SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[ x ] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: September 30, 2002
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to _______________
Commission file number: 0-22865
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AMERIMMUNE PHARMACEUTICALS, INC.
- -------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Colorado 84-1044910
- -------------------------------------- --------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2325A Renaissance Drive, Las Vegas, Nevada 89119
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(Address of Principal Executive Offices)
(805) 497 - 7252
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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
------- -------
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of November 4,
2002, 34,194,609 shares of the issuer's Common Stock, $0.05 par value per
share, were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes No X
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AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 2002 and
September 30, 2002 (unaudited) . . . . . . . . . . . . . . . . . . . . .2
Consolidated Statements of Operations - for the Three Months Ended
September 30, 2001 and 2002 and cumulative amounts from
April 10, 1988 (date of inception) through
September 30, 2002 (unaudited) . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Operations - for the Six Months Ended
September 30, 2001 and 2002 and cumulative amounts from
April 10, 1988 (date of inception) through
September 30, 2002 (unaudited) . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows - for the Six Months Ended
September 30, 2001 and 2002 and cumulative amounts from
April 10, 1988 (date of inception) through
September 30, 2002 (unaudited) . . . . . . . . . . . . . . . . . . . . .5
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . .7
Item 2. Management's Discussion and Analysis or Plan of Operation. . . 19
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 23
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 25
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 25
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Certification of Chief Executive Officer . . . . . . . . . . . . . . . 28
Certification of Chief Financial Officer . . . . . . . . . . . . . . . 30
PART I AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS
ASSETS
MARCH 31, 2002 SEPTEMBER 30,
(AUDITED) 2002
(UNAUDITED)
-------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 126,313 $ 4,354
Other current assets 9,152 37,734
------------ ------------
TOTAL CURRENT ASSETS 135,465 42,088
------------ ------------
PROPERTY AND EQUIPMENT, NET 1,350 1,104
------------ ------------
OTHER ASSETS
Deposits 3,100 200
------------ ------------
TOTAL ASSETS $ 139,915 $ 43,392
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,267 $ 67,090
Note payable - 200,000
Accrued liabilities 506,833 758,007
------------ ------------
TOTAL CURRENT LIABILITIES 530,100 1,025,097
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock $0.10 par value, 50,000,000 shares
authorized, no shares issued or outstanding - -
Common stock $0.05 par value, 100,000,000 shares
authorized, 34,644,609 and 34,194,609 shares
issued and outstanding on March 31, and
September 30 respectively 1,732,231 1,709,731
Additional paid-in-capital 4,672,904 4,695,404
Note receivable from affiliate (71,074) -
Deficit accumulated during the development stage (6,724,246) (7,386,840)
------------ ------------
TOTAL SHAREHOLDERS' DEFICIENCY (390,185) (981,705)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIENCY $ 139,915 $ 43,392
============ ============
2
See accompanying notes
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH SEPTEMBER 30, 2002
(unaudited)
THREE MONTHS THREE MONTHS CUMULATIVE
ENDED ENDED AMOUNTS FROM
SEPTEMBER 30, SEPTEMBER 30, INCEPTION
------------- ------------- ---------
2001 2002
---- ----
COSTS AND EXPENSES
Research and development $ 177,207 $ 20,735 $ 2,398,880
General and administrative 203,178 115,016 5,130,027
------------ ------------ ------------
OPERATING LOSS (380,385) (135,751) (7,528,907)
OTHER INCOME (EXPENSE)
Interest income 480 269 174,726
Interest expense (590) (5,111) (25,459)
------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (380,495) (140,593) (7,379,640)
PROVISION FOR INCOME TAXES - - 7,200
------------ ------------ ------------
NET LOSS $ (380,495) $ (140,593) $ (7,386,840)
============ ============ ============
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED $ (0.01) $ (0.00)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 42,298,832 34,344,609
============ ============
See accompanying notes
3
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH SEPTEMBER 30, 2002
(unaudited)
SIX MONTHS SIX MONTHS CUMULATIVE
ENDED ENDED AMOUNTS FROM
SEPTEMBER 30, SEPTEMBER 30, INCEPTION
------------- ------------- ---------
2001 2002
---- ----
COSTS AND EXPENSES
Research and development $ 239,970 $ 74,305 $ 2,398,880
General and administrative 395,502 383,771 5,130,027
------------ ------------ ------------
OPERATING LOSS (635,472) (458,076) (7,528,907)
OTHER INCOME (EXPENSE)
Interest income 6,299 4,775 174,726
Interest expense (1,524) (7,391) (25,459)
------------ ------------ ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (630,697) (460,692) (7,379,640)
PROVISION FOR INCOME TAXES 1,600 1,600 7,200
------------ ------------ ------------
NET LOSS $ (632,297) $ (462,292) $ (7,386,840)
============ ============ ============
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED $ (0.01) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 42,668,811 34,494,609
============ ============
See accompanying notes
4
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH SEPTEMBER 30, 2002
(unaudited)
SIX MONTHS SIX MONTHS CUMULATIVE
ENDED ENDED AMOUNTS FROM
SEPTEMBER 30, SEPTEMBER 30, INCEPTION
------------- ------------- ---------
2001 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (632,297) $ (462,292) $ (7,386,840)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED BY OPERATING ACTIVITIES
Noncash transactions:
Depreciation and amortization 5,968 246 35,443
Reserve for note receivable from
affiliate 26,400 71,074 150,000
Fair value of stock and an option
issued in exchange for services and
trademark rights - - 814,000
Fair value of stock issued to
prospective officers - - 142,500
Fair value of stock transferred to a
prospective officer by a principal
shareholder - - 90,000
Fair value of stock and an option
transferred by a principal shareholder
in exchange for services - - 452,000
Fair value of stock options issued in
exchange for services - - 9,996
Modification of stock options - 383,794
Exchange of stock options to warrants
for employee services - - 382,821
Changes in assets and liabilities:
Other current assets 4,667 (28,581) (37,733)
Deposits - 2,900 (200)
Accounts payable and accrued expenses 215,936 94,694 825,097
------------ ------------ ------------
Total adjustments 252,971 140,333 3,247,718
------------ ------------ ------------
NET CASH USED BY OPERATING
ACTIVITIES (379,326) (321,959) (4,139,122)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - - (36,547)
Loan to an affiliate (4,245) - (150,000)
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (4,245) - (186,547)
------------ ------------ ------------
Continued on next page
5
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH SEPTEMBER 30, 2002
(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sales of common stock
and warrants 250,000 - 4,130,023
------------ ------------ ------------
Net proceeds from loan from affiliate - 200,000 200,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 250,000 200,000 4,330,023
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (133,571) (121,959) 4,354
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
Beginning of Period 215,810 126,313 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
Ending of Period $ 82,239 $ 4,354 $ 4,354
============ ============ ============
See accompanying notes
6
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
1. BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND ORGANIZATION
Amerimmune Pharmaceuticals, Inc. (the "Company"), formerly named
Versailles Capital Corporation, is a Colorado Corporation incorporated on
December 31, 1986. From 1991 through February 22, 1999, the Company was
inactive aside from seeking a business combination candidate.
