-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MQ8OPZhemFAI+NqG79Qy+OCPCt9PzYyqWNlQTDwYIjSJofmIgz10/lgfDsAo+rdY ZRP1Fcoa90VkDJOEL3NCvw== 0000950131-99-006249.txt : 19991115 0000950131-99-006249.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950131-99-006249 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENDOREX CORP CENTRAL INDEX KEY: 0000812796 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 411505029 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16929 FILM NUMBER: 99749340 BUSINESS ADDRESS: STREET 1: 28101 BALLARD DR. CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 847-573-8990 MAIL ADDRESS: STREET 1: 28101 BALLARD DR. CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: IMMUNOTHERAPEUTICS INC DATE OF NAME CHANGE: 19920703 10QSB 1 FORM 10-QSB 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 September 30, 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 Identification incorporation or organization) 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 November 12, 1999 10,352,632 shares of the registrant's common stock (par value, $.001 per share) were outstanding. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PART I. - FINANCIAL INFORMATION ITEM 1 - Financial Statements ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, 1999 ASSETS Current assets: Cash and cash equivalents $ 6,044,697 Marketable securities - available for sale 3,000,000 Restricted cash 500,000 Prepaid expenses 93,404 Deferred costs 73,865 ------------ Total current assets 9,711,966 Leasehold improvements and equipment, net of accumulated amortization of $633,685 481,952 Patent issuance costs, net of accumulated amortization of $56,633 483,883 Investment in joint venture 400,500 ------------ TOTAL ASSETS $ 11,078,301 ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 280,952 Accrued compensation 108,714 Due to joint venture 500,000 Note payable 30,185 Current portion of line of credit 108,545 ------------ Total current liabilities 1,028,396 Long-term liabilities: Long-term portion of line of credit 570,683 Note payable to EIS 310,314 ------------ Total long-term liabilities 880,997 ------------ Total Liabilities 1,909,393 Series C exchangeable convertible preferred stock, $.05 par value. Authorized 200,000 shares; 84,105 issued and outstanding at liquidation value 8,872,187 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 9,094,971 Common stock, $.001 par value. Authorized 50,000,000 shares; 10,471,274 issued, and 10,352,632 outstanding 10,472 Additional paid-in capital 33,261,301 Deficit accumulated during the development stage (41,626,273) ------------ 740,471 Less: Treasury stock, at cost, 118,642 shares (443,750) ------------ Total Stockholders' Equity 296,721 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,078,301 ============
See accompanying condensed notes to financial statements. ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative from Nine Months February 15, 1985 Ended Sept. 30, (date of inception) 1999 1998 to Sept. 30, 1999 Revenue: SBIR contract revenue $ -- $ -- $ 100,000 Expenses: SBIR contract research and development -- -- 86,168 Proprietary research and development 1,716,546 2,283,829 14,641,839 General and administrative 2,576,567 2,588,170 10,500,160 ----------- ------------ ------------ Total operating expenses 4,293,113 4,871,999 25,228,167 ----------- ------------ ------------ Loss from operations (4,293,113) (4,871,999) (25,128,167) Equity losses in joint ventures (1,626,826) (8,010,000) (17,646,826) Other income -- -- 1,512 Interest income 370,365 629,962 2,176,298 Interest expense (38,338) (13,483) (247,905) ----------- ------------ ------------ Net loss (5,587,912) (12,265,520) (40,845,088) Preferred stock dividends (928,260) (438,905) (1,641,447) ----------- ------------ ------------ Net loss available to common shareholders $(6,516,172) $(12,704,425) $(42,486,535) =========== ============ ============ Basic and diluted net loss per share available to common shareholders $ (0.63) $ (1.23) $ (21.58) Basic and diluted weighted average common shares outstanding 10,352,632 10,360,164 1,969,225
See accompanying condensed notes to financial statements. 2 ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Sept. 30, 1999 1998 Revenue: SBIR contract revenue $ -- $ -- Expenses: SBIR contract research and development -- -- Proprietary research and development 334,446 854,367 General and administrative 836,821 845,098 ----------- ----------- Total operating expenses 1,171,267 1,699,465 ----------- ----------- Loss from operations (1,171,267) (1,699,465) Equity in losses from joint ventures (492,580) -- Interest income 116,000 182,964 Interest expense (12,820) (3,074) ----------- ----------- Net loss (1,560,667) (1,519,575) Preferred stock dividends (309,910) (159,761) ----------- ----------- Net loss available to common shareholders $(1,870,577) $(1,679,336) =========== =========== Basic and diluted net loss per share available to common shareholders $ (0.18) $ (0.16) Basic and diluted weighted average common shares outstanding 10,352,632 10,352,632
