See accompanying notes to condensed unaudited financial statements.
ENTEROLOGICS, INC
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation
The accompanying unaudited condensed financial statements are presented in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal occurring accruals) considered necessary in order to make the financial statements not misleading, have been included. Operating results for the six months ended June 30, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010. The condensed financial statements are presented on the ac crual basis.
(B) Organization
Enterologics, Inc. was incorporated under the laws of the State of Delaware on September 2, 2009 to develop, test, and obtaining regulatory approvals for, manufacturing, commercializing and selling new prescription drug products
Activities during the development stage include developing the business plan, acquiring technology and raising capital.
(C) Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
(D) Cash and Cash Equivalents
For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. The Company at times has cash in excess of FDIC insurance limits and places its temporary cash investments with high credit quality financial institutions. At June 30, 2010 and December 31, 2009 the Company did not have any balances that exceeded FDIC insurance limits.
(E) Website Development
The Company has adopted the provisions of FASB Accounting Standards Codification No. 350 Intangible-Goodwills and Other. Costs incurred in the planning stage of a website are expensed, while costs incurred in the development state are capitalized and amortized over the estimated three year life of the asset. During the six months ended June 30, 2010 and year ended December 31, 2009, the Company incurred $1,000 and $0, respectively, in website development costs. As of June 30, 2010, the website has not been placed into service and no amortization expense has been recorded.
(F) Stock-Based Compensation
In December 2004, the FASB issued FASB Accounting Standards Codification No. 718, Compensation – Stock Compensation. Under FASB Accounting Standards Codification No. 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the opti on grant. The Company applies this statement prospectively.
Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by FASB Accounting Standards Codification No. 718. FASB Accounting Standards Codification No. 505, Equity Based Payments to Non-Employees defines the measurement date and recognition period for such instruments. In general, the measurement date is when either a (a) performance commitment, as defined, is reached or (b) the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the FASB Accounting Standards Codification .
(G) Loss Per Share
Basic and diluted net (loss) per common share is computed based upon the weighted average common shares outstanding as defined by FASB Accounting Standards Codification Topic 260, “Earnings Per Share.” As of June 30, 2010, there was no common share equivalent outstanding.
(H) Fair Value of Financial Instruments
The carrying amounts of the Company's accounts payable, accrued expenses, and notes payable related approximate fair value due to the relatively short period to maturity for these instruments.
NOTE 2 NOTES PAYABLE - RELATED PARTIES
On March 23, 2009 a related party loaned $3,500 to the Company for initial start-up costs. The loan is unsecured, carries an interest rate of 6%, and matures on August 23, 2010. As of December 31, 2009 the Company recorded accrued interest of $135. In February 2010 loan and accrued interest of $151 were repaid. (See note 4).
NOTE 3 STOCKHOLDERS' EQUITY / (DEFICIENCY)
(A) Common Stock Issued to Founders for Cash
In September 2009 the Company sold a total of 10,300,000 shares of common stock to four founders for $1,030 ($.0001 per share).
(B) Common Stock Issued for Cash
In 2009, the Company sold a total of 15,700,000 shares of common stock to 55 individuals for cash of $47,080 and a subscription receivable of $20 ($.003 per share). Cash of $20 was collected during the six months ended June 30, 2010.
(C) Imputed Compensation
During the three and six months ended June 30, 2010 an individual contributed services to the Company at a fair value of $3,000 and $6,000, respectively.
(D)Stock Issued for Services
In May 2010 Company issued 20,000 shares of common stock to an outside vendor for services with a fair value of $60 ($.003 per share), the most recent cash offering price.
NOTE 4 RELATED PARTY TRANSACTIONS
On March 23, 2009 a related party loaned $3,500 to the Company for initial start-up costs. The loan is unsecured, carries an interest rate of 6%, and matures on August 23, 2010. As of December 31, 2009 the Company recorded accrued interest of $135. In February 2010 loan and accrued interest of $151 were repaid.
During the three and six months ended June 30, 2010 an individual contributed services to the Company at a fair value of $3,000 and $6,000, respectively.
NOTE 5 LETTER OF INTENT
On June 15, 2010, the Company entered into a binding letter of intent (“LOI”) with New York Health Care, Inc., a New York corporation (“Seller”) and BioBalance LLC, a Delaware limited liability company, setting forth the terms pursuant to which The Company will acquire from Seller all of the Company’s intellectual property rights and property relating to biotherapeutic agents for the treatment of various gastrointestinal disorders (collectively, the “Assets”). The purchase price for the Assets will be that number of The Company Series A preferred stock (the “Preferred Stock”) as mutually agreed upon by The Company and Seller, exclusively issued to Seller, which shall initially not represent more than 20% of Enterologics. If the Company does not raise a mi nimum of $1 million within 12 months of the closing, Seller has the right to redeem the Preferred Stock in exchange for the Assets. The Company may not create any lien or encumbrance on the Assets until and unless it raises $1 million.
