FORM 10-QSB/A
AMENDMENT #1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarter Ended September 30, 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 November 5, 1997, 9,736,641 shares of the registrant's common stock
(par value, $.001 per share) were outstanding.
<PAGE>
<TABLE>
PART I.
ITEM 1 - Financial Statements
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<CAPTION>
September 30,
1997
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 800,707
Prepaid Expenses 131,527
------------
TOTAL CURRENT ASSETS 932,234
Leasehold improvements and equipment, net of
accumulated amortization of $916,277. 99,019
Patent issuance costs, net of accumulated
amortization of $36,300. 260,382
------------
TOTAL ASSETS $ 1,291,635
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 252,988
------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.05 par value.
Authorized 100,000 shares;
none issued and outstanding --
Common stock, $.001 par value.
Authorized 50,000,000 shares;
issued 2,071,432; outstanding 1,952,790 2,071
Additional paid-in capital 13,527,230
(Deficit) accumulated during the development stage (12,046,904)
------------
1,482,397
Less:
Treasury Stock, at cost, 118,642 shares (443,750)
------------
TOTAL STOCKHOLDERS' EQUITY 1,038,647
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,291,635
============
<F/N>
See accompanying condensed notes to financial statements
</TABLE>
<PAGE>
<TABLE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Cumulative from
Nine Months February 15, 1985
Ended September 30, (date of inception)
1997 1996 to September 30, 1997
<S> <C> <C> <C>
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract
research and
development -- -- 86,168
Proprietary research
and development 1,103,003 775,538 9,152,088
General and
administrative 738,889 292,692 3,705,146
------------ ------------ -------------
Total operating expenses 1,841,892 1,068,230 12,943,402
------------ ------------ -------------
(Loss) from operations (1,841,892) (1,068,230) (12,843,402)
Other income -- -- 1,512
Interest income 19,597 37,302 840,553
Interest expense (4,929) -- (45,567)
------------ ------------ -------------
Net loss $(1,827,224) $(1,030,928) $(12,046,904)
============ ============ =============
Net loss per share $ (1.36) $ (1.83)
Weighted average
common shares
outstanding 1,329,322 562,655
</TABLE>
<F/N>
See accompanying condensed notes to financial statements
<PAGE>
<TABLE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three Months Ended September 30,
1997 1996
<S> <C> <C>
SBIR contract revenue $ -- $ --
Expenses:
SBIR contract
research and
development -- --
Proprietary research
and development 369,006 196,952
General and
administrative 226,211 137,979
----------- ------------
Total operating expenses 595,217 334,931
----------- ------------
(Loss) from operations (595,217) (334,931)
Other income -- --
Interest income 11,648 17,521
Interest expense (4,929) --
----------- ------------
Net loss $ (588,498) $ (317,410)
=========== ============
Net loss per share $ (0.33) $ (0.42)
Weighted average
common shares
outstanding 1,810,230 760,122
</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
Nine months February 15, 1985
ended September 30, (date of inception)
1997 1996 to September 30,
1997
<S> <C> <C> <C>
Net cash used in operating
activities $(1,773,686) $(1,030,928) $(12,046,904)
------------ ----------- -------------
INVESTING ACTIVITIES:
Patent issuance cost (64,945) (19,755) (397,688)
Organizational costs
incurred -- -- (135)
Deposit on leasehold
improvements -- -- (5,000)
Purchase of leasehold
improvements -- -- (414,671)
Purchases of office
and lab equipment (52,977) (5,219) (606,776)
Proceeds from assets
sold -- -- 1,000
----------- ----------- -------------
Net cash used in
investing activities (117,922) (24,974) (1,423,270)
----------- ----------- -------------
FINANCING ACTIVITIES:
Net proceeds from
issuance of common
stock 1,746,408 1,324,999 12,666,284
Proceeds from exercise
of options -- 132,049 134,236
Proceeds from borrowings
from President -- -- 41,433
Repayment of borrowings
from President -- -- (41,433)
Proceeds from borrowings
under line of credit 287,490 -- 587,490
Repayment of borrowings
under line of credit (287,490) -- (587,490)
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 1,746,408 1,457,048 12,335,117
----------- ----------- -------------
Net increase (decrease)
in cash and cash
equivalents (105,200) 547,230 800,707
Cash and cash equivalents at
beginning of periods 905,907 1,146,351 --
----------- ----------- -------------
Cash and cash equivalents at
end of periods $ 800,707 $1,603,362 $ 800,707
=========== =========== =============
<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.
