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, 2001
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 14, 2001 there were 11,615,803 shares of registrant's Common
Stock, $.01 par value, outstanding.
HOLLIS-EDEN PHARMACEUTICALS, INC.
Form 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
INDEX
PART I Financial Information Page
------ --------------------- ----
Item 1 Financial Statements ............................................................................... 3
Balance Sheets - September 30, 2001 and December 31, 2000 .......................................... 3
Statements of Operations for the Three-Month and Nine-Month Periods
Ended September 30, 2001 and 2000 and Period from August 15, 1994
(Inception) to September 30, 2001 .................................................................. 4
Statements of Cash Flows for the Nine-Month Periods Ended September
30, 2001 and 2000 and Period from August 15, 1994 (Inception) to
September 30, 2001 ................................................................................. 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 .................................................................................. 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 ................................................ 9
Item 5 Other Information .................................................................................. 9
Item 6 Exhibits and Reports on Form 8-K ................................................................... 9
2
Part I. Financial Information
Item I. Financial Statements
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Balance Sheets
All numbers in thousands (except par value) Sept. 30, Dec. 31,
2001 2000
(Unaudited)
------------------ ------------------
ASSETS:
Current assets:
Cash and cash equivalents $ 23,244 $ 34,298
Prepaid expenses 114 96
Deposits 27 27
--------------------------------------
Total current assets 23,385 34,421
Property and equipment, net of accumulated
depreciation of $301 and $204 443 422
Other receivables - -
Other receivable from related party 293 256
------------------ ------------------
Total assets $ 24,121 $ 35,099
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable and accrued expenses $ 2,363 $ 2,636
------------------ ------------------
Total liabilities 2,363 2,636
------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000 shares
authorized; no shares outstanding - -
Common stock, $.01 par value,
30,000 shares authorized; 11,616 and
11,590 shares issued and outstanding 116 116
Paid-in capital 80,901 80,503
Deficit accumulated during development stage (59,259) (48,156)
------------------ ------------------
Total stockholders' equity 21,758 32,463
------------------ ------------------
Total liabilities and stockholders' equity $ 24,121 $ 35,099
================== ==================
The accompanying notes are an integral part of these financial statements.
3
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
----------------------------------------------------------------------------------------------------
All numbers in thousands, except per share amounts
Period from
Inception
(Aug.15,1994)
3 months ended Sept. 30, 9 months ended Sept. 30, to Sept. 30
2001 2000 2001 2000 2001
---------- ----------- --------- --------- -----------
Operating expenses:
Research and development:
R&D operating expenses ........ $ 2,714 $ 2,147 $ 8,372 $ 8,963 $ 34,962
R&D costs related to common
stock, option, & warrant grants
for collaborations ............ 24 24 72 2,502 5,252
General and administrative:
G&A operating expenses ........ 991 771 3,498 2,872 16,484
G&A costs related to common
stock, option, & warrant grants 208 - 208 - 9,698
-------- -------- -------- -------- --------
Total operating expenses ........... 3,937 2,942 12,150 14,337 66,396
Other income (expense):
Interest income ................ 243 663 1,047 1,980 7,187
Interest expense ............... - - - - (50)
-------- -------- -------- -------- --------
Total other income ................. 243 663 1,047 1,980 7,137
-------- -------- -------- -------- --------
Net loss ........................... $ (3,694) $ (2,279) $(11,103) $(12,357) $(59,259)
======== ======== ======== ======== ========
Net loss per share-basic and diluted (0.32) (0.20) (0.96) (1.10)
Weighted average number of common
shares outstanding-basic and diluted 11,616 11,315 11,609 11,240
The accompanying notes are an integral part of these financial statements.