British Lion Medical, Inc. ("British Lion") was incorporated in
California in August 1997 and commenced operations on April 10, 1998.
British Lion was engaged in the pharmaceutical research business with the
primary purpose of developing Cytolin(R), a drug designed to protect the
immune system, especially in patients suffering from Human
Immunodeficiency Virus ("HIV").
On February 17, 1999, the Company, British Lion and Amerimmune, Inc.
("AI"), a newly organized, wholly owned subsidiary of the Company,
entered into an Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement on February 23, 1999, each share of
British Lion's issued and outstanding no par value common stock
(5,853,500 shares) was exchanged for 7.133978 newly issued shares
(41,758,740 shares) of the Company's $0.05 par value per share common
stock. After the exchange, former British Lion shareholders acquired
approximately 97% of the issued and outstanding voting shares of the
Company and the Company acquired all of the issued and outstanding shares
of British Lion through a merger of British Lion with and into AI, with
AI as the surviving legal entity (the "Transaction"). Prior to the
Transaction, the Company had nominal assets and liabilities. Unless
otherwise noted, all references to the number of shares of common stock
in these financial statements are based upon the equivalent post-exchange
number of shares of the Company's common stock.
For financial reporting purposes, the Transaction has been accounted for
as a reverse acquisition whereby British Lion is deemed to have acquired
the Company. Since this was a reverse acquisition, the legal acquiror,
the Company, continued in existence as the legal entity whose shares
represent the outstanding common stock of the combined entities. The
acquisition has been accounted for as a recapitalization of British Lion
based upon historical cost. The recapitalization was given retroactive
effect. In connection with the Transaction, the Company succeeded to the
business of British Lion and became engaged in the pharmaceutical
research business with the primary purpose of developing Cytolin(R). The
Company has assumed the obligations of British Lion including all
outstanding stock options and warrants to purchase shares of British
Lion's common stock and has issued equivalent shares of the Company
common stock under the same terms and conditions.
7
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
On August 6, 1999, the shareholders of the Company adopted an amendment
to the Company's articles of incorporation to change the name of the
Company to Amerimmune Pharmaceuticals, Inc. from Versailles Capital
Corporation.
BASIS OF PRESENTATION AND MANAGEMENT PLAN
As described in the Form 8-K filed on November 15, 2002, the Company
believes that an accrual of research and development expenses in the
approximate amount of $200,000 should have been made as of March 31,
2002. The Company intends to file an amendment to its Form 10-KSB for
the fiscal year ended March 31, 2002. Because the Company is in the
process of determining the appropriate periods to which the charge
belongs, and since our 10-KSB for the year ended March 31, 2002, has
not been modified as of the filing of this September 30, 2002 10-QSB,
the accrual has been reflected in the accompanying financial statements
of the Company in the following manner.
The entire amount of approximately $200,000 is included in Accrued
Liabilities in the September 30, 2002 Balance Sheet, but no accrual is
included in the March 31, 2002 Balance Sheet, (the March 31, 2002
balance sheet will be adjusted when the amended 10-KSB for the year
ended March 31, 2002 is filed). The entire amount of approximately
$200,000 is included as Research and Development expenses in the
Statement of Operations for Cumulative Amounts From Inception through
September 30, 2002, but not in the Statements of Operations for the Three
and Six Month periods Ended September 30, 2001 and 2002. The entire
amount of approximately $200,000 is included in Accounts Payable and
Accrued Expenses in the Statement of Cash Flows for Cumulative Amounts
From Inception through September 30, 2002, but not in the Statements of
Cash Flows for the Six Month periods Ended September 30, 2001 and 2002.
The Statement of Operations amounts for the year ended March 31, 2002 and
the interim periods in fiscal 2002, and the interim periods in fiscal
2001, will be adjusted when the periods to which the approximately
$200,000 adjustment have been determined. This will be done in the
footnotes to the amended March 31, 2002 10-KSB upon its filing.
Except as discussed above, the accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States for
interim financial statements and with the instructions to Form 10-QSB
on the basis of a going concern. Certain notes and other information have
been condensed or omitted from the unaudited interim financial statements
presented in this report. Accordingly, they do not include all of the
information and footnotes required by accounting principals generally
accepted in the United States for complete financial statements. In
the opinion of management, the unaudited financial statements reflect
all adjustments considered necessary for a fair presentation. The
results of operations for the six months ended September 30, 2002 are
8
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
not necessarily indicative of the results to be expected for the full
year. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-KSB
for the period ended March 31, 2002 as filed with the Securities and
Exchange Commission. All significant intercompany balances and
transactions have been eliminated in consolidation.
The Company is a development stage pharmaceutical research company and
has not generated any revenues from operations for the period from April
10, 1998 (the date that British Lion commenced operations) through
September 30, 2002. The Company has devoted substantially all of its
resources to the acquisition of a license, research and development of
Cytolin(R), and expenses related to the startup of its business. The
Company has been unprofitable since inception and expects to incur
substantial additional operating losses for the next twelve months, as
well as for the next few years, as it increases expenditures on its
research and development activities and allocates significant and
increasing resources to clinical testing, marketing and other activities.
The Company commenced a tolerability study for Cytolin(R) after a
clinical protocol was sanctioned by the Food and Drug Administration
("FDA") and the bulk drug has been manufactured, tested, packaged, and
released for clinical use. The Company has completed the submission of
related manufacturing records to the FDA.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The Company estimates that
it will require significant additional funding over the next three years
to continue operations and to successfully complete the FDA approval
process for its products. The Company believes that additional funds
will be needed to fund operations after November 30, 2002. The Company
has established plans designed to increase the capitalization of the
Company and is seeking additional capital that will provide funds needed
to increase the internal growth of the Company in order to fully
implement its business plans. There can be no assurances that such
additional capital will be available to the Company on favorable terms,
if at all. The failure of the Company to obtain additional funding if
and when required would have a material adverse effect on the Company's
ability to fulfill its business plan, continue its operations and meet
its financial commitments.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with
an original maturity of three months or less to be cash equivalents.
