03-hol-115 ar cover singles - annualreports.com · the human body 1998 from discovery to medicine...
TRANSCRIPT
Passagesof
Hollis-Eden
Passagesof
Hollis-Eden
1997looking insidethe human body
1998from discoveryto medicine
1999bringing visionto life
2001harnessing sciencefor the most importanthealth issues of our time
2000spanning the globeto improve humanhealth
2002creating the future:
products for21st century
global medicine
hollis-edenpharmaceuticals
R A D I A T I O N I N J U R Y / B I O D E F E N S E
2003 AN N UAL R E PORT
C H E M O T H E R A P Y P R O T E C T I O N
I N F L A M M A T I O N / A U T O I M M U N E D I S O R D E R S
I M M U N E R E G U L A T I N G H O R M O N E S
G L O B A L I N F E C T I O U S D I S E A S E S
Passagesof
Hollis-Eden
Passagesof
Hollis-Eden
On September 26, 2003, Hollis-Eden Pharmaceuticals rang the opening bell of the NASDAQ market, in part to elevate
awareness of the need to advance development of new medical countermeasures for weapons of mass destruction.
Joining management at the NASDAQ opening was former New York City Mayor Rudy Giuliani, who spoke on behalf
of the need for passage of Project BioShield to incentivize development of new biodefense drugs.
“I believe it is every entrepreneur’s dream to list their company
on NASDAQ, take their idea, build a business and create value.
I’m quite honored to be here with the former mayor of New York,
Rudy Giuliani, who shares the same vision as Hollis-Eden – to
provide medical countermeasures to acts of terrorism to protect
all of our citizens and to add to our nation’s security.”Richard B. Hollis, Founder, Chairman and CEO of Hollis-Eden, at the NASDAQ opening ceremony, September 26, 2003
TO OU R VALU E D SHAR E HOLDE RS
It is with heartfelt gratitude that I welcome this opportunity to thankour investors, both old and new, for providing the capital necessaryto create a company based on an entrepreneur’s dream. When I wasjust a teenager, I remember reading a wonderful poem by Samuel TaylorColeridge that has stayed with me all these years and has continuedto spark my imagination:
What if you slept? And what if, in your sleep,you dreamed? And what if in your dream you went to heaven
and there plucked a strange and beautiful flower?And what if, when you awoke, you had the flower
in your hand? Ah! What then?
We have taken the seeds of this flower and over the last several yearscultivated its growth. But instead of just a single beautiful rose, we havediscovered and grown an enormous rose garden. The task before us nowis to further understand the secrets in this garden: grow the flowers,share their beauty with the world, take them to the marketplace, andlet their value create wealth.
In any endeavor of wealth creation that is sustainable and worthwhile,there must be real underlying intrinsic value coupled with a noble causethat a company can be built upon; in other words, a solid foundation.Our intrinsic value is in our underlying science and technology that we areconverting into pharmaceutical products. Our noble cause is to improve thehuman condition by treating diseases and helping to alleviate suffering.
H O L L I S -E D E N 2003 A N N U A L R E P O R T
Therefore, your continued investment in Hollis-Eden
Pharmaceuticals has allowed us the privilege to
evolve through several key corporate passages
and progress from an entrepreneurial vision to a
company poised with the potential to make a sig-
nificant contribution to the world of science and
medicine; and in this noble endeavor of serving
humanity by improving the human condition, create
products that have the potential to generate
revenues for years to come. We are creating the
rare combination that all great companies strive
to achieve — the ability to do well by doing good.
Since inception, we have advanced Hollis-Eden
through numerous key passages necessary to lay
the solid foundation of science and technology,
managerial expertise and financial strength
required to sustain the inherent long-term nature
of drug discovery and development. By achieving
these “rites of passage” we have brought
Hollis-Eden today to a point where it has in place
multiple sustainable drivers of enterprise value:
- significant near-term revenue and profitability
potential in our radiation protection drug
candidate NEUMUNE™ (HE2100), with
the opportunity to extend our expertise in
hematopoiesis into the rapidly growing
chemotherapy protection market;
- a deep pipeline of proprietary drug candidates
with potential application in the areas of biode-
fense, chemotherapy protection/cancer, global
infectious disease, and diseases of inflamma-
tion/autoimmunity;
- a core technology platform and development
program yielding an evolving pipeline
of rationally designed, next-generation drug
candidates, supported by a strong intellectual
property position.
Building a company to develop drugs to treat and
cure human diseases is no small challenge. The
time and expense required to bring a new drug
to market can be staggering. On average, it is
now calculated that it can take from 10 to 15
years and up to $800 million to move a drug
from discovery through development and com-
mercialization. This is because the nature of drug
development is both time consuming, costly, and
fraught with failed experiments before a success-
ful drug is eventually commercialized.
In pursuing the journey of translating the entrepre-
neurial vision for Hollis-Eden into a reality, the
pivotal question is “what does it take to build a
successful pharmaceutical company… a company
that can truly make a difference?”
First and foremost you must have a clear and
steady corporate vision. At Hollis-Eden, we have
never wavered from our core vision of building
a world-class pharmaceutical company serving
humanity by improving quality of life. This vision is
backed by values and principles that provide the
compass and roadmap to keep the Company on
course regardless of the challenges and hurdles
that might arise. Our corporate statement of philos-
ophy and credo were implemented day one, and
have acted as our code of conduct.
In order to realize this vision, a company must
have a proprietary technology that meets unmet
medical needs, is novel and offers advantages
over currently available products. That technology
also should convert to multiple products off
a single platform, thereby allowing the company
to build a future pipeline and address multiple
market opportunities. Those products should be
easy to manufacture, providing the opportunity for
attractive margins with competitive pricing. They
2 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Platform technology identified
Company formed andinitial patents acquired
PASSAG ES OF COR PORATE PROG R ESS
3 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
should address major markets that offer signifi-
cant revenue potential that can reward investors
and fund further research and development. The
technology should also be protected by a strong
intellectual property position that justifies the
investment of additional resources.
Proprietary Technology Platform
Hollis-Eden’s core immune regulating hormone
(IRH) technology — based on a class of hormones
in the human body that have been implicated in
most immune system related diseases – meets
each of those criteria and is a key value driver of
our company. Although known for decades in the
scientific and medical literature, the potential role
and benefit of IRHs in treating human disease
was not fully under-
stood, and IRHs were
overlooked as thera-
peutic development
candidates as a
result. In founding
Hollis-Eden, there-
fore, our first step
was identifying this
promising technology
and then acquiring
the initial patents on
the technology. We
endeavored to further
investigate the
potential role these
hormones could
play in the body and
undertook the innova-
tive approach of
looking inside the
body to discover,
design and redirect
human molecules to treat medical diseases and
disorders. In other words, we trusted and built on
the biology. This is in contrast to most pharma-
ceutical companies that begin by identifying drug
targets and then design therapeutic molecules
that interact with those targets.
In 2003, we enhanced our scientific understanding
of our proprietary class of compounds and how
they are able to regulate immune function. We
expanded our understanding of the metabolism,
pharmacology and structure-activity relationships
of our proprietary class of IRH compounds
across several different species, allowing us to
now pursue development of even more potent
and specific second-generation IRH compounds.
We also articulated
the potential cell
proliferation role
of our IRHs in
hematopoiesis.
Further, in early
2004, we presented
data on the molecu-
lar mechanisms by
which IMMUNITIN™
(HE2000) may
be producing
beneficial effects,
including the ability
of the compound to
regulate a number
of important genes
involved in control-
ling the inflammatory
response and
immune function.
We believe that
increased scientific
Initial Public Offering Listed on NASDAQ
B USI N ESS MANAG E M E NT TEAM
LEFT TO RIGHT Traci Campbell, Eric J. Loumeau, Heather Callahan, Ph.D.,
Scott A. Rieger, Daniel D. Burgess, Robert L. Marsella, Robert W. Weber
knowledge of our technology should enable us
to identify optimal development candidates and
shorten development times, and ultimately reduce
investment risk.
Novel, Differentiated Products
Hollis-Eden’s proprietary technology platform has
yielded to date a deep and diversified pipeline of
both near-term and longer-term product opportu-
nities addressing a variety of market needs.
Currently, our focus is in the areas of biodefense,
chemotherapy protection/cancer, global infectious
diseases and inflammatory disorders.
Our IRH drug candidates are small molecule
compounds that are easy to manufacture and
offer unique properties that may make them highly
valuable as therapeutic agents. To date, they have
shown in either clinical or preclinical studies the
ability to regulate innate and adaptive immunity,
decrease inflammation and oxidative stress, and
stimulate bone marrow production. We have
demonstrated these properties of our IRHs in a
variety of indications, and have sought to trans-
late from one indication to another the benefit of
discoveries made. For example, it was in our HIV
trials that we demonstrated the reduction of
inflammatory mediators, and we are now taking
that discovery into other diseases and disorders
where inflammation is a factor. Our opportunity in
radiation protection stems from preclinical work
conducted with the military, and from studies
in both chemotherapy models and HIV patients
showing protection of neutrophils. Again, we have
followed the biology in translating our technology
to product opportunity.
During 2003, we made significant progress in
advancing our drug development programs. In our
biodefense program we moved NEUMUNE forward
for acute radiation injury while working actively
in Washington, D.C. and elsewhere in support
of securing a national stockpiling contract. With
NEUMUNE, we demonstrated in two pilot non-
human primate studies that the compound could
provide significant protection for neutrophils and
platelets. NEUMUNE is being developed under
a new U.S. Food and Drug Administration (FDA)
rule for medical countermeasures for weapons
of mass destruction, under which marketing
approval may be gained based solely on the
demonstration of safety in humans and efficacy
in relevant animal species. We are now working
to complete the process of optimizing dose and
formulation with the objective of initiating pivotal
non-human primate efficacy studies and human
safety studies in support of a New Drug
Application filing with the FDA.
In early 2004, we expanded our product
opportunities in radiation protection through the
acquisition of Congressional Pharmaceutical
Corporation (CPC), a company that was formed
to commercialize a series of compounds that
have the potential to protect against DNA muta-
tions that can occur as a result of radiation or
chemotherapy injury. In addition to our work
with the military on radiation injury, in 2003 we
provided our investigational IRHs to a number of
governmental agencies to be tested for activity in
preclinical models against a variety of bioterrorism
agents as well as parasitic, bacterial and viral
infections of military interest.
In the chemotherapy protection area, last year
we identified a substantially more potent second-
generation IRH for chemotherapy-induced
immune suppression, and announced positive
results from preclinical studies demonstrating the
ability to protect the bone marrow and increase
4 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
PASSAG ES OF COR PORATE PROG R ESS
Initial HIV/AIDS
studies in humans withfirst-generation compounds
Demonstrated broad-spectrumbenefit in other human andanimal models
5 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
neutrophils and platelets. The enhanced potency
of this second-generation compound demon-
strates the tremendous leverage we may gain
from the recent discoveries we have made rela-
tive to our underlying IRH technology. We are
preparing to select one or more of our IRH
candidates for testing in Phase I/II clinical trials
in chemotherapy protection.
In our global infectious disease program, we
presented data from a Phase II clinical trial
conducted with IMMUNITIN in South Africa,
demonstrating a statistically significant reduction
in opportunistic infections in late-stage AIDS
patients treated with
the compound as
a monotherapy.
In addition, we
reported data from a
series of preclinical
studies in tubercu-
losis (TB) that
demonstrated the
ability of IMMUNITIN
to provide significant
benefit in either
acute or chronic TB
when used as a
monotherapy, and
showed an additive
effect in this model
system when the
compound was com-
bined with standard
triple antibiotic
therapy. We are
continuing active
discussions with a
number of govern-
mental and international healthcare organizations
about collaborating through a public/private
partnership to develop and potentially com-
mercialize IMMUNITIN for a number of global
infectious diseases, specifically, HIV/AIDS, TB
and malaria. We believe the compound is espe-
cially well-suited for these indications because it
is inexpensive to manufacture, has an attractive
safety profile to date, and is unlikely to result
in drug resistant strains of pathogens.
In the area of inflammation/autoimmune disorders,
preclinical and clinical work conducted in past
years has demonstrated promising anti-inflamma-
tory potential for our
IRHs. As a result we
are very interested in
exploring the poten-
tial role for these
compounds in the
treatment of auto-
immune disorders.
Toward that end, in
2003 we entered
into a collaboration
with the Cystic
Fibrosis Foundation
to test IMMUNITIN
in a Phase I/II pilot
study in cystic fibro-
sis. We also are
investigating
numerous second-
generation
compounds for
potential develop-
ment for the
autoimmune market.
Embarked on biodefensedevelopment program withradiation protection compound
Articulated differentialmetabolism of IRHs
NASDAQ MAR KET OPE N I NG – SE PTE M B E R 26, 2003
LEFT TO RIGHT John Vitalie, Regional Vice President, NASDAQ, Paul Bagley III,
Daniel D. Burgess, Bruce Aust, Executive Vice President, NASDAQ,
Rudy Giuliani, Former Mayor, New York City, Richard B. Hollis,
Robert L. Marsella, James M. Frincke, Salvatore Zizza
Throughout the year, we added to the value of
our technology platform by continuing to build our
intellectual property portfolio, and by publishing
and presenting preclinical and clinical findings
in international peer reviewed publications
and meetings.
Efficient Business Model
In building a pharmaceutical company, it is
critical to have a business model tailored for
the challenges and opportunities inherent in the
industry. Such a model should be efficient relative
to the use of capital and scalable in order to
adjust spending levels to align with capital market
trends. A successful model will have a well-
defined strategy to translate technology value
into market value, and a clear roadmap to revenue
and profitability, in order to generate an attractive
return to investors.
We believe our business model at Hollis-Eden,
what we consider to be a partially integrated
pharmaceutical company, served our investors
well in 2003. It enabled us to scale back our
spending in a difficult operating environment
that biotech companies in general have endured
over the past several years. At the same time,
however, we were able to make significant
achievements in 2003 and entered 2004 in a
position of strength. Due in part to the progress
we continued to demonstrate, we raised gross
proceeds of $87.5 million from three separate
financings, despite a difficult financial market
environment. Structured as we are, we have been
able to extend our technology platform, with a rel-
atively low level of investment and share dilution,
into a deep program pipeline with both near-term
and longer-term revenue opportunities. In some
cases, we plan to develop and commercialize
those product opportunities on our own, and
in others we may seek partners with relevant
scientific expertise or market clout. To date, it has
been our strategy to build as much technology
value as possible before seeking potential partners.
We have recently initiated dialog with a number
of companies to explore potential interest in
current and next-generation products.
Commitment to Integrity
Key to our progress to date has been the
extremely talented and dedicated employees of
Hollis-Eden. Employees, and the professional
environment in which they work, are critical
factors to the success of any pharmaceutical
company. At Hollis-Eden, we pledge to our
employees an environment where business and
personal achievements are accomplished to the
highest standard of integrity, excellence and
professionalism. We take this opportunity to
thank them for their contributions.
To investors, we pledge to prosper as a business
and to reward owners with an attractive return. As
this year’s annual report conveys, we are building
a company that we believe will grow into a signifi-
cant enterprise and generate an excellent return
on investment over the long-term. However, we
changed with the external environment and created
shorter-term opportunities that we are focused to
deliver on while maintaining our long-term vision
of bringing our diversified product pipeline to
fruition. These near and longer-term opportunities
should allow us to keep a regular news flow to
the marketplace in the future, which will continue
to create investor interest and shareholder value.
