United States
Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 1
TO
Form 10-QSB/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 2004.
[ ] Transition Report to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the Transition Period from _____________ to ___________.
000-28371
(Commission File Numbers)
ENDOVASC, INC.
(Exact name of registrant as specified in its charter)
NEVADA 76-0512500
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
550 Club Drive, Suite 440
Montgomery, Texas 77316
(Address of principal executive offices) (Zip Code)
(281) 404-2222
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
As of May 19, 2004, 69,760,102 and 14,158,593 shares of Common
Stock-Endovasc Series and Common Stock-NDC Series, respectively, par value $.001
per share, of Endovasc, Inc. were outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- --------------------------------------------------------------
Balance Sheet as of March 31, 2004 and June 30, 2003 3
Statement of Operations for the three months and nine
months ended March 31, 2004 and 2003, and for the
period from inception, June 10, 1996, to March 31,
2004 4
Statement of Stockholders' Equity (Deficit) for the
nine months ended March 31, 2004 5
Statement of Cash Flows for the nine months ended
March 31, 2004 and 2003, and for the period from
inception, June 10, 1996, to March 31, 2004 6
Notes to Financial Statements 7
2
ENDOVASC, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET
MARCH 31, 2004 AND JUNE 30, 2003
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
2004 2003
ASSETS (UNAUDITED) (NOTE)
- ----------------------------------------------------------- ------------ ----------
Current assets:
Cash and cash equivalents $ 157 $ 120
Accounts receivable - 98
Other current assets 385 365
------------ ----------
Total current assets 542 583
Property and equipment, net 128 175
Other assets, net 105 112
------------ ----------
Total assets $ 775 $ 870
============ ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -----------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 14 $ 41
Current portion of obligations under capital leases 27 47
Note payable to shareholder 251 680
Accounts payable 312 339
Accrued liabilities 34 17
------------ ----------
Total current liabilities 638 1,124
Long-term debt, net of current maturities 27 29
Long-term obligations under capital leases 37 58
Convertible debentures 1 1
Deferred liabilities 43 -
------------ ----------
Total liabilities 746 1,212
------------ ----------
Commitment and contingencies
Stockholders' deficit:
Common stock, $.001 par value, 200,000,000 shares
authorized:
Common stock-Endovasc Series, 67,732,632 and
50,933,138 shares issued and outstanding at
March 31, 2004 and June 30, 2003, respectively 68 51
Common stock-NDC Series, 14,158,593 and -0- shares
issued and outstanding at March 31, 2004 and
June 30, 2003, respectively 14 -
Preferred stock, $.001 par value, 20,000,000 shares
authorized, 208 shares of Series A 8% cumulative
convertible preferred stock issued and outstanding
at March 31, 2004 and June 30, 2003, stated value
$100 per share - -
Preferred stock, $0.001 par value, 3,000,000 shares
authorized, -0- shares of Series B convertible pre-
ferred stock issued and outstanding at March 31,
2004 and June 30, 2003 - -
Preferred stock, $0.001 par value, 370,000 shares
authorized, -0- shares of Series C convertible
preferred stock issued and outstanding at March 31,
2004 and June 30, 2003 - -
Additional paid-in capital 24,577 20,521
Unissued common stock 62 -
Losses accumulated during the development stage (24,692) (20,914)
------------ ----------
Total stockholders' equity (deficit) 29 (342)
------------ ----------
Total liabilities and stockholders' equity (deficit) $ 775 $ 870
============ ==========
<FN>
Note: The balance sheet at June 30, 2003 has been derived from the audited financial
statements at that date but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
The accompanying notes are an integral
part of these financial statements.
3
ENDOVASC, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003 AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1996, TO MARCH 31, 2004
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- -------------------------- INCEPTION
MARCH 31, MARCH 31, MARCH 31, MARCH 31, TO MARCH
2004 2003 2004 2003 31, 2004
------------ ------------ ------------ ------------ -----------
Income:
Revenue $ - $ 94 $ 49 $ 293 $ 1,105
Interest income - - 1 - 30
Other income - - - 1 47
------------ ------------ ------------ ------------ -----------
Total income - 94 50 294 1,182
------------ ------------ ------------ ------------ -----------
Costs and expenses:
Operating, general and
administrative expenses 1,489 549 2,528 3,328 15,544
Research and development
costs 378 1,032 1,247 2,338 9,057
Interest expense 2 4 13 51 640
Settlement with former
employee - - - - 408
Loss from investment in
joint venture 5 - 40 - 40
------------ ------------ ------------ ------------ -----------
Total costs and expenses 1,874 1,585 3,828 5,717 25,689
------------ ------------ ------------ ------------ -----------
Net loss (1,874) (1,491) (3,778) (5,423) (24,507)
Extraordinary loss on extin-
guishment of convertible
debentures - - - - 127
------------ ------------ ------------ ------------ -----------
Net loss $ (1,874) $ (1,491) $ (3,778) $ (5,423) $ (24,634)
============ ============ ============ ============ ===========
Basic and diluted net loss
per common share $ (0.02) $ (0.03) $ (0.05) $ (0.10)
============ ============ ============ ============
Weighted average shares
outstanding 80,257,983 59,053,987 74,618,260 52,585,058
============ ============ ============ ============
The accompanying notes are an integral
part of these financial statements.