4
Hollis-Eden Pharmaceuticals, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
------------------------------------------------------------------------------------------------
All numbers in thousands
Period from
Inception
(Aug. 15, 1994)
9 months ended Sept. 30, to Sept. 30
2001 2000 2001
---------- ----------- -------------
Cash flows from operating activities:
Net loss ............................................. $(11,103) $(12,357) $(59,259)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation ..................................... 97 78 301
Common stock issued for the company 401k/401m plan 95 63 158
Common stock issued as consideration for
amendments/termination of agreements ............ -- -- 67
Expense related to common stock issued
for the purchase of technology .................. -- 1,848 1,848
Common stock and options issued as consideration
for license fees and services ................... 72 654 1,766
Common stock issued as consideration
for In Process R&D .............................. -- -- 2,000
Expense related to warrants issued
as consideration to consultants ................. -- -- 2,140
Expense related to warrants issued to a
director for successful closure of merger ....... -- -- 570
Expense related to warrants issued
as consideration for financial services ......... 208 -- 208
Expense related to stock options issued .......... -- -- 5,140
Deferred compensation expense related
to options issued ............................... -- -- 1,210
Changes in assets and liabilities:
Prepaid expenses ..................................... (18) (28) (114)
Deposits ............................................. -- -- (27)
Loan receivable from related party ................... (37) (9) (293)
Accounts payable and accrued expenses ................ 308 336 2,363
Wages payable ........................................ (581) -- --
Disposal of assets ................................... -- -- 7
-------- -------- --------
Net cash used in operating activities ............ (10,959) (9,415) (41,915)
-------- -------- --------
Cash flows provided by investing activities:
Purchase of property and equipment ................... (118) (60) (751)
-------- -------- --------
Net cash used in investing activities ............ (118) (60) (751)
-------- -------- --------
Cash flows from financing activities:
Contributions from stockholder ....................... -- -- 104
Net proceeds from sale of preferred stock ............ -- -- 4,000
Net proceeds from sale of common stock ............... -- -- 42,172
Proceeds from issuance of debt ....................... -- -- 371
Net proceeds from recapitalization ................... -- -- 6,271
Net proceeds from warrants and options exercised ..... 23 765 12,992
-------- -------- --------
Net cash from financing activities ............... 23 765 65,910
-------- -------- --------
Net increase (decrease) in cash ........................ (11,054) (8,710) 23,244
Cash and equivalents at beginning of period ............ 34,298 47,486 --
-------- -------- --------
Cash and equivalents at end of period .................. $ 23,244 $ 38,776 $ 23,244
======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
HOLLIS-EDEN PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The information at September 30, 2001, and for the three-month and
nine-month periods ended September 30, 2001 and 2000, 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 the Hollis-Eden Pharmaceuticals, Inc.
("Hollis-Eden" or the "Company") Annual Report on Form 10-K for the year ended
December 31, 2000, which was filed with the United States Securities and
Exchange Commission on March 30, 2001.
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, 2000.
2. Equity Financing
On September 13, 2001, the Company entered into an agreement with
Ballsbridge Finance Ltd., a Nevis corporation, for a maximum of $10 million in
equity financing. Under this agreement, at the Company's election, Ballsbridge
will purchase up to $10 million of the Company's common stock over the next 18
months. The agreement is planned to operate in a manner similar to a line of
credit, allowing the Company to draw upon funds periodically, when and if
desired, which draw-down rights may be restricted by certain provisions of the
agreement such as volume and price of our common stock. In addition, as a
commitment fee, the Company agreed to issue to Ballsbridge a warrant to purchase
shares of common stock. The number of shares underlying the warrant will be
equal to 5,000 shares for each $1 million of the equity drawdown facility that
is not drawn down during the 18-month period. The warrant will be exercisable
for three years following the 18-month period, at an exercise price equal to the
market price of the Company's common stock at the end of the 18-month period.
