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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
Quarterly Report Under Section 13 or 15(d)
X Of the Securities Exchange Act of 1934
---
For Quarterly Period Ended March 31, 1997
Transition Report Pursuant to Section 13 or 15(d)
___ of the Securities Exchange Act 1934 for the period
from ___ to ___ .
HOLLIS-EDEN PHARMACEUTICALS, INC
(formerly known as Initial Acquisition Corp.)
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
<TABLE>
<S> <C>
000-24672 13-3197002
(Commission File No.) (I.R.S. Employer Identification No.)
</TABLE>
808 SW THIRD AVENUE, SUITE 540
PORTLAND, OREGON 97204
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (503) 226-1277
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
As of May 2, 1997 there were 6,652,618 shares of registrant's Common Stock,
$.01 par value, outstanding.
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(a corporation in the development stage)
Form 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
No.
PART I Financial Information
Item 1 Financial Statements 3
Balance Sheet -
March 31, 1997 and December 31, 1996 3
Statement of Operations -
Three-Month Periods Ended March 31, 1996 and 1997
and Period August 15, 1994 to March 31, 1997 4
Statement of Stockholders' Equity -
Three Months Ended March 31,1997 5
Statements of Cash Flows -
Three-Month Periods Ended March 31, 1996 and 1997
and Period August 15, 1994 to March 31, 1997 6
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
PART II Other Information
Item 1 Legal Proceedings 14
Item 2 Changes in Securities 14
Item 3 Default upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLLIS EDEN PHARMACEUTICALS, INC.
(a corporation in the developing stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1997 December 31,
(unaudited) 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 6,469,105 $ 17,914
Prepaid expenses 20,939 116,885
Deposits - 100,000
Other receivable from related party 43,944 -
-------------- -------------
Total current assets 6,533,988 234,799
Property and equipment, net 6,153 6,407
-------------- -------------
Total assets $ 6,540,141 $ 241,206
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 383,960 $ 210,894
Wages payable 137,396 96,771
Income taxes payable 110,114 -
License fees payable to related party 499,700 499,700
R & D fees payable to related party 1,500,000 -
-------------- -------------
Total liabilities 2,631,170 807,365
Commitments and contingencies
Stockholders' equity (deficit)
Preferred stock, no par value, 10,000,000 shares
authorized; no shares issued or outstanding
Common stock, $.01 and $.0001 par value,
30,000,000 shares authorized; 5,794,254 and
4,911,004 shares issued and outstanding 57,944 491
Paid-in capital 8,857,636 2,074,307
Deficit accumulated during development stage (5,006,609) (2,640,957)
------------- ------------
Total stockholders' equity (deficit) 3,908,971 (566,159)
Total liabilities and stockholders' equity $ 6,540,141 $ 241,206
============= ============
</TABLE>
See accompanying notes to unaudited financial statements
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(a corporation in the development stage)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Period from
3 Months 3 Months inception
Ended March 31, Ended March 31, (August 15, 1994) to
1996 1997 March 31, 1997
--------------- --------------- --------------------
<S> <C> <C> <C>
Operating expenses:
Research and development $ - $ 1,573,680 $ 3,387,718
General and administrative $ 18,786 793,344 $ 1,578,371
-------------- ----------- ------------
Total operating expenses 18,786 2,367,024 4,966,089
Other income (expense):
Interest income - 1,372 7,104
Interest expense (3,142) - (47,624)
-------------- ------------ -----------
Total other income (expense) (3,142) 1,372 (40,520)
Net loss $ (21,928) $ (2,365,652) $ (5,006,609)
============== ============ ============
Net loss per share $ (0.01) $ (0.48) $ (1.20)
Weighted average number of
common shares outstanding 4,150,943 4,959,583 4,161,042
</TABLE>
See accompanying noted to unaudited financial statements
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(a corporation in the development stage)
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Common stock Accumulated
at par value Capital in during
------------------- excess of development
Shares Amount par value stage Total
--------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 4,911,004 $ 491 $ 2,074,307 $(2,640,957) $ (566,159)
Recapitalization of Hollis-Eden for the net