4
ENDOVASC, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED MARCH 31, 2004
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK COMMON STOCK SERIES A
ENDOVASC SERIES NDC SERIES PREFERRED STOCK UNISSUED ADDITIONAL
--------------------- ------------------- ------------------- COMMON PAID-IN
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES STOCK CAPITAL
--------- ---------- ------- ---------- ---------- ------- --------- ------------
Balance at June 30, 2003 $ 51 50,933,138 $ - - $ - 330 $ - $ 20,521
Issuance of common stock for
services 6 5,313,720 - - - - - 1,576
Conversion of liabilities to
common stock - 401,461 - - - - - 114
Conversion of note payable
to stockholder to common
stock 1 1,500,000 - - - - - 584
Issuance of common stock for
cash 8 7,615,737 - - - - - 1,215
Issuance of common stock for
exercise of warrants 2 1,850,758 - - - - - 405
Issuance of common stock for
investment in joint venture - 48,000 - - - - - 15
Common stock committed for pay-
ment of accrued liabilities - - - - - - 62 -
Conversion of preferred stock
to common stock - 55,518 - - - (122) - -
4 to 1 stock dividend through
issuance of common stock-
NDC Series - - 14 14,158,593 - - - (14)
Issuance of stock options for
services - - - - - - - 157
Issuance of common stock for
employee compensation - 14,300 - - - - - 4
Net loss - - - - - - - -
--------- ---------- ------- ---------- ---------- ------- --------- ------------
Balance at March 31, 2004 $ 68 67,732,632 $ 14 14,158,593 $ - 208 $ 62 $ 24,577
========= ========== ======= ========== ========== ======= ========= ============
LOSSES
ACCUMULATED
DURING THE
DEVELOPMENT
STAGE TOTAL
------------- ---------
Balance at June 30, 2003 $ (20,914) $ (342)
Issuance of common stock for
services - 1,582
Conversion of liabilities to
common stock - 114
Conversion of note payable
to stockholder to common
stock - 585
Issuance of common stock for
cash - 1,223
Issuance of common stock for
exercise of warrants - 407
Issuance of common stock for
investment in joint venture - 15
Common stock committed for pay-
ment of accrued liabilities - 62
Conversion of preferred stock
to common stock - -
4 to 1 stock dividend through
issuance of common stock-
NDC Series - -
Issuance of stock options for
services - 157
Issuance of common stock for
employee compensation - 4
Net loss (3,778) (3,778)
------------- ---------
Balance at March 31, 2004 $ (24,692) $ 29
============= =========
The accompanying notes are an integral part of these financial statements.
5
ENDOVASC, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1996, TO MARCH 31, 2004
__________
(IN THOUSANDS)
NINE MONTHS ENDED
----------------------- INCEPTION TO
MARCH 31, MARCH 31,
2004 2003 2004
---------- ----------- --------------
Cash flows used in operating activities:
Net loss $ (3,778) $ (5,423) $ (24,634)
Adjustments to reconcile net loss to net
cash used in operating activities 2,099 4,447 15,943
---------- ----------- --------------
Net cash used in operating activities (1,679) (976) (8,691)
---------- ----------- --------------
Cash flows used in investing activities:
Capital expenditures - (9) (157)
Proceeds received from repayment of loan to
stockholder - - 72
---------- ----------- --------------
Net cash used in investing activities - (9) (85)
---------- ----------- --------------
Cash flows from financing activities:
Proceeds from sale of equity securities - - 337
Proceeds from sale of common stock 1,223 266 1,916
Proceeds from sale of convertible debentures - - 1,437
Proceeds from exercise of warrants 407 560 1,055
Net proceeds from issuance of preferred stock - - 2,263
Issuance of notes payable 377 50 893
Repayment of notes payable (406) (54) (864)
Payments of obligations under capital leases (41) (46) (123)
Proceeds from advances from stockholders 205 245 2,266
Repayments of notes to stockholder (49) - (225)
Purchase of treasury stock - - (22)
---------- ----------- --------------
Net cash provided by financing activities 1,716 1,021 8,933
---------- ----------- --------------
Net increase in cash and cash equivalents 37 36 157
Cash and cash equivalents at beginning of period 120 1 -
---------- ----------- --------------
Cash and cash equivalents at end of period $ 157 $ 37 $ 157
========== =========== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 13 $ 79 $ 181
========== =========== ==============
Cash paid for income taxes $ - $ - $ -
========== =========== ==============
The accompanying notes are an integral
part of these financial statements.
6
ENDOVASC, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
1. INTERIM FINANCIAL STATEMENTS
------------------------------
The accompanying unaudited interim financial statements have been prepared
without audit pursuant to the rules and regulations of the U.S. Securities
and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted,
pursuant to such rules and regulations. These unaudited condensed financial
statements should be read in conjunction with the audited financial
statements and notes thereto of Endovasc, Inc. (the "Company") included in
the Company's Annual Report on Form 10-KSB for the year ended June 30,
2003. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position, results of operations and cash flows for the interim
periods presented have been included. Operating results for the interim
periods are not necessarily indicative of the results that may be expected
for the respective full year.
