<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
[X] Quarterly Report Under Section 13 or 15 (d) Of the Securities Exchange
Act of 1934
For Quarterly Period Ended March 31, 1998
[ ] 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 110
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (619) 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 April 16, 1998 there were 6,801,315 shares of registrant's Common Stock,
$.01 par value, outstanding.
<PAGE> 2
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
ITEM 1 Financial Statements..........................................................................3
Balance Sheet - March 31, 1998 and December 31, 1997..........................................3
Statements Of Operations for the Three-Month Periods Ended March 31, 1997
and 1998 and Period from August 15, 1994 to March 31, 1998...................................4
Statements Of Cash Flows for the Fiscal Years Ended March 31, 1997 and 1998
and Period from August 15, 1994 to March 31, 1998.............................................5
Notes To Financial Statements.................................................................6
ITEM 2 Management's Discussion and Analysis of Results of Operations and Financial
Condition.....................................................................................6
PART II OTHER INFORMATION.
ITEM 1 Legal Proceedings.............................................................................9
ITEM 2 Changes in Securities.........................................................................9
ITEM 3 Defaults Upon Senior Securities...............................................................9
ITEM 3 Submission of Matters to a Vote of Security Holders...........................................9
ITEM 4 Other Information.............................................................................9
ITEM 6 Exhibits and Reports on Form 8-K..............................................................9
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents .......................... $ 6,053,007 $ 7,102,620
Prepaid expenses .................................... 405,853 53,009
Deposits ............................................ 9,163 9,163
Other receivable - tax refund ....................... 105,436 105,436
Other receivable from related party ................. 46,679 46,679
------------ ------------
Total current assets ........................... 6,620,138 7,316,907
Property and equipment, net of accumulated
depreciation of $11,295 and $6,602 ................ 81,271 82,941
------------ ------------
Total assets ................................... $ 6,701,409 $ 7,399,848
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses ............... $ 114,024 $ 128,631
R & D fees payable to related party ................. 250,000 338,000
------------ ------------
Total liabilities .............................. 364,024 466,631
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued or outstanding ..... -- --
Common stock, $01 par value,
30,000,000 shares authorized; 6,801,315 and
6,772,023 shares issued and outstanding ......... 68,013 67,720
Paid-in capital ................................... 16,835,520 16,325,338
Deferred compensation-stock options, net of
accumulated amortization of $359,000 and $282,000 (1,489,000) (1,566,000)
Deficit accumulated during development stage ...... (9,077,148) (7,893,841)
------------ ------------
Total stockholders' equity ...................... 6,337,385 6,933,217
------------ ------------
Total liabilities and stockholders' equity ...... $ 6,701,409 $ 7,399,848
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUG.15,1994)
TO
3 MONTHS ENDED MARCH 31, MARCH 31,
1997 1998 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating expenses:
Research and development . $ 1,573,680 $ 556,047 $ 5,858,443
General and administrative 793,344 712,395 3,541,561
----------- ----------- -----------
Total operating expenses .. 2,367,024 1,268,442 9,400,004
Other income (expense):
Interest income .......... 1,372 85,135 370,679
Interest expense ......... -- -- (47,823)
----------- ----------- -----------
Total other income ........ 1,372 85,135 322,856
----------- ----------- -----------
Net loss .................. $(2,365,652) $(1,183,307) $(9,077,148)
=========== =========== ===========
Net loss per share ........ $ (0.48) $ (0.17)
Weighted average number of
common shares outstanding 4,959,583 6,796,485
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUG. 15, 1994)
TO
3 MONTHS ENDED MARCH 31, MARCH 31,
1997 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................... $ (2,365,652) $ (1,183,307) $ (9,077,148)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation ................................... 254 4,873 11,475
Common stock issued as consideration
for amendments to the license agreements ...... -- -- 32,540
Common stock issued as consideration
for termination of a finance agreement ........ -- -- 33,962
Expense related to options and warrants
issued as consideration to consultants ........ 2,006 104,006 118,047
Expense related to warrants issued to
director for successful closure of merger ..... 570,000 -- 570,000
Deferred compensation expense related
to options issued ............................. -- 77,000 359,000
Changes in assets and liabilities:
Prepaid expenses ................................... 93,937 (48,850) (91,831)
Deposits ........................................... 100,000 -- (9,163)
Other receivable - tax refund ...................... -- -- (105,436)
Other receivable from related party ................ (43,944) -- (46,679)
Accounts payable and accrued expenses .............. 173,066 (14,607) 114,024
Wages payable ...................................... 40,625 -- --
R & D fees payable to related party ................ 1,500,000 (88,000) 250,000
Income taxes payable ............................... 110,114 -- --
------------ ------------ ------------
Net cash provided (used) in operating activities 180,406 (1,148,885) (7,841,209)
Cash flow provided by investing activities:
Purchase of property and equipment ................. -- (4,924) (94,467)
------------ ------------ ------------
Net cash used in investing activities .......... -- (4,924) (94,467)
Cash flows from financing activities:
Borrowings from related party ...................... 92,000 -- 342,000
Payments on note payable to related party .......... (92,000) -- (342,000)
Contributions from stockholder ..................... -- -- 103,564
Net proceeds from sale of common stock ............. -- 102,475 1,611,974
Proceeds from issuance of debt ..................... -- -- 371,164
Net proceeds from recapitalization ................. 6,270,782 -- 6,270,782
Net proceeds from warrants exercised ............... -- -- 5,629,478
------------ ------------ ------------
Net cash from financing activities ............. 6,270,782 102,475 13,986,962
Net increase (decrease) in cash ...................... 6,451,188 (1,051,334) 6,051,286
Cash at beginning of period .......................... 17,917 7,102,620 --
------------ ------------ ------------
Cash at end of period ................................ $ 6,469,105 $ 6,051,286 $ 6,051,286
============ ============ ============
</TABLE>
Supplemental disclosure cash flow information:
1) The Company issued warrants for services in lieu of cash with an
estimated value of $408,000.
