<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the Quarterly Period Ended March 31, 1999
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________ to ____________
Commission File No. 1-14778
ENDOREX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 41-1505029
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
28101 BALLARD DRIVE, SUITE F, LAKE FOREST, IL 60045
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (847) 573-8990
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
At May 14, 1999 9,936,000 shares of the registrant's common stock (par value,
$.001 per share) were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
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PART I. - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,535,396
Marketable securities - available for sale 1,950,000
Restricted cash 500,000
Prepaid expenses 82,363
Deferred costs 864,848
------------
Total current assets 12,932,607
Leasehold improvements and equipment, net of accumulated
amortization of $979,100 524,369
Patent issuance costs, net of accumulated amortization
of $50,072 377,295
Investment in Newco 400,500
------------
TOTAL ASSETS $ 14,234,771
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 344,436
Accrued compensation 81,801
Due to Newco 500,000
Current portion of line of credit 84,197
------------
Total current liabilities 1,010,434
Long-term portion of line of credit 290,387
------------
Total Liabilities 1,300,821
Series C exchangeable convertible preferred stock, $.05 par
value. Authorized 200,000 shares; 84,105 issued and
outstanding at liquidation value 8,577,014
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 8,773,694
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 33,096,984
Deficit accumulated during the development stage (37,080,047)
------------
</TABLE>
2
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<TABLE>
<S> <C>
4,800,686
Less:
Treasury stock, at cost, 118,642 shares (443,750)
------------
Total stockholders' equity 4,356,936
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,234,771
============
</TABLE>
See accompanying condensed notes to financial statements.
3
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ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
Three Months February 15, 1985
Ended March 31, (date of inception)
1999 1998 to March 31, 1999
<S> <C> <C> <C>
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract research and development -- -- 86,168
Proprietary research and development 945,714 611,748 13,871,007
General and administrative 789,203 834,566 8,712,796
----------- ----------- ------------
Total operating expenses 1,734,917 1,446,314 22,669,971
----------- ----------- ------------
Loss from operations (1,734,917) (1,446,314) (22,569,971)
Equity losses from joint ventures (220,000) (8,010,000) (16,240,000)
Other income -- -- 1,512
Interest income 144,933 224,136 1,950,866
Interest expense (12,887) -- (222,454)
----------- ----------- ------------
Net loss (1,822,871) (9,232,178) (37,080,047)
Preferred stock dividends (311,808) (121,138) (1,024,995)
----------- ----------- ------------
Net loss available to common stockholders $(2,134,679) $(9,353,316) $ 38,105,042
=========== =========== ============
Basic and diluted net loss per share available
to common stockholders $ (0.21) $ (0.93) $ (30.36)
Basic and diluted weighted average common
shares outstanding 9,936,000 10,077,571 1,255,158
</TABLE>
See accompanying condensed notes to financial statements.
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ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION> Cumulative from
Three Months February 15, 1985
Ended March 31, (date of inception)
1999 1998 to March 31, 1999
<S> <C> <C> <C>
Net cash used in operating
activities $(1,534,243) $ (771,391) $(16,307,914)
----------- ----------- ------------
INVESTING ACTIVITIES:
Patent issuance cost (16,032) (69,232) (540,015)
Investment in joint ventures -- (8,010,000) (16,420,500)
Organizational costs
incurred -- -- (135)
Purchases of leasehold
improvements -- -- (675,559)
Purchases of office and
lab equipment (98,679) (42,370) (902,082)
Proceeds from assets
sold -- -- 1,000
Purchases of marketable
securities - available for
sale (1,000,000) -- (1,950,000)
----------- ----------- ------------
Net cash used in
investing activities (1,114,711) (8,121,602) (20,487,291)
----------- ----------- ------------
FINANCING ACTIVITIES:
Net proceeds from
issuance of common
stock -- 1,871,845 30,024,722
Net proceeds from issuance
of preferred stock -- 8,010,000 16,325,712
Proceeds from exercise
of options -- 61,750 200,986
Proceeds from borrowings
from President -- -- 41,433
Repayment of borrowings
from President -- -- (41,433)
Proceeds from borrowings
under line of credit -- -- 1,055,139
Repayment of borrowings
under line of credit (18,065) -- (680,555)
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)
</TABLE>
5
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Purchase of treasury stock -- -- (443,750)
----------- ----------- ------------
Net cash provided by (used by)
financing activities (18,065) 9,813,595 46,330,601
----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents (2,667,019) 920,602 9,535,396
Cash and cash equivalents at
beginning of periods 12,202,415 15,706,374 --
----------- ----------- ------------
Cash and cash equivalents at
end of periods $ 9,535,396 $16,626,976 $ 9,535,396
=========== =========== ============
</TABLE>
See accompanying condensed notes to financial statements.
