<PAGE>
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, 1999
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 July 30, 1999 there were 11,058,344 shares of registrant's Common Stock,
$.01 par value, outstanding.
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I Financial Information Page
----
<S> <C>
Item 1 Financial Statements.......................................................... 3
Balance Sheet - December 31, 1998 and June 30, 1999........................... 3
Statements Of Operations for the Three-Month and Six-Month Periods Ended
June 30, 1998 and 1999 and Period from August 15, 1994 to June 30, 1999....... 4
Statements Of Cash Flows for the Six-Month Periods Ended June 30, 1998
and 1999 and Period from August 15, 1994 to June 30, 1999..................... 5
Notes To Financial Statements................................................. 6
Item 2 Management's Discussion and Analysis of Results of Operations and
Financial Condition........................................................... 7
PART II Other Information
Item 1 Legal Proceedings............................................................. 10
Item 2 Changes in Securities......................................................... 10
Item 3 Defaults Upon Senior Securities............................................... 10
Item 4 Submission of Matters to a Vote of Security Holders........................... 10
Item 5 Other Information............................................................. 10
Item 6 Exhibits and Reports on Form 8-K.............................................. 10
</TABLE>
2
<PAGE>
Part I. Financial Information
Item I. Financial Statements
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
Dec. 31, June 30,
1998 1999
---- ----
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents........................................ $ 24,189,806 $ 50,591,936
Prepaid expenses.................................................. 26,250 122,062
Deposits.......................................................... 9,163 27,185
Other receivable from related party............................... 206,663 248,165
------------- -------------
Total current assets............................................ 24,431,882 50,989,348
Property and equipment, net of accumulated
depreciation of $28,201 and $51,567............................. 92,343 331,294
------------- -------------
Total assets.................................................... $ 24,524,225 $ 51,320,642
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses............................. $ 221,670 $ 502,913
------------- -------------
Total liabilities............................................... 221,670 502,913
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized; 4,000 and 0 shares outstanding 40 -
Common stock, $.01 par value,
30,000,000 shares authorized;8,592,202 and
11,058,344 shares issued and outstanding....................... 85,922 110,583
Paid-in capital................................................. 38,795,887 74,698,780
Deferred compensation-stock options, net of
accumulated amortization of $590,000 and $641,333.............. (1,258,000) -
Deficit accumulated during development stage.................... (13,321,294) (23,991,634)
------------- -------------
Total stockholders' equity..................................... 24,302,555 50,817,729
------------- -------------
Total liabilities and stockholders' equity..................... $ 24,524,225 $ 51,320,642
============= =============
</TABLE>
The accompaning notes are an integral part of these financial statements.
3
<PAGE>
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Inception
(Aug.15,1994)
to
3 months ended June 30, 6 months ended June 30, June 30,
1998 1999 1998 1999 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development.............. $ 628,486 $ 1,601,292 $ 1,184,533 $ 2,360,272 $ 10,440,128
General and administrative............ 762,690 1,274,435 1,475,085 9,406,258 15,812,607
----------- -------------------------- ----------------------------
Total operating expenses............... 1,391,176 2,875,727 2,659,618 11,766,530 26,252,735
Other income (expense):
Interest income....................... 209,676 598,690 294,811 1,096,190 2,310,650
Interest expense...................... (1,726) - (1,726) - (49,549)
----------- -------------------------- ----------------------------
Total other income..................... 207,950 598,690 293,085 1,096,190 2,261,101
----------- -------------------------- ----------------------------
Net loss............................... $(1,183,226) $(2,277,037) $(2,366,533) $(10,670,340) $(23,991,634)
=========== ========================== ============================
Net loss per share..................... $ (0.15) $ (0.21) $ (0.33) $ (1.00)
Weighted average number of
common shares outstanding............. 7,716,671 11,058,344 7,256,578 10,661,021
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period from
Inception
(Aug. 15, 1994)
to