The Preferred Stock will have the terms, rights and preferences as set forth on Exhibit A to the LOI, including the following:
Dividends - The Preferred Stock holders will be entitled to cumulative dividends (in cash or shares of common stock, at Enterologics’ option) prior and in preference to any dividend payment to common stock holders. After such preference, the Preferred Stock will participate pro rata with the common stock on an as-converted basis as to any additional dividends.
Conversion - The Preferred Stock will be convertible at any time into shares of common stock. The Preferred Stock will automatically convert into shares of common stock at the election of (a) the majority of the Preferred Stock holders, or (b) The Company’s board of directors upon a capital raise of not less than $5 million.
Anti-Dilution - The Preferred Stock will have “full ratchet”’ anti-dilution protection, subject to customary exceptions.
Liquidation Preference - The Preferred Stock will have rights senior to all other equity securities. Upon liquidation, the Preferred Stock holder will be entitled to receive, in preference to the common stock holders, an amount equal to the effective purchase price for each share of Preferred Stock, plus accrued but unpaid dividends. The Preferred Stock will also participate with the common stock on an as-converted basis for all remaining proceeds of a liquidation.
Preemptive Rights - The Preferred Stock will have preemptive rights with respect to any future issuance of securities of The Company, subject to the exceptions set forth in the LOI.
Voting Rights - The Preferred Stock will vote together with the common stock and as a separate class. Each share of Preferred Stock will have the number of votes equal to the number of shares issuable upon conversion of such share of Preferred Stock.
Board Representation - The holder of the Preferred Stock will have the right to appoint one member to the board of directors of Enterologics.
Registration Rights - The outstanding shares of common stock issued or issuable upon conversion of the Preferred Stock will have “piggyback” registration rights.
Enterologics may not, without the approval of the holders of a majority of the Preferred Stock, amend its Articles of Incorporation to change the terms of the Preferred Stock.
Consummation of the acquisition of the Assets is subject to and dependent upon, among other things, the entering into a definitive purchase agreement, obtaining any requisite board of directors’ approvals and required third-party consents, the receipt by Seller of a fairness opinion, and satisfactory financial information of the Company.
Pursuant to the LOI, neither the Seller nor the Company or any of their affiliates will solicit or engage in any discussions or negotiations or engage in any business combination transaction with any third party involving the Company for a period of 90 days from the date of the LOI.
For all the terms and conditions of the LOI, reference is hereby made to such LOI annexed hereto as Exhibit 10.1. All statements made herein concerning the foregoing LOI are qualified by reference to said Exhibit.
Through July 27, 2010 no definitive agreement has been signed and the LOI has no expiration date. On or about July 15, 2010, we were informed that a lawsuit was commenced against the seller seeking to block the sale of its Biobalance assets to us pursuant to the terms of the LOI. Although we are not a party in this litigation, we do not know if seller will be able to close on the sale of the Biobalance assets as contemplated in the LOI.
NOTE 6 GOING CONCERN
As reflected in the accompanying unaudited condensed financial statements, the Company is in the development stage with no operations, a net loss of $53,029 from inception and used cash in operations from inception of $37,458. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management intends to continue to seek $1 million in financing and execute the letter of intent with New York Health Care, Inc. and Biobalance, LLC. If, management is unable to raise funds immediately, management intends to fund operations through shareholder loans. Management believes that the actions presently being taken to obtain additional funding and complete the two transactions above provide the Company with the opportunity to continue as a going concern.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As used in this Form 10-Q, references to “Enterologics,” the “Company,” “we,” “our” or “us” refer to Enterologics, Inc. unless the context otherwise indicates.
Forward-Looking Statements
The following discussion should be read in conjunction with our financial statements, which are included elsewhere in this Form 10-Q (the “Report”). This Report contains forward-looking statements which relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, per formance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.
For a description of such risks and uncertainties, refer to our Registration Statement on Form S-1, filed with the Securities and Exchange Commission on February 17, 2010 and declared effective on April 9, 2010. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Business Overview
We are an early stage biopharmaceutical company with plans to focus on the identification, licensing and development of treatments for GI disorders, such as pouchitis, irritable bowel syndrome (“IBS”), Crohn’s disease, ulcerative colitis and Clostridium difficile infections, that we believe are poorly addressed by current therapies.
On June 15, 2010, we entered into a binding letter of intent (“LOI”) with New York Health Care, Inc., a New York corporation (“Seller”) and BioBalance LLC, a Delaware limited liability company (“BioBalance”), setting forth the terms pursuant to which we will acquire from Seller all of BioBalance’s intellectual property rights and property relating to biotherapeutic agents for the treatment of various gastrointestinal disorders (collectively, the “Assets”). For a further description of the terms of the LOI, including the terms of the preferred stock to be issued to Seller which shall initially not represent more than 20% of our share capital, see the Current Report on Form 8-K we filed with the Securities and Exchange Commission on June 16, 2010.