6
<PAGE>
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED NOTES TO FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements included herein are
prepared under the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnote disclosures normally accompanying
the annual financial statements have been omitted. The interim financial
statements and notes should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's latest annual
report on Form 10-KSB. In the opinion of management, the consolidated financial
statements include all adjustments necessary for a fair statement of the results
of operations, financial position and cash flows for the interim periods. All
adjustments were of a normal recurring nature. The results of operations for
interim periods are not necessarily indicative of the results for the full
fiscal year.
NET LOSS PER SHARE
Net loss per share is presented on the Consolidated Statements of
Operations in accordance with SFAS No. 128 for the current and prior periods.
Operations resulted in a net loss for all periods presented, resulting in
diluted and basic earnings per share being the same for all periods presented
due to the anti-dilutive effect of potential dilutive common shares, including
warrants and stock options.
EQUITY LOSSES FROM JOINT VENTURES
During the first quarter, Innovax purchased an option to acquire an
exclusive license to proprietary technology and patents for the development of
orally delivered human and veterinary vaccines from Vaxcel, Inc. ("Vaxcel"). The
Company paid option fees of $220,000 on behalf of Innovax and recorded such fees
as Equity Losses from Joint Ventures.
During the second quarter of 1999, Innovax exercised its option to acquire
the technology. In addition, Innovax amended the license agreement that it
acquired from Vaxcel. The technology is licensed from the Southern Research
Institute ("SRI") and the University of Alabama Research Foundation ("UABRF") in
Birmingham, Alabama. Innovax paid total licensing fees of $870,000 during the
first and second quarter, of which the Company and Elan each paid $435,000.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following "Discussion and Analysis or Plan of Operation" provides
information which management believes is relevant to an assessment and
understanding of the Company's results of operations and financial condition.
The discussion should be read in conjunction with the Company's unaudited
consolidated interim financial statements and notes thereto and the Company's
Annual Report on Form 10-KSB. This report contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Investors are cautioned that such statements are
only predictions and that actual events or results may differ materially. In
evaluating such statements, investors should carefully consider the various
factors identified in this report, which could cause actual results to differ
materially from those indicated from such forward-looking statements,
7
<PAGE>
including those set forth in Exhibit 99 "Certain Factors that May Affect Future
Results, Financial Condition and the Market Price of Securities" on this
Quarterly Report on Form 10-QSB.
Material Changes in Results of Operations
Net loss for the three months ended March 31, 1999 decreased approximately
$7.4 million, or 80%, as compared to the three months ended March 31, 1998,
primarily due to the $8 million equity loss from Innovax, recorded in the first
quarter of 1998. The equity loss included the Company's 80.1% share of the $10
million license fee paid by Innovax to Elan. The Company recognized a $.2
million equity loss on the Innovax joint venture during the first quarter of
1999 due to Innovax's purchase of an option to acquire rights to patents and
technology. 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 three months ended March 31,
1999 increased $.3 million, or 55%, as compared to the corresponding period
ended March 31, 1998. The increase was primarily due to increased research and
development activities to support the Company's preparatory work, including
development of a new formulation for filing its own Investigational New Drug
("IND") for Perillyl alcohol ("POH") and initiation of a Phase I trial related
to the IND, preclinical work on the Orasome(TM) technology, the Innovax joint
venture with Elan, a research agreement with the University of Wisconsin-Madison
to develop and evaluate other monoterpene analogs as cancer drug candidates, and
expenses associated with the second joint venture, established with Elan for the
commercialization, research and development of two drugs using the Medipad(R)
technology. The Medipad(R) system is a small, disposable drug delivery system.
General and administrative expenses for the three months ended March 31,
1999 decreased approximately $45,000, or 5%, as compared to the three months
ended March 31, 1998.
Interest income for the three months ended March 31, 1999 decreased
approximately $79,000 as compared to the three months ended March 31, 1998 as a
result of decreasing cash and investment balances.
Plan of Operation and Financial Condition
During the next twelve months, the Company will continue to conduct Phase
II clinical trials for its cancer drugs. During the current quarter additional
Phase II human clinical trials were initiated to evaluate POH in colorectal and
pancreatic cancers. These trials are sponsored by the National Cancer Institute
and are not expected to have a significant impact on the Company's expenses. We
are planning to file our own IND application with the FDA with a new formulation
of POH, and initiate a Phase I bridging study to be conducted about midyear. The
Company is also evaluating initiation of additional clinical trials with POH 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.
