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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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(Mark
One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
Commission File No. 1-14778
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ENDOREX CORPORATION
(Formerly Endorex Corp.)
(Exact name of registrant as specified in its charter)
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DELAWARE 41-1505029
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
28101 BALLARD DRIVE, SUITE F 60045
LAKE FOREST, IL (Zip Code)
(Address of principal executive
offices)
Issuer's telephone number, including area code: (847) 573-8990
Securities registered under Section 12(b) of the Exchange Act:
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Name of each Exchange
Title of each class on Which registered
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<S> <C>
None American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of class)
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 [_]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]
Revenues for its most recent fiscal year were: $-0-
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price of such stock, as of March 1, 1999,
was $13,634,000. Non-affiliates have been determined on the basis of holdings
set forth under Item 11 of this Annual Report on Form 10-KSB.
At March 1, 1998, 9,936,000 shares of the registrant's common stock (par
value, $.001 per share) were outstanding.
Documents Incorporated by Reference
The definitive proxy statement of Endorex Corporation in connection with
the annual meeting to be held on or about May 12, 1999 is incorporated by
reference into Part III of this Form 10-KSB.
Transitional Small Business Issuer: Yes [_] No [X]
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PART I
Item 1. Business.
The Company
Endorex Corporation (the "Company" or "Endorex") is a development stage
drug delivery and cancer products company founded in 1985. The Company was
incorporated in January 1987 as ImmunoTherapeutics, Inc, a wholly-owned
subsidiary of BiologicalTherapeutics, Inc. ("BTI"). BTI was incorporated on
December 19, 1984 and commenced operations on February 15, 1985. On March 30,
1987, BTI was merged into the Company.
The Company's original focus was on immunotherapy research and development
for cancer and infectious diseases. In 1996, a new CEO with extensive
pharmaceutical experience, Michael Rosen, was hired and a new management team
assembled quickly to reposition Endorex in new areas that offered greater
near-term income potential and less risk. Under Mr. Rosen's direction, Endorex
has: 1) developed a balanced business portfolio consisting of novel cancer
products and a proprietary drug delivery platform; 2) terminated drug
discovery activities in favor of in-licensing more advanced technologies and
products from key universities; 3) secured multinational drug company giant
Elan as a joint venture partner; 4) raised over $40 million of new capital for
product development activities; and 5) recently listed the company on the
American Stock Exchange.
The Company established a majority owned subsidiary, Orasomal Technologies,
Inc. ("Orasomal"), in 1996 to develop oral delivery technology obtained via an
exclusive license from Massachusetts Institute of Technology ("MIT") for
vaccines, proteins and peptides via advanced generation liposomal technology.
In July 1997, the Company formed another majority owned subsidiary, Wisconsin
Genetics, Inc. ("WGI"), to develop and commercialize a new class of cancer
drugs called monoterpenes derived from natural plants, with the leading drug
being perillyl alcohol ("POH").
In January 1998, Endorex obtained its first corporate partner, Elan
Corporation, plc ("Elan"), the leading drug delivery company in the world and
established a joint venture, named Innovax Corporation ("Innovax"), for the
research, development and commercialization of oral and mucosal vaccines.
Innovax combines novel existing and future delivery systems of the two
companies for the development of human vaccines, a $4 billion market that is
projected to increase to $7 billion by 2001, as well as for the growing
veterinary vaccine market.
In October 1998, Endorex formed a second joint venture with Elan, Endorex
Newco, Ltd., to develop two drugs for life-threatening disease to be
administered via a novel Elan delivery system called Medipad(TM). This
delivery system combines patch technology with the capabilities of an infusion
pump to painlessly deliver critical drugs over a period up to 48 hours.
The Company's principal executive office is located in the northern Chicago
suburbs at 28101 Ballard Drive, Suite F, Lake Forest, Illinois 60045 and its
telephone number is (847) 573-8990. It is close to the headquarters of several
major pharmaceutical companies such as Abbott, Baxter and Searle.
Research and Development Programs
The Company is currently directing its research and product development
efforts in the following areas: drug delivery systems, including oral delivery
and Medipad, and cancer therapy. Research and development expenditures for the
periods ending December 31, 1998 and 1997 were approximately $3.1 million and
$1.8 million, respectively.
Oral Delivery Technology
Many drugs based on proteins and peptides such as insulin, human growth
hormone and vaccines, cannot currently be delivered orally because the drugs
are degraded in the gastrointestinal tract, and therefore must be
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given by injection. Injections are painful, particularly in children and the
elderly, and are more expensive to administer because they require a doctor or
nurse, often in a hospital or outpatient setting. Oral delivery of drugs and
vaccines is significantly less expensive and preferred by the patient.
The Orasome(TM) technology is based on lipids that can easily be assembled
into structures that efficiently capture drugs and proteins, bypassing the
destructive action of stomach acids and intestinal degradative enzymes--while
being taken up efficiently by crucial key cells in the intestinal tract.
Because of the unique ability of these polymerized liposomes to withstand the
cleansing activity of bile salts, digestive enzymes, and gastric acids, this
proprietary liposomal technology may be utilized practically and commercially
for the oral delivery of many therapeutics.
Oral Delivery of Vaccines--Endorex and Elan are developing technology to
orally deliver vaccines through their Innovax joint venture. During 1998,
Innovax has continued development of both the Orasome system and Elan's
microparticulate PLGA technology in key animal models. During 1999, Innovax
will complete a data package including in vivo testing, toxicology and
manufacturing scale-up data with the goal of attracting corporate partners for
development of oral vaccines.
Proteins and Peptides--Orasomal continues to develop its Orasome(TM)
technology for drugs. Orally delivered hormones, such as insulin and human
growth hormone are being evaluated in key animal models at Johns Hopkins. The
current market for those two drugs exceeds $3 billion. Orasomal also plans to
evaluate oral delivery of other proteins and peptides.
Disposable Delivery System
In October 1998, Elan and Endorex entered into a second joint venture
agreement to develop products using Medipad(TM) technology. Medipad(TM) is a
small, disposable delivery system that contains a tiny needle for subcutaneous
access and a microinfusion pump. Since the system has an adhesive backing, it
can be worn similarly to a transdermal patch and then be discarded after use.
Medipad(TM) can be used with a wide variety of drugs, such as peptides and
proteins, compounds with short half-life requiring multiple daily doses, and
parenteral formulations requiring controlled, prolonged delivery.
Cancer Therapy
The American Cancer Society estimates that approximately 1.4 million people
in the U.S. were diagnosed with some form of cancer in 1997. Approximately $35
billion is spent annually in the U.S. alone on direct medical costs of managing
cancer patients.
Despite medical advances in diagnosing and treating the disease that have
been made over the past twenty years, only modest improvements have been
achieved in cancer patient survival rates. According to the National Cancer
Institute, the overall five-year relative survival rates for all cancer sites
combined has increased only slightly from 49.3% in 1974-76 to 53.9% in 1983-90.
Currently utilized cancer therapies such as surgery, radiation and chemotherapy
to date have demonstrated limited efficacy in treating selected tumors.
New directions in cancer therapy include gene therapy, cell therapy,
angiogenesis inhibitors, photodynamic therapy, immunotherapy, novel sources of
traditional chemotherapy (e.g., natural plants and marine organisms). The
rationale for developing a new cancer drug is based on 1) novel mechanism of
action, 2) evidence of antitumor activity on several tumor models and 3)
evidence of a therapeutic window for the drug (i.e. a dose level for which
potential toxicity's are manageable).
Immunotherapy Program--Endorex's immunomodulator, ImmTher(R), works by
activating macrophages, cells that specifically recognize and destroy cancer
cells. ImmTher(R) is currently being evaluated in a randomized
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Phase II (efficacy) trial as an adjunct therapy, following surgery and
chemotherapy, for the treatment of bone cancer in children and young adults.
The initial therapy for this type of cancer is often surgery (including limb
amputation). However, residual cancer cells remaining after surgery
metastasize to the liver or lungs and patients rarely survive more than a few
years. ImmTher(R) is being tested for its usefulness in treating
micrometastases with a goal of increasing the life of these children and young
adults. The trials are being conducted at the two leading cancer centers in
the U.S., Memorial Sloan Kettering in New York and M.D. Anderson Cancer Center
in Houston.
In the second quarter of 1998, the FDA granted ImmTher(R) Orphan Drug
status as a treatment of both Ewing's sarcoma and osteosarcoma, the most
prevalent forms of bone cancer in children and young adults. The Orphan Drug
designation benefits Endorex in two ways: first, it provides the company with
a 50% tax credit on human clinical trials; and secondly, it gives Endorex
seven years of additional market exclusivity. Endorex intends to evaluate this
drug in another type of cancer during 1999.
Natural Cancer Therapy
Perillyl alcohol is a synthetic compound that is a member of a new class of
anti-cancer agents, monoterpenes, which have shown anti-tumor and preventative
activity against a wide range of tumor types in preclinical studies at non-
toxic dose levels. POH was developed by Dr. Michael Gould and his
collaborators at the University of Wisconsin-Madison, with the support of the
National Cancer Institute.
Monoterpenes are natural compounds produced by plants and are found in
commonly consumed fruits and vegetables, and have multiple cellular effects
including the modulation of the cellular levels of growth factors and their
receptors. Monoterpenes selectively inhibit cell growth in a wide variety of
rodent tumors and human cancer cell lines and also act to induce programmed
cell death (apoptosis).
WGI was founded by Endorex to develop new therapies for the prevention and
treatment of cancer. Patents covering the use of POH in the treatment of
cancer have been licensed for development by WGI from Wisconsin Alumni
Research Foundation ("WARF"). WARF, a non-profit organization, is the office
designated to receive and license new discoveries made by the UW-Madison
researchers.
In 1998, three Phase II open label studies sponsored by the National Cancer
Institute ("NCI") were initiated to evaluate the effect of POH for the
treatment of advanced carcinomas of breast, prostate and ovary. Two of the
trials, one in patients with advanced prostate cancer and another in patients
with advanced breast cancer, are being conducted at the University of
Wisconsin-Madison Comprehensive Cancer Center. The third Phase II trial for
patients with advanced epithelial ovarian cancer is being conducted by the
Eastern Cooperative Oncology Group ("ECOG"). Additionally, the NCI has
sponsored a Phase I trial at the Cleveland Clinic to evaluate POH for the
prevention of cancer.
