SEC 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 June 30, 2001
( ) 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 August 10, 2001, 12,741,858 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 SHEETS
(UNAUDITED)
June 30, December 31,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $9,808,676 $10,831,266
Marketable securities - available for sale 0 2,014,984
Related party receivable 26,745 126,538
Prepaid expenses 52,930 58,803
------------ -----------
Total current assets 9,888,351 13,031,591
Leasehold improvements and equipment,
net of accumulated amortization of $883,409 407,373 384,162
Patent issuance costs, net of accumulated
amortization of $13,030 281,845 253,705
Other Assets:
Prepaid Acquisition Cost 1,004,608 0
------------ -----------
TOTAL ASSETS $11,582,177 $13,669,458
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 674,319 $ 642,440
Accrued compensation 174,616 147,205
Due to joint ventures 2,285,831 2,010,713
Current portion of line of credit 126,611 118,793
------------ -----------
Total current liabilities 3,261,377 2,919,151
Long-term liabilities:
Long-term portion of line of credit 162,754 204,162
------------ -----------
Total long-term liabilities 162,754 204,162
------------ -----------
Total Liabilities 3,424,131 3,123,313
Series C exchangeable convertible preferred
stock, $.05 par value. Authorized 200,000
shares; 97,603 issued and outstanding at
liquidation value 10,004,315 9,665,512
Stockholders' equity:
Preferred stock, $.001 par value. Authorized
4,600,000 shares; none issued and outstanding -- --
Series B convertible preferred stock,
$.05 par value. Authorized 200,000 shares;
100,410 issued & outstanding at
liquidation value 10,439,339 10,041,000
Common stock, $.001 par value. Authorized
50,000,000 shares; 12,860,500 issued,
and 12,741,858 outstanding 12,861 12,861
Additional paid-in capital 39,633,107 40,365,410
Unearned compensation (6,350) (4,852)
Deficit accumulated during the development stage (51,481,746) (49,090,111)
Unrealized gain/(loss) on marketable securities 270 75
------------ -----------
(1,402,519) 1,324,383
Less:
Treasury stock, at cost, 118,642 shares (443,750) (443,750)
------------ -----------
Total Stockholders' Equity (1,846,269) 880,633
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,582,177 $ 13,669,458
============= ============
See accompanying condensed notes to financial statements.
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Cumulative from
Six Months February 15, 1985
Ended June 30, (date of inception)
2001 2000 to June 30, 2001
Revenue:
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract
research and
development -- -- 86,168
Proprietary research
and development 1,171,494 468,193 16,004,499
General and
administrative 908,269 981,521 13,980,313
------------ ------------ -------------
Total operating expenses 2,079,763 1,449,714 30,070,980
------------ ------------ -------------
Loss from operations (2,079,763) (1,449,714) (29,970,980)
Equity losses in
joint ventures (577,661) (1,578,856) (23,223,912)
Other income (1,577) -- 253,725
Interest income 294,686 320,965 3,336,274
Interest expense (27,320) (23,019) (340,630)
------------ ------------ -------------
Net loss (2,391,635) (2,730,624) (49,945,523)
Preferred stock dividends (737,142) (687,378) (4,117,942)
------------ ------------ -------------
Net loss available to common
stockholders $(3,128,777) $ (3,418,002) $(54,063,465)
============ ============= =============
Basic and diluted
net loss per share
available to common
stockholders $ (0.25) $ (0.29) $ (15.78)
Basic and diluted
weighted average common
shares outstanding 12,741,858 11,646,663 3,416,117
See accompanying condensed notes to financial statements.
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months
Ended June 30,
2001 2000
Revenue:
SBIR contract revenue $ -- $ --
Expenses:
SBIR contract
research and
development -- --
Proprietary research
and development 585,642 217,112
General and
administrative 439,515 615,559
------------ ------------
Total operating expenses 1,025,157 832,671
------------ ------------
Loss from operations (1,025,157) (832,671)
Equity losses in
joint ventures (260,603) (648,779)
Other income -- --
Interest income 120,317 198,165
Interest expense (16,728) (11,221)
------------ ------------
Net loss (1,182,171) (1,294,506)
Preferred stock dividends (370,608) (342,747)
------------ ------------
Net loss available to common
stockholders $(1,552,779) $ (1,637,253)
============ =============
Basic and diluted
net loss per share
available to common
stockholders $ (0.12) $ (0.13)
Basic and diluted
weighted average common
shares outstanding 12,741,858 12,488,842
See accompanying condensed notes to financial statements.
