ENDOREX CORP
10QSB, 2000-05-15
PHARMACEUTICAL PREPARATIONS
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<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, 2000

   ( )  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 April 30, 2000 12,703,237 shares of the registrant's common stock (par value,
                      $.001 per share) were outstanding.

          Transitional Small Business Disclosure Format (check one):

                              Yes  [ ]    No   [X]

<PAGE>

                        PART I. - FINANCIAL INFORMATION

ITEM 1 - Financial Statements

                              ENDOREX CORPORATION
                       (A DEVELOPMENT STAGE ENTERPRISE)
                     CONDENSED CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)


                                                              March 31, 2000
ASSETS
Current assets:
  Cash and cash equivalents                                    $  3,270,390
  Marketable securities - available for sale                      4,087,219
  Prepaid expenses                                                  165,271
                                                               ------------
        Total current assets                                      7,522,880
Leasehold improvements and equipment, net of accumulated
  amortization of $685,420                                          432,975
Patent issuance costs, net of accumulated amortization
  of $5,936                                                         149,671
                                                               ------------
TOTAL ASSETS                                                   $  8,105,526
                                                               ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses                        $    370,538
  Accrued compensation                                               60,663
  Due to joint ventures                                           1,276,505
Current portion of line of credit                                   108,806
                                                               ------------
        Total current liabilities                                 1,816,512
Long-term portion of line of credit                                 254,591
                                                               ------------
Total Liabilities                                                 2,071,103

Series C exchangeable convertible preferred stock, $.05 par
  value. Authorized 200,000 shares; 91,218 issued and
  outstanding at liquidation value                                9,186,205

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; 92,973 issued and outstanding
  at liquidation value                                            9,482,736
Common stock, $.001 par value. Authorized 50,000,000 shares;
  11,011,843 issued, and 10,893,201 outstanding                      11,013

<PAGE>

Additional paid-in capital                                       33,596,155
Deferred compensation                                               (59,744)
Deficit accumulated during the development stage                (45,730,535)
Unrealized gain/(loss) on marketable securities                      (7,657)
                                                                -----------
                                                                 (2,708,032)
Less:
  Treasury stock, at cost, 118,642 shares                          (443,750)
                                                                -----------
        Total stockholders' deficit                              (3,151,782)
                                                                -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                     $ 8,105,526
                                                                ===========



           See accompanying condensed notes to financial statements.

<PAGE>

                              ENDOREX CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               Cumulative from
                                                       Three Months           February 15, 1985
                                                      Ended March 31,        (date of inception)
                                                   2000             1999      to March 31, 2000
<S>                                             <C>            <C>           <C>

SBIR contract revenue                           $      --       $       --       $    100,000

Expenses:
SBIR contract research and development                 --               --             86,168
Proprietary research and development                251,081          588,109       14,127,344
General and administrative                          365,962          789,203       11,336,239
                                                -----------     ------------     ------------
Total operating expenses                            617,043        1,377,312       25,549,751
                                                -----------     ------------     ------------
  Loss from operations                             (617,043)      (1,377,312)     (25,449,751)

Equity losses from joint ventures                  (930,077)        (577,605)     (20,893,960)
Other income                                           --               --              5,302
Interest income                                      97,165          144,933        2,391,681
Gain on Marketable Securities
 available for sale                                  25,635             --             25,635
Interest expense                                    (11,798)         (12,887)        (273,219)
                                                -----------     ------------     ------------
  Net loss                                       (1,436,118)      (1,822,871)     (44,194,313)
  Preferred stock dividends                        (344,631)        (311,808)      (2,343,230)
                                                -----------     ------------     ------------
  Net loss available to common stockholders     $(1,780,749)    $ (2,134,679)    $(46,537,543)
                                                ===========     ============     ============
Basic and diluted net loss
 per share available
 to common stockholders                         $     (0.16)    $      (0.20)    $     (17.56)
Basic and diluted weighted
 average common shares outstanding               10,804,483       10,755,319        2,650,456
</TABLE>