During 1998, WGI initiated a research agreement with the University of
Wisconsin-Madison to sponsor the identification and preclinical development of
additional new cancer drugs from monoterpenes chemically related to POH.
Government Regulation
Prior to marketing, each of the Company's products must undergo an
extensive regulatory approval process conducted by the FDA and applicable
agencies in other countries. The Company is currently conducting Phase II
clinical trials for its two cancer drugs, POH and ImmTher(R). See also--
"Certain Factors which may Affect Future Results, Financial Condition and the
Market Price of Securities--Government Regulation; Need for FDA and Other
Regulatory Approval." The Company has contracted with Theradex, a Clinical
Research Organization ("CRO") to monitor the ImmTher(R) trials and Quintiles,
another CRO, as its regulatory interface with the FDA.
In connection with those trials, the FDA has reviewed the preclinical
testing and design protocols for the trials.
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Patents and Other Proprietary Rights
The Company relies on patent rights, trade secrets and nondisclosure
agreements to establish and protect its proprietary rights in its
technologies. Despite these precautions, it may be possible for unauthorized
third parties to utilize the Company's technology or to obtain and use
information that the Company regards as proprietary. The laws of some foreign
countries do not protect the Company's proprietary rights in its processes and
products to the same extent as the laws of the United States.
The Company currently has the following patent portfolio in the United
States: (1) Endorex has three issued patents and one pending, (2) Orasomal has
one patent issued, and (3) WGI has licensed the rights to three patents issued
to WARF. In addition, the Company has numerous foreign patents issued and
patent applications pending.
Employees
As of March 1, 1999 the Company had seventeen (17) full-time employees,
including seven Ph.D.s and 1 M.D.
Endorex has recruited seasoned managers with considerable experience in the
pharmaceutical industry and established world-class Scientific Advisory
Boards. Michael Rosen, the company's President/CEO joined Endorex in 1996.
Prior to joining Endorex, Mr. Rosen held senior executive positions at
Monsanto, Pfizer and Bristol-Myers Squibb. Endorex's Clinical and Regulatory
Affairs EVP, Rick Wilson, M.D., J.D., joined the company in 1997. Dr. Wilson
previously held senior regulatory and clinical positions with Pharmacia &
Upjohn, Syntex and Roche. Research and Development VP, Robert Brey, Ph.D., has
prior experience with American Home Products' vaccine division, while Business
Development Executive Director, Ellen Clough, Ph.D., was recruited from
Mallinckrodt (now Schering Plough Animal Health). David Franckowiak was
promoted to CFO in February 1999. Prior to joining Endorex in 1997, he spent
11 years with PricewaterhouseCoopers LLP.
The Company's board of directors includes CEO's and senior management of
other publicly traded biotech companies with extensive pharmaceutical company
expertise, and a member of Elan's senior management team.
Endorex has assembled strong Scientific Advisory Boards that include
leading cancer and drug delivery system experts from MIT, Johns Hopkins,
University of Wisconsin, Georgetown, Duke, Case Western Reserve and Keio
University in Japan. Drug Delivery Advisory Board Co-Chairman Dr. Robert
Langer, recognized as a leading expert on drug delivery technology, is a
member of three National Academies (Sciences, Medicine and Engineering), holds
265 patents and has authored over 500 articles. Dr. Langer is a Professor of
Biomedical and Chemical Engineering and is co-inventor of the Orasome(TM)
technology. Advisory Board Co-Chairman, Dr. Henry Brem, is a Professor of
Neurology, Ophthalmology and Oncology at Johns Hopkins University and the
other inventor of the Orasome(TM) technology. Drs. Langer and Brem have
significant continued involvement with Endorex as advisors, consultants and
shareholders.
Certain Factors that May Affect Future Results, Financial Condition and the
Market Price of Securities
Need for Substantial Additional Funds. The Company had approximately $13.6
million of cash and marketable securities at December 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
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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
trials for ImmTher(R) in treating micro-metastasis in pediatric sarcomas with
M.D. Anderson Cancer Center in Houston and Memorial Sloan-Kettering Cancer
Center in New York City. ImmTher(R) recently received FDA Orphan drug
designations for Ewings sarcoma and osteosarcoma, the most prevalent bone
cancers in children and young adults. Additionally, the Company's second
cancer drug, POH, has completed several Phase I trials as an anti-cancer drug
at the University of Wisconsin-Madison and with the Eastern Cooperative
Oncology Group, and has initiated three Phase II trials in breast, ovarian and
prostate cancers, all sponsored by the National Cancer Institute. Furthermore,
the Company initiated development of other monoterpene based cancer agents via
a sponsored research agreement with the University of Wisconsin-Madison. 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. 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, and 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, has a
significant accumulated deficit, and expects to incur losses for the next
several years. 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 successfully
completing development of 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 Ventures. The Company's strategy for research,
development and commercialization of certain of its products is to rely in
part upon various arrangements with corporate partners. As a result, the
Company's products are dependent in large part upon the subsequent success of
such third parties in performing preclinical studies and clinical trials,
obtaining regulatory approvals, manufacturing and marketing. In January 1998,
the Company entered into a joint venture with Elan for the exclusive research,
development
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and commercialization of oral and mucosal prophylactic and therapeutic
vaccines. In October 1998, the Company entered into a second joint venture
with Elan for the exclusive research, development and commercialization of
products using Elan's Medipad(TM) drug delivery system for two undisclosed
drugs. In connection with the two joint ventures, the Company is obligated to
fund each joint venture's research and development activities in an amount up
to approximately $1.5 million during the first year of each joint venture and
in proportion to its ownership interest in each joint venture thereafter. In
the event the Company does not have sufficient resources to meet its funding
obligations under the two joint ventures as well as other ongoing research and
development activities of the Company, the Company's funding obligations under
the two joint ventures could have a material adverse effect on the Company's
business, financial condition or results of operations. The Company intends to
pursue additional collaborations in the future. There can be no assurance that
the Company will be able to negotiate additional acceptable collaborative
arrangements or that such arrangements will be successful. No assurance can be
given that the Company's collaborative partners will be able to obtain FDA
approval for any licensed compounds, that any such licensed compounds, if so
approved, will be able to be commercialized successfully, or that the Company
will realize any revenues pursuant to such arrangements. Although the Company
believes that parties to collaborative arrangements generally have an economic
motivation to succeed in performing their contractual responsibilities, the
amount and timing of resources which they devote to these activities are not
within the Company's control. There can be no assurance that parties will
perform their obligations as expected or that current or potential
collaborators will not pursue treatments for other diseases or seek
alternative means of developing treatments for diseases targeted by
collaborative programs with the Company or that any additional revenues will
be derived from such arrangements. If any collaborative partner breaches or
terminates its agreement with the Company or otherwise fails to conduct its
collaborative activities in a timely manner, the development or
commercialization of the product candidate or research program under such
collaboration agreement may be delayed, the Company may be required to
undertake unforeseen additional responsibilities or to devote unforeseen
additional resources to development or commercialization, or development or
commercialization could be terminated. The termination or cancellation of
collaborative arrangements could also adversely effect the Company's financial
condition, intellectual property position and results of operations. In
addition, disagreements between collaborators and the Company have in the past
and could in the future lead to delays in the collaborative research,
development or commercialization of certain product candidates, or could
require or result in legal process or arbitration for resolution. These
consequences could be time consuming and expensive, and 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 government approvals or marketing of pharmaceutical products and has
limited experience with clinical testing and manufacturing. The Company may
form alliances with established pharmaceutical companies for the testing,
manufacturing, marketing, and regulatory approval of its products. There can
be no assurance that the Company will be successful in forming such alliances
or that the Company's partners will 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 internal expertise or
contract with third parties to perform these tasks. This will place increased
demand 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
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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 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 MIT, its license of perillyl alcohol from the Wisconsin Alumni
Research Foundation and licenses from Elan in connection with the Company's
two joint ventures with Elan. No assurance can be given that the technology
underlying such licenses will be profitable, or that the Company will retain
its license for such technologies 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 trials
and preclinical testing for the Company's products are subject to varying
interpretations. Furthermore, studies conducted with alternative
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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 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 pre- clinical 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
8
<PAGE>
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. 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 has recently completed 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
9
<PAGE>
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. As of March 10,
1998, the Company has increased its liability insurance with limits of
liability to $10.0 million for each claim from $1.0 million, and $10.0 million
in the aggregate, from $3.0 million. 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 that 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 March 1, 1999, 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 conducts limited 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
10
<PAGE>
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 Carryforwards. For Federal
income tax purposes, net operating loss and tax credit carryforwards as of
December 31, 1998 are approximately $10.1 million and $541,000, respectively.
These carryforwards will expire beginning in 2007 through 2017. Additionally,
the Tax Reform Act of 1986 provides for a limitation on the use of net
operating loss and tax credit carryforwards following certain ownership
changes. Future issuances of common and preferred stock may restrict severely
the Company's ability to utilize its net operating losses and tax credits.
Also, 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 the Company's
other equity securities. Since August 6, 1998, the Company's common stock has
been thinly traded on the American Stock Exchange. There can be no assurance
that a more active trading market will develop in the future.
Investors May Suffer Substantial Dilution. The Company has a number of
agreements or obligations that may result in dilution to investors. These
include:
--warrants to purchase 2,162,162 shares of Common Stock at $2.54375 per
share, subject to adjustment, issued in connection with the October 1997
Private Placement;
--warrants for the purchase of 230,770 shares of Common Stock at $10.00 per
share held by Elan;
--warrants to purchase 66,668 shares of Common Stock at $2.54375 per share,
subject to adjustment, held by the Aries Fund and the Aries Domestic
Fund, L.P.;
--conversion rights and dividend rights of preferred stock held by Elan,
consisting of 80,100 shares of Series B Convertible Preferred Stock ($8.0
million original liquidation value) bearing an 8% cumulative payment in
kind dividend and convertible at liquidation value into Common Stock at
$7.50 per share, subject to adjustment, and 84,105 shares of Series C
Exchangeable Convertible Preferred Stock ($8.4 million original
liquidation value) bearing a 7% cumulative payment in kind dividend and
which is exchangeable for part of the Company's interest in the second
joint venture or convertible at liquidation value into Common Stock at
$9.00 per share;
--1,460,442 Common Stock options outstanding to participants in the
Company's stock option plan with a weighted average exercise price of
$3.18;
--semiannual 5% payment in kind dividend ("PIK") obligations at the rate of
approximately 865,000 shares of Common Stock per year payable to holders
of approximately 8,648,718 shares of Common Stock annually, unless
certain conditions are met; and
--antidilution rights under the above warrants and Series B Convertible
Preferred stock which can permit purchase of additional shares and/or at
lower prices under certain circumstances.
