<PAGE>
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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 June 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 July 26, 2000 there were 11,248,853 shares of registrant's Common Stock,
$.01 par value, outstanding.
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HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1 Financial Statements............................................. 3
Balance Sheets - June 30, 2000 and December 31, 1999............. 3
Statements of Operations for the Three-Month and Six-Month
Periods Ended June 30, 2000 and 1999 and Period from
August 15, 1994 to June 30, 2000................................. 4
Statements of Cash Flows for the Six-Month Period Ended
June 30, 2000 and 1999 and Period from August 15, 1994
to June 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....... 9
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
2
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(UNAUDITED)
All numbers in thousands June 30, Dec. 31,
2000 1999
-------- -------
ASSETS:
Current assets:
Cash and cash equivalents......................... $ 41,140 $47,486
Prepaid expenses................................... 197 115
Deposits........................................... 27 27
-------- -------
Total current assets.......................... 41,364 47,628
Property and equipment, net of accumulated
depreciation of $149 and $97..................... 389 392
Other receivable from related party................ 250 245
-------- -------
Total assets.................................. $ 42,003 $48,265
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses.............. $ 2,151 $ 1,640
-------- -------
Total liabilities............................. 2,151 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; 11,249 and 11,071
shares issued and outstanding.................. 112 111
Paid-in capital.................................. 78,055 75,155
Common stock to be issued........................ 9,240 --
Deficit accumulated during development stage..... (47,555) (28,641)
------- -------
Total stockholders' equity..................... 39,852 46,625
------- -------
Total liabilities and stockholders' equity..... $ 42,003 $48,265
======== =======
The accompanying notes are an integral part of these financial statements.
3
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
All numbers in thousands, except per share amounts
Period from
Inception
(Aug.15,1994)
3 months ended June 30, 6 months ended June 30, to June 30
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development:
R&D operating expenses ........ $ 2,617 $ 1,601 $ 6,815 $ 2,360 $ 19,998
R&D costs related to common
stock, option, & warrant grants
for collaborations ............ 24 -- 11,314 -- 11,968
General and administrative:
G&A operating expenses ........ 1,025 1,127 2,101 2,092 10,931
G&A costs related to common
stock, option, & warrant grants -- 148 7,314 9,490
------------ ------------ ------------ ------------ ------------
Total operating expenses ........... 3,666 2,876 20,230 11,766 52,387
Other income (expense):
Interest income ................... 673 599 1,316 1,096 4,882
Interest expense .................. -- -- -- (50)
------------ ------------ ------------ ------------ ------------
Total other income ................. 673 599 1,316 1,096 4,832
Net loss ........................... $ (2,993) $ (2,277) $ (18,914) $ (10,670) $ (47,555)
============ ============ ============ ============ ============
Net loss per share basic and
diluted ........................... (0.27) (0.21) (1.69) (1.00)
Weighted average number of
common shares outstanding
basic and diluted ................. 11,233 11,058 11,203 10,661
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
All numbers in thousands
Period from
Inception
(Aug. 15, 1994)
6 months ended June 30, to June 30
2000 1999 2000
-------- -------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $(18,914) $(10,670) $(47,555)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation .................................. 52 23 149
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 .............. 31 2,140 2,593
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 ............................ -- 285 1,210
Changes in assets and liabilities:
Prepaid expenses .................................. (75) (96) (197)
Deposits .......................................... -- (18) (27)
Receivable from related party ..................... (13) (42) (250)
Accounts payable and accrued expenses ............. 511 271 2,151
Disposal of assets ................................ -- 7 7
R & D fees payable to related party ............... -- -- --
-------- -------- --------
Net cash used in operating activities ......... (7,062) (3,200) (24,202)
Cash flows provided by investing activities:
Purchase of property and equipment ................ (49) (269) (544)
-------- -------- --------
Net cash used in investing activities ......... (49) (269) (544)
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 ............ -- 24,773 42,172
Proceeds from issuance of debt .................... -- -- 371
Net proceeds from recapitalization ................ -- -- 6,271
Net proceeds from warrants and options exercised .. 765 5,098 12,969
-------- -------- --------
Net cash from financing activities ............ 765 29,871 65,886
Net increase in cash ................................ (6,346) 26,402 41,140
Cash at beginning of period ......................... 47,486 24,190 --
-------- -------- --------
Cash at end of period ............................... $ 41,140 $ 50,592 $ 41,140
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at June 30, 2000, and for the three-month and six-month
periods ended June 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 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 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, within a month of
receipt of all required documents, the Company was obligated to pay Edenland $2
million. The Company paid the $2 million to Edenland during the second quarter
of 2000.
6
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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.
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 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 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.
7
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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 June 30, 2000, had an
accumulated deficit of approximately $47.5 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 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 June 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 June 30, 2000, we have incurred expenses of
approximately $32 million in research and development and $20.4 million in
general and administrative expenses, which has been partially offset by $4.9
million in net interest income resulting in a cumulative loss of $47.5 million,
of which $21.7 million consisted of non-cash expenses.
Research and development operating expenses increased to $2.6 million from
$1.6 million and increased to $6.8 million from $2.4 million for the three- and
six-month periods ended June 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 six-month periods ended June 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 six-month period
ended June 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 six-month period ended June 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 $1.0 million for the three-month period ended June 30, 2000, compared to $1.1
million for the same period in 1999, and $2.1 million for both six-month periods
ended June 30, 2000 and 1999. General and administrative operating expenses
relate to staffing, facilities, supplies, benefits, recruiting, legal and
travel.
During the six-month period ending June 30, 1999, $7.3 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 six-month period ended June 30, 2000.
Net interest income increased to $673,000 from $599,000 and to $1.3 million
from $1.1 million for the three- and six-month periods ended June 30, 2000 and
1999, respectively. The increase in interest income is primarily due to higher
interest rates from investment accounts.
8
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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 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, increased
or unanticipated costs or effects associated with Year 2000 compliance by the
Company or its service or supply providers, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
9
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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
The Annual Meeting of Stockholders of Hollis-Eden Pharmaceuticals was held
on June 23, 2000. 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 III directors to hold office until the 2003
Annual Meeting of Stockholders. Elected to serve as Class III
directors were Richard B. Hollis and Leonard Makowka M.D., Ph.D.,
FRCS(C), FACS. For each elected director the results of voting
were: 9,327,135 for, 128,782 withheld, and 0 abstained. The
continuing directors are Salvatore J. Zizza, Paul Bagley, William
H. Tilley, Thomas Charles Merigan, Jr., M.D and Brendan R.
McDonnell.
(2) To approve the Company's 1997 Incentive Stock Option Plan, as
amended, to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 500,000 shares
to a total of 2,750,000 shares. The 1997 Incentive Stock option
Plan, as amended, was approved with the following votes:
9,080,069 for, 271,742 against, and 104,106 abstained.
(3) To ratify the selection of BDO Seidman, LLP as independent
auditors of the Company for its fiscal year ending December 31,
2000. The selection of BDO Seidman, LLP as independent auditors
of the Company for its fiscal year ending December 31, 2000 was
ratified with the following votes: 9,433,543 for, 12,976 against,
and 9,398 abstained.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27 Financial Data Schedule (filed electronically only)
10
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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: July 25, 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)
11