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
HOLLIS-EDEN PHARMACEUTICALS, INC.
(a corporation in the development stage)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at March 31, 1998, and for the three-month periods ended
March 31, 1998 and 1997, 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 (the "Company") Annual Report on Form 10-K for the
year ended December 31, 1997, which was filed with the United States Securities
and Exchange Commission on March 31, 1998.
2. ISSUANCE OF WARRANTS
During February 1998, the Company entered into an agreement with an
investors relations firm, which expires on December 31, 1998. The Company agreed
to issue as part of the compensation for services, 150,000 warrants with an
exercise price of $14.75 per share and an expiration date of December 31, 1998.
The warrants were estimated to have a value of $408,000, which amount will be
expensed $102,000 per quarter during 1998.
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. The Company's 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, 1997.
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, 1997 which was filed with the United States Securities and Exchange
Commission on March 31, 1998.
GENERAL
Hollis-Eden Pharmaceuticals, a development-stage pharmaceutical company, is
engaged in the discovery, development and commercialization of products for the
treatment of a number of targeted disease states caused by viral, bacterial,
parasitic or fungal infections, including HIV/AIDS, hepatitis B and C, and
malaria. The Company has three technology platforms, one based on cellular
energy regulation, the second on a unique immune system modulation technology,
and the third on biochemical synthesis regulators. The Company believes that
certain of its drug candidates may provide the first long-term treatment for HIV
without the development of viral strain resistance to the drugs' effectiveness,
significant toxicity or severe side effects. The Company has not yet generated
any operating revenues. The Company has experienced significant operating losses
due to substantial expenses incurred to acquire and fund development of its drug
candidates and, as of March 31, 1998, had an accumulated deficit of $9.1
million.
6
<PAGE> 7
When and if any of the Company's drug candidates have been approved for
commercial sale, the Company plans to market them in the United States. For
international markets, the Company intends to develop strategic alliances with
major pharmaceutical companies that have foreign regulatory expertise and
established distribution channels, and will also consider corporate strategic
partnerships and co-marketing agreements. No assurances can be given that any of
the Company's drug candidates will be approved for commercial sale or that any
of the foregoing proposed arrangements will be implemented or prove to be
successful.
The Company has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to its clinical testing and other
activities. In addition, during the next few years, the Company will have to
meet the substantial new challenge of developing the capability to market
products. Accordingly, 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
the Company's future operating results or financial condition or its ability to
operate profitably as a commercial enterprise when and if it succeeds in
bringing any drug candidate to market.
During March 1997, Hollis-Eden, Inc. ("Hollis-Eden"), a Delaware
corporation, was merged with and into the Company (then known as Initial
Acquisition Corp. ("IAC")). Upon the consummation of the merger, Hollis-Eden
ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals. For
accounting and financial reporting purposes, the merger was treated as a
recapitalization of Hollis-Eden. As used herein, unless otherwise indicated, for
periods prior to March 1997 the terms "Company" and "Hollis-Eden
Pharmaceuticals" shall refer to Hollis-Eden, not IAC.
RESULTS OF OPERATIONS
The Company has not generated any revenues for the period from August 15,
1994 (inception of Hollis-Eden) through March 31, 1998. The Company has devoted
substantially all its resources to the payment of licensing fees and research
and development fees plus expenses related to the startup of its business. From
inception until March 31, 1998, the Company incurred expenses of approximately
$5.9 million in research and development fees, $3.5 million in general and
administrative expenses, and $300,000 in net interest income resulting in a loss
of $9.1 million for the period.
Research and Development expenses totaled $556,000 for the three months
ended March 31, 1998, compared to $1.6 million for the comparable period in
1997. The 1997 research and development expenses were significantly larger than
1998 due to a $1.5 million expense to Edenland, Inc., a related party, as
funding to continue the development of the Company's second drug candidate,
REVERSIONEX. The 1998 research and development expenses relate primarily to the
ongoing development of the Company's first drug candidate, INACTIVIN.
