SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended MARCH 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-11572
Endorex Corp.
(Exact name of registrant as specified in its charter)
Delaware 41-1505029
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
900 North Shore Drive, Lake Bluff, IL 60044
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (847) 604-7555
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15 (d) of the Securities Exchange Act during the past
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
At May 2, 1996, 16,318,870 shares or the registrant's common stock
(par value, $.001 per share) were outstanding.
<PAGE>
<TABLE>
PART I.
ITEM 1 - FINANCIAL STATEMENTS
ENDOREX CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
March 31,
1997
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 298,077
Prepaid expenses 81,855
------------
TOTAL CURRENT ASSETS 379,932
Leasehold improvements and equipment, net of
accumulated depreciation of $884,736. 107,853
Patent issuance costs, net of accumulated
amortization of $32,202 209,061
------------
TOTAL ASSETS $ 696,846
============
<F/N>
See accompanying condensed notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
Current liabilities:
Accounts payable and accrued expenses $ 165,294
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value.
Authorized 100,000 shares;
none issued and outstanding --
Common stock, $0.001 par value.
Authorized 50,000,000 shares;
issued 18,098,498, outstanding 16,318,870 18,099
Additional paid-in capital 11,766,202
(Deficit) accumulated during development stage (10,808,999)
------------
965,802
Less:
Treasury Stock, at cost, 1,779,628 shares (443,750)
------------
TOTAL STOCKHOLDERS' EQUITY 522,052
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 696,846
============
<F/N>
See accompanying condensed notes to financial statements
</TABLE>
<PAGE>
<TABLE>
ENDOREX CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Cumulative from
February 15, 1985
Three Months Ended March 31, (date of inception)
1997 1996 to March 31, 1997
<S> <C> <C> <C>
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract
research and
development -- -- 86,168
Proprietary research
and development 382,376 242,069 8,431,461
General and
administrative 214,891 66,772 3,181,148
----------- ------------ -------------
Total operating expenses 597,267 308,841 11,698,777
----------- ------------ -------------
(Loss) from operations (597,267) (308,841) (11,598,777)
Other income -- -- 1,512
Interest income 7,948 10,080 828,904
Interest expense -- -- (40,638)
----------- ------------ -------------
Net loss $ (589,319) $ (298,761) $(10,808,999)
=========== ============ =============
Net loss per share $ (0.04) $ (0.05)
Weighted average
common shares
outstanding 16,307,111 6,039,559
</TABLE>
<F/N>
See accompanying condensed notes to financial statements
<PAGE>
<TABLE>
ENDOREX CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Cumulative from
Three months February 15, 1985
ended March 31, (date of inception)
1997 1996 to March 31, 1997
<S> <C> <C> <C>
Net cash used in operating
activities $ (569,442) $ (273,298) $ (8,946,896)
----------- ----------- -------------
INVESTING ACTIVITIES:
Patent issuance cost (9,526) (9,865) (342,269)
Organizational costs
incurred -- -- (135)
Deposit on leasehold
improvements -- -- (5,000)
Purchase of leasehold
improvements -- -- (414,671)
Purchases of office
and lab equipment (30,270) (1,580) (584,069)
Proceeds from assets
sold -- -- 1,000
----------- ----------- -------------
Net cash used in
investing activities (39,796) (11,445) (1,345,144)
----------- ----------- -------------
FINANCING ACTIVITIES:
Net proceeds from
issuance of common
stock 1,408 108,334 10,921,284
Proceeds from exercise
of options -- -- 134,236
Proceeds from borrowings
from President -- -- 41,433
Repayment of borrowings
from President -- -- (41,433)
Proceeds from borrowings
under line of credit -- -- 300,000
Repayment of borrowings
under line of credit -- -- (300,000)
Proceeds from note
payable to bank -- -- 150,000
Payments on note
payable to bank -- -- (150,000)
Proceeds from borrowings
from stockholders -- -- 15,867
Repayment of borrowings
from stockholders -- -- (15,867)
Advances from parent
Company -- -- 135,000
Payments to Parent
company -- -- (135,000)
Repayment of long-
term note receivable -- -- 50,315
Repayment of note
payable issued in
exchange for legal
service -- -- (71,968)
Purchase of treasury
stock -- -- (443,750)
----------- ----------- -------------
Net cash provided by
financing activities 1,408 108,334 10,590,117
----------- ----------- -------------
Net increase (decrease)
in cash and cash
equivalents (607,830) (176,409) 298,077
Cash and cash equivalents at
beginning of periods 905,907 1,146,351 --
----------- ----------- -------------
Cash and cash equivalents at
end of periods $ 298,077 $ 969,942 $ 298,077
=========== =========== =============
<F/N>
See accompanying Condensed Notes to Financial Statements
</TABLE>
<PAGE>
