<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark one)
Quarterly Report Under Section 13 or 15(d)
[X] Of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1997
Transition Report Pursuant to Section 13 or 15(d)
[ ] of the Securities Exchange Act of 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)
000-24672 13-3197002
(Commission File No.) (I.R.S. Employer Identification No.)
9333 GENESEE AVENUE, SUITE 110
SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (619) 587-9333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of October 31, 1997 there were 6,702,618 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 SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
No.
-----
<S> <C>
PART I Financial Information
Item 1 Financial Statements 3
Balance Sheet -
September 30, 1997 and December 31, 1996 3
Statement of Operations -
Three-Month and Nine-Month Periods Ended September 30, 1996 and
1997 and Period August 15, 1994 to September 30, 1997 4
Statement of Stockholders' Equity -
Three-Month and Nine-Month Periods Ended September 30, 1997 5
Statements of Cash Flows -
Nine-Month Periods Ended September 30, 1996 and 1997 and Period
August 15, 1994 to September 30, 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
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOLLIS EDEN PHARMACEUTICALS, INC.
(a corporation in the developing stage)
BALANCE SHEET
<TABLE>
<CAPTION>
September 30, 1997 December 31,
(unaudited) 1996
------------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,406,988 $ 17,914
Prepaid expenses 12,034 116,885
Prepaid insurance 81,802 --
Deposits 9,163 100,000
Other receivable - tax refund 105,436 --
Other receivable from related party 46,679 --
------------ ------------
Total current assets 7,662,102 234,799
Property and equipment, net of accumulated
depreciation of $2,404 and $594 51,375 6,407
------------ ------------
Total assets $ 7,713,477 $ 241,206
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 153,677 $ 210,894
Wages payable -- 96,771
Income taxes payable -- --
License fees payable to related party -- 499,700
R & D fees payable to related party -- --
------------ ------------
Total liabilities 153,677 807,365
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; 6,702,618 and
4,911,004 shares issued and outstanding 67,027 491
Paid-in capital 16,154,316 2,074,307
Deferred compensation - stock options, net of
accumulated amortization of $205,000 (1,643,000) --
Deficit accumulated during development stage (7,018,543) (2,640,957)
------------ ------------
Total stockholders' equity (deficit) 7,559,800 (566,159)
Total liabilities and stockholders' equity $ 7,713,477 $ 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 ended 3 months ended 9 months ended 9 months ended inception
September 30, September 30, September 30, September 30, (August 15, 1994) to
1996 1997 1996 1997 September 30, 1997
----------- ----------- ----------- ----------- --------------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Research and development $ 22,203 $ 109,378 $ 124,706 $ 3,006,319 $ 4,820,357
General and administrative 134,350 433,805 345,616 1,665,153 2,450,180
----------- ----------- ----------- ----------- -----------
Total operating expenses 156,553 543,183 470,322 4,671,472 7,270,537
Other income (expense):
Interest income 3,208 100,844 3,208 188,649 194,381
Interest expense -- -- (3,142) (199) (47,823)
----------- ----------- ----------- ----------- -----------
Total other income (expense) 3,208 100,844 66 188,450 146,558
Earnings before income taxes (153,345) (442,339) (470,256) (4,483,022) (7,123,979)
Income taxes -- -- -- 105,436 105,436
Net loss $ (153,345) $ (442,339) $ (470,256) $(4,377,586) $(7,018,543)
=========== =========== =========== =========== ===========
Net loss per share $ (0.03) $ (0.07) $ (0.10) $ (0.73)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 4,911,004 6,702,613 4,573,199 6,020,778
</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 Deferred development
Shares Amount par value compensation stage Total
--------- ----------- ----------- ------------ ----------- -----------
<S> <C> <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 a 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
--------- ----------- ----------- ----------- ----------- -----------
Exercise of warrants, net of expenses 908,365 9,083 5,448,680 -- -- 5,457,763
Deferred compensation - stock options -- -- 1,848,000 (1,848,000) -- --
Amortization of deferred compensation -- -- -- 128,000 -- 128,000
Net loss -- -- -- -- (1,569,595) (1,569,595)
--------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 6,702,619 $ 67,027 $16,154,316 $(1,720,000) $(6,576,204) $ 7,925,139
--------- ----------- ----------- ----------- ----------- -----------
Amortization of deferred compensation -- -- -- 77,000 -- 77,000
Net Loss -- -- -- -- (442,339) (442,339)
--------- ----------- ----------- ----------- ----------- -----------