See accompanying condensed notes to financial statements. 3 ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative from Nine Months February 15, 1985 Ended Sept. 30, (date of inception) 1999 1998 to Sept. 30, 1999 Net cash used in operating activities $(2,282,588) $(2,093,126) $(17,056,259) ----------- ----------- ------------ INVESTING ACTIVITIES: Patent issuance cost (129,181) (89,396) (653,164) Investment in joint ventures (1,626,826) (8,010,000) (18,047,326) Organizational costs incurred -- -- (135) Purchases of leasehold improvements -- (237,375) (675,559) Purchases of office and lab equipment (125,518) (149,865) (928,921) Proceeds from assets sold -- -- 1,000 Purchases of marketable securities - available for sale (4,095,000) -- (5,045,000) Sale of marketable securities - available for sale 2,045,000 -- 2,045,000 ----------- ----------- ------------ Net cash used in investing activities (3,931,525) (8,486,636) (23,304,105) ----------- ----------- ------------
4
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 note payable to financing company 53,706 -- 53,706 Repayment of note payable to financing company (23,521) -- (23,521) Proceeds from borrowings from President -- -- 41,433 Repayment of borrowings from President -- -- (41,433) Proceeds from borrowings under line of credit 95,774 -- 1,150,913 Repayment of borrowings under line of credit (69,564) -- (732,054) Proceeds from note payable to bank -- -- 150,000 Payments on note payable to bank -- -- (150,000) Proceeds from borrowings from stockholders -- -- 15,867 Repayment of borrowings from stockholders -- -- (15,867) Advances from parent company -- -- 135,000 Payments to parent company -- -- (135,000) Repayment of long-term note receivable -- -- 50,315 Repayment of note payable issued in exchange for legal service -- -- (71,968) Purchase and retirement of common stock -- (130,000) (130,000) Purchase of treasury stock -- -- (443,750) ----------- ----------- ---------- Net cash provided by financing activities 56,395 9,813,595 46,405,061 ----------- ---------- ----------- Net increase (decrease) in cash and cash equivalents (6,157,718) (1,603,167) 6,044,697 Cash and cash equivalents at beginning of periods 12,202,415 15,706,374 -- ----------- ------------ ----------- Cash and cash equivalents at end of periods $ 6,044,697 $ 14,103,207 $ 6,044,697 ============ ============ ===========
See accompanying condensed notes to financial statements. 5 ENDOREX CORPORATION (A DEVELOPMENT STAGE ENTERPRISE) CONDENSED NOTES TO 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. COMMON STOCK DIVIDEND In 1997, we sold and issued 8,648,716 shares of common stock in a private placement (the "Private Placement"). The terms of the Private Placement included 5%, semi-annual dividends payable in additional shares of common stock based on the number of shares held as of the record date, including previous dividend distributions. The first semi-annual common stock dividend was payable to holders of stock with dividend rights as of the record date of April 16, 1999. We distributed the first stock dividend on June 1, 1999. Semi-annual common stock dividends continue to be payable through October 16, 2002. Approximately 865,000 shares of common stock per year will be payable to Private Placement shareholders. The first stock dividend was reflected as a charge to accumulated deficit in the second quarter, using the fair market value method computed with the closing price as of the day before the declaration date. NET LOSS PER SHARE Net loss is restated from prior periods to include the effect of the common stock dividend. Therefore, the number of shares outstanding is retroactively restated for prior periods. The effect on the earnings per share for 1998 is a decrease in net loss per share of $0.05 and $.01, respectively, for the nine- and three-month periods ended September 30, 1998. 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 it would have resulted in an anti-dilutive net loss per share. JOINT VENTURES Until March 31, 1999, Elan Corporation, plc ("Elan") and Endorex each performed research and development activities for their oral vaccine delivery joint venture. We included research and development expenditures incurred to conduct those activities in Endorex's consolidated statement of operations as research and development expense. Beginning April 1, 1999, Endorex and Elan fund joint venture 6 expenditures in proportion to their respective ownership levels. Therefore, Endorex now records its share of the joint venture expenditures as equity in losses from joint ventures. Intercompany profit is eliminated. Effective April 1, 1999, Elan, through its subsidiary Elan International Services, Ltd. ("EIS"), extended to Endorex a line of credit of up to $2.5 million that is restricted to Endorex's funding obligations for the joint venture. The note bears interest of 11% per annum and matures on December 31, 2002. In the event that EIS exercises its option to increase