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 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(R) in one drug through its second joint venture with
Elan.
8
<PAGE>
On March 31, 1999 and December 31, 1998, the Company had unrestricted cash,
cash equivalents, and marketable securities of $11.5 million and $13.2 million,
respectively, and working capital of $11.0 million and $12.6 million,
respectively, exclusive of deferred costs. As of March 31, 1999, the Company
also had $5.7 million of unused lines of credit and restricted cash. The
Company's current level of operating 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 March 31, 1999, the Company has used approximately
$8.2 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 codes
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 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
9
<PAGE>
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.
PART II. - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
As disclosed in the Company's latest proxy statement, the deadline for
Submitting proposals to be considered for inclusion in the Company's Proxy
Statement for the 2000 Annual Meeting is January 1, 2000.
Pursuant to recent amendments to Rule 14a-4(c)(1) under the Securities Exchange
Act of 1934, the Company will have discretionary voting authority if a proponent
does not notify the Company by March 2, 2000 of their intent to present a
proposal from the floor at the 2000 Annual Meeting of Stockholders or of their
intent to commence a proxy solicitation for the 2000 Annual Meeting of
Stockholders.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
27 Financial Data Schedule
99 Certain Factors that May Affect Future Results, Financial
Condition, and the Market Price of Securities
____________________
b) Reports on Form 8-K:
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENDOREX CORPORATION
May 14, 1999 /s/ Michael S. Rosen
---------------------
Michael S. Rosen
President and Chief Executive Officer
10
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(principal executive officer)
/s/ David G. Franckowiak
------------------------
May 14, 1999 David G. Franckowiak
Chief Financial Officer
(principal financial and accounting officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,535,396
<SECURITIES> 1,950,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,932,607
<PP&E> 524,369
<DEPRECIATION> 979,100
<TOTAL-ASSETS> 14,234,771
<CURRENT-LIABILITIES> 1,010,434
<BONDS> 0
0
17,350,708
<COMMON> 10,055
<OTHER-SE> (4,426,813)
<TOTAL-LIABILITY-AND-EQUITY> 14,234,771
<SALES> 0
<TOTAL-REVENUES> 144,933
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,954,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,887
<INCOME-PRETAX> (1,822,871)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,822,871)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,822,871)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
<PAGE>
Certain Factors that May Affect Future Results, Financial Condition and the
Market Price of Securities
Need for Substantial Additional Funds. The Company had approximately $11.5
million of unrestricted cash and marketable securities at March 31, 1999. The
Company may be required to seek additional financing in the future to continue
operations during such period in the event of cost overruns, unanticipated
expenses, a determination to pursue additional research projects, or the failure
to receive funds anticipated from other sources. The Company will require
substantial additional funds to finance its business activities on an ongoing
basis. The Company's actual future capital requirements will depend on numerous
factors, including, but not limited to, costs associated with technologies and
products which it may license from third parties, progress in its research and
development programs, including preclinical and clinical trials, costs of filing
and prosecuting patent applications and, if necessary, enforcing issued patents
or obtaining additional licenses to patents, competing technological and market
developments, the cost and timing of regulatory approvals, the ability of the
Company to establish collaborative relationships, and the cost of establishing
manufacturing, sales and marketing capabilities. The Company has no current
commitment to obtain other additional funds and is unable to state the amount or
potential source of any other additional funds. Because of the Company's
potential long-term capital requirements, it may undertake additional equity
offerings whenever conditions are favorable, even if it does not have an
immediate need for additional capital at that time. There can be no assurance
that the Company will be able to obtain additional funding when needed, or that
such funding, if available, will be obtainable on reasonable terms. Any such
additional funding may result in significant dilution to existing stockholders.
If adequate funds are not available, the Company may be required to accept
unfavorable alternatives, including (i) the delay, reduction or elimination of
research and development programs, capital expenditures, and marketing and other
operating expenses, (ii) arrangements with collaborative partners that may
require the Company to relinquish material rights to its products that it would
not otherwise relinquish, or (iii) a merger of the Company or a sale of the
Company or its assets.
Early Stage of Development. The Company is a development stage enterprise and
expects no significant revenue from the sale of products in the near future. The
Company's proprietary immunomodulator, ImmTher(R), has completed some Phase II
clinical trials for cancer with limited response in gross metastatic disease.
