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, 1998
( ) 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 13, 1998 9,936,000 shares of the registrant's common stock
(par value, $.001 per share) were outstanding.
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31,
1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $16,626,976
Prepaid Expenses 64,017
Deferred costs 1,580,000
------------
Total current assets 18,270,993
Leasehold improvements and equipment,
net of accumulated amortization of
$942,291 121,263
Deferred Costs 862,492
Patent issuance costs, net of accumulated
amortization of $40,397 352,725
------------
TOTAL ASSETS $19,607,473
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 605,372
Series B redeemable convertible preferred
stock, $.05 par value, 200,000 authorized,
80,100 issued and outstanding
at redemption value 8,131,138
Stockholders' equity:
Preferred Stock, $.05 par value.
Authorized 300,000 shares; none
issued and outstanding
Common stock, $.001 par value.
Authorized 50,000,000 shares, issued
10,054,642, outstanding 9,936,000 10,055
Additional paid-in capital 34,000,842
(Deficit) accumulated during the
development stage (22,696,184)
------------
11,314,713
Less:
Treasury Stock, at cost, 118,642 shares (443,750)
------------
Total stockholders' equity 10,870,963
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $19,607,473
============
</TABLE>
See accompanying condensed notes to financial statements
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
Three Months February 15, 1985
Ended March 31 (date of inception)
1998 1997 to March 31, 1998
<S> <C> <C> <C>
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract
research and
development -- -- 86,168
Proprietary research
and development 611,748 382,376 10,481,072
General and
administrative 834,566 214,891 5,257,477
------------ ------------ -------------
Total operating expenses 1,446,314 597,267 15,824,717
------------ ------------ -------------
(Loss) from operations (1,446,314) (597,267) (15,724,717)
Equity in loss from
joint venture (8,010,000) (8,010,000)
Other income -- -- 1,512
Interest income 224,136 7,948 1,230,734
Interest expense -- -- (193,713)
------------ ------------ -------------
Net loss $(9,232,178) $ (589,319) $(22,696,184)
============ ============ =============
Basic and diluted
net loss per share $ (0.92) $ (0.54) $ (36.84)
Weighted average
common shares
outstanding 10,077,571 1,087,141 616,133
</TABLE>
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)
1998 1997 to March 31, 1998
<S> <C> <C> <C>
Net cash used in operating
activities $ (771,391) $ (569,442) $(11,433,206)
------------ ----------- -------------
INVESTING ACTIVITIES:
Patent issuance cost (69,232) (9,526) (496,282)
Investment in joint venture (8,010,000) (8,010,000)
Organizational costs
incurred -- -- (135)
Deposit on leasehold
improvements -- -- (5,000)
Purchase of leasehold
improvements -- -- (414,671)
Purchases of office
and lab equipment (42,370) (30,270) (655,035)
Proceeds from assets
sold -- -- 1,000
------------ ----------- -------------
Net cash used in
investing activities (8,121,602) (39,796) (9,580,123)
------------ ----------- -------------
FINANCING ACTIVITIES:
Net proceeds from
issuance of common
stock and warrant 1,871,845 1,408 30,024,722
Proceeds from issuance of
Redeemable Convertible
Preferred Stock 8,010,000 8,010,000
Proceeds from exercise
of options 61,750 -- 200,986
Proceeds from borrowings
from President -- -- 41,433
Repayment of borrowings
from President -- -- (41,433)
Proceeds from borrowings
under line of credit -- -- 662,490
Repayment of borrowings
under line of credit -- -- (662,490)
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 (130,000) -- (573,750)
------------ ----------- -------------
Net cash provided by
financing activities 9,813,595 1,408 37,640,305
------------ ----------- -------------
Net increase (decrease)
in cash and cash
equivalents 920,602 (607,830) 16,626,976
Cash and cash equivalents at
beginning of periods 15,706,374 905,907 --
------------ ----------- -------------
Cash and cash equivalents at
end of periods $16,626,976 $ 298,077 $ 16,626,976
============ =========== =============
<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 of 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.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" as of January 1, 1998. Since the Company has
no components of comprehensive income for the periods presented, there is no
effect of the adoption reflected in the financial statements.