its ownership in the joint venture to 50%, the note will be canceled and unpaid principal and interest will be applied to EIS obligations to Endorex upon exercise. Also during 1999, the joint venture purchased and exercised an option to acquire an exclusive worldwide license to proprietary oral microsphere delivery technology and a portfolio of patents (U.S. and foreign) from Vaxcel, Inc., for human and veterinary vaccines. This technology had been originally invented and developed at the Southern Research Institute ("SRI") and University of Alabama- Birmingham Research Foundation ("UABRF"), and had been acquired by Vaxcel. In addition, during the second quarter, the joint venture completed negotiations with SRI and UABRF to further amend the license agreement that it acquired from Vaxcel. The joint venture paid total licensing fees to Vaxcel and SRI/UABRF of $870,000, which Elan and Endorex agreed to fund equally. Accordingly, Endorex recorded $435,000 as equity in losses from joint ventures in the first and second quarters. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following "Discussion and Analysis or Plan of Operation" provides information to explain Endorex's 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 statements of a forward-looking nature relating to possible future events or our future financial performance. You should be aware that forward-looking statements are only predictions and actual events or results may differ materially from those forward-looking statements. In evaluating forward-looking statements, you should carefully consider the various factors identified in this report, including the additional risks discussed in Exhibit 99 "Risk Factors" of this Quarterly Report on Form 10-QSB. 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, excluding preferred stock dividends, for the nine months ended September 30, 1999 decreased approximately $6.7 million, or 54%, compared to the nine months ended September 30, 1998. The primary difference was an $8.0 million equity loss from the joint venture, recorded in the first quarter of 1998, as compared to the $1.6 million equity loss for the same period in 1999. The 1998 equity loss reflected our 80.1% share of the one-time $10.0 million license fee paid by the joint venture to Elan in that period. The 1999 equity loss represents our 80.1% share of the joint venture--$0.4 million for the joint venture's acquisition of rights to patents and technology, and $1.2 million for the joint venture's net losses for the second and third quarters. 7 Research and development expenditures for the nine months ended September 30, 1999 decreased $.5 million, or 25%, compared to the same period of 1998. The allocation of expenses to the joint venture decreased research expenses by $0.7 million, which is now recorded as equity losses in joint ventures. In September 1999, we initiated a phase I human clinical trial for the new formulation of our proprietary cancer drug, Perillyl alcohol ("POH"). Interest income for the nine and three-month periods ended September 30, 1999 decreased approximately $260,000 and $67,000, respectively, compared to the nine and three-month periods ended September 30, 1998 as a result of decreasing cash and investment balances. Plan of Operation and Financial Condition Endorex continues to progress preclinical development of the Orasome(TM) delivery system for the oral delivery of vaccines and drugs. Development includes ongoing work with Elan and several major medical institutions for vaccines and key hormones such as insulin and human growth hormone. We began marketing this technology to major pharmaceutical companies based on key in vivo data completed during the first half of 1999. Data on the Orasome(TM) delivery system in conjunction with the oral delivery of two key proteins, human growth hormone and insulin, has been presented at a number of key scientific conferences including the 26th International Symposium for the Controlled Release of Bioactive Materials held in Boston. Included in this data were in vivo results demonstrating 10% bioavailability of human growth hormone. In the coming months, we anticipate that the joint venture will begin to develop a prototype combination oral vaccine. Such new vaccines have been made possible by the joint venture advances in delivery technology that include safe and effective adjuvants and site specific targeting. `Targeting' vaccines to the correct sites in the gastrointestinal tract or the nasal passage gets the antigen to the right place; otherwise, antigens are lost and are ineffective. Adjuvants boost the overall immune response to the antigen, creating a higher level of immunization. This element is critical in persons with diminished immune systems, such as the elderly, where many vaccines are much less effective. During the first half of 1999, collaborative development efforts began for our second joint venture with Elan, established 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, which combines a microinfusion