General and administrative expenses totaled $712,000 for the three month's
ended March 31, 1998, compared to $793,000 for the comparable period in 1997.
During 1997, general and administrative expenses included one time charges
associated with the merger with IAC, including a $570,000 charge relating to the
issuance of warrants to a certain director and former officer. The 1998 general
and administrative expenses included (i) the non-cash charges for the issuance
of warrants to an investors relations group (described above) and (ii) increased
expenses as a public company such as legal fees, filing and reporting fees, and
directors and officers insurance.
Net interest income totaled $85,000 for the three months ended March 31,
1998, compared to $1,000 for the comparable period in 1997. The increase in net
interest income in 1998 from 1997 is due to high balances in cash and cash
equivalents.
7
<PAGE> 8
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through the sale of
shares of Common Stock and with loans from the Company's founder, Richard B.
Hollis. The Company repaid Mr. Hollis in January 1996.
During the year ended December 31, 1995, the Company received cash proceeds
of $250,000 from the sale of its securities. In May 1996, the Company completed
a private placement of shares of Common Stock, from which it received aggregate
gross proceeds of $1.3 million. In March 1997, the Merger of IAC and Hollis-Eden
provided the Company with $6.5 million in cash and other receivables.
Under its license agreements with Dr. Patrick T. Prendergast, Colthurst and
Edenland, the Company is obligated to pay certain minimum license fees to
maintain its rights to its drug candidates. Under these agreements, the Company
is obligated to pay the licensors an aggregate of two and one-half percent of
all such proceeds raised within 24 months of the $350,000 license payment which
was made on April 5, 1996. An annual renewal license fee of $500,000 is due
when one of the following events occur: the Company raises a predetermined
amount of capital; the Company sublicenses the technology received under the
Colthurst License Agreement; the Company generates sales; the Company licenses
or funds new technologies not covered under the existing agreements; or a
predetermined date in the future. As of March 31, 1998, the Company is current
on all license fee obligations under these agreements.
Under its Research and Development Agreement with Edenland and Dr. Patrick
T. Prendergast, the Company is committed to pay $3.0 million for the development
costs related to REVERSIONEX. An amount of $1.5 million was recorded as a charge
to operations upon the closing of the Merger and was paid in April 1997. An
additional $1.2 million was recorded as a charge to operations upon the exercise
of the warrants and was paid in May 1997. The remaining $300,000 was accrued as
an expense during the fourth quarter of 1997 and is payable by April 28, 1998.
In addition, the Company has agreed to commit at least 30% of its annual
research and development budget up to a maximum of $50.0 million during the term
of the agreement, but a minimum of $2.0 million and maximum of $10.0 million for
any given calendar year, to pay development costs for REVERSIONEX or any new
product developed under the agreement. In addition, payments made towards the
$3.0 million development costs are deductible from the amounts due for the $2.0
million per year of research. Accordingly, with respect to the $2.0 million per
year obligation, assuming only such minimum amounts will be due, only $1.0
million will be due in 1998.
The Company's operations to date have consumed substantial capital without
generating any revenues, and the Company will continue to require substantial
and increasing amounts of funds to conduct necessary research and development
and preclinical and clinical testing of its drug candidates, and to market any
drug candidates that receive regulatory approval. The Company does not expect to
generate revenue from operations for the foreseeable future, and the Company's
ability to meet its cash obligations as they become due and payable is expected
to depend for at least the next several years on its ability to sell securities,
borrow funds or some combination thereof. Based upon its current plans, the
Company's management believes that its existing capital resources, together with
interest thereon, will be sufficient to meet the Company's operating expenses
and capital requirements through at least the end of 1998. There can be no
assurance, however, that changes in the Company's research and development plans
or other events affecting the Company's operating expenses will not result in
the expenditure of such cash before that time. No assurance can be given that
the Company will be successful in raising necessary funds. The Company's future
capital requirements will depend upon many factors, including progress with
preclinical testing and clinical trials, the number and breadth of the Company's
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, the ability of the Company to establish collaborative
arrangements and effective commercialization and marketing activities and other
arrangements. In any event, the Company will continue to incur increasing
negative cash flows and net losses for the foreseeable future.
8
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YEAR 2000 ISSUE
The year 2000 computer issue is not expected to have any material affect on
the Company's financial statements or operations of the Company.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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
Exhibits:
27 Financial Data Schedule (filed electronically only)
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: April 21, 1998 By: /s/ Robert W. Weber
--------------------------------
Robert W. Weber
Vice President-Controller
(Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
27 FINANCIAL DATA SCHEDULE (FILED ELECTRONICALLY ONLY)
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,053,007
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,620,138
<PP&E> 92,566
<DEPRECIATION> 11,295
<TOTAL-ASSETS> 6,701,409
<CURRENT-LIABILITIES> 364,024
<BONDS> 0
0
0
<COMMON> 68,013
<OTHER-SE> 6,269,372
<TOTAL-LIABILITY-AND-EQUITY> 6,701,409
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,268,442
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,183,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,183,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,183,307)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
