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: December 31, 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 January 14,
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 FINANCIAL STATEMENTS
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements:
Balance Sheets - March 31, 2002 and December 31, 2002 (unaudited). . . .3
Statements of Operations - for the Three Months Ended
December 31, 2001 and 2002 and cumulative amounts from
April 10, 1988 (date of inception) through December 31, 2002
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Operations - for the Nine Months Ended
December 31, 2001 and 2002 and cumulative amounts
from April 10, 1988 (date of inception) through
December 31, 2002 (unaudited). . . . . . . . . . . . . . . . . . . . . .5
Statements of Cash Flows - for the Nine Months Ended
December 31, 2001 and 2002 and cumulative amounts
from April 10, 1988 (date of inception) through
December 31, 2002 (unaudited). . . . . . . . . . . . . . . . . . . . . .6
Notes to Unaudited Financial Statements. . . . . . . . . . . . . . . . .8
Item 2. Management's Discussion and Analysis or Plan of Operation. . . 20
Item 3. Controls and Procedures. . . . . . . . . . . . . . . . . . . . 25
PART II OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . 28
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 29
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Certification of Chief Executive Officer . . . . . . . . . . . . . . . 32
Certification of Chief Financial Officer . . . . . . . . . . . . . . . 34
EXHIBITS
99.1 Section 906 Certification, Chief Executive Officer
99.2 Section 906 Certification, Chief Financial Officer
Form 8-K, Notification, Change of Auditors
2
PART I AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ITEM 1. FINANCIAL STATEMENTS
ASSETS
MARCH 31, 2002 DECEMBER 31,
(AUDITED) 2002
(RESTATED) (UNAUDITED)
-------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 126,313 $ 2,163
Other current assets 9,152 32,356
------------ ------------
TOTAL CURRENT ASSETS 135,465 34,519
------------ ------------
PROPERTY AND EQUIPMENT, NET 1,350 981
------------ ------------
OTHER ASSETS
Deposits 3,100 200
------------ ------------
TOTAL ASSETS $ 139,915 $ 35,700
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIENCY
CURRENT LIABILITIES
Accounts payable $ 23,267 $ 208,561
Note payable - 400,000
Accrued liabilities 692,127 608,136
------------ ------------
TOTAL CURRENT LIABILITIES 715,394 1,216,697
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY DEFICIENCY
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 December 31, respectively 1,732,231 1,709,730
Additional paid-in-capital 4,672,904 4,695,404
Note receivable from affiliate (71,074) -
Deficit accumulated during the development stage (6,909,540) (7,586,131)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY DEFICIENCY (575,479) (1,180,996)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY DEFICIENCY $ 139,915 $ 35,700
============ ============
See accompanying notes
3
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH DECEMBER 31, 2002
(Unaudited)
THREE MONTHS
ENDED
DECEMBER 31, THREE MONTHS CUMULATIVE
2001 ENDED AMOUNTS FROM
(RESTATED) DECEMBER 31, 2002 INCEPTION
---------- ----------------- ---------
COSTS AND EXPENSES
Research and development $ 188,721 $ 38,597 $ 2,422,468
General and administrative 492,185 166,328 5,303,555
------------ ------------ ------------
OPERATING LOSS (680,906) (204,925) (7,726,023)
OTHER INCOME (EXPENSE)
Interest income 8,815 112 174,838
Interest expense (239) (9,487) (34,946)
------------ ------------ ------------
NET LOSS $ (672,330) $ (214,300) $ (7,586,131)
============ ============ ============
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED $ (0.02) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 33,264,252 34,344,609
============ ============
See accompanying notes
4
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH DECEMBER 31, 2002
(Unaudited)
NINE MONTHS
ENDED
DECEMBER 31, NINE MONTHS CUMULATIVE
2001 ENDED AMOUNTS FROM
(RESTATED) DECEMBER 31, 2002 INCEPTION
---------- ----------------- ---------
COSTS AND EXPENSES
Research and development $ 435,555 $ 112,902 $ 2,422,468
General and administrative 889,285 551,699 5,303,555
------------ ------------ ------------
OPERATING LOSS (1,324,840) (664,601) (7,726,023)
OTHER INCOME (EXPENSE)
Interest income 15,113 4,887 174,838
Interest expense (1,763) (16,878) (34,946)
------------ ------------ ------------
NET LOSS $ (1,311,490) $ (676,592) $ (7,586,131)
============ ============ ============
NET LOSS PER COMMON SHARE - BASIC
AND DILUTED $ (0.03) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - BASIC AND DILUTED 39,522,559 34,494,609
============ ============
See accompanying notes
5
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH DECEMBER 31, 2002
(Unaudited)
NINE MONTHS
ENDED
DECEMBER 31, NINE MONTHS CUMULATIVE
2001 ENDED AMOUNTS FROM
(RESTATED) DECEMBER 31, 2002 INCEPTION
---------- ----------------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,311,491) $ (676,591) $ (7,586,131)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED BY OPERATING ACTIVITIES
Noncash transactions:
Depreciation and amortization 8,952 368 35,566
Reserve for note receivable from
affiliate (115,600)
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 382,821 - 383,794
Exchange of stock options to warrants
for employee services - - 382,821
Changes in assets and liabilities:
Other current assets 6,361 (20,303) (32,356)