           See accompanying condensed notes to financial statements.
<PAGE>

                              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)
                                                 2000           1999   to March 31, 2000
<S>                                   <C>                 <C>            <C>
Net cash used in operating
 activities                                 $  (373,681)   $(1,176,638)   $(16,046,152)
                                            -----------   ------------    ------------
INVESTING ACTIVITIES:
 Patent issuance cost                            26,355        (16,032)       (650,158)
 Investment in joint ventures                  (930,077)      (357,605)    (20,893,960)
 Organizational costs
  incurred                                           --             --            (135)
 Purchases of leasehold
  improvements                                       --             --        (695,613)
 Purchases of office and
  lab equipment                                 (20,401)       (98,679)       (931,677)
 Proceeds from assets
  sold                                               --             --           4,790
 Purchases of marketable
  securities - available for
  sale                                       (1,513,736)    (1,000,000)     (7,126,835)
 Proceeds from sale of marketable
  Securities - available for sale             1,000,000             --       3,175,496
Unrealized gain/loss on marketable
  Securities - available for sale                (7,657)            --          (7,657)
                                            -----------   ------------    ------------
Net cash used in
 investing activities                        (1,445,516)    (1,472,316)    (27,125,749)
                                            -----------   ------------    ------------
FINANCING ACTIVITIES:
 Net proceeds from
  issuance of common
  stock                                              --             --      30,024,722
 Net proceeds from issuance
  of preferred stock                                 --             --      16,325,712
 Proceeds from exercise
  of options                                    122,525             --         323,862
 Proceeds from borrowings
  from President                                     --             --          41,433
 Repayment of borrowings
  from President                                     --             --         (41,433)
 Proceeds from borrowings
  under line of credit                               --             --       1,150,913
 Repayment of borrowings
  under line of credit                          (28,844)       (18,065)       (787,515)
 Proceeds from note
</TABLE>
<PAGE>

<TABLE>
<S>                                   <C>                 <C>            <C>
  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)
Purchase of treasury stock                           --             --        (443,750)
                                      -----------------   ------------   -------------
Net cash provided by (used by)
 financing activities                            93,681        (18,065)     46,442,291
                                      -----------------   ------------   -------------
Net increase (decrease)
 in cash and cash
 equivalents                                 (1,725,516)    (2,667,019)      3,270,390
Cash and cash equivalents at
 beginning of periods                         4,995,906     12,202,415              --
                                      -----------------   ------------   -------------
Cash and cash equivalents at
 end of periods                             $ 3,270,390    $ 9,535,396    $  3,270,390
                                      =================   ============   =============
</TABLE>

           See accompanying condensed notes to financial statements.
<PAGE>

                              ENDOREX CORPORATION
                       (A DEVELOPMENT STAGE ENTERPRISE)
             CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

We prepared these unaudited interim consolidated financial statements under the
rules and regulations for reporting on Form 10-QSB.  Accordingly, we omitted
some information and footnote disclosures normally accompanying the annual
financial statements.  You should read these interim financial statements and
notes in conjunction with the consolidated financial statements and their notes
included in our latest annual report on Form 10-KSB.  It is our opinion that 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

The number of shares outstanding in prior periods has been adjusted to include
the effect of the common stock dividends issued in 1999.  The effect on the
earnings per share for 1999 is a decrease in net loss per share of $0.01 for the
three-month period ended March 31, 1999.

Net loss per share is presented on the Consolidated Statements of Operations in
accordance with SFAS No. 128 for the current and prior periods. Endorex had a
net loss for all periods being presented, which resulted in diluted and basic
earnings per share being the same for all periods presented. The potential
impact of warrants and stock options outstanding was not included in the
calculation because their inclusion would have been anti-dilutive.


JOINT VENTURE ESTIMATES

The preparation of the quarterly consolidated financial statements requires
management to make estimates and assumptions that affect the reported amounts
related to the activities of InnoVaccines Corporation and Endorex Newco, Ltd.,
our joint ventures with Elan Corporation, plc, including the reported net
liabilities related to the joint ventures and the reported amounts of equity in
losses from joint ventures. Actual results could differ from those estimates.

RESEARCH AND DEVELOPMENT COSTS

Expenditures for research and development activities are charged to operations
as incurred. Previously reported research and development expenses related to
the initial year funding of InnoVaccines have been reclassified in the
accompanying 1999 interim consolidated statement of operations to equity in
losses from joint ventures to conform to our 2000 presentation of expenditures.
The reclassification did not impact previously reported net loss or deficit
accumulated during the development stage.


SUBSEQUENT EVENT

On April 12, 2000, we completed a private placement of common stock and warrants
with domestic and foreign institutional investors. Gross proceeds were
approximately $8.6 million. The private placement consisted of approximately
1.81 million newly issued common shares priced at $4.725 per share and warrants
to
<PAGE>

purchase 452,383 common shares at $5.91 per share. These warrants are
immediately exercisable and expire in April 2005. In partial consideration for
its services in assisting us through the capital raising process, Paramount
Capital, Inc. received warrants to purchase 226,190 common shares at $5.25 per
share. These warrants are exercisable after October 12, 2000, expire in October
2007, and we may call them for exercise once the closing bid price of our common
stock has equaled or exceeded $13.125 per share for at least 20 consecutive
trading days. We intend to use the net proceeds of this financing, expected to
be approximately $8.0 million, to fund the development of our drug delivery
technologies, to continue our clinical development efforts, and for other
general corporate purposes.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion provides information to explain our results of
operations and financial condition. You should also read our unaudited
consolidated interim financial statements and their notes and our Annual Report
on Form 10-KSB. This report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, and is subject to the
safe-harbors created by those sections. These forward-looking statements are
subject to significant risks and uncertainties, including those identified in
Exhibit 99 "Risk Factors" of this Form 10-QSB, which may cause actual results to
differ materially from those discussed in any forward-looking statements. The
forward-looking statements within this Form 10-QSB are identified by words such
as "believes," "anticipates," "expects," "intends," "may," "will" and other
similar expressions. However, these words are not the exclusive means of
identifying such statements. In addition, any statements that refer to
expectations, projections, or other characterizations of future events or
circumstances are forward-looking statements. We undertake no obligation to
publicly release the results of any revisions to forward-looking statements that
may be made to reflect events or circumstances occurring subsequent to the
filing of this form 10-QSB with the SEC. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the SEC that attempt to advise interested parties of the risks and
factors that may affect our business.