ENDOREX CORPORATION
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative Period
Six Months February 15, 1985
Ended June 30, (Inception) to
2001 2000 June 30, 2001
------------ ------------ -----------------
NET CASH USED IN OPERATING
ACTIVITIES....................... (1,279,329) (1,319,747) (20,401,497)
INVESTING ACTIVITIES:
Patent issuance cost............. (30,201) (33,454) (789,426)
Investment in joint ventures..... (577,661) (964,064) (20,541,544)
Organizational costs incurred.... -- -- (135)
Purchases of leasehold
improvements.................... (7,098) -- (702,711)
Purchases of office and lab
equipment....................... (87,893) (52,236) (1,085,354)
Proceeds from assets sold........ -- -- 4,790
Purchases of marketable
securities--available for sale.. (3,973,724) (3,456,799) (14,977,804)
Proceeds from sale of marketable
securities--available for sale.. 5,988,708 3,000,000 15,088,123
Prepaid acquisition cost......... (1,004,608) -- (1,004,608)
----------- ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES....................... 307,524 (1,506,553) (24,008,668)
FINANCING ACTIVITIES:
Net proceeds from issuance of
common stock.................... 0 7,797,238 37,799,270
Net proceeds from issuance of
preferred stock................. -- -- 16,325,712
Proceeds from exercise of
options......................... -- 215,888 417,092
Proceeds from borrowings under
line of credit.................. 0 45,621 1,196,534
Repayment of borrowings under
line of credit.................. (50,785) (57,971) (924,364)
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 IN)
FINANCING ACTIVITIES............. (50,785) 8,000,776 54,218,841
----------- ------------ ------------
NET INCREASE(DECREASE) IN CASH
AND CASH EQUIVALENTS............. (1,022,590) 5,174,476 9,808,676
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD.............. 10,831,266 4,995,906 --
----------- ------------ ------------
CASH AND CASH EQUIVALENTS -
END OF PERIOD.................... $ 9,808,676 $10,170,382 $ 9,808,676
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW:
Cash paid for interest.......... $ 27,321 $ 23,020 $ 187,662
NON-CASH TRANSACTIONS
Issuance of common stock
dividends in kind.............. $ -- -- $ 1,536,223
Issuance of preferred stock
dividends in kind.............. 737,142 687,378 (4,117,942)
The accompanying notes are an integral part
of the consolidated financial statements
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, as amended. 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
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, or InnoVaccines and
Endorex Newco, Ltd., or Newco, our joint ventures with Elan Corporation, plc, or
"Elan", 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.
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR UNCONSOLIDATED JOINT VENTURES
Condensed, unaudited financial statement information of the joint ventures is
stated below. The joint ventures had no revenues. Net expenses equaled the net
loss for all periods.
For the six months ended
June 30,
2001 2000
------------ ------------
InnoVaccines, net of Endorex mark up on
billings to InnoVaccines....................... $ (482,202) $(2,077,843)
Newco, net of Endorex mark up on billings
to Newco....................................... (230,825) (131,496)
------------ ------------
Total net loss................................... $ (713,027) $(2,209,339)
============ ============
Reconciliation to equity in losses from
joint ventures:
Total joint venture net losses................... $ (713,027) $(2,209,339)
Less: Elan minority interest..................... 135,366 630,454
------------ ------------
Equity in losses from joint ventures............. $ (577,661) $(1,578,885)
============ ============
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 most recent
Annual Report on Form 10-KSB, as amended. 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" "plans" 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
For the second quarter ended June 30, 2001, the Company had a net loss
available to common shareholders of $1,552,779, or a decrease of 5 percent,
as compared to a loss of $1,637,253 for the second quarter ended June 30,
2000. Net loss included preferred stock dividends, which are paid-in-kind in
shares of preferred stock.
Research and development, or R&D expenditures for the second quarter ended
June 30, 2001 were $585,642, a 170 percent increase when compared with
$217,112 for the corresponding period ended June 30, 2000. This increase in
R&D expenditures was due to the hiring of additional R&D personnel and
expansion of proprietary pre-clinical R&D drug delivery activities.
General and administrative expenses for the second quarter ended June 30,
2001 were $439,515 compared to $615,559 for the same period ended June 30,
2000, a 29 percent decrease. General and administrative expenses during the
second quarter of 2001 were lower due to higher legal and accounting expenses
as well as the payment of SEC filing fees related to the Company's private
placement during this period last year.
Total Operating expenses of $1,025,157 for the second quarter of 2001
increased 23 percent compared to $832,671 for the same period last year, due
to the increased spending in R&D pre-clinical drug delivery activities.
