SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
Quarterly Report Under Section 13 or 15 (d)
X Of the Securities Exchange Act of 1934
---------
For Quarterly Period Ended March 31, 2001
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act 1934 for the period
from ____ to ____.
HOLLIS-EDEN PHARMACEUTICALS, INC
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
000-24672 13-3697002
(Commission File No.) (I.R.S. Employer Identification No.)
9333 Genesee Ave., Suite 200
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (858) 587-9333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of May 10, 2001 there were 11,615,803 shares of registrant's Common Stock,
$.01 par value, outstanding.
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
INDEX
PART I Financial Information Page
----
Item 1 Financial Statements....................................................... 3
Balance Sheets - March 31, 2001 and December 31, 2000...................... 3
Statements of Operations for the Three-Month Periods Ended March 31, 2001
and 2000 and Period from August 15, 1994 to March 31, 2001................. 4
Statements of Cash Flows for the Three-Month Periods Ended March 31, 2001
and 2000 and Period from August 15, 1994 to March 31, 2001................. 5
Notes to Financial Statements.............................................. 6
Item 2 Management's Discussion and Analysis of Results of Operations and Financial
Condition.................................................................. 7
Item 3 Quantitative and Qualitative Disclosures about Market Risk................. 8
PART II Other Information
Item 1 Legal Proceedings.......................................................... 9
Item 2 Changes in Securities...................................................... 9
Item 3 Defaults Upon Senior Securities............................................ 9
Item 4 Submission of Matters to a Vote of Security Holders........................ 9
Item 5 Other Information.......................................................... 9
Item 6 Exhibits and Reports on Form 8-K........................................... 9
2
Part I. Financial Information
Item I. Financial Statements
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheets
(Unaudited)
All numbers in thousands March 31, Dec. 31,
2001 2000
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents............................ $ 30,529 $ 34,298
Prepaid expenses...................................... 276 96
Deposits.............................................. 27 27
-----------------------
Total current assets............................. 30,832 34,421
Property and equipment, net of accumulated
depreciation of $234 and $204........................ 434 422
Other receivable from related party................... 260 256
-------- --------
Total assets..................................... $ 31,526 $ 35,099
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses................. $ 2,474 $ 2,636
-------- --------
Total liabilities................................ 2,474 2,636
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000 shares
authorized; no shares outstanding - -
Common stock, $.01 par value,
30,000 shares authorized; 11,606 and
11,590 shares issued and outstanding............... 116 116
Paid-in capital..................................... 80,623 80,503
Deficit accumulated during development stage........ (51,687) (48,156)
-------- --------
Total stockholders' equity....................... 29,052 32,463
-------- --------
Total liabilities and stockholders' equity....... $ 31,526 $ 35,099
======== ========
The accompanying notes are an integral part of these financial statements.
3
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
--------------------------------------------------------------------------------
All numbers in thousands, except per share amounts
Period from
Inception
(Aug.15,1994)
3 months ended March 31, to March 31
2001 2000 2001
---- ---- ----
Operating expenses:
Research and development:
R&D operating expenses...................... $ 2,716 $ 4,198 $ 29,306
R&D costs related to common stock and
stock option grants for collaborations
and technology purchase..................... 24 2,454 5,204
General and administrative:
G&A operating expenses...................... 1,265 1,077 14,251
G&A costs related to common
stock, option, & warrant grants............. - - 9,490
------- ------- ---------
Total operating expenses....................... 4,005 7,729 58,251
Other income (expense):
Interest income................................ 474 644 6,614
Interest expense............................... - - (50)
------- ------- ---------
Total other income............................. 474 644 6,564
------- ------- ---------
Net loss....................................... $(3,531) $(7,085) $ (51,687)
======= ======= =========
Net loss per share-basic and diluted........... (0.30) (0.63)
Weighted average number of common
shares outstanding-basic and diluted........... 11,602 11,173
The accompanying notes are an integral part of these financial statements.