To the extent that the PIK dividends are paid, antidilution rights are
triggered, or warrants or conversion rights are exercised, our stockholders
will experience substantial dilution and the Company's stock price may
decrease.
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.
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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
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 to 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."
Item 2. Facilities.
The Company's executive offices and research and development center are
located in a leased facility of approximately 7,500 square feet in Lake
Forest, Illinois, near Chicago. The lease expires on December 31, 2000 and
provides an option to renew for an additional three years. The Company
believes that its current leased facilities may not be sufficient to meet its
needs for the foreseeable future, however suitable additional space will be
available if and as needed.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
As of August 6, 1998, the Company's Common Stock started trading on the
American Stock Exchange under the symbol "DOR." Prior to that, quotations for
the Company's Common Stock appeared on the "pink sheets" published by the
National Quotations Bureau, Inc. and on the "Bulletin Board" of the National
Association of Securities Dealers, Inc. The following table sets forth the
high and low bid quotations, as provided by the National Quotation Bureau,
Inc., for the Company's Common Stock during the period January 1, 1997 through
August 5, 1998. The table sets forth the high and low closing prices, as
provided by the American Stock Exchange, for the period from August 6, 1998
through March 1, 1999. The amounts represent inter-dealer quotations without
adjustment for retail markups, markdowns or commissions and do not represent
the prices of actual transactions. All prices have been adjusted for the one-
for-fifteen reverse stock split effected by the Company on June 11, 1997.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
1997
1st Quarter................................................ $12.19 $7.97
2nd Quarter................................................ $ 7.20 $2.75
3rd Quarter................................................ $ 2.94 $2.75
4th Quarter................................................ $ 6.50 $2.94
1998
1st Quarter................................................ $ 9.00 $5.38
2nd Quarter................................................ $ 6.25 $2.88
3rd Quarter................................................ $ 4.88 $2.13
4th Quarter................................................ $ 2.63 $1.88
1999
1st Quarter................................................ $ 2.69 $1.50
</TABLE>
As of December 31, 1998, the Company had approximately 1,100 stockholders
of record.
In connection with a senior line of credit agreement entered into by the
Company with two of its major stockholders, Aries Domestic Fund, L.P. and The
Aries Fund, on May 19, 1997, the Company granted warrants to purchase an
aggregate of 66,668 shares of Common Stock at an initial exercise price equal
to the offering price of the Company's Private Placement (as defined below),
subject to adjustment under certain circumstances. Such warrants are
exercisable until May 19, 2002.
Pursuant to a private placement (the "Private Placement") of Common Stock,
the Company issued and sold an aggregate of 8,648,718 shares of Common Stock
to certain accredited investors on July 16, October 10, and October 16, 1997,
in consideration of an aggregate amount of $20,000,000. The net proceeds to
the Company after deducting commissions and expenses of Paramount Capital,
Inc., which acted as the placement agent for the Private Placement (the
"Placement Agent"), were $17,400,000.
In connection with the Private Placement, the Company issued and sold to
the Placement Agent and/or its designees warrants (the "Placement Warrants")
to purchase up to an aggregate of 864,865 shares of Common Stock and, in
connection with the execution of a financial advisory agreement, dated October
16, 1997, between the Company and the Placement, the Company issued and sold
to the Placement Agent warrants (the "Advisory Warrants") to purchase up to an
aggregate of 1,297,297 shares of Common Stock. The Placement Warrants and the
Advisory Warrants are exercisable until April 16, 2003, at an exercise price
of $2.54375 per share, subject to adjustment under certain circumstances.
On January 21, 1998, the Company formed a joint venture, Innovax, with
Elan. In connection with the agreement, the Company issued and sold to Elan
International Services, Ltd. ("EIS"), 307,692 shares of the Company's Common
Stock and warrants to purchase an aggregate of 230,770 shares of Common Stock
in
13
<PAGE>
consideration of an aggregate amount of $2.0 million. The warrants are
exercisable until January 20, 2007, at an exercise price of $10.00 per share.
In addition, the Company issued and sold to EIS 80,100 shares of Series B
Convertible Preferred Stock at a price of $100 per share. The Series B
Preferred is voting and pays an 8% annual cumulative in-kind dividend. The
shares can be converted to common stock based upon their liquidation value,
currently at $7.50 per share, subject to adjustment.
On October 21, 1998, the Company formed a second joint venture with Elan.
In connection with the new agreement, the Company issued and sold to EIS
84,105 shares of Series C Exchangeable Convertible Preferred Stock ("Series C
Preferred") at a price of $100 per share. The Series C Preferred is non-voting
and pays an 7% annual cumulative in-kind dividend. The shares can be exchanged
for common stock in the joint venture or converted to Endorex Common Stock at
$9.00 per common share.
Item 6. Management's Discussion and Analysis or Plan of Operations.
The following "Discussion and Analysis" 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 audited consolidated financial statements of
the Company and notes thereto. This report contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Investors are cautioned that such statements are
only predictions and that actual events or results may differ materially. In
evaluating such statements, investors should carefully consider the various
factors identified in this report, which could cause actual results to differ
materially from those indicated from such forward-looking statements,
including those set forth in "Business--Certain Factors that may Affect Future
Results, Financial Condition and the Market Price of Securities" on this
Annual Report Form 10-KSB.
Material Changes in Results of Operations
Net loss for the twelve months ended December 31, 1998 of $21.8 million
increased approximately $18.5 million as compared to the $3.2 million loss
recorded for the twelve months ended December 30, 1997, primarily due to
recognizing $16.0 million of equity losses. The equity losses reflect the
Company's 80.1% share of the aggregate $20.0 million license fees paid by the
joint ventures to Elan to acquire two technologies: 1) oral delivery
technologies for vaccines, and 2) a medical device called Medipad(TM) for
delivery of certain drugs for treatment of life-threatening diseases. 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 year ended December 31, 1998
increased to $3.1 million ($1.2 million, or 67%), as compared to $1.8 million
for the year ended December 31, 1997. During 1998, the Company completed its
new research and development center in Lake Forest, Illinois, dedicated to
developing the Company's oral delivery technology for drugs and vaccines. The
increase was primarily due to salary expenses for three new scientists added
during the first three quarters; increased expenses to support Immther(R)
clinical trials, pre-clinical work on the Orasome(TM) technology, and the
Innovax joint venture with Elan; increased expenses for university research
support for POH and related compound development projects; and non-recurring
charges for the move from Fargo to Lake Forest.
General and administrative expenses for the year ended December 31, 1998
increased to $3.5 million ($2.0 million, or 141%), as compared to $1.5 million
incurred for the year ended December 31, 1997. The increase was mainly due to
$1.2 million of amortization of the fair value of warrants issued in
connection with the financial advisory agreement with Paramount. Excluding
this amortization, general and administrative expenses increased 71% due to
additional business development personnel and expenses related to expanded
public and investor relations activities, including legal, accounting and
public relations expenses for the year related to the initiation of the
Company's listing on the American Stock Exchange. The Company began trading on
the American Stock Exchange under its new symbol, DOR, on August 6, 1998.
14
<PAGE>
Interest income for the year ended December 31, 1998 increased
approximately $614,000 as compared to the year ended December 31, 1997 as a
result of investing cash proceeds from the Company's October 1997 private
placement and the sale of common stock to Elan in January 1998.
Plan of Operation and Financial Condition
During the next twelve months, the Company will continue to conduct Phase
II clinical trials for its two main cancer drugs: POH and ImmTher(R). During
the third quarter of 1998, the Company expanded the clinical trial for
ImmTher(R) in Ewings sarcoma to Memorial Sloan-Kettering, a major cancer
center in New York. The Company is also evaluating initiation of additional
clinical trials with POH and/or ImmTher(R) in other types of cancer, and
continues to conduct a sponsored research agreement with the University of
Wisconsin-Madison to develop and evaluate other monoterpene analogs as cancer
drug candidates.
During the third quarter, the Company received notice of issuance of a
patent for its proprietary cancer drug ImmTher(R) for Japan. In addition, the
FDA designated ImmTher(R) as an Orphan drug for two types of cancer, Ewings
sarcoma and osteosarcoma. This will allow marketing exclusivity when and if
the drug is approved for market, as well as tax credits.
The Company continues preclinical development of its Orasome(TM) technology
for the oral delivery of vaccines and drugs. This development includes ongoing
work with Elan for vaccines and Johns Hopkins Endrocrinology Department for
hormones. The first patent for this technology issued in June 1998. A new R&D
center was completed in July for the development of this technology. The
amortization and maintenance of leasehold improvements and related new
equipment are not expected to have a material effect on results of operations
or financial condition. The Company plans initial partnering with major
pharmaceutical companies of its oral delivery technology during 1999 based on
key data currently being completed. The Company also expects to initiate
clinical trials during 1999 with Medipad in one drug through is second joint
venture with Elan.
On December 31, 1998 and December 31, 1997, the Company had cash, cash
equivalents, and marketable securities of $13.2 million and $15.7 million,
respectively, and working capital of $12.6 million and $15.2 million,
respectively, exclusive of deferred costs. The Company's current level of
activities requires the expenditure of approximately $.5 million per month,
including costs associated with the second joint venture. Management of the
Company believes that its current cash resources will be sufficient to support
its currently planned operations for the next two 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. See "Certain Factors that May Affect Future
Results, Financial Condition and the Market Price of Securities--Need for
Substantial Additional Funds."
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 $.4 million to repay a loan from two of its major stockholders.
The remaining proceeds are being used to fund research and development
activities, clinical trials, operations and the acquisition of new
technologies. From October 1997 through December 31, 1998, the Company has
used approximately $4.6 million to fund research and development, including
capital improvements and equipment, clinical trials and operations.