JOINT VENTURE WITH ELAN CORPORATION
On December 31, 1997, the Company executed a binding letter of intent with
Elan Corporation, plc ("Elan"), for the exclusive research, development and
commercialization of oral and mucosal vaccines. The closing of the transactions
contemplated by the letter of intent occurred as of January 21, 1998.
At the time of closing, Endorex issued to Elan International Services, Ltd.
("EIS"), a subsidiary of Elan, for an aggregate purchase price of $2,000,000:
(i) 307,692 shares of Endorex common stock at $6.50 per share and (ii) a
six-year warrant to purchase an additional 230,777 shares of Endorex common
stock at an exercise price of $10.00 per share. The estimated fair value of
the warrants at the grant date was $1.5 million, which has been recorded as a
reclassification of Additional paid-in capital. In addition, EIS purchased
$8.01 million of Endorex Series B Redeemable Convertible Preferred Stock
(Series B Preferred), which is convertible into Endorex common stock at a
price of $7.50 per share.
Series B Preferred is voting and pays an 8% annual cumulative in-kind dividend.
Series B Preferred is redeemable at par value plus accrued dividends if
certain conditions are met. The joint venture will be conducted in a
newly-formed company that is initially owned 80.1% by Endorex and 19.9% by
EIS. The new company has licensed certain technology from Elan and certain
other technology from Orasomal Technologies, Inc. ("Orasomal"). Endorex has
invested $8.01 million in the joint venture and Elan has invested $1.99
million.
Elan received an initial $10 million license payment from the joint
venture, and may receive future milestones and royalties based on the joint
venture's performance. Since the technology does not yet represent a commercial
product, the joint venture recorded an expense in the first quarter of 1998
for the initial license fee paid to Elan. Endorex consolidated its $8.01
million share of that expense and simultaneously recorded Elan's purchase of
$8.01 million of Endorex Series B Preferred.
Orasomal licensed to the joint venture oral vaccine rights to its proprietary
Orasome(TM) polymerized liposome technology exclusively licensed from
Massachusetts Institute of Technology (MIT). In consideration of the license,
Orasomal will receive milestone payments and warranties.
The Joint Development and Operating Agreement between the Company and Elan
provides for equal control of the joint venture including representation
on the Board of Directors and agreement of both parties for budgets and
material transactions. Therefore, the Company records the joint venture's
activities using the equity method of accounting.
Elan and Endorex will each fund R&D activities equally in the first year.
Accordingly, the Company includes R&D expenses which it incurred in conducting
such activities in the consolidated statement of operations. After the first
year, Endorex and Elan will thereafter fund future joint venture expenditures
in proportion to their respective ownership levels.
NET LOSS PER SHARE
On October 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share". Earnings per share have been
presented on the Consolidated Statement of Operations in accordance with SFAS
No. 128 for the current and prior periods. As operations resulted in a net loss
for all periods presented, diluted earnings per share are the same as basic
earnings per share due to the antidilutive effect of potential dilutive common
shares. The net loss per share is computed by dividing the net loss by the
weighted average number of shares outstanding during the period as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(9,232,178)
Less: Preferred Stock Dividends --
-----------
BASIC AND DILUTED EPS
Income available to
common stockholders $(9,232,178) 10,077,571 $(0.92)
============ ========== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) -AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(589,319)
Less: Preferred Stock Dividends --
----------
BASIC AND DILUTED EPS
Income available to
common stockholders $(589,319) 1,087,141 $(0.54)
========== ========== =======
</TABLE>
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion 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.
New Clinical Trials Initiated
During the quarter ended March 31, 1998, the Company started Phase II human
clinical trials for its two anti-cancer drugs, Perillyl alcohol (POH) and
ImmTher(R).
