<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 September 30, 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 November 10, 2000 there were 11,589,525 shares of registrant's Common
Stock, $.01 par value, outstanding.
<PAGE>
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I Financial Information Page
----
<S> <C>
Item 1 Financial Statements.......................................................................... 3
Balance Sheets - September 30, 2000 and December 31, 1999..................................... 3
Statements of Operations for the Three-Month and Nine-Month Periods Ended September 30,
2000 and 1999 and Period from August 15, 1994 to September 30, 2000........................... 4
Statements of Cash Flows for the Nine-Month Period Ended September 30, 2000 and 1999 and
Period from August 15, 1994 to September 30, 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.................................... 10
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>
All numbers in thousands Sept. 30, Dec. 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents..................................... $ 38,776 $ 47,486
Prepaid expenses.............................................. 143 115
Deposits...................................................... 27 27
----------------- -----------------
Total current assets........................................ 38,946 47,628
Property and equipment, net of accumulated
depreciation of $176 and $97................................. 373 392
Deferred acquisition costs.................................... 127 -
Other receivable from related party........................... 254 245
----------------- -----------------
Total assets................................................ $ 39,700 $ 48,265
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses......................... $ 2,103 $ 1,640
----------------- -----------------
Total liabilities........................................... 2,103 1,640
----------------- -----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value, 10,000 shares
authorized; no shares outstanding............................ $ - $ -
Common stock, $.01 par value,
30,000 shares authorized; 11,381 and
11,071 shares issued and outstanding......................... 114 111
Paid-in capital............................................... 79,925 75,155
Common stock to be issued..................................... 7,392 -
Deficit accumulated during development stage.................. (49,834) (28,641)
----------------- -----------------
Total stockholders' equity.................................. 37,597 46,625
----------------- -----------------
Total liabilities and stockholders' equity.................. $ 39,700 $ 48,265
================= =================
</TABLE>
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 Sept. 30, 9 months ended Sept. 30, to Sept. 30
2000 1999 2000 1999 2000
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development:
R&D operating expenses................... $ 2,147 $ 1,406 $ 8,963 $ 3,766 $ 22,145
R&D costs related to common
stock, option, & warrant grants
for collaborations....................... 24 7 11,338 10 11,992
General and administrative:
G&A operating expenses................... 771 791 2,872 2,884 11,702
G&A costs related to common
stock, option, & warrant grants.......... - 158 - 7,469 9,490
------------ ------------ ------------ ------------ ------------
Total operating expenses.................... 2,942 2,362 23,173 14,129 55,329
Other income (expense):
Interest income............................ 663 608 1,980 1,704 5,545
Interest expense........................... - - - - (50)
------------ ------------ ------------ ------------ ------------
Total other income.......................... 663 608 1,980 1,704 5,495
------------ ------------ ------------ ------------ ------------
Net loss.................................... $ (2,279) $ (1,754) $ (21,193) $ (12,425) $ (49,834)
============ ============ ============ ============ ============
Net loss per share-basic and diluted........ (0.20) (0.16) (1.89) (1.15)
Weighted average number of common
shares outstanding-basic and diluted....... 11,315 11,059 11,240 10,794
</TABLE>
The accompanying notes are an integral part of these financial Statements.
4
<PAGE>
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
--------------------------------------------------------------------------------
All numbers in thousands
<TABLE>
<CAPTION>
Period from
Inception
(Aug. 15, 1994)
9 months ended Sept. 30, to Sept. 30
2000 1999 2000
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................................... $ (21,193) $ (12,425) $ (49,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation.................................................... 78 44 176
Common stock issued for the company 401k/m plan................. 63 - 63
Common stock issued as consideration for
amendments/termination of agreements........................... - - 66
Common stock/warrants 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................................ 55 2,150 2,618
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.............................................. - 439 1,210
Changes in assets and liabilities:
Prepaid expenses.................................................. (28) (55) (143)
Deposits.......................................................... - (18) (27)
Receivable from related party..................................... (9) (44) (254)
Accounts payable and accrued expenses............................. 336 346 1,976
Disposal of assets................................................ - 7 7
R & D fees payable to related party............................... - - -
---------------- ---------------- ----------------
Net cash used in operating activities........................... (9,415) (4,656) (26,554)
Cash flows provided by investing activities:
Purchase of property and equipment................................ (60) (338) (556)
---------------- ---------------- ----------------
Net cash used in investing activities........................... (60) (338) (556)
Cash flows from financing activities:
Borrowings from related party..................................... - - 342
Payments on note payable to related party......................... - - (342)
Contributions from stockholder.................................... - - 103
Net proceeds from sale of preferred stock......................... - - 4,000
Net proceeds from sale of common stock............................ - 24,772 42,172
Proceeds from issuance of debt.................................... - - 371
Net proceeds from recapitalization................................ - - 6,271
Net proceeds from warrants and options exercised.................. 765 5,118 12,969
---------------- ---------------- ----------------
Net cash from financing activities.............................. 765 29,890 65,886
Net increase in cash............................................... (8,710) 24,896 38,776
Cash at beginning of period........................................ 47,486 24,190 -
---------------- ---------------- ----------------
Cash at end of period.............................................. $ 38,776 $ 49,086 $ 38,776
================ ================ ================
</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 September 30, 2000, and for the three-month and nine-
month periods ended September 30, 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 were issued in
2000, with the remaining 528,000 shares to be issued over the next four years
conditioned on continued compliance with the agreement. 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 dependant 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
stockholders' 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, the Company paid $2
million to Edenland during the second quarter of 2000.