Balance at September 30, 1997 6,702,619 $ 67,027 $16,154,316 $(1,643,000) $(7,018,543) $ 7,559,800
--------- ----------- ----------- ----------- ----------- -----------
</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
9 months ended 9 months ended inception
September 30, September 30, (August 15, 1994) to
1996 1997 September 30, 1997
------------ ------------ ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (470,256) $ (4,377,586) $ (7,018,543)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 339 1,810 2,404
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 -- 33,962
Expense related to options issued as
consideration to consultants -- 6,018 12,035
Expense related to warrants issued to a
director for successful closure of merger -- 570,000 570,000
Deferred compensation expense related
to options issued -- 205,000 205,000
Changes in assets and liabilities:
Prepaid expenses (19,572) 98,833 --
Prepaid insurance -- (81,802) (81,802)
Deposits -- 90,837 (9,163)
Other receivable - tax refund -- (105,436) (105,436)
Other receivable from related party -- (46,679) (46,679)
Accounts payable and accrued expenses (189,134) (57,217) 153,677
Wages payable 59,478 (96,771) --
Accounts payable to related party (73,040) -- --
License fees payable to related party (418,300) (499,700) --
R & D fees payable to related party -- -- --
Accrued interest expense (44,482) -- --
Income taxes payable -- -- --
------------ ------------ ------------
Net cash used by operating activities (1,121,005) (4,292,693) (6,252,005)
Cash flow provided by investing activities:
Purchase of property and equipment (7,001) (46,778) (53,779)
------------ ------------ ------------
Net cash used by investing activities (7,001) (46,778) (53,779)
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 1,234,499 -- 1,509,499
Proceeds from issuance of debt 371,164 -- 371,164
Net proceeds from recapitalization -- 6,270,782 6,270,782
Net proceeds from warrants exercised -- 5,457,763 5,457,763
------------ ------------ ------------
Net cash from financing activities 1,355,663 11,728,545 13,712,772
Net increase in cash 227,657 7,389,074 7,406,988
Cash at beginning of period -- 17,914 --
------------ ------------ ------------
Cash at end of period $ 227,657 $ 7,406,988 $ 7,406,988
============ ============ ============
</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 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 of Hollis-Eden and
IAC was treated as a recapitalization of Hollis-Eden. Since IAC has had no
business operations other than the
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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 transaction 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 represent
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 on the date of the
Merger. 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. A total
of 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 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
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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). 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.
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.
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4. NOTICE OF REDEMPTION AND EXERCISE OF WARRANTS
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 incurred
approximately $42,000 in transaction costs associated with the exercise and
redemption of the warrants which was recorded against equity.
A director and former officer exercised warrants to purchase 50,000 shares of
Company Common Stock at an exercise price of $0.10 per share.
5. NET LOSS PER SHARE
The weighted average shares outstanding used in the calculation of net loss per
share includes the effect of the Merger and the exercise of Warrants. The common
stock equivalents have been excluded from the calculations because they have the
effect of reducing the net loss per share.
6. R & D EXPENSES
Concurrently with the Merger and the exercise of Warrants, the Company incurred
a $1.5 million and a $1.2 million expense, respectively, 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.
7. TRADING SYMBOL CHANGE
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 and 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 September 30, 1997, had an
accumulated deficit of $7.0 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 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 Company engaged an
independent appraiser to prepare several financial and valuation analyses to
estimate the fair value for accounting purposes. The appraiser estimated the
intrinsic value of the options to be $1,848,000. As a result, the Company has
recorded as deferred
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compensation a non-cash charge of $1,848,000, which will be amortized ratably
over the six-year vesting period. For the nine-month period ending September 30,
the Company has amortized a total of $205,000.
