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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
Quarterly Report Under Section 13 or 15 (d)
[X] Of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1998
[ ] 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 110
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (619) 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 17, 1998 there were 8,352,765 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, 1998
INDEX
PART I FINANCIAL INFORMATION PAGE
----
ITEM 1 Financial Statements...............................................................3
Balance Sheet - June 30, 1998 and December 31, 1997................................3
Statements of Operations for the Three-Month and Six-Month Periods Ended
June 30, 1997 and 1998 and Period from August 15, 1994 to June 30, 1998............4
Statements of Cash Flows for the Six-Month Periods Ended June 30, 1997
and 1998 and Period of August 15, 1994 to June 30, 1998............................5
Notes To Financial Statements......................................................6
ITEM 2 Management's Discussion and Analysis of Results of Operations and
Financial Condition................................................................6
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings..................................................................9
ITEM 2 Changes in Securities..............................................................9
ITEM 3 Defaults Upon Senior Securities....................................................9
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
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS:
Current Assets:
Cash and cash equivalents .......................... $ 25,495,241 $ 7,102,620
Prepaid expenses .................................... 372,347 53,009
Deposits ............................................ 9,163 9,163
Other receivable - tax refund ....................... -- 105,436
Other receivable from related party ................. 58,206 46,679
------------ ------------
Total current assets ........................... 25,934,957 7,316,907
Property and equipment, net of accumulated
depreciation of $16,362 and $6,602 ............ 82,324 82,941
Other Assets:
Loan receivable from related party ............... 201,161 --
------------ ------------
Total assets ................................... $ 26,218,442 $ 7,399,848
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses ............. $ 80,288 $ 128,631
R & D fees payable to related party ............... -- 338,000
------------ ------------
Total liabilities .............................. 80,288 466,631
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $ .01 par value, 10,000,000 shares
authorized; 4,000 shares issued and outstanding.. 40 --
Common stock, $ .01 par value,
30,000,000 shares authorized; 8,352,765 and
6,772,023 shares issued and outstanding ......... 83,528 67,720
Paid-in capital ................................... 37,726,960 16,325,338
Deferred compensation-stock options, net of
accumulated amortization of $436,000 and $282,000 (1,412,000) (1,566,000)
Deficit accumulated during development stage ...... (10,260,374) (7,893,841)
------------ ------------
Total stockholders' equity (deficit) ........... 26,138,154 6,933,217
Total liabilities and stockholders' equity ..... $ 26,218,442 $ 7,399,848
============ ============
The accompanying notes are an integral part of these financial statements.
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
UNAUDITED
- --------------------------------------------------------------------------------
PERIOD FROM
INCEPTION
(AUG.15,1994)
3 MONTHS ENDED JUNE 30, 6 MONTHS ENDED JUNE 30, TO
-------------------------------- -------------------------------- JUNE 30,
1997 1998 1997 1998 1998
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development . $ 1,323,261 $ 628,486 $ 2,896,941 $ 1,184,533 $ 6,486,929
General and administrative 332,568 762,690 1,125,912 1,475,085 4,304,251
------------ ------------ ------------ ------------ ------------
Total operating expenses .. 1,655,829 1,391,176 4,022,853 2,659,618 10,791,180
Other income (expense):
Interest income .......... 86,433 209,676 87,805 294,811 580,355
Interest expense ......... (199) (1,726) (199) (1,726) (49,549)
------------ ------------ ------------ ------------ ------------
Total other income ........ 86,234 207,950 87,606 293,085 530,806
------------ ------------ ------------ ------------ ------------
Net loss .................. $ (1,569,595) $ (1,183,226) $ (3,935,247) $ (2,366,533) $(10,260,374)
============ ============ ============ ============ ============
Net loss per share ........ $ (0.25) $ (0.15) $ (0.69) $ (0.33)
Weighted average number of
common shares outstanding 6,400,133 7,716,671 5,679,858 7,256,578
The accompanying notes are an integral part of these financial statements
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
PERIOD FROM
(AUG. 15, 1994)
6 MONTHS ENDED JUNE 30,
-------------------------------- TO
1997 1998 1998
------------ ------------ ------------
Cash flows from operating activities:
Net loss ......................................... $ (3,935,247) $ (2,366,533) $(10,260,374)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation ................................. 508 9,760 16,362
Common stock issued as consideration
for amendments to the license agreements .... -- -- 32,540
Common stock issued as consideration
for termination of a finance agreement ...... -- -- 33,962
Expense related to options and warrants
issued as consideration to consultants ...... 4,012 208,012 222,053
Expense related to warrants issued to
director for successful closure of merger ... 570,000 -- 570,000
Deferred compensation expense related
to options issued ........................... 128,000 154,000 436,000
