<PAGE>
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, 2000
[_] 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 April 28, 2000 there were 11,206,458 shares of registrant's Common Stock,
$.01 par value, outstanding.
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
PART I FINANCIAL INFORMATION Page
----
Item 1 Financial Statements............................................. 3
Balance Sheets - December 31, 1999 and March 31, 2000............ 3
Statements of Operations for the Three-Month Periods Ended March
31, 1999 and 2000 and Period from August 15, 1994 to March 31,
2000............................................................. 4
Statements of Cash Flows for the Three-Month Periods Ended March
31, 1999 and 2000 and Period from August 15, 1994 to March 31,
2000............................................................. 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....... 9
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................ 10
Item 2 Changes in Securities............................................ 10
Item 3 Defaults Upon Senior Securities.................................. 11
Item 4 Submission of Matters to a Vote of Security Holders.............. 11
Item 5 Other Information................................................ 11
Item 6 Exhibits and Reports on Form 8-K................................. 11
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
BALANCE SHEETS
(Unaudited)
================================================================================
All numbers in thousands
March 31, Dec. 31,
2000 1999
-------- --------
ASSETS:
Current assets:
Cash and cash equivalents ........................ $ 45,044 $ 47,486
Prepaid expenses ................................. 237 115
Deposits ......................................... 27 27
-------- --------
Total current assets ........................ 45,308 47,628
Property and equipment, net of accumulated
depreciation of $122 and $97 ................... 393 392
Other receivable from related party .............. 247 245
-------- --------
Total assets ................................ $ 45,948 $ 48,265
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses ............ $ 3,511 $ 1,640
-------- --------
Total liabilities ........................... 3,511 1,640
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000,000 shares
authorized; no shares outstanding ............ -- --
Common stock, $.01 par value,
30,000,000 shares authorized; 11,206,458 and
11,071,054 shares issued and outstanding ..... 112 111
Paid-in capital ................................ 77,647 75,155
Common stock to be issued ...................... 9,240 --
Deficit accumulated during development stage ... (44,562) (28,641)
-------- --------
Total stockholders' equity ................... 42,437 46,625
-------- --------
Total liabilities and stockholders' equity ... $ 45,948 $ 48,265
======== ========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(Unaudited)
================================================================================
All numbers in thousands, except per share amounts
<TABLE>
<CAPTION>
Period from
Inception
(Aug. 15, 1994)
3 months ended March 31 to March 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
Operating expenses:
Research and development:
R&D operating expenses ........... $ 4,198 $ 759 $ 17,381
R&D costs related to common
stock, option, & warrant grants
for collaborations ............... 11,290 -- 11,917
General and administrative:
G&A operating expenses ........... 1,077 966 9,907
G&A costs related to common
stock, option, & warrant grants -- 7,166 9,516
------------ ------------ ------------
Total operating expenses .............. 16,565 8,891 48,721
Other income (expense):
Interest income ...................... 644 498 4,209
Interest expense ..................... -- -- (50)
------------ ------------ ------------
Total other income ................... 644 498 4,159
------------ ------------ ------------
Net loss .............................. $ (15,921) $ (8,393) $ (44,562)
============ ============ ============
Net loss per share .................... $ (1.42) $ (0.92)
Weighted average number of
common shares outstanding ............ 11,172,607 9,101,991
</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)
================================================================================
All numbers in thousands
<TABLE>
<CAPTION>
Period from
Inception
3 months ended (Aug. 15, 1994)
March 31, to March 31,
2000 1999 2000
-------- -------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $(15,921) $ (8,393) $(44,562)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation .................................. 25 6 122
Common stock issued for the company 401k/m plan 63 -- 63
Common stock issued as consideration for
amendments/termination of agreements ......... -- -- 66
