HEPI Pharmaceuticals 10-Q 2008 Q1 Quarterly report

U.S. Securities and Exchange Commission

Washington, D.C.  20549

Form 10-Q

(Mark One)

S

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

£

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _____________ to ______________

Commission file number:000-52680

HEPI Pharmaceuticals, Inc.

(Exact name of small business issuer as specified in its charter)

Delaware	20-8282461
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

7740 East Evans Road, Scottsdale, Arizona  85260

(Address of principal executive offices)

480-385-3800

(Issuer’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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   S  No£

Indicate by check mark whether the issuer is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer

£

Accelerated filer

£

Non-accelerated filer

£

Smaller reporting company

S

Indicated by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  £    No  S

APPLICABLE ONLY TO CORPORATE ISSUERS

There were 100 shares of common stock, $0.01 par value, outstanding at May 15, 2008.

FORM 10-Q

HEPI PHARMACEUTICALS, INC.

INDEX

PART I – FINANCIAL INFORMATION

4

Item 1.   Financial Statements

4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   10

Item 4. Controls and Procedures

12

PART II – OTHER INFORMATION

13

Item 6.  Exhibits

SIGNATURES

14

(Inapplicable items have been omitted)

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding:

• inability to raise funds for product research and development;

• inability to identify, develop or obtain, and introduce new products;

• inability to successfully conduct clinical and preclinical trials for any new products;

• competitive pressures from existing competitors and new entrants;

• enactment of adverse state or federal legislation or regulation that increases the costs of compliance or requisite regulatory approvals, or adverse findings by a regulator with respect to existing operations;

• our ability to obtain required regulatory approvals to develop and market potential products;

• our ability to execute our development plan on time and on budget; and

• inability to secure partners for development and marketing of pharmaceutical opportunities

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only a s of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based.  We qualify all of our forward-looking statements by these cautionary statements.

3

HEPI Pharmaceuticals, Inc.

(A Development Stage Company)

CONDENSED BALANCE SHEET

March 31, 2008

		(Unaudited)
		March 31,		December 31,
ASSETS		2008		2007
CURRENT ASSETS:
Cash	$	100	$	100
Total Current Assets		100		100
PROPERTY AND EQUIPMENT, NET		-
OTHER ASSETS		-		-
	$	100	$	100
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts Payable	$	90,590	$	90,590
Advances from Parent Company		354,188		320,132
Accrued Liabilities		47,802		33,713
Total Current Liabilities		492,580		444,435
LONG TERM LIABILITIES		-		-
TOTAL LIABILITIES		492,580		444,435
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value,
3,000 shares authorized
100 issued and outstanding		1		1
Additional Paid-In Capital		9		9
Accumulated deficit		(492,490)		(444,345)
Total Stockholders' Deficit		(492,480)		(444,335)
	$	100	$	100

The accompanying notes are an integral part of these unaudited financial statements.

4

HEPI Pharmaceuticals, Inc.

(A Development Stage Company)

CONDENSED STATEMENT OF OPERATIONS

						(Unaudited)
		For the period		(Unaudited)		For the period
		January 10, 2007		For the Quarter		January 10, 2007
		(inception) through		Ended		(inception) through
		March 31, 2007		March 31, 2008		March 31, 2008
NET SALES	$	-	$	-	$	-
OPERATING EXPENSES:
Selling		500		-		500
General and Administrative		28,282		28,141		197,502
Research and Development		64,127		13,415		269,186
Total Operating Expenses		92,909		41,556		467,188
LOSS FROM OPERATIONS		(92,909)		(41,556)		(467,188)
OTHER INCOME  (EXPENSE):
Interest Expense - Related Party		(660)		(6,589)		(25,302)
Total Other Income (Expense)		(660)		(6,589)		(25,302)
NET LOSS	$	(93,569)	$	(48,145)	$	(492,490)
BASIC LOSS PER SHARE	$	(936)	$	(481)
WEIGHTED AVERAGE  BASIC
SHARES OUTSTANDING		100		100
PROFORMA BASIC LOSS PER SHARE	$	(0.02)	$	(0.01)
PROFORMA WEIGHTED AVERAGE
BASIC SHARES OUTSTANDING		4,233,731		4,233,731

The accompanying notes are an integral part of these unaudited financial statements.

5

HEPI Pharmaceuticals, Inc.