Common stock issued as consideration for
license fees and services .................. -- 564,000 564,000
Changes in assets and liabilities:
Prepaid expenses ................................. (29,482) (119,350) (162,331)
Deposits ......................................... 81,674 -- (9,163)
Other receivable - tax refund .................... (105,436) 105,436 --
Other receivable from related party .............. (46,679) (11,527) (58,206)
Loan receivable from related party ............... -- (201,161) (201,161)
Accounts payable and accrued expenses ............ (78,713) (48,343) 80,288
Wages payable .................................... (96,771) -- --
License fees payable to related party ............ (499,700) -- --
R & D fees payable to related party .............. -- (338,000) --
------------ ------------ ------------
Net cash used by operating activities ........ (4,007,834) (2,043,706) (8,736,030)
Cash flow provided by investing activities:
Purchase of property and equipment ............... -- (9,143) (98,686)
------------ ------------ ------------
Net cash used in investing activities ........ -- (9,143) (98,686)
Cash flows from financing activities:
Borrowings from related party .................... 92,000 -- 342,000
Payments on note payable to related party ........ (92,000) -- (342,000)
Contributions from stockholder ................... -- -- 103,564
Net proceeds from sale of preferred stock ........ -- 4,000,000 4,000,000
Net proceeds from sale of common stock ........... -- 15,889,829 17,399,328
Proceeds from issuance of debt ................... -- -- 371,164
Net proceeds from recapitalization ............... 6,270,782 -- 6,270,782
Net proceeds from warrants and options exercised . 5,457,763 555,641 6,185,119
------------ ------------ ------------
Net cash from financing activities ........... 11,728,545 20,445,470 34,329,957
Net increase in cash ............................... 7,720,711 18,392,621 25,495,241
Cash at beginning of period ........................ 17,914 7,102,620 --
------------ ------------ ------------
Cash at end of period .............................. $ 7,738,625 $ 25,495,241 $ 25,495,241
============ ============ ============
Supplemental disclosure cash flow information:
1) In 1998, the Company issued warrants for services in lieu of cash
with an estimated value of $408,000
The accompanying notes are an integral part of these financial
statements.
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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, 1998, and for the three and six month
periods ended June 30, 1998 and 1997, is unaudited. In the opinion of
management, these financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the results
for the interim periods presented. Interim results are not necessarily
indicative of results for a full year. These financial statements should be read
in conjunction with Hollis-Eden Pharmaceuticals (the "Company") Annual Report on
Form 10-K for the year ended December 31, 1997, which was filed with the United
States Securities and Exchange Commission on March 31, 1998, and the Company's
Form 8-K which was filed on May 12, 1998.
2. ISSUANCE OF WARRANTS
During February 1998, the Company entered into an agreement with an
investors relations firm, which expires on December 31, 1998. The Company agreed
to issue as part of the compensation for services, 150,000 warrants with an
exercise price of $14.75 per share and an expiration date of February 4, 1999.
The warrants were estimated to have a value of $408,000, which amount will be
expensed $102,000 per quarter during 1998.
3. FINANCING
During May 1998, the Company completed a private financing totaling
$20.6 million in gross proceeds. The Company issued 1,329,201 shares of Common
Stock, 4,000 shares of 5% Series A Convertible Preferred Stock and Warrants to
purchase 1,437,475 shares of Common Stock in the financing.
The Convertible Preferred Stock has an initial conversion price of
$20.30 for the first seven months, after which it can be adjusted, either up or
down, based on the future stock prices of the Company's Common Stock.
The Warrants are exercisable for three years and entitle the holders to
purchase up to a total of 1,437,475 shares of Common Stock at a price of $17.00
per share.
Terms of the Warrants and the Convertible Preferred Stock are set forth
in the Form of Warrant and the Certificate of Designation, respectively, copies
of which are attached to the Form 8-K filed May 12, 1998 as exhibits 4.1 and
4.2, respectively.
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, 1997.
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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, 1997 which was filed with the United States Securities and
Exchange Commission (the "SEC") on March 31, 1998.
GENERAL
Hollis-Eden Pharmaceuticals, a development-stage pharmaceutical company,
is engaged in the discovery, development and commercialization of products for
the treatment of a number of targeted disease states caused by viral, bacterial,
parasitic or fungal infections, including HIV/AIDS, hepatitis B and C, and
malaria. The Company has three technology platforms, one based on cellular
energy regulation, the second on a unique immune system modulation technology,
and the third on biochemical synthesis regulators. The Company believes that
certain of its drug candidates may provide the first long-term treatment for HIV
without the development of viral strain resistance to the drugs' effectiveness,
significant toxicity or severe side effects. The Company has not yet generated
any operating revenues. The Company has experienced significant operating losses
due to substantial expenses incurred to acquire and fund development of its drug
candidates and, as of June 30, 1998, had an accumulated deficit of $10.3
million.