Year 2000
The Company is aware of the issues associated with computer programming
code and certain embedded computer chips used in computer systems as the Year
2000 approaches. Some systems may not be able to distinguish between the year
2000 and the year 1900. The Company utilizes personal computers, software
15
<PAGE>
packages developed by third party vendors, and a service bureau for payroll to
manage its business. It has no internally developed software and does not sell
any products that are derived from internally developed software.
The Company is currently in the process of determining and coordinating the
actions necessary to provide uninterrupted, normal operation of business-
critical systems. There are four stages to the Year 2000 project: 1)
awareness, 2) vendor assessment, 3) selection of new software, and 4)
implementation. The Company has completed the second stage of the project
plan, which included surveying vendors as to Year 2000 readiness. The results
of the surveys indicated that critical business systems and vendors are or
anticipate being Year 2000 compliant in all material aspects of operations.
The Company estimates that the potential impact of problems should any of the
systems be non-compliant will not have a significant impact on operations.
The Company has cash equivalents which may be exposed to credit risk to the
extent that investment companies are materially adversely affected by the Year
2000 issue. The results of the Company's vendor surveys indicate that all
banks and investment companies which the Company currently utilizes are in the
process of testing Year 2000 modifications and expect to be compliant before
the end of the year. It is anticipated that any Year 2000 impact would be
short lived and would not impact the liquidity of the Company or its operating
results.
Based on the review of its systems to date, management believes that the
Year 2000 problem will not pose significant operational problems and that the
total costs associated with the Year 2000 issues will not have a material
effect on the consolidated results of the Company. To date, the Company has
determined that it will require nominal personal computer program upgrades to
accommodate Year 2000 issues.
These estimates and conclusions contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
Year 2000 plan include the availability of alternative software, the Company's
ability to discover and correct potential Year 2000 problems which might have
a serious impact on operations, failure of vendors to complete their expected
Year 2000 compliance, and liquidity issues surrounding securities investments.
Impact of New Accounting Standards
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The Company estimates that the effect of
the adoption of this pronouncement does not have a material effect on results
of operations or financial condition.
16
<PAGE>
Item 7. Financial Statements.
Pursuant to Rule 12b-23, the financial statements set forth on pages F-1,
et seq. attached hereto are incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers Promoters and Control Persons;
Compliance with Section 16(A) of the Exchange Act.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1998.
Item 10. Executive Compensation.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1998.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1998.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission prior to
120 days after December 31, 1998.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following financial statements are filed as part of this report:
Financial Statements.
(1) Balance Sheet as of December 31, 1998.
(2) Statements of Operations for the periods ended December 31,
1998 and 1997 and cumulative from February 15, 1985 (date of inception)
to December 31, 1998.
(3) Statements of Cash Flows for the periods ended December 31,
1998 and 1997 and cumulative from February 15, 1985 (date of inception)
to December 31, 1998.
(4) Statements of Stockholders' Equity for the period from February
15, 1985 (date of inception) to December 31, 1998.
(5) Notes to Financial Statements.
(6) Independent Accountants' Report.
17
<PAGE>
(b) Reports on Form 8-K
During the fiscal quarter ended December 31, 1998 the Company did not file
any Current Reports on Form 8-K.
(c) Exhibits:
<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Company. (1)
3.2 Certificate of Ownership and Merger filed March 30, 1987. (1)
3.3 Certificate of Amendment to Certificate of Incorporation filed
September 7, 1989. (2)
3.4 Certificate of Amendment to Certificate of Incorporation filed
November 13, 1990. (3)
3.5 Certificate of Amendment to Certificate of Incorporation filed
May 29, 1991. (3)
3.6 Certificate of Amendment to Certificate of Incorporation filed
February 27, 1992. (3)
3.7 Certificate of Amendment to Certificate of Incorporation filed
February 27, 1992. (3)
3.8 Certificate of Amendment to Certificate of Incorporation filed
June 29, 1993. (6)
3.9 Certificate of Amendment to Certificate of Incorporation filed
April 15, 1996. (6)
3.10 Certificate of Amendment to Certificate of Incorporation filed
June 10, 1997. (8)
3.11 Certificate of Amendment to Certificate of Incorporation filed
December 9, 1998.
3.12 Series B Preferred Certificate of Designations, Preferences and
Rights filed January 21, 1998. (8)
3.13 Series C Preferred Certificate of Designations, Preferences and
Rights filed October 21, 1998. (10)
3.14 By-laws of Company. (1)
4.1 Specimen Common Stock Certificate. (1)
4.2 Warrant for the Purchase of 864,865 shares of Common Stock. (7)
4.3 Warrant for the Purchase of 1,297,297 shares of Common Stock.
(7)
4.4 Warrant for the Purchase of 230,770 shares of Common Stock. (8)
10.1 Patent License Agreement dated December 16, 1996 between the
Company and Massachusetts Institute of Technology. (6)
10.2 Consultation Agreement dated as of September 1, 1996 between the
Company and Kenneth Tempero, Ph.D., M.D. (6)
10.3 Employment Agreement dated July 25, 1996 between the Company and
Michael S. Rosen. (4)
10.4 Employment Agreement dated December 1, 1996 between the Company
and Robert N. Brey. (6)
10.5 Purchase Agreement dated as of June 26, 1996 between the
Company, The Aries Fund and The Aries Domestic Fund, L.P. (6)
10.6 Amended and Restated 1995 Omnibus Incentive Plan. (9)
10.7 Placement Agency Agreement between the Company and Paramount
Capital, Inc. dated July 1, 1997. (7)
</TABLE>
18
<PAGE>
<TABLE>
<C> <S>
10.8 Side Letter #1 to Placement Agency Agreement. (7)
10.9 Form of Subscription Agreement for the purchase of Common Stock.
(7)
10.10 Financial Advisory Agreement between the Company and Paramount
Capital, Inc. dated October 16, 1997. (7)
10.11 Lease dated December 19, 1997 between the Company and Howard M.
Ruskin. (8)
10.12+ Joint Development and Operating Agreement, dated as of January
21, 1998, between the Company, Elan Corporation, plc, Orasomal
Technologies, Inc. and Endorex Vaccine Delivery Technologies,
Inc. (8)
10.13 Securities Purchase Agreement, dated as of January 21, 1998,
between the Company and Elan International Services, Ltd. (8)
10.14 Registration Rights Agreement, dated as of January 21, 1998,
between the Company and Elan International Services, Ltd. (8)
10.15+ License Agreement, dated as of January 21, 1998, between Elan
Pharmaceuticals, plc. and Endorex Vaccine Delivery Technologies,
Inc. (8)
10.16+ License Agreement, dated as of January 22, 1998, between
Orasomal Technologies, Inc., Endorex Vaccine Delivery
Technologies, Inc. and the Company. (8)
10.17 Securities Purchase Agreement, dated as of October 21, 1998,
between the Company and Elan International Services, Ltd. (10)
10.18 Registration Rights Agreement, dated as of October 21, 1998,
between the Company and Elan International Services, Ltd. (10)
10.19+ License Agreement, dated as of October 21, 1998, between the
Company, Elan Corporation, plc, Endorex Newco, Ltd. and Elan
Medical Technologies Ltd. (10)
10.20+ Joint Development and Operating Agreement, dated as of October
21, 1998, between the Company, Elan Corporation, plc, Elan
International Services, Ltd. and Endorex Newco, Ltd. (10)
16 Letter on change in certifying accountants. (5)
21 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP, independent certified
public accountants.
27 Financial Data Schedule.
</TABLE>
- --------
+The Company was granted confidential treatment of portions of this exhibit
pursuant to Rule 24b-2 under the Securities Act of 1934, as amended.
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-13492).
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1989.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1992.
(4) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the fiscal quarter ended July 31, 1996.
(5) Incorporated by reference to the Company's Report on Form 8-K/A dated
February 10, 1997.
(6) Incorporated by reference to the Company's Annual Report on Form 10-KSB,
as amended, for the transition period ended December 31, 1996.
19
<PAGE>
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-
QSB, as amended, for the fiscal quarter ended September 30, 1997.
(8) Incorporated by reference to the Company's Annual Report on Form 10-KSB,
as amended, for the transition period ended December 31, 1997.
(9) Incorporated by reference to the Company's Registrations Statement on
Form S-8 dated September 23, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-
QSB, for the fiscal quarter ended September 30, 1998.
20
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 12,202,415
Marketable securities--available for sale...................... 950,000
Restricted cash................................................ 500,000
Prepaid expenses............................................... 65,761
Deferred costs................................................. 1,253,856
------------
Total current assets....................................... 14,972,032
Leasehold improvements and equipment, net of accumulated
amortization of $945,184........................................ 459,606
Patent issuance costs, net of accumulated amortization of
$44,601......................................................... 366,735
Investment in Newco.............................................. 400,500
------------
Total Assets..................................................... $ 16,198,873
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.......................... $ 308,386
Accrued compensation........................................... 241,017
Due to Newco................................................... 500,000
Current portion of line of credit.............................. 78,519
------------
Total current liabilities.................................. 1,127,922
Long-term portion of line of credit.............................. 314,130
------------
Total Liabilities................................................ 1,442,052
Series C exchangeable convertible preferred stock, $.05 par
value. Authorized 200,000 shares; 84,105 issued and outstanding
at liquidation value............................................ 8,430,233
Stockholders' Equity:
Preferred stock, $.05 par value. Authorized 100,000 shares;
none issued and outstanding................................... --
Series B convertible preferred stock, $.05 par value.