2. ORGANIZATION
------------
Endovasc, Inc. (the "Company") is incorporated under the laws of the State
of Nevada. The Company's principal business is the production of various
drugs that can be administered using an advanced drug delivery system. The
Company believes that its drug delivery system will ultimately be widely
used by cardiologists, interventional radiologists and vascular surgeons.
The Company is considered a development stage enterprise because it has not
yet generated significant revenue from sale of its products and has devoted
substantially all of its efforts in raising capital.
Effective June 27, 2003, the Company's board of directors approved the
creation of a wholly-owned subsidiary named Nutraceutical Development
Corporation ("NDC") to manage its Nutraceutical product line. In addition,
on October 7, 2003, the Company acquired a controlling interest in a joint
venture that has been consolidated in the accompanying financial statements
for the period from October 7, 2003 to March 31, 2004 (Note 10). The
consolidated financial statements include the accounts of the Company, its
subsidiary and its majority owned joint venture investment. All
intercompany accounts and transactions are eliminated in consolidation.
3. GOING CONCERN CONSIDERATIONS
------------------------------
Since its inception, as a development stage enterprise, the Company has not
generated significant revenue and has been dependent on debt and equity
raised from individual investors to sustain its operations. The Company has
conserved cash by issuing its common stock and preferred stock to satisfy
obligations, to compensate individuals and vendors and to settle disputes
that have arisen. However, during the nine months ended March 31, 2004 and
2003, the Company incurred net losses of $(3,778) and $(5,423),
respectively, and negative cash flows from operations of $(1,679) and
$(976), respectively. These factors along with a $(96) negative working
capital position at March 31, 2004 raise substantial doubt about the
Company's ability to continue as a going concern.
Management plans to take specific steps to address its difficult financial
situation as follows:
7
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
3. GOING CONCERN CONSIDERATIONS, CONTINUED
------------------------------------------
- In the near term the Company plans additional private sales of debt
and common and preferred stock to qualified investors to fund its
current operations.
- The Company originally anticipated the generation of approximately
$500 in revenue from its Nutraceutical product in the third and fourth
quarters of the year ending June 30, 2004. The anticipated revenue to
be generated by the launch of the Nutraceutical product line has been
delayed pending certain problems with formulation. The Company has
made the required changes and the product will launch during the first
and second quarters of the year ending June 2005.
- In the long-term, the Company believes that cash flows from
commercialization of its products will provide the resources for
continued operations.
There can be no assurance that the Company's planned private sales of debt
and equity securities or its planned public registration of common stock
will be successful or that the Company will have the ability to
commercialize its products and ultimately attain profitability. The
Company's long-term viability as a going concern is dependent upon three
key factors, as follows:
- The Company's ability to obtain adequate sources of debt or equity
funding to meet current commitments and fund the commercialization of
its products.
- The ability of the Company to obtain positive test results of its
products in clinical trials.
- The ability of the Company to ultimately achieve adequate
profitability and cash flows to sustain its operations.
4. OTHER CURRENT ASSETS
----------------------
Other current assets at March 31, 2004 and June 30, 2003 consists of the
following (in thousands):
MARCH 31, JUNE 30,
2004 2003
---------- ---------
Other prepaids $ 21 $ -
Other receivable 3 29
Prepaid license 83 58
Prepaid supplies 278 278
---------- ---------
$ 385 $ 365
========== =========
5. INCOME TAXES
-------------
The difference between the 34% federal statutory income tax rate and
amounts shown in the accompanying interim financial statements is primarily
attributable to an increase in the valuation allowance applied against the
tax benefit from utilization of net operating loss carryforwards.
8
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
6. LITIGATION
----------
On August 28, 2003, Cause No. 03-08-0681-CV, "The Dow Chemical Company vs.
Endovasc LTD., Inc.," was filed against the Company in the District Court
of Montgomery County, Texas, 359th Judicial District. Dow Chemical Company
("Dow") filed a complaint against the Company for breach of contract and
damages. The amount of damages sought is approximately $230,000. This case
is being vigorously defended against the allegations made by Dow. The
Company has also filed its own counter-claim against Dow for breach of
contract and damages. On March 31, 2004, a prediction cannot be made as to
the final outcome of the complaint and damages allegedly owed to Dow or to
the Company. As a result, no amounts have been accrued for this
contingency.
On November 7, 2003, Cause No. 03-11-08112-CV, "Greg Creekmore vs.
Endovasc, Inc. and Endovasc, LTD., Inc.," was filed against the Company in
the District Court of Montgomery County, Texas, 284th Judicial District.
Greg Creekmore ("Creekmore") filed a complaint against the Company for
breach of an employment contract between the parties. Creekmore seeks
payment of $114,000 plus interest, 1 million shares of the Company's common
stock and reimbursement of court costs including reasonable attorneys fees
allowed by law. This case is being vigorously defended against the
allegations made by Creekmore. On March 31, 2004, a prediction cannot be
made as to the final outcome of the complaint and damages allegedly owed to
Creekmore. As a result, no amounts have been accrued for this contingency.
On January 13, 2004, Case No. H-03-5226, "Lorenz M. Hofmann, Ph.D. and LMH
Associates, Inc. vs. Endovasc, LTD., Inc., Endovasc, Inc., David P.