Operating expense increases were offset by reductions in equity losses in
joint ventures of $260,603 for the second quarter of 2001 compared with
losses of $648,779 during the same period in 2000. These losses pertain to
the two joint ventures with Elan. InnoVaccines, the oral/mucosal vaccine
delivery joint venture, has been developing several delivery systems for oral
and mucosal vaccines. Newco has been developing Elan's Medipad(R), a small,
disposable microinfusion pump, for the delivery of iron chelation drugs to
treat a type of genetic blood disease known as iron overload disorders (e.g.
Cooley's anemia, and sickle cell anemia). Our share of the research,
development and business expenditures through these joint ventures is
recorded as equity losses in joint ventures. The decrease in expenses
represents a reduction of activities in each joint venture. Although
activities to evaluate the efficacy of selected oral vaccines is still
underway in Innovaccines, both partners in the joint venture are in
discussions regarding the future direction of this joint venture and its
possible termination. The Newco joint venture has recently met with Watson
Pharmaceuticals, or Watson, which acquired Schein Pharmaceutical Inc. or
Schein, during 2000, as well as Schein's licensing rights to the Medipad(R)
device for iron chelation therapy. Watson has indicated to Newco its
intention to discontinue its iron chelation program. Such action may require
the modification, or termination of Watson's agreement with Newco. Newco is
also evaluating other commercialization alternatives.
Interest income for the second quarter of 2001 of $120,317 decreased 39
percent compared to $198,165 for the same period last year reflecting the
reduction in interest rates as well as a reduction in the available cash
investment balance generated by the April 2000 equity financing.
Net loss for the six months ended June 30, 2001 of $3,128,777 decreased 8%
as compared to a loss of $3,418,002 for the same period in 2000.
The decrease in net loss year to date versus the prior year reflects an
overall decrease in joint venture R&D activities as we redirected our
activities towards more proprietary drug delivery research and development.
Additionally, the expenses related to our private placement incurred during
the first and second quarter of 2000 which were not reflected in our 2001
activity.
PLAN OF OPERATION AND FINANCIAL CONDITION
On July 31, 2001, Endorex and Corporate Technology Development, Inc., or
CTD, a privately held, development-stage specialty pharmaceutical company
developing novel oral and mucosal formulations for therapeutic indications of
small molecule drugs, based in Miami, Florida, entered into a definitive
merger agreement, whereby we will acquire all of the outstanding capital
stock of CTD in a stock-for-stock merger. This acquisition will broaden our
product pipeline by the addition of two drug candidates currently in various
stages of clinical development as well as other products in pre-clinical
development.
CTD's lead product, orBec(TM), is currently in a multi-center phase III
clinical trial, and is being developed for the treatment of intestinal
graft-versus-host disease, or GVHD, a life-threatening complication affecting
the skin, liver, and the gastrointestinal tract, or GI, following bone marrow
transplantation. According to the International Bone Marrow Transplant Registry
& Autologous Blood and Marrow Transplant Registry, there were 17,000 allogeneic
bone marrow transplants (transplants of blood or bone marrow cells from another
person) worldwide in 1998. It is estimated that intestinal GVHD affects
approximately
15-30 percent, or approximately 2500 to 5100, of these patients per year
worldwide, resulting in a high mortality rate. Allogeneic transplants remain a
viable treatment strategy for a variety of cancers. CTD is also planning other
phase II clinical trials for the treatment of other GI related disorders, which
represent larger market segments.
The FDA has granted orBec(TM) "fast track" status for the treatment of
intestinal GVHD, allowing for an expedited review process. orBec(TM) has also
been designated as an "orphan drug" by the FDA for the prevention of Intestinal
GVHD.
orBec(TM) is an oral dual-release formulation of beclomethasone dipropionate,
or "BDP," a potent site-active corticosteroid drug. BDP has already been
approved by the FDA and is sold by GlaxoSmithKline, as Beconase(R), in an
inhaled and nasal formulation for the treatment of asthma, allergic rhinitis,
and nasal polyposis. orBec(TM) allows for larger doses of BDP to be delivered to
the afflicted GI area without systemic side effects associated with other
steroids used to treat intestinal GVHD.
CTD's second clinical-stage compound is Oraprine(TM), a liquid formulation of
a commonly prescribed immunosuppressant, azathioprine, the active pharmaceutical
ingredient in Imuran(R). Imuran(R) is currently marketed in tablet form for the
treatment of transplant rejection by Faro Pharmaceuticals, Inc. in North America
and GlaxoSmithKline worldwide. Oraprine(TM) has recently completed a phase I
bioequivalency trial which demonstrated that Oraprine(TM) is equivalent to
Imuran(R). In addition, a pilot phase I/II trial has been completed for the
treatment of chronic oral autoimmune diseases, such as oral GVHD. Oraprine(TM)
has been designated an "orphan drug" for the treatment of oral GVHD.