Endorex is a development stage enterprise and expects no significant revenue
from the sale of products in the near future.


Material Changes in Results of Operations

Net loss for the three months ended March 31, 2000 decreased approximately $0.4
million, or 21%, to $1.4 million as compared to a loss of $1.8 million for the
three months ended March 31, 1999.  Net loss available to common shareholders
decreased approximately $0.4 million (17%) to $1.8 million, or $0.16 per share,
compared with $2.1 million, or $.20 per share for the year-earlier period.
Reductions in proprietary research and development expenditures and lower
general and administrative expenses were partially offset by increased equity
losses in joint ventures.

Proprietary research and development expenditures for the three months ended
March 31, 2000 decreased approximately $0.3 million, or 57%, as compared to the
corresponding period ended March 31, 1999.  On March 1, 2000 we announced our

<PAGE>

decision to divest our oncology business. Substantially all of the quarterly
decline in proprietary research and development expense represents reduced
spending on oncology product development. Substantially all proprietary research
and development expense in the first quarter of 2000 related to development of
our Orasome/TM/ drug delivery system, which we are developing for oral delivery
of proteins and peptides, including hormones.

General and administrative expenses for the three months ended March 31, 2000
decreased approximately $0.4 million, or 54%, as compared to the three months
ended March 31, 1999. Whereas during the first quarter of 1999 general and
administrative expense included amortization of the cost of financial advisory
warrants issued in association with capital raising transactions in 1997, these
warrants were fully amortized as of the beginning of 2000. Approximately 75% of
the decline in this period's general and administrative expenses relates to the
absence of warrant amortization expense. The balance of the decline reflects
higher charges to joint ventures as a result of proportionally greater resource
allocation to the ventures' activities relative to the prior year's first
quarter.

We have two joint ventures with Elan. InnoVaccines Corporation is developing the
Orasome/TM/ delivery system for oral and mucosal vaccines. Endorex Newco, Ltd is
developing Elan's MEDIPAD(R) drug delivery system, which consists of a small,
disposable drug delivery system that combines a microinfusion pump with the
convenience of patch technology, for the delivery of iron chelation drugs. Our
share of research and development expenditures through these joint ventures is
recorded as equity in losses from joint ventures. During the first three months
of 2000, we increased our financial support for these activities by
approximately $0.4 million, or 61%, as compared to the same period of 1999.
Substantially all of the increase related to support for InnoVaccines.

Interest income for the three months ended March 31, 2000 decreased
approximately $48 thousand as compared to the three months ended March 31, 1999
as a result of decreasing cash and investment balances.

During the first quarter of 2000, we signed a research and option agreement with
Novo Nordisk A/S under which we will jointly evaluate the Orasome/TM/ system for
delivery of Norditropin(R), Novo Nordisk's brand of human growth hormone, in
several animal models. Endorex granted Novo Nordisk an exclusive option to
license the Orasome technology for Norditropin(R) on a worldwide basis. Endorex
Newco formalized a license, co-development and supply agreement with Schein
Pharmaceutical, Inc. in February of this year. The agreement provides for joint
development and marketing in the United States of a Schein iron chelation drug
administered using Elan's MEDIPAD(R) drug delivery system.

We were granted two new patents during the first quarter of 2000 and
InnoVaccines was granted one new patent. Our Orasome(TM) delivery system patent
portfolio was expanded by the issuance of a patent describing improved methods
for oral and/or mucosal delivery of vaccines, allergens and therapeutics as well
as methods for "targeting" polymerized liposomes to specific sites or cell
types. A second patent issued to Endorex described methods for chemically
synthesizing muramyl dipeptide-based immunomodulators, which are used as vaccine
components. InnoVaccines was awarded a patent that covered methods and
compositions for enhancing the activity of vaccines by encapsulating antigens in
microparticles of less than ten micrometers in size.

In February, Frank C. Reid joined Endorex as Vice President of Finance and
Corporate Development. David Franckowiak, formerly our Vice President, Chief

<PAGE>

Financial Officer, Treasurer and Corporate Secretary, has left the company to
accept a position with another firm.


Plan of Operation and Financial Condition

Endorex intends to continue to progress preclinical development of the
Orasome/TM/ delivery system for the oral delivery of proteins and peptides,
including hormones. During 2000, Endorex also plans to begin to evaluate the
Orasome/TM/ system for oral delivery of a DNA vaccine. Under the research and
option agreement with Novo Nordisk, we intend to jointly evaluate the
Orasome/TM/ system for delivery of Norditropin(R), Novo Nordisk's brand of human
growth hormone, in several animal models.