Summers, Ph.D. and M. Dwight Cantrell" was filed against the Company in the
United States District Court for the Southern District of Texas Houston
Division. Lorenz M. Hofmann, Ph.D. and LMH Associates, Inc. ("LMH") filed a
complaint against the Company for breach of contract and damages. LMH seeks
payment of $91,859. This case is being vigorously defended against the
allegations made by LMH. The Company has also filed its own counter-claim
against LMH for breach of contract and damages. On March 31, 2004, a
prediction cannot be made as to the final outcome of the complaint and
damages allegedly owed to LMH. As a result, no amounts have been accrued
for this contingency.
In March 2003, Francis C. Pizzulli ("Pizzulli") filed a lawsuit against the
Company and others in the Los Angeles Superior Court Case No. BC291463
seeking damages for alleged breach of contract, damages for alleged
misrepresentations, and to invalidate a merger/reverse stock split of the
Company. The Company denied any and all liability in the lawsuit. Without
the admission of any liability by either Pizzulli or the Company, in
February 2004, the Company agreed to issue to Pizzulli 500,000 shares of
common stock of the Company to settle the lawsuit. The value of the stock
of $125,000 has been recorded in the accompanying income statement for the
three and nine-month periods ended March 31, 2004.
The Company is subject to certain other legal proceedings and claims which
arose in the ordinary course of its business. In the opinion of management,
the amount of ultimate liability with respect to these actions will not
materially affect the financial position, results of operations or cash
flows of the Company.
9
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
7. NOTE PAYABLE-SHAREHOLDER
-------------------------
During the nine months ended March 31, 2004, the former Chief Executive
Officer of the Company advanced an additional $205 to the Company under the
existing note payable which had a balance of $680 as of June 30, 2003. The
Company repaid $634 of the note through a $49 cash payment and issuance of
common stock with a value of $585. The balance of this note of $251 as of
March 31, 2004 is due on demand, non-interest bearing and is not
collateralized.
8. NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------
NINE MONTHS ENDED
---------------------- INCEPTION TO
MARCH 31, MARCH 31,
2004 2003 2004
---------- ---------- -------------
Non-cash investing and financing
activities:
Common stock issued in exchange for
equity securities $ - $ - $ 302
========== ========== =============
Common and treasury stock issued upon
conversion of debentures and interest
on debentures $ - $ 169 $ 1,697
========== ========== =============
Common and preferred stock issued for
services and license and patent rights $ 1,586 $ 4,060 $ 4,220
========== ========== =============
Common stock issued in settlement of
lawsuit and other liabilities $ 114 $ 602 $ 1,439
========== ========== =============
Common stock issued for assets $ 15 $ - $ 212
========== ========== =============
Warrants issued for services $ 157 $ 134 $ 162
========== ========== =============
Conversion of note payable to shareholder
to common stock $ 585 $ 46 $ 2,088
========== ========== =============
Conversion of dividends payable to common
stock $ - $ 47 $ 178
========== ========== =============
Reduction of note payable to stockholder
and accrued liabilities through exercise
of stock options $ - $ - $ 275
========== ========== =============
Issuance of notes payable for insurance $ - $ - $ 37
========== ========== =============
Issuance of notes payable for the purchase
of equipment $ - $ - $ 180
========== ========== =============
Dividends declared on preferred stock $ - $ 37 $ 143
========== ========== =============
Receipt of treasury stock for note payable
to stockholders $ - $ - $ 560
========== ========== =============
Common stock committed for payments of
accrued liabilities $ 62 $ - $ 62
========== ========== =============
10
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
9. NDC SUBSIDIARY
---------------
During the nine months ended March 31, 2004, the Company's board of
directors authorized the creation of a new class of common stock, called
Series NDC common stock, $0.001 par value per share, whose rights and
distributions would be based on the performance of NDC. During the nine
months ended March 31, 2004, the Company issued a dividend of one share of
the Series NDC common stock for each four shares of the Company's common
stock. As of March 31, 2004, 14,158,593 shares of Endovasc Series NDC
common stock were issued and outstanding. Included in operating, general
and administrative expenses for the nine months ended March 31, 2004 is $33
of expenses of NDC.
10. JOINT VENTURE AGREEMENTS
------------------------
Effective August 12, 2003, the Company entered into a joint venture
agreement with TissueGen, Inc. named Endovasc-TissueGen Research Sponsors,
L.L.C. (the "Partnership"). The purpose of the Partnership is to develop a
bioresorbable drug-eluting cardiovascular stent for the advanced treatment
of coronary artery disease. The Company and TissueGen agreed to co-license
certain intellectual property to the Partnership for a 49.9% and 51.1%
interest, respectively, in the Partnership. In addition to its license
contribution, Endovasc is required to purchase a convertible promissory
note from the Partnership in the maximum principal amount of $150. The
convertible promissory note is convertible at Endovasc's option into Class
B Membership interests in the Partnership. As of March 31, 2004, the
Company has not purchased the promissory note. Included in the net loss for
the nine months ended March 31, 2004 is $14 from loss from investment in
the Partnership. On October 7, 2003, the Company contributed $23 to the
Partnership, which caused the Company to have a controlling interest in the
Partnership. As a result, the activity of the Partnership has been
consolidated in the accompanying financial statements for the period from
October 7, 2003 to March 31, 2004.