4
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
--------------------------------------------------------------------------------
All numbers in thousands
Period from
Inception
(Aug. 15, 1994)
3 months ended March 31, to March 31
2001 2000 2001
-------- -------- ---------------
Cash flows from operating activities:
Net loss................................................ $(3,531) $(7,085) $(51,687)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................................ 30 25 234
Common stock issued for the company 401k/401m
plan............................................... 95 63 158
Common stock issued as consideration for
amendments/termination of agreements............... - - 67
Expense related to common stock issued
for the purchase of technology..................... - 1,848 1,848
Common stock and options issued as consideration
for license fees and services...................... 24 606 1,718
Common stock issued as consideration
for in process R&D................................. - - 2,000
Expense related to warrants issued
as consideration to consultants.................... - - 2,140
Expense related to warrants issued to a
director for successful closure of merger.......... - - 570
Expense related to stock options issued - - 5,140
Deferred compensation expense related
to options issued.................................. - - 1,210
Changes in assets and liabilities:
Prepaid expenses........................................ (180) (122) (275)
Deposits................................................ - - (27)
Loan receivable from related party...................... (3) (3) (260)
Accounts payable and accrued expenses................... 420 1,871 2,475
Wages Payable........................................... (581)
Disposal of assets...................................... - - 7
-------- -------- --------
Net cash used in operating activities............... (3,726) (2,797) (34,682)
Cash flows provided by investing activities:
Purchase of property and equipment...................... (43) (26) (675)
-------- -------- --------
Net cash used in investing activities............... (43) (26) (675)
Cash flows from financing activities:
Contributions from stockholder.......................... - - 103
Net proceeds from sale of preferred stock............... - - 4,000
Net proceeds from sale of common stock.................. - - 42,172
Proceeds from issuance of debt.......................... - - 371
Net proceeds from recapitalization...................... - - 6,271
Net proceeds from warrants and options exercised........ - 381 12,969
-------- -------- --------
Net cash from financing activities.................. 0 381 65,886
Net increase in cash...................................... (3,769) (2,442) 30,529
Cash and equivalents at beginning of period............... 34,298 47,486 -
-------- -------- --------
Cash and equivalents at end of period..................... $ 30,529 $ 45,044 $ 30,529
======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information at March 31, 2001, and for the three-month periods ended
March 31, 2001 and 2000, is unaudited. In the opinion of management, these
financial statements include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the results for the interim
periods presented. Interim results are not necessarily indicative of results
for a full year. These financial statements should be read in conjunction with
Hollis-Eden Pharmaceuticals, Inc. ("Hollis-Eden" or the "Company") Annual Report
on Form 10-K for the year ended December 31, 2000, which was filed with the
United States Securities and Exchange Commission on March 30, 2001.
While management believes that the discussion and analysis in this report
is adequate for a fair presentation of the information, management recommends
that this discussion and analysis be read in conjunction with Management's
Discussion and Analysis of Results of Operations and Financial Condition
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
2. Technology Acquisition - Commitments and Contingencies
Pursuant to a Technology Assignment Agreement dated January 20, 2000,
Patrick Prendergast and Colthurst Limited assigned to Hollis-Eden ownership of
all patents, patent applications and current or future improvements of the
technology previously licensed to Hollis Eden under the Colthurst License
Agreement dated May 18, 1994 (as amended), including HE2000, Hollis-Eden's lead
clinical compound. In consideration for the foregoing, Hollis-Eden agreed to
issue to Colthurst 660,000 shares of Common Stock and a warrant to purchase an
aggregate of 400,000 shares of Common Stock at $25 per share. Only 132,000 of
such shares of Common Stock were issued in 2000, with the remaining 528,000
shares to be issued over the next four years conditioned on continued compliance
with the agreement and, in particular, satisfaction of the Conditions (as
defined below). In addition, the agreements provided that the shares under the
warrant were to vest over four years conditioned on continued compliance with
the agreement and, in particular, satisfaction of the Conditions (as defined
below).
As stated above, the issuance of the additional shares of Common Stock and
the vesting of the warrant was dependent upon the satisfaction of certain
conditions (the "Conditions"), including (i) support of Hollis-Eden's actions by
Mr. Prendergast and Colthurst, by voting their shares of Hollis-Eden stock in
favor of management, and (ii) Mr. Prendergast and his affiliated companies not
conducting research and development activities relating to the transferred
technology. In accordance with Emerging Issues Task Force No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services, these future events could not be
determined at the date of the agreements (January 2000). Accordingly, the
shares and warrants were to be accounted for as they vest or were issued.
During 2000, we recorded a research and development charge for $1.9 million
representing the fair value of the 132,000 shares issued under the agreement.
Because all of the Conditions have not been satisfied, Hollis-Eden has not
issued any additional shares to Colthurst and believes it has no obligation to
issue to Colthurst any additional shares and that the warrant will not vest as
to any shares of Common Stock. While Hollis Eden is confident in its analysis,
if any dispute should arise in this matter, Hollis-Eden cannot guarantee that,
subject to the resolution of any such dispute, it will not be required to issue
additional equity to Mr. Prendergast and Colthurst or that it will
6
not incur additional accounting charges or other adverse accounting reporting as
a result of any such resolution.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The forward-looking comments contained in the following discussion involve
risks and uncertainties. Our actual results may differ materially from those
discussed here. Factors that could cause or contribute to such differences can
be found in the following discussion, as well as in the Company's Annual Report
on Form 10-K for the year ended December 31, 2000.
General
Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company, is presently engaged in the discovery and development of products for
the treatment of infectious diseases and immune system disorders, including
HIV/AIDS, hepatitis B and C, and malaria.
We are focusing our initial development efforts on a potent series of
immune regulating hormones and hormone analogs. Our lead compound in this
series, HE2000, is currently in Phase II clinical studies. By altering cytokine
production, HE2000 appears from early clinical studies to help reestablish
immune system balance in situations such as HIV, where the immune system is
dysregulated. In the case of HIV, we believe that by reestablishing this
balance the immune system may be able to better control virus levels and
potentially delay or prevent the progression to AIDS. In addition, based on the
mechanism of action, we believe these compounds will have an attractive safety
profile and will avoid issues of resistance that plague many existing antiviral
drugs.
