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 June 30, 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 August 3, 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 JUNE 30, 2001
INDEX
PART I Financial Information Page
----
Item 1 Financial Statements................................................................................ 3
Balance Sheets - June 30, 2001 and December 31, 2000................................................ 3
Statements of Operations for the Three-Month and Six-Month Periods Ended June 30, 2001 and 2000 and
Period from August 15, 1994 (Inception) to June 30, 2001............................................ 4
Statements of Cash Flows for the Six-Month Periods Ended June 30, 2001 and 2000 and Period from
August 15, 1994 (Inception) to June 30, 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................................................................................... 10
Item 6 Exhibits and Reports on Form 8-K.................................................................... 10
2
Part I. Financial Information
Item I. Financial Statements
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheets
(Unaudited)
All numbers in thousands June 30, Dec. 31,
2001 2000
----------- ----------
ASSETS:
Current assets:
Cash and cash equivalents.............................. $ 27,465 $ 34,298
Prepaid expenses....................................... 224 96
Deposits............................................... 27 27
------------------------------
Total current assets.............................. 27,716 34,421
Property and equipment, net of accumulated
depreciation of $267 and $204........................ 468 422
Other receivables...................................... 35 -
Other receivable from related party.................... 279 256
---------- ---------
Total assets...................................... $ 28,498 $ 35,099
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses.................. $ 3,279 $ 2,636
---------- ---------
Total liabilities................................. 3,279 2,636
---------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized; no shares outstanding.................. - -
Common stock, $.01 par value,
30,000 shares authorized; 11,616 and
11,590 shares issued and outstanding............... 116 116
Paid-in capital...................................... 80,669 80,503
Deficit accumulated during development stage......... (55,566) (48,156)
---------- ---------
Total stockholders' equity......................... 25,219 32,463
---------- ---------
Total liabilities and stockholders' equity......... $ 28,498 $ 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 June 30, 6 months ended June 30, to June 30
2001 2000 2001 2000 2001
--------- --------- --------- ---------- -------------
Operating expenses:
Research and development:
R&D operating expenses.................... $ 2,942 $ 2,617 $ 5,659 $ 6,815 $ 32,249
R&D costs related to common
stock, option, & warrant grants
for collaborations........................ 24 24 48 2,478 5,228
General and administrative:
G&A operating expenses.................... 1,242 1,025 2,507 2,101 15,493
G&A costs related to common
stock, option, & warrant grants........... - - - - 9,490
--------- --------- --------- ---------- -------------
Total operating expenses....................... 4,208 3,666 8,214 11,394 62,460
Other income (expense):
Interest income............................... 330 673 804 1,316 6,944
Interest expense.............................. - - - - (50)
--------- --------- --------- ---------- -------------
Total other income............................ 330 673 804 1,316 6,894
--------- --------- --------- ---------- -------------
Net loss....................................... $ (3,878) $ (2,993) $ (7,410) $ (10,078) $ (55,566)
========= ========= ========= ========== =============
Net loss per share-basic and diluted........... (0.33) (0 27) (0.64) (0.90)
Weighted average number of common
shares outstanding-basic and diluted........... 11,616 11,233 11,609 11,203
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)
6 months ended June 30, to June 30
2001 2000 2001
------------ ----------- ---------------
Cash flows from operating activities:
Net loss.......................................................... $ (7,410) $ (10,078) $ (55,566)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation.................................................. 63 52 267
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............................................. 48 630 1,742
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.................................................. (128) (75) (224)
Deposits.......................................................... - - (27)
Other receivables................................................. (35) - (35)
Loan receivable from related party................................ (23) (13) (279)
Accounts payable and accrued expenses............................. 1,224 511 3,279
Wages Payable..................................................... (581) - -
Disposal of assets................................................ - - 7
------------ ----------- ---------------
Net cash used in operating activities......................... (6,747) (7,062) (37,703)
Cash flows provided by investing activities:
Purchase of property and equipment................................ (109) (49) (742)
------------ ----------- ---------------
Net cash used in investing activities......................... (109) (49) (742)
Cash flows from financing activities:
Contributions from stockholder.................................... - - 104
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.................. 23 765 12,992
------------ ----------- ---------------
Net cash from financing activities............................ 23 765 65,910
Net increase in cash................................................ (6,833) (6,346) 27,465
Cash and equivalents at beginning of period......................... 34,298 47,486 -
------------ ----------- ---------------
Cash and equivalents at end of period............................... $ 27,465 $ 41,140 $ 27,465
============ =========== ===============
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 June 30, 2001, and for the three-month and six-month
periods ended June 30, 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 the 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 exchange for certain covenants made by Mr. Prendergast and
Colthurst regarding their future activities (the "Covenants") as well as for the
consideration described above, 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, of which only 132,000 shares were to be issued
in 2000, with the remaining 528,000 shares to be issued over the next four years
conditioned on continued compliance with the Covenants. The shares underlying
the warrant were to vest over four years and were likewise conditioned on
continued compliance with the Covenants.