Authorized 200,000 shares; 80,100 issued and outstanding at
liquidation value............................................. 8,608,666
Common stock, $.001 par value. Authorized 50,000,000 shares;
10,054,642 issued and 9,936,000 outstanding................... 10,055
Additional paid-in capital..................................... 33,408,793
Deficit accumulated during the development stage............... (35,257,176)
------------
6,770,338
------------
Less: treasury stock, at cost, 118,642 shares.................... (443,750)
------------
Total stockholders' equity................................. 6,326,588
------------
Total Liabilities and Stockholders' Equity....................... $ 16,198,873
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-1
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative Period
Year Ended Year Ended February 15,
December 31, December 1985 (Inception)
1998 31, 1997 to December 31, 1998
------------ ----------- --------------------
<S> <C> <C> <C>
SBIR contract revenue.......... $ -- $ -- $ 100,000
Expenses:
SBIR contract research and
development................. -- 86,168
Proprietary research and
development................. 3,055,969 1,826,066 12,925,293
General and administrative... 3,500,682 1,450,828 7,923,593
------------ ----------- ------------
Total expenses................. 6,556,651 3,276,894 20,935,054
------------ ----------- ------------
Loss from operations........... (6,556,651) (3,276,894) (20,835,054)
Equity in loss from joint
ventures...................... (16,020,000) (16,020,000)
Other income................... -- -- 1,512
Interest income................ 799,335 185,642 1,805,933
Interest expense............... (15,854) (153,074) (209,567)
------------ ----------- ------------
Loss before income taxes....... (21,793,170) (3,244,326) (35,257,176)
Income taxes................... -- -- --
------------ ----------- ------------
Net loss....................... (21,793,170) (3,244,326) (35,257,176)
Preferred stock dividends...... (713,187) -- (713,187)
------------ ----------- ------------
Net loss available to common
stockholders.................. $(22,506,357) $(3,244,326) $(35,970,363)
============ =========== ============
Basic and diluted net loss per
share available to common
stockholders.................. $ (2.26) $ (1.03) $ (32.67)
Basic and diluted weighted
average common shares
outstanding................... 9,941,639 3,141,827 1,100,999
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
-------------------- -------------------- Paid-In Development ------------------ Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
---------- --------- --------- ---------- ----------- ------------ -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock
issued for cash
in February 1985
at $1.50 per
share........... 667 $ 1 -- $ -- $ 999 $ -- -- $ -- $ -- $ --
Net earnings for
the period from
February 15,
1985 to January
31, 1996........ -- -- -- -- -- 6,512 -- -- -- --
---------- ------- --------- ---------- ----------- ------------ -------- --------- --------- --------
Balance--January
31, 1986........ 667 1 -- -- 999 6,512 -- -- -- --
Common stock
issued for cash
in October 1986
at $750.00 per
share........... 666 1 -- -- 499,999 -- -- -- -- --
Excess of fair
market value
over option
price of non-
qualified stock
option granted.. -- -- -- -- 13,230 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (34,851) -- -- -- --
---------- ------- --------- ---------- ----------- ------------ -------- --------- --------- --------
Balance--January
31, 1987........ 1,333 2 -- -- 514,228 (28,339) -- -- -- --
Common stock
issued in May
1987 at $750.00
per share for
legal services
performed for
the company..... 7 -- -- -- 5,000 -- -- -- -- --
Net proceeds
from initial
public stock
offering in June
1987 at
$6,000.00 per
share, less
issuance costs.. 333 -- -- -- 1,627,833 -- -- -- -- --
Non-qualified
stock options
exercised....... 48 -- -- -- 33,808 -- -- -- (28,188) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 7,425 --
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 75,063 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (627,652) -- -- -- --
---------- ------- --------- ---------- ----------- ------------ -------- --------- --------- --------
Balance--January
31, 1988--
forward......... 1,721 $ 2 -- $ -- $ 2,255,932 $ (655,991) -- $ -- $ (20,763) $ --
<CAPTION>
Total
Stockholders'
Equity
--------------
<S> <C>
Common stock
issued for cash
in February 1985
at $1.50 per
share........... $ 1,000
Net earnings for
the period from
February 15,
1985 to January
31, 1996........ 6,512
--------------
Balance--January
31, 1986........ 7,512
Common stock
issued for cash
in October 1986
at $750.00 per
share........... 500,000
Excess of fair
market value
over option
price of non-
qualified stock
option granted.. 13,230
Net loss for the
year............ (34,851)
--------------
Balance--January
31, 1987........ 485,891
Common stock
issued in May
1987 at $750.00
per share for
legal services
performed for
the company..... 5,000
Net proceeds
from initial
public stock
offering in June
1987 at
$6,000.00 per
share, less
issuance costs.. 1,627,833
Non-qualified
stock options
exercised....... 5,620
Amortization of
deferred
compensation.... 7,425
Excess of fair
market value
over option
price of non-
qualified stock
options granted. 75,063
Net loss for the
year............ (627,652)
--------------
Balance--January
31, 1988--
forward......... $ 1,579,180
</TABLE>
F-3
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
--------------------- ------------------------ Paid-In Development ------------------ Deferred
Shares Par Value Shares Value Capital Stage Shares Cost Compensation
---------- --------- --------- -------------- ----------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1988--
forward......... 1,721 $ 2 -- $ -- $ 2,255,932 $ (655,991) -- $ -- $ (20,763)
Non-qualified
stock options
exercised....... 18 -- -- -- 256 -- -- -- --
Stock warrants
exercised....... 1 -- -- -- 12,000 -- -- -- --
Common stock
redeemed and
retired......... (10) -- -- -- (150) -- -- -- --
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 36,524 -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 19,113
Net loss for the
year............ -- -- -- -- -- (1,092,266) -- -- --
---------- ------- --------- -------------- ----------- ------------ -------- --------- ---------
Balance--January
31, 1989........ 1,730 2 -- -- 2,304,562 (1,748,257) -- -- (1,650)
Non-qualified
stock options
exercised....... 71 -- -- -- 1,060 -- -- -- --
Common stock
redeemed and
retired......... (12) -- -- -- (175) -- -- -- --
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 113,037 -- -- -- --
Net proceeds
from secondary
public stock
offering in
April 1989 at
$525.00 per
share, less
issuance cost... 2,174 2 -- -- 980,178 -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 1,650
Net loss for the
year............ -- -- -- -- -- (1,129,477) -- -- --
---------- ------- --------- -------------- ----------- ------------ -------- --------- ---------
Balance--January
31, 1990--
forward......... 3,963 $ 4 -- $ -- $ 3,398,662 $ (2,877,734) -- $ -- $ --
<CAPTION>
Total
Note Stockholders'
Receivable Equity
---------- --------------
<S> <C> <C>
Balance--January
31, 1988--
forward......... $ -- $ 1,579,180
Non-qualified
stock options
exercised....... -- 256
Stock warrants
exercised....... -- 12,000
Common stock
redeemed and
retired......... -- (150)
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- 36,524
Amortization of
deferred
compensation.... -- 19,113
Net loss for the
year............ -- (1,092,266)
---------- --------------
Balance--January
31, 1989........ -- 554,657
Non-qualified
stock options
exercised....... -- 1,060
Common stock
redeemed and
retired......... -- (175)
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- 113,037
Net proceeds
from secondary
public stock
offering in
April 1989 at
$525.00 per
share, less
issuance cost... -- 980,180
Amortization of
deferred
compensation.... -- 1,650
Net loss for the
year............ -- (1,129,477)
---------- --------------
Balance--January
31, 1990--
forward......... $ -- $ 520,932
</TABLE>
F-4
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
-------------------- --------------------- Paid-In Development ------------------ Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
---------- --------- --------- ----------- ----------- ------------ -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1990--
forward......... 3,963 $ 4 -- $ -- $ 3,398,662 $ (2,877,734) -- $ -- $ -- $ --
Common stock
issued for cash
in October 1990
through January
1991 at $9.00
per share....... 5,694 6 -- -- 51,244 -- -- -- -- --
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 30,635 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (854,202) -- -- -- --
---------- ------- --------- ----------- ----------- ------------ -------- --------- --------- --------
Balance--January
31, 1991........ 9,657 10 -- -- 3,480,541 (3,731,936) -- -- -- --
Common stock
issued for cash
in February 1991
through April
1991 at $9.00
per share....... 2,772 3 -- -- 24,947 -- -- -- -- --
Common stock
issued for cash
and services in
November 1991 at
$1.50 per share. 15,333 15 -- -- 22,985 -- -- -- -- --
Common stock
issued for cash
and note in
December 1991 at
$0.75 per share. 296,949 297 -- -- 200,018 -- -- -- -- (50,315)
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 16,570 -- -- -- -- --
Non-qualified
stock options
exercised....... 1 -- -- -- 1 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (410,149) -- -- -- --
---------- ------- --------- ----------- ----------- ------------ -------- --------- --------- --------
Balance--January
31, 1992--
forward......... 324,712 $ 325 -- $ -- $ 3,745,062 $ (4,142,085) -- $ -- $ -- $(50,315)
<CAPTION>
Total
Stockholders'
Equity
--------------
<S> <C>
Balance--January
31, 1990--
forward......... $ 520,932
Common stock
issued for cash
in October 1990
through January
1991 at $9.00
per share....... 51,250
Excess of fair
market value
over option
price of non-
qualified stock
options granted. 30,635
Net loss for the
year............ (854,202)
--------------
Balance--January
31, 1991........ (251,385)
Common stock
issued for cash
in February 1991
through April
1991 at $9.00
per share....... 24,950
Common stock
issued for cash
and services in
November 1991 at
$1.50 per share. 23,000
Common stock
issued for cash
and note in
December 1991 at
$0.75 per share. 150,000
Excess of fair
market value
over option
price of non-
qualified stock
options granted. 16,570
Non-qualified
stock options
exercised....... 1
Net loss for the
year............ (410,149)
--------------
Balance--January
31, 1992--
forward......... $ (447,013)
</TABLE>
F-5
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
-------------------- --------------- Paid-In Development ------------------ Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
---------- --------- --------- ----- ----------- ----------- -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1992--
forward......... 324,712 $325 -- $-- $3,745,062 $(4,142,085) -- $-- $-- $(50,315)
Payment on note
receivable...... -- -- -- -- -- -- -- -- -- 11,300
Net proceeds
from secondary
public stock
offering in
August 1992 at
$112.50 per
share, less
issuance costs.. 66,666 66 -- -- 6,230,985 -- -- -- -- --
Non-qualified