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 September 30, 1997. The Company has devoted
substantially all its resources to the payment of licensing fees and research
and development fees plus expenses related to the startup of its business. From
inception until September 30, 1997, the Company incurred expenses of
approximately $4.8 million in research and development fees, $2.5 million in
general and administrative expenses, and $300,000 in net interest income and tax
refunds, resulting in a loss of $7.0 million for the period.
Research and development expenses increased to $109,000 from $22,000 and
increased to $3.0 million from $125,000 for the three- and nine-month periods
ended September 30, 1997, respectively, as compared to the same periods in 1996.
A substantial portion of the research and development expenses have been
incurred since the completion of the Merger on March 26, 1997 as described
below.
General and administrative expenses increased to $434,000 from $134,000 and
increased to $1.7 million from $346,000 for the three- and nine-month periods
ended September 30, 1997, respectively, as compared to the same periods in 1996.
These increases are due primarily to (i) the non-cash charges for the issuance
of warrants to a certain director (described below), (ii) the amortization of
the unearned compensation charge of Mr. Peizer's stock options (described
above), and (iii) increased expenses as a public company such as legal fees,
filing fees, and directors and officers insurance.
Upon the completion of the Merger and the exercise of warrants, the Company
incurred significant non-recurring charges to operations that have been recorded
as expenses during the quarters ended March 31 and June 30, 1997. In particular,
the Company incurred (i) a $1.5 million and a $1.2 million expense for research
and development fees during the first and second quarters, respectively, and
(ii) a $570,000 non-cash charge relating to the issuance of warrants to a
certain director and former officer during the first quarter. The $2.7 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.
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
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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 $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 these licensing agreements,
the Company is obligated to pay the licensors an aggregate of two and one-half
percent of all such proceeds raised hereafter 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; 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. As of
September 30, 1997, the Company is current for all license fee obligations under
these agreements.
Under a 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. An additional $1.2 million was
recorded as a charge to operations upon the exercise of the warrants and was
paid in May 1997. The remaining balance of $300,000 is due upon future funding
events or April 28, 1998, which ever occurs sooner. In addition, the 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 a
minimum of $2.0 million and maximum of $10.0 million for any given calendar
year, to pay development costs for REVERSIONEX or any new product developed
under the agreement. In addition, payments made towards the $3.0 million
development costs are deductible from the amounts due for the $2.0 million per
year of research. Accordingly, with respect to the $2.0 million per year
obligation, assuming only such minimum amounts will be due, no additional amount
will be due in 1997 and only $1.3 million will be due in 1998.
The Company's operations to date have consumed substantial capital without
generating any revenues, and the Company will continue to require substantial
and increasing amounts of funds to conduct necessary research and development
and preclinical and clinical testing of its drug candidates, and to market any
drug candidates that receive regulatory approval. The Company does not expect to
generate revenue from operations for the foreseeable future, and the Company's
ability to meet its cash obligations as they become due and payable is expected
to depend for at least the next several years on its ability to sell securities,
borrow funds or some combination thereof. Based upon its current plans, the
Company's management believes that its existing capital resources, together with
interest thereon, will be sufficient to meet the Company's operating expenses
and capital requirements through the end of 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
13
<PAGE> 14
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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27 Financial Data Schedule (filed electronically only).
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.
November 12, 1997 By: /s/ Robert W. Weber
-----------------------------------
Robert W. Weber
Vice President-Controller
(Principal Financial Officer)
INDEX TO EXHIBITS
14
<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 NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,406,988
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,662,102
<PP&E> 53,779
<DEPRECIATION> 2,404
<TOTAL-ASSETS> 7,713,477
<CURRENT-LIABILITIES> 153,677
<BONDS> 0
0
0
<COMMON> 67,027
<OTHER-SE> 7,492,773
<TOTAL-LIABILITY-AND-EQUITY> 7,713,477
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,671,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 199
<INCOME-PRETAX> (4,483,022)
<INCOME-TAX> (105,436)
<INCOME-CONTINUING> (4,377,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,377,586)
<EPS-PRIMARY> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