Before we get to that fortunate position of
commercializing our products and generating
revenues, we will, like all other emerging growth
companies in the pharmaceutical/biotech sector,
6 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
PASSAG ES OF COR PORATE PROG R ESS
Advanced knowledge of IRHstructure-activity relationshipsand mechanism of action
Demonstrated stem celldifferentiation, activation andproliferation with IRHs
7 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
both benefit and suffer from the swings of a
volatile and uncertain stock market. These fluctu-
ating valuations may or may not be reflective of
our progress. They may have to do more with the
general market conditions and/or speculation and
market timing of traders. Our success, until we
generate revenues, is measured by a much
broader set of parameters than temporary per-
formance in the stock market. Our discoveries
and fundamental development accomplishments
can sometimes be masked by perceptions of a
stock price in a nervous market. I do not believe
that in the history of our market sector any emerg-
ing growth company has escaped stock market
volatility – it is just part of the environment. The
leadership in Hollis-Eden will remain focused on
the goals and execute the fundamentals that will
ultimately bring products to the marketplace.
Significant Market Opportunities
This is an especially opportune time for
Hollis-Eden. Significant corporate and scientific
passages lie ahead. Today, we are focused
on matters of grave concern to our nation –
Homeland defense and bioterrorism, and to the
world community — global infectious diseases.
Additionally, we are targeting major mainstream
markets with programs in chemotherapy-induced
neutropenia, and in autoimmune disorders and
inflammation. We also are poised to deliver on
the potential of an entirely new class of pharma-
ceuticals, not just a new compound, that could be
of significant therapeutic value to patients suffer-
ing from a wide array of diseases and disorders,
and of significant economic value to our share-
holders. We believe we have the financial and
human resources both to drive our short-term
opportunities home, and to take the Company
to the next level of opportunity. We look forward
to keeping you updated as we continue to
advance on our goal of serving humanity with
beneficial new global medicines. We are now in
the enviable position with our resources where
we can realize our entrepreneurial dream and
bring our flowers to the marketplace.
Sincerely,
Richard B. HollisChairman and Chief Executive Officer
R ICHAR D B. HOLLIS
Founder, Chairman and CEO
Accelerating rational steroiddesign in pursuit of second-generation compounds
Expanding extensivepatent portfolio
8 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Hollis-Eden is developing a proprietary class ofsmall molecules known as immune regulatinghormones (IRHs). IRHs are cellular signalers withinthe body that control gene expression necessary forproper immune function. Diseases, stress, traumaand aging can significantly alter the levels of thesehormones in the body and disrupt normal signalingpathways and gene expression, leading to immunedysregulation. The body then either over responds,leading to inflammatory conditions, or underresponds, resulting inimmune suppression.Hollis-Eden’s goalis to use its IRHstherapeutically torestore the signals thatare required for theimmune system andother organ systemsof the body to functionproperly and effectivelycontrol a variety ofconditions.
Hollis-Eden has anumber of investiga-tional compoundsunder development,including NEUMUNE™
(he2100), which theCompany is co-devel-oping with the UnitedStates military for usein protection fromradiation injury;
PHOSPHONOL™, a non-IRH drug candidate forproviding protection against DNA mutations fromradiation exposure and chemotherapy treatment;and IMMUNITIN™ (he2000), which has shownactivity in a variety of infectious diseases, includingHIV/AIDS, tuberculosis and malaria. Hollis-Edenis developing additional IRHs for protection fromchemotherapy and for other conditions of immunedysregulation.
Much of Hollis-Eden’s IRH technology is basedon the fundamentalpremise that inflam-mation dysregulatesimmunity and otherbodily functionsand is related tovirtually all diseases.Increasingly, thishypothesis – whichthe Company hasbeen working on forthe past ten years –is being affirmedas scientists linkinflammation witha growing numberof major diseasesand disorders.
Hollis-Eden’s IRH
compounds are basedon naturally occurringmolecules in theandrostene class ofsteroid hormones.
SCI E NTI FIC MANAG E M E NT TEAM
LEFT TO RIGHT Dwight R. Stickney, M.D., James M. Frincke, Ph.D.,
Christopher L. Reading, Ph.D.
HOLLIS-E DE N ’S
IRH TECHNOLOGYCE LLU LAR SIG NALE RS
FOR H U MAN H EALTH
9 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Days
Placebo IMMUNITIN
0 60 120 180 240 300 360 420
7.06.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Cumulative Occurence of Opportunistic Infections
Cum
ulat
ive
# o
f Op
port
unis
ticIn
fect
ions
/Pat
ient
0 50 100 150 200
Placebo IMMUNITIN Dosing
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
Days
Log
Chan
ge fr
om B
asel
ine
Viral Load in H IV Patients
1009080706050403020100
I L-6
Rela
tive
Expr
essi
on L
evel
Healthy Pre-Dosing 43 Days AfterIMMUNITINTreatment
60
Placebo NEUMUNE Placebo NEUMUNE Placebo NEUMUNE
-5 1 3 6 8 10 13 15 16 17 20
181614121086420
Days
Neut
roph
ils (
x10-9
/L)
Severe Neutropenia Severe Neutropenia
-5 1 3 6 8 10 13 15
600
500
400
300
200
100
0
Days
Plat
elet
s (x
10-9
/L)
100.0
10.0
1.0
0.1
Days
Neut
roph
ils (
x10-9
/L)
Chemotherapycarboplatin (35 mg/kg)
Chemotherapycarboplatin (35 mg/kg)
Chemotherapycarboplatin (35 mg/kg)
0 10 20 30 40
NEUMUNENEUMUNENEUMUNE
Neutrophils 10 Days Dosing
Neutrophils5 Days Dosing
Platelets10 Days Dosing
Placebo NEUMUNE
Severe Neutropenia
0 5 10 15 20 25 30 35
10.0
1.0
0.1Neut
roph
ils (
x10-9
/L)
NEUMUNE
Radiation (4 00 cGy)
N
RDays
Neutrophils 8 Days Dosing
0
1000
100
10
Plat
elet
s (x
10-9
/L)
Healthy Pre-Dosing 43 Days AfterIMMUNITINTreatment
10
8
6
4
2
0
I L-1 beta
Rela
tive
Expr
essi
on L
evel
Healthy Pre-Dosing 43 Days AfterIMMUNITINTreatment
COX-26
4
2
0
Rela
tive
Expr
essi
on L
evel
Healthy Pre-Dosing
14
121086420
TNF-alphaRe
lativ
e Ex
pres
sion
Lev
el
ANTI-I N FLAM MATORY
Regulated inflammatory cytokines in HIV patients, with durable effect.
CE LL PROLI FE RATION
Accelerated neutrophil and platelet recovery in non-human primates
treated with chemotherapy.
Accelerated neutrophil and platele
I M M U N E R EG U LATION
Stimulated immune mediators and reduced viral
load in HIV patients.
Reduced opportunistic infections in late-stage AIDS patien
10 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
0 1 2 4 6
Placebo RIP (Rifampin, Isoniazid, Pyrazinamide) RIP+IMMUNITIN
7
6
5
4
3
2
1
0
Weeks of Treatment
IRH and Antibiotic Therapy in Mouse Model of TB
CFU
106/
LUN
G
TB Colony-forming UnitsN = 21 Per Study
IMMUNITIN
Buccal IM
Median time to 50% clearance (study endpoint)
Median time to 90% parasite clearance
Median time to 100% parasite clearance
Number of patients who cleared parasites by day 7
Median time normal temperature
Number of patients who cleared fever by day 7
6 hr
24 hr
42 hr
15/21
12 hr
18/21
6 hr
12 hr
36 hr
16/21
24 hr
8/8
Severe Neutropenia
NEUMUNE
Radiation (4 00 cGy)
Placebo NEUMUNE
0 10 20 30 40
10.0
1.0
0.1Neut
roph
ils (
x10-9
/L)
Radiation (4 00 cGy)
NEUMUNE
Days
Neutrophils5 Days Dosing
Platelets 5 Days Dosing
Platelets8 Days Dosing
10 20 30 40
Placebo NEUMUNE
Days
Plat
elet
s (x
10-9
/L)
Radiation (4 00 cGy)
Placebo NEUMUNE
0 10 20 30 40
1000
100
10NEUMUNE
Days
43 Days AfterIMMUNITINTreatment
1.0E+05
1.0E+04
1.0E+03
1.0E+02
1.0E+01
1.0E+00
Week of Culture
Colo
ny-F
oam
ing
Cells
per
Cultu
re
Mouse Hematopoietic Stem Cells
+330% versus DMSO (p<0.0 5)
1 2 3 4
Solvent Control NEUMUNE(10 ng/mL)
O 20 40 60 80 100 120 140 160
100
80
60
40
20
0
-20
Median Days
Neutrophils /µL
Mea
n %
Cha
nge
from
Bas
elin
e
IMMUNITIN Dosing
Induced neutrophils in HIV patients.
CE LL PROLI FE RATION
Demonstrated activity in preclinical models
of autoimmune disorders, including multiple
sclerosis, lupus and others.
et recovery in irradiated non-human primates. Stimulated bone marrow production in
in vitro models.
Demonstrated activity in preclinical models
of tuberculosis, including additive benefits
to standard triple antibiotic therapy.
Cleared malaria parasites in infected patients.ents.
Placebo HE2200
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Days Post-Immunization
IRH in Mouse EAE Model of Multiple Sclerosis
Mea
n Cl
inic
al S
core
11 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
The metabolic precursor to this class of hormonesis pregnenalone, which is also the precursor to theglucocorticosteroid class of hormones. These includecortisol and other corticosteroids, frequently pre-scribed today for their potent anti-inflammatoryproperties. Like corticosteroids, for which 67 millionprescriptions are written each year in the U.S. alone,Hollis-Eden’s IRHs appear to be potent anti-inflammatory agents. However, unlike corticosteroids,which can be immune suppressive, IRHs are potentimmune modulators enhancing immune response.
To date, IRHs have shown activity in a variety ofclinical and preclinical studies that demonstrate theirpotential benefit in a broad spectrum of diseases.Through these studies, it has been clearly establishedthat IRHs have three important properties that distin-guish them as unique drug candidates – they appearto regulate innate and adaptive immunity, decreaseinflammation and oxidative stress, and stimulatecell proliferation in the bone marrow. Specificdemonstrations of these properties include thoselisted below (graphs for which are presented insidethis foldout.)
IMMUNE REGULATION
- Stimulated immune mediators
and reduced viral load in HIV patients.
- Reduced opportunistic infections (including
tuberculosis) in late-stage AIDS patients.
- Demonstrated activity in preclinical models
of tuberculosis, including additive benefits
to standard triple antibiotic therapy.
- Cleared malaria parasites in infected patients.
ANTI-INFLAMMATORY
- Regulated inflammatory cytokines in HIV
patients, with durable effect.
- Demonstrated activity in preclinical models
of autoimmune disorders, including multiple
sclerosis, lupus and others.
CELL PROLIFERATION
- Induced neutrophils in HIV patients.
- Accelerated neutrophil and platelet recovery in
non-human primates treated with chemotherapy.
- Accelerated neutrophil and platelet recovery in
irradiated non-human primates.
- Stimulated bone marrow production in
in vitro models.
I R Hs
OPEN FOR GRAPHS
12 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
KEY DISCOVE R I ESI N 2003
2003 was a breakthrough year for Hollis-Eden inadvancing the Company’s knowledge of how totranslate its IRHs into an important new class oftherapeutics. Through its ongoing drug developmentefforts, the Company made substantial progress inunderstanding the metabolism, structure-activityrelationships, and mechanism of action for thesecompounds, as well as their pharmacology profile.
MetabolismVolumes of publications show impressive activityof precursors to IRHs in many rodent models ofimmune-mediated and other diseases. However,scientists have been perplexed for decades as to whythose compounds demonstrated limited activity inhumans. During the year, Hollis-Eden made a keyfinding regardingIRHs and theirprecursors. TheCompany’s scientistsfound that rodentsmetabolize thischemical series verydifferently than dohumans and non-human primates. Inrodents, compoundsare metabolizedlargely into immuno-logically active IRHs,whereas in primates,they are metabolizedprimarily into sexsteroids that have verydifferent biologicalproperties. An under-standing of how thesecompounds are
metabolized has led to key discoveries by Hollis-Edenin structure-activity relationships for this series ofdrug candidates.
Structure-Activity RelationshipsDuring 2003 Hollis-Eden presented data from apreclinical model demonstrating for the first timethe relationship between the chemical structure ofspecific IRHs and their ability to regulate specificimmune responses associated with human disease.In this study, different compounds were able to limitand stimulate discrete arms of the immune response,apparently based on functional groups and theirorientation at specific positions on the steroid ring.
Mechanism of ActionHollis-Eden made significant discoveries in 2003 thathave greatly illuminated the mechanism of action ofIRHs. Among these, IRHs were shown to have potent
cell proliferationproperties in thebone marrow.The Companylearned that, not onlydo IRHs increaseneutrophil andplatelet recoveryfollowing radiation orchemotherapy injury,but that cells pro-duced followingtreatment with IRHsare more effective atkilling pathogensthan untreated cells.The ability of IRHsto regulate reactiveoxygen species (seetext below) may alsohelp to prevent thedeath of key bonemarrow stem cells.
Immune Regulation:
HIV/AIDS
Immune Regulation:
Malaria
Anti-inflammatory:
HIV
PASSAG ES OF SCI E NTI FIC PROG R ESS
CH E M ISTRY G ROU P
LEFT TO RIGHT Steven White, Ph.D., (Director), Yu Ge, Ph.D.,
Yujin Huang, Ph.D.
13 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Therefore, IRHs appear both to accelerate the rate atwhich new cells are generated and to protect theproliferative potential of residual bone marrow cellsafter injury. In early 2004, the Company presentedmolecular findings indicating that IMMUNITIN canup-regulate specific antioxidant response genes anddown-regulate a number of important inflammatorymediators. This new data represents a major advance-ment in the Company’s molecular understanding ofhow immune regulating hormones may be able tocontrol a number of different, difficult diseaseprocesses.
PharmacologyRecently, the Company made major advances inunderstanding the pharmacology of its compoundsand how the pharmacology differs between species.This is very important in understanding how to best
use IRHs in humans, so as to enhance their potencyand efficacy as pharmaceuticals. Hollis-Eden scientistsare now utilizing this knowledge to improve theperformance of the Company’s existing compounds,as well as to design second-generation candidateswith improved pharmaceutical attributes. To furtherimprove the therapeutic value of its IRHs, theCompany is also identifying novel ways of modifyingthe bioavailability of the candidate drugs, as wellas formulating them so as to better preserve theappropriate immunological activities in humans.
Harnessing the Potential of IRHsTogether, these discoveries give Hollis-Eden amuch better understanding of how its IRHs maybe harnessed to provide benefit in a wide varietyof disease conditions. Hollis-Eden believes thatby applying the latest tools of pharmaceutical drug
B IOLOGY G ROU P
LEFT TO RIGHT Mei Li, Ph.D., Urszula Orlinksa, Ph.D., David J. Bell,
G. Stuart Williams, Ph.D., Sonia Villegas, Ph.D.,
Jaime Flores-Riveros, Ph.D., (Vice President)
PHAR MACOLOGY G ROU P
LEFT TO RIGHT Donald D. Xu, M.D., Clarence N. Ahlem, (Director),
Ted Page, Ph.D.
