
$3,250, $5,460, $15,200 and $28,375, respectively. Preferred stock dividends are
payable in either additional shares of preferred stock (of the same series) or
in cash, at the option of the Board of Directors. On December 31, 1998, accrued
dividends on Series A, E, F and J Preferred stock totaling $52,285, were paid by
issuing 650 shares of Series A Preferred stock, 5.5 shares of Series E Preferred
stock, 25,333 shares of Series F Preferred stock and 28.4 shares of Series J
Preferred stock.
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 stock"),
-8-
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 stock 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 may be paid either in cash or in
additional shares of Series E Preferred stock at the discretion of the Board of
Directors of the Company. Each share of Series E Preferred stock 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 on the date of conversion less 42%, subject to
the Company's right of redemption. The holders of Series E Preferred stock are
also entitled to certain rights and preferences upon liquidation. Subsequent to
December 31, 1997, 283.5 shares of Series E Preferred stock were sold for
$283,500 in cash. In addition, 280 shares of Series E preferred stock 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 stock"), 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 stock 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 may 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 stock 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, 1,000,000 shares of Series F Preferred stock were sold for $600,000 in
cash.
(9) ROCKWOOD TRANSACTION
In April 1998, the Company acquired a controlling (52%) equity interest in
Rockwood's successor, Rockwood Companies LLC (referred to as "Rockwood LC"), for
$360,000 cash, a commitment to issue 500,000 shares of preferred stock (payable
if certain benchmarks in sales are obtained), and covenants on the part of the
Company to loan $1,500,000 to Rockwood LC or its affiliates over a one-year
period. Rockwood LC distributes and sells health and beauty aids to wholesale
and retail chains Rockwood LC has the right to redeem a member's interest if the
Company fails to keep its covenants to make the loans to Rockwood LC. Among
other things, Rockwood LC could reduce the Company's equity interest to
approximately 20% of the total issued and outstanding equity interests. As of
December 31, 1998, the Company had not advanced $850,000 of the funds it had
covenanted to loan to Rockwood LC, by March 15, 1999. Its ability to do so will
depend in part on the Company's ability to obtain additional debt or equity
financing and increasing sales of its products, of which there can be no
assurance.
Item 2 - Management's Discussion and Analysis or Plan of Operation
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-QSB.
Overview
The Company is engaged in the research, development, distribution and
sale of biologic pharmaceutical products, nutraceutical food products and
supplements, medical foods and health and beauty aids. Certain of these products
have been developed by the Company and incorporate a patented whey protein
technology, which is designed to provide or increase protective immunities from
an immune response to disease and to provide nutritional supplementation. The
Company's medical food bar is a patented formulation developed by researchers at
Beth Israel Deaconess Medical Center, Harvard Medical School, and marketed by
the Company under an exclusive license. The energy and sports nutrition bars of
the Company are also marketed under an exclusive license from the developer of
the products. Through a majority owned subsidiary, the Company also distributes
health and beauty aids and related products to national wholesale and retail
customers.
-9-
The Company believes its future results of operations will be affected
by factors such as:
o the availability of cash from financing activities to fund its
operations;
o the results of research and development efforts and the
clinical trials on BWPT-301, BWPT-302 and other future
pharmaceutical drug candidates based on or derived from the
Technology;
o market acceptance of Optimune, the nutrition and medical food
bars, and pharmaceutical drug candidates, increased
competitive pressures;
o changes in raw material sources and costs; and
o adverse changes in general economic conditions in any market
in which the Company conducts or markets its products.
o the company is in negotiations to renew its technology
license.
The Company believes that the majority of its future revenues will come
from its nutrition and medical food products and new nutraceutical products and
pharmaceutical drugs. The Company cannot determine the ultimate effect that new
products will have on revenues, earnings or the price of the Company's common
stock.