ENDOREX CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements included herein
are prepared pursuant to the rules and regulations for reporting on
Form 10-QSB. Accordingly, certain information and footnote disclosures
normally accompanying the annual financial statements have been
omitted. The interim financial statements and notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report on Form 10-KSB. In the
opinion of management, the consolidated financial statements include all
adjustments necessary for a fair statement of the results operations,
financial position and cash flows for the interim periods. All
adjustments were of a normally recurring nature. The results of operations
for interim periods are not necessarily indicative of the results for the
full fiscal year.
On January 31, 1997, the Company changed its fiscal year end from January 31
to December 31. The Transition Period resulting from the change was
reported in the annual report on Form 10-KSB for the period ended
December 31, 1996.
Common stock equivalents are excluded in the computation of primary earnings
per share or the face of the Consolidated Statements of Operations because
the effect would be anti-dilutive. Fully diluted earnings per share are not
disclosed on the face of the Consolidated Statement of Operations because
the effect is anti-dilutive.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company's current level of
research and development activities requires the expenditure of approximately
$200,000 per month. Management of the Company believes that its current cash
resources will not be sufficient to support its operations for the year
ending December 31, 1997. Based on current forecasts, management believes the
Company has sufficient cash to maintain its current level of operations until
May 15, 1997. These conditions raise substantial doubt about the Company's
ability to continue operating as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Management believes that the Company's future success is dependent on the
ability to raise additional capital through a planned private placement. The
private placement is expected to close early in the third quarter of 1997.
Management believes that the proceeds from such private placement may be
sufficient to maintain planned operations into 1998. In addition, the
Company is currently negotiating bridge financing from its majority
shareholders to fund operations until the proceeds from the private
placement are received.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Plan of Operation
The following "Plan of Operation" provides information which management
believes is relevant to an assessment and understanding of the Company's
results of operation and financial condition. The discussion should be
read in conjunction with the Company's unaudited consolidated interim
financial statements and notes thereto and the Company's Annual Report on
Form 10-KSB. This report contains certain statements of a forward-looking
nature relating to future events or the future financial performance of
the Company. Investors are cautioned that such statements
are only predictions and that actual events or results may differ
materially. In evaluating such statements, investors should carefully
consider the various factors identified in this report, which could cause
actual results to differ materially from those indicated from such forward-
looking statements, including those set forth in "Business - Certain
Factors that may Effect Future Results, Financial Condition and the Market
Price of Securities" of the Company's Annual Report on Form 10-KSB.
The Company is a development stage enterprise and expects no significant
revenue from the sale of products for the next twelve months. The Company's
proprietary immunomodulator, ImmTher, has completed some Phase II clinical
trials for cancer with limited response and its immuno-adjuvant, Theramide,
has completed certain Phase I clinical trials for cancer. The Company is
currently evaluating ImmTher for additional human trials as an anti-cancer
agent with at least one major cancer center and new preclinical programs as
an anti-infective agent. For Theramide, the Company is completing preclinical
data for new Phase I trials as an adjuvant for a vaccine program. The
Company's other product candidates are in the preclinical and early
preclinical evaluation stages. The Company has also initiated preclinical
evaluation of at least one new product utilizing its proprietary oral and
mucosal delivery system, and plans to expand, during 1997, an oral vaccine
program and oral therapeutics program. The Company plans to select products
for this program that are only available in injectable form and for which
oral therapy is not available. The Company believes its technology, if
effective, will increase patient compliance and ease of administration of
therapy and is currently evaluating a range of therapies including insulin,
allergens, vaccines and cancer chemotherapy.