assets of Initial Acquisition Corp. 883,250 57,453 6,213,329 - 6,270,782
Warrants issued to certain director upon
the successful closure of the merger - - 570,000 - 570,000
Net loss - - - (2,365,652) (2,365,652)
---------- -------- ----------- ----------- -----------
Balance at March 31, 1997 5,794,254 $ 57,944 $ 8,857,636 $(5,006,609) $ 3,908,971
========== ======== =========== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(a corporation in the development stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Period from
3 Months 3 Months inception
Ended March 31, Ended March 31, (August 15, 1994) to
1996 1997 March 31, 1997
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(21,928) $(2,365,652) $(5,006,609)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation - 254 848
Common stock issued as consideration
for amendments to the license agreements - - 32,540
Common stock issued as consideration for
termination of a finance agreement - - 33,962
Expense related to options issued as
consideration to consultants - 2,006 8,023
Expense related to warrants issued to
director for successful closure of merger - 570,000 570,000
Changes in assets and liabilities:
Prepaid expenses - 93,937 (4,893)
Deposits - 100,000 -
Other receivable from related party - (43,944) (43,944)
Accounts payable and accrued expenses 18,286 173,066 383,960
Wages payable - 40,625 137,396
Accounts payable to related party (73,040) - -
License fees payable to related party - - 499,700
R & D fees payable to related party - 1,500,000 1,500,000
Accrued interest expense (44,482) - -
Income taxes payable - 110,114 110,114
-------- ---------- ----------
Net cash used by operating activities (121,164) 180,406 (1,778,903)
Cash flow provided by investing activities:
Purchase of property and equipment - - (7,001)
-------- ---------- ------------
Net cash used by investing activities - - (7,001)
Cash flow provided by financing activities:
Borrowings from related party - 92,000 342,000
Payments on note payable to related party (250,000) (92,000) (342,000)
Contributions from stockholder - - 103,564
Net proceeds from sale of common stock - - 1,509,499
Proceeds from issuance of debt 371,164 - 371,164
Net proceeds from recapitalization - 6,270,782 6,270,782
-------- ---------- ----------
Net cash from financing activities 121,164 6,270,782 8,255,009
Net increase in cash - 6,451,188 6,469,105
Cash at beginning of period - 17,917 -
-------- ---------- -----------
Cash at end of period $ - $6,469,105 $ 6,469,105
======== ========== ===========
</TABLE>
See accompanying notes to unaudited financial statements
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HOLLIS-EDEN PHARMACEUTICALS, INC.
(a corporation in the development stage)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements are presented in accordance with the requirements of
Form 10-Q and Regulation 210 of S-X and consequently do not include all of the
disclosures normally made in an annual Form 10-K filing. In the opinion of the
Company, the accompanying unaudited financial statements contain all
adjustments necessary to present fairly the financial information included
therein. While the Company believes that the disclosures are adequate to make
the information not misleading, it is suggested that these financial statements
be read in conjunction with the audited financial statements and accompanying
notes included within: the Company's Annual Report on Form 10-K for the year
ended December 31, 1996; the Company's Joint Proxy Statement and Prospectus on
Form S-4 dated February 12, 1997; and the Company's Form 8- K dated April 10,
1997.
The December 31, 1996 financial information was derived from audited financial
statements contained within the Company's form 8-K filed April 10, 1997.
2. RECAPITALIZATION
On March 26, 1997, Hollis-Eden, Inc. ("Hollis-Eden"), a Delaware corporation,
was merged with and into Initial Acquisition Corp. ("IAC"), a Delaware
corporation, pursuant to an Agreement and Plan of Merger, dated November 1,
1996, among IAC, Hollis-Eden, Mr. Salvatore J. Zizza and Mr. Richard B. Hollis
(the "Merger Agreement"). Upon consummation of the merger of Hollis-Eden with
IAC (the "Merger"), Hollis-Eden ceased to exist, and IAC 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 reporting purposes. The Merger is intended to be a tax-free
reorganization for federal income tax purposes and is to be accounted for as a
recapitalization of Hollis-Eden by an exchange of Common Stock of Hollis-Eden,
$.0001 par value ("Hollis-Eden Common Stock"), for the net assets of IAC,
consisting primarily of cash.