Deposits - 2,900 (200)
Accounts payable and accrued expenses 239,922 98,402 816,697
------------ ------------ ------------
Total adjustments 638,056 (34,233) 3,094,818
------------ ------------ ------------
NET CASH USED BY OPERATING
ACTIVITIES (673,435) (710,824) (4,491,313)
------------ ------------ ------------
Continued on next page
6
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 AND 2002
AND CUMULATIVE AMOUNTS FROM APRIL 10, 1998 (Date of Inception)
THROUGH DECEMBER 31, 2002 (CONTINUED)
(Unaudited)
NINE MONTHS
ENDED
DECEMBER 31, NINE MONTHS CUMULATIVE
2001 ENDED AMOUNTS FROM
(RESTATED) DECEMBER 31, 2002 INCEPTION
---------- ----------------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - - (36,547)
Loan to an affiliate (12,827) 186,674
------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES (12,827) 186,674 (36,547)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sales of common
stock and warrants 500,000 - 4,130,023
Net proceeds from loan from affiliate - 400,000 400,000
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 500,000 400,000 4,530,023
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (186,262) (124,150) 2,163
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
Beginning of Period 215,810 126,313 -
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, End of Period $ 29,548 $ 2,163 $ 2,163
============ ============ ============
See accompanying notes
7
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 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, 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, and since this was a reverse acquisition, the legal
acquirer, 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. 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.
8
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 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
On June 18, 2002, the Company filed an amended 10-KSB containing restated
financial statements for the year ended March 31, 2002. This restatement
reflected the discovery by management of previously unrecorded
liabilities for invoices not accrued for outside services previously
performed on behalf of the Company. The restatement increased research
and development expense recorded for the year ended March 31, 2001, by
$59,585, with a corresponding increase in accrued expenses of the same
amount. At the same time, research and development expense for the year
ended March 31, 2002 was increased by $125,708, with a corresponding
increase in accrued expenses of the same amount. The cumulative effect
on net loss for the two years was $185,293. The adjustment has been
reflected in all comparative data presented in this report, including the
Statements of Operations for the Three Months Ended December 31, 2001 and
2002, as well as the Statements of Operations for the Nine Months Ended
December 31, 2001 and 2002. The Statements of Cash Flows for the Nine
Months Ended December 31, 2001 and 2002, reflect this restatement.
Except as discussed above, the accompanying unaudited 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 three and nine months ended December 31, 2002, are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB (restated)
for the period ended March 31, 2002, as filed with the Securities and
Exchange Commission from which the information of March 31, 2002, was
derived.
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 development stage
operations) through December 31, 2002. The Company has devoted
substantially all of its resources to the acquisition of a license,
research and development of Cytolin, 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
9
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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 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.
GOING CONCERN
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 realizes that additional funds
will be needed to fund operations after February 28, 2003.
The Company is pursuing other methods of funding operations including
various combinations of joint ventures, co-funding and licensing with
pharmaceutical companies and private investors. 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.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash
equivalents. At December 31, 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.
10
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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, 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 ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION. Management is considering the options offered
under SFAS 148, effective for its fiscal year ending March 31, 2003, but
has not determined its effects, if any.
NET LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No.
128, EARNINGS PER SHARE, 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.
11
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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.
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 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.
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, 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
12
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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 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 in
connection 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. The Company can terminate
the consulting agreement with one year's notice.