On March 31, 1997 and December 31, 1996, the Company had cash and cash
equivalents of $298,077 and $905,907, respectively, and working capital
of $214,638 and $824,821, respectively.
The Company's current level of research and development activities requires
the expenditure of approximately $200,000 per month. Additional expenses
will be incurred in outside expanded clinical trials to accomplish the
necessary data collection and clinical trials required by the FDA for the
commercial production, marketing and distribution of the Company's first
proposed product. Management of the Company believes that its current cash
resources will not be sufficient to support its operations for the year
ending December 31, 1997. The Company's cash resources will not be
sufficient at current levels to permit the Company to complete the clinical
trials of its initial proposed product necessary to obtain any FDA
approvals. Accordingly, the Company may be required to collaborate with
one or more large pharmaceutical companies which will provide the necessary
financing and expertise to obtain regulatory approvals, complete clinical
development, manufacture and market such product. Alternatively, the
Company will be required to seek additional funds from other sources not
now identified. There can be no assurance that the Company will be able to
enter into the collaborative agreements or raise additional capital
necessary to complete its clinical trials, obtain necessary regulatory
approvals, or fully develop or commercialize its proposed product on
acceptable terms. In such event, if the Company was unable to obtain from
alternative sources the substantial financing necessary on acceptable
terms, it would be unable to complete the development or commercialize any
products.
The Company intends, from time to time in the future, to seek to expand its
research and development activities into other technologies and/or products
that it either may license from other persons or develop. There can
be no assurance that the Company will be successful in this regard. Any
such activities may require the expenditure of funds not presently
available to the Company. The Company intends to seek to obtain these
funds from possible future public or private sales of its securities or
other sources. The Company successfully licensed oral delivery technology
from Massachusetts Institute of Technology ("M.I.T.") in December 1996 and
is currently developing such technology through its majority-owned
subsidiary, Orasomal Technologies, Inc. ("Orasomal").
On December 27, 1996, the Company announced its intention to raise
additional funds in a private placement of equity securities to accredited
individuals and institutional investors pursuant to Regulation D under the
Securities Act. It is uncertain whether the Company will be able to
complete the proposed private placement. If the placement reaches the
anticipated offering, management believes the net proceeds, together with
existing capital resources and interest earned on invested funds, may
be sufficient to fund the Company's operations through the end of 1998.
However, the Company may be required to seek additional financing
to continue operations during such period in the event of cost overruns,
unanticipated expenses, a determination to pursue additional research
projects, or failure to receive funds anticipated from other sources. The
Company has no current commitment to obtain other additional funds and is
unable to state the amount or potential source of any other funds.
The Company does not intend to significantly increase employees during the
next twelve months, but will recruit some key personnel to accelerate
preclinical development of products. On April 1, 1997, the Company hired
David G. Franckowiak, CPA, CMA as Controller/Treasurer. Mr. Franckowiak
was previously a manager with a Big Six accounting firm for over ten years.
The Company uses a number of outside consultants skilled in the area of
government regulatory management, clinical trial management, Good
Manufacturing Practices ("GMP") and business development. The Company also
formed a Scientific Advisory Board for Orasomal and in January appointed as
co-chairman Robert Langer, Ph.D., Professor of Biomedical Engineering of
M.I.T. and Henry Brem, M.D., Director of Neurosurgical Oncology at Johns
Hopkins Hospital. Both individuals are recognized leaders in drug delivery
systems. Dr. Langer is a co-inventor of the Orasome(TM) technology currently
under development by the Company and licensed from M.I.T.
<PAGE>
Certain Factors that may Effect Future Results, Financial Condition and the
Market Price of Securities
Need for Substantial Additional Funds -- The Company will require substantial
additional funds to finance its business activities on an ongoing basis. The
Company currently estimates that it will cost at least $10,000,000 to complete
the product development, manufacturing requirements and clinical trials
necessary to allow commercial sale of its macrophage activator product for
cancer treatment and/or infectious diseases, ImmTher, in the United States.