On May 19, 1997, the Company entered into a senior line of credit agreement
with The Aries Funds, two of its major stockholders, pursuant to which the
Company could borrow up to $500,000 (the "Bridge Loan"). The Bridge Loan
accrued interest at the rate of 12% per annum and was due and payable
on August 19, 1997. In consideration of the Bridge Loan, the Company has
granted warrants to purchase an aggregate of 66,668 shares of Common Stock at
an initial exercise price equal to the Offering Price of the Company's
private placement. The exercise price of such warrants and the
number of shares of common stock purchasable thereunder are subject to
adjustment in certain circumstances. Such warrants are exercisable from
May 19, 1997 until May 19, 2002. On July 18, 1997, the Company paid the
outstanding principal and interest on the Bridge Loan.
On June 11, 1997, the Company effected a one-for-fifteen reverse stock split
of its common stock. All share and per share amounts have been adjusted to
reflect such reverse stock split.
On July 16, 1997, the Company issued and sold an aggregate of 864,865 shares
of Common Stock to The Aries Funds for an aggregate consideration of
$2 million.
On July 29, 1997, the Company formed Wisconsin Genetics, Inc. ("WGI") a new
majority owned subsidiary devoted to the development of new drugs for the
prevention and treatment of cancer.
On August 13, 1997, the Company's warrants issued in connection with the
secondary offering on August 13, 1992 expired.
Pursuant to a Private Placement, the Company issued and sold an aggregate
of 7,783,851 shares of Common Stock on October 10 and October 16, 1997 to
certain accredited investors. The aggregate proceeds of the July 16,
October 10 and October 16, 1997 issuances were $20 million and the net
proceeds to the Company after deducting commissions and expenses were
$17,400,000. In connection with Private Placement, the Company issued
warrants to purchase 2,162,162 shares of Common Stock at an exercise
price of $2.54375 per share to Paramount Capital, Inc., the Placement
Agent. The warrants are exercisable after April 16, 1998 and expire on
April 16, 2003.
Common stock equivalents are excluded in the computation of primary earnings
per share on 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.
<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 Exhibit 99 "Certain Factors that may Effect
Future Results, Financial Condition and the Market Price of Securities" of
this Quarterly Report on Form 10-QSB.
The Company is a development stage enterprise and expects no significant
revenue from the sale of products in the near future. The Company's
proprietary immunomodulator, ImmTher, has completed some Phase II clinical
trials for cancer with limited response in gross metastatic disease and its
immuno-adjuvant, Theramide, has completed a Phase I clinical trial
for cancer. The Company plans to initiate new Phase II clinical trials for
ImmTher in treating micro-metastasis in pediatric sarcomas with two major
cancer centers and new preclinical programs as an anti-infective agent in
immuno-compromised patients. For Theramide, the Company is completing
preclinical data for new Phase I trials as an adjuvant for a vaccine
program.
Orasomal Technologies, Inc. ("Orasomal"), a majority-owned subsidiary, has
initiated preclinical evaluation of at least one new product utilizing its
proprietary oral and mucosal delivery system, and plans to expand, during
1997, its oral vaccine program and oral therapeutics program. Orasomal plans
to select products for this program that are only available in injectable
form and for which oral therapy is not available. Orasomal 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. Orasomal
is also evaluating several vaccines of other biotechnology companies in its
proprietary delivery system and expects to license its Orasome technology for
oral and/or mucosal delivery of other companies' products in the near future.
On August 1, 1997, WGI signed an exclusive worldwide license agreement with
the Wisconsin Alumni Research Foundation ("WARF"), a non-profit organization
dedicated to receive and license new discoveries made by University of
Wisconsin-Madison researchers, for the development of a new cancer therapy.
The new drug, perillyl alcohol, is completing Phase I human trials sponsored
by the National Cancer Institute (NCI) at several cancer centers. WGI plans
to initiate NCI-sponsored Phase II trials for breast, prostate and ovarian
cancer in the near future. The Company has the option to license another
perillyl alcohol analog with WARF.
On September 30, 1997 and December 31, 1996, the Company had cash and cash
equivalents of $800,707 and $905,907, respectively, and working capital
of $679,246 and $824,821, respectively. On October 16, 1997, the Company
sold Common Stock which, net of commissions and expenses, raised approx-
imately $15.7 million.
The Company's current level of research and development activities requires
the expenditure of approximately $250,000 per month. The Company may be
required to seek additional financing in the future to continue operations
during such period in the event of cost overruns, unanticipated expenses, a
determination to pursue additional research projects, or the failure to
receive funds anticipated from other sources. In addition to the net
proceeds from the Offering, the Company will require substantial additional
funds to finance its business activities on an ongoing basis. The Company's
actual future capital requirements will depend on numerous factors,
including, but not limited to, costs associated with technologies and
products which it may license from third parties, progress in its research
and development 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 has no current commitment to obtain other
additional funds and is unable to state the amount or potential source of any
other additional funds.