In November 2003, the Company entered into a joint venture agreement with
TissueGen, Inc. and Dr. Nathan Blumberg named Endovasc-TissueGen-Blumberg
Research Sponsors, L.L.C. (the "Joint Venture"). The purpose of the Joint
Venture is to develop biodegradable stents for ureteral and prostate
applications. The Company and TissueGen agreed to co-license certain
intellectual property to the Joint Venture for a 39.9% and 50.1% interest,
respectively, in the Joint Venture. Dr. Blumberg owns the remaining 10%
interest. In addition to its license contribution, the Company is required
to purchase a convertible promissory note from the Joint Venture in the
principal amount of approximately $137. The convertible promissory note is
convertible at Endovasc's option into Class B membership interests in the
Joint Venture. As of March 31, 2004, the Company has not purchased the
promissory note. Included in the net loss for the nine months ended March
31, 2004 is $26 from loss from investment in the Joint Venture, which
reduced the Company's investment in the Joint Venture to $-0-.
11. STOCK OPTIONS
--------------
During the nine months ended March 31, 2004, the Company issued stock
options to an individual for consulting services, all of which were
subsequently exercised, as follows:
11
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
11. STOCK OPTIONS, CONTINUED
--------------------------
WEIGHTED
NUMBER OF SHARES AVERAGE
NON- EXERCISE EXERCISE
EMPLOYEE EMPLOYEE TOTAL EXERCISABLE PRICE PRICE
----------------- ----------- ----------- ------------ ------------- ---------
Options outstanding
at June 30, 2003 10,516 29,250 39,766 39,766 $13.33-$33.33 $ 14.00
Options expired (10,516) (29,250) (39,766) (39,766) $13.33-$33.33 $ 14.00
Options issued - 1,850,758 1,850,758 1,850,758 $ 0.17-$0.29 $ 0.22
Options exercised - (1,850,758) (1,850,758) (1,850,758) $ 0.17-$0.29 $ 0.22
----------------- ----------- ----------- ------------
Options outstanding
at March 31, 2004 - - - -
================= =========== =========== ============
Proforma information regarding net income and earnings per share as required by
SFAS No. 123 and No. 148 has been excluded because there were no issuances of
employee stock options during the quarter ended March 31, 2004. The value of the
stock options of $157 was recorded in the accompanying income statement for the
nine months ended March 31, 2004. The value was determined by use of the Black
Scholes option valuation model using a risk-free interest rate of 3%, a
volatility of 30% and a time to expiration of 60 days.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS
- --------------
The statements contained in this Form 10-QSB that are not historical are
forward-looking statements, including statements regarding the Company's
expectations, intentions, beliefs or strategies regarding the future.
Forward-looking statements include the Company's statements regarding liquidity,
anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statement. It is important to note
that the Company's actual results could differ materially from those in such
forward-looking statements. Additionally, the following discussion and analysis
should be read in conjunction with the Financial Statements and notes thereto
appearing in our annual report filed in Form 10-KSB for the period ending June
30, 2003.
CRITICAL ACCOUNTING POLICIES
We believe that of the significant accounting policies used in the
preparation of our financial statements (See Note 1 to the audited financial
statements for the year ended June 30, 2003), the following are critical
accounting policies, which may involve a higher degree of judgment, complexity
and estimates.
SIGNIFICANT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of revenues and
expenses during the periods. Actual results could differ from estimates making
it reasonably possible that a change in the estimates could occur in the near
term.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. These costs
consist of direct and indirect costs associated with specific projects.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for using the intrinsic value method
prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees", rather than applying the fair value
method prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation".
LOSS PER SHARE
Basic and diluted loss per share is computed on the basis of the weighted
average number of shares of common stock outstanding during each period. Common
equivalent shares from common stock options and warrants and Series A, B and C
convertible preferred stock are excluded from the computation as their effect
would dilute the loss per share for all periods presented.
CONCENTRATION OF CREDIT RISK
The Company's financial instruments that potentially subject the Company to
concentration of credit risk consist principally of accounts receivable from a
sponsor under an external research agreement. Accounts receivable from this
sponsor represented 100% of the Company's accounts receivable outstanding at
June 30, 2003. In addition, the sponsor under the external research agreement
represented 100% of the Company's revenues for the nine months ended March 31,
2004 and 2003, respectively.
13
OVERVIEW
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The Company is in the development stage and has had limited operating
revenues since its inception on June 10, 1996. From June 10, 1996 through
December 31, 2003 the Company had an accumulated deficit of $(24,692).