The Company's actual future capital requirements will depend on numerous
factors, including, but not limited to, progress in its research and develop-
ment programs, including preclinical and clinical trials, costs of filing and
prosecuting patent applications and, if necessary, enforcing issued patents or
obtaining additional licenses to patents, competing technological and market
developments, the cost and timing of regulatory approvals, the ability of the
Company to establish collaborative relationships, and the cost of establishing
manufacturing, sales and marketing capabilities. The Company is currently
attempting to raise funds through a proposed private placement (See Plan of
Operations). The Company has no current commitment to obtain other additional
funds and is unable to state the amount or potential source of any other
additional funds.
<PAGE>
Because of the Company's potential long-term capital requirements, it may
undertake additional equity offerings whenever conditions are favorable,
even if it does not have an immediate need for additional capital at that
time. There can be no assurance that the Company will be able to obtain
additional funding when needed, or that such funding, if available, will be
obtainable on reasonable terms. Any such additional funding may result in
significant dilution to existing stockholders. If adequate funds are not
available, the Company may be required to accept unfavorable alternatives,
including (i) the delay, reduction or elimination of research and
development programs, capital expenditures, and marketing and other
operating expenses, (ii) arrangements with collaborative partners that may
require the Company to relinquish material rights to its products that it
would not otherwise relinquish, or (iii) a merger of the Company or a sale
of the Company or its assets. See "History of Losses; Going Concern
Reports, Uncertainty of Future Financial Results."
Early Stage of Development -- The Company's product candidates are in the
early stages of research and development and no revenues have been generated
to date from product sales, nor are any product revenues expected for at least
the next several years, if at all. The Company has completed some Phase I
and Phase II trials of its leading product condidates and other product
candidates are in the preclinical and early preclinical evaluation stages.
As a result, the Company must be evaluated in light of the problems, delays,
uncertainties and complications encountered in connection with early-stage
biopharmaceutical development. The risks include, but are not limited to,
the possibilities that any or all of the Company's potential
products will be found to be ineffective or toxic, or fail to receive
necessary regulatory clearances in the United States or abroad. To achieve
profitable operations, the Company must successfully develop, obtain
regulatory approval for, introduce and successfully market at a profit products
that are currently in the research and development phase. The Company is
currently not profitable, and no assurance can be given that the Company's
research and development efforts will be successful, that required regulatory
approvals will be obtained, that any of the Company's proposed products will be
safe and effective, that any such products, if developed and introduced, will
be successfully marketed or achieve market acceptance, or that such products
can be marketed at prices that will allow profitability to be achieved or
sustained. Failure of the Company to successfully develop, obtain regulatory
approval for, introduce and market its products under development would have a
material adverse effect on the business, financial condition and results of
operations of the Company.
<PAGE>
History of Losses; Going Concern Reports; Uncertainty of Future Financial
Results -- The Company has experienced significant operating losses since
its inception, and expects to incur losses for the next several years. As
of December 31, 1996, the Company's accumulated deficit was $10,219,680.
The Company's independent auditors have included an explanatory paragraph
in their report on the Company's financial statements at December 31, 1996,
which paragraph expresses substantial doubt concerning the Company's
ability to continue as a going concern. The amount of net losses may vary
significantly from year-to-year and quarter-to-quarter and depend on, among
other factors, the success of the Company in securing collaborative
partners and the progress of research and preclinical and clinical
development programs. The Company's ability to attain profitability will
depend, among other things, on its successfully completing development of
its product candidates, obtaining regulatory approvals, establishing
manufacturing, sales and marketing capabilities and obtaining sufficient
funds to finance its activities. There can be no assurance that the
Company will be able to achieve profitability or that profitability, if
achieved, can be sustained.