(A Development Stage Company)

STATEMENT OF CASH FLOWS

						(Unaudited)
		For the Period		(Unaudited)		For the Period
		January 10, 2007		For the Three		January 10, 2007
		(Inception) through		Months ended		(Inception) through
		March 31, 2007		March 31, 2008		March 31, 2008
Cash Flows from Operating Activities:
Net Loss	$	(93,569)	$	(48,145)	$	(492,490)
Adjustments to reconcile net loss to net
cash used by operating activities:
Changes in assets and liabilities:
Increase in accounts payable		-		-		90,590
Increase in accrued liabilities		8,160		14,089		47,802
Net Cash (Used) by Operating Activities		(85,409)		(34,056)		(354,098)
Cash Flows from Investing Activities:
Cash Flow from Financing Activities:
Proceeds from parent company advances		85,499		34,056		354,188
Proceeds from sale of common stock warrants		10				10
Net cash Provided by Financing Activities		85,509		34,056		354,198
Increase (Decrease) in Cash		100		-		100
Cash at Beginning of Period		-		100		-
Cash at End of Period	$	100	$	100	$	100
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	-	$	-	$	-
Income Taxes	$	-	$	-	$	-

The accompanying notes are an integral part of these audited financial statements

6

HEPI PHARMACEUTICALS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

NOTE 1 – DESCRIPTION OF BUSINESS

HEPI Pharmaceuticals, Inc. (“the Company”) was formed on January 10, 2007 under the laws of the State of Delaware.  The Company is wholly-owned subsidiary of Health Enhancement Products, Inc., a publicly owned corporation (the “Parent”).  The Company’s fiscal year ends on December 31.  The purpose of the Company is to develop potential pharmaceutical applications of ProAlgaZyme (PAZ), the Parent’s sole product.

The Company has not yet generated any revenues from planned principal operations and is considered a development stage company as defined in Statement of Financial Accounting Standards No. 7.

NOTE 2 – BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements include the accounts of HEPI Pharmaceuticals (the “Company”).  In the opinion of the Company’s management, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the information set forth therein.  These financial statements are condensed, and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The condensed financial statements should be read in conjunction with the company’s December 31, 2007 audited financial statements and supplementary data included in the Form 10KSB.

The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2008 or any other period.

The Company incurred a net loss of $48,145 for the three months ended March 31, 2008 and $492,490 during the period January 10, 2007 (inception) through March 31, 2008. In addition, the Company had a working capital deficiency of $492,480 and a stockholders' deficiency of $492,480 at March 31, 2008. These factors raise substantial doubt about the Company's ability to continue as a going concern.

There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financings or other potential sources.  The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business.  Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company's existing stockholders.

The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

During the period ending March 31, 2008, the Company relied on the Parent company for its financing needs.  The Parent does not currently have the ability to provide any further advances to the Company. There can be no assurances that the Parent will in the future be able to provide needed funds.

The Company is attempting to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof.  While the Company intends to raise several million dollars to fund its operations, including research and development, there can be no assurance that the Company will be able to raise the additional funds it requires.

7

NOTE 3 – RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.  The Company accounts for research and development expenses under two main categories:

-

Research Expenses, consisting of salaries, equipment, rental of space and related expenses incurred for product research studies conducted primarily within the Company and by Company personnel.  Research expenses were approximately $13,415 for the three months ended March 31, 2008 and $64,127 for the period January 10 (inception) to March 31, 2007.

-

Clinical Studies Expenses, consisting of fees, charges, and related expenses incurred in the conduct of clinical studies conducted with Company products by independent external entities.  External clinical studies expenses were zero for the quarter ended March 31, 2008, and $45,000 for the period January 10 (inception) to March 31, 2007.

Due to a lack of funding, we have largely suspended our research efforts.  We intend to resume our research activities, subject to receipt of necessary funding.  We cannot assure you that we will be able to secure the funds necessary to finance our operations.

NOTE 4 – LOSS PER SHARE

The computation of loss per share is based on the weighted average number of common shares outstanding during the period presented.  Since the Company has no common stock equivalents, diluted loss per share is the same as basic loss per share.  Pro-forma basic loss per share gives effect to the issuance of an aggregate of 42,262,207 shares of common stock in connection with the proposed distribution, of which approximately 4,226,231 shares will be distributed to the Parent’s shareholders.

NOTE 5 – LOANS PAYABLE - PARENT

Loans payable to our parent are payable on demand and bear interest at the rate of 10% per annum.  As of March 31, 2008, the outstanding principal amount was $354,188.  Interest expense of $25,302 for the period January 10, 2007 (inception) to March 31, 2008 is included in the Statement of Operations.