6 months ended June 30, June 30,
1998 1999 1999
------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (2,366,533) $(10,670,340) $(23,991,634)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. 9,760 23,366 51,567
Common stock issued as consideration
for amendments to license agreements.... - - 32,540
Common stock issued as consideration
for termination of a finance agreement.. - - 33,962
Common stock issued as consideration
for license fees and services........... 564,000 - 595,000
Expense related to warrants issued as
consideration to consultants............ - 2,140,000 2,140,000
Expense related to options issued as
consideration to consultants............ 208,012 10,029 432,070
Expense related to warrants issued to a
director for successful closure of
merger................................. - - 570,000
Expense related to stock options
issued.................................. - 4,900,000 5,140,000
Deferred compensation expense related
to options issued....................... 154,000 274,430 864,430
Changes in assets and liabilities:
Prepaid expenses............................. (119,350) (95,813) (122,063)
Deposits..................................... - (18,022) (27,185)
Other receivable - tax refund................ 105,436 - -
Receivable from related party................ (212,688) (41,502) (248,165)
Accounts payable and accrued expenses........ (48,343) 271,215 502,913
Disposal of assets........................... - 6,834 6,834
R & D fees payable to related party.......... (338,000) - -
------------ ------------ -------------
Net cash used in operating activities.... (2,043,706) (3,199,803) (14,019,731)
Cash flows provided by investing activities:
Purchase of property and equipment........... (9,143) (269,152) (389,696)
------------ ------------ ------------
Net cash used in investing activities.... (9,143) (269,152) (389,696)
Cash flows from financing activities:
Borrowings from related party................ - - 342,000
Payments on note payable to related party.... - - (342,000)
Contributions from stockholder............... - - 103,564
Net proceeds from sale of preferred stock.... 4,000,000 - 4,000,000
Net proceeds from sale of common stock....... 15,889,829 24,772,506 42,171,834
Proceeds from issuance of debt............... - - 371,164
Net proceeds from recapitalization........... - - 6,270,782
Net proceeds from warrants exercised......... 555,641 5,098,578 12,084,018
------------ ------------ ------------
Net cash from financing activities....... 20,445,470 29,871,084 65,001,362
Net increase in cash........................... 18,392,621 26,402,129 50,591,935
Cash at beginning of period.................... 7,102,620 24,189,806 -
------------ ------------ -------------
Cash at end of period.......................... $ 25,495,241 $ 50,591,935 $ 50,591,935
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information at June 30, 1999, and for the three- and six-month periods
ended June 30, 1998 and 1999, 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, 1998, which was filed with the United States Securities
and Exchange Commission on March 30, 1999.
2. Acceleration of Options
On March 1, 1999, the Company announced the resignation of its president.
Concurrent therewith, the Company accelerated the vesting of 300,000 stock
options previously granted to the president. This acceleration is considered to
be a new grant of options and as such, the Company expensed a one time non-cash
charge of $4.9 million during the first quarter of 1999.
3. Issuance of Warrants
During March 1999, the Company entered into a three-year agreement with a
financial consulting organization affiliated with a director of the Company. The
Company agreed to issue as compensation for services, warrants to purchase
500,000 shares of Common Stock with an exercise price of $20.50 per share and an
expiration date of March 2002. The warrants are not subject to any vesting
provisions. The warrants were estimated to have a value of approximately $2.1
million, which was expensed as a non-cash charge during the first quarter of
1999.
4. Preferred Stock converted to Common Stock
During January 1999, the Company issued 346,217 shares of common stock in
connection with the conversion of the Series A convertible preferred stock and
additional shares relating to the adjustable common stock. The adjustable
common stock was issued during the private placement of May 1998 and was subject
to adjustment based on the future average stock price of the Company's Common
Stock.
5. Private Placements of Common Stock
During January 1999, the company completed two private placements of an
aggregate of 1,367,868 shares of Common Stock at prices ranging from $18.00 to
$18.50 per share. In connection with the private placements, the Company issued
warrants to purchase an aggregate of 90,000 shares of the Company's Common
Stock, with an exercise price of $18.25 per share, as a finder's fee. The
Company raised approximately $25.0 million.