Under the terms of the Merger Agreement, each share of Hollis-Eden Common Stock
outstanding immediately prior to the closing of the Merger converted into one
share of Common Stock, $.01 par value, of Hollis-Eden Pharmaceuticals, Inc.
Common Stock ("Company Common Stock"), and all warrants and options to purchase
Hollis-Eden Common Stock outstanding immediately prior to the Merger converted
into the right to receive the same number of shares of Company Common Stock.
At the closing of the Merger, 4,911,004 shares of Company Common Stock
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were issued, which represented approximately 85% of the shares of Company
Common Stock outstanding immediately after consummation of the Merger.
For accounting and financial reporting purposes, the Merger was treated as a
recapitalization of Hollis-Eden. Since IAC has had no business operations other
than the search for a suitable target business, IAC's assets were recorded in
the balance sheet of the Company at book value. The unaudited financial
information contained in this document has been prepared on this basis.
Upon the consummation of the Merger, the Company had $6.5 million in cash and
other receivables, and incurred transactions costs of approximately $230,000
associated with the Merger for a net proceeds totaling $6.3 million which was
recorded as equity. Additional transaction costs totaling $4.7 million
represents a charge for (i) warrants to purchase an aggregate of 452,830 shares
of Company Common Stock at an exercise price of $2.48 issued to Laidlaw
Equities upon the closing of the Merger pursuant to an agreement and (ii) an
aggregate of 50,000 shares of Company Common Stock issued to Gruntal & Co. and
Reid & Priest LLP upon the closing of the Merger. An estimate of $11.50 per
share was used to calculate the charges which approximates fair market value.
These charges constitute transaction fees and accordingly have been recorded as
a charge to additional paid-in capital.
Upon the consummation of the Merger, pursuant to an agreement, the Company
issued warrants to purchase an aggregate of 50,000 shares of Company Common
Stock at an exercise price of $0.10 per share 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.
At the IAC Special Meeting, none of the IAC Non-Affiliate Stockholders elected
to redeem their shares of IAC Common Stock and therefore may be eligible for
Additional Merger Shares. See Note 3.
The Company's 1997 Stock Incentive Stock Option Plan became effective on
February 5, 1997 and was approved by the stockholders on March 26, 1997.
1,000,000 shares of Company Common Stock have been authorized for issuance
under the plan.
3. ADDITIONAL MERGER SHARES
Pursuant to IAC's prospectus dated May 15, 1995, each of the IAC Non-Affiliate
Stockholders (and each Initial IAC Stockholder who (i) participated in the
February 1993 private placement of IAC securities and (ii) purchased shares of
IAC Common Stock in the open market after May 15, 1995 (the "After Acquired
Stock"), but only to the extent of the After Acquired Stock)) had the right
(the "Redemption Right") to elect to have any or all of his or her shares of
IAC Common Stock redeemed for approximately $11.00 per share (the "Redemption
Value"). At the IAC Special Meeting, none of the IAC Non-Affiliate
Stockholders elected to redeem their shares of IAC Common Stock. In connection
with the Merger, IAC offered each IAC Non-Affiliate Stockholder the opportunity
to exchange his or her Redemption Right for the right to receive additional
shares of Company Common Stock ("Additional Merger Shares"), should any be
issued.