Anti-inflammatory:
Autoimmune Disorders
Immune Regulation:
Tuberculosis (OIs)
Cell Proliferation:
Chemotherapy
development technologies, it has the potential totranslate the great promise of the androstene seriesthat was seen in so many animal models of diseaseinto real clinical benefit in a variety of indications inhumans. The fact that IRHs are chemically similar tocorticosteroids and sex steroids should greatly assistin this effort, given the rich history of this chemicalseries in medicine. Results from many decades ofhormone research afford Hollis-Eden the chemicalsolutions that were previously developed to improvethe potency, bioavailability and pharmacologicalproperties of the current “steroid class” of FDA
approved hormone therapies. This should alsobenefit the development of new, second-generationcompounds that will improve upon the propertiesof the Company’s lead drug candidates.
Data on one such second-generation candidate waspresented in late 2003 from new studies performedin non-human primate models of chemotherapy-induced neutropenia. In these studies, the Companyshowed that a second-generation compound wassubstantially more potent than its first-generation
compound, NEUMUNE. Hollis-Eden scientists aretesting several additional compounds in non-humanprimate models that could produce even furtherimprovements. Similar efforts in the infectiousdisease, autoimmune and inflammatory areas areunderway. In support of these efforts, the Companyhas hired additional chemists and biologists andadded lab space to identify and formulate promisingnext-generation candidates for development.
Hollis-Eden has moved strategically and aggressivelyto build and protect the intellectual property relatingto its discoveries on its core IRH technology. TheCompany continued to add considerably to the valueof its intellectual property position in 2003, and nowhas more than 100 issued U.S. and foreign patentsand more than 100 pending U.S. and foreign applica-tions in its portfolio. Furthermore, the Company’sprogress in understanding the mechanism of actionfor these compounds as well as their structure-activityrelationships and pharmacology profile will allow itto maintain a leadership position in this technology.
14 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Immune Regulation:
Biowarfare
Cell Proliferation:
Radiation Injury
SECON D-G E N E RATION I R Hs
In addition to pursuing opportunities that can lead to near-term revenue streams with first-generation IRHs, such as NEUMUNE™
in acute radiation injury, Hollis-Eden is developing even more potent second-generation IRHs that can be used in large, chronic
conditions, such as chemotherapy protection. During 2003, the Company reported data (presented below) on a new IRH that,
at 1/20th the dose of NEUMUNE, eliminated severe neutropenia and had a beneficial effect on platelets in non-human primates
following chemotherapy. The Company is also developing second-generation compounds for other indications such as infectious
diseases, autoimmune disorders and inflammatory conditions.
100
10.0
1.0
0.1
Neut
roph
ils (
x10-9
/L)
0 10 20 30 40
Severe Neutropenia
P=0.03 versus vehicle
Days
Days of Grade 4 Neutropenia: Vehicle = 5.3 I RH = 0
Neutrophils
Chemotherapycarboplatin (3 5 mg/kg)
IRH
Placebo IRH Candidate
Plat
elet
s (
x10-9
/L)
10000
1000
1000 10 20 30 40
Days
Platelets
Chemotherapycarboplatin (3 5 mg/kg)
IRH
Placebo IRH Candidate
Cell Proliferation:
Bone Marrow Production
15 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
ADVANCE D DEVE LOPM E NT PROG RAMS
indications preclinical phase i phase ii phase iii
Biodefense Drugsneumune™
Radiation InjuryProtection
phosphonol™
Radiation InjuryProtection
Hematopoiesisirh candidateChemotherapy-Induced Neutropenia
Infectious Diseasesimmunitin™
HIV/AIDS*TuberculosisMalaria*Biowarfare Pathogens
Inflammation/Autoimmune Disordersimmunitin™
Cystic Fibrosis
Hollis-Eden’s immune regulating hormones have also shown activity in preclinical models of a numberof the following indications. The Company is currently identifying optimal lead candidates for potentialfurther study in these indications.
Biodefense DrugsBiowarfare Pathogens
Inflammation/Autoimmune DisordersAsthma Lupus
Arthritis IBD
Multiple Sclerosis Trauma
MetabolismCardiovascular Disease
Obesity
Diabetes
Immune EnhancementImmune Senescence
* Evidence of activity shown in human studies.
** FDA rule requires demonstration of safety in humans and efficacy in relevant animal species for approval.
*** The Company has not received any guidance from the FDA on whether or not the animal rule will be applicable to these indications.
FDA Animal Rule: Phase II/III Not Required**
PRODUCT PI PE LI N E
ADDITIONAL DEVE LOPM E NT PROG RAMS
FDA Animal Rule: Phase II/III PotentiallyNot Required***
FDA Animal Rule: Phase II/III PotentiallyNot Required***
16 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
In today’s post 9/11 environment,
Hollis-Eden is well-positioned to
make a significant near-term contri-
bution to the nation’s Homeland
defense efforts. The Company’s
lead biodefense compound,
NEUMUNE™ (HE2100), is being
co-developed with the U.S. military
for use in protecting the body from
acute radiation injury. In early 2004,
Hollis-Eden acquired Congressional
Pharmaceutical Corporation, adding
to its biodefense program a series of
compounds that have the potential
to protect against DNA mutations
that can occur as a result of
radiation or chemotherapy injury.
In addition, the Company’s com-
pounds are being screened by
a number of governmental agencies
as countermeasures against a
variety of pathogens that could
be used as biowarfare agents.
NEUMUNE
Hollis-Eden is developing
NEUMUNE for use in protecting
military personnel, first responders
and civilians from acute radiation
injury in the event of a terrorist act
using a nuclear device or dirty
bomb, or from an attack on a
nuclear power plant or facility.
The primary cause of acute radiation
injury is bone marrow suppression,
which leads to depletion of neutro-
phils and platelets. Neutrophils are
white blood cells that are part of
the body's key defense mechanism
against infections. Platelets are
actively involved in blood clotting
that stems bleeding. Depletion of
neutrophils or platelets can lead
to rapid fatalities.
NEUMUNE is being developed with
the Armed Forces Radiobiology
Research Institute (AFRRI) — a
leader in studying the short-term and
long-term effects of radiation injury.
Over the past several years, AFRRI
has screened thousands of com-
pounds in an effort to find an acute
radioprotectant suitable for wide-
spread use. Out of this screening
and profiling effort, NEUMUNE
emerged as a leading candidate
based on its efficacy in preclinical
models, its safety profile, and the
comparatively low-cost nature of its
manufacturing process.
Hollis-Eden is developing NEUMUNE
pursuant to a new U.S. Food and
Drug Administration (FDA) rule,
under which marketing approval
may be gained based solely on the
demonstration of safety in humans
and efficacy in relevant animal
species. This rule, adopted in 2002,
is applied in cases where it would
be unethical, such as in the case of
radiation, to expose humans to life-
threatening substances in an effort
to determine clinical efficacy. As a
result, development of NEUMUNE
under this rule will not require large-
scale clinical studies prior to seeking
marketing approval from the FDA.
During 2003, Hollis-Eden conducted
and reported on two pilot preclinical
radiation injury studies conducted
as part of a program to test several
different formulations of NEUMUNE
versus a vehicle placebo and to
determine the optimum formulation,
dose and dose schedule for the
compound. At the Annual Scientific
Meeting of the British Society of
Hematology, the Company reported
results from an initial pilot study in
rhesus macaques showing that 8
days of dosing with a high dose of
NEUMUNE could, on average, almost
eliminate severe neutropenia after
exposure to 400 cGy of whole body
irradiation, and could significantly
reduce the number of days of severe
neutropenia in animals given a lower
dose of NEUMUNE for 10 days.
At the American Society of
Hematology (ASH) meeting,
Hollis-Eden presented positive
results from a second pilot study in
non-human primates that were given
B IODE FE NSEM E DICAL
COU NTE R M EASU R ES
AGAI NST N UCLEAR
AN D B IOLOG ICAL
TE R ROR IST WEAPONS
17 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
400 cGy of whole body irradiation
and several hours later received five
once-daily injections of either a
vehicle placebo, a high dose of
NEUMUNE, or one of three different
formulations of a lower dose of NEU-
MUNE. In the placebo-treated group,
animals experienced an average of
12.5 days of severe neutropenia
through the 36-day follow-up period.
In contrast, those animals treated with
NEUMUNE in the three lower dose
groups experienced an average of
5 to 6 days of severe neutropenia
(50–60% reduction), and in the high
dose group, severe neutropenia was
not observed in any animal at any
time. The reduction in the number
of days of severe neutropenia in
each of the three lower dose
groups and the high dose group
was statistically significant compared
with the placebo group. NEUMUNE
was generally well tolerated in this
study, with injection site irritation and
transient swelling being the only
drug-related adverse events reported.
(See graphs pages 9–10)
In both studies, NEUMUNE also
had a positive effect on preserving
platelets. In the study presented at
ASH, for example, animals in the
placebo group experienced on
average 3 days of grade-3 or 4
thrombocytopenia, whereas those
in the groups treated with lower
doses of NEUMUNE experienced
an average of only 1.3 to 2 days of
thrombocytopenia (33–60% reduc-
tion) and those in the high dose
group on average did not encounter
grade-3 or 4 thrombocytopenia.
Upon completion of additional
optimization studies in non-human
primates, Hollis-Eden plans to
conduct a pivotal study with
NEUMUNE in non-human primates
to demonstrate efficacy under the
new FDA rule. Phase I studies in
humans to demonstrate safety are
also planned. Given the potentially
accelerated development path for
NEUMUNE and the significant
market opportunity for compounds
that can treat acute radiation injury,
Hollis-Eden has made development
of NEUMUNE a top priority. The
Company is collaborating with
AFRRI to establish all of the manu-
facturing, toxicology, efficacy and
human safety data that will be
needed to support a New Drug
Application (NDA) with the FDA.
Hollis-Eden management has
worked actively in Washington, D.C.
and elsewhere over the past year
in support of securing a national
stockpiling contract for NEUMUNE.
Management has met with members
of the Administration, with leading
members of both the U.S. Senate
and the House of Representatives,
as well as with top officials at key
agencies such as the Department
of Homeland Security and the
Department of Health and Human
Services. In those meetings,
Hollis-Eden executives have
re-enforced the need for an effective
radioprotectant compound in the
national drug stockpile, and
informed officials about the promis-
ing potential of NEUMUNE to
provide protection against acute
radiation injury.
Management has also supported
passage of Project BioShield and its
potential impact on spurring devel-
opment of important new medical
countermeasures. Project BioShield,
introduced by President Bush and
subject to Congressional approval, is
groundbreaking legislation that would
enable the government to enter into
advance purchase contracts with
biotech and pharmaceutical compa-
nies, guaranteeing payment upon
delivery of approved next-generation
medical countermeasures for
biological, chemical and radiological
threats. An appropriations bill pro-
viding $890 million for BioShield in
2004 has been passed by Congress
and signed by President Bush.
Funding for Project BioShield over
PROJ ECT B IOSH I E LD
Meeting in 2003 with Senate Majority Leader Bill Frist (third from left) to discuss
Project BioShield and Hollis-Eden’s radiation protection drug candidate NEUMUNE™
are Richard Hollis, Dwight Stickney, and Robert Marsella.
18 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
the next 10 years is expected to total
$5.6 billion, $2.5 billion of which is
included in President Bush’s pro-
posed budget for fiscal year 2005.
PHOSPHONOL
In early 2004, Hollis-Eden acquired
Congressional Pharmaceutical
Corporation, a closely held
company with exclusive rights to
intellectual property licensed from
the University of Chicago to develop
a series of compounds that have
the potential to protect against DNA
mutations that can occur as a result
of radiation or chemotherapy injury.
This DNA damage (mutagenesis) has
been associated with an increased
risk of a variety of cancers and is
believed to be a primary cause of
the harmful long-term effects of
radiation injury.
Hollis-Eden’s lead candidate to pre-
vent DNA mutations from radiation
exposure is PHOSPHONOL™.
Hollis-Eden expects to begin
profiling PHOSPHONOL in a
series of early-stage animal studies
designed to assess the safety,
efficacy and oral bioavailability of
the compound. The Company
believes that PHOSPHONOL may
be eligible for review by the FDA as
a biodefense drug pursuant to its
new animal efficacy rule. If PHOS-
PHONOL can be successfully
developed it may serve not only
as a radioprotectant from acts of
terrorism but also may serve to
protect people from other forms of
inadvertent environmental radiation
exposure. With NEUMUNE and
PHOSPHONOL, Hollis-Eden poten-
tially could have products to treat
both the short and long-term effects
of radiation injury.
The broader intellectual property
rights acquired by Hollis-Eden con-
sist of a series of patents and patent
applications that relate to discover-
ies made by David J. Grdina, Ph.D.,
Professor of Radiation and Cellular
Oncology at the University of
Chicago. Dr. Grdina, who has agreed
to an exclusive consulting arrange-
ment with Hollis-Eden for the
development of this technology, is
widely recognized as an expert in
radiobiology and has worked closely
with AFRRI and the Walter Reed
Army Institute of Research (WRAIR)
over the last 20 years in the devel-
opment of products for use against
radiation injury.
The Threat ofNuclear Terrorism
The possibility of a terrorist attack,
either through the use of a nuclear
weapon, a “dirty bomb” or an attack
on a nuclear power plant or waste
site, is a significant concern of the
U.S. government today. With the
large number of deployed nuclear
weapons and active nuclear power
generating facilities around the
world today, coupled with the
emerging black market in nuclear
technologies and radiological materi-
als, the threat of a “suitcase nuke” is
very real. According to an article that
appeared in The Lancet (Vol 355,
4/29/00), “a terrorist organization
could explode a crude weapon
made of stolen plutonium with a
yield of 0.1 to 20 kilotons.” The
British Medical Journal has esti-
mated that a 12.5-kiloton nuclear
bomb (equivalent to the bomb used
at Hiroshima) detonated in New York
City would cause 50,000 deaths
immediately from the explosion and
an additional 200,000 deaths from
radiation injuries. A nuclear incident
also could come in the form of an
attack on or accident at a nuclear
facility. There are 103 nuclear power
plants in the U.S. today, and over
430 nuclear power plants world-
wide. Should a terrorist succeed in
causing a breach in the reactor core
of one of these plants, a plume of
radioactive materials could be
released into the atmosphere, result-
ing in immediate health risks to
those nearby as well as longer term
risks at greater distances. Of equal
concern is the vulnerability of spent
fuel pools. A Nuclear Regulatory
Commission study stated that
breaching a cask used to store
spent fuel could release lethal radia-
tion in an area many times larger
than that caused by a 10-kiloton
nuclear weapon.
Radiation Effectsand Treatments
The effect of a nuclear explosion
on the body depends upon the size
and nature of the device, as well as
the proximity to the device. Some
deaths from an explosion would
result from the direct effects of the
explosion and contact with debris.
The majority of deaths, however,
would result from infections
attributable to a loss of the infection-
fighting capability of the body due to
a severe loss of neutrophils. Longer
term threats include damage to the
DNA, or mutagenesis, that can lead
to a variety of cancers.
The only pharmaceutical agent that
has been widely stockpiled to date
for use in the event of an act of
nuclear terrorism or a nuclear acci-
dent is potassium iodide (KI).
Potassium iodide is only effective
against the long-term risk of thyroid
cancer 10 to 15 years after expo-
19 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
sure to certain types of radiation,
and does not protect the body from
the acute effects radiation has on
the bone marrow, which can lead
to rapid fatalities. Despite the limita-
tions of potassium iodide, the drug
has been stockpiled broadly for
years in Europe and Japan for civil-
ians living within close proximity of
nuclear power plants, and the U.S.
has begun purchasing millions of
doses of the drug for stockpiling
in this country.