Limited Experience and Dependence on Third Parties for Completion of
Clinical Trials, Manufacturing and Marketing -- The Company has no
experience with receipt of government approvals or marketing pharmaceutical
products and has limited experience with clinical testing and
manufacturing. The Company may seek to form alliances with established
pharmaceutical companies for the testing, manufacturing and marketing of,
and pursuit of regulatory approval for, its products. There can be no
assurance that the Company will be successful in forming such alliances or
that the Company's partners would devote adequate resources to, and
successfully market, the Company's products. If the Company instead
performs such tasks itself, it will be required to develop expertise
internally or contract with third parties to perform these tasks. This
will place increased demands on the Company's resources, requiring the
addition of new management personnel and the development of additional
expertise by existing management personnel. The failure to acquire such
services or to develop such expertise could materially adversely affect
prospects for the Company's success. All of the Company's scientific and
clinical advisors are employed by others and may have commitments to or
consulting or advisory contracts with other entities that may limit their
availability to the Company.
Reliance on Patents and Other Proprietary Rights -- The pharmaceutical
industry places considerable importance on obtaining patent and trade
secret protection for new technologies, products and processes. The
Company's success will depend, in part, on its ability to enjoy or obtain
protection for its products and technologies under United States and
foreign patent laws and other intellectual property laws, to preserve its
trade secrets and to operate without infringing the proprietary rights of
third parties. There can be no assurance that the research conducted by or
on behalf of the Company will result in any patentable technology or
products. Even if patents are obtainable, the procedure for obtaining
patents is expensive, time consuming and can be subject to lengthy
litigation. Moreover, it is possible, with respect to some patentable
items, that the Company may conclude that better protection would be
afforded by not seeking patents. Although the Company has endeavored and
will continue to endeavor to prevent disclosure of any confidential
information by adopting a policy to bind its scientific advisors and
scientific and management employees and consultants by confidentiality
agreements, there can be no assurance that such information will not be
wrongfully disclosed. Any such disclosure would likely have an adverse
effect on the Company. The Company currently has two patents issued and
four patent applications pending in the United States and foreign
countries. Although the Company intends to apply for additional patents,
there can be no assurance that the Company will obtain patents either under
the pending applications or any future applications or that any of its
existing or any future patent will provide effective protection against
competitive products. If patent or other proprietary rights cannot be
obtained and maintained by the Company, its products may face significantly
increased competition.
<PAGE>
The application of patent law to the area of biotechnology is relatively
new and has resulted in considerable litigation. The ability of the
Company to obtain patents, licenses and similar rights and the nature,
extent and enforceability of the intellectual property rights, if any, that
are obtained as a result of its research programs involve complex legal and
factual issues. The issues are more significant with respect to any
product based upon natural substances, for which available patent
protection may be limited due to the prior use or reported utility of such
products (or their natural sources) to treat various disorders or diseases.
There can be no assurance as to the degree of protection that proprietary
rights, when and if established, will afford the Company. To the extent
that the Company relies on trade secret protection and confidentiality
agreements to protect technology, there can be no assurance that others
will not independently develop similar technology, or otherwise obtain
access to the Company's findings or research materials embodying those
findings.
There is also a substantial risk in the rapidly developing biotechnology
industry that patents and other intellectual property rights held by the
Company could be infringed by others or that products developed by the
Company or their method of manufacture could be covered by patents owned by
other companies. To the extent that any infringement should occur with
respect to any patents issued to the Company or licenses granted to the
Company, or if the Company is alleged to have infringed on patents or
licenses held by others, the Company could be faced with the expensive
prospect of litigating such claims; if the Company were to have
insufficient funds on hand to finance its litigation, it might be forced to
negotiate a license with such other parties or to otherwise resolve such a
dispute on terms less favorable to the Company than could result from
successful litigation.
Uncertainty of Clinical Trials and Results -- The results of clinical trial
and preclinical testing discussed in this Term Sheet for the Company's
products are subject to varying interpretations. Furthermore, studies
conducted with alternative designs or on alternative populations could
produce results that vary from those discussed in this Term Sheet.
Therefore, there can be no assurance that the results discussed in this
Term Sheet or the Company's interpretation of them will be accepted by
governmental regulators or the medical community. Even if the development
of the Company's products in the preclinical phase advances to the clinical
stage, there can be no assurance that they will prove to be safe and
effective. The products that are successfully developed, if any, will be
subject to requisite regulatory approval prior to their commercial sale,
and the approval, if obtainable, may take several years. Generally, only a
very small percentage of the number of new pharmaceutical products
initially developed is approved for sale. Even if they are approved for
sale, there can be no assurance that they will be commercially successful.