In order to perfect the right to receive Additional Merger Shares, if any, an
IAC Non- Affiliate Stockholder must (i) not have exercised his or her
Redemption Right in connection with the Merger
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and (ii) prior to May 25, 1997 (60 days following March 26, 1997, the effective
time of the Merger (the "Effective Time")), take whatever action that may be
necessary to cause such IAC Non-Affiliate Stockholder to become the registered
owner of his shares of Company Common Stock (each, a "Rights Share" and,
collectively, the "Rights Shares"). By not exercising his or her Redemption
Right in connection with the Merger, an IAC Non-Affiliate Stockholder shall be
deemed to have waived his or her Redemption Right and accepted IAC's offer to
receive the right to receive Additional Merger Shares, if any are issued
(provided such IAC Non-Affiliate Stockholder is not a dissenting stockholder
and becomes the registered owner of his or her shares of Company Common Stock
as provided above). As soon as practicable after May 25, 1997, the Company
will cause to be issued to each IAC Non-Affiliate Stockholder who shall have
perfected his or her right to receive Additional Merger Shares, if any,
certificates evidencing one right (each, a "Right" and, collectively, the
"Rights") for each Rights Share held by such IAC Non-Affiliate Stockholder (the
"Rights Certificates"). The Rights Certificates shall not be transferable,
assignable, subject to pledge or otherwise alienable, and the registered holder
of such Rights Certificates shall forfeit the number of Rights (the "Forfeited
Rights") equal to the number of shares of Company Common Stock sold or
otherwise transferred by such holder during the period commencing at the
Effective Time and ending on the date that a final determination of whether any
Additional Merger Shares will be issued is made (i.e., the second anniversary
of the Effective Time) (the "Holding Period"). The Forfeited Rights, at the
moment of such sale or transfer, shall be null and void and have no further
force or effect.
Additional Merger Shares, if any, shall be issued to the holders of Rights
Certificates who have not otherwise forfeited their Rights as a result of their
selling or otherwise transferring shares of Company Common Stock during the
Holding Period if, at no time during the 24-month period immediately following
the Effective Time, the average closing price per share of Company Common Stock
over a period of 20 consecutive trading days equals or exceeds $20.00 per share
(subject to adjustment as set forth below). The Additional Merger Shares shall
be issued in accordance with the records of the Company as promptly as
practicable following the second anniversary of the Effective Time to those
holders of Rights Certificates who have not otherwise forfeited their Rights.
The number of Additional Merger Shares, if any, to be issued to the holders of
the Rights Certificates shall be calculated as follows: each outstanding Right
(i.e., any Right other than a Forfeited Right) shall entitle the holder thereof
to the number of Additional Merger Shares equal to (a) the difference between
(i) $20.00 (subject to adjustment as set forth below) and (ii) the average of
the highest 60 closing prices per share of Company Common Stock during the
one-year period immediately prior to the second anniversary of the Effective
Time (the "Sixty Day Average Price"), divided by (b) the Sixty Day Average
Price. No fractional Additional Merger Shares shall be issued. In lieu thereof,
any fractional shares shall be rounded to the nearest whole share of Company
Common Stock. The amount of Additional Merger Shares, if any, to be issued
shall be computed by the Company's independent public accountants as soon as
practicable following the second anniversary of the Effective Time. The
determination by such independent public accountants shall be final and binding
on the Company and the holders of the Rights. Notwithstanding the foregoing,
the Sixty Day Average Price shall in no event be less than $5.00 per share
(subject to adjustment as set forth below).
In the event of a stock dividend, stock split, share combination, exchange of
shares, recapitalization, merger, consolidation, acquisition or disposition of
property or shares, reorganization, liquidation or other similar change or
transaction of or by the Company following the Effective Time, the closing
price per share of Company Common Stock and the Sixty Day Average Price shall
be adjusted as appropriate to give proper effect to the event.
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Notwithstanding the foregoing, the Company shall have the unilateral right to
redeem and cancel all, but not less than all, of the Rights evidenced by the
Rights Certificates, at a redemption price of $.001 per Right, if the Company,
at any time during the Holding Period, closes an equity offering pursuant to
which the Company (i) issues shares of Company Common Stock at a per share
price of not less than $15.00 per share and (ii) raises net proceeds to the
Company of not less than $10 million.
4. NET LOSS PER SHARE
The weighted average shares outstanding used in the calculation of net loss per
share includes the effect of the Merger as of March 26, 1997. The common stock
equivalents have been excluded from the calculations because they have the
effect of reducing the net loss per share.
5. R & D EXPENSES
Concurrently with the Merger, the Company incurred a $1.5 million expense for
research and development fees. These fees will be used by Edenland, Inc., a
related party, as funding to continue the development of the Company's second
drug candidate, REVERSIONEX.