Prussian Blue has recently been
approved to reduce the net exposure
to certain radioactive elements, but
does not protect the bone marrow.
Currently there are no pharmaceuti-
cals approved for use in preventing
DNA mutations or protecting bone
marrow from acute radiation injury.
However, Hollis-Eden's investiga-
tional drug NEUMUNE may offer
such protection against the acute
life-threatening effects of radiation
exposure. In addition, PHOS-
PHONOL offers the potential to
protect against DNA mutations and
subsequent cancers that can occur
as a result of radiation or chemo-
therapy injury.
Potential Radiation Market
The market opportunity for drugs
that reduce the effects of acute
radiation injury and protect against
mutagenesis could be significant.
In order to be practical, drugs to
treat these conditions need to be
very safe, inexpensive to manufac-
ture and easy to store and distribute.
Because the window of opportunity
to treat radiation injury is short,
such drugs would likely need to be
stockpiled on a local level to be
appropriately available for high-risk
populations. Such populations may
include those stationed at any
military installation or theater of
operations, first responders and
civilians living or working in any
urban or metropolitan area that
is at risk of a radiological attack,
and residents living within a 10 to
50 mile radius around any nuclear
power plant or spent fuel facility.
In the U.S., this could total more
than 20 million people. The Company
believes similar market opportunities
may exist in Europe and Asia.
Biowarfare
In addition to its collaboration with
AFRRI on radiation injury, Hollis-Eden
has provided its investigational
IRHs to a number of governmental
agencies to be tested for activity in
preclinical models against a variety
of bioterrorism agents as well as
parasitic, bacterial and viral infec-
tions of military interest. The broad
spectrum of activity IRHs have
demonstrated against viral, parasitic
and bacterial pathogens has stimu-
lated interest in researchers looking
for drugs to treat new or drug-resist-
ant organisms. Hollis-Eden believes
this class of compounds may be
particularly attractive in that it is
unlikely to lose activity against drug
resistant forms, is cost effective to
produce and has an attractive safety
profile to date. Their anti-inflammatory
properties also make them attractive
since runaway inflammation is known
to be a key part of the pathogenesis
associated with a number of the
infectious agents that would poten-
tially be used as bioterrorist
weapons. Ongoing research with a
number of governmental agencies
is underway to determine the best
applications in the area of biodefense.
SCI E NTI FIC DI R ECTORS
LEFT TO RIGHT Richard Trauger, Ph.D., Daryl D. Muenchau, Ph.D., J.D.,
Charles R. Dowding, Ph.D., Dominick Auci, Ph.D.
20 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
As in radiation injury, chemotherapy
can cause significant bone marrow
toxicity leading to depletion of neu-
trophils and platelets which can be
life threatening. These effects are
the primary dose-limiting side effects
for many chemotherapy regimens.
Currently marketed drugs for neu-
tropenia generate sales in excess
of $2.5 billion per year and are
projected to grow to more than
$3 billion in annual sales by 2006.
These drugs are designed to treat
neutropenia and not severe platelet
loss, yet up to 25% of chemotherapy
patients are estimated to experience
severe platelet deficiencies.
Compared to currently available
drugs for neutropenia, Hollis-Eden’s
IRHs may offer several advantages,
including the potential to provide
greater neutrophil protection as well
as the ability to boost platelets. In
addition, IRHs are expected to be
more cost effective to manufacture
than existing therapies and may
stimulate cell-mediated immunity,
which may benefit cancer treatment.
Hollis-Eden has demonstrated posi-
tive results with its IRHs in a number
of chemotherapy-induced immune
suppression studies in non-human
primates. Among these, at the
American Society of Hematology
(ASH) meeting in December 2003,
Hollis-Eden presented positive data
on chemotherapy-induced neutrope-
nia. In the study, which confirmed an
earlier study, non-human primates
were given carboplatin (a front-line
chemotherapy agent) followed by
once daily doses for 5 days of
a placebo, NEUMUNE™ (HE2100)
or a new, second-generation IRH
designed specifically for use in
chemotherapy. In this study, placebo-
treated animals experienced an
average of 5.3 days of grade-4
neutropenia, whereas animals receiving
NEUMUNE or the new IRH, which
was given at only 1/20th the dose
of NEUMUNE, had a substantially
improved profile. Animals receiving
the new IRH did not experience any
days of grade-4 neutropenia. As in
radiation experiments, Hollis-Eden’s
IRHs also appeared to have a
beneficial effect on platelets.
(See graphs pages 9–10, 14)
Based on the promising results
with its initial second-generation
compound in chemotherapy pro-
tection, Hollis-Eden is conducting
additional studies with several
second-generation compounds in
non-human primates. The Company
plans to select one or more of its
IRH drug candidates for testing
in Phase I/II clinical trials for
chemotherapy protection.
HEMATOPOIESISTARG ETI NG TH E
CH E MOTH E RAPY
PROTECTION
MAR KET
BON E MAR ROW PRODUCTION
Bone marrow samples, before and after chemotherapy treatment, demonstrate
the ability of Hollis-Eden’s NEUMUNE™ to protect neutrophils and platelets.
The Company is now testing second-generation IRHs for potential development
for the chemotherapy protection market.
Baseline
Placebo at Day 16 NEUMUNE-treated at Day 16
21 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Hollis-Eden believes that its immune
regulating hormones (IRHs) have
the potential to make a significant
difference in the war on global
infectious diseases. IRHs are
inexpensive to manufacture, have
an attractive safety profile to date,
and are unlikely to result in drug
resistant strains of pathogens.
Hollis-Eden’s lead drug candidate
for global infectious diseases is
IMMUNITIN™ (HE2000). To date,
IMMUNITIN has shown immune
enhancing activity against a broad
spectrum of pathogens, including
viruses, parasites and bacteria.
In 2003, the Company released data
from its Phase I/II clinical trial con-
ducted with IMMUNITIN in South
Africa in HIV patients who had pro-
gressed to late-stage AIDS. Patients
in this study who were treated with
IMMUNITIN experienced a statisti-
cally significant reduction in the
cumulative number of all oppor-
tunistic infections (OIs) over the
13-month study period when com-
pared to patients receiving placebo.
OIs, such as tuberculosis (TB), are
a leading cause of death in this
disease. The Company believes this
is the first time an immune modulator
has shown significant benefit against
a hard clinical endpoint.
The OI data reported in 2003 build
on previously released results from
the Phase I/II HIV study that demon-
strated statistically significant
declines in transcripts of inflamma-
tory mediators, significant increases
in a wide variety of immune cell
types that have been associated
with delaying disease progression
towards AIDS, and a fall in viral load.
The ability of IMMUNITIN to reduce
inflammation while stimulating innate
and adaptive cell-mediated immunity
has possible implications for a number
of other infectious diseases, includ-
ing malaria and TB. Tuberculosis,
a common opportunistic infection
experienced by AIDS patients,
has reached epidemic proportions
in the developing world, and
antibiotic-resistant TB is increasingly
being seen in both the developed
and developing world. In 2003,
Hollis-Eden presented data from a
confirmatory preclinical study in an
animal model of chronic TB demon-
strating that IMMUNITIN reduced
the TB bacterial load when given
as a monotherapy, compared to
placebo-treated animals. Furthermore,
IMMUNITIN appears to have an
additive effect when combined with
the current three-drug regimen of
antibiotic treatment in this model
system. (See graphs pages 9–10)
Given its study findings relative to
HIV/AIDS, opportunitic infections
such as tuberculosis, and malaria,
Hollis-Eden is in active discussions
with a number of governmental and
international healthcare organiza-
tions about collaborating through a
public/private partnership to develop
and potentially commercialize
IMMUNITIN for a number of global
infectious diseases. The Company
believes the compound is especially
well-suited for these indications
because it is inexpensive to manu-
facture, has an attractive safety
profile to date, and is unlikely to
result in drug resistant strains of
pathogens. Given recent changes
in the global political and economic
environment, however, Hollis-Eden
will seek assurances that its intellec-
tual property will be protected and
that the Company can expect to
make an attractive commercial return
prior to entering large-scale clinical
programs for infectious diseases.
IMMUNEREGULATION BOOSTI NG I M M U N ITY
TO FIG HT G LOBAL
I N FECTIOUS DISEASES
22 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Immune regulating hormones have
demonstrated impressive activity in
preclinical models of inflammation
and autoimmune disorders, including
multiple sclerosis, inflammatory
bowel disease (IBD), rheumatoid
arthritis, lupus and trauma. In addi-
tion, IMMUNITIN™ (HE2000) has
demonstrated the ability to normalize
a broad spectrum of inflammatory
mediators in HIV/AIDS patients.
(See graphs pages 9–10) As a
result of these preclinical and clinical
findings, Hollis-Eden is now profiling
potent second-generation compounds
in in vivo models for selection as
development candidates for the
treatment of inflammatory and
autoimmune conditions.
The potential opportunity for Hollis-
Eden’s second-generation IRHs in
autoimmune disorders could be
significant, given the unique profile
of the compounds and the size of
the market. Hollis-Eden is targeting
potential applications in autoimmunity
at a time when inflammation is
increasingly viewed by the scientific
and medical communities as funda-
mental to a wide variety of diseases.
It has always been a premise of
Hollis-Eden’s IRH technology that
inflammation dysregulates immunity
and is related to a broad spectrum
of major diseases and disorders.
The Company now stands to benefit
from its work in this area as this view
becomes more mainstream.
Cystic Fibrosis
An example of the opportunity in
chronic inflammation is cystic fibrosis
(CF). In 2003 Hollis-Eden entered
into a collaboration with Cystic
Fibrosis Foundation Therapeutics,
Inc, (CFFT), the non-profit drug dis-
covery and development affiliate of
the Cystic Fibrosis Foundation, to
test IMMUNITIN in a Phase I/II pilot
study in CF. CFFT is expected to
award approximately $1.7 million
in funding toward the study. CF is
a genetic disorder that causes the
build-up of thick mucus in the lungs
and pancreas. The mucus in the
lungs leads to chronic infections and
subsequent pulmonary inflammation
and deterioration. Based on data
regarding the anti-inflammatory
effects and attenuation of oppor-
tunistic infections in early clinical
studies in patients with HIV and
AIDS, and based on anti-mycobacte-
rial activity in preclinical models of
tuberculosis, the Company believes
IMMUNITIN may decrease the
chronic inflammation in lungs which
can lead to the damage associated
with CF. In addition, by stimulating
the immune system, IMMUNITIN may
be able to limit and prevent pulmonary
infections in these patients.
INFLAMMATION/AUTOIMMUNEDISORDERSSECON D-G E N E RATION
COM POU N DS WITH B ROAD-
SPECTR U M POTE NTIAL
CLI N ICAL/ R EG U LATORY DI R ECTORS
LEFT TO RIGHT Elizabeth Morgan, Barry S. Miller, Armando Garsd, Ph.D.,
Nanette Onizuka-Handa
23 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
MANAG E M E NT’S DISCUSSION AN D ANALYSIS
The following discussion contains forward-looking statements that involve risks and uncertainties. See “Forward-LookingStatements” above. This discussion and analysis should be read in conjunction with the financial statements and notesincluded elsewhere in this report.
General Hollis-Eden Pharmaceuticals, Inc., a development-stage pharmaceutical company, is engaged in thediscovery, development and commercialization of products for the treatment of diseases and disorders in whichthe body is unable to mount an appropriate immune response. Our initial development efforts target radiationand chemotherapy induced immune suppression and immune dysregulation caused by infectious diseases suchas HIV, malaria and tuberculosis. Our initial technology development efforts are primarily focused on a seriesof potent hormones and hormone analogs that we believe are key components of the body’s natural regulatorysystem. We believe these immune regulating hormones (IRHs) can be used to reestablish host immunity insituations of dysregulation.
We have been unprofitable since our inception and we expect to incur substantial additional operating lossesfor at least the next few years as we increase expenditures on research and development and begin to allocatesignificant 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 must undertake in the future, andour historical operations and financial information are not indicative of the future operating results or financialcondition or ability to operate profitably as a commercial enterprise when and if we succeed in bringing anydrug candidates to market.
On March 26, 1997, Hollis-Eden, Inc., a Delaware corporation, was merged with and into us, then knownas 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-EdenPharmaceuticals, Inc.
Results of Operations We have not generated any revenues for the period from August 15, 1994 (inceptionof Hollis-Eden Inc.) through December 31, 2003. We have devoted substantially all of our resources to thepayment of research and development expenses and general and administrative expenses. From inception untilDecember 31, 2003, we have incurred expenses of approximately $67.5 million in research and developmentand $39.7 million in general and administrative expenses. We have incurred $0.1 million in net other incomecomprised of $7.6 million in deemed discount expense, $0.4 million in interest expense and $8.1 million ininterest income. The combination of these resulted in a net loss of $107.1 million for the period from inceptionuntil December 31, 2003.
Research and development expenses were $10.8 million, $13.1 million and $11.9 million in 2003, 2002and 2001, respectively. The research and development expenses relate primarily to the ongoing development,preclinical testing, and clinical trials for IMMUNITIN, NEUMUNE and HE2200, as well as our investment inAeson Therapeutics, which has been expensed as in-process R&D. Research and development expenses decreased$2.3 million in 2003 compared to 2002. The decrease in research and development expenses was due mainly toreduced preclinical and clinical trial activities after streamlining our operations and focusing our research anddevelopment expenditures in the second half of 2002. Research and development expenses increased $1.2 millionin 2002 compared to 2001 due to increased staffing, license fees and clinical trials expenses, which was offset byreduced expenditures for preclinical work. We expect research and development expenses to increase in 2004 andbeyond as our products move into the more expensive later stages of development.
General and administrative expenses were $7.3 million, $4.8 million and $5.1 million in 2003, 2002 and 2001,respectively. General and administrative expenses relate to salaries and benefits, facilities, legal, investor relations,
24 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
insurance and travel. General and administrative expenses increased $2.5 million in 2003 compared to 2002primarily due to non-cash charges totaling $2.2 million for 2003. The non-cash charges are comprised of:$0.7 million in non-cash charges related to the issuance of a warrant and a change in the terms of a warrantto a service provider; $1.3 million in non-cash charges related to the issuance of a warrant to a director andissuance of stock options to an officer and a director; and $0.2 million in non-cash charges related to stockoptions issued to consultants.
General and administrative expenses decreased $0.3 million in 2002 compared to 2001 due to decreasedconsulting fees and legal expenses that were partially offset by an increase in facilities and investor relationsexpenses. We expect general and administrative expenses to increase in 2004 and beyond as a result of theincreased costs of compliance with new audit regulations, including section 404 of the Sarbanes Oxley Act,and costs associated with preparing for the potential launch of our products.
Other income and expenses were $(7.6) million, $0.4 million and $1.2 million in 2003, 2002 and 2001,respectively. For 2003, other income and expense was comprised of the following: an expense of $(7.6) millionfor the non-cash amortization of the deemed discount and deferred issuance costs on the convertible debenturesissued and converted to common stock during 2003; interest income of $0.4 million; and interest expense on theconvertible debentures totaling $(0.4) million. Other income and expense for 2002 and 2001 was interest incometotaling $0.4 million and $1.2 million for each year respectively. The interest income declined in 2002 comparedto 2001 due to lower cash balances and lower interest rates.