The Company may encounter unanticipated problems relating to development,
manufacturing, distribution and marketing, some of which may be beyond the
Company's financial and technical capacity to solve. The failure to
address such problems adequately could have a material adverse effect on
the Company's business, financial condition or results of operations. No
assurance can be given that the Company will succeed in the development
and marketing of any new drug products, or that they will not be rendered
obsolete by products of competitors.
<PAGE>
Uncertainty of Health Care Reform Measures -- Federal, state and local
officials and legislators (and certain foreign government officials and
legislators) have proposed or are reportedly considering proposing a
variety of reforms to the health care systems in the United States and
abroad. The Company cannot predict what health care reform legislation, if
any, will be enacted in the United States or elsewhere. Significant
changes in the health care system in the United States or elsewhere are
likely to have a substantial impact over time on the manner in which the
Company conducts its business. Such proposals and changes could have a
material adverse effect on the Company's ability to raise capital.
Furthermore, the Company's ability to commercialize its potential products
may be adversely affected to the extent that such proposals have a material
adverse effect on the business, financial condition and profitability of
other companies that are prospective corporate partners with respect to
certain of the Company's proposed products.
Uncertain Extent of Price Flexibility and Third-Party Reimbursement -- The
Company's ability to commercialize its products successfully will depend in
part on the extent to which appropriate reimbursement levels for the cost
of such products and related treatment are obtained from government
authorities, private health insurers and other organizations, such as
health maintenance organizations ("HMOs"). Third party payers are
increasingly challenging the prices charged for medical products
and services. Also, the trend towards managed health care in the United
States and the concurrent growth of organizations such as HMOs, which could
control or significantly influence the purchase of health care services and
products, as well as legislative proposals to reduce government insurance
programs, may all result in lower prices for the Company's products. The
cost containment measures that health care providers are instituting could
affect the Company's ability to sell its products and may have a material
adverse effect on the Company.
Government Regulation; Need for FDA and Other Regulatory Approval -- Prior
to marketing, each of the Company's products must undergo an extensive
regulatory approval process conducted by the FDA and applicable agencies in
other countries. The process, which focuses on safety and efficacy and
includes a review by the FDA of preclinical testing and clinical trials and
investigating as to whether good laboratory and clinical practices were
maintained during testing, takes many years and requires the expenditure of
substantial resources. The Company is, and will be dependent on the
external laboratories and medical institutions conducting its preclinical
testing and clinical trials to maintain both good laboratory practices
established by the FDA and good clinical practices. Data obtained from
preclinical and clinical testing are subject to varying interpretations
which could delay, limit or prevent regulatory approval. In addition,
delays or rejection may be encountered based upon changes in FDA policy for
drug approval during the period of development and by the requirement
for regulatory review of each submitted Product License Approval or New
Drug Application. There can be no assurance that, even after such time and
expenditures, regulatory approval will be obtained for any of the Company's
product candidates. Moreover, such approval may entail significant
limitations on the indicated uses for which a drug may be marketed. Even
if such regulatory approval is obtained, a marketed therapeutic product and
its manufacturer are subject to continual regulatory review, and later
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on such product or manufacturing, including
withdrawal of such product from the market. Change in the manufacturing
procedures used by the Company for any of the Company's approved drugs are
subject to FDA review, which could have an adverse effect upon the
Company's ability to continue the commercialization or sale of a drug. The
process of obtaining FDA and foreign regulatory approval is costly and time
consuming, and there can be no assurance that any product that
the Company may develop will be deemed to be safe and effective by the FDA.
The Company will not be permitted to market any product it may develop in
any jurisdiction in which the product does not receive regulatory approval.
<PAGE>
Competition; Technological Change -- There is substantial competition in the
pharmaceutical field in general and in vaccine development and lyposomal
formulation in particular. The Company's competitors include companies
with financial resources, and licensing, research and development staffs
and facilities substantially greater than those of the Company.