9
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents. At September 30, 2002, substantially all cash and cash
equivalents were on deposit with one financial institution.
PROPERTY AND EQUIPMENT
Office furniture and equipment is recorded at cost. Depreciation
commences as assets are placed in service and is computed on a
straight-line method over their estimated useful lives of three years.
Leasehold improvements are recorded at cost and amortized over the
three-year term of the lease.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Payments
related to the acquisition of technology rights, for which development
work is in-process, are expensed and considered a component of research
and development costs.
ACCOUNTING FOR STOCK BASED COMPENSATION
The Company's employee stock option plan is accounted for under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") which requires the recognition of expense
when the option price is less than the fair value of the stock at the
date of grant. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123").
10
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
NET LOSS PER SHARE
Loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"), and the Securities and Exchange Commission ("SEC") Staff
Accounting Bulletin No. 98 ("SAB 98"). Basic earnings per share excludes
dilution for common stock equivalents and is computed by dividing income
or loss available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted and resulted
in the issuance of common stock.
Pursuant to SAB 98, common stock issued for nominal consideration is
required to be included in the calculation of basic and diluted earnings
per share, as if they were outstanding for all periods presented. In
accordance with the SAB 98 requirements, 21,936,981 of the founder's
shares are considered to be nominal issuances and have been considered
outstanding for all of the periods ended since March 31, 1999.
All outstanding stock options and warrants have been excluded from the
calculation of diluted loss per share, because the assumed conversion of
such instruments is antidilutive.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general purpose financial statements. To date, the Company has not had
any transactions that are required to be reported in comprehensive
income.
SEGMENT INFORMATION
The Company has determined that it does not have separately reportable
operating segments in accordance with Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information".
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents and marketable securities
is assumed to be fair market value because of the liquidity of these
instruments. Accounts payable and accrued expenses approximate fair
value because of the short term nature of these instruments.
11
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results may differ from those estimates.
3. COMMITMENTS AND CONTINGENCIES
TERMINATION, SALE AND SHAREHOLDER AGREEMENT
CONDITIONAL LICENSE AGREEMENT
Allen D. Allen ("Allen") is the present owner of all United States patent
and foreign patent rights to Cytolin(R) and the associated technology and
know-how ("the "Technology"). In 1994, Allen granted CytoDyn of New
Mexico, Inc. ("CytoDyn"), of which Allen owns a substantial majority of
the voting stock, an exclusive, worldwide license to use the patent
rights and technology. In addition, CytoDyn obtained a trademark name
for Cytolin(R).
In August 1998, Allen and CytoDyn entered into a Termination, Sale and
Shareholder Agreement ("the Purchase Agreement") with Three R Associates,
Inc. ("Three R"), a corporation affiliated with the Company through its
ownership by three of the Company's former directors and/or officers.
Pursuant to the terms of the Purchase Agreement, CytoDyn agreed to
relinquish the exclusive license to use the technology and patents
previously granted to it by Allen in exchange for 4,280,387 shares of the
Company's common stock. In addition, Allen agreed to sell all United
States Patent rights, foreign patent rights, and all technological
know-how underlying the product, Cytolin(R), to Three R in exchange for
$1,350,000, payable monthly over a fifteen year period. Payments to
Allen commenced and the Company assumed the obligation to Allen, as part
of the Patent and Trademark License Agreement discussed below, upon
completion of the Transaction.
In September 1999, Allen and CytoDyn delivered written notice to the
Company that they believed the Termination, Sale and Shareholder
Agreement, dated August 1, 1998 was void and not enforceable due to
fraudulent inducement by Three R and other, unspecified reasons. Allen
and CytoDyn demanded that Three R and its owners surrender any and all
stock in the Company, which was obtained pursuant to such Agreement.
In February 2000, the Company entered into a Conditional License
Agreement with Allen and CytoDyn which is designed to preserve the
Company's rights to the technology in the event that the technology that
is the subject of both the Termination, Sale and Shareholder Agreement
between Three R, Allen, and CytoDyn, and the
12
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
License Agreement, in the event that Three R's rights to such technology
reverted to or were acquired by Allen and CytoDyn. The Conditional
License Agreement further stipulates that any and all Company stock,
awarded or returned to Allen or CytoDyn as a result of the dispute
between Allen, CytoDyn and Three R, be returned immediately to the
Company. In consideration for entering into the Conditional License
Agreement the Company advanced CytoDyn an additional $50,000 pursuant to
the terms of a Loan Agreement which was previously entered into whereby
the Company loaned CytoDyn $100,000 (See Note 4).
In May 2001, the dispute between Allen, CytoDyn and Three R was settled.
As a result of the settlement, Allen and CytoDyn acquired 9,778,604
shares of the Company's common stock from Three R and all of Three R's
rights, title, and interest in, to and under the License Agreement and
the Termination, Sale and Shareholder Agreement were claimed by Allen and
CytoDyn to have been assigned to Allen and CytoDyn. Allen and CytoDyn
claimed that as a result of the settlement, the Conditional License
Agreement became operative. If operative, the terms of the Conditional
License Agreement obligate the Company to pay Allen and CytoDyn as
successor Licensor pursuant to the terms of the License Agreement.
In September 2001, the Company, Allen and CytoDyn entered into an
agreement whereby Allen and CytoDyn transferred the 9,778,604 shares of
the Company's common stock received from Three R, to the Company for
cancellation, and the Company paid $40,000 to Allen and CytoDyn for
settlement of any claims for payment of fees and costs incurred with
acquiring the shares from Three R.
CONSULTING AGREEMENT - RESEARCH AND DEVELOPMENT
In August of 1998, Allen entered into a consulting agreement with Three R
whereby Allen agreed to provide the Company with any new and additional
similar technologies, if any, for a period of fifteen years in exchange
for a consulting fee of $10,000 per year. Payments under the consulting
agreement commenced subsequent to the completion of the Transaction, and
the Company assumed the obligation to Allen upon completion of the
Transaction, as part of the License agreement. Effective February 23,
2000, the Company can terminate the consulting agreement with one year's
notice.