Liquidity and Capital Resources We have financed our operations since inception primarily throughthe sale of shares of common stock. During the year ended December 31, 1995, we received cash proceedsof $250,000 from the sale of securities. In May 1996, we completed a private placement of shares of commonstock, from which we received aggregate gross proceeds of $1.3 million. In March 1997, the Merger of IACand Hollis-Eden, Inc. provided us with $6.5 million in cash and other receivables. In May 1998, we completeda private placement of common stock and warrants, 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 December 2001, we completed a private placement of common stock and warrants, from which we receivedgross proceeds of $11.5 million. In February 2003, we completed a private placement of convertible debenturesand warrants, from which we received gross proceeds of $10.0 million. In June 2003, we completed a privateplacement of common stock and warrants, from which we received gross proceeds of $14.7 million. In October2003 we completed a public offering of our common stock from which we received $62.5 million in grossproceeds. In addition, we have received a total of $17.3 million from the exercise of warrants and stockoptions from inception.
On June 20, 2003, convertible debentures with a face value of $0.5 million were converted into 87,720 sharesof our common stock, leaving a $9.5 million aggregate principal amount of convertible debentures outstanding.
We became entitled to convert the outstanding debentures into common stock as of the close of market onFriday, August 8, 2003, at which point the volume weighted average price of our common stock had exceeded$14.25 for 15 consecutive trading days. On August 11, 2003, the remaining aggregate principal amount ofconvertible debentures with a face value of $9.5 million were converted into 1,666,680 shares of our commonstock with a value of $5.70 per share.
A summary of our current contractual obligations is as follows (in thousands):
Payments Due by Period
Contractual Obligations Total Less than One to Three to More than one year three years five years five years
Operating Leases $1,045 $810 $213 $22 $ -
25 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Our operations to date have consumed substantial capital without generating any revenues, and wewill continue to require substantial and increasing amounts of funds to conduct necessary research anddevelopment and preclinical and clinical testing of our drug candidates, and to market any drug candidates thatreceive regulatory approval. With the possible exception of sales of our NEUMUNE product for radiationtreatment, we do not expect to generate revenue from operations for the foreseeable future, and our abilityto meet our cash obligations as they become due and payable may depend for at least the next several yearson 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 ouroperating expenses and capital requirements at least well into 2006. However, changes in our research anddevelopment plans or other events affecting our operating expenses may result in the expenditure of such cashbefore that time. We may not be successful in raising necessary funds.
Our future capital requirements will depend upon many factors, including progress with preclinical testingand 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 involvedin obtaining regulatory approvals, competing technological and market developments, and our ability to establishcollaborative arrangements, effective commercialization, marketing activities and other arrangements. We mayincur increasing negative cash flows and net losses for the foreseeable future. We may seek additional fundingthrough public or private financing or through collaborative arrangements with strategic partners.
Critical Accounting Policies Certain of our accounting policies require the application of judgment andestimates by management, which may be affected by different assumptions and conditions. These estimates aretypically based on historical experience, terms of existing contracts, trends in the industry and information availablefrom other outside sources, as appropriate. We believe the estimates and judgments associated with our reportedamounts are appropriate in the circumstances. Actual results could vary from those estimates under differentassumptions or conditions. Given the nature of our current operations, there are no other critical accountingpolicies that affect us.
Impact of Recently Issued Accounting Pronouncements On December 31, 2002, the FinancialAccounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148,Accounting for Stock-Based Compensation –– Transition and Disclosure. SFAS No.148 amends SFASNo. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to the fair valuemethod of accounting for stock-based employee compensation under SFAS No. 123. SFAS No.148 also amendsthe disclosure provisions of SFAS No.123 and APB Opinion No. 28, Interim Financial Reporting, to requiredisclosure in the summary of significant accounting policies of the effects of an entity's accounting policy withrespect to stock-based employee compensation on reported earnings in annual and interim financial statements.While the Statement does not amend SFAS No. 123 to require companies to account for employee stockoptions using the fair value method, the disclosure provisions of SFAS No.148 are applicable to all companieswith stock-based employee compensation, regardless of whether the accounting for that compensation is usingthe fair value method of SFAS No.123 or the intrinsic value method of Opinion 25. The company has electedto continue using the intrinsic value method and has incorporated these expanded disclosures into our NotesTo Financial Statements.
26 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Hollis-Eden Pharmaceuticals, Inc. (A Development Stage Company)
BALANCE SHEETS
December 31,
2003 2002
(in thousands)
Assets:
Current Assets:
Cash and cash equivalents $ 84,852 $ 13,087
Prepaid expenses 134 123
Deposits 27 87
Receivable from related party (Note 4) 18 –
Total current assets 85,031 13,297
Property and equipment, net of accumulated depreciation of $434 and $327 282 398
Deposits 68 –
Receivable from related party (Note 4) – 274
Other receivable – 13
Total assets $ 85,381 $ 13,982
Liabilities and Stockholders’ Equity:
Current Liabilities:
Accounts payable and accrued expenses $ 3,329 $ 2,950
Total current liabilities 3,329 2,950
Commitments and contingencies(Notes 6, 11, 12)
Stockholders’ Equity:(Notes 3, 7, 8, 9, 10)
Preferred stock, no par value, 10,000 shares authorized;no shares outstanding – –
Common stock, $.01 par value, 50,000 and 50,000 shares authorized respectively; 19,272 and 12,972 shares issued, respectively 193 130
Paid-in capital 189,296 92,322
Cost of treasury stock (59 shares) as of December 31, 2003 (346) –
Deficit accumulated during development stage (107,091) (81,420)
Total stockholders’ equity 82,052 11,032
Total liabilities and stockholders’ equity $ 85,381 $ 13,982
The accompanying notes are an integral part of these financial statements.
27 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Hollis-Eden Pharmaceuticals, Inc. (A Development Stage Company)
STATEMENTS OF OPERATIONS
Period fromInception
(Aug. 15, 1994)For the year ended December 31,to December 31,
2003 2002 2001 2003
(in thousands, except per share amounts)
Operating Expenses:
Research and development
R&D operating expenses $ 10,442 $ 13,017 $ 11,774 $ 61,823
R&D costs related to common stock and stock option grants for collaborations and technology purchases 322 66 96 5,664
Total research and development 10,764 13,083 11,870 67,487
General and administrativeG&A operating expenses 5,161 4,523 4,804 27,475
G&A costs related to options/warrants granted 2,166 264 287 12,207
Total general and administrative 7,327 4,787 5,091 39,682
Total operating expenses 18,091 17,870 16,961 107,169
Other Income (expense):
Gain/loss on disposition of assets (2) (21) – (23)
Non-cash amortization of deemed discount anddeferred issuance costs on convertible debentures (7,627) – – (7,627)
Interest income 387 389 1,199 8,116
Interest expense (338) – – (388)
Total other income (7,580) 368 1,199 78
Net loss $(25,671) $(17,502) $(15,762) $(107,091)
Net loss per share, basic and diluted $ (1.67) $ (1.35) $ (1.35)
Weighted average number of common shares outstanding 15,381 12,932 11,654
The accompanying notes are an integral part of these financial statements.
28 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
STATEMENTS OF STOCKHOLDERS’ EQUITY
Preferred Stockat Par Value
Shares Amount
(in thousands)
Contribution by stockholder – $ –Common stock issued for cash – –Common stock issued as consideration for the license agreements (Note 6) – –Net loss – –Balance at December 31, 1994 – –Common stock issued for cash – –Common stock issued as consideration for amendments to the license agreements (Note 6) – –Net loss – –Balance at December 31, 1995 – –Common stock issued in conversion of debt (Note 7) – –Common stock issued for cash, net of expenses (Note 7) – –Common stock issued as consideration for termination of a finance agreement – –Warrants issued to consultants for services rendered – –Net loss – –Balance at December 31, 1996 – –Recapitalization of Company upon the merger with Initial Acquisition Corp. (Note 3) – –Warrants issued to a certain director upon the successful closure of the merger (Note 3) – –Exercise of warrants, net of expenses – –Deferred compensation – stock options (Note 9) – –Amortization of deferred compensation – –Exercise of stock options – –Net loss – –Balance at December 31, 1997 – –Exercise of warrants – –Exercise of stock options – –Private Placement, net of expenses (Note 7) 4 –Warrants issued for services in lieu of cash (Note 10) – –Stock issued for license fee (Note 6) – –Stock issued for services in lieu of cash – –Options issued for services in lieu of cash (Note 9) – –Amortization of deferred compensation – –Net Loss – –Balance at December 31, 1998 4 –Exercise of warrants – –Exercise of stock options – –Private Placement, net of expenses (Note 7) – –Preferred Stock Conversion (Note 7, 8) (4) –Deferred compensation – Options forfeited (Note 9) – –Amortization of non-employee options – –Warrants issued for services in lieu of cash (Note 10) – –Options accelerated vesting (Note 9) – –Net Loss – –Balance at December 31, 1999 – $ –
Hollis-Eden Pharmaceuticals, Inc. (A Development Stage Company)
DeficitAccumulated
Common Stock Capital in Cost of Repurchased Duringat Par Value Excess of Common Stock Deferred Development
Shares Amount Par Value Shares Amount Compensation Stage Total
– $ – $ 103 – $ – $ – $ – $ 1032,853 – 25 – – – – 25
543 – 5 – – – – 5– – – – – – (1,277) (1,277)
3,396 – 133 – – – (1,277) (1,144)679 – 250 – – – – 250
76 – 28 – – – – 28– – – – – – (672) (672)
4,151 – 411 – – – (1,949) (1,538)165 – 371 – – – – 371580 – 1,234 – – – – 1,234
15 – 34 – – – – 34– – 24 – – – – 24– – – – – – (692) (692)
4,911 – 2,074 – – – (2,641) (567)883 58 6,213 – – – – 6,271
– – 570 – – – – 570978 10 5,619 – – – – 5,629
– – 1,848 – – (1,848) – –– – – – – 282 – 282– – 1 – – – – 1– – – – – – (5,253) (5,253)
6,772 68 16,325 – – (1,566) (7,894) 6,933399 4 1,196 – – – – 1,200
53 1 155 – – – – 1561,329 13 19,877 – – – – 19,890
– – 408 – – – – 40833 – 500 – – – – 500
6 – 95 – – – – 95– – 240 – – – – 240– – – – – 308 – 308– – – – – – (5,427) (5,427)
8,592 86 38,796 – – (1,258) (13,321) 24,303755 8 5,136 – – – – 5,144
10 – 75 – – – – 751,368 14 24,759 – – – – 24,773
346 3 (3) – – – – –– – (1,207) – – 1,258 – 51– – 559 – – – – 559– – 2,140 – – – – 2,140– – 4,900 – – – – 4,900– – – – – – (15,320) (15,320)
11,071 $ 111 $75,155 – $ – $ – $(28,641) $ 46,625
29 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
30 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
STATEMENTS OF STOCKHOLDERS ’ EQUITY Continued
Preferred Stockat Par Value
Shares Amount
(in thousands)
Balance at December 31, 1999 – $ –Exercise of warrants – –Exercise of stock options – –Common Stock issued for 401k/401m plan – –Common Stock issued for In-Process R & D (Note 6) – –Options granted for license fee – –Amortization of non-employee options – –Common Stock issued for purchase of technology – –Net Loss – –Balance at December 31, 2000 – –Exercise of stock options – –Common Stock issued for 401k/401m plan – –Private Placement, net of expenses (Note 7) – –Warrants issued for services in lieu of cash (Note 10) – –Amortization of non-employee options – –Warrants issued for services – –Net Loss – –Balance at December 31, 2001 – –Exercise of stock options – –Common Stock issued for 401k/401m plan – –Common Stock issued for sublicense agreement (Note 6) – –Common Stock issued to consultatnts – –Amortization of non-employee options – –Warrants issued for services – –Net Loss – –Balance at December 31, 2002 – –Common Stock issued for 401k/401m plan – –Exercise of warrants – –Exercise of stock options – –Stock options issued – –Private Placement, net of expenses – –Common Stock issued for sublicense agreement (Note 6) – –Common Stock issued for milestone payment – –Debt Conversion – –Common Stock issued in lieu of cash/interest – –Public Offering, net of expenses – –Deemed discount on convertible debentures – –Warrants issued for services – –Amortization of non-employee options – –Purchase of treasury stock – –Net Loss – –Balance at December 31, 2003 – $ –
The accompanying notes are an integral part of these financial statements.
Hollis-Eden Pharmaceuticals, Inc. (A Development Stage Company)
31 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
DeficitAccumulated
Common Stock Capital in Cost of Repurchased Duringat Par Value Excess of Common Stock Deferred Development
Shares Amount Par Value Shares Amount Compensation Stage Total
11,071 $ 111 $75,155 – $ – $ – $(28,641) $46,625133 2 758 – – – – 760
1 – 5 – – – – 56 – 63 – – – – 63
209 2 1,998 – – – – 2,00038 – 598 – – – – 598
– – 79 – – – – 79132 1 1,847 – – – – 1,848
– – – – – – (19,515) (19,515) 11,590 116 80,503 – – – (48,156) 32,463
10 – 22 – – – – 2216 – 96 – – – – 96
1,280 13 10,644 – – – – 10,657– – 80 – – – – 80– – 96 – – – – 96– – 208 – – – – 208– – – – – – (15,762) (15,762)
12,896 129 91,649 – – – (63,918) 27,860– – 2 – – – – 2
26 – 137 – – – – 13750 1 204 – – – – 205
– – 17 – – – – 17– – 66 – – – – 66– – 247 – – – – 247– – – – – – (17,502) (17,502)
12,972 130 92,322 – – – (81,420) 11,03232 – 223 – – – – 223
467 5 3,323 – – – – 3,32885 1 955 – – – – 956
– – 561 – – – – 5611,283 13 14,290 – – – – 14,303
119 1 644 – – – – 64550 1 281 – – – – 282
1,755 17 9,983 – – – – 10,0009 – 142 – – – – 142
2,500 25 58,576 – – – – 58,601– – 6,470 – – – – 6,470– – 1,398 – – – – 1,398– – 128 – – – – 128– – – (59) (346) – – (346)– – – – – – (25,671) (25,671)
19,272 $ 193 $189,296 (59) $(346) $ – $(107,091) $ 82,052
32 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Hollis-Eden Pharmaceuticals, Inc. (A Development Stage Company)
STATEMENTS OF CASH FLOWS
Period fromInception
(Aug. 15, 1994)For the year ended December 31,to December 31,
2003 2002 2001 2003
(in thousands)
Cash Flows from Operating Activities:
Net loss $(25,671) $(17,502) $(15,762) $(107,091)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 118 122 131 576
Disposal of assets 2 21 – 30
Amortization of deemed discount onconvertible debentures 6,470 6,470
Amortization of deferred issuance cost 1,157 1,157
Common stock issued for 401k/401m plan 223 137 96 519
Common stock issued as consideration foramendments to the license agreements – – – 33
Common stock issued as considerationfor termination of a finance agreement – – – 34
Common stock and options issued asconsideration for license fees, milestone payment, interest and services 552 271 176 2,692
Expense related to warrants issuedas consideration to consultants 1,518 247 208 4,113
Expense related to warrants issued toa director for successful closure of merger – – – 570
Expense related to stock options issued 561 17 – 5,718
Expense related to common stock issuedfor the purchase of technology – – – 1,848
Common stock issued as consideration for In-Process R&D – – – 2,000
Deferred compensation expense related to options issued – – – 1,210
Changes in Assets and Liabilities:
Prepaid expenses (11) 46 (73) (134)
Deposits (8) (60) – (95)
Other receivable 13 (13) – –
Loan receivable from related party 3 3 (21) (18)
Accounts payable and accrued expenses 1,024 (652) 966 3,974
Net cash used in operating activities $(14,049) $(17,363) $(14,279) $ (76,394)
33 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
Hollis-Eden Pharmaceuticals, Inc. (A Development Stage Company)
STATEMENTS OF CASH FLOWS Continued
Period fromInception
(Aug. 15, 1994)For the year ended December 31,to December 31,
2003 2002 2001 2003
(in thousands)
Cash Flows Provided by Investing Activities:
Purchase of property and equipment $ (4) $ (119) $ (132) $ (887)
Payback of loan by a company officer 253 – – –
Net cash provided by/used in investing activities 249 (119) (132) (887)
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 72,413 10,657 125,242
Net proceeds from issuance of convertible debentures and warrants 9,214 – – 9,214
Purchase of treasury stock (346) – – (346)
Proceeds from issuance of debt – – – 371
Net proceeds from recapitalization – – – 6,271
Net proceeds from warrants/options exercised 4,284 2 23 17,277
Net cash from financing activities 85,565 2 10,680 162,133
Net increase (decrease) in cash and equivalents 71,765 (17,480) (3,731) 84,852
Cash and equivalents at beginning of period 13,087 30,567 34,298 –
Cash and equivalents at end of period $ 84,852 $ 13,087 $ 30,567 $ 84,852
Supplemental disclosure of cash flow information
Interest paid $ 338 $ – $ – $ 388
Conversion of debt to equity 10,000 – – 10,371
Warrants issued to consultantsin lieu of cash, no vesting – 247 288 559
Warrants issued in lieu of cash,commissions on private placement – – – 733
Warrants issued in connection withconvertible debentures 371 – – 371
The accompanying notes are an integral part of these financial statements.