6. SUBSEQUENT EVENTS
On March 27, 1997, the Company sent a Notice of Redemption to holders of its
Class A Common Stock Purchase Warrants, Class B Unit Purchase Warrants and
certain management warrants stating that it would redeem all of such
outstanding warrants on April 28, 1997 at a redemption price of $0.05. The
right to exercise such Warrants terminated at 5:00 p.m. (New York time) on
April 25, 1997. 603,415 of the Class A Common Stock Purchase Warrants and
254,950 Class B Unit Purchase Warrants were exercised into an aggregate of
858,365 shares of Company Common Stock. The gross proceeds to the Company were
$5.5 million. The Company anticipates incurring approximately $100,000 in
transaction costs associated with the exercise and redemption of the warrants
which it will record against equity. This amount is a preliminary estimate and
there can be no assurance that the Company will not incur additional charges to
reflect costs associated with the exercise and redemption of the warrants.
The Company's trading symbol was changed on April 21, 1997 from IACQ to HEPH to
reflect the name change to Hollis-Eden Pharmaceuticals, Inc.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
While management believes that the discussion and analysis in this report is
adequate for a fair presentation of the information, management recommends that
this discussion and analysis be read in conjunction with Management's
Discussion and Analysis of Results of Operations and Financial Condition
included in the Company's Joint Proxy Statement and Prospectus on Form S-4
dated February 12, 1997.
GENERAL
Hollis-Eden Pharmaceuticals is a development stage pharmaceutical company
engaged in developing therapeutic and/or preventative pharmaceutical agents for
the treatment of a number of targeted disease states caused by viral,
bacterial, parasitic or fungal infections, including HIV an AIDS. The Company
believes that certain of its drug candidates may provide the first long-term
treatment for HIV without the development of viral strain resistance to the
drugs' effectiveness, significant toxicity or severe side effects. The Company
has not yet generated any operating revenues. The Company has experienced
significant operating losses due to substantial expenses incurred to acquire
and fund development of its drug candidates and, as of March 31, 1997, had an
accumulated deficit of $5.0 million.
Hollis-Eden Pharmaceuticals believes that certain of its drug candidates may
also be effective in the treatment of (i) other viral-caused disorders such as
hepatitis-C, (ii) auto-immune diseases such as multiple sclerosis, psoriasis and
rheumatoid arthritis and (iii) bacterial and parasitic diseases such as
tuberculosis, malaria, toxoplasmosis and leishmania.
When and if any of the Company's drug candidates have been approved for
commercial sale, the Company plans to market them in the United States. For
international markets, the Company intends to develop strategic alliances with
major pharmaceutical companies that have foreign regulatory expertise and
established distribution channels, and will also consider corporate strategic
partnerships and co-marketing agreements. No assurances can be given that any
of the Company's drug candidates will be approved for commercial sale or that
any of the foregoing proposed arrangements will be implemented or prove to be
successful.
The forward-looking comments contained in the following discussion involve
risks and uncertainties. The Company's actual results may differ materially
from those discussed here. Factors that could cause or contribute to such
differences can be found in the following discussion and elsewhere throughout
this Quarterly Report on Form 10-Q, as well as in the Company's Joint Proxy
Statement and Prospectus on Form S-4 dated February 12, 1997.
RESULTS OF OPERATIONS
The Company has not generated any revenues for the period from August 15,
1994 (inception of Hollis-Eden) through March 31, 1997 and has devoted
substantially all its resources to the payment of licensing fees (including
research and development fees) and expenses related to the startup of its
business. From inception until March 31, 1997, the Company incurred expenses of
$3.4 million in research and development fees, $1.6 million in general and
administrative expenses and $40,520 in net interest expenses resulting in a loss
of $5.0 million for the period from inception to March 31, 1997. For the three
months ended March 31, 1996, the Company incurred
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$18,786 in general and administrative expenses and $3,142 in interest expense,
resulting in a loss of $21,928. For the three months ended March 31, 1997, the
Company incurred expenses of $1.6 million in research and development fees and
$793,344 in general and administrative expenses and received $1,372 in net
interest income, resulting in a loss of $2.4 million.