PATENT AND TRADEMARK LICENSE AGREEMENT
In October 1998, the Company entered into a Patent and Trademark License
Agreement ("the License Agreement") with Three R. The Company was
granted an irrevocable, exclusive, worldwide license to use all present
and future patent rights, know-how and background technology of Three R
relating to Cytolin(R), which Three R had previously obtained from Allen
and CytoDyn. In addition, the License Agreement granted the Company a
sublicense to the trademark name, Cytolin(R). The License Agreement was
consummated simultaneously with the Transaction.
13
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
The Company issued 21,936,981 shares of its common stock to Three R upon
execution of the Agreement, and the Company also assumed Three R's
obligations to pay Allen under the agreements discussed above between
Three R and Allen.
Under the terms of the Purchase Agreement discussed above, the Company
was obligated to pay Allen, at a minimum, $180,000 in scheduled monthly
installments through February 23, 2001. The Company has the option to
terminate the payments due Allen after the minimum amounts are paid. If
the Company elects to terminate the payment in excess of the minimum due,
it would abandon the rights acquired through the Purchase agreement.
In May 2001, the dispute between Allen, Cytodyn and Three R was settled.
As a result of the settlement, all of Three R's rights, title, and
interest in, to and under the License agreement may have been assigned to
Allen and Cytodyn. If so, pursuant to the terms of the Conditional
License Agreement, the Company is obligated to pay Allen and Cytodyn as
successor Licensor pursuant to the terms of the License Agreement.
CONDITIONAL LICENSE AGREEMENT
In September 1999, Allen and CytoDyn delivered written notice to the
Company that they believed that the Purchase Agreement is void and is not
enforceable due to fraudulent inducement by Three R and other,
unspecified reasons. Allen and CytoDyn have demanded that Three R and
its owners surrender any and all stock in the Company, which was obtained
pursuant to the Purchase Agreement.
In February 2000, the Company entered into a Conditional License
Agreement with Allen and CytoDyn which is designed to preserve the
Company's rights to the technology in the event that the technology that
is the subject of both the Purchase Agreement and the License Agreement
reverted to, or was acquired by Allen or Cytodyn. In consideration for
entering into the Conditional License Agreement, the Company advanced
CytoDyn an additional $50,000 pursuant to the terms of a Loan Agreement
which was previously entered into whereby the Company loaned CytoDyn
$100,000. (See Note 4). At March 31, 2002, the note receivable of
$150,000, which is collateralized by shares of the Company's stock, plus
accrued interest was classified as a reduction of shareholders' equity.
As of September 30, 2002, the Company has written off the note receivable
and accrued interest receivable as it was deemed to be uncollectible, and
450,000 shares of the Company, that represented the collateral for the
loan were cancelled.
In May 2001, the dispute between Allen, Cytodyn and Three R was settled.
As a result of the settlement, all of Three R's rights, title, and
interest in, to and under the License agreement may have been assigned to
Allen and Cytodyn. If so, pursuant to the terms of the Conditional
License Agreement, the Company is obligated to pay Allen and Cytodyn as
successor Licensor pursuant to the terms of the License Agreement.
14
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
In June 2001, the Company received notice of a claim from CytoDyn and
Allen that, pursuant to the Conditional License Agreement among them, the
Company has breached an alleged obligation under the Conditional License
Agreement to allow them to inspect the Company's manufacturing processes.
In June 2002, the Company received a claim from Cytodyn and Allen
asserting that: (1) Amerimmune no longer has rights to the technology
pursuant to the Patent and Trademark License Agreement with Three R; (2)
the only rights Amerimmune has to the technology result from the
Conditional License Agreement; and (3) Amerimmune has breached the
Conditional License Agreement by failing to pay for the costs of patent
applications in Europe and other expenses allegedly incurred by Mr. Allen
as a result of Amerimmune's alleged actions or inactions, and by not
allowing Mr. Allen to inspect Amerimmune's manufacturing processes. The
Company has disputed CytoDyn's and Mr. Allen's allegation that it has no
rights to the technology from the Patent and Trademark License agreement
with Three R, Mr. Allen's alleged inspection rights and his allegations
regarding the consequences of the Company's decision not to pursue or pay
the costs of certain European patent applications as well as his
assertions regarding the Company's alleged failure to pay certain fees
and expenses. In the event that Mr. Allen and CytoDyn are successful in
any efforts to terminate the Conditional License Agreement, the License
Agreement, with Three R and/or any other rights of the Company to utilize
the technology that is the subject of such agreement, the Company's
business, financial position and prospects would be materially and
adversely affected.
MANAGEMENT AGREEMENT
In October 1998, the Company entered into a three year management
agreement for $585,000 per year with Western Center for Clinical Studies,
Inc. ("WCCS"), a corporation that is wholly-owned by three of the
Company's former officers and directors. The agreement was scheduled to
expire on February 23, 2002. The management agreement provided for
services by WCCS to the Company for the purpose of assisting the Company
in obtaining FDA approval to market Cytolin(R) for commercial use. In
November 1999, the Company notified WCCS of its rescission of this
agreement based upon the Company's belief that WCCS made certain
fraudulent misrepresentations to the Company and had breached its
performance under the management agreement. The Company is evaluating
remedies to collect all amounts paid to WCCS in conjunction with this
agreement.
In September 2000, Rex Lewis, O.B. Parrish, Kimberlie Cerrone, Wellington
Ewen and Pam Kapustay, each a current or former officer and/or director
of the Company, were served with a Complaint filed in August 2000 in the
Superior Court of California for Los Angeles County (Case No. BC 235312).
The Company was not named as a defendant.
The Complaint alleges causes of action against the defendants for libel
and slander, intentional infliction of emotional distress, interference
with contract, and unfair
15
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
business practices. It seeks compensatory damages in the amount of $20
million and punitive damages and injunctive relief.
The allegations of the Complaint involve acts relating to: (1) the
Company's cancellation in November 1999, of the Management Agreement with
plaintiff WCCS, and (2) the cancellation and rescission of a technology
licensing agreement by co-defendant CytoDyn. The Complaint alleges that
certain Company officers and directors (as well as officers and directors
of CytoDyn) made libelous and slanderous statements about the background
and competency of certain plaintiffs, who are officers and shareholders
of WCCS. It alleges that these statements caused the Company to cancel
its Management Agreement with WCCS and CytoDyn to cancel its technology
licensing agreement with plaintiff Three R. In May 2001, Three R, WCCS,
Allen and Cytodyn settled their claims among them. (See "Purchase
Agreement" above.)
The Company and the defendants have retained counsel to defend Mr. Lewis,
Mr. Parrish, Ms. Cerrone and Ms. Kapustay and will indemnify them for
fees and expenses incurred in their defense. The Company has also
requested coverage for the acts alleged in the Complaint from two
insurance companies under two different policies.