6. Termination of Additional Merger Share Rights
During January 1999, the Company terminated the additional merger share
rights as a result of the above mentioned private placement and the Company's
average closing stock price. The additional merger
6
<PAGE>
share rights were granted to non-affiliated stockholders of Initial Acquisition
Corp. at the time of the merger between Hollis-Eden and Initial Acquisition
Corp.
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, 1998.
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, 1998, which was filed with the United States Securities and Exchange
Commission on March 30, 1999.
General
Hollis-Eden is a pharmaceutical company in the development stage. We intend
to discover, develop and commercialize 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. We have three
technology platforms, the first based on cellular energy regulation, the second
on a unique immune system modulation technology, and the third on the inhibiting
of protein RNA and DNA synthesis. We believe that certain of our drug candidates
may provide the first long-term treatment of HIV without the development of
viral strain resistance to the drugs' effectiveness, significant toxicity or
severe side effects. Hollis-Eden has not yet generated any operating revenues.
We have experienced significant operating losses due to substantial expenses
incurred to acquire and fund development of our drug candidates and, as of June
30, 1999, had an accumulated deficit of $24.0 million.
When and if any of Hollis-Eden's drug candidates have been approved for
commercial sale, we plan to market them in the United States. For international
markets, we intend 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 our drug candidates
will be approved for commercial sale or that any of the foregoing proposed
arrangements will be implemented or prove to be successful.
Hollis-Eden 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 allocates significant and
increasing resources to its clinical testing and other activities. In addition,
during the next few years, we will 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 must undertake in
the future, and our historical operations and financial information are not
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 candidate to market.
Results of Operations
Hollis-Eden has not generated any revenues for the period from the
founding, on August 15, 1994, through June 30, 1999. We have devoted
substantially all of our resources to the payment of licensing fees and research
and development fees plus expenses related to the startup of our business. From
the founding until June 30, 1999, we have incurred expenses of approximately
$10.4 million in research and development fees,
7
<PAGE>
$15.8 million in general and administrative expenses, and $2.2 million in net
interest income resulting in a loss of $24.0 million for the period.
Research and Development expenses increased to $1.6 million from $628,000
and increased to $2.4 million from $1.2 million for the three- and six-month
periods ended June 30, 1999, respectively, as compared to the same periods for
the previous year. The research and development expenses relate primarily to the
ongoing development, preclinical testing, and clinical trials for the Company's
first drug candidate, HE2000. The increase in research and development expenses
in 1999 as compared to 1998 was due to increased staffing, preclinical work, and
the initiation of clinical trials.
General and administrative expenses increased to $1.3 million from $763,000
and increased to $9.4 million from $1.5 million for the three- and six- month
periods ended June 30, 1999. The 1999 general and administrative expenses
included (i) $7.0 million during the first quarter for non-cash charges, due to
the acceleration of vesting of stock options for the Company's former president
and the issuance of warrants for services (see notes 2 and 3 above), (ii)
increased staffing, and (iii) increased operating expenses for salaries,
benefits, recruiting, legal, and travel.
Net interest income increased to $599,000 from $210,000 and increased to
$1.1 million from $294,000 in the three- and six-month periods ended June 30,
1999 compared to 1998. The interest income increases are due to higher balances
of cash and cash equivalents as a result of the private placements of May, 1998
and January, 1999.
Liquidity and Capital Resources
Hollis-Eden has financed its operations since inception through the sale of
shares of stock and with loans from the founder, Richard B. Hollis, which were
repaid in January 1996.
During the year ended December 31, 1995, Hollis-Eden received cash proceeds
of $250,000 from the sale of its 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
provided us with $6.5 million in cash and other receivables. During May 1998, we
closed a private placement of shares of Common and Preferred Stock with gross
proceeds totaling $20.6 million. During January 1999, we closed two private
placements of shares of Common Stock with aggregate gross proceeds of
approximately $25.0 million. In addition, during the past two years, we have
received $12.1 million from the exercise of warrants.