When and if any of the Company's drug candidates have been approved for
commercial sale, the Company plans to market them in the United States. For
international markets, the Company intends to develop strategic alliances with
major pharmaceutical companies that have foreign regulatory expertise and
established distribution channels, and will also consider corporate strategic
partnerships and co-marketing agreements. No assurances can be given that any of
the Company's drug candidates will be approved for commercial sale or that any
of the foregoing proposed arrangements will be implemented or prove to be
successful.
The Company has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to its clinical testing and other
activities. In addition, during the next few years, the Company will have to
meet the substantial new challenge of developing the capability to market
products. Accordingly, the Company's activities to date are not as broad in
depth or scope as the activities it must undertake in the future, and the
Company's historical operations and financial information are not indicative of
the Company's future operating results or financial condition or its ability to
operate profitably as a commercial enterprise when and if it succeeds in
bringing any drug candidate to market.
During March 1997, Hollis-Eden, Inc. ("Hollis-Eden"), a Delaware
corporation, was merged with and into the Company (then known as Initial
Acquisition Corp. ("IAC")). Upon the consummation of the merger, Hollis-Eden
ceased to exist, and IAC changed its name to Hollis-Eden Pharmaceuticals. For
accounting and financial reporting purposes, the merger was treated as a
recapitalization of Hollis-Eden. As used herein, unless otherwise indicated, for
periods prior to March 1997 the terms "Company" and "Hollis-Eden
Pharmaceuticals" shall refer to Hollis-Eden, not IAC.
RESULTS OF OPERATIONS
The Company has not generated any revenues for the period from August
15, 1994 (inception of Hollis-Eden) through June 30, 1998. The Company has
devoted substantially all its resources to the payment of licensing fees and
research and development fees plus expenses related to the startup of its
business. From inception until June 30, 1998, the Company incurred expenses of
approximately $6.5 million in research and development fees, $4.3 million in
general and administrative expenses, and $500,000 in net interest income,
resulting in a loss of $10.3 million for the period.
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Research and Development expenses decreased to $628,000 from $1.3
million and decreased to $1.2 million from $2.9 million for the three- and
six-month periods ended June 30, 1998, respectively, as compared to the same
periods for the previous year. The research and development expenses were
significantly larger in 1997 due to the funding of the development of the
Company's second drug candidate, REVERSIONEX. During 1997, this expense totaled
$1.2 million for the quarter and a $2.7 million for the six-month period. The
1998 research and development expenses relate primarily to license fees and the
ongoing development of the Company's first drug candidate, INACTIVIN.
General and administrative expenses increased to $762,000 from $333,000
and increased to $1.5 million from $1.1 million for the three- and six-month
periods ended June 30, 1998. During 1997, the six-month period included one time
expenses associated with the merger of IAC, including a $570,000 charge relating
to the issuance of warrants to a certain director and former officer. The 1998
general and administrative expenses include: (i) the non-cash charges for the
issuance of warrants to an investors relations group (described above) and (ii)
increased expenses as a public company such as legal and accounting fees, filing
and reporting fees, public relations, and directors and officers insurance.
Net interest income increased to $300,000 from $100,000 in the first six
months of 1998 compared to 1997 due to higher balances in cash and cash
equivalents.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through the sale
of shares of Common Stock and with loans from the Company's founder, Richard B.
Hollis. The Company repaid Mr. Hollis in January 1996.
During the year ended December 31, 1995, the Company received cash
proceeds of $250,000 from the sale of its securities. In May 1996, the Company
completed a private placement of shares of Common Stock, from which it received
aggregate gross proceeds of $1.3 million. In March 1997, the Merger of IAC and
Hollis-Eden provided the Company with $6.5 million in cash and other
receivables. During May 1998, the Company closed a private placement of shares
of Common Stock and Preferred Stock with gross proceeds totaling $20.6 million.
Under its license agreements with Dr. Patrick T. Prendergast, Colthurst
and Edenland, the Company is obligated to pay certain minimum license fees to
maintain its rights to its drug candidates. Under these agreements, the Company
was obligated to pay the licensors an aggregate of two and one-half percent of
all such proceeds raised within 24 months of the $350,000 license payment, which
was made on April 5, 1996. An annual renewal license fee of $500,000 became due
under the Colthurst License Agreement upon the closing of the private placement
during May 1998. This license fee was paid in shares of the Company's Common
Stock. As of June 30, 1998, the Company is current on all license fee
obligations under these agreements.
