-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TBgWyhKyCVRl6LD7KaO+aCg9EwEZtPxO8t1ELCNWvL2L6j+wfTrmnz2QRC6CfynY OxtGosOVDiibsmAH03IWlA== 0000936392-97-001502.txt : 19971113 0000936392-97-001502.hdr.sgml : 19971113 ACCESSION NUMBER: 0000936392-97-001502 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLLIS EDEN PHARMACEUTICALS INC /DE/ CENTRAL INDEX KEY: 0000899394 STANDARD INDUSTRIAL CLASSIFICATION: BLANK CHECKS [6770] IRS NUMBER: 133197002 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24672 FILM NUMBER: 97716009 BUSINESS ADDRESS: STREET 1: 808 SW THIRD AVENUE STREET 2: SUITE 540 CITY: PORTLAND STATE: OR ZIP: 97204 BUSINESS PHONE: (503) 226-1277 MAIL ADDRESS: STREET 1: 810 SEVENTH AVE STREET 2: 27TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: INITIAL ACQUISITION CORP DATE OF NAME CHANGE: 19930329 10-Q 1 FORM 10-Q 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. 1 2 HOLLIS-EDEN PHARMACEUTICALS, INC. (a corporation in the development stage) Form 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997 INDEX
Page No. ----- 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
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HOLLIS EDEN PHARMACEUTICALS, INC. (a corporation in the developing stage) BALANCE SHEET
September 30, 1997 December 31, (unaudited) 1996 ------------------ ------------ 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 ============ ============
See accompanying notes to unaudited financial statements 3 4 HOLLIS-EDEN PHARMACEUTICALS, INC. (a corporation in the development stage) STATEMENTS OF OPERATIONS (Unaudited)
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 ----------- ----------- ----------- ----------- -------------------- 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
See accompanying noted to unaudited financial statements 4 5 HOLLIS-EDEN PHARMACEUTICALS, INC. (a corporation in the development stage) STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Deficit Common stock accumulated at par value Capital in during ----------------------- excess of Deferred development Shares Amount par value compensation stage Total --------- ----------- ----------- ------------ ----------- ----------- 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 --------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to unaudited financial statements 5 6 HOLLIS-EDEN PHARMACEUTICALS, INC. (a corporation in the development stage) STATEMENTS OF CASH FLOWS (Unaudited)
Period from 9 months ended 9 months ended inception September 30, September 30, (August 15, 1994) to 1996 1997 September 30, 1997 ------------ ------------ --------------------- 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 ============ ============ ============
See accompanying notes to unaudited financial statements 6 7 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 7 8 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 8 9 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. 9 10 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. 10 11 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 11 12 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 12 13 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 9-MOS DEC-31-1996 JAN-01-1997 SEP-30-1997 7,406,988 0 0 0 0 7,662,102 53,779 2,404 7,713,477 153,677 0 0 0 67,027 7,492,773 7,713,477 0 0 0 4,671,472 0 0 199 (4,483,022) (105,436) (4,377,586) 0 0 0 (4,377,586) (0.73) (0.73)
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