On or about July 15, 2010 we were informed that a lawsuit was commenced against the Seller seeking to block the sale of its Biobalance assets to us pursuant to the terms of the LOI. Although we are not a party in this litigation, we do not know if Seller will be able to close on the sale of the Biobalance assets as contemplated in the LOI.
Plan of Operation
Over the next twelve months, the Company intends to focus on establishing business operations, recruiting additional management to guide the development program, engaging expert consultants to assist in identifying products and intellectual property for in-licensing and further development, evaluating and expanding the intellectual property coverage for those products, and establishing the clinical and regulatory development program for the first in-licensed product.
The Company estimates that it will require an approximate minimum of $1,000,000 in the next 12 months to implement its activities. The following chart indicates how we would utilize such funds:
| Purpose | | Amount | |
| G&A including expert consultant fees | | $ | 500,000 | |
| Licensing costs | | $ | 300,000 | |
| Legal, intellectual property and patents | | $ | 150,000 | |
| | | $ | | |
| Cost of operating as a public company | | $ | 50,000 | |
| Total | | $ | 1,000,000 | |
Results of Operations
The following discussion should be read in conjunction with the financial statements and in conjunction with the Company's Form S-1, filed with the Securities and Exchange Commission on February 17, 2010 and declared effective on April 9, 2010.
The Company did not generate any revenues for the three (3) months ended June 30, 2010,for the six month period ended June 30, 2010 and for the period from September 2, 2009 (inception) to June 30, 2010.
Total Operating Expenses
During the three (3) months ended June 30, 2010, total operating expenses was $25,634, which includes $17,329 for professional fees, $3,000 for compensation expense and general and administrative expenses of $5,305. During the six(6) month period ended June 30, 2010, total operating expenses were $44,919, which consists of $31,861 of professional fees, $6,000 for compensation expense and general and administrative expenses of $7,058. During the period from September 2, 2009 (inception) to June 30, 2010, total operating expenses was $52,883.
Net loss
During the three (3) months ended June 30, 2010, the net loss was $25,629. Net loss for the six month period ended June 30, 2010 was $44,930 and $53,029 for the period from September 2, 2009 (inception) to June 30, 2010.
Liquidity and Capital Resources
Our balance sheet as of June 30, 2010, reflects cash of $7,872. Cash from inception to date has been sufficient to provide the capital necessary to operate.
We do not have any other available credit, bank financing or other external sources of liquidity and will need to obtain substantial additional capital in order to develop the Company’s business operations, effectuate its business plan and become profitable in the next twelve months. In order to obtain such capital, we will need to obtain additional financing from external sources such as debt or equity financings or other potential sources. There can be no assurance that we will be successful in obtaining such additional funding. If we are not successful in raising sufficient capital, this would have a material adverse effect on our business, results of operations, liquidity and financial condition. If we proceed with the proposed transaction with Seller to purchase BioBalance, we are required pursuant to the LOI to raise capital.
Going Concern Consideration
The Company is in the development stage with no operations, a net loss of $53,029 from inception and used cash in operations from inception of $37,458. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional capital and implement its business plan as described above. Management believes that actions presently being taken to obtain additional funding and implement its strategic plans provide the opportunity for the Company to continue as a going concern.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
Item 4(T). Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the United States Securities and Exchange Commission. Our Chief Executive Officer and Chief Financial Officer have reviewed the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report and have concluded that our disclosure controls and procedures are effective to ensure that material information relating to the Company is recorded, processed, summarized, and reported in a timely manner.
Changes in Internal Controls over Financial Reporting
During the quarter ended June 30, 2010, there was no change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.
Item 1A. Risk Factors.
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 1A.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In June 2010 the Company issued 20,000 shares of its common stock to Island Capital Management LLC, an affiliate of the Company’s transfer agent, with a value of $60. This issuance was conducted in reliance upon an exemption from registration provided under Section 4(2) of the Securities Act of 1933, as amended.
Purchases of equity securities by the issuer and affiliated purchasers
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Removed and Reserved
Item 5. Other information.
Item 6. Exhibits.
| Exhibit No. | | Description |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certifications of Robert Hoerr, President |
| | | |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certifications of Lawrence Levitan, Treasurer |
| | | |
| 32.1 | | Section 1350 Certifications of Robert Hoerr, President |
| | | |
| 32.2 | | Section 1350 Certifications of Lawrence Levitan, Treasurer |
SIGNATURES
Pursuant to the requirements of the Securities Exchange act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | ENTEROLOGICS, INC. |
Dated: August 16, 2010 | |
| | By: /s/ Robert Hoerr, M.D. Name: Robert Hoerr, M.D. Title: President (principal executive officer) and Director |
| | |
Dated: August 16, 2010 | By: /s/ Lawrence Levitan, M.D. Name: Lawrence Levitan, M.D. Title: Treasurer (principal financial and accounting officer) and Director |