34 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
NOTES TO FI NANCIAL STATE M E NTS
1. The Company
Hollis-Eden Pharmaceuticals, Inc. (“Hollis-Eden” or the “Company”), a development stage pharmaceuticalcompany, is engaged in the discovery, development and commercialization of products for the treatmentof diseases and disorders in which the body is unable to mount an appropriate immune response. Frominception (August 15, 1994) through March 1997, the Company's efforts were directed toward organizing,licensing technology and preparing for offerings of shares of its common stock. Since 1997, the Company hasbeen expanding its intellectual property, developing its lead drug candidates, performing preclinical tests andhas entered into multiple Phase II clinical studies. Our initial technology development efforts are focused ona series of potent hormones and hormone analogs that we believe are key components of the body’s naturalregulatory system. We believe these immune regulating hormones can be used to reestablish host immunityin situations of dysregulation. To date, the Company has not developed commercial products or generatedsales for the period since inception (August 15, 1994) through December 31, 2003.
2. Summary of Accounting Policies
Cash Equivalents The Company considers any liquid investments with a maturity of three months or less whenpurchased to be cash equivalents. At December 31, 2003, the Company's cash equivalents are approximately$84.9 million and are deposited primarily in a money market mutual fund with a large financial institution.
Property and Equipment Property and equipment is stated at cost and depreciated over the estimated usefullives of the assets (five and seven years) using the straight-line method.
Research and development Research and development costs consist of license fee expenses related to licenseagreements, preclinical and clinical trial expenses, as well as research and development expenses with relatedparties. Such amounts paid to related parties aggregated $11.5 million in the form of cash and stock forthe period from inception (August 15,1994) to December 31, 2003 (see Note 6, “Colthurst, Edenland andMr. Prendergast” and “Aeson Therapeutics”). Such expenses are recognized as incurred.
Accounting for Stock-Based Compensation During 1995, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards 123, Accounting for Stock-Based Compensation No. 123, whichdefines a fair-value-based method of accounting for stock compensation plans. However, it also allows an entityto continue to measure compensation cost related to employee stock compensation plans using the method ofaccounting prescribed by the Accounting Principles Board Opinion No. 25 (APB 25), Accounting for StockIssued to Employees. Entities electing to follow APB 25 must make pro forma disclosures of net income, as ifthe fair-value-based method of accounting defined in SFAS 123 had been applied.
If the Company had accounted for stock options issued to employees and directors in accordance with SFAS 123,the Company’s net loss would have been reported as follows (in thousands, except per share amounts):
Year ended December 31,
2003 2002 2001
Net loss - As reported $(25,671) $(17,502) $(15,762)
Deduct: Total stock-based employee compensation expensedetermined under fair-value-based method for all awards $ (4,690) $ (5,570) $ (767)
Net loss – Pro forma $(30,361) $(23,072) $(16,529)
Basic and diluted net loss per share - As reported $ (1.67) $ (1.35) $ (1.35)
Basic and diluted net loss per share - Pro forma $ (1.97) $ (1.78) $ (1.42)
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Income Taxes The Company provides for income taxes under the principles of SFAS 109 which requires thatprovision be made for taxes currently due and for the expected future tax effects of temporary differencesbetween book and tax bases of assets and liabilities.
Financial instruments The Company's financial instruments consist primarily of cash, other receivables andaccounts payable. These financial instruments are stated at their respective carrying values, which approximatetheir fair values, due to their short term nature.
Use of estimates The preparation of financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actual results could differfrom those estimates.
Net loss per share Basic net loss per share is computed by dividing net loss by the weighted average numberof common shares outstanding during the period. Diluted net loss per share is computed in a manner consistentwith basic net loss per share after giving effect to potentially dilutive securities. Potential common shares of7,097,978, 6,254,853, and 6,297,364 related to the Company’s outstanding stock option and warrants wereexcluded from the computation of diluted net loss per share for the years ended December 31, 2003, 2002and 2001 because their effect on net loss per share is anti-dilutive.
Recent accounting pronouncements On December 31, 2002, the Financial Accounting Standards Board(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-BasedCompensation –– Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-BasedCompensation, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation under SFAS No. 123. SFAS No. 148 also amends the disclosure provisions ofSFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summaryof significant accounting policies of the effects of an entity's accounting policy with respect to stock-basedemployee compensation on reported earnings in annual and interim financial statements. While the Statementdoes not amend SFAS No. 123 to require companies to account for employee stock options using the fair valuemethod, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employeecompensation, regardless of whether the accounting for that compensation is using the fair value method ofSFAS No. 123 or the intrinsic value method of Opinion 25. The company has elected to continue using theintrinsic value method and has incorporated these expanded disclosures into these notes.
3. Recapitalization
During March 1997, Hollis-Eden Inc. was merged (the “Merger”) with and into the Company (then knownas Initial Acquisition Corp. (IAC)). Upon consummation of the Merger, Hollis-Eden Inc. ceased to exist, andIAC changed its name to Hollis-Eden Pharmaceuticals, Inc. IAC (now called Hollis-Eden Pharmaceuticals,Inc.) remains the continuing legal entity and registrant for Securities and Exchange Commission reportingpurposes. The Merger was accounted for as a recapitalization of Hollis-Eden Inc. by an exchange of CommonStock of Hollis-Eden Inc., for the net assets of IAC, consisting primarily of $6.5 million in cash and otherreceivables.
Under the terms of the merger agreement, each share of Hollis-Eden Inc. Common Stock outstandingconverted into one share of Common Stock of Hollis-Eden Pharmaceuticals, Inc. Common Stock (“CompanyCommon Stock”), and all warrants and options to purchase Hollis-Eden Inc. Common Stock outstandingconverted into the right to receive the same number of shares of Company Common Stock.
Upon the consummation of the Merger, pursuant to an agreement, the Company issued warrants topurchase an aggregate of 50,000 shares of Company Common Stock at an exercise price of $0.10 per share
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to a director and former officer. Additional paid-in capital was increased by $570,000 with an offsetting$570,000 charge recorded to operations during the three months ended March 31, 1997.
4. Note Receivable from Related Party
On April 23, 2001, the Company entered into a promissory note with a stockholder/officer in the amount of$16,875. Interest is at 4.5% per annum. Two payments totaling two-thirds of the note was paid by each of thedue dates during April 2002 and 2003 and the remaining one third payment is due and payable on April 23of 2004.
On May 22, 1998, the Company entered into a promissory note with a stockholder/officer in the amountof $200,000. Interest was at 5.5% per annum. The note was repaid in full during May 2003.
5. Income Taxes
The Company has available a net operating loss carryforward of approximately $79 million at December 31,2003 which may be carried forward as an offset to taxable income, if any, in future years through its expirationin 2012 to 2023. The Company has a net deferred tax asset of approximately $30 million at December 31, 2003comprised of capitalized start-up costs, research and development credits, and the net operating loss carryfor-ward. The net deferred tax asset has been fully reserved due to the uncertainty of the Company being able togenerate taxable income under the more likely than not criteria of SFAS 109. If certain substantial changes inthe Company’s ownership should occur, there would potentially be an annual limitation on the amount of thecarryforwards, which could be utilized in a tax year.
6. Related Party Licenses and other Agreements and Contingencies
Colthurst, Edenland and Mr. Prendergast During 1994, the Company entered into two license agreementsand one research, development and option agreement as discussed in the following paragraphs.
Pursuant to a license agreement dated May 18, 1994 (“Colthurst License Agreement”) with related parties,Patrick T. Prendergast, a significant stockholder at the time, and with Colthurst Limited, a company controlledby Mr. Prendergast, the Company acquired the exclusive worldwide rights of Mr. Prendergast's patent rights,know-how and background technology relating to the treatment of human/animal immunodeficiency. Theagreement was amended on August 11, 1995 to change the license fee payment terms as discussed below inparagraph four of this Note. Per the license agreement, the Company agreed to pay royalties on product rev-enues.
On August 25, 1994, the Company entered into a license agreement (“Edenland License Agreement”) witha related party, Edenland Inc., a company controlled by Mr. Prendergast, for the exclusive worldwide rights ofMr. Prendergast's patent rights, know-how and background technology related to the substance tradenamedHE317 and to any other pharmaceutical product that became subject to the license agreement under theresearch, development and option agreement discussed below The agreement was amended on August 11, 1995to change the license fee payment terms as discussed in the following paragraph. Per the Edenland LicenseAgreement, the Company agreed to pay royalties on product revenues.
Effective August 11, 1995, Edenland, Inc., Colthurst Limited and the Company entered into amendmentsconcerning the license fee payment terms to the two agreements described above. Under this amendment,the Company agreed to pay a license fee by April 28, 1996 plus additional license fees within 24 months ofApril 1996. The balances of these fees were paid in full by May 1997. As consideration for entering intocertain amendments, the Company issued 75,472 shares of the Company's common stock to Edenland, Inc.and Colthurst Limited.
Per the amended Colthurst License Agreement, a renewal annual license fee was payable commencing May1998. The Company paid this fee in 1998 by issuing shares of its common stock and, in 1999, paid in cash.
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In August 1994, the Company entered into a Research, Development and Option Agreement, withEdenland, Inc. and Mr. Prendergast. The agreement provided for the development of HE317 to a certainstage of development and granted the Company the right of first option on new products developed byEdenland, Inc. The agreement committed the Company to pay for certain development costs up to theamount of $3.0 million with certain contingencies for funding. In October 1996, the Company and Edenland,Inc. entered into an amendment, which accelerated the date that the $3.0 million payment for HE317 or otherproduct development costs was to be made. The Company paid $2.7 million during 1997 and the remaining$300,000 in April 1998.
During November 1999, the Company filed two separate requests for arbitration with Mr. Prendergast,Colthurst and Edenland. The first arbitration sought clarification of certain operational issues with respect toroles and responsibilities set forth in the license agreement covering IMMUNITIN. The second arbitrationsought to rescind both of the agreements with Edenland covering future potential drug candidates other thanIMMUNITIN.
On January 20, 2000, Hollis-Eden reached a settlement on its pending arbitrations with Mr. Prendergast,Colthurst and Edenland. The Settlement and Mutual Release Agreement completely disposed of all of thematters that were at issue in the pending arbitrations. In addition, the parties entered into two new technologyagreements, the Technology Assignment Agreement and the Sponsored Research and License Agreement.
The Technology Assignment Agreement replaces the Colthurst License Agreement. Pursuant to theTechnology Assignment Agreement, Mr. Prendergast and Colthurst assigned to Hollis-Eden ownership ofall patents, patent applications and current or future improvements of the technology under the ColthurstLicense Agreement, including IMMUNITIN, Hollis-Eden’s lead clinical compound. The annual license feeof $500,000 and the royalty obligations under the Colthurst License Agreement were eliminated. Inconsideration for the foregoing, Hollis-Eden agreed to issue to Colthurst 660,000 shares of Common Stockand a warrant to purchase an aggregate of 400,000 shares of Common Stock at $25 per share. Only 132,000of such shares of Common Stock were issued in 2000, with the remaining 528,000 shares to be issued over thenext four years conditioned on continued compliance with the agreement and, in particular, satisfaction of theConditions (as defined below). In addition, all of the shares under the warrant vest over four years conditionedon continued compliance with the agreement and, in particular, satisfaction of the Conditions (as definedbelow). The Sponsored Research and License Agreement replaces the Edenland License Agreement and theResearch, Development and Option Agreement. Pursuant to the Sponsored Research and License Agreement,Edenland exclusively licensed to Hollis-Eden a number of compounds, together with all related patents andpatent applications, and Hollis-Eden agreed to fund additional preclinical research projects conducted byEdenland. Hollis-Eden will also have exclusive license rights to all results of such research and will haveroyalty obligations to Edenland on sales of new products, if any, resulting from such research.
As stated above, the issuance of the additional shares of Common Stock and the vesting of the warrant wasdependent upon the satisfaction of certain conditions (the “Conditions”), including (i) support of Hollis-Eden’sactions by Mr. Prendergast and Colthurst, by voting their shares of Hollis-Eden stock in favor of managementand (ii) Mr. Prendergast and his affiliated companies not conducting research and development activitiesrelating to the transferred technology. In accordance with Emerging Issues Task Force No. 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services,” these future events could not be determined at the date of theagreements (January 2000). Accordingly, the shares and warrants are accounted for as they vest or are issued.During 2000, the Company recorded a research and development charge for $1.9 million representing the fairvalue of the 132,000 shares issued under the agreement.
Because all of the Conditions have not been satisfied, Hollis-Eden has not issued any additional shares toColthurst and believes it has no obligation to issue any additional shares and that the warrant will not vest as
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to any shares of Common Stock. While Hollis-Eden is confident in its analysis, if any dispute should arise inthis matter, Hollis-Eden cannot guarantee that, as a result of such dispute, additional equity will not be issuedor that an additional accounting charge will not be made.
Aeson Therapeutics In October 2000, the Company acquired a 21% equity stake in Aeson Therapeutics Inc.(“Aeson”) and an exclusive worldwide sublicense to three issued patents in the area of adrenal steroids inexchange for $2.0 million in cash and 208,672 shares of Common Stock valued at $2 million. The cash andshares were expensed as in-process R&D during the fourth quarter of 2000. As part of the transaction, Aesonand its shareholders granted the Company an exclusive option to acquire the remainder of Aeson at a predeter-mined price.
In March 2002, the Company amended certain of its agreements with Aeson. Under the amendments, theCompany paid Aeson $1.2 million, which extended the initial date by which the Company could exercise itsoption to acquire the remainder of Aeson to September 30, 2002. Hollis-Eden also received additional equitysecurities as a result of its $1.2 million payment and now has approximately a 25% equity stake in Aeson.The $1.2 million payment was expensed as in-process R&D.