Concurrently with the Merger, the Company incurred significant non-recurring
charges to operations that have been recorded as expenses during the quarter
ended March 31, 1997. In particular, the Company incurred (i) a $1.5 million
expense for research and development fees and (ii) a $570,000 charge relating
to the issuance of warrants to a certain director and former officer. The $1.5
million research and development fees will be used by Edenland, Inc., a related
party, as funding to continue the development of the Company's second drug
candidate, REVERSIONEX.
The Company has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next few years as it
increases expenditures on research and development and begins to allocate
significant and increasing resources to its clinical testing and other
activities. In addition, during the next few years, the Company will have to
meet the substantial new challenge of developing the capability to market
products. Accordingly, the Company's activities to date are not as broad in
depth or scope as the activities it must undertake in the future, and the
Company's historical operations and financial information are not indicative of
the Company's future operating results or financial condition or its ability to
operate profitably as a commercial enterprise when and if it succeeds in
bringing any drug candidate to market.
On February 6, 1997, as part of an employment agreement, the Company granted a
non-statutory stock option to its newly elected President, Terren S. Peizer, to
purchase 2,400,000 shares of Company Common Stock at a price of $5.00 per
share. This stock option vests ratably over a six-year period. The compensation
expense charge is being calculated at fair value.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception through the sale of
shares of Common Stock and with loans from the Company's founder, Richard B.
Hollis. At December 31, 1994, amounts borrowed from Mr. Hollis totaled $210,000
and were evidenced by an unsecured promissory note bearing interest at the rate
of 15% per annum. During the year ended December 31, 1995, Mr. Hollis advanced
the Company an additional $40,000 for the Company's license fee obligations and
also loaned $73,040 to pay business expenses of the Company. As a result of
these transactions, at December 31, 1995, the Company owed Mr. Hollis $323,040
plus accrued interest of $44,482, or a total of $367,522 (the "Hollis Debt").
In January 1996, the Company borrowed $367,522 from a group of private
investors, including the brother of Mr. Hollis (the "Bridge Lenders"). The
Company repaid the Hollis Debt from these proceeds.
During the year ended December 31, 1995, the Company received cash proceeds of
$250,000 from the sale of its securities. In May 1996, the Company completed a
private placement of shares of Common Stock, from which it received aggregate
gross proceeds of $1.3 million. Concurrent with the closing of such private
placement, the notes held by the Bridge Lenders were converted into 164,962
shares of Common Stock. In March, 1997, the Merger of IAC and Hollis-Eden
provided the Company with of $6.5 million in cash and other receivables.
Under agreements with Dr. Patrick T. Prendergast, Colthurst Limited and
Edenland, the Company is obligated to pay certain minimum license fees to
maintain its rights to its drug candidates. Under
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these licensing agreements, the Company is obligated to pay $600,000 by April
28, 1998. The $600,000 is a minimum fee payable by way of a five percent
payment of the first $12.0 million of net proceeds or funds or investments
required by or expended on behalf of the Company by way of equity sale,
partnership agreement, loan, or other means. Following payment of the $600,000
fee, the Company is obligated to pay the licensors an aggregate of two and
one-half percent of all such proceeds raised through April 28, 1998. An annual
renewal license fee of $500,000 is due when one of the following events occur:
the Company raises a predetermined amount of capital occurring after May 18,
1994; the Company sublicenses the technology received under the Colthurst
license agreement; the Company generates sales; the Company licenses or funds
new technologies not covered under the existing agreements; or a predetermined
date in the future. An additional monthly license fee of $10,000 per month was
paid beginning November 5, 1996 through the effective date of the Merger.
Under an existing Research, Development, and Option Agreement with Edenland and
Dr. Patrick T. Prendergast, the Company is committed to pay $3.0 million for
the development costs related to REVERSIONEX, the Company's second drug
candidate. An amount of $1.5 million was recorded as a charge to operations
upon the closing of the Merger and was paid in April 1997. The balance is due
upon future funding events until the $3.0 million has been paid in full. In
addition, Company has agreed to commit at least thirty percent of its annual
research and development budget up to a maximum of $50.0 million during the
term of the agreement, but at least a minimum of $2.0 million and a maximum of
$10.0 million for any given calendar year, to pay development costs for
REVERSIONEX or any new product developed under the agreement. In addition,
payments made towards the $3.0 million development costs are deductible from
the amounts due for the $2.0 million per year of research.