3. Technology Acquisition - Commitments and Contingencies
Pursuant to a Technology Assignment Agreement dated January 20, 2000,
Patrick Prendergast and Colthurst Limited assigned to Hollis-Eden ownership of
all patents, patent applications and current or future improvements of the
technology previously licensed to Hollis-Eden under the Colthurst License
Agreement dated May 18, 1994 (as amended), including HE2000, Hollis-Eden's lead
clinical compound. In exchange for certain covenants made by Mr. Prendergast and
Colthurst regarding their future activities (the "Covenants"), as well as for
the consideration described above, Hollis-Eden agreed to issue to Colthurst
660,000 shares of Common Stock and a warrant to purchase an aggregate of 400,000
shares of Common Stock at $25 per share, of which only 132,000 shares were to be
issued in 2000, with the remaining 528,000 shares to be issued over the next
four years conditioned on continued compliance with the Covenants. The shares
underlying the warrant were to vest over four years and were likewise
conditioned on continued compliance with the Covenants.
In accordance with Emerging Issues Task Force No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services, certain future events could not
be determined at the date of the agreements (January 2000). Accordingly, the
6
shares and warrants were to be accounted for as they vest or were issued. During
2000, the company recorded a research and development charge for $1.9 million
representing the fair value of the 132,000 shares issued under the agreement.
Because Mr. Prendergast and Colthurst failed to comply with the
Covenants, Hollis-Eden has not issued any additional shares to Colthurst and
believes it has no obligation to issue to Colthurst any additional shares. While
Hollis-Eden is confident in its analysis, if any dispute should arise in this
matter, Hollis-Eden cannot guarantee that, subject to the resolution of any such
dispute, it will not be required to issue additional equity to Mr. Prendergast
and Colthurst or that it will not incur additional accounting charges or other
adverse accounting reporting as a result of any such resolution.
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. Our 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, 2000.
General
Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical
company, is presently engaged in the discovery and development of products for
the treatment of infectious diseases and immune system disorders, including
HIV/AIDS, hepatitis B and C, and malaria.
We are focusing our initial development efforts on a potent series of
immune regulating hormones and hormone analogs. We are currently developing
three clinical stage compounds with potentially broad therapeutic applications:
HE2000, HE2200 and, through our relationship with Aeson Therapeutics, HE2500.
Our lead compound, HE2000, is currently in Phase II clinical studies in HIV,
Malaria and hepatitis B. 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 addition, based on the
mechanism of action, we believe these compounds may have an attractive safety
profile and will avoid issues of resistance that plague many existing antiviral
drugs.
We have been unprofitable since our 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 clinical testing and other activities.
In addition, during the next few years, we may 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 may
undertake in the future, and our historical operations and financial information
may not be indicative of our future operating results or financial condition or
our ability to operate profitably as a commercial enterprise when and if we
succeed in bringing any drug candidates to market.
On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was
merged with and into us, then known as Initial Acquisition Corp. ("IAC"), a
Delaware corporation. Upon consummation of the merger of Hollis-Eden, Inc. with
IAC (the "Merger"), Hollis-Eden, Inc. ceased to exist, and IAC changed its name
to Hollis-Eden Pharmaceuticals, Inc.
7
Results of Operations
We have not generated any revenues for the period from August 15, 1994
(inception of Hollis-Eden) through September 30, 2001. We have devoted
substantially all of our resources to the payment of licensing fees and research
and development expenses plus expenses related to the startup of our business.
From inception until September 30, 2001, we have incurred expenses of
approximately $40.2 million in research and development ($5.2 million are
non-cash expenses) and $26.2 million in general and administrative expenses
($9.7 million are non-cash expenses), which have been partially offset by $7.1
million in net interest income, resulting in a loss of $59.3 million for the
period.
Research and development expenses were $2.7 million and $8.4 million
for the three- and nine-month periods ended September 30, 2001 and $2.2 million
and $11.5 million for the same periods in 2000. The research and development
expenses relate primarily to the ongoing development, preclinical testing, and
clinical trials for our first drug candidate, HE2000. Included in the nine-month
period ended September 30, 2000 was $2.2 million related to collaborations and
$2.5 million in non-cash charges related to the acquisition of technology and
in-process R&D. There were no material collaboration expenses in the nine-month
period ended September 30, 2001. The increase in research and development
expenses (net of collaborations and technology acquisitions) for the three- and
nine-month periods ended September 30, 2001, compared to the same period in
2000, was also due to increased staffing and clinical trial activities.