The Company has been informed that the defendants intend to vigorously
contest the allegations of the Complaint. To the extent that the costs
of the defense and any damages resulting from the Action are not covered
by insurance and the Company is required to pay such amounts, the
Company's financial condition could be materially adversely affected.
The matter has been ordered to arbitration, which has not yet commenced.
OFFICER EMPLOYMENT AGREEMENT
On January 3, 2001, Rex H. Lewis' employment agreement was effective. The
Company has accrued $70,000 representing the pro rata portion of the
compensation applicable to the year ended March 31, 2000, $180,000 in
fiscal 2002 and 2001 applicable to the respective years ended March 31,
and $90,000 applicable to the six months ended September 30, 2002.
Additionally, the Company issued 6,380,357 stock options to Mr. Lewis, at
an exercise price of $0.22, which would have expired 10 years from the
date of grant. The options that were issued to Mr. Lewis were
non-qualified options and were not granted under the 1998 Omnibus Stock
Incentive Plan.
In November 2001, the Company entered into an agreement with Mr. Lewis
whereby he agreed to cancel the existing options in exchange for a
warrant to purchase up to 6,380,357 shares of the Company's common stock
at an exercise price of $0.22. In December 2001, Mr. Lewis assigned the
warrant to Maya LLC. (See Item 4 Related Party Transactions.)
16
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
4. RELATED PARTY TRANSACTIONS
During the period from inception (April 10, 1998) through March 31, 2000,
the Company incurred expenses of $442,575 as a result of services
performed by an affiliate, WCCS, on behalf of the Company. In fiscal
1999, the Company advanced $219,375 to WCCS to commence certain services
in connection with the development of Cytolin(R) to be performed over a
three year period beginning when the management agreement between the
parties became effective. In November 1999, the Company notified WCCS of
its rescission of this agreement and expensed the remaining prepaid
management fees. The Company is evaluating remedies to collect all
amounts paid to WCCS in conjunction with this agreement. See Note 3 and
Part II Item 1 for a discussion of a Complaint filed against current or
former officers and/or directors of the Company related to the rescission
of this agreement.
During the period from inception (April 10, 1998) through September 30,
2002, the Company paid consulting fees of $126,577 to Allen for providing
scientific expertise regarding the development of Cytolin(R) and $348,771
pursuant to the Patent and Trademark License Agreement.
During the period from inception (April 10, 1998) through March 31, 2000,
the Company incurred legal expenses of $10,000 for an attorney who is
also a director of the Company.
During June 1999, the Company loaned CytoDyn $100,000 to facilitate
payment by CytoDyn of certain legal and office expenses and to facilitate
repayment to the Company by CytoDyn of previous advances. In February
2000, the Company loaned CytoDyn an additional $50,000 under the same
terms and conditions as the original loan, as consideration for entering
into the Conditional License Agreement (see Note 3). The loans bear
interest at a rate of 8% per annum and are due, together with accrued
interest, on or before February 23, 2001. The loans are secured by
450,000 shares of Company common stock which are owned by CytoDyn. As of
September 30, 2002 this note was deemed to be uncollectible, and the
450,000 shares of the Company which served as collateral were cancelled.
In July 2001, the Company entered into a Warrant Purchase Agreement
("Warrant Agreement") with Maya LLC ("Maya"), a limited liability company
of which Rex H. Lewis, the Company's president and chief executive
officer is the manager. The Warrant Agreement stipulates that Maya would
purchase an initial warrant for $125,000 and would be entitled to
purchase additional warrants in up to three separate closings of no less
than $125,000 per closing during the 12-month period ending in July 2002.
Each warrant has an exercise price of $0.20 per share of common stock,
and expires 10 years from the date of issuance of the warrant. The
number of shares of common stock underlying each warrant has been
calculated using a valuation by an independent valuation consultant and
it has been determined that each warrant to purchase one share of common
stock had a value of $0.02.
17
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 (CONTINUED)
As of September 30, 2002, Maya had purchased $500,000 of warrants
pursuant to the Warrant Agreement, and accordingly, warrants to purchase
an aggregate of 25,000,000 shares of common stock of the Company have
been issued to Maya. In February 2002, Maya exercised its right to
purchase 1,380,357 shares of the Company's common stock at an exercise
price of $0.20 per share for a total price of $276,071.
In November 2001, the Company entered into an agreement with Lewis
whereby he agreed to cancel options which were granted to him as part of
his initial employment agreement (See "Officer Employment Agreement"
above) in exchange for a warrant to purchase up to 6,380,357 shares of
the Company's common stock at an exercise price of $0.22. In December
2001, Lewis assigned the warrant to Maya. As of September 30, 2002, none
of these warrants have been exercised. A non-cash general and
administrative expense of $382,821 was recorded as a result of this
exchange in the quarter ended December 31, 2001.
In June 2002, the Company borrowed $200,000 from Maya, secured by a
promissory note. The loan is for six months with an interest rate of
10%. The lender may elect to accept payment of principal and interest in
common stock of the Company, instead of cash, at a price of $0.10 per
share.
In October 2002, the Company borrowed $100,000 from Maya, secured by a
promissory note. The loan is for two months with an interest rate of
10%. The lender may elect to accept payment of principal and interest in
common stock of the Company, instead of cash, at a price of $0.10 per
share.
In November 2002, the Company borrowed $100,000 from Maya, secured by a
promissory note. The loan is for two months with an interest rate of
10%. The lender may elect to accept payment of principal and interest in
common stock of the Company, instead of cash, at a price of $0.10 per
share.
18
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Some of the statements made in this Form 10-QSB and the documents
incorporated herein by reference that are not historical facts, such as
anticipated results of clinical trials, may constitute "forward-looking
statements," which forward looking statements are made pursuant to the
safe harbor provisions in the federal securities laws. These statements
often can be identified by the use of terms such as "may," "will,"
"expect," "anticipate," "estimate," "should", "could", "experts",
"plans", "believes", "predicts", "potential", or "continue," or the
negative thereof. Such forward-looking statements speak only as of the
date made. Forward-looking statements are subject to risks,
uncertainties and other factors beyond the control of the Company that
could cause actual results, levels of activity, performance,
achievements, and events to differ materially from historical results of
operations, levels of activity, performance, achievements, and events and
any future results, levels of activity, performance, achievements and
events implied by such forward-looking statements. Reference is made to
the Company's Annual Report on Form 10-K for a discussion of these various
risk factors and uncertainties. Although the Company believes that the
expectations reflected in the forward-looking statements are reasonable,
the Company cannot guarantee future results, levels of activity,
performance, achievements, or events. Moreover, neither the Company nor
any other person assumes responsibility for the accuracy or completeness
of such statements. The Company disclaims any obligation to revise any
forward-looking statements to reflect events or circumstances after the
date of such statement or to reflect the occurrence of anticipated or
unanticipated events.