13
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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, 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. The License Agreement was
consummated simultaneously with the Transaction.
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
14
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
classified as a reduction of shareholders' equity. The Company has
written off the note receivable and accrued interest receivable effective
September 30, 2002, as it was deemed to be uncollectible. As a result,
the 450,000 shares of the Company that were pledged as 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.
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 addition, the Company received notice on February 11, 2003, that a
complaint was filed in Los Angeles County Superior Court (Case No. BC
290154) against the Company, Rex Lewis, Pamela Kapustay, Kimberly
Cerrone, O.B. Parris and Michael Davis. The plaintiffs in the Complaint
are CytoDyn of New Mexico, Inc. and Terri Hess, purportedly on behalf of
themselves and all persons disabled by the AIDS/HIV virus. The complaint
alleges that the Company breached the Conditional License Agreement with
CytoDyn, engaged in unfair business methods by failing to get Cytolin on
the market as soon as possible, committed fraud against CytoDyn, disabled
persons and the public, made false representations in quarterly and
annual reports, unjustly appropriated patents from CytoDyn, and
interfered with business relations between CytoDyn and Vista Biologicals.
The Complaint alleges out of pocket loss by CytoDyn of $898,543, plus
treble and exemplary damages, an injunction ordering Amerimmune to
transfer all rights it may have in any patents and trademarks received
from CytoDyn, and declaratory relief. As of February 12, 2003, the
Complaint had not been served on the Company or any of the Defendants.
The lawsuit purports to be on behalf of disabled persons and asks for an
expedited trial, within 6 months of appointment of a retired judge to act
as arbitrator.
15
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
In the event that the plaintiffs are successful in any of their efforts
to obtain damages, 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. In addition, to the extent that the Company is
required to expend significant capital or management resources to defend
these or any other claims, 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 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 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.)
16
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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.
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 $ 135,000 applicable to the nine months ended December 31, 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.)
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 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 December 31,
2002, the Company paid consulting fees of $ 143,941 to Allen for
providing scientific expertise regarding the development of Cytolin and
$348,771 pursuant to the Patent and Trademark License Agreement.
17
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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 were secured by
450,000 shares of Company common stock, which were owned by CytoDyn.
This note was deemed to be uncollectible, and as of September 30, 2002,
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.
As of December 31, 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. The Company has not complied with the terms of the note and is
in default. The note is accruing interest at a default rate of 15%.
18
AMERIMMUNE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2002 (CONTINUED)
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. The Company has not complied with the terms of the note and is in
default. The note is accruing interest at a default rate of 15%.
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. The Company has not complied with the terms of the note and is in
default. The note is accruing interest at a default rate of 15%.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN OF OPERATION
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
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. Such factors include,
among others, the Company's inability to obtain adequate working capital,
general economic and business conditions, changes in foreign, political,
social and economic conditions, regulatory initiatives and compliance
with governmental conditions, and various other matters. Reference is
made to the Company's Annual Report on Form 10-KSB 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.
GENERAL OVERVIEW
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the unaudited
balance sheet as of December 31, 2002, and the unaudited statement of
operations and cash flows for the nine months ended December 31, 2002 and
2001, and other related notes thereto as well as the audited financial
statements of the Company for the year ended March 31, 2002 (restated),
included in the Company's Annual Report (amended) on Form 10-KSB filed
with the Securities and Exchange Commission. This discussion contains
forward-looking statements based upon current expectations that involve
risks and uncertainties.
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 December 31,
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
20
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. To date, the Company has devoted
substantially all of its resources to the acquisition of a license,
research and development of Cytolin, 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 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 February 28, 2003. The Company has
commenced a tolerability study for Cytolin 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 received additional funding in February 2003 with a note
receivable in the amount of $57,000 from Rex Lewis, Chief Executive
Officer and director of the Company. It is the intention that the loan
will be repaid if and when other financing is obtained. These funds will
be utilized for immediate working capital needs and to pay past due
payables. The Company recognizes that it will require additional funding
by February 28, 2003, and thereafter, in order to continue operations and
to complete the development, testing and FDA approval process for its
drugs. In the event the Company is unable to obtain such funding on
favorable terms, if at all, the Company's business, financial condition,
and prospects would be materially and adversely affected.
The Company is investigating and pursuing other methods of funding
operations including various combinations of joint ventures, co-funding
and licensing with pharmaceutical companies and private investors. 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.