During the remainder of 2000, we anticipate that InnoVaccines will begin efforts
to scale up production of an oral tetanus vaccine to take into human clinical
trials. Additionally, InnoVaccines will continue its efforts to develop
prototype oral hepatitis B and flu vaccines and evaluate them in animal models.
In conjunction with Schein Pharmaceutical, Endorex Newco will continue its
efforts to initiate clinical trials during 2000 using Elan's MEDIPAD drug
delivery system to deliver the iron chelator drug that is the subject of the
agreement signed in February of this year.

On March 31, 2000 and December 31, 1999, we had cash, cash equivalents, and
marketable securities of $7.4 million and $8.5 million, respectively, and
working capital of $5.7 million and $6.9 million, respectively. Our current
level of activities requires the expenditure of approximately $400,000 per
month, including costs associated with the joint ventures. We believe that our
current cash resources will be sufficient to support currently planned
operations for the next two years. However, we intend, from time to time in the
future, to seek to expand our research and development activities into other
technologies and/or products that we either may license from other persons or
develop. Any such activities may require the expenditure of funds not presently
available. We also may seek to obtain funds from possible future public or
private sales of our securities or other sources. See SUBSEQUENT EVENT, above,
and Exhibit 99--"Risk Factors."


                          PART II. - OTHER INFORMATION

ITEM 2--CHANGES IN SECURITIES

Pursuant to a private placement, on April 12, 2000 we issued to investors an
aggregate of approximately 1.81 million shares of our common stock and warrants
to purchase 452,282 shares of our common stock. The warrants issued to these
investors are immediately exercisable at $5.91 per share and expire in April
2005. The gross proceeds of the private placement were approximately $8.6
million and the net proceeds will be approximately $8.0 million. As part of the
compensation received by Paramount Capital, Inc. for its assistance in the
private placement, Paramount Capital, Inc. received warrants to purchase 226,190
shares of our common stock. These warrants issued to Paramount Capital, Inc. are
exercisable after October 12, 2000 at $5.25 per share and expire in October
2007.

<PAGE>

ITEM 5--OTHER INFORMATION

As disclosed in our latest proxy statement, the deadline for submitting
proposals to be considered for inclusion in Endorex's Proxy Statement for the
2001 Annual Meeting is January 1, 2001.

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 us by March 2, 2001 of their intent to present a proposal from
the floor at the 2001 Annual Meeting of Stockholders or of their intent to
commence a proxy solicitation for the 2001 Annual Meeting of Stockholders.


ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

      4.1  Warrant issued to Aries Fund dated as of May 19, 1997. (1)

      4.2  Warrant issued to Aries Domestic Fund, L.P. dated as of May 19,
           1997.(1)

     10.1  Financial Advisory Agreement between the Registrant and Paramount
           Capital, Inc. dated as of October 25, 1999 (1)

     10.2  Finder Agreement between the Registrant and Paramount Capital, Inc.
           dated as of February 29, 2000 (1)

     10.3  Amendment and Supplement to Finder Agreement dated as of April 6,
           2000. (1)

     27    Financial Data Schedule

     99    Risk Factors

     ------------------------

           (1)  Incorporated by reference to our Registration Statement on Form
     S-3 filed with the Commission on May 12, 2000.


b)   Reports on Form 8-K:

On March 20, 2000 we filed a report on Form 8-K to announce that certain stock
dividend and anti-dilution rights provided to investors in our October 1997
private placement terminated effective March 20, 2000.


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 12, 2000                            /s/  Michael S. Rosen
                                        -------------------------------------
                                        Michael S. Rosen
                                        President and Chief Executive Officer
                                        (principal executive officer)


May 12, 2000                            /s/  Frank C. Reid
                                        ------------------------
                                        Frank C. Reid
                                        Vice President, Finance and Corporate
                                        Development (principal financial and
                                        accounting officer)

<PAGE>

EXHIBIT 4.1    Warrant issued to Aries Fund dated as of May 19, 1997. (1)

EXHIBIT 4.2    Warrant issued to Aries Domestic Fund, L.P. dated as of May 19,
               1997. (1)

EXHIBIT 10.1   Financial Advisory Agreement between the Registrant and Paramount
               Capital, Inc. dated as of October 25, 1999. (1)

EXHIBIT 10.2   Finder Agreement between the Registrant and Paramount
               Capital, Inc. dated as of February 29, 2000. (1)

EXHIBIT 10.3   Amendment and Supplement to Finder Agreement dated as of April 6,
               2000. (1)

EXHIBIT 27

EXHIBIT 99     Risk Factors

(1)  Incorporated by reference to our Registration Statement on Form S-3 filed
     with the Commission on May 12, 2000.