PLAN OF OPERATION
The Company (for purposes of this section, the term the "Company"
includes the predecessor entity to its current operations, British Lion)
is a development stage pharmaceutical research company and has not
generated any revenues from operations for the period from April 10, 1998
(the date that British Lion commenced operations) through September 30,
2002. The Company is engaged in the pharmaceutical research business
with the primary purpose of developing drugs designed to protect the
immune system, especially in patients suffering from Human
Immunodeficiency Virus (HIV). The Company believes that drugs being
developed by the Company may be important for the growing number of
patients who have not been receiving treatment, for those who are on
multi-drug therapy, and for those who have become resistant to drugs
currently used to treat the HIV/AIDS virus. The Company intends to seek
governmental approval from the Food and Drug Administration ("FDA") for
drugs developed by the Company, including Cytolin(R). To date, the
Company has devoted substantially all of its resources to the acquisition
of a license, research and development of Cytolin(R), and expenses
related to the startup of its business. The Company has been
unprofitable since inception and expects to incur substantial additional
operating losses for the next twelve months, as well as for the next few
years, as it increases expenditures on research and development and
allocates significant and increasing resources to clinical testing,
marketing and other activities.
In November and December 1998, the Company sold 1,426,790 shares of
its common stock (at approximately $0.21 per share), for gross proceeds
of $300,000, to certain accredited
19
investors in a private placement. In December 1998, the Company began a
second private placement of common stock to accredited investors, which
was completed on February 22, 1999. The second private placement was
made on a minimum/maximum "best efforts" basis. The Company raised the
maximum amount of gross proceeds of $3,210,000 (7,633,364 common shares
at approximately $0.42 per share) and paid cash offering expenses of
$159,698. Net cash proceeds from the private placement aggregated
$3,050,302. In July 2001, the Company entered into a Warrant Purchase
Agreement with Maya (See Note 4) and as of June 30, 2002, Maya had
purchased $500,000 in warrants pursuant to the Warrant Agreement and in
February of 2002, Maya exercised its right under the Warrant Agreement to
purchase 1,380,357 shares of the Company's common stock at an exercise
price of $.20 per share which resulted in total proceeds to the Company
of $276,071. In October and November 2002, the Company borrowed a total
of $200,000 from Maya (See Note 4). The Company believes that the funds
received in these private placements and transactions will enable it to
satisfy its cash requirements without the need to raise additional funds
before November 30, 2002. The Company has commenced a tolerability study
for Cytolin(R) after a clinical protocol was sanctioned by the FDA and
the bulk drug was manufactured, tested, packaged, and released for
clinical use. The Company has completed the submission of related
manufacturing records to the FDA.
The Company estimates that it will require significant additional
funding over the next three years in order to continue operations and to
successfully complete the development, testing and FDA approval process
for its drugs(R). The Company believes that additional funds will be
needed to fund operations after November 30, 2002. There can be no
assurances that such additional capital will be available to the Company
on favorable terms, if at all. The failure of the Company to obtain
additional funding if and when required would have a material adverse
effect on the Company's ability to fulfill its business plan, continue
its operations and meet its financial commitments.
RESULTS OF OPERATIONS
For the three months ended September 30, 2002 the Company incurred
$20,735 in research and development expenses, $115,016 in general and
administrative expenses and paid $4,842 in interest expense net of
interest income, resulting in a net loss of $140,593. The expenses
incurred during this period relate primarily to continuation of research
activities, regulatory and administrative expenses. The decline in
expenses for the three months ended September 30, 2002 when compared to
three months ended September 30, 2001 is primarily due to a reduction
of funds available to fund such expenditures.
For the three months ended September 30, 2001 the Company incurred
$177,207 in research and development expenses, $203,178 in general and
administrative expenses and paid $110 in interest expense net of
interest income, resulting in a net loss of $380,495. The expenses
incurred during this period relate primarily to commencement of research
activities, regulatory and administrative expenses. See Note 1, "Basis
of Presentation and Management Plan" for a discussion of certain
adjustments to prior period financial statements relating to the accrual
of certain research and development expenses.
20
For the six months ended September 30, 2002 the Company incurred
$74,305 in research and development expenses, $383,771 in general and
administrative expenses and paid $2,616 in interest expense net of
interest income, resulting in a net loss of $462,292. The expenses
incurred during this period relate primarily to continuation of
research activities, regulatory and administrative expenses. The
decline in expenses for the six months ended September 30, 2002 when
compared to the six months ended September 30, 2001 is primarily due
to a reduction of funds available to fund such expenditures.
For the six months ended September 30, 2001 the Company incurred
$239,970 in research and development expenses, $395,502 in general and
administrative expense and earned $3,175 in interest income net of taxes
and interest expense, resulting in a net loss of $632,297. The expenses
incurred during this period relate primarily to commencement of research
activities, regulatory and administrative expenses. See Note 1, "Basis
of Presentation and Management Plan" for a discussion of certain
adjustments to prior period financial statements relating to the accrual
of certain research and development expenses.
From April 10, 1998 (date of inception) to September 30, 2002, the
Company incurred $2,398,880 in research and development expenses,
$5,130,027 in general and administrative expenses and earned $142,087 in
interest income net of taxes and interest expense, resulting in a net
loss of $7,386,840. The expenses incurred during inception to September
30, 2002 relate primarily to commencement of business operations,
research activities, purchase of license, stock compensation, regulatory,
and administrative expenses.
The Company's activities to date are not as broad in depth or scope
as the activities it must undertake in the future, and the Company's
historical operations and financial information are not indicative of its
future operating results or financial condition or its ability to operate
profitably as a commercial enterprise if and when it succeeds in bringing
any product to market.
