10QSB 1 q1202.txt FORM 10-QSB DATED DECEMBER 31, 2002 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 ------- 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 ------------------------------------------------------------------------- (Address of Principal Executive Offices) (805) 497 - 7252 ------------------------------------------------------------------------- (Issuer's Telephone Number, Including Area Code) ------------------------------------------------------------------------- (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 ------- ------- 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