The Company presented pre-clinical data to the U.S. Food and Drug
Administration (FDA) in October 1999, in preparation for its Investigational New
Drug (IND) filing for Liprostin, its liposomal prostaglandin E-1 (PGE-1) drug
for indications of critical limb ischemia (CLI). The FDA reviewed the Company's
Phase I data and responded with a waiver of Phase II clinical trials, if the
Company elected to proceed directly to a Phase III trial for the product. The
Company moved forward with preparations for the Phase III trial as suggested by
the FDA, but decided to submit a second filing for an additional indication for
peripheral obstructive artery disease, severe intermittent claudication, which
is pain that occurs while walking. The Phase III protocol "A PHASE III,
RANDOMIZED, MULTICENTER, PLACEBO-CONTROLLED STUDY OF LIPOSOMAL PROSTAGLANDIN E1
(LIPROSTINTM ) IN CONJUNCTION WITH PERCUTANEOUS TRANSLUMINAL LIMB ANGIOPLASTY IN
PATIENTS WITH CRITICAL LIMB ISCHEMIA" was made on August 2, 2001 and
subsequently approved in February 2002.
Due to the complexity of the protocol, the Company commenced a pilot study
at Memorial Hermann Hospital in the third quarter of fiscal year ended June 30,
2003 to test the safety and efficacy of Liprostin as an adjunct therapy for PTA
and stenting. The trial was terminated October 2003.
In the first quarter of 2003, the company retained Pharm-Olam, a clinical
research organization (CRO), to conduct a Phase II clinical trial to examine the
safety and dosage of Liprostin as a stand alone therapy for patients suffering
from peripheral obstructive artery disease (PAOD) but do not require
angioplasty. A new protocol entitled "A PHASE II, OPEN LABEL, MULTICENTER,
STUDY OF LIPOSOMAL PROSTAGLANDIN E1 (LIPROSTINTM) IN PATIENTS WITH CRITICAL LIMB
ISCHEMIA AND INTERMITTANT CLAUDICATION", was prepared, submitted to the FDA on
September 19, 2003 and approved in the second fiscal quarter of 2003.
Physicians (interventional cardiologists and vascular surgeons) at seven sites
identified in Georgia, Russia and Mexico were selected to carry out the study,
which began in December 2003. A total of 78 patients were enrolled between
December 2003 and April 2004. The purpose of this trial is to establish dose
levels that are safe and show efficacy (proof of concept). Since the trial is
"open label", Endovasc had been able to assess the progress of each patient
during the three month duration of the trial. A "dose to effect" protocol, that
will extend the treatment for six month for a limited number of the patients to
determine the dosage requirement needed to show greatest improvement will be
submitted to the FDA. The trial will conclude at the end of June 2004.
In support of the PROStent coating technology, studies were continued in
January, 2003 to evaluate the utility of prostaglandin E-1 (PGE-1) as an
anti-restenotic agent when applied to metal stents. At the Armed Forces
Institute of Pathology in Washington, D.C., Drs. Renu Virmani and Frank Kolodgie
directly compared the effect of prostaglandin E-1 to rapamycin, the Cordis
anti-restenotic agent (Sirrolimus) coating on Cypher stents. Using cultured
rabbit iliac smooth muscle cells, they showed that, like rapamycin, PGE-1 was
also effective at blocking smooth muscle cell migration and proliferation.
Blocking these activities is essential for preventing restenosis.
In November 2000, the Company submitted a research grant application to
study methods of delivery of a powerful angiogenic reagent, AngiogenixTM. In
April 2001, the Company was notified of the grant approval for $512,000 with an
option to extend for an additional year. The option to extend this agreement for
an additional one year term was exercised. The extension increased the maximum
funding to $730,000. The agreement was verbally extended subsequent to June 30,
2003 to allow the Company to receive the maximum funding allowed under the
agreement. The Company presented accumulated data on safety and efficacy at the
American College of Angioplasty annual meeting in October 2002 and acknowledged
the granting agency Philip Morris, USA, External Research Group for their
support.
During the fourth quarter of the fiscal year ended June 30, 2003 and
continuing, the Company instituted a second porcine trial at Washington Hospital
Center, Washington DC to test a less invasive method of administering
AngiogenixTM. An extension of the granting period was applied for and received.
14
Progress continues on this project and is expected to be completed during the
fourth quarter of fiscal year ending June 30, 2004.
The Company submitted animal data to the FDA in February 2002 on trials
carried out at Stanford University and Columbia University; with its nicotinic
acetylcholine receptor (nAChR) agonist trademarked AngiogenixTM. After review of
the data, the FDA approved a phase III clinical trial. However, more experiments
are planned to better understand the mechanism of action and broad range of
consequences of nicotine when given as a therapeutic agent. The Company
continues to make progress on both trials.
The Company developed a Nutraceutical preparation for use in muscle
building and increase in strength and endurance. The product is owned by the
Company's wholly owned subsidiary, Nutraceutical Development Corporation, who
negotiated a license agreement with Basic Research, L.L.C. of Salt Lake City,
UT. Basic Research has begun the development of a mass market and expects to
begin sales in the fourth quarter of 2004, of which NDC will receive royalties.
In August 2003, the Company signed a joint venture agreement forming a
partnership with TissueGen, Inc. to create Endovasc-TissueGen Research Sponsors,
LLC (the "Partnership"). The purpose of the Partnership is to develop a totally
bioresorbable drug-eluting cardiovascular stent for the advanced treatment of
coronary artery disease.