Competitors in the vaccine development field include major pharmaceutical
companies, specialized biotechnology firms, universities and governmental
agencies, including American Home Products, the Merck Company, SmithKline
Beecham, MedImmune, Aviron and Chiron. Competitors in the liposomal
formulation field include The Liposome Company, NexStar and Sequus. Many
competitors have greater experience than the Company in undertaking
preclinical testing and clinical trials and obtaining FDA and other
regulatory approvals. There can be no assurance that the Company's
competitors will not succeed in developing similar technologies and
products more rapidly than the Company and that these technologies and
products will not be more effective than any of those that are being or
will be developed by the Company, or that such competitors' technologies
and products will not render the Company's technologies and products
obsolete or noncompetitive.
Manufacturing and Marketing Capabilities -- The Company does not now have
and probably will not have in the foreseeable future, the resources to
manufacture or directly market on a large commercial scale any products
which it may develop. In connection with the Company's research and
development activities, it will seek to enter into collaborative
arrangements with pharmaceutical companies to assist in funding development
costs, including the costs of clinical testing necessary to obtain
regulatory approvals. It is expected that these entities will also be
responsible for commercial scale manufacturing which must be in compliance
with applicable FDA regulations. The Company anticipates that such
arrangements may involve the grant by the Company of the exclusive or semi-
exclusive right to sell specific products to specified market segments in
particular geographic territories in exchange for a royalty, joint venture,
future co-marketing or other financial interest. The Company believes that
these arrangements will be more effective in promoting and distributing
therapeutic products in the United States in view of the Company's limited
resources and the extensive marketing networks and large advertising
budgets of large pharmaceutical companies. To date, the Company has not
entered into any collaborative agreements or distributorship arrangements
for any of its proposed products and there can be no assurance that the
Company will be able to enter into any such arrangements on favorable terms
or at all. The Company may ultimately determine to establish its own
manufacturing and/or marketing capability, at least for certain products,
in which case it will require substantial additional funds and personnel.
<PAGE>
Use of Hazardous Materials -- The Company's research and development
involves the controlled use of small quantities of hazardous materials,
chemicals and various radioactive compounds. Although the Company believes
that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local
regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any resulting damages, and any such
liability could exceed the resources of the Company.
Product Liability Exposure; Limited Insurance Coverage -- The testing and
marketing of pharmaceutical products entails an inherent risk of exposure
to product liability claims from adverse effects of products. The Company
has obtained liability insurance with limits of liability of $1,000,000 for
each claim and $3,000,000 in the aggregate. There is no assurance that
current or future policy limits will be sufficient to cover all possible
liabilities. Further, there can be no assurance that adequate product
liability insurance will continue to be available in the future or that
it can be maintained at reasonable costs to the Company. In the event of a
successful product liability claim against the Company, lack or
insufficiency of insurance coverage could have an adverse effect
on the Company.
Dependence on Key Personnel and Scientific Advisors; Evolution of
Management -- The Company is dependent on the principal members of its
management and scientific staff, the loss of whose services could impede
the achievement of development objectives. Furthermore, as the Company's
focus evolves, the Company's need for certain skills may diminish and the
need for other skills may arise. Thus, recruiting and retaining qualified
scientific personnel to perform research and development work in the future
will also be critical to the Company's success and may lead to further
evolution of the Company's management. Although the Company believes it
will be successful in attracting and retaining skilled and experienced
scientific personnel, there can be no assurance that the Company will be
able to attract and retain such personnel on acceptable terms given the
competition among numerous pharmaceutical and health care companies,
universities and non-profit research institutions for experienced
scientists and managers.
The Company's scientific advisors are employed on a full-time basis by
unrelated employers and some have one or more consulting or other advisory
arrangements with other entities which at times may conflict with their
obligations to the Company. Inventions or processes discovered by such
persons, other than those to which the Company's licenses relate, or those
for which the Company is able to acquire licenses or those which were
invented while performing consulting services under contract to the
Company, will most likely not become the property of the Company, but will
remain the property of such persons or such persons' full-time employers.