The Company's operations to date have consumed substantial capital without
generating any revenues, and the Company will continue to require substantial
and increasing amounts of funds to conduct necessary research and development
and preclinical and clinical testing of its drug candidates, and to market any
drug candidates that receive regulatory approval. The Company does not expect
to generate revenue from operations for the foreseeable future, and the
Company's ability to meet its cash obligations as they become due and payable
is expected to depend for at least the next several years on its ability to
sell securities, borrow funds or some combination thereof. Based upon its
current plans, the Company's management believes that its existing capitol
resources, together with interest thereon, will be sufficient to meet the
Company's operating expenses and capital requirements through mid-1998. There
can be no assurance, however, that changes in the Company's research and
development plans or other events affecting the Company's operating expenses
will not result in the expenditure of such cash before that time. No assurance
can be given that the Company will be successful in raising necessary funds.
The Company's future capital requirements will depend upon many factors,
including progress with preclinical testing and clinical trials, the number and
breadth of the Company's programs, the time and costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, the ability of the
Company to establish collaborative arrangements and effective commercialization
and marketing activities and other arrangements. In any event, the Company will
continue to incur increasing negative cash flows and net losses for the
foreseeable future.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
In March 1997, in connection with the merger of Hollis-Eden with and
into the Company pursuant to which the Company changed its name from
Initial Acquisition Corp. to Hollis-Eden Pharmaceuticals, Inc., the
Company received stockholder approval to amend the Company's
Certificate of Incorporation and Bylaws in certain respects as
described in Item 4.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of stockholders was held on March 26, 1997. At this
meeting the Company solicited the vote of the stockholders on the
proposals set forth below and received for each proposal the votes
indicated below:
(1) To approve and adopt the Merger Agreement providing for, among
other things, (a) the Merger of Hollis-Eden with and into the
Company, with the Company being the surviving corporation to the
Merger and the Hollis-Eden Certificate of Incorporation and
Bylaws in effect immediately prior to the effectiveness of the
Merger becoming the charter and bylaws of the Company, and (b)
the issuance to the stockholders of Hollis-Eden and to the
holders of warrants and options to acquire Hollis-Eden capital
stock as a result of the Merger of (i) an aggregate of 4,911,004
shares of common stock, $.01 par value per share, of the Company
("Company Common Stock"), (ii) warrants to purchase an aggregate
of 1,501,603 shares of Company Common Stock upon the same terms
as Hollis-Eden warrants outstanding at the time of the Merger
and (iii) options to purchase an aggregate of 3,178,047 shares
of Company Common Stock upon the same terms as Hollis-Eden
options outstanding at the time of the Merger, in exchange for
all of the issued and outstanding capital stock of Hollis-Eden;
(2) To elect seven directors to hold office effective upon the
consummation of the Merger; and
(3) To approve and adopt the Company's 1997 Incentive Stock Option
Plan.
For each of the proposals presented to the stockholders for their
approval under subparagraphs (1) through (3) above, the results of
voting were: 598,437 shares for, 0 against and 0 abstentions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
10.1 Amendment to Employment Agreement, by and between Hollis-Eden
Pharmaceuticals, Inc. and Terren S. Peizer, dated April 1, 1997.
27.1 Financial Data Schedule (filed electronically only).
The Company filed the following report on Form 8-K during the quarter:
On April 10, 1997, a report on Form 8-K dated March 26, 1997 was filed with the
Securities and Exchange Commission announcing the merger of Hollis-Eden, Inc.
with and into Initial Acquisition Corp. Upon the consummation of the merger,
IAC, the surviving corporation, changed its name to Hollis-Eden
Pharmaceuticals, Inc. A new Board of Directors consisting of seven persons was
elected by the stockholders of IAC as contemplated by the Merger Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HOLLIS-EDEN PHARMACEUTICALS, INC.