Under its Research and Development Agreement with Edenland and Dr.
Patrick T. Prendergast, the Company was committed to pay $3.0 million for the
development costs related to REVERSIONEX. An amount of $1.5 million was recorded
as a charge to operations upon the closing of the Merger and was paid in April
1997. An additional $1.2 million was paid in May 1997 and recorded as a charge
to operations. The remaining $300,000 was accrued as an expense during the
fourth quarter of 1997 and was paid during April 1998. In addition, the Company
has agreed to commit at least 30% of its annual research and development budget
up to a maximum of $50.0 million during the term of the agreement, but a minimum
of $2.0 million and maximum of $10.0 million for any given calendar year, to pay
development costs for REVERSIONEX or any new product developed under the
agreement. In addition, payments made towards the $3.0 million development costs
are deductible from the amounts due for the $2.0 million per year of research.
Accordingly, with respect to the $2.0 million per year obligation, assuming only
such minimum amounts will be due, only $1.0 million will be due in 1998.
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The Company's operations to date have consumed substantial capital
without generating any revenues, and the Company will continue to require
substantial and increasing amounts of funds to conduct necessary research and
development and preclinical and clinical testing of its drug candidates, and to
market any drug candidates that receive regulatory approval. The Company does
not expect to generate revenue from operations for the foreseeable future, and
the Company's ability to meet its cash obligations as they become due and
payable is expected to depend for at least the next several years on its ability
to sell securities, borrow funds or some combination thereof. Based upon its
current plans, the Company's management believes that its existing capital
resources, together with interest thereon, will be sufficient to meet the
Company's operating expenses and capital requirements through at least the next
twelve months. There can be no assurance, however, that changes in the Company's
research and development plans or other events affecting the Company's operating
expenses will not result in the expenditure of such cash before that time. No
assurance can be given that the Company will be successful in raising necessary
funds. The Company's future capital requirements will depend upon many factors,
including progress with preclinical testing and clinical trials, the number and
breadth of the Company's 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, the ability of the
Company to establish collaborative arrangements and effective commercialization
and marketing activities and other arrangements. In any event, the Company will
continue to incur increasing negative cash flows and net losses for the
foreseeable future.
YEAR 2000 ISSUE
The year 2000 computer issue is not expected to have any material affect
on the Company's financial statements or operations of the Company.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
During May 1998, the Company closed a private financing totaling $20.6
million in gross proceeds. The Company issued 1,329,201 shares of Common Stock,
4,000 shares of 5% Series A Convertible Preferred Stock and Warrants to purchase
1,437,475 shares of Common Stock to certain accredit investors. The shares of
Common Stock underlying such securities were registered with the SEC in June
1998.
The Company issued 36,878 shares of Common Stock to its research
affiliate and a supplier, in lieu of cash, for license fees and services,
respectively.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of Stockholders of Hollis-Eden Pharmaceuticals was
held on May 18, 1998. 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 three Class I directors to hold office until the 2001
Annual Meeting of Stockholders. Elected to serve as Class I
directors were Terren S. Peizer, Salvatore J. Zizza and J. Paul
Bagley. For each elected director the results of voting were:
5,525,004 for, 3,255 withheld, and 0 abstained. The continuing
directors are Thomas Charles Merigan, Jr., M.D., Brendan R.
McDonnell, and Richard B. Hollis.
(2) To approve the Company's 1997 Incentive Stock Option Plan, as
amended, to increase the aggregate number of shares of Common
Stock for issuance under such plan by 250,000 shares. The 1997
Incentive Stock Option Plan, as amended, was approved with the
following votes: 5,457,597 for, 48,552 against, and 22,110
abstained.
(3) To ratify the selection of BDO Seidman, LLP as independent
auditors of the Company for its fiscal year ending December 31,
1998. The selection of BDO Seidman, LLP as independent auditors
of the Company for its fiscal year ending December 31, 1998 was
approved with the following votes: 5,523,489 for, 1,100 against,
and 3,670 abstained.
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 May 12, 1998, a report on Form 8-K dated May 8, 1998 was filed with
the SEC announcing the completion of a private placement of Common Stock, 5%
Series A Convertible Preferred Stock and Warrants.
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 17, 1998 By: /s/ Robert W. Weber
------------------------------------
Robert W. Weber
Vice President-Controller
(Principal Financial and Accounting
Officer)
INDEX TO EXHIBITS
27 FINANCIAL DATA SCHEDULE (FILED ELECTRONICALLY ONLY)
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