The Company's primary focus and efforts during the fiscal year ended
September 30, 1998, were the commercialization of its nutraceutical products,
assessing and obtaining additional nutraceutical and medical products to add to
product line, and, to a lesser extent, continuing its efforts to obtain FDA
approval of BWPT-301 for the treatment of cryptosporidiosis in people with AIDS
and BWPT-302 for the treatment of E. coli, strain 0157:H7. During the quarter
ended December 31, 1998, the Company's revenues were generated from the sale of
Optimune and Maximune, special food bars and nutrition bars, and sale of health
and beauty aids through the Company's majority owned Rockwood subsidiary.
Continuing in fiscal year 1999, the Company will focus its resources
and efforts on:
o commercialization of its nutraceutical products;
o continued marketing and selling of the NiteBite and Mountain
Lift bars;
o acquisition of new nutraceutical and or medical food products;
o development of one or more additional nutraceutical products
based on the Technology; and
o approval of BWPT-301 and BWPT-302.
o renewing its technology license.
Results of Operations
Comparison of the Three Months Ended December 31, 1998
with the Three Months Ended December 31, 1997
During the three months ended December 31, 1998, the Company had
revenues of $1,161,827 compared to $51,917 for the comparable three month period
ended December 31, 1997. The increase in sales is due primarily to sales of
health and beauty aids, through Rockwood LC, acquired in April 1998, and sales
of medical foods and nutrition bars that commenced during the quarter ended
December 31, 1998.
-10-
Cost of sales were $489,892 for the three months ended December 31,
1998 compared to cost of sales of $36,551 for the same period in 1997. The
overall gross margin for the quarter in 1998 was 58% of revenues, compared to
30% for the comparable quarter in 1997. The increase in gross margin is due to
the higher margins from the Company's Rockwood subsidiary.
Management, consulting and research fees were $199,632 for the three
months ended December 31, 1998, as compared to $422,210 for the three months
ended December 31, 1997. The Company recorded $225,000 of management fee income,
from its Rockwood subsidiary, for the quarter ended December 31, 1998, which
reduced management, consulting and research fee expense. General and
administrative expenses decreased from $481,383 for the three months ended
December 31, 1997 to $328,405 for the three months ended December 31, 1998. The
decrease in fees and expenses is due to the Company's efforts to reduce overhead
costs.
During the three months ended December 31, 1997, the Company had a net
loss of $829,378 compared to a net profit of $174,313 for the three months ended
December 31, 1998. This turnaround from a net loss in 1997 to a net profit in
the same quarter in 1998 is attributable primarily to the increase in revenue
from the Company's nutraceutical products and medical food bars and revenues
from Rockwood LC and a reduction in operating expenses discussed above.
Net (fully diluted) loss per common share was $(2.62) during the
quarter ended December 31, 1997 compared to net income per common share of $0.05
for the quarter ended December 31, 1998. This turnaround from a net loss in 1997
to a net profit in the same quarter in 1998 is attributable primarily to the
increase in revenue from the Company's nutraceutical products and medical food
bars and revenues from Rockwood LC and a reduction in operating expenses
discussed above.
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
Historically, the Company has been unable to finance its operations
from cash flows from operating activities. The Company expects it will require
substantial funds and time to commercialize its 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, 1998, the Company had cash and cash equivalents of
$668,988 and working capital of $991,107 as compared to cash and cash
equivalents of $27,701 and working capital of $981,757 as of September 30, 1998.
The Series A Preferred stock bears a 10% cumulative dividend payable
annually in cash or in additional shares of Series A Preferred stock, at the
election of the Company's Board of Directors. As of December 31, 1998, the
Company had accrued dividends on the Series A Preferred stock totaling $3,250,
which dividends the Company paid in additional shares of Series A Preferred
stock.
During the three months ended December 31, 1998, the Company's
operating activities generated $1,089,105 of cash. During the same period in the
previous fiscal year, the Company's operating activities used $1,303,130 of
cash, which was provided by the raising of capital from the sale of preferred
stock.