The terms of the agreement call for Endovasc to co-license its patented,
time-released prostaglandin E-1 (PGE-1) drug to the newly formed Partnership. In
addition, Endovasc will purchase a $150,000 convertible promissory note from the
Partnership. The majority of these proceeds will be used to fund the development
of a prototype stent. The parties contemplate that the Partnership will seek to
raise up to an additional $2.5 million from third party investors in exchange
for membership interests in the Partnership. This money, if successfully raised,
is anticipated to be used to conduct clinical trials and bring the product to
market.
In November 2003, the company, in conjunction with its joint venture
partner TissueGen, retained Nathan Blumberg, MD, to collaborate with the company
on the development of biodegradable stents for ureteral and prostate
applications, thereby forming the Endovasc-Tissuegen-Blumberg Reasearch Sponsors
LLC joint venture. The mission of this joint venture is to develop a
biodegradable stent to replace the current stents used. This will simplify such
procedures (ureteroscopies or lithotripsies) by eliminating the removal of the
stent post patient improvement.
During the 3rd quarter 2003, a laboratory facility in Dallas, Texas was
designed and equipped to support the research efforts related to both joint
ventures. Dr. Kevin Nelson, lead chemist, and his staff, produced different
biodegradable, biocompatible materials and performed in vitro analyses to
determine degradation rates. Suitable candidates will be tested in dogs.
RESULTS OF OPERATIONS
- -----------------------
THREE MONTH PERIOD ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS)
- ---------------------------------------------------------------
During the three months ended March 31, 2004, the Company had $-0- in
revenue compared with $94 in revenue for the three months ended March 31, 2003.
The revenue during the three months ended March 31, 2003 was a result of a
research agreement with another company relating to the Company's Nicotine
Receptor Agonist.
During the three months ended March 31, 2004 and 2003, administrative and
operating expenses were $1,489 and $549, respectively. The increase in costs
and operating expenses is primarily due to an increase in stock based
compensation to third party consultants.
Research and development costs totaled $378 during the three months ended
March 31, 2004, compared to $1,032 during the three months ended March 31, 2003.
This decrease of $654 was related to the increased cost of materials, labor and
travel associated with the preparation for Phase III clinical studies with
Liprostin(TM) in the quarter ended March 31, 2003, as compared to the same
quarter in 2004.
15
Interest expense decreased from $4 during the three months ended March 31,
2003 to $2 during the three months ended March 31, 2004. This decrease is a
result of a lower average interest bearing debt balance.
NINE MONTH PERIOD ENDED MARCH 31, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------
During the nine months ended March 31, 2004, the Company had total revenues
of $50 compared with $294 of revenues for the nine months ended March 31, 2003.
The decrease primarily relates to less revenue received from an external
research agreement with another company entered into in July 2001 whereby the
Company received assistance from this company in funding its research and
development costs related to its Nicotine Receptor Agonist.
During the nine months ended March 31, 2004 and 2003, administrative and
operating expenses were $2,528 and $3,328, respectively. The decrease is
primarily due to a decrease in stock based compensation paid to third party
consultants.
Research and development costs totaled $1,247 during the nine months ended
March 31, 2004, compared to $2,338 during the nine months ended March 31, 2003.
This decrease of $1,091 was related to the increased cost of materials, labor
and travel related to the preparation for Phase III clinical studies with
Liprostin(TM) during the nine months ended March 31, 2003 as compared to the
same period in 2004.
Interest expense decreased from $51 during the nine months ended March 31,
2003 to $13 during the nine months ended March 31, 2004. This decrease is
primarily a result of a lower average interest bearing debt balance.
Cash flows used in operating activities for the nine months ended March 31,
2004 increased $703 to $1,679 compared to $976 for the nine months ended March
31, 2003, primarily due to the increase in cash used to pay accounts payable
vendors and a decrease in the issuance of common stock for services during the
nine months ended March 31, 2004, as compared to the corresponding period in
2003.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
- ---------------------------------------------------
The Company had a working capital deficit at March 31, 2003 of $(96),
compared to a deficit of $(541) at June 30, 2003. This decrease in the working
capital deficit is primarily related to the decrease in notes payable to
shareholder resulting from the issuance of $585 of common stock.
The Company requires significant additional funds to enable it to continue
its Liprostin product development and to complete its Food and Drug
Administration required clinical trials, as well as research and development of
its licensed product nicotine receptor agonist (NRA) and its stent coating
technology.
The Company continues to actively pursue additional financing,
collaborations with firms, and other arrangements aimed at increasing its
capital resources. Failure to acquire such funds may adversely impact the
scheduled marked introduction of Liprostin and Angiogenix and possibly adversely
affect the Company's operations. These events raise doubt as to our ability to
continue as a going concern. The report of our independent public accountants,
which accompanied our financial statements for the year ended June 30, 2003, was
qualified with respect to that risk. In order to continue as a going concern,
the Company must raise additional funds as noted above and ultimately achieve
profit from its operations.
ITEM 3. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
- ------- -----------------------------------------------------
As of March 31, 2004, the Company carried out an evaluation,
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Exchange Act Rule 13a-15(e) and Rule
15d-15(e)). Based upon that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls
16
and procedures are effective at a reasonable level in timely alerting them to
material information relating to the Company that is required to be included
in the Company's periodic filings with the Securities and Exchange
Commission. There has been no change in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
The Company's management, including the Chief Executive Officer and Chief
Financial Officer, do not expect that the Company's disclosure controls or
internal controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met due to
numerous factors, ranging from errors to conscious acts of an individual, or
individuals acting together. In addition, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in a cost-effective control system, misstatements due to error
and/or fraud may occur and not be detected.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- ------- ------------------
On August 28, 2003, Cause No. 03-08-0681-CV, "The Dow Chemical Company vs.