21
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2001
RESEARCH AND DEVELOPMENT EXPENSE
For the three months ended December 31, 2002 the Company incurred $
$38,597 in research and development expenses, compared to $188,721
incurred for the three-month period ended December 31, 2001. The
reduction of $150,224 is mainly the result of the Company's lack of
adequate funding as compared to the prior year.
GENERAL AND ADMINISTRATIVE EXPENSE
The Company incurred $166,328 in general and administrative expenses for
the three months ended December 31, 2002 compared to $492,185 for the
period ended December 31, 2001. The reduction of $325,857 reflects
reductions in expenses in recognition of more limited working capital.
INTEREST EXPENSE
The Company recognized $9,375 in interest expense net of interest income
for the three-month period ending December 31, 2002, as compared to
$8,576 net interest income for the three months ending December 31, 2001.
The difference of $17,951 is the result of a note write-off from an
affiliate.
NET LOSS
These expenses resulted in a net loss of $ $214,300 for the three-month
period ending December 31, 2002 as compared to a net loss of $672,330 for
the three months ended December 31, 2001. The expenses incurred during
this period relate primarily to continuation of research activities,
regulatory and administrative expenses, resulting in $458,030 reductions
in losses in the comparable periods.
NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO NINE MONTHS ENDED
DECEMBER 31, 2001
RESEARCH AND DEVELOPMENT EXPENSE
For the nine months ended December 31, 2002 the Company incurred
$112,902 in research and development expenses, as compared to $435,555 in
the nine-month period ended December 31, 2001. The decrease of $323,653
is due primarily to a reduction in available working capital.
GENERAL AND ADMINISTRATIVE EXPENSE
For the nine months ended December 31, 2002, the Company incurred
$551,699 in general and administrative expenses as compared to $889,285
for the nine months ended December 31,
22
2001. The decrease of $337,586 is due primarily to the decreased
availability of working capital.
INTEREST EXPENSE
The Company incurred $11,991 in interest expense net of interest income,
for the nine months ended December 31, 2002, as compared to $13,350 of
net interest income for the nine months ended December 31, 2001. The
difference of $25,341 is due to the cancellation of a note receivable
from an affiliate.
NET LOSS
These expenses resulted in a net loss of $676,592 for the nine-month
period ended December 31, 2002 as compared to a net loss of $1,311,490
for the nine months ended December 31, 2001. The reduction in net losses
is primarily due to reductions in spending that reflect less working
capital availability.
RESULTS FROM INCEPTION
From April 10, 1998 (date of inception) to December 31, 2002, the Company
incurred $2,422,468 in research and development expenses, $5,303,555 in
general and administrative expenses and earned $139,892 in interest
income net of taxes and interest expense, resulting in a net loss of
$7,586,131. The expenses incurred during inception to December 31, 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.
AMENDED FILING OF 10-KSB
Please note that the Company filed an amended 10-KSB for the Year ended
March 31, 2002, when it discovered that an accrual in the amount of
$185,293, from prior periods, covering research and development expense
had not been made.
23
LIQUIDITY
WORKING CAPITAL CHANGES FOR THE NINE MONTHS ENDED DECEMBER 31, 2002
During the nine months ended December 31, 2002, the Company's cash
position decreased by $124,150 to $2,163. Although the Company generated
cash of $586,674 from investing and financing activities, the Company's
operating activities used net cash of $710,824. These activities
contributed to a net working capital deficit as of December 31, 2002
$1,182,178.
CASH FROM FINANCING ACTIVITIES
The total cash raised from financing activities for the nine months ended
December 31, 2002 was $400,000 and consisted of loans from a principal
shareholder (See Note 4, Related Party Transactions).
From the commencement of operations on April 10, 1998 to December 31,
2002, the Company had no operating revenues and incurred net losses of
$7,586,131. 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 February
28, 2003.
Subsequent to December 31, 2002, the Company received funding in the
amount of $57,000 on a short-term note that will be repaid when and if
additional funding becomes available to the Company. This note is with
Mr. Lewis, an executive officer and director of the Company.
Recently, the Company has been dependent upon financing from Maya LLC, an
affiliate of Rex Lewis, and Mr. 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.
CAPITAL RESOURCES
The Company does not currently have any material commitments for capital
expenditures other than those incurred in the research and development
and the ordinary course of business.