NOTE 6 - STOCKHOLDERS’ DEFICIT

On January 10, 2007 the Company issued 100 shares of common stock for $10 to its founder and Parent.

On February 15, 2007, the Parent’s board of directors declared a distribution in the form of shares of the common stock of  the Company, to all shareholders of record as of March 15, 2007. Each shareholder of record on the record date has received 1 share of the Company for every 10 shares of common stock of the Parent they own on the record date. The shares of the Company will be distributed promptly following compliance with applicable laws, including the Parent delivering a Registration/Information Statement to its stockholders pursuant to the requirements of the Securities Exchange Act of 1934 ("Exchange Act") and the effectiveness of the Company's registration under the Exchange Act. The number of shares to be distributed will at the time of distribution represent 10% of the total outstanding shares of the Company. It is anticipated that the remaining 90% of the equity of the Company will be owned by the Parent.

8

NOTE 7 - RELATED PARTY TRANSACTIONS  

In connection with its formation, the Company entered into a Pharmaceutical Development Agreement with its Parent. Under the Development Agreement, the Company was granted the right to develop the potential pharmaceutical applications of ProAlgaZyme® and its derivatives. In exchange for these rights, the Parent became the sole stockholder of the Company and is entitled to certain payments based on the attainment of specified development milestones and sales revenues.

Research and administrative salaries have been recorded as a loan from the parent company, based upon employees percentage of time spent on the Company functions.  Rent expense has been recorded as a loan from the parent company, based upon the square footage occupied by activities of the Company.

9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We were established in January, 2007 as HEPI Pharmaceuticals, Inc. (“HEPI Pharma”), a wholly owned subsidiary of Health Enhancement Products, Inc. (“HEPI”).  Our purpose is to develop potential pharmaceutical applications for HEPI’s primary product,ProAlgaZyme® (PAZ). In connection with our formation, we entered into a Pharmaceutical Development Agreement with HEPI. Under the Development Agreement, HEPI granted us the exclusive right to develop the potential pharmaceutical applications of PAZ and its derivatives. In exchange for these rights, HEPI became our sole stockholder and is entitled to certain payments based on the attainment of specified development milestones and sales revenues.  

Plan of Operation

We currently have no cash and are we are totally reliant on advances and extensions of credit from our parent company, HEPI, for the resources we need to pursue our strategic goals.  HEPI does not currently have sufficient resources to provide us with the funds we need to finance our operations.  Accordingly, we need to immediately secure funding in order to continue as a going concern and implement our business strategy.  To date, we have not raised any capital from external sources.  Developing pharmaceutical products and seeking approvals for such products from regulatory authorities is very costly. We will need to raise a substantial amount of capital almost immediately in order to execute our business plan and fund the development and commercialization of our potential pharmaceutical product candidates.

We may need to finance future cash needs through public or private equity offerings, debt financings or strategic collaboration and licensing arrangements. To the extent that we raise additional funds by issuing equity securities or securities convertible into equity, our stockholders may experience additional dilution, and debt financing, if available, may involve restrictive covenants. If we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to any products we develop, technologies or our development projects or grant licenses on terms that are not favorable to us. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available from the foregoing sources, we may consider additional strategic financing options, including sales of assets (such as rights to any specialty pharmaceutical products we develop), or we may be required to delay , reduce the scope of, or eliminate one or more of our research or development programs or curtail some of our commercialization efforts of our operations. We may seek to access the public or private equity markets whenever conditions are favorable, even if we do not have an immediate need for additional capital.

From inception (January 10, 2007) through March 31, 2008, we incurred research and development expenses associated with clinical testing of ProAlgaZyme® of approximately $270,000.  We have general and administrative expenses of approximately $25,000 per month due to salaries, benefits and rent.  Total general and administrative expenses for the period January 10, 2007 (inception) through March 31, 2008 were $197,502.  

10

Critical Accounting Policies 

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and all available information. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to recording various accrua ls, income taxes, the useful lives of long-lived assets, such as property and equipment and intangible assets, and potential losses from contingencies and litigation. We believe the policies discussed below are the most critical to our financial statements because they are affected significantly by management's judgments, assumptions and estimates. 

Financing Costs. We incurred $6,589 in interest expense on our indebtedness to our parent company for the three months ended March 31, 2008, and $25,302 for the period from inception (January 10, 2007) through March 31, 2008.  

