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 June 30, 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 August 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>
June 30,
1998
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $15,139,534
Prepaid expenses 134,342
Deferred costs 1,580,000
------------
Total current assets 16,853,876
Leasehold improvements and equipment,
net of accumulated amortization of
$953,992 301,249
Deferred costs 469,162
Patent issuance costs, net of accumulated
amortization of $42,482 361,200
------------
TOTAL ASSETS $17,985,487
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 497,005
Series B redeemable convertible preferred
stock, $.05 par value, 200,000 authorized,
80,100 issued and outstanding
at redemption value 8,289,143
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 33,842,836
(Deficit) accumulated during the
development stage (24,209,802)
------------
9,643,089
Less:
Treasury stock, at cost, 118,642 shares (443,750)
------------
Total stockholders' equity 9,199,339
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,985,487
============
</TABLE>
See accompanying condensed notes to financial statements
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
Six Months February 15, 1985
Ended June 30, (date of inception)
1998 1997 to June 30, 1998
<S> <C> <C> <C>
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract
research and
development -- -- 86,168
Proprietary research
and development 1,429,465 733,997 11,298,789
General and
administrative 1,742,920 512,678 6,165,831
------------ ------------ -------------
Total operating expenses 3,172,385 1,246,675 17,550,788
------------ ------------ -------------
(Loss) from operations (3,172,385) (1,246,675) (17,450,788)
Equity in loss from
joint venture (8,010,000) (8,010,000)
Other income -- -- 1,512
Interest income 446,998 8,086 1,453,329
Interest expense (10,142) -- (203,855)
------------ ------------ -------------
Net loss $(10,745,529) $(1,238,589) $(24,209,802)
============= ============ =============
Basic and diluted
net loss per share $ (1.08) $ (1.14) $ (31.52)
Weighted average
common shares
outstanding 9,947,338 1,087,537 768,152
</TABLE>
See accompanying condensed notes to financial statements
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
1998 1997
<S> <C> <C>
SBIR contract revenue $ -- $ --
Expenses:
SBIR contract
research and
development -- --
Proprietary research
and development 817,714 351,621
General and
administrative 908,350 297,787
------------ ------------
Total operating expenses 1,726,064 649,408
------------ ------------
(Loss) from operations (1,726,064) (649,408)
Equity in loss from
joint venture -- --
Other income -- --
Interest income 218,765 138
Interest expense (5,820) --
------------ ------------
Net loss $(1,513,119) $ (649,270)
============ ============
Basic and diluted
net loss per share $ (0.15) $ (0.60)
Weighted average
common shares
outstanding 9,936,000 1,087,925
</TABLE>
See accompanying condensed notes to financial statements
<PAGE>
<TABLE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Cumulative from
Six Months February 15, 1985
Ended June 30, (date of inception)
1998 1997 to June 30, 1998
<S> <C> <C> <C>
Net cash used in operating
activities $(2,056,586) $(1,048,501) $(12,718,401)
------------ ------------ -------------
INVESTING ACTIVITIES:
Patent issuance cost (79,792) (54,193) (506,842)
Investment in joint venture (8,010,000) (8,010,000)
Organizational costs
incurred -- -- (135)
Deposit on leasehold
improvements -- -- (5,000)
Purchase of leasehold
improvements (122,152) -- (414,671)
Purchases of office
and lab equipment (111,905) (33,790) (846,722)
Proceeds from assets
sold -- 1,000
------------ ----------- -------------
Net cash used in
investing activities (8,323,849) (87,983) (9,782,370)
------------ ----------- -------------
FINANCING ACTIVITIES:
Net proceeds from
issuance of common
stock and warrant 1,871,845 6,408 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 -- 287,490 662,490
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 9,813,595 293,898 37,640,305
------------ ----------- -------------
Net increase (decrease)
in cash and cash
equivalents (566,840) (842,586) 15,139,534
Cash and cash equivalents at
beginning of periods 15,706,374 905,907 --
------------ ----------- -------------
Cash and cash equivalents at
end of periods $15,139,534 $ 63,321 $ 15,139,534
============ ============ =============
<F/N>
See accompanying condensed notes to financial statements
</TABLE>
<PAGE>
ENDOREX CORPORATION
(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 normal 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") 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 fair value allocated to the warrants at the grant date
was $846,000, 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 recorded 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 (EPS) 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>
SIX MONTHS ENDED
JUNE 30, 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(10,745,529)
Less: Preferred Stock Dividends --
-------------
BASIC AND DILUTED EPS
Income available to
common stockholders $(10,745,529) 9,947,338 $(1.08)
============= ========= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1997
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) -AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(1,238,589)
Less: Preferred Stock Dividends --
------------
BASIC AND DILUTED EPS
Income available to
common stockholders $(1,238,589) 1,087,537 $(1.14)
============ ========== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1998
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(1,513,119)
Less: Preferred Stock Dividends --
------------
BASIC AND DILUTED EPS
Income available to
common stockholders $(1,513,119) 9,936,000 $(0.15)
============ ========= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1997
------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) -AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(649,270)
Less: Preferred Stock Dividends --
----------
BASIC AND DILUTED EPS
Income available to
common stockholders $(649,270) 1,087,925 $(0.60)
========== ========= =======
</TABLE>
Options to purchase 1,483,172 shares of common stock at a weighted average
exercise price of $3.199 and warrants to purchase 2,459,600 shares of common
stock at a weighted average exercise price of $3.243, were outstanding but not
included in the computation of diluted EPS because the effect of the securities
was antidilutive.