The Company initiated new randomized Phase II clinical 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) 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 five Phase II trials
in breast, ovarian, Prostate, pancreatic and colorectal 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
<PAGE>
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
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(R) 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
<PAGE>
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
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
<PAGE>
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 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
<PAGE>
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
<PAGE>
restrictions on such product or manufacturing, including withdrawal of such
product from the market. Change in the manufacturing procedures used by the
Company for any of the Company's approved drugs are subject to FDA review, which
could have an adverse effect upon the Company's ability to continue the
commercialization or sale of a drug. The process of obtaining FDA and foreign
regulatory approval is costly and time consuming, and there can be no assurance
that any product that the Company may develop will be deemed to be safe and
effective by the FDA. The Company will not be permitted to market any product it
may develop in any jurisdiction in which the product does not receive regulatory
approval.
The Company is also subject to various foreign, federal, state and local laws,
regulations and recommendations (collectively "Governmental Regulations")
relating to safe working conditions, laboratory and manufacturing practices, the
experimental use of animals and the use, manufacture, storage, handling and
disposal of hazardous or potentially hazardous substances, including radioactive
compounds and infectious disease agents, used in connection with the Company's
research and development work and manufacturing processes. 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
<PAGE>
advertising budgets of large pharmaceutical companies. To date, the Company has
not entered into any collaborative marketing agreements or distributorship
arrangements for any of its proposed products and there can be no assurance that
the Company will be able to enter into any such arrangements on favorable terms
or at all. The Company may ultimately determine to establish its own
manufacturing and/or marketing capability, at least for certain products, in
which case it will require substantial additional funds and personnel.
Use of Hazardous Materials; Environmental Matters. The Company's research and
development involves the controlled use of small quantities of hazardous
materials, chemicals and various radioactive compounds. Although the Company
believes that its safety procedures for handling and disposing of such materials
comply with the standards prescribed by federal, state and local regulations,
the risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, the Company could be held liable
for any resulting damages, and any such liability could exceed the resources of
the Company. There can be no assurance that the Company will not be required to
incur significant costs to comply with environmental laws and regulations in the
future, nor that the operations, business or assets of the Company will not be
materially adversely affected by current or future environmental laws or
regulations.
Product Liability Exposure; Limited Insurance Coverage. The testing and
marketing of pharmaceutical products entails an inherent risk of exposure to
product liability claims from adverse effects of products. The Company has
insurance with limits of liability to $10.0 million for each claim from $1.0
million, and to $10.0 million in the aggregate. There is no assurance that
current or future policy limits will be sufficient to cover all possible
liabilities. Further, there can be no assurance that adequate product liability
insurance will continue to be available in the future or that it can be
maintained at reasonable costs to the Company. In the event of a successful
product liability claim against the Company, lack or insufficiency of insurance
coverage could have an adverse effect on the Company.
Dependence on Key Personnel and Scientific Advisors; Evolution of Management.
The Company is dependent on the principal members of its management and
scientific staff, the loss of whose services could impede the achievement of
development objectives. Furthermore, as the Company's focus evolves, the
Company's need for certain skills may diminish and the need for other skills may
arise. Thus, recruiting and retaining qualified scientific personnel to perform
research and development work in the future will also be critical to the
Company's success and may lead to further evolution of the Company's management.
Although the Company believes it will be successful in attracting and retaining
skilled and experienced scientific personnel, there can be no assurance that the
Company will be able to attract and retain such personnel on acceptable terms
given the competition among numerous pharmaceutical and health care companies,
universities and non-profit research institutions for experienced scientists and
managers.
The Company's scientific advisors are employed on a full-time basis by
unrelated employers and some have one or more consulting or other advisory
arrangements with other entities which at times may conflict with their
obligations to the Company. Inventions or processes discovered by such persons,
other than those to which the Company's licenses relate, or those for which the
Company is able to acquire licenses, or those 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.
<PAGE>
Limited Personnel; Dependence on Contractors. As of May 1, 1999, the Company
had nineteen 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 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
<PAGE>
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.
Certain Interlocking Relationships; Potential Conflicts of Interest.
Lindsay A. Rosenwald, M.D., is the President and sole stockholder of Paramount
Capital Asset Management, Inc. ("PCAM"), Paramount Capital, Inc. ("Paramount"),
and Paramount Capital Investment LLC ("PCI"), a merchant banking and venture
capital firm specializing in biotechnology companies. 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. 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
<PAGE>
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."