General and administrative expenses were $1.2 million and $3.7 million
for the three- and nine-month periods ended September 30, 2001, compared to $0.8
million and $2.9 million for the same period in 2000. The general and
administrative expenses relate to salaries and benefits, facilities, legal,
investor relations, insurance and travel. Included in the nine-month period
ended September 30, 2001 was $0.2 million in non-cash charges related to
warrants issued for a financial advisory / investment banking agreement. The
increase in general and administrative expenses (net of the non-cash charges)
was mainly due to expenses associated with investor relations, legal fees and
the growth of the Company's operations.
Net interest income was $0.2 million and $1.0 million for the three-
and nine-month periods ended September 30, 2001, compared to $0.7 million and
$2.0 million for the same periods in 2000. The decline in interest income is due
to lower interest rates and lower average balances of cash and cash equivalents
as a result of ongoing operating losses.
Liquidity and Capital Resources
We have financed our operations since inception through the sale of
equity. During the year ended December 31, 1995, we 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 IAC and Hollis-Eden, Inc.
provided us with $6.5 million in cash and other receivables. In May 1998, we
completed a private placement of common stock and warrants to purchase common
stock, from which we received gross proceeds of $20 million. During January
1999, we completed two private placements of common stock raising approximately
$25 million. In September 2001, we entered into an equity line of credit
agreement which gives the company an option to sell up to $10 million of our
common stock on predetermined terms. In addition, since inception we have
received a total of $13 million from the exercise of warrants and stock options.
Our 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 through 2002. However,
changes in our research and development plans or other events affecting our
operating expenses may result in the expenditure of such cash
8
before that time. We may not 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. We expect to continue to incur increasing negative cash flows and
net losses for the foreseeable future.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
PART II Other Information
Item 1. Legal Proceedings
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Quarterly Report on Form 10-Q, we are not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on our business, financial condition or operating
results.
Item 2. Changes in Securities and use of Proceeds
In May 2001, we entered into a financial advisory and investment
banking agreement with H.C. Wainwright & Co., Inc. ("HCW"). Under the terms of
the agreement, in August 2001 we issued to HCW a warrant to purchase up to
25,000 shares of Common Stock at an exercise price of $6.225 per share.
During September 2001, we entered into an equity line of credit with
Ballsbridge Finance Ltd. for a maximum of $10 million in equity financing. As a
commitment fee, we issued a warrant to purchase shares of our Common Stock. The
number of shares underlying the warrant will be equal to 5,000 shares for each
$1 million of the equity drawdown facility that is not drawn down during the
18-month period of the facility, up to a maximum of 50,000 shares. The warrant
will be exercisable until March 12, 2006 at an exercise price equal to our
common stock's volume weighted average price on March 11, 2003.
The sale and issuance of securities in the transaction described in the
foregoing paragraph was 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 recipient 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 securities issued
in such transaction. 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
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
(a) Exhibits:
10.1 Common Stock Purchase Agreement, dated September 13, 2001,
between Ballsbridge Finance Ltd. and the Registrant.(1)
10.2 Registration Rights Agreement, dated September 13, 2001,
between Ballsbridge Finance Ltd. and the Registrant.(2)
10.3 Warrant Agreement, dated September 13, 2001, between
Ballsbridge Finance Ltd. and the Registrant.(3)
--------------------
(1) Incorporated by reference to Exhibit 10.1 to the Registrant's Registration
Statement on Form S-3 (No. 333-69454)(the "Form S-3")
(2) Incorporated by reference to Exhibit 10.2 of the Form S-3.
(3) Incorporated by reference to Exhibit 10.3 of the Form S-3.
(b) Reports on Form 8-K:
None.
9
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 14, 2001 By:/s/ Daniel D. Burgess
--------------------------
Daniel D. Burgess
Chief Operating Officer/
Chief Financial Officer
(Principal Financial Officer)
Dated: November 14, 2001 By:/s/ Robert W. Weber
--------------------------
Robert W. Weber
Vice President-Controller/
Chief Accounting Officer
(Principal Accounting Officer)
10