The National Cancer Institute (NCI) is sponsoring three Phase II studies to
evaluate the effect of POH for the treatment of advanced carcinomas of breast,
prostate and ovary. POH is a synthetic compound that is a member of a new
class of anti-cancer agents, monoterpenes, which have shown anti-tumor activity
against a wide range of tumor types in preclinical studies at non-toxic dose
levels. Results from Phase I trials in more than 70 patients offer additional
support for studying these three cancers in the Phase II setting. Some of the
results of these trials will be presented in an abstract at the upcoming
annual meeting of the American Society of Clinical Oncology in May, 1998.
The prostate and breast cancer trials are being conducted at the University
of Wisconsin - Madison Comprehensive Cancer Center. The ovarian cancer
trial is being conducted by the Eastern Cooperative Oncology Group (ECOG).
The University of Texas M.D. Anderson Cancer Center in Houston is conducting a
randomized Phase II trial to evaluate the efficacy of ImmTher for the treatment
of Ewing's sarcoma, a deadly bone cancer that afflicts children. ImmTher is a
novel muramyl dipeptide (MDP) immunomodulator that stimulates the patient's own
immune system to kill cancer cells. The goal of this Phase II trial will be to
utilize ImmTher to destroy residual tumor cells, or micrometases, and increase
the patient's overall survival rate.
Material Changes in Results of Operations
Net loss for the three months ended March 31, 1998 increased approximately $8.6
million as compared to the three months ended March 31, 1997 primarily due to
Equity in loss from joint venture which included the Company's 80.1% share of
the $10 million license fee paid by the joint venture to Elan.
Research and development expenditures increased $229,372 or 60% as compared to
the three months ended March 31, 1997 due to additional personnel, consultants
and clinical supplies in connection with the commencement of Phase II clinical
trials for the Company's two cancer drugs, Perillyl alcohol and ImmTher.
General and Administrative expenses for the three months ended March 31, 1998
increased $619,675 or 288% as compared to the three months ended March 31, 1997
due to amortization of the fair value of warrants issued in connection with
the financial advisory agreement with Paramount Capital, Inc., additional
personnel and expenses related to expanded investor relations activities.
Interest income for the three months ended March 31, 1998 increased
approximately $216,000 as compared to the three months ended March 31, 1997 as
a result of investing cash proceeds from the Company's private placement in
October 1997 and sale of Common Stock to Elan in January 1998. The Company
is a development stage enterprise and expects no significant revenue from
the sale of products in the near future.
Plan of Operations
The Company is a development stage enterprise and expects no significant
revenue from the sale of products in the near future. During the next twelve
months, the Company will continue to conduct the clinical trials for POH and
ImmTher. The Company plans to expand the clinical trial for ImmTher in Ewings
sarcoma to at least one additional major cancer center. The Company is also
evaluating initiation of additional clinical trials with POH and/or ImmTher.
In February 1998, the Company announced moving its North Dakota research and
development operations to a new leased facility in Chicago. In addition,
Gerald Vosika, M.D., Chairman of the Board and Scientific Director, resigned
to pursue scientific activities with a new start-up biotech company based in
Fargo. Several scientific personnel have relocated and seven new people have
been hired for the new facility, four of which hold Ph.D.'s. As of May 13,
1998, the Company has eighteen full time employees including eight Ph.D.'s,
one M.D./J.D. and two M.B.A.'s. Improvements to the facility have commenced
and are expected to be completed by mid-year. The improvements and additional
equipment are not expected to have a material effect on results of operations
or financial condition. The Company does not plan to significantly increase
employees in the next twelve months.
In January 1998, Endorex formed, with Elan, a joint venture for the
exclusive research, development and commercialization of oral vaccines. The
joint venture will combine novel existing and future delivery systems of the two
companies for the development of vaccines. The joint venture plans to select a
few key vaccines for testing in and further development of the delivery systems
during 1998 and to build a data package which may attract interest from vaccine
companies.