<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and consolidated statement of operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>

<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                         DEC-31-2000
<PERIOD-START>                            JAN-01-2000
<PERIOD-END>                              MAR-31-2000
<CASH>                                              3,270,390
<SECURITIES>                                        4,087,219
<RECEIVABLES>                                               0
<ALLOWANCES>                                                0
<INVENTORY>                                                 0
<CURRENT-ASSETS>                                    7,522,880
<PP&E>                                              1,118,395
<DEPRECIATION>                                        685,420
<TOTAL-ASSETS>                                      8,105,526
<CURRENT-LIABILITIES>                               1,816,512
<BONDS>                                                     0
                               9,186,205
                                         9,482,736
<COMMON>                                               11,013
<OTHER-SE>                                        (12,645,531)
<TOTAL-LIABILITY-AND-EQUITY>                        8,105,526
<SALES>                                                     0
<TOTAL-REVENUES>                                      122,800
<CGS>                                                       0
<TOTAL-COSTS>                                        (617,043)
<OTHER-EXPENSES>                                     (930,077)
<LOSS-PROVISION>                                            0
<INTEREST-EXPENSE>                                    (11,798)
<INCOME-PRETAX>                                    (1,436,118)
<INCOME-TAX>                                                0
<INCOME-CONTINUING>                                (1,436,118)
<DISCONTINUED>                                              0
<EXTRAORDINARY>                                             0
<CHANGES>                                                   0
<NET-INCOME>                                       (1,436,118)
<EPS-BASIC>                                             (0.16)
<EPS-DILUTED>                                           (0.16)



</TABLE>

<PAGE>

                                                                      Exhibit 99

                                 RISK FACTORS

     An investment in our shares involves a high degree of risk and if any of
the risks discussed below come to fruition you may lose all or part of your
investment. In deciding whether to purchase shares of our common stock, you
should carefully consider the following risk factors, in addition to other
information contained in this 10-QSB, in our most recent annual report on Form
10-KSB, and in any other documents incorporated by reference from other SEC
filings. This 10-QSB also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed here or incorporated by reference. Factors that could cause or
contribute to differences in our actual results include those discussed in this
section, as well as those discussed elsewhere in this 10QSB and in other
documents incorporated by reference.

If we cannot obtain additional funding, our product development and
commercialization efforts may be reduced or discontinued.

     We will require additional funding to sustain our research and development
efforts, provide for future clinical trials, and continue our operations until
we are able to generate sufficient revenue from the sale and/or licensing of our
products. We cannot be certain whether we will be able to obtain required
additional funding on terms satisfactory to us, if at all. In addition, we have
expended, and will continue to expend, substantial funds on the development of
our product candidates and for clinical trials. We currently have commitments to
expend additional funds for the development of the Orasome(TM) oral delivery
system, the MEDIPAD(R) infusion pump for iron chelation therapy, license
contracts, severance arrangements, employment agreements, and consulting
agreements. If we are unable to raise additional funds when necessary, we may
have to reduce or discontinue development, commercialization or clinical testing
of some or all of our product candidates or enter into financing arrangements on
terms that we would not otherwise accept.

We have had significant losses and anticipate future losses.

     We are a development stage company, have experienced significant losses
since inception and have a significant accumulated deficit. We expect to incur
significant additional operating losses in the future and expect cumulative
losses to substantially increase due to expanded research and development
efforts, preclinical studies and clinical trials. All of our products are
currently in development, preclinical studies or clinical trials, and we have
not generated significant revenues from product sales. We do not expect to
generate significant product revenues in the next year. There can be no
guarantee that we will ever generate product revenues sufficient to become
profitable or to sustain profitability.

We are dependent on our joint ventures with Elan Corporation and any future
joint ventures.

     Our strategy for research, development and commercialization of certain of
our products is to rely on arrangements with corporate partners. As a result,
our products are dependent upon the success of third parties in performing
preclinical studies and clinical trials, obtaining regulatory approvals,
manufacturing and marketing. In connection with our two joint ventures with
Elan, we are obligated to fund research and development activities in proportion
to our ownership interest in each joint venture, currently 80.1% of each joint
venture, based on the research and development plan and budget that we mutually
agree upon with Elan. If we do not have sufficient resources to meet our funding
obligations under each of the two Elan joint ventures, we may have to terminate
the venture prior to commercialization or renegotiate the terms of the joint
venture with Elan, or our interest in the venture may be diluted. We intend to
pursue additional collaborations in the future; however, the terms available may
not be acceptable to us and the collaborations may not be successful. In
addition, the amount and timing of resources that our collaborators devote to
these activities are not within our control.

<PAGE>

Problems in product development may cause our cash depletion rate to increase.

     We have limited experience with clinical trials and if we encounter
unexpected difficulties with our operations or clinical trials, we may have to
expend additional funds, which would increase our cash depletion rate. Our
ability to manage expenses and our cash depletion rate are keys to the continued
development of product candidates and the completion of ongoing clinical trials.
Our cash depletion rate will vary substantially from quarter to quarter as we
fund non-recurring items associated with clinical trials, product development,
patent legal fees and consulting fees.