Dated: May 14, 1997 By: /s/ Robert W. Weber
------------------------------
Robert W. Weber
Vice President-Controller
(Principal Financial Officer)
14
<PAGE> 15
INDEX TO EXHIBITS
10.1 AMENDMENT TO EMPLOYMENT AGREEMENT, BY AND BETWEEN HOLLIS-EDEN
PHARMACEUTICALS, INC. AND TERREN S. PEIZER, DATED APRIL 1, 1997.
27.1 FINANCIAL DATA SCHEDULE (FILED ELECTRONICALLY ONLY).
15
<PAGE> 1
EXHIBIT 10.1
AMENDMENT
TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement (the "Agreement") is made and entered
into effective as of April 1, 1997, by and between Hollis-Eden Pharmaceuticals,
Inc., a Delaware corporation (the "Company"), and Terren S. Peizer
("Executive"). The Company and Executive are hereinafter collectively referred
to as the "Parties", and may individually be referred to as a "Party".
RECITALS
A. The Company and Executive are parties to an Employment Agreement made and
entered into effective as of February 6, 1997 (the "Employment Agreement"),
which Employment Agreement remains in full force and effect.
B. In recognition of the results of Executive's efforts in connection with the
Company's recently completed merger, the Company wished to modify certain
provisions of the Employment Agreement, as provided below.
C. The following modifications to the Employment Agreement have been presented
to the Company's Board of Directors for review and have been approved.
AGREEMENT
In consideration of the foregoing premises and the mutual covenants contained
herein and in the Employment Agreement, and for other good and valuable
consideration, the Parties, intending to be legally bound, agree as follows.
1. COMPENSATION OF EXECUTIVE
The minimum salary to be paid to Executive for services rendered under the
Employment Agreement shall be increased as of the date of this Amendment to an
amount equal to the minimum salary paid by the Company to its Chairman and
Chief Executive Officer. Executive's minimum salary shall remain equal to the
amount paid by the Company to its Chairman and CEO for so long as Executive is
employed by the Company.
2. VESTING OF OPTIONS UPON TERMINATION WITHOUT CAUSE
If the Company shall terminate Executive's employment without cause in
accordance with the provisions of the Employment Agreement, Executive shall be
entitled to immediate vesting of all unvested stock options granted to him
pursuant to Section 3.6 of the Employment Agreement and the stock option
agreement entered into by the Parties with respect thereto (the "Stock Option
Agreement"). The expiration date of such fully vested options shall remain as
stated in the Employment Agreement and the Stock Option Agreement.
16
<PAGE> 2
3. REQUIREMENT OF BOARD APPROVAL FOR TERMINATION
Executive's employment with the Company may not be terminated unless a majority
of the Company's Board of Directors have voted in favor of such termination at
a meeting of the Board of Directors duly called and noticed.
4. AMENDMENT TO CONTROL
With respect to any and all provisions of the Employment Agreement which are
not addressed by this Amendment, the Employment Agreement shall remain in full
force and effect. With respect to any and all provisions of the Employment
Agreement which are modified by or which otherwise conflict with the provisions
of this Amendment, the Employment Agreement shall be superseded, and the
provisions of the Amendment shall control.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
The Company:
Hollis-Eden Pharmaceuticals, Inc.
By: /s/ Richard B. Hollis
-------------------------------
Richard B. Hollis, Chairman and
Chief Executive Officer
Executive:
/s/ Terren S. Peizer
------------------------------
Terren S. Peizer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTH PERIOD ENDED MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 6,469,105
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,533,988
<PP&E> 7,001
<DEPRECIATION> 848
<TOTAL-ASSETS> 6,540,141
<CURRENT-LIABILITIES> 2,631,170
<BONDS> 0
0
0
<COMMON> 57,944
<OTHER-SE> 3,851,027
<TOTAL-LIABILITY-AND-EQUITY> 3,908,971
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 2,367,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,365,652)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,365,652)
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<EXTRAORDINARY> 0
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<NET-INCOME> (2,365,652)
<EPS-PRIMARY> (0.48)
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