pump with the convenience of patch technology. We expect to initiate clinical trials during 2000 with Medipad(R) in one drug through the joint venture. During the next twelve months, Endorex's oncology subsidiary, Wisconsin Genetics, Inc. ("WGI") plans to continue development of POH. In June 1999, WGI completed development of a new oral formulation of POH and filed an Investigational New Drug ("IND") application. The new formulation significantly reduces the number of pills a patient needs to take daily and should enhance overall patient compliance during the treatment. In September 1999, we commenced the first Endorex-sponsored POH trial of the new formulation, a phase I (safety) human clinical trial commenced at the University of Wisconsin-Madison Comprehensive Cancer Center. The National Cancer Institute ("NCI") continues to sponsor phase II clinical trials in breast, prostate and pancreatic cancer. Recently, two Phase II NCI-sponsored trials for ovarian and colorectal cancer were closed due to lack of objective response. All of the NCI-sponsored phase II trials use the initial formulation of POH developed by the NCI. We are evaluating initiation of additional phase II clinical trials with POH in other types of cancer, and we are actively recruiting potential partners for development of our cancer drugs. 8 On September 30, 1999 we had unrestricted cash, cash equivalents, and marketable securities of $9.0 million, compared to $13.2 million as of December 31, 1998. Our working capital, exclusive of deferred costs, was $8.6 million as of September 30, 1999 and $12.6 million as of December 31, 1998. We presently have available $5.6 million of unused lines of credit and restricted cash. The current level of operating activities requires us to spend approximately $450,000 per month. We believe our cash resources are 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 research and development activities into other technologies and/or products that we either may license from other entities or develop ourselves. Research and development activities may require the expenditure of funds not presently available. We may seek to obtain funds from possible future public or private sales of securities or other sources. For further discussion of these risks, you should read Exhibit 99 "Risk Factors" of this report on Form 10-QSB. On October 22, 1999, Andrew J. Stein resigned from our board of directors siting other commitments on his time. We thank him for his contributions to Endorex. Year 2000 We are aware of the issues associated with some computer programming codes and embedded computer chips used in computer systems as the Year 2000 approaches. Some systems or software will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. We utilize personal computers, software packages developed by third party vendors, and a service bureau for payroll processing to manage our business. We do not have internally developed software and do not sell any products that are derived from internally developed software. We have evaluated substantially all of our major hardware platforms and software in use and have modified and upgraded our hardware, software and information technology and other systems to be Year 2000 compliant. We have surveyed our major vendors as to Year 2000 readiness. The results of our surveys indicate critical business systems and vendors are or anticipate being Year 2000 compliant in all material aspects of operations. We do not presently believe that the Year 2000 problem will pose significant operational problems for our internal computer systems or have a negative effect on our operations. However, we cannot assure you that any Year 2000 compliance problems of our suppliers will not negatively affect our operations. Based on the results of our review, we do not have a formal contingency plan. However, because uncertainty exists concerning the potential costs and effects associated with any Year 2000 compliance, we intend to continue to make efforts to ensure that third parties with whom we have relationships are Year 2000 compliant. Our cash equivalents may be exposed to credit risk if investment companies are materially adversely affected due to the Year 2000 issue. The results of our vendor surveys indicate that all banks and investment companies which we currently utilize are in the process of testing Year 2000 modifications and expect to be compliant before the end of the year. We anticipate that any Year 2000 impact would be short lived and would not impact Endorex's liquidity or its operating results. We have not incurred significant costs associated with Year 2000 compliance and presently believe estimated future costs will not be material. However, actual results could differ materially from our expectations due to unanticipated technological difficulties or project delays. These estimates and conclusions contain forward-looking statements and are based on our best estimates of future events. If we, or any third parties on which we 9 rely, are unable to