Our product development and commercialization efforts may not be successful.

     Our product candidates, which have not received regulatory approval, are
generally in the early stages of development. If the initial results from any of
the clinical trials are poor, those results will adversely effect our ability to
raise additional capital, which will affect our ability to continue full-scale
research and development for our oral delivery technology. In addition, product
candidates resulting from our research and development efforts, if any, are not
expected to be available commercially for several years, if at all. Our
products, if approved, may not be immediately used by doctors unfamiliar with
our product applications. We or our marketing partner may be required to
implement an aggressive education and promotion plan with doctors in order to
gain market recognition, understanding and acceptance of our products. Any such
effort may be time consuming and might not be successful. Accordingly, we cannot
guarantee that our product development efforts, including clinical trials, or
commercialization efforts will be successful or that any of our products, if
approved, can be successfully marketed.

Our technology and products may prove ineffective or harmful, or be too
expensive to market successfully.

     Our future success is significantly dependent on our ability to develop and
test workable products for which we will seek approval from the U.S. Food and
Drug Administration, or FDA, and/or from the FDA's equivalents in other
countries, to market to certain defined patient groups. The products we are
currently developing will require significant additional laboratory and clinical
testing and investment for the foreseeable future. Although we are optimistic
that we will be able to complete development of one or more products, our
proposed products may not prove to be effective in clinical trials or they may
cause harmful side effects during clinical trials. In addition, our product
candidates, if approved, may prove impracticable to manufacture in commercial
quantities at a reasonable cost and/or with acceptable quality. Any of these
factors could negatively affect our financial position and results of
operations.

Our dependence on a limited number of suppliers may negatively impact our
ability to complete clinical trials and market our products.

     Prior to commercial distribution of any of our products, if approved, we
will be required to identify and contract with a commercial supplier or
manufacturer. We cannot guarantee that these suppliers or manufacturers will be
able to qualify their facilities under regulations imposed by the FDA or that
they will be able to label and supply us with drugs in a timely manner, if at
all. Accordingly, any change in our existing or future contractual relationships
with, or an interruption in supply from, any third-party service provider or
supplier could negatively impact our ability to complete clinical trials and to
market our products, if approved.

We do not have a sales force to market our products.

     If and when we receive approval from the FDA for our initial product
candidates, the marketing of these products will be contingent upon our ability
to either license these products or enter into marketing agreements with partner
companies or our ability to recruit, develop, train and deploy our own sales
force. We currently intend to sell our products in the United States and
internationally in collaboration with one or more marketing partners. However,
we presently have only one agreement for the licensing or marketing of our
product candidates, and we cannot assure you that we will be able to enter into
any such additional agreements in a timely manner or on commercially favorable
terms, if at all. Additionally, we do not presently have a sales force, or
possess the resources or experience necessary to market any of our product

<PAGE>

candidates, if and when they are approved. Development of an effective sales
force requires significant financial resources, time and expertise. We cannot
assure you that we will be able to obtain the financing necessary to establish
such a sales force in a timely or cost effective manner, if at all, or that such
a sales force will be capable of generating demand for our product candidates,
if and when they are approved.

We maintain only limited product liability insurance and may be exposed to
claims if our insurance coverage is insufficient.

     The manufacture and sale of our products involves an inherent risk of
product liability claims. We currently have product liability insurance with
limits of liability of $10 million. Because product liability insurance is
expensive and difficult to obtain, we cannot assure you that we will be able to
maintain existing insurance or obtain additional product liability insurance on
acceptable terms or with adequate coverage against potential liabilities. Our
inability to obtain sufficient insurance coverage on acceptable terms or to
otherwise protect against potential product liability claims in excess of our
insurance coverage, if any, could negatively impact our financial position and
results of operations.

We may not be able to compete with our competitors in the biotechnology
industry.

     The biotechnology industry is intensely competitive, subject to rapid
change and sensitive to new product introductions or enhancements. Virtually all
of our existing competitors have greater financial resources, larger technical
staffs, and larger research budgets than we have, as well as greater experience
in developing products and conducting clinical trials. Our competitors in the
vaccine delivery field include Aviron, which is developing a nasal flu vaccine
that is in phase III, BioVector, which is in phase II trials with an intranasal
flu vaccine and another major vaccine, specialized biotechnology firms,
universities, and governmental agencies. Our competitors in the liposomal
formulation field include The Liposome Company (owned by Elan Corporation),
Gilead Sciences, Inc. and ALZA Corporation. Our competitors in the field of the
oral delivery of drugs include Emisphere, which has recently started Phase III
trials for oral heparin and phase I trials with oral calcitonin, and is in
preclinical development with oral hormones; Unigene, which has an oral
calcitonin product in phase I; and Protein Delivery which has an oral insulin in
early clinical trials in Europe and the U.S. In addition, there may be other
companies which are currently developing competitive technologies and products
or which may in the future develop technologies and products which are
comparable or superior to our technologies and products. Accordingly, we cannot
assure you that we will be able to compete successfully with our existing and
future competitors or that competition will not negatively affect our financial
position or results of operations in the future.