Failure to obtain needed patents, licenses or proprietary information held
by others could have a material adverse effect on the Company's business,
financial condition or results of operations.
<PAGE>
Limited Personnel; Dependence on Contractors -- The Company has twelve full-
time and two part-time employees. With these exceptions, the Company
relies, and for the foreseeable future will rely, on certain independent
organizations, advisors and consultants to provide certain services with
regard to clinical research. There can be no assurance that their services
will continue to be available to the Company on a timely basis when needed,
or that the Company could find qualified replacements. The Company's
advisors and consultants generally sign agreements that provide for
confidentiality of the Company's proprietary information. However, there
can be no assurance that the Company will be able to maintain the
confidentiality of the Company's technology, the dissemination of which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Conducting Business Abroad -- Although the Company currently does not
conduct business outside the United States, it is in discussions with
potential strategic partners for the in-licensing and out-licensing of
technology and the development and marketing of its products. No assurance
can be given that the Company will be able to establish arrangements
covering foreign countries, that the necessary foreign regulatory approvals
for its product candidates will be obtained, that foreign patent coverage
will be available or that the development and marketing of its products
through such licenses, joint ventures or other arrangements will be
commercially successful. The Company might also have greater difficulty
obtaining proprietary protection for its products and technologies outside
the United States rather than in it, and enforcing its rights in foreign
courts rather than in United States courts.
Limited Availability of Net Operating Loss Carry Forwards -- For Federal
income tax purposes, net operating loss and tax credit carryforwards as of
December 31, 1996 are approximately $1,929,000 and $260,000, respectively.
These carryforwards will expire beginning in 2003 through 2010 . The Tax
Reform Act of 1986 provided for a limitation on the use of net operating
loss and tax credit carryforwards following certain ownership changes. The
Company believes that its proposed private placement, together with certain
prior issuance's of Common Stock, is likely to severely restrict the
Company's ability to utilize its net operating losses and tax credits.
Additionally, because U.S. tax laws limit the time during which net
operating loss and tax credit carryforwards may be applied against
future taxable income tax liabilities, the Company may not be able to fully
utilize its net operating loss and tax credits for federal income tax
purposes.
<PAGE>
Potential Volatility of Price; Low Trading Volume -- The market price of the
Common Stock, like that of many other development-stage public
pharmaceutical or biotechnology companies, has been highly volatile and may
be in the future. Factors such as announcements of technological
innovations or new commercial products by the Company or its competitors,
disclosure of results of preclinical and clinical testing, adverse
reactions to products, governmental regulation and approvals, developments
in patent or other proprietary rights, public or regulatory agency concerns
as to the safety of products developed by the Company and general market
conditions may have a significant effect on the market price of the Common
Stock and its other equity securities. In addition, in general, the Common
Stock has been thinly traded on the Bulletin Board, which may affect the
ability of the Company's stockholders to sell shares of the Common Stock in
the public market. There can be no assurance that a more active
trading market will develop in the future.
Impact of New Accounting Standards
During 1996, the Financial Accounting Standards Board issued a new
pronouncement, SFAS No. 128 "Earnings per Share" which is relevant to the
Company's operations. The statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. The Company intends to adopt SFAS
No. 128 at year end 1997 and expects that the effect will increase loss per
share.
<PAGE>
PART II.
ITEM 6 - EXHIBITS AND REPORTS OF FORM 8-K
a)Exhibits: 27 Financial Data Schedule.
b)Reports on Form 8-K:
On January 27, February 10 and 21, 1997, the Company filed Current Reports
on Form 8-K and 8-K/A relating to changes in accountants.
On February 26 and March 5, 1997, the Company filed Current Reports on Form
8-K and 8-K/A relating to the Company's change in fiscal year.
<PAGE>
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOREX CORP.
Michael S. Rosen
President and CEO
David G. Franckowiak
Controller/Treasurer
(principal financial officer)
</PAGE>
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<ARTICLE> 5
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THIS SCHEDULE CONTAINS AMMENDED FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED
STATEMENTS
OF OPERATION.
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1997
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