<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. The
issuance of the Common Stock resulted in a $598,500 non-cash charge during the
quarter ended March 31, 2000.
4. Subsequent Events
On October 11, 2000, the Company acquired a 21% equity stake in Aeson
Therapeutics, Inc., an Arizona-based company which is developing molecules that
are analogs with similar biological properties to HE2000, the Company's lead
compound in development. The Company exchanged $2 million in cash and 208,681
shares of Hollis-Eden Common Stock for its equity interest in Aeson. In
addition, the Company also obtained an exclusive worldwide sublicense to three
issued patents (not including fluasterone) from Aeson. As part of the
transaction, Aeson and its shareholders have granted the Company an exclusive
option to acquire the remainder of Aeson at a pre-determined price at any time
during the next 30 months. Regardless of whether the Company elects to exercise
this option, however, the Company will retain its exclusive sublicense to the
three patents.
Aeson's lead compound, fluasterone, is in Phase II clinical studies for
cardiovascular disease and actinic keratosis, a precursor to squamous cell
cancer, as well as in preclinical studies in other indications. The cash
portion of the Company's investment will be used by Aeson to fund specific
studies with fluasterone as well as other compounds in its pipeline.
Since the technology is still in its early stages, the Company expects to take a
one-time charge for in process research and development of approximately $4
million during the fourth quarter of 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 primarily for the treatment of infectious diseases and immune system
disorders, including HIV/AIDS, hepatitis and malaria.
We are focusing our initial development efforts on a potent series of
immune regulatory hormones and hormone analogs. Our lead compound in this
series, HE2000, is currently in clinical studies in the U.S. and South Africa.
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 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.
<PAGE>
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 September 30, 2000, had an
accumulated deficit of approximately $49.8 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 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 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 September 30, 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 September 30, 2000, we have incurred expenses
of approximately $34.1 million in research and development and $21.2 million in
general and administrative expenses, which has been partially offset by $5.5
million in net interest income resulting in a cumulative loss of $49.8 million,
of which $21.7 million consisted of non-cash expenses.
Research and development operating expenses increased to $2.1 million from
$1.4 million and increased to $9.0 million from $3.8 million for the three- and
nine-month periods ended September 30, 2000 and 1999, respectively. 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- and nine-month periods ended September 30, 2000, as compared to the same
periods in 1999, was due mainly to increased staffing and preclinical and
clinical trial activities. These expenses are expected to continue to increase
as the Company expands its clinical activities. Included in the nine-month
period ended September 30, 2000 was $2.2 million in license and collaboration
expenses related to new or restructured collaborations. The 1999 results
included a $500,000 license fee.
In the nine-month period ended September 30, 2000, research and development
non-cash charges of $11.3 million were incurred for costs relating to issuances
of Common Stock and warrants. The non-cash charges are comprised mainly of
$10.7 million relating to our new Technology Assignment Agreement (see note 2)
and $600,000 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 remained relatively unchanged
at $0.8 million for both the three-month period ended September 30, 2000 and
1999, and $2.9 million for both nine-month periods ended September 30, 2000 and
1999. General and administrative operating expenses relate to staffing,
facilities, supplies, benefits, recruiting, legal and travel.
During the nine-month period ending September 30, 1999, $7.5 million in
general and administrative expenses were incurred for non-cash charges relating
to issuances of options and warrants. There were no comparable general and
administrative charges for the nine-month period ended September 30, 2000.
<PAGE>
Net interest income increased to $663,000 from $608,000 and to $1.9 million
from $1.7 million for the three- and nine-month periods ended September 30, 2000
and 1999, respectively. The change in interest income is due primarily to
higher interest rates from investment accounts, partially offset by lower cash
balances.
Liquidity and Capital Resources
Hollis-Eden has financed its operations since inception through the sale of
shares of stock and with loans from its 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 $13.0 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 2002.
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.
This report may contain certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that are based on the beliefs of the management of the
Company as well as assumptions made by and information currently available to
the management of the Company. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend," "plan" and similar
expressions, as they relate to the Company or the management of the Company,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events, the outcome of which is subject to
certain risks, including among others general economic and market conditions,
possible disruptions in the Company's computer or telephone systems, possible
work stoppages or increases in labor costs, effects of competition, litigation
results or effects, and other factors which maybe outside of the Company's
control. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results or outcomes may
vary materially from those described as anticipated, believed, estimated,
expected, intended or planned. Subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements in this
paragraph.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II Other Information
Item 1. Legal Proceedings
Please refer to Form 10-Q for Quarterly Period Ended March 31, 2000
filed on May 2, 2000.
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)
<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: November 10, 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)
INDEX TO EXHIBITS
27 Financial Data Schedule (Filed Electronically Only)