<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.
Material Changes in Results of Operations
Net loss for the six months ended June 30, 1998 increased approximately $9.5
million as compared to the six months ended June 30, 1997, primarily due to
equity in loss from the joint venture which included the Company's 80.1% share
of the $10 million license fee paid by the joint venture to Elan. Net loss for
the three months ended June 30, 1998 increased $863,849, or 133%, as compared
to the three months ended June 30, 1997. The Company is a development stage
enterprise and expects no significant revenue from the sale of products in the
near future.
Research and development expenditures for the six and three months ended
June 30, 1998 increased $695,468, or 95%, and $466,093, or 133%, respectively,
as compared to the corresponding periods ended June 30, 1997. During the
quarter, Endorex completed its new R&D center in Lake Forest, Illinois
dedicated to developing the Company's oral delivery technology for drugs and
vaccine. Additionally, the Company recruited new scientific personnel for the
joint venture with Elan for the oral delivery of vaccines. R&D expenses also
increased due to the start of a new randomized Phase II clinical trial for the
treatment of pediatric bone cancer with the Company's proprietary cancer drug,
ImmTher(R).
General and administrative expenses for the six and three months ended June 30,
1998 increased $1,230,242, or 240%, and $610,563, or 205%, respectively, as
compared to the six and three months ended June 30, 1997, due to amortization
of the fair value of warrants issued in connection with the financial advisory
agreement with Paramount Capital, Inc., and additional business development
personnel and expenses related to expanded public and investor relations
activities.
Interest income for the six and three months ended June 30, 1998 increased
approximately $439,000 and $219,000, respectively, as compared to the six and
three months ended June 30, 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.
Plan of Operation
During the next twelve months, the Company will continue to conduct Phase II
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 other types of
cancer. The Company has also recently commenced a sponsored research
agreement with the University of Wisconsin-Madison to develop and evaluate
other monoterpene analogs as cancer drug candidates.
The Company continues preclinical development of its Orasome(TM)technology for
the oral delivery of vaccines and drugs. The first patent for this technology
issued in June 1998. A new R&D Center was completed in July for this
development. The leasehold improvements and related new equipment are not
expected to have a material effect on results of operations or financial
condition. Additionally, the Company recruited new scientific personnel for
the joint venture with Elan for the oral delivery of vaccines, bringing total
employees to seventeen as of August 13, 1998 of which eight are Ph.D.'s and
one is an M.D. The Company does not plan to significantly increase
employees in the next twelve months.
On June 30, 1998 and December 31, 1997, the Company had cash and cash
equivalents of $15,139,534 and $15,706,374, respectively, and working capital
of $14,776,871 and $15,212,680, respectively, exclusive of deferred costs. The
Company's current level of 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. However, the Company intends, from time to time in the
future, to seek to expand its research and development activities into other
technologies and/or products that it either may license from other persons or
develop. Any such activities may require the expenditure of funds not
presently available to the Company. The Company may seek to obtain these funds
from possible future public or private sales of its securities or other
sources.
In October 1997, the Company completed a $20 million private placement.