The Company has initiated preclinical evaluation of at least one new product
utilizing its proprietary oral delivery system, and plans to expand, during
1998, its oral delivery program for proteins and peptides including insulin and
human growth hormone. 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.
On March 31, 1998 and December 31, 1997, the Company had cash and cash
equivalents of $16,626,976 and $15,706,374, respectively, and working capital
of $16,085,621 and $15,212,680, respectively. The Company's current level of
research and development activities requires the expenditure of approximately
$350,000 per month.
Management of the Company believes that its current cash resources will be
sufficient to support its currently planned operations for the next three
years. 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.
<PAGE>
Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information". In February 1998, FASB
issued SFAS No. 132 "Employers' Disclosure about Pensions and Other
Postretirement Benefits." The Company does not expect the
effect of the adoption of these pronouncements to have a material effect on
results of operations or financial condition.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS OF FORM 8-K
a)Exhibits: 27 Financial Data Schedule.
99 Certain Factors that may Effect Future Results,
Financial Condition and the Market Price of
Securities.
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 (principal executive officer)
David G. Franckowiak
Vice President, Finance and Administration
(principal financial and accounting officer)
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AND THE CONSOLIDATED STATEMENTS OF OPERATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 16,626,707
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,270,993
<PP&E> 121,263
<DEPRECIATION> 942,291
<TOTAL-ASSETS> 19,607,473
<CURRENT-LIABILITIES> 605,372
<BONDS> 0
<COMMON> 10,055
0
8,131,138
<OTHER-SE> 10,860,908
<TOTAL-LIABILITY-AND-EQUITY> 19,607,473
<SALES> 0
<TOTAL-REVENUES> 224,136
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,456,314
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,232,178)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,232,178)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,232,178)
<EPS-PRIMARY> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
Certain Factors that may Effect Future Results, Financial Condition and the
Market Price of Securities
Need for Substantial Additional Funds. The Company had approximately
$16.6 million of cash, cash equivalents and marketable securities at March 31,
1998. 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. 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.
Early Stage of Development. The Company is a development state
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 has initiated new Phase II clinical
trials for ImmTher in treating micro-metastasis in pediatric sarcomas with a
major cancer center and plans to expand this trial to another major cancer
center. For Theramide, the Company is completing preclinical data for new phase
I trials as an adjuvant for a vaccine program. Additionally, perillyl alcohol
has completed several Phase I trials as an anti-cancer drug and has started
three Phase II trials in breast, ovarian and prostate cancers. The Company's
oral 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. These 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.
History of Losses; 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,
1997, the Company's accumulated deficit was $13.5 million. 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.
Dependence on Elan Joint Venture. As described more fully under
"Notes to Financial Statements-Joint Venture with Elan Corporation," the
Company recently established a joint venture with Elan for the exclusive
research, development and commercialization of oral and mucosal prophylactic
and therapeutic vaccines. As part of the joint venture, the Company will be
obligated to fund the Elan joint venture's research and development activities,
in an amount of approximately $1.5 million during the first year of the joint
venture and in proportion to its ownership interest in the joint venture
thereafter. In the event that the Company is unable to have sufficient
resources to meet its obligations under the Elan joint venture, or if by
meeting those funding obligations, the Company is therefore unable to have
sufficient resources to fund its other research and development activities,
such funding obligations could have a material adverse effect on the
Company's business, financial condition or results of operations.
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. No assurance can be given that patents issued to or licensed by the
Company will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide competitive advantages to the Company. There can
be no assurance that the Company's patent applications will be approved, that
the Company will develop additional products that are patentable, that any
issued patent will provide the Company with any competitive advantage or
adequate protection for its inventions or will not be challenged by others, or
that the patents of others will not have an adverse effect on the ability of the
Company to do business. Competitors may have filed
<PAGE>
applications, may have been issued patents or may obtain additional patents and
proprietary rights relating to products or processes competitive with those of
the Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate any of the Company's products
or design around any patented products developed by the Company. 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. No assurance can be given that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets, or that the
Company can effectively protect its rights to its unpatented trade secrets. Any
such discovery or disclosure would likely have an adverse effect on the Company.