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.
In October 1997, the Company completed a private placement of Common Stock
with gross proceeds of $20 million. However, the Company may be required
to seek additional financing to continue operations 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.
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 Orasomal and licensed from M.I.T. WGI is currently
assembling s Scientific Advisory Board to be comprised of a select group of
oncologists to guide the clinical development of perillyl alcohol.
<PAGE>
Impact of New Accounting Standards
During 1996, the Financial Accounting Standards Board ("FASB")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 no significant effect on loss per
share.
During 1997, FASB issued SFAS No. 130 "Reporting Comprehensive Income" and
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information". The Company has not determined the effect of the adoption of
these pronouncements.
<PAGE>
PART II.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's Annual Meeting of Stockholders was held on July 16, 1997.
c) The motions before the stockholders were:
1) To elect four directors:
<TABLE>
<CAPTION>
Votes Votes Votes
Broker
Name of Director For Against Withheld Abstentions
Nonvotes
<S> <C> <C> <C> <C> <C>
Michael S. Rosen 12,217,403 21,331 - - -
Gerald J. Vosika, MD 12,221,472 17,262 - - -
Steve H. Kanzer, Esq. 12,221,272 17,462 - - -
Kenneth F. Tempero, MD 12,221,472 17,262 - - -
</TABLE>
2) To ratify the appointment of Coopers & Lybrand L.L.P. as
independent public accountants for the year ending
December 31, 1997.
Votes For: 12,229,277
Votes Against: 5,750
Votes Withheld: -
Abstentions: 3,707
Broker Nonvotes: -
3) To ratify a Private Placement of the sale of up to 60 units of the
Company's securities for a purchase price of $100,000 per unit.
Votes For: 3,702,143
Votes Against: 19,982
Votes Withheld: -
Abstentions: 6,017,132
Broker Nonvotes: 2,499,477
ITEM 6 - EXHIBITS AND REPORTS OF FORM 8-K
a)Exhibits: 4(i)(c) Warrant for the Purchase of 864,865 shares of
Common Stock (1)
4(i)(d) Warrant for the Purchase of 1,297,297 shares of
Common Stock (1)
10.13 Placement Agency Agreement between the Registrant
and Paramount Capital, Inc. dated July 1, 1997 (1)
10.14 Side Letter #1 to Placement Agency Agreement (1)
10.15 Form of Subscription Agreement for the purchase
of Common Stock (1)
10.16 Financial Advisory Agreement between the Registrant
and Paramount Capital, Inc. dated October 16, 1997 (1)
27 Financial Data Schedule.
99 Certain Factors that may Effect Future Results,
Financial Condition and the Market Price of
Securities.
(1) Incorporated by reference to the Registrant's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997.
b)Reports on Form 8-K:
None.
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS AMMENDED FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED
STATEMENTS
OF OPERATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 800,707
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 932,234
<PP&E> 99,019
<DEPRECIATION> 916,277
<TOTAL-ASSETS> 1,291,635
<CURRENT-LIABILITIES> 252,988
<BONDS> 0
<COMMON> 2,071
0
0
<OTHER-SE> 13,527,230
<TOTAL-LIABILITY-AND-EQUITY> 1,038,647
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,841,892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,827,224)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,827,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,827,224)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
Certain Factors that may Effect Future Results, Financial Condition and the
Market Price of Securities
Need for Substantial Additional Funds, Risk of Insolvency -- The Company may
be required to seek additional financing in the future to continue operations
during such period in the event of cost overruns, unanticipated expenses, a
determination to pursue additional research projects, or the failure to
receive funds anticipated from other sources. In addition to the net
proceeds from the Offering, the Company will require substantial additional
funds to finance its business activities on an ongoing basis. The Company's
actual future capital requirements will depend on numerous factors, including,
but not limited to, costs associated with technologies and products which it
may license from third parties, progress in its research and development
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
has no current commitment to obtain other additional funds and is unable to
state the amount or potential source of any other additional funds.
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 is a development stage enterprise
and expects no significant revenue from the sale of products in the
near future. The Company's proprietary immunomodulator, ImmTher, has
completed some Phase II clinical trials for cancer with limited response
in gross metastatic disease and its immuno-adjuvant, Theramide, has
completed a Phase I clinical trial for cancer. The Company plans to
initiate new Phase II clinical trials for ImmTher in treating
micro-metastasis in pediatric sarcomas with two major cancer centers and
new preclinical programs as an anti-infective agent in immuno-compromised
patients. For Theramide, the Company is completing preclinical data for
new Phase I trials as an adjuvant for a vaccine program. Additionally,
perillyl alcohol is completing several Phase I trials as an anti-cancer
drug. The Company's oral drug delivery technology is in the preclinical
evaluation stage. 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 through a larger pharmaceutical partner 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 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 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
expected. Therefore, there can be no assurance that the results 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.