We may not be successful if we are unable to obtain and maintain patents and
licenses to patents.

     Our success depends, in large part, on our ability to obtain and maintain a
proprietary position in our products through patents, trade secrets and orphan
drug designations. We have been granted several United States patents and have
submitted several United States patent applications and numerous corresponding
foreign patent applications, and have also obtained licenses to patents or
patent applications owned by other entities. However, we cannot assure you that
any of these patent applications will be granted or that our patent licensors
will not terminate any of our patent licenses. We also cannot guarantee that any
issued patents will provide competitive advantages for our products or that any
issued patents will not be successfully challenged or circumvented by our
competitors. Further, the laws of certain countries may not protect our
proprietary rights to the same extent as U.S. law. We are dependent upon our
license of oral delivery technology from MIT, and licenses from Elan in
connection with our two joint ventures with Elan. We cannot assure you that the
technology underlying such licenses will be profitable, or that we will be able
to retain licenses for such technologies or that we will obtain patent
protection outside the United States. To the extent that we rely on trade secret
protection and confidentiality agreements to protect our technology, others may
develop similar technology, or otherwise obtain access to our findings or
research materials embodying those findings. The application of patent law to
the field of biotechnology is relatively new and has resulted in considerable
litigation. There is a substantial risk in the rapidly developing biotechnology
industry that patents and other intellectual property rights held by us could be
infringed by others or that products developed by us or their method of
manufacture could be covered by patents owned by other companies. Although we
believe that our patents and our licensors' patents do not infringe on any third
party's patents, we cannot be certain that we can avoid litigation involving
such patents or other

<PAGE>

proprietary rights. Patent and proprietary rights litigation entails substantial
legal and other costs, and we may not have the necessary financial resources to
defend or prosecute our rights in connection with any litigation. Responding to,
defending or bringing claims related to patents and other intellectual property
rights may require our management to redirect our human and monetary resources
to address these claims and may take years to resolve.

Our product development and commercialization efforts may be reduced or
discontinued due to difficulties or delays in clinical trials.

     We may encounter unanticipated problems, including development,
manufacturing, distribution, financing and marketing difficulties, during the
product development, approval and commercialization process. Our product
candidates may take longer than anticipated to progress through clinical trials.
In addition, patient enrollment in the clinical trials may be delayed or
prolonged significantly, thus delaying the clinical trials and causing increased
costs. If we experience any such difficulties or delays, we may have to reduce
or discontinue development, commercialization or clinical testing of some or all
of our product candidates.

Our product development and commercialization efforts may be reduced or
discontinued due to delays or failure in obtaining regulatory approvals.

     We will need to do substantial additional development and clinical testing
prior to seeking any regulatory approval for commercialization of our product
candidates. Testing, manufacturing, commercialization, advertising, promotion,
export and marketing, among other things, of our proposed products are subject
to extensive regulation by governmental authorities in the United States and
other countries. The testing and approval process requires substantial time,
effort and financial resources and we cannot guarantee that any approval will be
granted on a timely basis, if at all. At least initially, we intend, to the
extent possible, to rely on licensees to obtain regulatory approval for
marketing our products. The failure by us or our licensees to adequately
demonstrate the safety and efficacy of any of our product candidates under
development could delay, limit or prevent regulatory approval of the product,
which may require us to reduce or discontinue development, commercialization or
clinical testing of some or all of our product candidates. Companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks
in conducting advanced human clinical trials, even after obtaining promising
results in earlier trials. Furthermore, the United States Food & Drug
Administration may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk. Also, even if regulatory approval of a product is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Accordingly, we may experience difficulties and delays in
obtaining necessary governmental clearances and approvals to market our
products, and we may not be able to obtain all necessary governmental clearances
and approvals to market our products.

Our products, if approved, may not be commercially viable due to health care
changes and third-party reimbursement limitations.

     Recent initiatives to reduce the federal deficit and to change health care
delivery are increasing cost-containment efforts. We anticipate that Congress,
state legislatures and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, price controls on pharmaceuticals, and other fundamental changes to
the health care delivery system. Any such changes could negatively impact the
commercial viability of our products, if approved. Our ability to successfully
commercialize our product candidates, if and when they are approved, will depend
in part on the extent to which appropriate reimbursement codes and authorized
cost reimbursement levels of such products and related treatment are obtained
from governmental authorities, private health insurers and other organizations,
such as health maintenance organizations. In the absence of national Medicare
coverage determination, local contractors that administer the Medicare program,
within certain guidelines, can make their own coverage decisions. Accordingly,
there can be no assurance that any of our product candidates, if approved and
when commercially available, will be included within the then current Medicare
coverage determination or the coverage determination of state Medicaid programs,
private insurance companies and

<PAGE>

other health care providers. In addition, third-party payers are increasingly
challenging the prices charged for medical products and services. Also, the
trend toward managed health care and the growth of health maintenance
organizations in the United States may all result in lower prices for our
products, if approved and when commercially available, than we currently expect.
The cost containment measures that health care payers and providers are
instituting and the effect of any health care changes could negatively affect
our financial performance, if and when one or more of our products are approved
and available for commercial use.