Common stock/warants issued as consideration
for the purchase of technology ............... 10,684 -- 10,684
Common stock issued as consideration
for license fees and services ................ 599 -- 1,194
Expense related to options/warrants issued
as consideration to consultants .............. 7 2,140 2,569
Expense related to warrants issued to a
director for successful closure of merger .... -- -- 570
Expense related to stock options issued ....... -- 4,900 5,140
Deferred compensation expense related
to options issued ............................ -- 136 1,210
Changes in assets and liabilities:
Prepaid expenses .................................. (122) (136) (237)
Deposits .......................................... -- (18) (27)
Receivable from related party ..................... (3) (39) (247)
Accounts payable and accrued expenses ............. 1,871 248 3,511
Disposal of assets ................................ -- 7 7
R & D fees payable to related party ............... -- -- --
-------- -------- --------
Net cash used in operating activities ......... (2,797) (1,149) (19,937)
Cash flows provided by investing activities:
Purchase of property and equipment ................ (26) (42) (522)
-------- -------- --------
Net cash used in investing activities ......... (26) (42) (522)
Cash flows from financing activities:
Borrowings from related party ..................... -- -- 342
Payments on note payable to related party ......... -- -- (342)
Contributions from stockholder .................... -- -- 104
Net proceeds from sale of preferred stock ......... -- -- 4,000
Net proceeds from sale of common stock ............ -- 24,773 42,172
Proceeds from issuance of debt .................... -- -- 371
Net proceeds from recapitalization ................ -- -- 6,271
Net proceeds from warrants exercised .............. 381 5,098 12,585
-------- -------- --------
Net cash from financing activities ............ 381 29,871 65,503
Net increase in cash ................................ (2,442) 28,680 45,044
Cash at beginning of period ......................... 47,486 24,190 --
-------- -------- --------
Cash at end of period ............................... $ 45,044 $ 52,870 $ 45,044
======== ======== ========
</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 March 31, 2000, and for the three-month periods ended
March 31, 2000 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 Inc. ("Hollis-Eden" or the "Company") Annual Report
on Form 10-K for the year ended December 31, 1999, which was filed with the
United States Securities and Exchange Commission on March 20, 2000.
2. ISSUANCE OF COMMON STOCK / WARRANTS FOR TECHNOLOGY ACQUISITION
During January 2000, Hollis-Eden entered into new agreements settling its
pending arbitration with Patrick T. Prendergast, Colthurst and Edenland. The
Settlement and Mutual Release Agreement completely disposed of all of the
matters that were at issue in the pending arbitration. In addition, the parties
entered into two new technology agreements, the Technology Assignment Agreement
and the Sponsored Research and License Agreement.
The Technology Assignment Agreement replaces the Colthurst License
Agreement dated May 18, 1994 among Hollis-Eden, Mr. Prendergast and Colthurst.
Pursuant to the Technology Assignment Agreement, Mr. Prendergast and Colthurst
assigned to Hollis-Eden ownership of all patents, patent applications and
current or future improvements of the technology under the Colthurst License
Agreement. In consideration for the termination of the Colthurst agreement,
including Hollis-Eden's royalty obligations thereunder, and transfer of
technology under the Technology Transfer Agreement, Hollis-Eden agreed to issue
to Colthurst 660,000 shares of Hollis-Eden Common Stock ("Common Stock") and
warrants to purchase an aggregate of 400,000 shares of Common Stock with an
exercise price of $25 per share. Since the technology is still in it's early
stages, Hollis Eden incurred a one-time non-cash charge during January 2000, of
$9.24 million and $1.44 million for the Common Stock and warrants issued,
respectively. Only 132,000 of the 660,000 shares of Common Stock will be issued
in 2000, with the remaining 528,000 shares to be issued over the next four years
conditioned on continued compliance with the agreement. In addition, all of the
shares under the warrant will vest over the next four years conditioned on
continued compliance with the agreement. Continued compliance with the agreement
is not dependent upon any substantive actions to be performed or taken by
Prendergast or Colthurst. The compliance relates primarily to (i) their support
of specified Company actions and (ii) not conducting any research and
development activities relating to the transferred technology. Accordingly, the
shares of stock to be issued in the future have been recorded in stockholder's
equity.