Hollis-Eden elected not to exercise the option to acquire the remainder of Aeson by September 30, 2002.Accordingly, the option to acquire Aeson has now expired. The Company continues to hold a 25% equityinterest in Aeson.
Pharmadigm In August 2002, we entered into a Sublicense Agreement with Pharmadigm, Inc. Under theagreement, we obtained exclusive worldwide rights to certain intellectual property of Pharmadigm and theUniversity of Utah and we agreed to make aggregate payments of $0.9 million in cash or in shares of ourcommon stock, at our option, over the next year. This cost was expensed in the third quarter of 2002. Weelected to make such payments in equity and have issued a total of 168,921 shares of our common stock incomplete satisfaction of this requirement (of which 118,921 were issued the quarter ended March 31, 2003).We may also make additional milestone and royalty payments to Pharmadigm if we meet specified develop-ment and commercialization milestones for products covered by the patents. The principal patents licensedunder the agreement, originally licensed to Pharmadigm from the University of Utah, relate to inventions byDr. Raymond Daynes and Dr. Barbara A. Areneo. Dr. Daynes is currently a scientific consultant to Hollis-Eden.
7. Common Stock
Reverse Stock Splits During February 1995, there was a 3 for 5 reverse stock split of the Company's commonstock and in March 1996, a 1 for 2.65 reverse stock split of the Company's common stock. Both reverse stocksplits have been retroactively reflected for all periods presented.
Common Stock Financings In January 1996, the Company completed a $367,522 round of debt financingwith a group of private investors. These notes, with an 8% interest rate, were due on or before the earlier of(i) January 21, 1997 or (ii) the closing of a private or public offering of securities. During April 1996, the debtfinancing, plus accrued interest, was converted into 164,962 shares of common stock at a price of $2.25 pershare. In April 1996, the Company privately issued 580,005 shares of the Company's common stock at anoffering price of $2.25 per share. Total proceeds from this offering aggregated $1,234,499.
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, (of which 192,061 shares were subject to adjustmentbased on future average stock price (“Adjustable Common Stock”)), 4,000 shares of 5% Series A ConvertiblePreferred Stock and warrants to purchase 1,437,475 shares of common stock in the financing. The warrantsentitled the holders to purchase up to a total of 1,437,475 shares of common stock at a price of $17.00 per share.
The Convertible Preferred Stock had an initial conversion price of $20.30 for the first seven months, afterwhich it could be adjusted, either up or down, based on the future stock prices of the Company’s commonstock. The Convertible Preferred Stock was converted to common stock in January 1999 (See Note 8).
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In January 1999, the Company completed two private placements of an aggregate of 1,367,868 shares ofcommon stock at prices ranging from $18.00 to $18.50 per share. In connection with the private placements,the Company issued warrants to purchase an aggregate of 90,000 shares of the Company’s common stock,with an exercise price of $18.25 per share, as a finder’s fee. The Company raised approximately $25.0 millionin gross proceeds.
During December 2001, the Company raised $11.5 million in gross proceeds from the sale of 1.28 millionshares of newly issued common stock in a private placement at a price of $9.00 per share. The investors were agroup of qualified institutional buyers and institutional accredited investors. The Company also issued warrantsto purchase up to 128,000 shares of common stock having an exercise price of $12.00 per share to investors.As a finders fee, the Company issued to its placement agent two warrants for a total of 112,640 shares ofcommon stock, one warrant with an exercise price of $9.00 and the other with an exercise price of $12.00.
On February 25, 2003, we completed a private placement in which we issued $10.0 million aggregateprincipal amount of three-year convertible debentures (“debentures”), bearing interest at 7.5% per year, andwarrants to purchase up to 701,760 shares of common stock. The debentures were convertible into commonstock at a price of $5.70 per share, which represented a discount from the price of our common stock on thecommencement date. Also issued in connection with this private placement were warrants to purchase up to350,880 shares of common stock which are exercisable at a price per share of $6.17, subject to adjustment, andwarrants to purchase up to 350,880 shares of common stock which are exercisable at a price per share of $6.71,subject to adjustment. The warrants are exercisable until February 25, 2007.
In connection with the issuance of the debentures and warrants, we recorded approximately $3.5 millionrelated to the beneficial conversion feature and approximately $3.0 million for the detachable warrants on thedebentures. The total amount of the deemed discount on the debentures as a result of the warrant issuanceand the beneficial conversion feature amounts to $6.5 million. The beneficial conversion feature and warrantvalue (deemed discount) were amortized over the term of the debentures and as conversion of the debenturesoccurred.
On June 20, 2003, convertible debentures with a face value of $0.5 million were converted into 87,720shares of our common stock leaving a $9.5 million aggregate principal amount of convertible debentures out-standing. On August 11, 2003, the remaining aggregate principal amount of convertible debentures with a facevalue of $9.5 million were converted into 1,666,680 shares of our common stock with a value of $5.70 per share.
During June 2003, the Company completed a private placement of common stock and warrants, fromwhich it received gross proceeds of $14.7 million. In October 2003 the Company completed a public offeringof an aggregate of 2,500,000 shares of common stock at a price of $25.00 per share and received $62.5 millionin gross proceeds from this offering.
8. Preferred Stock
During May 1998, as part of a private placement, the Company issued 4,000 shares of Convertible Preferred Stockfor proceeds of $4.0 million. The proceeds of the offering is included in the proceeds to the May 1998 financingdescribed in Note 7, above.
During January 1999, the Company issued 346,127 shares of common stock in connection with theconversion of the Series A Convertible Preferred Stock and additional shares relating to the AdjustableCommon Stock. The Adjustable Common Stock was issued during the private placement of May 1998 andwas subject to adjustment based on the future average stock price of the Company’s common stock as describedin Note 7. Upon conversion, all outstanding Preferred shares and Adjustable Common shares were eliminated.
In November 1999, the Company adopted a Shareholders Rights Plan in which Preferred Stock purchaserights (“Rights”) were distributed as a dividend at the rate of one Right for each share of common stock heldas of the close of business on November 29, 1999. Each right entitles stockholders to buy, upon certain events,one one-hundredth of a share of a new Series B junior participating preferred stock of the Company at an
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exercise price of $100.00. The Rights are designed to guard against partial tender offers and other abusivetactics that might be used in an attempt to gain control of the Company or to deprive stockholders of theirinterest in the long-term value of the Company. The Rights are exercisable only if a person or group acquires15% or more of the Company’s common stock or announces a tender offer of which the consummation wouldresult in ownership by a person or group of 15% or more of the Company’s common stock. The Rights areredeemable for one cent per Right at the option of the Board of Directors prior to this event occurring.The Rights expire on November 14, 2009.
9. Stock Options
1997 Stock Option Plan The 1997 Stock Option Plan (the “Plan”) was approved by the Company’s stock-holders in 1997. Under the Plan, 4,400,000 shares of common stock have been reserved for issuance toemployees, officers, directors, and consultants of the Company and provides for the grant of incentive andnonstatutory stock options. The Board of Directors determines terms of the stock option agreements, includingvesting requirements. The exercise price of incentive stock options must equal at least the fair market valueon the date of grant. The options expire not later than ten years from the date of the grant and becomeexercisable immediately or generally are exercisable ratably over a three-year or four-year period beginningone year from the date of the grant. The following table summarizes stock option activity under the Planfor 1997 through 2003 (in thousands, except per share amounts):
Price Per Share
WeightedShares Range Average
1997 Granted 518 $ 6.75 – 8.70 $ 7.13Outstanding, December 31, 1997 518 6.75 – 8.70 7.131998 Granted 341 13.25 –16.75 14.521998 Forfeited 100 8.70 8.70Outstanding, December 31, 1998 759 6.75 –16.75 10.241999 Granted 776 10.56 –16.63 12.701999 Forfeited 61 14.06 –14.63 14.63Outstanding, December 31, 1999 1,474 6.75 –16.75 11.362000 Granted 774 6.50 –15.06 8.182000 Exercised 1 6.75 6.752000 Forfeited 24 6.75 –15.13 14.22Outstanding, December 31, 2000 2,223 6.50 –16.75 10.222001 Granted 170 3.53 –11.84 6.132001 Forfeited 65 5.09 –16.63 13.31Outstanding, December 31, 2001 2,328 3.53–16.75 9.802002 Granted 696 5.15–10.10 9.482002 Forfeited 55 5.13–13.13 8.17Outstanding, December 31, 2002 2,969 3.53 –16.75 10.982003 Granted 943 2.25–17.83 6.592003 Exercised 85 4.50–13.13 11.252003 Forfeited 66 4.00–16.75 12.17Outstanding, December 31, 2003 3,761 $ 2.25–17.83 $ 8.88
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The Company entered into stock option agreements with certain directors, officers and consultants. Theseoptions became exercisable according to a schedule of vesting as determined by the Board of Directors. During2002 and 2003 the Company granted options to certain directors, officers, and consultants, and will recognize$17,000 and $730,000, respectively, in expense related to these options over the vesting periods. Expensesrelated to options for consultants and directors were $96,000, $66,000 and $630,000 in 2001, 2002 and 2003,respectively. The remaining $144,000 charge for these options will be expensed over the vesting period ofthe options.
Non-Plan Options During 1995 and 1996, the Company granted non-statutory stock options to purchase atotal of 608,000 shares to directors, officers and consultants. As of December 31, 2003, options to purchase250,000 shares were outstanding.
In February 1997, as part of an employment agreement, the Company granted a non-statutory stock optionto an executive to purchase 2,400,000 shares of the Company’s common stock at a price of $5.00 per share, whichoption vested ratably over a six-year period. The intrinsic value of the options was $1,848,000. As a result, theCompany recorded as deferred compensation a non-cash charge of $1,848,000, which was being amortizedratably over the six-year vesting period. Through February 1999, the Company had amortized a total of$641,333. In March 1999, the Company announced the resignation of this executive, at which time the Companyand the executive agreed that the option would remain outstanding for a total of 1,200,000 shares, includingthe acceleration of vesting of 300,000 shares. This acceleration is considered to be a new grant of options and,as such, the Company took a one-time non-cash charge of $4.9 million during the first quarter of 1999.
In March 1999, the Company granted a non-statutory stock option to purchase 300,000 shares to an officer.The following table summarizes stock option activity not pursuant to the Plan for 1995 through 2003
(in thousands, except per share amounts):
Price Per Share
WeightedShares Range Average
1995 Granted 38 $2.65 – 7.95 $ 4.64Outstanding, December 31, 1995 38 2.65 – 7.95 4.641996 Granted 570 2.25 2.25Outstanding, December 31, 1996 608 2.25 – 7.95 2.401997 Granted 2,400 5.00 5.001997 Forfeited 50 2.25 2.25Outstanding, December 31, 1997 2,958 2.25 – 7.95 4.511998 Exercised 53 2.25 – 5.30 2.931998 Forfeited 50 2.25 2.25Outstanding, December 31, 1998 2,855 2.25 – 7.95 4.581999 Granted 300 16.63 16.631999 Exercised 10 7.95 7.951999 Forfeited 1,220 2.25 – 5.00 4.95Outstanding, December 31, 1999 1,925 2.25 – 16.63 6.16Outstanding, December 31, 2000 1,925 2.25 – 16.63 6.162001 Exercised 10 2.25 2.25Outstanding, December 31, 2001 1,915 2.25 – 16.63 6.23Outstanding, December 31, 2002 1,915 2.25 – 16.63 6.232003 Forfeited 165 2.25 2.25Outstanding, December 31, 2003 1,750 $2.25 – 16.63 $ 6.60
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For various price ranges, weighted average characteristics of outstanding stock options at December 31, 2003were as follows:
Outstanding Options Exercisable Options
Range of Remaining Weighted WeightedExercise Prices Shares Life (years) Average Price Shares Average Price
$ 2.25 – $ 4.99 445,000 3.3 $ 2.39 433,417 $ 2.34
$ 5.00 – $ 8.99 2,857,503 6.3 5.66 2,110,795 5.69
$ 9.00 – $12.99 1,237,698 7.4 10.51 843,851 10.44
$13.00 – $17.99 971,250 5.6 15.24 877,146 15.26
Pro Forma Disclosures of Net Income The Company has elected to account for its stock-based compensationplans under APB 25; however, for pro forma disclosure purposes, the Company has computed the value of alloptions granted to employees during 2001 through 2003, using the Black-Scholes option pricing model withthe following weighted average assumptions:
2003 2002 2001
Risk free interest rate 3.27% 4.25% 4.66%Expected dividend yield 0% 0% 0%Expected lives 5 years 5 years 5 yearsExpected volatility 122% 93% 137%
The stock options are assumed to be exercised in five years. The total value of warrants and options wascomputed to be the following approximate amounts, which would be amortized on the straight-line basis overthe vesting period of the options (in thousands):
Year ended December 31, 2001 $ 767Year ended December 31, 2002 $5,570Year ended December 31, 2003 $4,690
The Black-Scholes option valuation model was developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. In addition, option valuation models requirethe input of highly subjective assumptions including the expected stock price volatility. Because the Company’semployee stock options have characteristics significantly different from those of traded options, and becausechanges in subjective input assumptions can materially affect the fair value estimate, in management’s opinion,the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s options.
The weighted average, estimated fair values of employee stock options granted during fiscal 2003, 2002 and2001 were $6.31, $8.00 and $4.50 per share, respectively.
10. Common Stock Purchase Warrants
Series A warrants During April 1996, in accordance with anti-dilution privileges triggered by an offering inMarch 1995, the Company issued 1,018,866 Series A Warrants to all stockholders of record as of March 1995to purchase the same number of shares of common stock at a price of $11.02 per share. The warrants expiredJanuary 2002, except for one warrant for 393,250 shares, which expires January 7, 2006.
IAC Management Warrants During April 1994, the Company issued warrants, to existing shareholders andmanagement, to purchase 160,000 units (the “Units”) at $10.00 per Unit, each unit to be identical to the Unitsissued as part of its initial public offering. Each Unit consists of (i) one share of common stock, $.01 par valueper share and (ii) one Class A Warrants entitling the holder to purchase one share of common stock at a priceof $9.00 per share. The warrants have expired except for one warrant to purchase 50,000 units, which expiresMarch 18, 2005.
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Representatives warrants In connection with the Company’s initial public offering, the Company issuedwarrants to the underwriters for 60,000 Units at an exercise price of $11.00 per Unit and 24,000 Class BWarrants at an exercise price of $5.775 per warrant and were exercisable until May 2000. Each Class B Warrantentitled the holder to purchase one Unit (i.e. one share of common stock and one Class A Warrant). Theunexercised warrants have expired.
Investor Relations Warrants During February 1998, as part of payment for services relating to investorrelations, the Company issued a warrant to purchase 150,000 shares with an exercise price of $14.75 per shareand an expiration date of February 1999. The warrant was estimated to have a value of $408,000, which wasexpensed in 1998. This warrant was exercised.
1998 Private Placement Warrants In connection with the May 1998 private placement, the Company issuedwarrants to purchase 1,437,475 shares of common stock at an exercise price of $17.00 per share. The warrantswere exercisable until May 2001. Of the warrants issued, 157,000 were issued as finders fees, and 1,280,475 wereissued to the private placement investors. These warrants have expired.
1999 Agent Warrants In connection with the January 1999, private placement, the Company issued warrantsas a finders fee to purchase 90,000 shares of common stock at an exercise price of $18.25 per shares. Thewarrants expired January 2002.