Under the license agreements with Patrick T. Prendergast, Colthurst and
Edenland, Hollis-Eden is obligated to pay certain minimum license fees to
maintain its rights to its drug candidates. As of June 30, 1999, we are current
on all license fee obligations under these agreements.
Under its Research and Development Agreement with Edenland and Patrick T.
Prendergast, Hollis-Eden committed to pay $3.0 million for the development costs
related to REVERSIONEX. These development costs were accrued as an expense
during 1997 and paid in full by April 1998.
Hollis-Eden's 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 through the end of 2001.
There can be no assurance, however, that changes in our research and development
plans or other events affecting our operating expenses will not result in the
expenditure of such cash before that time. No assurance can be given that we
will be
8
<PAGE>
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. In any event, we will continue to
incur increasing negative cash flows and net losses for the foreseeable future.
Year 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish the 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with such "Year 2000" requirements.
We upgraded our accounting software during 1998 with a version that is Year
2000 compliant. In addition, we have upgraded all of our computer operating
systems. We recently completed the upgrading of our communications systems and
other non-information technology systems. We believe that our computer systems,
applications and communications systems are Year 2000 compliant.
We do not expect that the costs associated with achieving Year 2000
compliance will have a material adverse effect on its future results of
operations, liquidity or capital resources. We have spent less than five
thousand dollars in connection with our Year 2000 compliance efforts to date.
We have been contacting our material suppliers and third party service
providers to identify their Year 2000 problems and provide solutions to prevent
the disruption of our business activities. We have completed our review of the
compliance efforts with the majority of these parties.
We cannot guarantee that the computer systems and applications of other
companies on which we rely upon will be timely converted. Any such failure by
these other companies to become Year 2000 compliant could materially adversely
affect us. Moreover, the following could have a material adverse effect on our
business or financial condition:
[_] failure of suppliers and third-party service providers equipment
to operate or to operate accurately;
[_] failure of clinical trial site medical equipment to perform
properly;
[_] failure of necessary materials or supplies to be available to us
when needed, or
[_] failure of other equipment, software, or systems as a result of
Year 2000 problems.
During the balance of this year, we intend to complete our review of the
remaining third party service providers, to assess worst case scenarios and to
develop one or more contingency plans that may be necessary, such as securing
alternative vendors.
9
<PAGE>
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
The Annual Meeting of Stockholders of Hollis-Eden Pharmaceuticals was held
on May 17, 1999. 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 two Class II directors to hold office until the 2002 Annual
Meeting of Stockholders. Elected to serve as Class II directors were
Brendan R. McDonnell and Thomas Charles Merigan, Jr., M.D. For each
elected director the results of voting were: 8,817,560 for, 368,087
withheld, and 0 abstained. The continuing directors are Richard B.
Hollis, J. Paul Bagley, Leonard Makowka, William H. Tilley, and
Salvatore J. Zizza.
(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 1,000,000 shares to a total of
2,250,000 shares. The 1997 Incentive Stock Option Plan, as amended,
was approved with the following votes: 5,036,005 for, 516,346 against,
and 19,222 abstained.
(3) To ratify the selection of BDO Seidman, LLP as independent auditors of
the Company for its fiscal year ending December 31, 1999. The
selection of BDO Seidman, LLP as independent auditors of the Company
for its fiscal year ending December 31, 1999 was approved with the
following votes: 9,165,352 for, 14,650 against, and 5,645 abstained.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
27 Financial Data Schedule (filed electronically only)
10
<PAGE>
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 5, 1999 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)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 50,591,936
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 50,989,348
<PP&E> 382,861
<DEPRECIATION> 51,567
<TOTAL-ASSETS> 51,320,642
<CURRENT-LIABILITIES> 502,913
<BONDS> 0
0
0
<COMMON> 110,583
<OTHER-SE> 51,210,059
<TOTAL-LIABILITY-AND-EQUITY> 51,320,642
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 11,766,530
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,670,340)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,670,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,670,340)
<EPS-BASIC> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