The Sponsored Research and License Agreement replaces both the Edenland
License Agreement and the Research, Development and Option Agreement, each dated
August 25, 1994 among Hollis-Eden, Mr. Prendergast and Edenland. Pursuant to the
Sponsored Research and License Agreement, Edenland exclusively licensed to
Hollis-Eden a number of compounds, together with all related patents and patent
applications. In consideration for the license agreement, within a month of
receipt of all required documents, the Company is obligated to pay Edenland
$2 million. These funds were accrued in the first quarter of 2000.
6
<PAGE>
3. ISSUANCE OF COMMON STOCK FOR LICENSE FEES
The Company entered into an exclusive license agreement with Humanetics
Corporation on January 28, 2000. In consideration of the license agreement, the
Company agreed to issue to Humanetics 38,000 shares of Common Stock with a value
of $15.75 per share. The issuance of the Common Stock resulted in a $598,500
non-cash charge during the quarter ended March 31, 2000.
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, 1999.
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, 1999, which was filed with the United States Securities and Exchange
Commission on March 20, 2000.
GENERAL
Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company, is engaged in the discovery, development and commercialization of
products for the treatment of infectious diseases and immune system disorders,
including HIV/AIDS, hepatitis C and malaria.
We are focusing our initial development efforts on a potent series of
adrenal steroid hormone analogs. Our lead compound in this series, HE2000, is
currently in Phase I/II clinical studies in the U.S. and South Africa. 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 setting 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 this compound will have an attractive safety
profile and will avoid issues of resistance that plague many existing antiviral
drugs.
The ability to restore immune system balance has the potential to have
broad applicability to a wide variety of infectious diseases and oncology-
related applications as well as a number of inflammatory conditions. To more
fully exploit this commercial opportunity we have begun an aggressive research
and licensing effort designed to expand both the number of compounds in
development and the breadth of potential therapeutic applications. Several
compounds resulting from these activities are in late stage preclinical
development and are candidates for clinical trials.
We are pursuing a partially integrated approach to building our business.
As such, we intend to utilize third parties for many of our activities such as
clinical development and manufacturing. We believe by being involved in the
design and supervision of these activities, but not the day-to-day execution, we
can preserve
7
<PAGE>
our flexibility and limit our net losses during the development phase. If we are
able to successfully develop HE2000 or other pharmaceutical products, we
anticipate marketing them directly in the U.S. and potentially elsewhere,
subject to applicable regulatory approvals. For certain therapeutic indications
or geographic regions, we anticipate establishing strategic collaborations to
commercialize these opportunities.
We have 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 March 31, 2000, had an
accumulated deficit of approximately $44.5 million. We cannot guarantee 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. 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 our 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 future operating 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 March 31, 2000. We have devoted
substantially all of our resources to the payment of licensing fees and research
and development expenses in addition to expenses related to the startup of our
business. From the founding until March 31, 2000, we have incurred expenses of
approximately $29.3 million in research and development and $19.4 million in
general and administrative expenses, which has been partially offset by $4.2
million in net interest income resulting in a cumulative loss of $44.5 million,
of which $21.8 million consisted of non-cash expenses.
Research and development operating expenses increased to $4.2 million from
$759,000 for the three-month period ended March 31, 2000 and 1999, respectively.
Included in the first quarter of 2000 was $2.2 million in license and
collaboration expenses related to new or restructured collaborations. There were
no such expenses in the first quarter of 1999. Research and development
operating expenses relate primarily to ongoing development, preclinical testing
and clinical trial expenses for the Company's drug candidates. The increase in
research and development operating expenses for the three-month period ended
March 31, 2000, as compared to the same period in 1999, was due mainly to
increased staffing and preclinical and clinical trial activities.