Net proceeds were $17.2 million after commissions and expenses. The Company
used approximately $370,000 to repay the Loan from two of its major
stockholders. The remaining proceeds will be used to fund research and
development activities, clinical trials, operations and to acquire new
technologies. From October 1997 through June 30, 1998, the Company has used
approximately $3.5 million to fund research and development, including capital
improvements and equipment, clinical trials and operations.
<PAGE>
Impact of New Accounting Standards
In February 1998 and June 1998, FASB issued SFAS No. 132 "Employers' Disclosure
about Pensions and Other Postretirement Benefits" and SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities," respectively. 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Company's Annual Meeting of Stockholders was held on May 22, 1998.
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 5,895,209 807 - - -
Richard Dunning 5,895,276 739 - - -
Steve H. Kanzer 5,895,310 706 - - -
Paul Rubin 5,895,293 723 - - -
H. Laurence Shaw 5,895,310 706 - - -
Andrew Stein 5,895,276 739 - - -
Kenneth F. Tempero 5,895,293 723 - - -
Steven Thornton 5,895,293 723 - - -
</TABLE>
2) To ratify the appointment of Coopers & Lybrand L.L.P. as
independent public accountants for the year ending
December 31, 1998.
Votes For: 5,894,921
Votes Against: 767
Votes Withheld: -
Abstentions: 328
Broker Nonvotes: -
3) To approve the Amended and Restated 1995 Omnibus Incentive Plan.
Votes For: 5,616,401
Votes Against: 68,569
Votes Withheld: -
Abstentions: 12,561
Broker Nonvotes: 198,485
4) To approve name change of the Company from "Endorex Corp." to "Endorex
Corporation."
Votes For: 5,893,064
Votes Against: 631
Votes Withheld: -
Abstentions: 2,321
Broker Nonvotes: -
ITEM 5 - OTHER INFORMATION OF FORM 10-QSB
As disclosed in the Company's latest proxy statement, the deadline for
Submitting proposals to be considered for inclusion in the Company's Proxy
Statement for the 1999 Annual Meeting is January 1, 1999.
Pursuant to recent amendments to Rule 14a-4(c)(1) under the Securities Exchange
Act of 1934, the Company will have discretionary voting authority if a
proponent does not notify the Company by March 2, 1998 of their intent to
present a proposal from the floor at the 1999 Annual Meeting of
Stockholders or of their intent to commence a proxy solicitation for the 1999
Annual Meeting of Stockholders.
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)
August 13, 1998
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 15,139,534
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,853,876
<PP&E> 301,249
<DEPRECIATION> 953,992
<TOTAL-ASSETS> 17,985,487
<CURRENT-LIABILITIES> 497,005
<BONDS> 0
<COMMON> 10,055
0
8,289,143
<OTHER-SE> 9,189,284
<TOTAL-LIABILITY-AND-EQUITY> 17,985,487
<SALES> 0
<TOTAL-REVENUES> 446,998
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,192,527
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,745,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,745,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,745,529)
<EPS-PRIMARY> (1.08)
<EPS-DILUTED> (1.08)
</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
$15.1 million of cash, cash equivalents and marketable securities at June 30,
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 stage
enterprise and expects no significant revenue from the sale of products in the
near future. The Company's proprietary immunomodulator, ImmTher (r), has
completed some Phase II clinical trials for cancer with limited response in
gross metastatic disease. The Company initiated new randomized Phase II
clinical trial for ImmTher in treating micro-metastasis in pediatric sarcomas
with M.D. Anderson Cancer Center and plans to expand this trial to another
major cancer center. ImmTher recently received FDA Orphan drug designations
for Ewings Sarcoma and osteosarcoma, the most prevalent bone cancers in
children and young adults. Additionally, Perillyl alcohol has completed
several Phase I trials as an anti-cancer drug and at the University of
Wisconsin-Madison and with the Eastern Cooperative Oncology Group and three
Phase II trials in breast, ovarian and prostate cancers have been initiated.
The Company's oral delivery technology is in the preclinical development 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 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,
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 II trials for oral heparin
and in preclinical development with oral hormones, and Cortecs,
which has several products in clinical development. Additionally there are
numerous major pharmaceutical companies and biotech companies developing new
cancer therapies. 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 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 August 13, 1998,
the Company had seventeen 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 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. As of
August 6, 1998, the Company's common stock is now traded on the American Stock
Exchange. There can be no assurance that a more active trading market will
develop in the future.
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 ("PCI"), a
merchant banking and venture capital firm specializing in biotechnology
companies. 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."