stock options
exercised....... 2,000 2 -- -- 28 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (564,173) -- -- -- --
---------- ---- --------- ---- ----------- ----------- -------- --------- -------- --------
Balance--January
31, 1993........ 393,378 393 -- -- 9,976,075 (4,706,258) -- -- -- (39,015)
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 126,000 -- -- -- (126,000) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 40,750 --
Non-qualified
stock options
exercised....... 67 -- -- -- 57 -- -- -- -- --
Collection of
note receivable. -- -- -- -- -- -- -- -- -- 39,015
Net loss for the
year............ -- -- -- -- -- (1,012,882) -- -- -- --
---------- ---- --------- ---- ----------- ----------- -------- --------- -------- --------
Balance--January
31, 1994........ 393,445 393 -- -- 10,102,132 (5,719,140) -- -- (85,250) --
Acquisition of
treasury stock.. -- -- -- -- -- -- 41,975 (300,000) -- --
Forfeiture of
non-qualified
stock options
granted......... -- -- -- -- (22,402) -- -- -- 22,402 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 49,348 --
Net loss for the
year............ -- -- -- -- -- (1,349,678) -- -- -- --
---------- ---- --------- ---- ----------- ----------- -------- --------- -------- --------
Balance--January
31, 1995--
forward......... 393,445 $393 -- $-- $10,079,730 $(7,068,818) 41,975 $(300,000) $(13,500) $--
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Balance--January
31, 1992--
forward......... $(447,013)
Payment on note
receivable...... 11,300
Net proceeds
from secondary
public stock
offering in
August 1992 at
$112.50 per
share, less
issuance costs.. 6,231,051
Non-qualified
stock options
exercised....... 30
Net loss for the
year............ (564,173)
-------------
Balance--January
31, 1993........ 5,231,195
Excess of fair
market value
over option
price of non-
qualified stock
options granted. --
Amortization of
deferred
compensation.... 40,750
Non-qualified
stock options
exercised....... 57
Collection of
note receivable. 39,015
Net loss for the
year............ (1,012,882)
-------------
Balance--January
31, 1994........ 4,298,135
Acquisition of
treasury stock.. (300,000)
Forfeiture of
non-qualified
stock options
granted......... --
Amortization of
deferred
compensation.... 49,348
Net loss for the
year............ (1,349,678)
-------------
Balance--January
31, 1995--
forward......... $2,697,805
</TABLE>
F-6
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
-------------------- --------------- Paid-In Development ------------------ Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
---------- --------- --------- ----- ----------- ------------ -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1995--
forward......... 393,445 $ 393 -- $-- $10,079,730 $ (7,068,818) 41,975 $(300,000) $(13,500) $--
Acquisition of
treasury stock.. -- -- -- -- -- -- 76,667 (143,750) -- --
Forfeiture of
non-qualified
stock options
granted......... -- -- -- -- (1,379) -- -- -- 1,379 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 12,121 --
Net loss for the
year............ -- -- -- -- -- (1,187,985) -- -- -- --
---------- ------ --------- ---- ----------- ------------ -------- --------- -------- ----
Balance--January
31, 1996........ 393,445 393 -- -- 10,078,351 (8,256,803) 118,642 (443,750) -- --
Common stock
issued at $0.975
per share....... 333,333 333 -- -- 324,667 -- -- -- -- --
Common stock
issued at $3.00
per share....... 333,333 333 -- -- 999,667 -- -- -- -- --
Non-qualified
stock options
exercised....... 145,283 146 -- -- 379,003 -- -- -- -- --
Net loss for the
period.......... -- -- -- -- -- (1,962,877) -- -- -- --
---------- ------ --------- ---- ----------- ------------ -------- --------- -------- ----
Balance--
December 31,
1996............ 1,205,394 1,205 -- -- 11,781,688 (10,219,680) 118,642 (443,750) -- --
Warrents
exercised at
$1.20 per share. 1,173 1 -- -- 1,407 -- -- -- -- --
Proceeds on
exercise of
stock options... -- -- -- -- 5,000 -- -- -- -- --
Warrants issued. -- -- -- -- 5,407,546 -- -- -- -- --
Net proceeds
from private
placement at
$2.3125 per
share, less
issuance cost... 8,648,718 8,650 -- -- 15,122,943 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (3,244,326) -- -- -- --
---------- ------ --------- ---- ----------- ------------ -------- --------- -------- ----
Balance--
December 31,
1997--forward... 9,855,285 $9,856 -- $-- $32,318,584 $(13,464,006) 118,642 $(443,750) $ -- $--
<CAPTION>
Total
Stockholders'
Equity
--------------
<S> <C>
Balance--January
31, 1995--
forward......... $ 2,697,805
Acquisition of
treasury stock.. (143,750)
Forfeiture of
non-qualified
stock options
granted......... --
Amortization of
deferred
compensation.... 12,121
Net loss for the
year............ (1,187,985)
--------------
Balance--January
31, 1996........ 1,378,191
Common stock
issued at $0.975
per share....... 325,000
Common stock
issued at $3.00
per share....... 1,000,000
Non-qualified
stock options
exercised....... 379,149
Net loss for the
period.......... (1,962,877)
--------------
Balance--
December 31,
1996............ 1,119,463
Warrents
exercised at
$1.20 per share. 1,408
Proceeds on
exercise of
stock options... 5,000
Warrants issued. 5,407,546
Net proceeds
from private
placement at
$2.3125 per
share, less
issuance cost... 15,131,593
Net loss for the
year............ (3,244,326)
--------------
Balance--
December 31,
1997--forward... $ 18,420,684
</TABLE>
F-7
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
--------------------- ----------------- Paid-In Development ------------------ Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
---------- --------- ------ ---------- ----------- ------------ ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--
December 31,
1997--forward... 9,855,285 $ 9,856 -- $ -- $32,318,584 $(13,464,006) 118,642 $ (443,750) $ -- $ --
Net proceeds
from issuance of
common stock and
warrants........ 307,692 308 -- -- 1,871,537 -- -- -- -- --
Proceeds from
exercise of
stock options... 25,000 25 -- -- 61,725 -- -- -- -- --
Purchase and
retirement of
common stock.... (133,335) (134) -- -- (129,866) -- -- -- -- --
Net proceeds
from issuance of
Series B
Preferred Stock
at $100 per
share........... -- -- 80,100 8,010,000 -- -- -- -- -- --
Accrued
preferred stock
dividends....... -- 598,666 (713,187)
Net loss for the
year............ -- -- -- (21,793,170) -- -- -- --
---------- ------- ------ ---------- ----------- ------------ ------- ---------- --------- --------
Balance--
December 31,
1998............ 10,054,642 $10,055 80,100 $8,608,666 $33,408,793 $(35,257,176) 118,642 $ (443,750) $ -- $ --
========== ======= ====== ========== =========== ============ ======= ========== ========= ========
<CAPTION>
Total
Stockholders'
Equity
--------------
<S> <C>
Balance--
December 31,
1997--forward... $ 18,420,684
Net proceeds
from issuance of
common stock and
warrants........ 1,871,845
Proceeds from
exercise of
stock options... 61,750
Purchase and
retirement of
common stock.... (130,000)
Net proceeds
from issuance of
Series B
Preferred Stock
at $100 per
share........... 8,010,000
Accrued
preferred stock
dividends....... (114,521)
Net loss for the
year............ (21,793,170)
--------------
Balance--
December 31,
1998............ $ 6,326,588
==============
</TABLE>
The accompanying notes are an integral part of this statement.
F-8
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Cumulative Period
February 15, 1985
Year Ended Year Ended (Inception) to
December 31, 1998 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating Activities:
Net loss................ $(21,793,170) $(3,244,326) $(35,257,176)
Adjustments to
reconcile net loss to
cash used in operating
activities:
Depreciation and
amortization......... 82,081 71,311 1,063,830
Amortization of
deferred
compensation......... 131,786
Equity in loss on
joint ventures....... 16,020,000 16,020,000
Excess of fair market
value over option
prices on non-
qualified stock
options.............. 528,680
Amortization of fair
value of warrants.... 1,577,644 476,046 2,053,690
Gain on sale of
assets............... (740)
Write off patent
issuance cost........ 11,641 112,647
Changes in assets and
liabilities:
Restricted cash....... (500,000) (500,000)
Prepaid expenses...... 70,027 (90,035) (65,761)
Accounts payable and
accrued expenses..... (177,734) 359,281 398,356
Accrued compensation.. 97,655 143,362 241,017
Due to newco.......... 500,000 500,000
------------ ----------- ------------
Total adjustments... 17,681,314 959,965 20,483,505
------------ ----------- ------------
Net Cash Used in
Operating Activities.... (4,111,856) (2,284,361) (14,773,671)
Investing Activities:
Patent issuance cost.... (96,933) (94,307) (523,983)
Investment in joint
ventures............... (16,420,500) (16,420,500)
Organizational costs
incurred............... (135)
Purchases of leasehold
improvements........... (255,888) (675,559)
Purchases of office and
lab equipment.......... (190,738) (58,866) (803,403)
Proceeds from assets
sold................... 1,000
Purchases of marketable
securities--available
for sale............... (950,000) (950,000)
------------ ----------- ------------
Net Cash Used in
Investing Activities.... (17,914,059) (153,173) (19,372,580)
Financing Activities:
Net proceeds from
issuance of common
stock.................. 1,871,845 17,233,001 30,024,722
Net proceeds from
issuance of preferred
stock.................. 16,325,712 16,325,712
Proceeds from exercise
of options............. 61,750 5,000 200,986
Proceeds from
borrowings from
president.............. 41,433
Repayment of borrowings
from president......... (41,433)
Proceeds from
borrowings under line
of credit.............. 392,649 362,490 1,055,139
Repayment of borrowings
under line of credit... (362,490) (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 and retirement
of common stock........ (130,000) (130,000)
Purchase of treasury
stock.................. -- (443,750)
------------ ----------- ------------
Net Cash Provided by
Financing Activities.... 18,521,956 17,238,001 46,348,666
------------ ----------- ------------
Net Increase (Decrease)
in Cash and Cash
Equivalents............. (3,503,959) 14,800,467 12,202,415
Cash and Cash
Equivalents--Beginning
of Period............... 15,706,374 905,907 --
------------ ----------- ------------
Cash and Cash
Equivalents--End of
Period.................. $ 12,202,415 $15,706,374 $ 12,202,415
============ =========== ============
Supplemental Disclosure
of Cash Flow:
Cash Paid for Interest.. $ 15,854 $ 5,529 $ 56,502
</TABLE>
The accompanying notes are an integral part of this statement.
F-9
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Operations
Basis of Presentation--Endorex Corporation and Subsidiaries (the "Company")
was incorporated in January 1987 as ImmunoTherapeutics, Inc, a wholly-owned
subsidiary of BiologicalTherapeutics, Inc. ("BTI"). BTI was incorporated on
December 19, 1984 and commenced operations on February 15, 1985 (inception
date). On March 30, 1987 BTI was merged into the Company. The financial
statements of the Company include the accounts of its predecessor, BTI, for
all periods presented. In October 1996, the Company formed its subsidiary,
Orasomal Technologies, Inc. ("Orasomal") and in July 1997, the Company formed
another subsidiary, Wisconsin Genetics, Inc. ("WGI"). In 1998, the Company
formed two joint ventures with Elan Corporation, plc ("Elan").