In the three months ended March 31, 2000, research and development non-cash
charges of $11.2 million were incurred for costs relating to issuances of Common
Stock and warrants. The non-cash charges are comprised of $10.7 million relating
to our new Technology Assignment Agreement (see note 2) and $500,000 relating to
our new license agreement with Humanetics Corporation (see note 3). There were
no such charges for the same time period in 1999.
General and administrative operating expenses were $1,077,000 for the
three-month period ended March 31, 2000, compared to $966,000 for the same
period in 1999, reflecting an increase of $111,000. The general and
administrative expenses relate to staffing, facilities, supplies, benefits,
recruiting, legal and travel. The increase in general and administrative
operating expenses was mainly due to expenses associated with the growth of the
Company's operations.
During the three-month period ending March 31, 1999, $7.1 million in
general and administrative expenses were incurred for non-cash charges relating
to issuances of options and warrants. There were no such charges for the three-
month period ended March 31, 2000.
8
<PAGE>
Net interest income increased to $644,000 for the three-month period ended
March 31, 2000, compared to $498,000 for the same period in 1999. The interest
income increase is primarily due to higher interest rates and higher average
balances of cash and cash equivalents as a result of our private placement of
common stock on January 25, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Hollis-Eden has financed its operations since inception through the sale of
shares of stock and with loans from our 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 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 Initial Acquisition Corp.
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 $24.8 million. In addition, we have received $12.6 million from
the exercise of options and warrants.
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 at least well into 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 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 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.
9
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 20, 2000, Hollis-Eden reached a settlement on its pending
arbitration with Patrick T. Prendergast, Colthurst and Edenland. The Settlement
and Mutual Release Agreement completely disposed of all of the matters that were
at issue in the pending arbitration. In addition, the parties entered into two
new technology agreements, the Technology Assignment Agreement and the Sponsored
Research and License Agreement (see note 2).
The settlement resulted in the Company acquiring ownership rights to HE2000
and terminating all future obligations under the Colthurst and Edenland License
Agreements, and the Research, Development and Option Agreements.
ITEM 2. CHANGES IN SECURITIES
During January 2000, the Company entered into a new Technology Assignment
Agreement which replaces the Colthurst License Agreement. The Company agreed to
issue 660,000 shares of Common Stock and warrants to purchase an aggregate of
400,000 shares of Common Stock with an exercise price of $25 per share. Only
132,000 shares of Common Stock are to be issued in 2000, with the remaining
Common Stock to be issued over the next four years conditioned on Colthurst's
and Mr. Prendergast's continued compliance with the agreement. In addition, all
of the shares under the warrant will vest over the next four years conditioned
on continued compliance with the agreement.
During January 2000, the Company entered into a license agreement with
Humanetics Corporation. The Company agreed to issue to Humanetics as a license
fee, 38,000 shares of Common Stock.
The sales and issuances of securities in the transactions described in the
foregoing paragraphs were 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 recipients in each case 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 stock
certificates issued in such transactions. All recipients either received
adequate information about the Company or had access, through employment or
other relationships, to such information.
10
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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)
The Company filed the following report on Form 8-K during the quarter:
On February 4, 2000, a report on Form 8-K dated January 20, 2000 was filed
with the SEC announcing that the Company had reached a settlement on its pending
arbitration with Patrick T. Prendergast, Colthurst Limited and Edenland, Inc.
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 28, 2000 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
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INDEX TO EXHBITS
27 Financial Data Schedule (Filed Electronically Only)
12
<TABLE> <S> <C>
<PAGE>
<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, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 45,044
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,948
<PP&E> 515
<DEPRECIATION> 122
<TOTAL-ASSETS> 45,948
<CURRENT-LIABILITIES> 3,511
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> 42,437
<TOTAL-LIABILITY-AND-EQUITY> 45,948
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 16,565
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,921)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,921)
<EPS-BASIC> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