The Company currently has several patents issued and 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.
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. For example, the Company is dependent upon its license of oral delivery
technology from M.I.T. and its license of perillyl alcohol from the Wisconsin
Alumni Research Foundation. No assurance can be given that the technology
underlying such license will be profitable, or that the Company will retain its
license for such technology or that the Company will obtain patent protection
outside the United States. 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 new products 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
<PAGE>
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.
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 U.S. Food and Drug Administration
(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,
<PAGE>
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. Currently, 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 such
compliance. Although the Company believes it is in compliance with all other
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.
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. Competitors in the field of the oral delivery of
drugs include Emisphere, which is currently in Phase I trials for oral heparin
and in preclinical development with an oral human growth hormone, and Cortecs,
which has several products in clinical development. 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 marketing 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.
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 affected 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
<PAGE>
Company has obtained liability insurance with limits of liability of $1.0
million for each claim and $3.0 million 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.
Limited Personnel; Dependence on Contractors. As of May 13, 1998, the
Company had eighteen full-time employees. With the exception of these
employees, 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 may 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, 1997 are approximately $5.2 million and $322,000, respectively.
These carryforwards will expire beginning in 2004 through 2011. 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 the Private Placement, together with certain prior issuances of Common
Stock, is likely to restrict severely 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
<PAGE>
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.
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
continue to 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 OTC 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.
Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on
Liquidity for the Company's Securities. Since the Company's securities are not
listed on a national securities exchange nor listed on a qualified automated
quotation system, they are, under certain circumstances, subject to Rule 15g-9
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
which imposes additional sales practice requirements on broker-dealers that sell
such securities to persons other than established customers and "accredited
investors" (generally, individuals with a net worth in excess of $1.0 million or
annual incomes exceeding $200,000 or $300,000 together with their spouses). For
transactions covered by this Rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
affect the ability of broker-dealers to sell the Company's securities and may
materially adversely affect the ability of purchasers in this Offering to sell
any of the securities acquired hereby, after subsequent registration, in the
secondary market.
The SEC has adopted regulations that define a "penny stock" to be any
equity security that has a market price (as therein defined) of less than $5.00
per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt,
the rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about sales commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.
The foregoing required penny stock restrictions will not apply to the
Company's securities so long as the Company meets certain minimum net tangible
assets or average revenue criteria. Even while the Company's securities are
exempt from such restrictions, the Company would remain subject to Section
15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any
person from participating in a distribution of penny stock, if the SEC finds
that such a restriction would be in the public interest.
Dividends. The Company has never paid cash dividends on its Common
Stock and does not anticipate paying any such dividends in the foreseeable
future. The Company currently intends to retain its earnings, if any, for the
development of its business.
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 Paramount Capital, Inc. ("Paramount"). Paramount Capital Asset
Management, Inc. ("PCAM") is the investment manager and general partner of The
Aries Fund, a Cayman Island Trust, and the Aries Domestic Fund, L.P.,
respectively, each of which is a significant shareholder of the Company.
Lindsay A. Rosenwald, M.D., the President and sole stockholder of PCAM, is
also the President and sole stockholder of Paramount. Dr. Rosenwald is also
President and sole stockholder of Paramount Capital Investment LLC, a
merchant banking and venture capital firm specializing in biotechnology
companies ("PCI"). In addition, certain officers, employees and/or
associates of the Paramount and/or its affiliates own securities in
the Company's subsidiaries. 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 Private 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 Private 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 Private
Placement Shares or of certain contractual rights described in the Subscription
Agreements, (iii) incur indebtedness in excess of $1.0 million, (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."