Nature of Business--The Company is involved in drug delivery and cancer
therapy. Orasomal licensed technology from Massachusetts Institute of
Technology ("MIT") that is being developed to deliver vaccines, proteins and
peptides. WGI is conducting Phase II clinical trials for novel cancer therapy
based on monoterpenes. Endorex is presently developing two drugs for cancer
and infectious disease: an immunomodulator and an immuno-adjuvant for
vaccines. Innovax Corporation ("Innovax"), the first joint venture with Elan,
is developing oral delivery systems for vaccines. Endorex Newco, Ltd.
("Newco"), the second joint venture, is utilizing Elan's Medipad(TM) delivery
system to deliver drugs for life-threatening diseases.
2. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
Endorex Corporation and its subsidiaries, Orasomal and WGI. Intercompany
accounts and transactions have been eliminated. The Company accounts for its
investments in Innovax and Newco using the equity method.
Segment and Geographic Information--Endorex operates exclusively in the
biotechnology drug delivery industry. It is currently in the development stage
and does not have any revenues, or any segregation of assets relating to
products or business entities. All development work is performed in the United
States. During 1999, the Company made operating decisions based upon product
and market potential and collaborative agreements and did not utilize specific
operating results to manage the business. Therefore, the Company does not have
reportable operating segments as defined by Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
Cash and Cash Equivalents--Cash equivalents are comprised of certain highly
liquid investments with maturity of three months or less when purchased.
Restricted Cash and Due to Newco--Represents cash of Newco which was held
by the Company as of December 31, 1998 on behalf of Newco.
Marketable Securities--Marketable securities are comprised of fully insured
bank certificates of deposit which have maturities ranging from six to twelve
months from the purchase date. The fair value of marketable securities
classified as available for sale approximates the carrying value of these
assets due to the short maturity of these instruments.
Leasehold Improvements and Equipment--Leasehold improvements and equipment
are stated at cost. Depreciation on equipment is computed on the straight-line
basis over five years. Leasehold improvements are amortized utilizing the
straight-line method over the term of the lease. Depreciation expense was
$75,934 and $63,045 for the periods ended December 31, 1998 and 1997,
respectively.
F-10
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Research and Development Costs--Expenditures for research and development
activities are charged to operations as incurred.
Patent Issuance Costs--The cost of patents is accumulated during the
approval process. Patents granted are amortized on a straight-line basis over
20 years from the application date or the estimated remaining economic life.
When a patent is not granted or the process is terminated the accumulated cost
is charged to operations.
Investment in Joint Ventures--Each joint venture is 80.1% owned by the
Company as of December 31, 1998. However, each joint venture is governed by a
joint development and operating agreement which provides that both Elan and
Endorex must approve all major transactions, research and development plans
and budgets. Therefore, since Endorex does not control either joint venture,
the Company accounts for its investments in them using the equity method.
Each joint venture paid a license fee to Elan for the exclusive research,
development, and commercialization of certain Elan technologies in specified
markets. The licenses were expensed by the joint ventures at the time of
purchase because there is not yet a commercial product based on the
technologies. As a result, the Company expensed $16,020,000 during 1998,
representing its share of the joint venture losses.
Impairment of Long-Lived Assets--In the event that facts and circumstances
indicate that the cost of any long-lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow is required.
Concentrations of Credit Risk--Financial instruments that potentially
subject the Company to concentrations of credit risk primarily are limited to
cash and cash equivalents. Cash is primarily invested in money market mutual
funds managed by investment banks approved by the Company's Board of
Directors. The Company's marketable securities investments are fully insured
bank certificates of deposit.
Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Risk and Uncertainties--The Company is subject to risks common to companies
in the biotechnology industry, including, but not limited to, litigation,
product liability, development by the Company or its competitors of new
technological innovations, dependence on key personnel, protection of
proprietary technology, and compliance with FDA regulations.
3. Innovax Corporation
Innovax was established in January 1998 pursuant to agreements between the
Company and Elan. At the time of closing, the Company issued to Elan
International Services, Ltd. ("EIS") 307,692 shares of Endorex Common Stock
and a six-year warrant to purchase an additional 230,770 shares of Endorex
Common Stock at an exercise price of $10.00 per share for an aggregate
purchase price of $2.0 million. In addition, EIS purchased $8.0 million of
Endorex Series B Convertible Preferred Stock, which is convertible into
Endorex Common Stock at a price of $7.50 per share, subject to adjustment. The
Series B Convertible Preferred Stock pays an 8% annual in-kind dividend. As of
December 31, 1998, accumulated and unpaid dividends amounted to $.6 million.
Innovax is initially owned 80.1% by the Company and 19.9% by Elan. Innovax
licensed certain technology from Elan and certain other technology from
Orasomal. The Company invested $8.0 million in the joint venture and Elan
invested $2.0 million.
F-11
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At the time of closing, Innovax paid Elan an initial $10.0 million license
payment. Elan may receive future milestones and royalties based on Innovax's
performance. Since the technology does not yet represent a commercial product,
Innovax recorded an expense in the first quarter of 1998 for the initial
license fee. The Company recorded its $8.0 million share of that expense and
simultaneously recorded Elan's purchase of $8.0 million of Endorex Series B
Convertible Preferred Stock.
Orasomal sub-licensed to Innovax 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 may receive milestone payments and royalties.
Elan and the Company will each fund research and development activities
equally in the first year. Accordingly, the Company includes research and
development expenses incurred in conducting such activities in the
consolidated statement of operations. After the first year, the Company and
Elan will fund future joint venture expenditures in proportion to their
respective ownership levels.
4. Endorex Newco, Ltd.
Newco was established in October 1998 pursuant to agreements between the
Company and Elan. At the time of closing, the Company and EIS purchased $8.4
million and $2.1 million of Newco's Common Stock, respectively. In addition,
Elan purchased $8.4 million of Series C Exchangeable Convertible Preferred
Stock ("Series C Preferred") of the Company. The Series C Preferred is
exchangeable at Elan's option for an additional 30.1% ownership interest of
Newco's common stock, or it may be converted into the Company's Common Stock
at a price of $9.00 per share. The Series C Preferred pays a 7% annual in-kind
dividend. As of December 31, 1998, accrued unpaid dividends amounted to $.1
million.
Newco is initially owned 80.1% by the Company and 19.9% by EIS. At the time
of closing, Newco paid Elan an initial $10.0 million license payment. Elan may
receive future milestones and royalties based on Newco's performance. Since
the technology does not yet represent a commercial product, Newco recorded an
expense in the fourth quarter of 1998 for the initial license fee. The Company
also recorded its $8.0 million share of that expense and simultaneously
recorded EIS's $8.4 million purchase of Series C Preferred.
In consideration of the license fee, Newco has obtained an exclusive
worldwide license to the Medipad(TM) drug delivery system from Elan with two
undisclosed drugs. Medipad(TM) is a lightweight, disposable drug delivery
system, which combines the simplicity of a patch with the extensive delivery
capabilities of an infusion pump.
Until December 31, 1999, EIS and the Company each will fund Newco's
research and development activities equally, and each will fund subsequent
years' expenditures in proportion to their respective ownership levels. In
addition, during 2000 and 2001, the Company may require Elan to lend up to
$4.8 million, pursuant to a convertible note, to fund the Company's portion of
the joint venture's research and development expenses. The note will bear
interest at 7% per year, compounded semi-annually, and will be convertible
into Common Stock at $5.70 per share.
5. Development Stage Activities and Operations
For the period from its incorporation to date, the Company has been a
"development stage enterprise" and the Company's operations have consisted
primarily of financial planning, raising capital, and research and development
activities. The Company has not produced any revenues from product sales since
its inception.
F-12
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Leasehold Improvements and Equipment
As of December 31, 1998, leasehold improvements and equipment consisted of
the following:
<TABLE>
<S> <C>
Leasehold improvements................. $ 670,558
Laboratory equipment................... 634,564
Office equipment....................... 99,668
---------
1,404,790
Accumulated depreciation............... (945,184)
---------
$ 459,606
=========
</TABLE>
7. Lines of Credit
On December 31, 1998, the Company obtained a $750,000 equipment financing
line with Finova Technology Financing, Inc. ("Finova"). As of December 31,
1998, the Company had used $360,000 to finance equipment and leasehold
improvements related to the Lake Forest Research and Development Center.
Interest rates for each draw are based upon the Company's base rate of 7.4%,
plus an Index Rate equivalent to the highest yield as published in The Wall
Street Journal of three-year United States Treasury Notes two days prior to
the loan draw. The Index Rate for the first draw is 4.75%, resulting in an
aggregate interest rate of 12.15%. Draws are payable in monthly installments
over a period of 48 months, which for the current draw amounts to $9,075 per
month. Finova filed security interest in the assets. In addition, the
agreement is subject to certain terms and covenants, including the right of
Finova to call the loan in the event of materially adverse financial
conditions. The fair value of the Company's line of credit is estimated to
approximate the carrying value based upon borrowing rates currently available
to the Company for borrowings with similar terms.
On May 19, 1997, the Company entered into a senior line of credit agreement
with The Aries Funds, two of its major stockholders, pursuant to which the
Company could borrow up to $500,000 (the "Bridge Loan"). The Bridge Loan
accrued interest at the rate of 12% per annum and was due and payable on
August 19, 1997. In partial consideration of the Bridge Loan, the Company
granted warrants to purchase an aggregate of 66,668 shares of Common Stock at
an initial exercise price equal to the Offering Price of the Company's private
placement. The exercise price of such warrants and the number of shares of
common stock purchasable thereunder are subject to adjustment in certain
circumstances. Such warrants are exercisable until May 19, 2002. On July 18,
1997, the Company paid the outstanding principal and interest on the Bridge
Loan. In connection with the warrant issuance, Endorex recognized additional
interest expense and a $147,546 increase to additional paid-in capital based
on the fair value of the warrants using the Black-Scholes model.