Liquidity and Capital Resources

The condensed  financial statements contained in this Report have been prepared on a “going concern” basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  We currently have an immediate and urgent need for additional capital.  There is a significant risk that we will be unable to continue as a going concern, in which case, our stockholders would suffer a total loss of their investment in our company.

We have incurred significant net losses since inception, including a net loss of $48,145 during the three months ended March 31, 2008 and an aggregate net loss of $492,490 since inception.  We have no revenue and do not expect to have revenue for the foreseeable future.  Further, since inception, we have incurred negative cash flow from operations.  During the three months ended March 31, 2008, we incurred negative cash flows from operations of $34,056.  As of May 15, 2008, we had a cash balance of $100, a working capital deficiency of $492,480 and a stockholders’ deficit of $492,480.  We are largely dependent upon our parent company for funding; however, HEPI does not currently have sufficient resources to provide us with the funds we need to finance our operations. We have never raised capital from external sources.  If we are unable to raise funds almost immediately, it is highly unlikely we will be able to continue as a going concern.  These factors raise substantial doubt about our ability to continue as a going concern.

During the three months ended March 31, 2008 and the period from inception (January 10, 2007) through March 31, 2008, our operating activities used $34,056 and $354,098 in cash, respectively.  Our financing activities generated $34,056 and $354,198 during the three months ended March 31, 2008 and January 10, 2007 (inception) through March 31, 2008, respectively, primarily due to advances to us made by our Parent.

We estimate that we will require approximately $3,000,000 in cash over the next 12 months in order to fund our operations, primarily to fund our external research.  Based on this cash requirement, we have an immediate and urgent need for additional funding.  For the foreseeable future, we do not expect that we will generate sales revenues sufficient to fund our cash requirements.  We have never raised funds from external sources.  As noted above, if we are unable to raise additional funds almost immediately, it is highly unlikely we will be able to continue as a going concern, in which case you will suffer a total loss of your investment in our company.

Significant elements of income or loss not arising from our continuing operations

We do not expect to experience any significant elements of income or loss other than those arising from our continuing operation.

11

Seasonality

Our product is directed to the improvement of the health of our consumers, and we do not expect that operating results will be affected materially by seasonal factors.  In addition, ProAlgaZyme® is cultivated in a climate-controlled laboratory environment, not subject to seasonal growing effects or influences.

Staffing

We have conducted all of our activities since inception with staffing supplied by HEPI, at agreed upon rates.  We currently do not expect to hire our own staff.  

Off-Balance Sheet arrangements

We have no off-balance sheet arrangements that would create contingent or other forms of liability.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures.  The Company’s management, with the participation of the chief administrative officer (who functions effectively as the chief executive officer) and the principal accounting officer (the chief administrative officer is also the principal financial officer), carried out an evaluation of the effectiveness of the Company’s “disclosure, controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(3) and 15-d-15(3)) as of the end of the period covered by this quarterly report (the “Evaluation Date”).  Based upon that evaluation, the chief administrative officer and the chief accounting officer concluded that, as of the Evaluation Date, the Company’s disclosure, controls and procedures are effective, providing them with material information relating to the Company as required to be disclosed in the reports the Company files or submits under the Exchange Act on a timely basis.

(b)

Changes in Internal Control over Financial Reporting.  There were no changes in the Company’s internal controls over financial reporting, known to the chief administrative officer or the chief accounting officer that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

12

PART II – OTHER INFORMATION

Item 6. Exhibits  

Exhibit Number	Description
(1)	Filed as Exhibit 2.1 to our current Report on Form 8-K, Filed with the Commission on December 9, 2003 and incorporated by this reference.
(2)	Filed as Exhibit 3.1 to our Form 10-QSB, filed with the Commission on August 30, 2004 and incorporated by this reference.
(3)	Filed as Exhibit 3.2 to our Form 10SB, filed with the Commission on April 20, 2000 and incorporated by this reference.

13

SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

HEPI Pharmaceuticals, Inc..

Date:  May 15, 2008

By:  /s/Janet L Crance                   

Chief Administrative Officer

(Principal Executive Officer)

14

Exhibit INDEX

Exhibit Number	Description
(1)	Filed as Exhibit 2.1 to our current Report on Form 8-K, Filed with the Commission on December 9, 2003 and incorporated by this reference.
(2)	Filed as Exhibit 3.1 to our Form 10-QSB, filed with the Commission on August 30, 2004 and incorporated by this reference.
(3)	Filed as Exhibit 3.2 to our Form 10SB, filed with the Commission on April 20, 2000 and incorporated by this reference.

15