address the Year 2000 issue in a timely manner, it could have an adverse impact on our operations. Risks to completing the Year 2000 plan include potential unavailability of alternative software, our 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 our latest proxy statement, the deadline for submitting a proposal to be considered for inclusion in Endorex's proxy statement for the 2000 Annual Meeting is January 1, 2000. Under recent amendments to Rule 14a-4(c)(1) under the Securities Exchange Act of 1934, we will have discretionary voting authority if a proponent does not notify us 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 Risk Factors ____________________ 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 November 12, 1999 /s/ Michael S. Rosen -------------------- Michael S. Rosen President and Chief Executive Officer (principal executive officer) November 12, 1999 /s/ David G. Franckowiak ------------------------ David G. Franckowiak Chief Financial Officer (principal financial and accounting officer) 10 EX-27 2 FINANCIAL DATA SCHEDULE
5 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. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 6,044,697 3,000,000 0 0 0 9,711,966 1,115,637 481,952 11,078,301 1,028,396 0 8,872,187 9,094,971 10,472 (8,808,722) 11,078,301 0 370,365 0 0 (5,919,939) 0 38,338 (5,587,912) 0 (5,587,912) 0 0 0 (5,587,912) (0.63) (0.63)
EX-99 3 RISK FACTORS Exhibit 99 RISK FACTORS 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, clinical trials for our two cancer drugs, 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 50% of each joint venture's research and development activities during the first year of each joint venture and in proportion to our ownership interest in each joint venture thereafter, based on the research and development plan and budget we mutually agree upon with Elan. If we do not have sufficient resources to meet our funding obligations under 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. 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, have not received regulatory approval, and 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 used by doctors who are unfamiliar with their application in the treatment of cancer. As with any new drug, doctors may be inclined to continue to treat patients with conventional therapies, in most cases chemotherapy, rather than new alternative therapies. 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 United States Food & Drug Administration 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. We currently procure, and intend in the future to procure, clinical supply of our cancer drugs from a small number of manufacturers. Additionally, prior to commercial distribution of any of our products, if approved, we will be required to identify and contract with a commercial supplier. We cannot guarantee that these suppliers 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 ongoing 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 United States Food and Drug Administration for our initial product candidates, product marketing will be contingent on our ability to license the products or enter into marketing agreements with partner companies or on 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 no agreements for the licensing or marketing of our product candidates, and we cannot assure you that we will be able to enter into any such 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 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 a sales force in a timely or cost effective manner, if at all, or that 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 development field include American Home Products, the Merck Company, SmithKline Beecham, MedImmune, Aviron and Chiron, other major pharmaceutical companies, specialized biotechnology firms, universities and governmental agencies. Our competitors in the liposomal formulation field include The Liposome Company, NexStar and Sequus. Our competitors in the field of the oral delivery of drugs include Emisphere, which has recently completed Phase II trials for oral heparin and is in preclinical development with oral hormones, and Cortecs, which has several products in clinical development. In addition, there may be other companies that are currently developing competitive technologies and products or which may in the future develop technologies and products that 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, our license of Perillyl alcohol ("POH") from the Wisconsin Alumni Research Foundation 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. The issues are more significant with respect to any product based upon natural substances, such as POH, 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. 