Endovasc LTD., Inc.," was filed against the Company in the District Court of
Montgomery County, Texas, 359th Judicial District. Dow Chemical Company ("Dow")
filed a complaint against the Company for breach of contract and damages. The
amount of damages sought is approximately $230,000. This case is being
vigorously defended against the allegations made by Dow. The Company has also
filed its own counter-claim against Dow for breach of contract and damages. On
March 31, 2004, a prediction cannot be made as to the final outcome of the
complaint and damages allegedly owed to Dow or to the Company.
On November 7, 2003, Cause No. 03-11-08112-CV, "Greg Creekmore vs.
Endovasc, Inc. and Endovasc, LTD., Inc.," was filed against the Company in the
District Court of Montgomery County, Texas, 284th Judicial District. Greg
Creekmore ("Creekmore") filed a complaint against the Company for breach of an
employment contract between the parties. Creekmore seeks payment of $114,000
plus interest, 1 million shares of the Company's common stock and reimbursement
of court costs including reasonable attorneys fees allowed by law. This case is
being vigorously defended against the allegations made by Creekmore. On March
31, 2004, a prediction cannot be made as to the final outcome of the complaint
and damages allegedly owed to Creekmore.
On January 13, 2004, Case No. H-03-5226, "Lorenz M. Hofmann, Ph.D. and LMH
Associates, Inc. vs. Endovasc, LTD., Inc., Endovasc, Inc., David P. Summers,
Ph.D. and M. Dwight Cantrell" was filed against the Company in the United States
District Court for the Southern District of Texas Houston Division. Lorenz M.
Hofmann, Ph.D. and LMH Associates, Inc. ("LMH") filed a complaint against the
Company for breach of contract and damages. LMH seeks payment of $91,859. This
case is being vigorously defended against the allegations made by LMH. The
Company has also filed its own counter-claim against LMH for breach of contract
and damages. On March 31, 2004, a prediction cannot be made as to the final
outcome of the complaint and damages allegedly owed to LMH.
In March 2003, Francis C. Pizzulli ("Pizzulli") filed a lawsuit against the
Company and others in the Los Angeles Superior Court Case No. BC291463 seeking
damages for alleged breach of contract, damages for alleged misrepresentations,
and to invalidate a merger/reverse stock split of the Company. The Company
denied any and all liability in the lawsuit. Without the admission of any
liability by either Pizzulli or the Company, in February, 2004, the Company
agreed to issue to Pizzulli 500,000 shares of common stock of the Company to
17
settle the lawsuit. The value of the stock of $125,000 has been recorded in the
accompanying income statement for the three and nine-month periods ended March
31, 2004.
The Company is subject to other certain legal proceedings and claims which
arose in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or cash flows of the
Company.
ITEM 2. CHANGES IN SECURITIES
- ------- -----------------------
Recent Sale of Unregistered Securities. During the three months ended
March 31, 2004, the following transactions were effected by us in reliance upon
exemptions from registration under the Securities Act of 1933 as amended (the
"Act"). Unless stated otherwise, we believe that each of the persons who
received these unregistered securities had knowledge and experience in financial
and business matters which allowed them to evaluate the merits and risk of the
receipt of these securities, and that they were knowledgeable about our
operations and financial condition. No underwriter participated in, nor did we
pay any commissions or fees to any underwriter in connection with the
transactions. These transactions did not involve a public offering. Each
certificate issued for these unregistered securities contained a legend stating
that the securities have not been registered under the Act and setting forth the
restrictions on the transferability and the sale of the securities.
We issued 37,631 shares of common stock for services, which we valued at
$0.34 per share, with an aggregate value of $12,795. This transaction was
exempt from registration pursuant to Section 4(2) of the Act.
We issued an aggregate of 60,000 shares of common stock for cash at $0.14
per share, with an aggregate value of $8,400. These transactions were exempt
from registration pursuant to Section 4(2) of the Act.
ITEM 5. OTHER INFORMATION
- ------ -----------------
The Board has not adopted a formal policy with regard to the process to be
used for identifying and evaluating nominees for director. At this time, the
consideration of candidates for the Board of Directors is in the Board's
discretion, which we believe is adequate based on the size of the Company and
each current board member's qualifications.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- -------------------------------------
(a) Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
- We filed a Form 8-KA on February 5, 2004, reporting Item 7 - Exhibits.
18
SIGNATURES
In accordance with the requirements of Sections 13 and 15(d) of the
Exchange Act, the registrant has caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
ENDOVASC, INC.
Date: May 24, 2004 By: /s/ Diane Dottavio
--------------------- -----------------------------
Diane Dottavio
Chief Executive Officer
Date: May 24, 2004 By: /s/ M. Dwight Cantrell
--------------------- ------------------------------
M. Dwight Cantrell
Chief Financial Officer
19