1999 Consulting Warrants During March 1999, the Company entered into a three-year agreement with afinancial consulting organization affiliated with a director of the Company. The Company agreed to issue ascompensation for services, a warrant to purchase 500,000 shares of common stock with an exercise price of$20.50 per share and an expiration date of March 2002. The warrant was not subject to any vesting provisions.The warrant was estimated to have a value of approximately $2.1 million, which was expensed as a non-cashcharge during the first quarter of 1999. During 2001, the expiration date for this warrant was extended toMarch 2003. The warrant extension did not result in an additional non-cash charge.
During March 2003, the Company amended the consulting arrangement with the same financial organizationaffiliated with a director. The Company amended the warrant so that the warrant is now exercisable into anaggregate of 250,000 shares of common stock with an exercise price of $10.00 per share and an expiration dateof the earlier of March 12, 2006 or thirty days after the consulting agreement is terminated. A non-cash chargeof approximately $0.8 million was expensed. For accounting purposes, the original warrant was consideredcancelled and a new warrant issued as a replacement.
2001 Consulting Warrants During April 2001, the Company issued warrants to purchase 25,000 sharesof common stock at an exercise price of $3.09. The warrants expire April 30, 2006. During July 2001, theCompany issued warrants to purchase 25,000 shares of common stock at an exercise price of $6.225. Thesewarrants are exercisable until July 31, 2006. These warrants, collectively, were issued for compensation forservices and were estimated to have a combined value of approximately $208,000, which was expensed as anon-cash charge. Approximately 15% of these warrants have been exercised.
During the fourth quarter of 2001, the Company issued three-year warrants to purchase 16,870 sharesof common stock with exercise prices ranging from $4.72 to $10.10. The warrants have no vesting period, anestimated value of approximately $80,000, and were issued in lieu of cash for services. The majority of thesewarrants have not been exercised.
2001 Private Placement Warrants In connection with the December 2001 private placement, the Companyissued warrants to purchase 128,000 shares of common stock to investors with an exercise price of $12.00.Warrants to purchase 68,329 shares of our common stock were exercised and the remaining warrants expiredDecember 11, 2003.
As a finders fee, the Company issued two warrants with an expiration date of December 11, 2006 to theplacement agent for a total of 112,640 shares of common stock. One warrant has an exercise price of $9.00 and
44 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
the other an exercise price of $12.00. The value ascribed to these warrants based on the Black-Scholes pricingmodel was $1.5 million and was included as a charge to equity. These warrants have not been exercised.
2002 Consulting Warrants In March 2002, the Company agreed to issue a three-year warrant to aconsultant, Dr. Joseph Hollis, to purchase up to 60,000 shares of common stock at an exercise price of $11.00per share. Dr. Hollis is the brother of Richard B. Hollis.
During the fourth quarter of 2002, the Company issued a three-year warrant to purchase up to 10,000shares of common stock at exercise price of $4.54 per share. The warrants were issued in lieu of cash forconsulting services performed for the Company.
All of the 2002 warrants were valued at a total of $247,000 using the Black-Scholes pricing model.The value of the warrants was expensed and is included in the 2002 operating expenses.
2003 Convertible Note Warrants On February 25, 2003, we completed a private placement in whichwe issued $10.0 million aggregate principal amount of three-year convertible debentures (“debentures”),bearing interest at 7.5% per year, and warrants to purchase up to 701,760 shares of common stock.The debentures are convertible into common stock at a price of $5.70 per share, which represented a discountfrom the price of common stock on the commencement date. Also issued in connection with this privateplacement were warrants to purchase up to 350,880 shares of common stock which are exercisable at a priceper share of $6.17, subject to adjustment, and warrants to purchase up to 350,880 shares of common stockwhich are exercisable at a price per share of $6.71, subject to adjustment. The warrants are exercisable untilFebruary 25, 2007. Approximately half of these warrants have been exercised.
In connection with the issuance of the debentures and warrants, we recorded approximately $3.5 millionrelated to the beneficial conversion feature and approximately $3.0 million for the detachable warrantson the debentures. The total amount of the deemed discount on the debentures as a result of the warrantissuanc and the beneficial conversion feature amounts to $6.5 million. The beneficial conversion featureand warrant value (deemed discount) were amortized over the term of the debentures and as conversion ofthe debentures occurred.
The placement agent received a warrant to purchase 73,684 shares of common stock having an exercise priceof $5.99 This warrant is exercisable until February 25, 2008. The value ascribed to this warrant based on theBlack-Scholes pricing model was $0.4 million and was expensed as a non-cash charge. This warrant has notbeen exercised.
2003 Private Placement Warrants In connection with the June 2003 private placement, the Company issuedwarrants to purchase 192,456 shares of common stock to investors with an exercise price of $15.45. Thesewarrants expire June 19, 2007. These warrants have not been exercised.
As a finders fee, the Company issued a warrant with an expiration date of June 19, 2008 to the placementagent, for a total of 44,266 shares of common stock with an exercise price of $13.22. The value ascribed to thiswarrant based on the Black-Scholes pricing model was $0.5 million and was expensed as a non-cash charge.This warrant has not been exercised.
45 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
The following table summarizes stock warrant activity for 2001 through 2003 (in thousands, except pershare amounts):
Price Per Share
WeightedShares Range Average
Outstanding, December 31, 2000 3,534 $ 9.00–25.00 $16.52
2001 Issued 308 3.09–12.00 9.48
2001 Forfeited 1,837 17.00–25.00 18.74
Outstanding, December 31, 2001 2,005 3.09–20.50 13.40
2002 Issued 70 4.54–11.00 10.08
2002 Forfeited 704 11.02–18.25 11.94
Outstanding, December 31, 2002 1,371 3.09–20.50 13.97
2003 Issued 1,262 5.99–15.45 8.73
2003 Exercised 467 3.09–15.45 7.49
2003 Forfeited 579 3.09–20.50 19.26
Outstanding, December 31, 2003 1,587 $ 3.09–15.45 $ 9.85
For various price ranges, the following table summarizes the weighted average prices of outstandingwarrants as of December 31, 2003 (in thousands, except per share amounts):
Outstanding Warrants Exercisable Warrants
Range of Weighted WeightedExercise Prices Shares Average Price Shares Average Price
$ 3.00 – $ 5.00 37 $ 3.78 37 $ 3.78$ 5.01 – $10.00 871 8.05 871 8.05$10.01 – $15.00 455 11.03 455 11.03$15.01 – $20.00 224 15.45 224 15.45
11. Employment Agreement
Pursuant to an employment agreement between Hollis-Eden and Mr. Richard B. Hollis entered into inNovember 1996 (the “Hollis Employment Agreement”), Mr. Hollis’ annual base salary was increased to$225,000 upon the consummation of the Merger, with bonuses, future salary increases and equity compensationas determined by the Hollis-Eden Pharmaceuticals Board of Directors. On July 1, 2003, Mr. Hollis’ base salarywas increased from $440,000 to $462,000. If Mr. Hollis' employment is terminated “without cause,” “forinsufficient reason” or pursuant to a “change in control” (as such terms are defined in the Hollis EmploymentAgreement), Mr. Hollis will receive as severance (i) an amount equal to five times his then current annual basesalary plus five times the amount of the bonus awarded to him in the prior calendar year, (ii) immediate vestingof all unvested stock options of Hollis-Eden Pharmaceuticals (or the Surviving Corporation, if applicable) heldby him and (iii) continued benefits under all employee benefit plans and programs for a period of three years.All of such payments are to be made in one lump sum within 30 days of termination. If Mr. Hollis' employmentis terminated “with cause” or if Mr. Hollis resigns other than for “sufficient reason,” Mr. Hollis' compensationand benefits will cease immediately and Mr. Hollis will not be entitled to severance benefits.
46 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
12. Leases
Rental expenses for principally leased facilities under non-cancelable operating leases were approximately$754,000, $644,000 and $435,000 for 2003, 2002 and 2001 respectively. Future minimum payments for oper-ating leases are as follows (in thousands):
Operating Leases
2004 $ 8272005 1832006 132007 13
2008 9
Total minimum lease payments $1,045
13. Subsequent Event
In February 2004, the Company acquired Congressional Pharmaceutical Corporation (“CPC”) and replacedCPC as the exclusive licensee to certain intellectual property rights held by the University of Chicago. Theseintellectual property rights consist of a series of patents and patent applications that relate to discoveries madeby David J. Grdina, Ph.D., Professor of Radiation and Cellular Oncology at the University of Chicago. Thepatented technology covers a series of compounds that have the potential to protect against DNA mutationsthat can occur as a result of radiation injury or chemotherapy. In the acquisition the Company will issueapproximately 50,000 shares of common stock to the former stockholders of CPC valued at approximately$650,000, in accordance with Emerging Issues Task Force No. 99-12. In addition, if the Company achievescertain development milestones, it will be required to issue additional shares of our common stock to the formerstockholders of CPC. In the event all of the milestones are achieved, the total number of additional sharesthat the Company would be required to issue to the former stockholders of CPC is 275,000, more than halfof which would be issued only upon FDA approval of CPC’s product. Furthermore, upon regulatory approvaland commercialization of products covered by the licensed intellectual property, the Company may be requiredto pay royalties to the former stockholders of CPC and the University of Chicago. Following the acquisition,Dr. Grdina agreed to an exclusive consulting arrangement with the Company in the fields of hematopoiesisand radiation and chemotherapy exposure.
Supplementary Financial Data Interim Financial Information (Unaudited)
Quarter TotalMar Jun Sep Dec Year
Year ended December 31, 2003R&D expenses $ 2,305 $ 1,741 $ 2,619 $ 3,777 $10,442G&A expenses 973 1,155 1,197 1,836 5,161Non-cash charges 1,656 725 91 16 2,488Net loss 5,197 4,731 10,328 5,415 25,671Net loss per share (0.40) (0.36) (0.66) (0.28) (1.67)Cash and cash equivalents $19,424 $32,796 $29,720 $84,852 $84,852
Year ended December 31, 2002R&D expenses $ 2,916 $ 4,462 $ 3,572 $ 2,067 $13,017G&A expenses 1,180 1,245 995 1,103 4,523Non-cash charges 238 17 31 44 330Net loss 4,218 5,616 4,515 3,153 17,502Net loss per share (0.33) (0.43) (0.35) (0.24) (1.35)Cash and cash equivalents $25,523 $20,484 $16,441 $13,087 $13,087
47 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
To the Board of Directors and Stockholders ofHollis-Eden Pharmaceuticals, Inc.:San Diego, CA
We have audited the accompanying balance sheets of Hollis-Eden Pharmaceuticals, Inc. (a development stagecompany) as of December 31, 2003 and 2002 and the related statements of operations, stockholders’ equity,and cash flows for each of the three years in the period ended December 31, 2003 and for the period frominception (August 15, 1994) to December 31, 2003. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements based onour audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the financialposition of Hollis-Eden Pharmaceuticals, Inc. as of December 31, 2003 and 2002 and the results of itsoperations and its cash flows for each of the three years in the period ended December 31, 2003 and for theperiod from inception (August 15, 1994) to December 31, 2003, in conformity with accounting principlesgenerally accepted in the United States.
BDO Seidman, LLP
New York, NYFebruary 3, 2004 (except for Note 13 which is as of February 24, 2004)
BOAR D OF DI R ECTORS
Richard B. HollisFounder, Chairman and CEO
Paul Bagley IIIManaging PartnerStone Pine Companies
Brendan R. McDonnellPartner, Preston Gates & Ellis, LLP
Thomas C. Merigan, Jr., M.D.Becker Professor of Medicine and Directorof the Center for AIDS ResearchStanford University School of Medicine
William H. TilleyChairman and CEOThe Jacmar Companies
Salvatore ZizzaFormer Chairman and PresidentInitial Acquisition Corporation
MANAG E M E NT
Richard B. HollisFounder, Chairman and CEO
Daniel D. BurgessChief Operating OfficerChief Financial Officer
James M. Frincke, Ph.D.Chief Scientific Officer
Eric J. LoumeauVice PresidentGeneral Counsel
Robert L. MarsellaVice PresidentBusiness Development
Christopher L. Reading, Ph.D.Executive Vice PresidentScientific Development
Dwight R. Stickney, M.D.Vice PresidentMedical Affairs
Robert W. WeberVice PresidentChief Accounting Officer
SE N IOR SCI E NTI FIC STAFF
Clarence N. AhlemDirector, Product Development
Dominick Auci, Ph.D.Director, Allergy, Autoimmunity and Inflammation
Charles R. Dowding, Ph.D.Director, Hematology and Immunology
Jaime Flores-Riveros, Ph.D.Vice President, Endocrinology and Metabolism
Armando Garsd, Ph.D.Director, Biostatistics
Barry S. MillerDirector, Data Management
Elizabeth MorganDirector, Clinical Development
Daryl D. Muenchau, Ph.D., J.D.Director, Intellectual Property
Nanette Onizuka-HandaDirector, Regulatory Affairs
Richard Trauger, Ph.D.Director, Infectious Disease and Cancer
Steven White, Ph.D.Director, Medicinal Chemistry
AU DITORS
BDO Seidman, LLPNew York, New York
OUTSI DE COR PORATECOU NSE L
Cooley Godward, LLPSan Diego, California
TRANSFE R AG E NT
American Stock Transfer and Trust
AN N UAL STOCKHOLDE RSM E ETI NG
June 18, 2004, 2:00 pm (pdt)
Hilton La Jolla Torrey Pines
10950 North Torrey Pines Road
La Jolla, CA
HOLLIS-E DE NH EADQUARTE RS4435 Eastgate Mall, Suite 400
San Diego, CA 92121
t: 858 587 9333
f: 858 558 6470
www.holliseden.com
NASDAQ Symbol: HEPH
48 | H O L L I S -E D E N 2003 A N N U A L R E P O R T
This annual report, including the Letter to Shareholders, contains for-ward-looking statements concerning the potential and prospects ofthe Company’s drug discovery program and its drug candidates. Anystatement describing a goal, expectation, intention or belief of theCompany is a forward-looking statement and should be consideredan at-risk statement. Such statements are subject to certain risks anduncertainties, including the failure to successfully complete clinicaltrials, the Company’s future capital needs, the Company’s ability toobtain additional funding and required regulatory approvals, the abilityof the Company to protect its intellectual property rights and to notinfringe the intellectual property rights of others, the development ofcompetitive products by other companies, and other risks detailedfrom time to time in the Company’s filings with the Securities andExchange Commission. The actual results may differ materially fromthose contained in this annual report.
SE RVI NG H U MAN ITY AWAR D
Through this annual award, Hollis-Eden recognizes the individuals who
made the most significant contribution during the year to the realization
of the Company’s vision.
2002 – 2003 AWAR D R ECI PI E NTS
LEFT TO RIGHT Daniel D. Burgess, Chief Operating Officer and CFO;
Dwight R. Stickney, M.D., Vice President, Medical Affairs;
Daryl D. Muenchau, Ph.D., J.D., Director, Intellectual Property.
CR E DO
F O R O U R E M P L OY E E S
We pledge to createan environment where business andpersonal achievements are accomplishedto the highest standards of integrity,excellence and professionalism.
F O R O U R PAT I E N T S
We pledge to providesafe, affordable and effective treatmentsthat improve the quality of life.
F O R O U R P R O D U C T S
We pledge to remainsteadfast in our commitment to turn our innovative science into pharmaceutical products for global health.
F O R O U R S H A R E H O L D E R S
We pledge to prosperas a business and to reward our ownerswith an attractive return.
Our vision
is to build a world-class
pharmaceutical company
serving humanity
by improving quality of life.