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 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. Without regulatory approval, we may have 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 reform and third-party reimbursement limitations. Recent initiatives to reduce the federal deficit and to reform 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 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 reform 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 remaining employed with us, including Michael S. Rosen, President and Chief Executive Officer, David G. Franckowiak, Chief Financial Officer, and Dr. Robert N. Brey, Vice President of Research and 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 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. We may be adversely affected by Year 2000 issues. Beginning on January 1, 2000, some computer systems and software will produce erroneous results or fail unless they have been modified or upgraded to process date information correctly. We have evaluated substantially all of our major hardware and software platforms in use and have modified and upgraded our hardware, software and information technology and other systems to be Year 2000 compliant. We do not presently believe that the Year 2000 problem will pose significant operational problems for our internal computer systems or have a negative affect on our operations. However, we cannot assure you that any Year 2000 compliance problems of our suppliers will not negatively affect our operations. We have surveyed our major vendors as to Year 2000 readiness. The results of the surveys indicate the vendors are or anticipate being Year 2000 compliant. Because uncertainty exists concerning the potential costs and effects associated with any Year 2000 compliance, we intend to continue to make efforts to ensure that third parties with whom we have relationships are Year 2000 compliant. We have not incurred significant costs to date associated with Year 2000 compliance and presently believe estimated future costs will not be material. However, actual results could differ materially from our expectations due to unanticipated technological difficulties or project delays. If we, or any third parties on which we rely, are unable to address the Year 2000 issue in a timely manner, it could have an adverse impact on our operations. In order to assure that this does not occur, we have developed a contingency plan and intend to devote all resources required to attempt to resolve any significant Year 2000 problems in a timely manner. 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. In addition to the shares of common stock currently outstanding, Endorex has a number of agreements or obligations that may result in dilution to investors. These include: . warrants to purchase 2,162,162 shares of common stock at $2.54375 per share, subject to adjustment, issued in connection with the October 1997 Private Placement; . warrants for the purchase of 230,770 shares of common stock at $10.00 per share held by Elan; . warrants to purchase 66,668 shares of common stock at $2.54375 per share, subject to adjustment, held by the Aries Master 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 Endorex's interest in the second joint venture or convertible at liquidation value into common stock at $9.00 per share; . options to purchase approximately 1.5 million shares of common stock outstanding to participants in our stock option plan with a weighted average exercise price of $3.18; . semiannual 5% payment-in-kind dividend obligations at the rate of approximately 865,000 shares of common stock per year payable to holders of approximately 8.6 million shares of common stock, payable semiannually until October 16, 2002, unless certain conditions are met; and . anti-dilution rights under the above warrants, preferred stock and contractual rights granted in connection with the October 1997 private placement which can permit purchase of additional shares and/or at lower prices under certain circumstances. To the extent that the payment-in-kind dividends are paid, 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 if our existing stockholders sell shares of common stock in the market, or because of 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, 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 subsidiaries 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 or directors 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, as long as 50% of the shares sold in our October 1997 private placement remain outstanding and subject to contractual rights described in the subscription agreement, we may not do any of the following without the placement agent's prior approval: . issue or increase the authorized amount or alter the terms of any of our securities senior to, or on parity with, the private placement shares with respect to voting, liquidation or dividends, . alter our 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, . incur indebtedness in excess of $1.0 million, . incorporate or acquire any subsidiaries, and . enter any transactions with our affiliates. In addition, our 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 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. -----END PRIVACY-ENHANCED MESSAGE-----