Since inception, operating and research and development activities have
used cash without any offsetting revenue streams until such time that the
Company can finish development of the product Cytolin and there can be no
assurance that the product will ever be marketed
24
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. In addition, the Agreement granted the
Company a sublicense to the trademark Cytolin. 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 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.
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 December 31, 2002. We have
taken corrective action to ensure that such expenses are captured
and timely recognized in the future. Those measures include the
institution of a Disclosure Committee the members of which will be
furnished with a checklist that details the procedures that must be
followed to ensure that appropriate disclosures are timely made in
SEC filings and other public releases. All employees involved in
the monthly and quarterly closing process have received additional
training and counseling.
25
(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
The Company received notice on February 11, 2003, that a complaint was
filed in Los Angeles County Superior Court (Case No. BC 290154) against
the Company, Rex Lewis, Pamela Kapustay, Kimberly Cerrone, O.B. Parris
and Michael Davis. The plaintiffs in the Complaint are CytoDyn of New
Mexico, Inc. and Terri Hess, purportedly on behalf of themselves and all
persons disabled by the AIDS/HIV virus.
The complaint alleges that the Company breached the Conditional License
Agreement with CytoDyn, engaged in unfair business methods by failing to
get Cytolin on the market as soon as possible, committed fraud against
CytoDyn, disabled persons and the public, made false representations in
quarterly and annual reports, unjustly appropriated patents from CytoDyn,
and interfered with business relations between CytoDyn and Vista
Biologicals. The Complaint alleges out of pocket loss by CytoDyn of
$898,543, plus treble and exemplary damages, an injunction ordering
Amerimmune to transfer all rights it may have in any patents and
trademarks received from CytoDyn, and declaratory relief. As of February
12, 2003, the Complaint had not been served on the Company or any of the
Defendants. The lawsuit purports to be on behalf of disabled persons and
asks for an expedited trial, within 6 months of appointment of a retired
judge to act as arbitrator.
In the event the action is successful, the Company's business, financial
position and prospects would be materially and adversely affected.
While, other than the legal proceedings described above, 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 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.
26
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
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.
27
ITEM 2. CHANGES IN SECURITIES
In June, October and November of 2002, the Company borrowed a total of
$400,000 from Maya LLC, secured by promissory notes. 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).
28
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)
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.
29
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.
99.5 Promissory Note between Amerimmune Pharmaceuticals, Inc. and Maya
LLC dated June 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.
(b) Reports on Form 8-K
-------------------
On November 15, 2002, the Company filed a Current Report on Form 8-K
describing a restatement of certain financial information contained in
the Annual Report on Form 10-KSB for the fiscal year ended March 31,
2002.
On February 14, 2003, the Company filed a Current Report on Form 8-K
informing the Commission of a change in the Company's certifying
accountant.
30
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.
Date: February 18, 2003
Signatures:
/s/ O.B. Parrish
- --------------------
O.B. Parrish
Chairman of the Board
/s/ Rex H. Lewis
- --------------------
Rex H. Lewis
Chief Executive Officer
/s/ Kenneth M. Collins
- ---------------------------
Kenneth M. Collins
Chief Financial Officer
(Principal Accounting Officer)
31
CERTIFICATIONS
I, Rex H. Lewis, certify that:
1) I reviewed this quarterly report on Form 10-QSB;
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
materials respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the period
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 have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant is made known
to us by others within those entities, particularly during the
period in which this quarterly report is 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 the Registrant's board of directors (or
persons performing the equivalent functions);
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
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
32
6) The Registrant's other certifying officers and I have indicated in
this quarterly report whether 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: February 18, 2003
/s/ Rex H. Lewis
- --------------------
Rex H. Lewis
Chief Executive Officer
33
I, Kenneth M. Collins, certify that:
1) I reviewed this quarterly report on Form 10-QSB;
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
materials respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the period
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 have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant is made known
to us by others within those entities, particularly during the
period in which this quarterly report is 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 the Registrant's board of directors (or
persons performing the equivalent functions);
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
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
34
6) The Registrant's other certifying officers and I have indicated in
this quarterly report whether 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: February 18, 2003
/s/ Kenneth M. Collins
- ---------------------------
Kenneth M. Collins
Chief Financial Officer
(Principal Accounting Officer)
35