The Company is also subject to various foreign, federal, state and local laws
regulations and recommendations (collectively "Governmental Regulations")
relating to safe working conditions, laboratory and manufacturing practices,
the experimental use of animals and the use, manufacture, storage, handling
and disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in connection with
the Company's research and development work and manufacturing processes.
Included in this area is Good Manufacturing Practices ("GMP") compliance and
its European equivalent, ISO 9000, a measure of quality control and assurance.
The Company's manufacturing activities for preclinical and clinical supplies
are not fully in GMP compliance, although the Company expects to reach full
compliance in the near future. There can be no assurance that the Company
will achieve GMP compliance. Although the Company believes it is in
compliance with Governmental Regulations in all material respects, there
can be no assurance that the Company will not be required to incur
significant costs to comply with Governmental Regulations in the future.
<PAGE>
Competition; Technological Change -- There is substantial competition in the
pharmaceutical field in general and in vaccine development and liposomal
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. A
competitor in the field of oral delivery of drugs is Emisphere which is
currently in Phase I trials for oral heparin and in pre-clinical development
with an oral human growth hormone. 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; Environmental Matters -- 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. There can be no
assurance that the Company will not be required to incur significant costs
to comply with environmental laws and regulations in the future, nor that the
operations, business or assets of the Company will not be materially
adversely effected by current or future environmental laws or regulations.
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 one part-time employee. 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. See "Reliance on Patents and Other
Proprietary Rights."
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.
Certain Interlocking Relationships; Potential Conflicts of Interest. Steve H.
Kanzer, C.P.A., Esq., a director of the Company, is a Senior Managing
Director of the Placement Agent. Paramount Capital Asset Management, Inc.
("PCAM") is the investment manager and general partner of The Aries Fund and
the Aries Domestic Fund, L.P., respectively. Lindsay A. Rosenwald, M.D.,
the President and sole stockholder of PCAM, is also the President and sole
stockholder of the Placement Agent. Dr. Rosenwald is also President and
sole stockholder of Paramount Capital Investment LLC, a New York-based
merchant banking and venture capital firm specializing in biotechnology
companies ("PCI"). In the regular course of its business, PCI identifies,
evaluates and pursues investment opportunities in biomedical and
pharmaceutical products, technologies and companies. Generally, Delaware
corporate law requires that any transactions between the Company and any
of its affiliates be on terms that, when taken as a whole, are substantially
as favorable to the Company as those then reasonably obtainable from a person
who is not an affiliate in an arms-length transaction. Nevertheless, neither
such affiliates nor PCI is obligated pursuant to any agreement or
understanding with the Company to make any additional products or
technologies available to the Company, nor can there be any assurance, and
the Company does not expect and purchasers of the securities offered hereby
should not expect, that any biomedical or pharmaceutical product or
technology identified by such affiliates or PCI in the future will be made
available to the Company. In addition, certain of the current officers and
directors of the Company or certain of any officers or directors of the
company hereafter appointed may from time to time serve as officers or
directors of other biopharmaceutical or biotechnology companies. There can
be no assurance that such other companies will not have interests in conflict
with those of the Company.
Concentration of Ownership and Control. The Company's directors, executive
officers and principal stockholders and certain of their affiliates have the
ability to influence the election of the Company's directors and most other
stockholder actions. In particular, pursuant to the Placement Agency
Agreement, so long as 50% of the Placement Shares remain outstanding and
subject contractual rights described in the Subscription Agreement between
the Company and each signatory thereto (the "Subscription Agreements"), the
Company may not do any of the following without the Placement Agent's prior
approval: (i) issue or increase the authorized amount or alter the terms of
any securities of the Company senior to, or on parity with, the Placement
Shares with respect to voting, liquidation or dividends, (ii) alter the
Company's charter documents in any manner that would adversely affect the
relative rights, preferences, qualifications, limitations or restrictions of
the Placement Shares or of certain contractual rights described in the
Subscription Agreements, (iii) incur indebtedness in excess of $1,000,000,
(iv) incorporate or acquire any subsidiaries and (v) enter any transactions
with affiliates of the Company. In addition, the Company's Board of
Directors cannot exceed seven persons without the prior written consent of
the Placement Agent. These arrangements may discourage or prevent any
proposed takeover of the Company, including transactions in which stockholders
might otherwise receive a premium for their shares over the then current
market prices. Such stockholders may influence corporate actions, including
influencing elections of directors and significant corporate events. See also,
"--Certain Interlocking Relationships; Potential Conflicts of Interest."