8. Stockholders' Equity
Pursuant to a Private Placement, the Company issued and sold an aggregate
of 8,648,718 shares of Common Stock on July 16, October 10, and October 16,
1997 to certain accredited investors. The aggregate proceeds of these
issuances were $20.0 million and the net proceeds to the Company after
deducting commissions and expenses were $17.2 million.
In connection with the Private Placement, the Company issued warrants to
purchase 864,865 shares of Common Stock at an exercise price of $2.54375 per
share to Paramount Capital, Inc., the Placement Agent ("Paramount") and
certain of its affiliates and employees. The estimated fair value at grant
date of the warrants was $2.1 million, which was recorded as a
reclassification of additional paid-in capital. The Company also executed a
financial advisory agreement with Paramount. In connection with the financial
advisory agreement, the Company issued warrants to purchase 1,297,297 shares
of common stock at an exercise price of $2.54375 per share to certain
employees of Paramount. The estimated fair value at grant date of the warrants
was $3.16
F-13
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
million, which is was recorded as a deferred cost and is being amortized to
expense over two years, the term of the agreement. The warrants currently are
exercisable and expire on April 16, 2003.
Net Loss Per Share--Pursuant to SFAS No. 128 "Earnings per Share," Net loss
per share is 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, including warrants, discussed above and
stock options discussed in Note 9.
9. Stock Based Compensation
The Amended and Restated 1995 Omnibus Plan ("the Plan") is intended to
promote the interests of the Company by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Company as an incentive for them to remain in the
service of the Company. The Plan is divided into three separate equity
programs: 1) the Discretionary Option Grant Program, under which eligible
persons may, at the discretion of the Plan Administrator, be granted options
to purchase shares of Common Stock, 2) the Salary Investment Option Grant
Program, under which eligible employees may elect to have a portion of their
base salary invested each year in options to purchase shares of Common Stock,
3) the Automatic Option Grant Program, under which eligible non-employee Board
members will automatically receive options at periodic intervals to purchase
shares of Common Stock, and 4) the Director Fee Option Grant Program, under
which non-employee Board members may elect to have all, or any portion, of
their annual retainer fee otherwise payable in cash applied to a special
option grant.
The terms of the options, including vesting periods, are determined by the
Compensation Committee of the Board of Directors in accordance with the Plan.
Options generally vest over four years. No one person participating in the
Plan may receive options and separately exercisable stock appreciation rights
for more than 750,000 shares of Common Stock per calendar year.
The Company has elected the disclosure-only option under Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and accordingly accounts for stock options per the terms of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Had compensation expense for stock options been determined based
upon the fair value at the grant date according to the terms of SFAS No. 123,
the Company's net loss would have increased by approximately $1.1 million or
$0.12 per share and $3.3 million, or $1.05 per share for 1998 and 1997,
respectively. Net loss and net loss per share would have increased as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Net loss available to common stockholders:
As reported................................ $(22,506,357) $(3,244,326)
Pro forma.................................. (23,649,821) (6,544,326)
Basic and diluted net loss per share
available to common stockholders:
As reported................................ $ (2.26) $ (1.03)
Pro forma.................................. (2.38) (2.08)
</TABLE>
F-14
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted average fair value of options granted with an exercise price
equal to the fair market value of the stock was $5.46 and $2.54 for 1998 and
1997, respectively.
For purposes of estimating the fair value of options according to SFAS 123,
the fair value of each option grant is estimated as of the date of the grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used: dividend yield 0%, volatility of 149-226% and 187%,
expected life of four (4) years, and risk-free interest rates of 5.36-6.06%
and 6.0% for 1998 and 1997, respectively.
Option activity for the periods ended December 31, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Price Shares
-------- ---------
<S> <C> <C>
Ending Balance at December 31, 1996................... $11.22 109,627
Granted............................................... $ 2.68 1,285,834
Expired/Cancelled..................................... $12.37 (95,347)
Exercised............................................. $ -- --
------ ---------
Ending Balance at December 31, 1997................... $ 2.66 1,300,114
====== =========
Granted............................................... $ 6.24 209,500
Expired/Cancelled..................................... $ 2.68 (24,172)
Exercised............................................. $ 2.47 (25,000)
------ ---------
Ending Balance at December 31, 1998................... $ 3.18 1,460,442
====== =========
</TABLE>
The range of exercise prices and weighted average contractual lives are as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ------------------------
Weighted Average Weighted Average
Exercise Price Shares Term Exercise Price Shares Exercise Price
-------------- ------ ---- ---------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$1.05 5,004 5.79 $1.05 5,004 $1.05
$2.47 1,155,938 8.81 $2.47 449,438 $2.47
$4.75 35,000 8.97 $4.75 8,750 $4.75
$5.50 95,000 9.00 $5.50 20,000 $5.50
$5.63 35,000 8.92 $5.63 17,500 $5.63
$6.50 42,000 9.04 $6.50 1,500 $6.50
$6.63 12,500 9.16 $6.63 -- n/a
$6.75 80,000 9.12 $6.75 -- n/a
--------- ---- ----- ------- -----
1,460,442 8.85 $3.18 502,192 $2.74
========= ==== ===== ======= =====
</TABLE>
F-15
<PAGE>
ENDOREX CORPORATION
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Income Taxes
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $10.1 million after limitations based on changes in ownership.
If not utilized to offset future taxable income, this carryforward will expire
in years 2007 to 2017. In addition, the Company has research and development
tax credit carryforwards of approximately $.5 million which expire between
2004 and 2012. Pursuant to SFAS No. 109, the Company has a deferred tax asset
as of December 31, 1998 consisting of the following:
<TABLE>
<S> <C>
Net operating loss carryforward............................... $3,447,470
Research & development credit carryforward.................... 540,729
Licensing fees--amortization.................................. 5,265,240
Depreciation.................................................. (3,344)
----------
Gross deferred tax assets..................................... 9,250,095
Valuation allowance........................................... (9,250,095)
----------
Net deferred tax assets....................................... $ --
==========
</TABLE>
Due to the uncertainty that the Company will generate income in the future
sufficient to fully or partially utilize these carryforwards, and because
potential future issuances of common and preferred stock may restrict the
Company's ability to utilize its net operating loss and tax credit
carryforwards, a valuation allowance of $9,250,095 has been established to
offset this asset. This represents an increase of $7.0 million over the
valuation allowance at December 31, 1997.
11. Leases
The Company leases its executive offices and research facilities under
operating leases, which provide for annual minimum rent and additional rent
based on increases in operating costs and real estate taxes.
Future minimum lease payments for operating leases are as follows:
<TABLE>
<S> <C>
1999............................. $82,332
2000............................. 64,924
</TABLE>
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Endorex Corporation (formerly
Endorex Corp.)
(A Development Stage Enterprise):
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows,
present fairly, in all material respects, the financial position of Endorex
Corporation (formerly Endorex Corp.) (the "Company") (a development stage
enterprise) as of December 31, 1998 and the results of its operations and cash
flows for the years ended December 31, 1998, and 1997, and for the period
cumulative from inception (February 15, 1985) to December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit in accordance with generally accepted
accounting standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 11, 1999
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Lake Forest,
State of Illinois, on March 26, 1999.
Endorex Corporation
/s/ Michael S. Rosen
By: _________________________________
Michael S. Rosen
President and Chief Executive
Officer, and Director
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Lake Forest,
State of Illinois, on March 26, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Michael S. Rosen President, Chief Executive Officer and
___________________________________________ Director
Michael S. Rosen
/s/ David G. Franckowiak Chief Financial Officer (Principal
___________________________________________ Financial and Accounting Officer)
David G. Franckowiak
* Director
___________________________________________
Richard Dunning
* Director
___________________________________________
Steve H. Kanzer
Director
___________________________________________
Paul D. Rubin
Director
___________________________________________
H. Laurence Shaw
* Director
___________________________________________
Andrew Stein
* Director
___________________________________________
Steve Thornton
* Director
___________________________________________
Kenneth Tempero
</TABLE>
/s/ David G. Franckowiak
*By: ________________________________
David G. Franckowiak Attorney-
in-fact
II-1
<PAGE>
EXHIBIT 3.11
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 12/09/1998
981472641 -- 2115033
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ENDOREX CORP.
ENDOREX CORP., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of Endorex Corp.,
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
Amended by changing Article FIRST thereof so that, as amended said
Article shall be read as follows:
"FIRST, The name of the Corporation is Endorex Corporation."
SECOND: That thereafter, pursuant to resolution of its Board of Directors,
an annual meeting of the stockholders of said corporation was duly called and
held, upon notice in accordance with Section 222 of the General Corporation Law
of the State of Delaware, at which meeting the necessary number of shares as
required by statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation law of the State of
Delaware.
IN WITNESS WHEREOF, said Endorex Corp. has caused this certificate to be
signed by David G. Franckowiak, its authorized officer, this 9/th/ day of
December, 1998.
/s/ David G. Franckowiak
------------------------------------------
David G. Franckowiak
Vice President, Finance and Administration
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
1) Orasomal Technologies, Inc.
Incorporated in the State of Delaware
Does business as Orasomal Technologies, Inc.
2) Wisconsin Genetics, Inc.
Incorporated in the State of Delaware
Does business as Wisconsin Genetics, Inc.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Endorex Corporation (formerly Endorex Corp.) on Form S-8 (File No. 333-64035)
and Form S-2 (File No. 333-44583) of our report dated February 11, 1999 on our
audits of the consolidated financial statements of Endorex Corporation as of
December 31, 1998 and for the years ended December 31, 1998 and 1997 and for the
period cumulative from inception (February 15, 1985) to December 31, 1998, which
reports are included on this Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
Chicago, Illinois
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1998
<CASH> 12,202,415
<SECURITIES> 950,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 14,972,032
<PP&E> 459,606
<DEPRECIATION> 945,184
<TOTAL-ASSETS> 16,198,873
<CURRENT-LIABILITIES> 1,127,922
<BONDS> 0
0
8,608,666
<COMMON> 10,055
<OTHER-SE> (2,292,133)
<TOTAL-LIABILITY-AND-EQUITY> 16,198,873
<SALES> 0
<TOTAL-REVENUES> 799,335
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,676,651
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,854
<INCOME-PRETAX> (22,506,357)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,506,357)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,506,357)
<EPS-PRIMARY> (2.26)
<EPS-DILUTED> (2.26)
</TABLE>