Upon closing, CTD's Chairman, Colin Bier, Ph.D., will join our
organization as Chairman of the Board and Chief Executive Officer. The
current Chairman, Kenneth Tempero, M.D., Ph.D., will continue to serve as a
director on our board. Michael S. Rosen, our current President and Chief
Executive Officer, will remain as President and assume the newly created
position of Chief Operating Officer. Steve H. Kanzer, currently CTD's
President and Chief Executive Officer and an Endorex director, will remain on
our board. Additionally, three members of the CTD board, including Dr. Bier,
will become members of our board.
As of June 30, 2001, CTD had approximately $5 million in cash and no debt. CTD
believes this will be sufficient to fund development of their two primary
products in the near term as well as to take orBec(TM), its lead drug candidate
in phase III clinical trials, through the FDA approval process.
Our proprietary drug delivery activities include preclinical testing (IN
VITRO and IN VIVO) of the Orasome(TM) and other delivery systems for the oral
and mucosal delivery of macromolecular drugs based on proteins and peptides.
Endorex believes that the acquisition of CTD provides us with a product pipeline
of both clinical and preclinical oral and mucosal drug candidates covering both
small molecule and macromolecule drugs. We have expanded the number of
macromolecular drugs under evaluation for delivery beyond insulin, human growth
hormone and vaccines. We continue to collaborate with Novo Nordisk on the
development of an oral human growth hormone. We believe that Novo Nordisk will
determine whether to license our Orasome(TM) technology for its human growth
hormone product, Norditropin(R), later in 2001.
The recent announced merger between Endorex and CTD and the renewed focus on
proprietary R&D activities have prompted a review of our existing joint ventures
to determine the progress to date.
The InnoVaccine development activities during the second quarter included
further evaluation of development work of the Orasome(TM) delivery system for
oral and mucosal delivery of the tetanus and influenza vaccines and the
development of mucosal tissue targeting technology for this delivery system.
Work in this area has been focused on the PLGA microparticle system licensed
from the Southern Research Institute.
Newco is in the process of assessing its relationship with Watson. Watson,
the marketing and development partner to the joint venture, has recently
verbally expressed its desire to discontinue its iron chelation therapy
program with the Medipad(R) device. As a result, the joint venture partners
are reviewing their commercialization agreements in light of this development
with Watson. Newco is also evaluating other commercialization partners for
its iron chelation delivery system, as well as the future direction of this
joint venture.
On June 30, 2001 and December 31, 2000, Endorex had cash, cash equivalents,
and marketable securities of approximately $9.8 million and $12.8 million,
respectively, and working capital of approximately $6.6 million and $10.1
million, respectively. We believe that our cash and cash equivalents are
sufficient to satisfy our cash requirements for the next two years. We intend,
from time to time in the future, to seek to expand our research and development
activities into other drug delivery 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 and may deplete our cash resources
sooner than anticipated. We also may seek to obtain funds from possible future
public or private sales of our securities or other sources. See Exhibit
99--"Risk Factors."
PART II. - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT NO. DESCRIPTION
--------------------------------
2.1 Agreement and Plan of Merger and Reorganization,
dated as of July 31, 2001 by and among Endorex Corporation,
Roadrunner Acquisition, Inc. and Corporate Technology
Development, Inc.
10.1 Voting Agreement dated as of July 31, 2001 by and
among Endorex Corporation, Roadrunner Acquisition,
Inc. and Corporate Technology Development, Inc. and
certain stockholders of Corporate Technology
Development, Inc.
99.1 Risk Factors
-------------------
(b) On August 1, 2001, Endorex filed a Current Report on Form 8-K,
reporting under Item 5 thereof, Endorex's execution of the
Agreement and Plan of Merger and Reorganization dated as of
July 31, 2001 by and among Endorex, Roadrunner Acquisition Inc.
and Corporate Technology Development Inc. ("CTD") and filing as an
exhibit under Item 7 thereof the press release issued by Endorex
and CTD regarding the execution of the agreement.
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
August 14, 2001 /s/ MICHAEL S. ROSEN
--------------------
Michael S. Rosen
President and Chief Executive Officer
(Principle executive officer)
August 14, 2000 /s/ STEVE KOULOGEORGE
---------------------
Steve Koulogeorge
Controller
(Principle financial officer)