-11-
The Company has no established credit facility with a bank of other
lending institution. The Company has in the past, from time to time, borrowed
money from certain shareholders, but there is no formal financing arrangement,
agreement or understanding in affect with any of its shareholders or any other
related or unrelated party at this time. The Company's current line of credit is
due and payable on February 28, 1999.
The Company's product line is limited and the Company has relied in
large part 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 becomes 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. Finally, based upon its operational needs in the coming months,
some of the Company's existing assets may not be readily converted into
sufficient liquid working capital to meet the company's cash requirements.
The Company has a note payable of $559,000 due February 27, 1999. In
addition, as of December 31, 1998, the Company had not advanced $850,000 of the
funds it had covenanted to Rockwood LC by March 15, 1999. Its ability to meet
these obligations will depend in part on the Company's ability to obtain
additional debt or equity financing and increasing sales of its products, of
which there can be no assurance.
Special Statement Concerning Forward-looking Statements
This Report, in particular the "Management's Discussion and Analysis or
of Operation" section, contains forward-looking statements concerning the
expectations and anticipated operating results of the Company. All such
forward-looking statements contained herein are intended to qualify for the safe
harbor protection provided by Section 21Eof the Securities Exchange Act of 1934,
as amended. The reader should understand that numerous factors govern whether
events described by any forward-looking statement made by the Company will
occur. Any one of such factors could cause actual results to differ materially
from those projected by the forward-looking statements made in this Report.
These forward-looking statements include plans and objectives of management for
future operations, including plans and objectives relating to the products and
the future economic performance of the Company. The forward-looking statements
and associated risks relate to:
o market acceptance of the products;
o development of new nutraceutical products;
o the extent of additional research and development, general and
administrative and other direct costs associated with
obtaining final FDA approval on BWPT-301;
o the anticipated cost and related expense of the BWPT-301 and
BWPT-302 clinical trials until final FDA approval has been
received;
o unexpected delays in receipt of final FDA approval on BWPT-
301;
o the estimated commencement date of Phase III clinical trials
and the completion of those clinical trials on BWPT-301;
o and the lack of sufficient cash to fund current and projected
operations and budgeted research and development for fiscal
year 1999.
The forward-looking statements are based on current expectations that
may be affected by a number of risks and uncertainties and are based on certain
assumptions, such as:
o the Company will have adequate financing available.
o the efficacy of BWPT-301 will be established during the
ongoing Phase II clinical trials and the Phase III clinical
trials;
-12-
o the Company will be able to successfully undertake and
complete clinical trials on BWPT-302(TM);
o the Company will be able to successfully market the health and
beauty aids and it's the nutraceutical products, and
successfully develop and commercialize other nutraceutical
products;
o the Company will be able to successfully develop and
commercialize the Technology;
o the Company will successfully conduct additional Phase II
clinical trials on BWPT-301and 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
o the Company will be able to timely and properly quantify and
analyze the data derived from its clinical trials.
Assumptions 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 in this Report are reasonable, any of these
assumptions could prove inaccurate. Therefore, there can be no assurance that
the results contemplated in any of the forward-looking statements will be
realized. Budgeting and other management decisions are subjective in many
respects and are 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. This
will affect the Company's results of operations. In light of the significant
uncertainties inherent in the forward-looking statements, any such statement
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
By a Current Report on Form 8-K dated October 6, 1998, the Company
reported an increase in the number of Volu-Sol shares issued as part of the
divestiture of Volu-Sol, Inc., pursuant to an agreement with the NASD.
By a Current Report on Form 8-K dated December 15, 1998, the Company
reported the results of a hearing before the NASD regarding the continued
listing of the Company's common stock on the Nasdaq SmallCap Stock Market.
-13-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BIOMUNE SYSTEMS, INC.
(Registrant)
Date: February 11, 1999 /s/ Michael G. Acton
----------------------------------------------
Michael G. Acton, Chief Executive Officer and
Controller (Principal Financial and Accounting
Officer)
-14-