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, certain 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 Mr. Prendergast and Colthurst failed to comply with the Covenants,
Hollis-Eden has not issued any additional shares to Colthurst and believes it
has no obligation to issue to Colthurst any additional shares. 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. We are currently developing
three clinical stage compounds with potentially broad therapeutic applications:
HE2000, HE2200 and, through our relationship with Aeson Therapeutics, HE2500.
Our lead compound, 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 June 30, 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 June 30, 2001, we have incurred expenses of approximately $37.5
million in research and development ($5.2 million are non-cash expenses) and
$25.0 million in general and administrative expenses ($9.5 million are non-cash
expenses), which have been partially offset by $6.9 million in net interest
income resulting in a loss of $55.6 million for the period.
Research and development expenses were $3.0 million and $5.7 million for
the three- and six-month periods ended June 30, 2001 and $2.6 million and $9.3
million for the same periods in 2000. The research and
7
development expenses relate primarily to the ongoing development, preclinical
testing, and clinical trials for our first drug candidate, HE2000. Included in
the six-month period ended June 30, 2000 was $2.2 million related to
collaborations and $2.5 million in non-cash charges related to the acquisition
of technology and in-process R&D. There were no such expenses in the six-month
period ended June 30, 2001. The increase in research and development expenses
(net of collaborations and technology acquisitions) for the three- and six-month
periods ended June 30, 2001, compared to the same period in 2000, was due to
increased staffing and clinical trial activities.
General and administrative operating expenses were $1.2 million and $2.5
million for the three- and six-month periods ended June 30, 2001, compared to
$1.0 million and $2.1 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
investor relations and the growth of the Company's operations.
Net interest income was $330,000 and $804,000 for the three- and six-month
periods ended June 30, 2001, compared to $673,000 and $1,316,000 for the same
periods in 2000. The decline in interest income is due to lower interest rates
and 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, since inception 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
In May 2001, the Company entered into a financial advisory and
investment banking agreement with H.C. Wainwright & Co., Inc. As an initial
retainer fee, the Company agreed to issue to H.C. Wainwright & Co. Inc, $25,000
and a warrant to purchase up to 25,000 shares of Common Stock at an exercise
price of $3.09 per share.
The sale and issuance of securities in the transaction described in
the foregoing paragraph was deemed to be exempt from registration under the
Securities Act of 1933, as amended, by virtue of Section 4(2) and/or Regulation
D promulgated under such Act. The recipient represented their intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends are affixed to the securities issued
in such transaction. All recipients either received adequate information about
the Company or had access, through employment or other relationships, to such
information.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
The Annual Meeting of Stockholders of Hollis-Eden Pharmaceuticals was
held on June 29, 2001. At this meeting, the Company solicited the vote of the
stockholders on the proposals set forth below and received for each proposal the
votes indicated below:
(1) To elect three Class I directors to hold office until the 2004
Annual Meeting of Stockholders. Elected to serve as Class I
directors were Paul Bagley, William H. Tilley and Salvatore J.
Zizza. For each elected director the results of voting were:
9,974,219 for, 542,099 withheld, and 0 abstained. The continuing
directors are Thomas Charles Merigan, Jr., M.D., Brendan R.
McDonnell, Richard B.Hollis and Leonard Makowka M.D., Ph.D.,
FRCS(C), FACS.
(2) To approve the Company's 1997 Incentive Stock Option Plan, as
amended, to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 500,000 shares
to a total of 3,250,000 shares. The 1997 Incentive Stock Option
Plan, as amended, was approved with the following votes:
9,799,259 for, 655,081 against, and 61,978 abstained.
(3) To approve the Company's Restated Certificate of Incorporation,
as amended, to increase the authorized number of shares of Common
Stock to 50,000,000. The Company's Restated Certificate of
Incorporation, as amended, was approved with the following votes:
10,289,416 for, 202,861 against, and 24,041 abstained.
(4) To ratify the selection of BDO Seidman, LLP as independent
auditors of the Company for its fiscal year ending December 31,
2001. The selection of BDO Seidman, LLP as independent auditors
of the Company for its fiscal year ending December 31, 2001 was
ratified with the following votes: 10,489,259 for, 8,256 against,
and 18,803 abstained.
9
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included as part of this report:
Exhibit Number Description
-------------- -----------
3.4 Certificate of Amendment to
Certificate of Incorporation
(b) Reports on Form 8-K: None
10
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: August 3, 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)
11