Our operations and financial performance could be negatively affected if we
cannot attract and retain key personnel.

     Our success is dependent, in part, upon a limited number of key executive
officers and technical personnel, including Michael S. Rosen, our President and
Chief Executive Officer, Dr. Robert N. Brey, our Vice President of Research and
Development, and Frank C. Reid, our Vice President of Finance and Corporate
Development. We also believe that our future success will depend largely upon
our ability to attract and retain highly skilled research and development and
technical personnel. We maintain key man insurance only on Mr. Rosen. We face
intense competition in our recruiting activities, including competition from
larger companies with greater resources. We cannot assure you that we will be
successful in attracting or retaining skilled personnel. The loss of certain key
employees or our inability to attract and retain other qualified employees could
negatively affect our operations and financial performance.

Our stock price is highly volatile and our common stock is thinly traded.

     The market price of our common stock, like that of many other development-
stage public pharmaceutical and biotechnology companies, has been highly
volatile and may continue to be so in the future. Factors such as disclosure of
results of preclinical and clinical testing, adverse reactions to products,
governmental regulation and approvals, and general market conditions may have a
significant effect on the market price of the common stock and our other equity
securities. Since it commenced trading on the American Stock Exchange on August
6, 1998, our common stock has been thinly traded. We cannot guarantee that a
more active trading market will develop in the future.

Investors may suffer substantial dilution.

     Endorex has a number of agreements or obligations that may result in
dilution to investors. These include:

 .    warrants to purchase 2,012,622 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, subject to adjustment, held by Elan;

 .    warrants to purchase 43,334 shares of common stock at $2.3125 per share,
     subject to adjustment, held by the Aries Master Fund and warrants to
     purchase 23,334 shares of common stock at $2.3125 per share, subject to
     adjustment, held by the Aries Domestic Fund, L.P.;

 .    warrants to purchase 452,383 shares of common stock at $5.91, subject to
     adjustment, held by certain investors pursuant to the April 2000 private
     placement of our common stock;

 .    warrants to purchase 226,190 shares of common stock at $5.25, subject to
     adjustment, issued in connection with the April 2000 private placement of
     our common stock;

 .    conversion rights and dividend rights of preferred stock held by Elan,
     consisting of 92,973, subject to adjustment, 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 $7.38 per share, subject to adjustment, and 91,218,
     subject to adjustment, 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
     Endorex's interest in the second joint venture or convertible at
     liquidation value into common stock at $8.86 per share;

<PAGE>

 .    options to purchase approximately 1.7 million shares of common stock
     outstanding to participants in our stock option plan with a weighted
     average exercise price of approximately $2.88; and

 .    anti-dilution rights under the above warrants and preferred, which can
     permit purchase of additional shares and/or lower exercise/conversion
     prices under certain circumstances. To the extent that anti-dilution rights
     are triggered, or warrants or conversion rights are exercised, our
     stockholders will experience substantial dilution and the Company's stock
     price may decrease.

Future sales of common stock by our existing stockholders could adversely affect
our stock price.

     The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market, or the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.

We have not paid cash dividends.

     We have never paid cash dividends on our common stock and we do not
anticipate paying any dividends in the foreseeable future. We currently intend
to retain earnings, if any, for the development of our business.

We have certain interlocking relationships that may present potential conflicts
of interest.

     Lindsay A. Rosenwald, M.D., is the Chairman 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 of The Aries Master Fund II, a Cayman Island exempted
company, and the general partner of each of the Aries Domestic Fund, L.P. and
the Aries Domestic Fund II, L.P., each of which is a significant stockholder of
Endorex. In addition, certain officers, employees and/or associates of Paramount
and/or its affiliates own securities in a subsidiary of Endorex. 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 Endorex and any of its affiliates be on terms that, when taken as a
whole, are substantially as favorable to us 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 us to make any additional products or
technologies available to us. We do not expect and you 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 us. In addition,
certain of the current officers and directors of Endorex or any officers or
directors of the company hereafter appointed may from time to time serve as
officers, directors or consultants of other biopharmaceutical or biotechnology
companies. There can be no assurance that such other companies will not have
interests in conflict with us.

Certain directors and stockholders have significant influence.

     Our directors, executive officers and principal stockholders and certain of
their affiliates have the ability to influence the election of directors and
most other stockholder actions. In particular, pursuant to a placement agency
agreement, Paramount may propose up to three persons for nomination as directors
until October 2000. In addition, our Board of Directors cannot exceed six
persons without the prior written consent of Paramount until October 2000. These
arrangements may discourage or prevent any proposed takeover of Endorex,
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.



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