As described in the Form 8-K filed on November 15, 2002, the Company
believes that an accrual of research and development expenses in the
approximate amount of $200,000 should have been made as of March 31,
2002. The Company intends to file an amendment to its Form 10-KSB for
the fiscal year ended March 31, 2002. The Company is in the process of
determining the appropriate periods to which the charge belongs. In the
interim, the discussion of the Company's Results of Operations for the
three and six month periods ended September 30, 2001 and 2002 do not
reflect such accruals. However, the entire amount of approximately
$200,000 is included as Research and Development expenses in the
Statement of Operations for Cumulative Amounts From Inception through
September 30, 2002 in the accompanying financial statements. See page
8, "Basis of Presentation and Management Plan" for full discussion of
this issue.
21
CAPITAL RESOURCES AND LIQUIDITY
From the commencement of operations on April 10, 1998 to September
30, 2002, the Company had no operating revenues and incurred net losses
of $7,386,840. At September 30, 2002, the Company had negative net
working capital of $983,009. The Company requires significant capital to
conduct the research and development and preclinical and clinical testing
of its drugs. Management of the Company does not expect to generate
revenue from operations within the next year and there can be no
assurances that the Company will ever generate significant revenue. The
Company believes that additional funds will be needed to fund operations
after November 30, 2002. Recently, the Company has been dependent upon
financing from Maya LLC, an affiliate of Rex Lewis, an executive officer,
director and significant stockholder of the Company. There can be no
assurance that Mr. Lewis or Maya LLC will be willing to continue to
finance the Company's operations and there can be no assurance that any
other source of additional capital will be available to the Company on
favorable terms, if at all. The failure of the Company to obtain
additional funding if and when required would have a material adverse
effect on the Company's ability to fulfill its business plan, continue
its operations and meet its financial commitments.
In October 1998, the Company entered into a Patent and Trademark
License Agreement (the "Agreement") with Three R. The Company was
granted an irrevocable, exclusive, worldwide license to use all present
and future patent rights, knowledge and background technology owned by
Three R relating to the product, Cytolin(R). In addition, the
Agreement granted the Company a sublicense to the trademark Cytolin(R).
The Agreement was consummated simultaneously with the Company's
acquisition of British Lion. The Company issued 21,936,981 shares of
its common stock at $.001 per share to Three R upon execution of the
Agreement, and the Company also agreed to assume Three R's obligations
to pay Allen $1,350,000, payable monthly over a fifteen year period,
and fees of $10,000 per year for consulting services under the
agreements discussed above between Three R and Mr. Allen. See Note 3
to Unaudited Consolidated Financial Statements contained in Item 1.
of Part I of this Form 10-QSB for a description of these Agreements and
certain potential disputes. The Company could abandon its patent
rights with no further obligations after minimum payments aggregating
$180,000 to Allen, with one year's notice.
Effect of Inflation and Foreign Currency Exchange
- -------------------------------------------------
The Company has not experienced material unfavorable effects on its
results of operations due to currency exchange fluctuations with any
foreign suppliers or material unfavorable effects upon its results of
operations as a result of domestic inflation.
Plant, Equipment and Employees
- ------------------------------
As of this time, the Company does not expect to make any purchases
of significant plant, facilities or equipment and does not foresee a
significant change in the number of employees.
22
ITEM 3. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief
Financial Officer, the Company conducted an evaluation of its disclosure
controls and procedures, as such term is defined under Rule 13a-14(c)
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), within 90 days of the filing date of this report. Based
on their evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective, except as follows:
The Chief Executive Officer and Chief Financial Officer have
concluded that there were certain material deficiencies in
controls over the capture and recognition of research and
development expenses. This deficiency resulted in a material
misstatement of the Company's expenses and related accrued
liabilities for the year ended March 31, 2002, and prior periods,
which misstatement was not detected until the current quarter
ended September 30, 2002. We have taken corrective action to
ensure that such expenses are captured and timely recognized in
the future.
(b) There have been no significant changes (including corrective
actions with regard to significant deficiencies or material weaknesses),
except as noted above, in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in paragraph (a) above.
PART II
ITEM 1. LEGAL PROCEEDINGS
While the Company is not a party to any pending legal proceedings
which management believes are not routine and incidental to its business
or which are material, the Company may in the future be a party to legal
proceedings and may be potentially affected by certain pending
litigation to which it is not a party. See Note 3 to Unaudited
Consolidated Financial Statements of this Form 10-QSB for a discussion
of certain potential disputes.
In September 2000, Rex Lewis, O.B. Parrish, Kimberlie Cerrone,
Wellington Ewen and Pamela Kapustay, each a current or former officer
and/or director of the Company, were served with a Complaint filed in
August 2000 in the Superior Court of California for Los Angeles County
(Case No. BC 235312). The Company was not named as a defendant.
The Complaint alleges causes of action against the defendants for
libel and slander, intentional infliction of emotional distress,
interference with contract, and unfair business practices. It seeks
compensatory damages in the amount of $20 million and punitive damages
and injunctive relief.
The allegations of the Complaint involve acts relating to: (1) the
Company's cancellation in November 1999, of a Management Agreement with
plaintiff WCCS, and (2) the cancellation and rescission of a technology
licensing agreement by co-defendant CytoDyn. The Complaint alleges that
certain Company officers and directors (as well as officers and directors
23
of CytoDyn) made libelous and slanderous statements about the background
and competency of certain plaintiffs, who are officers and shareholders
of WCCS. It alleges that these statements caused the Company to cancel
its Management Agreement with WCCS and CytoDyn to cancel its technology
licensing agreement with plaintiff Three R.
The Company and the defendants have retained counsel to defend Mr.
Lewis, Mr. Parrish, Ms. Cerrone and Ms. Kapustay, and will indemnify them
for fees and expenses incurred in their defense. The Company has also
requested coverage for the acts alleged in the Complaint from two
insurance companies under two different policies.
The Company has been informed that the defendants intend to
vigorously contest the allegations of the Complaint. To the extent that
the costs of the defense and any damages resulting from the Action are
not covered by insurance and the Company is required to pay such amounts,
the Company's financial condition could be materially adversely affected.
The matter has been ordered to arbitration which has not yet commenced.