We have been unprofitable since our inception and we expect to incur
substantial additional operating losses for at least the next few years as we
increase expenditures on research and development and begin to allocate
significant and increasing resources to clinical testing and other activities.
In addition, during the next few years, we may have to meet the substantial new
challenge of developing the capability to market products. Accordingly, our
activities to date are not as broad in depth or scope as the activities we may
undertake in the future, and our historical operations and financial information
may not be indicative of our future operating results or financial condition or
our ability to operate profitably as a commercial enterprise when and if we
succeed in bringing any drug candidates to market.
On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was merged
with and into us, then known as Initial Acquisition Corp. ("IAC"), a Delaware
corporation. Upon consummation of the merger of Hollis-Eden, Inc. with IAC (the
"Merger"), Hollis-Eden, Inc. ceased to exist, and IAC changed its name to
Hollis-Eden Pharmaceuticals, Inc.
Results of Operations
We have not generated any revenues for the period from August 15, 1994
(inception of Hollis-Eden) through March 31, 2001. We have devoted substantially
all of our resources to the payment of licensing fees and research and
development expenses plus expenses related to the startup of our business. From
inception until March 31, 2001, we have incurred expenses of approximately $34.5
million in research and development and $23.8 million in general and
administrative expenses, which have been partially offset by $6.6 million in net
interest income resulting in a loss of $51.7 million for the period.
Research and development expenses were $2.7 million for the three-month
period ended March 31, 2001 and $4.2 million for the same period in 2000. The
research and development expenses relate primarily to the ongoing development,
preclinical testing, and clinical trials for our first drug candidate, HE2000.
$2.5 million of the research and development expenses in the first quarter of
2000 were non-cash charges related to
7
the acquisition of technology and in-process R&D. There were no such expenses in
the first quarter of 2001. The increase in research and development operating
expenses for the three-month period ended March 31, 2001, compared to the same
period in 2000, was due to increased staffing and clinical trial activities.
General and administrative operating expenses were $1.3 million for the
three-month period ended March 31, 2001, compared to $1.1 million for the same
period in 2000. The general and administrative expenses relate to staffing,
facilities, supplies, benefits, recruiting, legal, investor relations and
travel. The increase in general and administrative operating expenses was
mainly due to expenses associated with the growth of the Company's operations.
Net interest income was $474,000 for the three-month period ended March 31,
2001, compared to $644,000 for the same period in 2000. The decline in interest
income is primarily due to lower average balances of cash and cash equivalents
as a result of ongoing operating losses.
Liquidity and Capital Resources
We have financed our operations since inception through the sale of equity.
During the year ended December 31, 1995, we received cash proceeds of $250,000
from the sale of securities. In May 1996, we completed a private placement of
shares of Common Stock, from which we received aggregate gross proceeds of $1.3
million. In March 1997, the Merger of IAC and Hollis-Eden, Inc. provided us
with $6.5 million in cash and other receivables. In May 1998, we completed a
private placement of shares and warrants, from which we received gross proceeds
of $20 million. During January 1999, we completed two private placements
raising approximately $25 million. In addition, Hollis-Eden has received a
total of $13 million from the exercise of warrants and stock options.
Our operations to date have consumed substantial capital without generating
any revenues, and we will continue to require substantial and increasing amounts
of funds to conduct necessary research and development and preclinical and
clinical testing of our drug candidates, and to market any drug candidates that
receive regulatory approval. We do not expect to generate revenue from
operations for the foreseeable future, and our ability to meet our cash
obligations as they become due and payable is expected to depend for at least
the next several years on our ability to sell securities, borrow funds or some
combination thereof. Based upon our current plans, we believe that our existing
capital resources, together with interest thereon, will be sufficient to meet
our operating expenses and capital requirements well into 2002. However, changes
in our research and development plans or other events affecting our operating
expenses may result in the expenditure of such cash before that time. We may
not be successful in raising necessary funds. Our future capital requirements
will depend upon many factors, including progress with preclinical testing and
clinical trials, the number and breadth of our programs, the time and costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other proprietary rights, the time and costs involved in obtaining
regulatory approvals, competing technological and market developments, and our
ability to establish collaborative arrangements, effective commercialization,
marketing activities and other arrangements. We expect to continue to incur
increasing negative cash flows and net losses for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
8
PART II Other Information
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Quarterly Report on Form 10-Q, we are not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on our business, financial condition or operating
results.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
9
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOLLIS-EDEN PHARMACEUTICALS, INC.
Dated: May 10, 2001 By: /s/ Daniel D. Burgess
----------------------------------
Daniel D. Burgess
Chief Operating Officer/
Chief Financial Officer
(Principal Financial Officer)
By: /s/ Robert W. Weber
----------------------------------
Robert W. Weber
Vice President-Controller/
Chief Accounting Officer
(Principal Accounting Officer)
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