In June 2001, the Company received notice of a claim from CytoDyn
and Allen that, pursuant to the Conditional License Agreement among them,
the Company has breached an alleged obligation under the Conditional
License Agreement to allow them to inspect the Company's manufacturing
processes. In June 2002, the Company received a claim from Cytodyn and
Allen asserting that: (1) Amerimmune no longer has rights to the
technology pursuant to the Patent and Trademark License Agreement with
Three R; (2) the only rights Amerimmune has to the technology result
from the Conditional License Agreement; and (3) Amerimmune has breached
the Conditional License Agreement by failing to pay for the costs of
patent applications in Europe and other expenses allegedly incurred by
Mr. Allen as a result of Amerimmune's alleged actions or inactions, and
by not allowing Mr. Allen to inspect Amerimmune's manufacturing
processes. The Company has disputed CytoDyn's and Mr. Allen's allegation
that it has no rights to the technology from the Patent and Trademark
License agreement with Three R, Mr. Allen's alleged inspection rights and
his allegations regarding the consequences of the Company's decision not
to pursue or pay the costs of certain European patent applications as well
as his assertions regarding the Company's alleged failure to pay certain
fees and expenses. In the event that Mr. Allen and CytoDyn are successful
in any efforts to terminate the Conditional License Agreement, the License
Agreement, with Three R and/or any other rights of the Company to utilize
the technology that is the subject of such agreement, the Company's
business, financial position and prospects would be materially and
adversely affected.
The Company has received a claim from Symbion Research International,
Inc. (Symbion) that the Company allegedly owes approximately $360,000 for
work performed on clinical trials. The Company is disputing the amount
owed and Symbion has threatened litigation. The Company is currently
discussing the possibility of resolving the matter by means of arbitration
with Symbion.
A portion of the claim relates to services performed by Symbion for
research and development for periods through March 31, 2002. The Company
believes that an accrual of expenses in the approximate amount of $200,000
should have been made as of March 31, 2002 and the Company intends to file
an amendment to its Form 10-KSB for the fiscal year ended
24
March 31, 2002. It has not yet been determined by the Company the impact of
the adjustment on the net loss for the fiscal year ended March 31, 2002, or
for any interim period in fiscal 2002, or for any prior periods. The
Company is in the process of determining the appropriate periods to which
the charge belongs.
ITEM 2. CHANGES IN SECURITIES
In August 2002, 450,000 shares of the Company's stock were cancelled.
These shares had been pledged by Cytodyn as collateral for a loan from
the Company and were subsequently forfeited by Cytodyn when the loan was
deemed uncollectible.
In June, October and November 2002, the Company borrowed a total of
$400,000 from Maya LLC, secured by a promissory note. The lender may
elect to accept payment of principal and interest in common stock of the
Company, instead of cash, at a price of $0.10 per share (Note 4).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Amended and Restated By-Laws.(1)
3.3 Articles of Merger, as filed with the Colorado Secretary of State
on February 23, 1999.(2)
3.4 Articles of Amendment to the Articles of Incorporation.(3)
10.1 Patent and Trademark License Agreement between British Lion
Medical, Inc. and Three R Associates, Inc., dated October 24,
1998.(2)
10.2 Termination, Sale and Shareholder Agreement by and among Three R
Associates, Inc., Allen D. Allen and CytoDyn( of New Mexico,
Inc., dated August 1, 1998. (2)
10.3 Management Agreement between British Lion Medical, Inc. and WCCS,
Inc., dated October 24, 1998. (2)
10.4 Subscription, Share Restriction and Proxy Agreement between
British Lion Medical, Inc. and Allen D. Allen, dated October 23,
1998. (2)
10.5 Versailles Capital Corporation 1998 Omnibus Stock Incentive Plan
as amended and restated through February 23, 1999.(4)
10.6 Conditional License Agreement between Allen D. Allen, CytoDyn of
New Mexico, Inc. and Amerimmune, Inc., dated February 24,
2000.(5)
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10.7 Warrant Purchase Agreement between Amerimmune Pharmaceuticals,
Inc. and Maya LLC (a limited liability company of which Rex H.
Lewis, the Company's president and chief executive officer, is
the manager), dated July 13, 2001.(6)
10.8 Exchange Agreement and Warrant to Purchase Shares of Common Stock
between Amerimmune Pharmaceuticals, Inc. and Rex H. Lewis dated
November 15, 2001.(7)
10.9 Greenery Executive Suites Lease between Amerimmune
Pharmaceuticals, Inc. and Greenery Executive Suites dated
January 30, 2002.
16.0 Letter on change in certifying accountant. (8)
99.1 Certification for Rex Lewis, Chief Executive Officer of
Amerimmune Pharmaceuticals, Inc.
99.2 Certification for Kenneth Collins, Chief Financial Officer of
Amerimmune Pharmaceuticals, Inc.
99.3 Promissory Note between Amerimmune Pharmaceuticals, Inc. and Maya
LLC dated October 1, 2002.
99.4 Promissory Note between Amerimmune Pharmaceuticals, Inc. and Maya
LLC dated November 1, 2002.
- -------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form 10-SB, Registration No. 0-22865, as filed with the
Commission on July 22, 1997, and amended on Form 10-SB/A-1, filed
with the Commission on February 25, 1998.
(2) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Current Report on Form 8-K, as amended, dated
March 10, 1999.
(3) Incorporated by reference from the Registrant's September 30, 1999
Form 10-QSB, dated November 12, 1999.
(4) Incorporated by reference from the Registrant's March 31, 1999 Form
10-KSB.
(5) Incorporated by reference from the Registrant's March 31, 2000 Form
10-KSB.
(6) Incorporated by reference from the Registrant's June 30, 2001 Form
10-QSB.
(7) Incorporated by reference from the Registrant's December 31, 2001
Form 10-QSB.
(8) Incorporated by reference from the like numbered exhibit filed with
the Registrant's Current Report on Form 8-K, dated March 29, 1999.
26
(b) Reports on Form 8-K
-------------------
On November 15, 2002, the Company filed a Current Report on
Form 8-K describing an upcoming restatement of Form 10-KSB for the
fiscal year ended 3-31-02.
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERIMMUNE PHARMACEUTICALS, INC.
Signatures Title Date
- ---------- ----- ----
Chairman of the Board
/s/ O.B Parrish and Director November 19, 2002
- ---------------
O.B Parrish
/s/ Kenneth M. Collins Chief Financial Officer November 19, 2002
- ----------------------
Kenneth M. Collins
27
CERTIFICATIONS
--------------
I, Rex Lewis, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Amerimmune Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report in being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
28
b) any fraud, whether or not material, that involves
management or other employees who have a significant roles
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 19, 2002
/s/ REX LEWIS
------------------------
Rex Lewis
Chief Executive Officer
29
CERTIFICATIONS
--------------
I, Kenneth M. Collins, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of
Amerimmune Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report in being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date.
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
30
b) any fraud, whether or not material, that involves
management or other employees who have a significant roles
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 19, 2002
/s/ KENNETH M. COLLINS
------------------------
Kenneth M. Collins
Chief Financial Officer
31