United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 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 November 10, 2004, 82,698,546 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.
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- ----------------------------------------------
Balance Sheet as of September 30, 2004 and
June 30, 2004 3
Statement of Operations for the three months
ended September 30, 2004 and 2003, and for
the period from inception, June 10, 1996,
to September 30, 2004 4
Statement of Stockholders' Deficit for the
three months ended September 30, 2004 5
Statement of Cash Flows for the three months
ended September 30, 2004 and 2003, and for
the period from inception, June 10, 1996,
to September 30, 2004 6
Notes to Financial Statements 7
2
ENDOVASC, INC.
(A CORPORATION IN THE DEVELOPMENT STAGE)
BALANCE SHEET
SEPTEMBER 30, 2004 AND JUNE 30, 2004
--------------
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER JUNE 30,
30, 2004 2004
ASSETS (UNAUDITED) (NOTE)
------ ------------ ----------
Current assets:
Cash and cash equivalents $ - $ 116
Accounts receivable 22 22
Other current assets 317 375
------------ ----------
Total current assets 339 513
Property and equipment, net 98 114
Other assets, net 98 102
------------ ----------
Total assets $ 535 $ 729
============ ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Current maturities of long-term debt $ 52 $ 52
Current portion of obligations under capital leases 30 30
Notes payable to shareholders 312 290
Accounts payable 622 539
Accrued liabilities 18 27
------------ ----------
Total current liabilities 1,034 938
Long-term obligations under capital leases 23 28
Convertible debentures 1 1
Deferred liabilities 49 53
------------ ----------
Total liabilities 1,107 1,020
------------ ----------
Commitment and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value, 20,000,000 shares authorized,
208 shares of Series A 8% cumulative convertible
preferred stock issued and outstanding at September 30, 2004
and June 30, 2004, stated value $100 per share - -
Common stock, $.001 par value, 200,000,000 shares authorized
Common stock-Endovasc Series, 72,733,634 and 70,203,634
shares issued and outstanding at September 30, 2004 and
June 30, 2004, respectively 73 70
Common stock-NDC Series, 14,158,593 shares issued and out-
standing at September 30, 2004 and June 30, 2004 14 14
Additional paid-in capital 25,528 25,218
Losses accumulated during the development stage (26,187) (25,593)
------------ ----------
Total stockholders' deficit (572) (291)
------------ ----------
Total liabilities and stockholders' deficit $ 535 $ 729
============ ==========
<FN>
Note: The balance sheet at June 30, 2004 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 ENDED SEPTEMBER 30, 2004 AND 2003 AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1996, TO SEPTEMBER 30, 2004
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004
-------------------- -------------------- --------------------
Income:
Revenue $ - $ 49 $ 1,127
Interest income - - 30
Other income - - 47
-------------------- -------------------- --------------------
Total income - 49 1,204
-------------------- -------------------- --------------------
Costs and expenses:
Operating, general and administrative
expenses 501 372 16,632
Research and development costs 86 494 9,543
Interest expense 7 3 651
Settlement with former employee - - 408
Loss on extinguishment of convertible
debentures - - 127
-------------------- -------------------- --------------------
Total costs and expenses 594 869 27,361
-------------------- -------------------- --------------------
Loss attributed to minority interest - - 28
-------------------- -------------------- --------------------
Net loss $ (594) $ (820) $ (26,129)
==================== ==================== ====================
Basic and diluted net loss per common share $ (0.01) $ (0.01)
==================== ====================
Weighted average shares outstanding 71,697,112 68,894,520
==================== ====================
<FN>
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 THREE MONTHS ENDED SEPTEMBER 30, 2004
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
LOSSES
ACCUMULATED
COMMON STOCK COMMON STOCK SERIES A ADDITIONAL DURING THE
ENDOVASC SERIES NDC SERIES PREFERRED STOCK PAID-IN DEVELOPMENT
-------------------- ------------------- ------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES CAPITAL STAGE TOTAL
-------- ---------- ------- ---------- --------- ------- ----------- ------------- ---------
Balance at June 30, 2004 $ 70 70,203,634 $ 14 14,158,593 $ - 208 $ 25,218 $ (25,593) $ (291)
Stock issued for services 2 1,790,000 - - - - 234 - 236
Stock issued for payment of
accounts payable 1 425,000 - - - - 43 - 44
Stock issued for settlement
of lawsuit - 315,000 - - - - 33 - 33
Net loss - - - - - - - (594) (594)
-------- ---------- ------- ---------- --------- ------- ----------- ------------- ---------
Balance at September 30,
2004 $ 73 72,733,634 $ 14 14,158,593 $ - 208 $ 25,528 $ (26,187) $ (572)
======== ========== ======= ========== ========= ======= =========== ============= =========
<FN>
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 THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003, AND
FOR THE PERIOD FROM INCEPTION, JUNE 10, 1996, TO SEPTEMBER 30, 2004
----------
(IN THOUSANDS)
THREE MONTHS ENDED
------------------------ INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004
------------ ---------- ---------------
Cash flows used in operating activities:
Net loss $ (594) $ (820) $ (26,129)
Adjustments to reconcile net loss to net
cash used in operating activities 461 40 16,997
------------ ---------- ---------------
Net cash used in operating activities (133) (780) (9,132)
------------ ---------- ---------------
Cash flows used in investing activities:
Capital expenditures - - (158)
Proceeds received from repayment of loan to
stockholder - - 72
------------ ---------- ---------------
Net cash used in investing activities - - (86)
------------ ---------- ---------------
Cash flows from financing activities:
Proceeds from sale of equity securities - - 337
Proceeds from sale of common stock - 763 1,916
Proceeds from exercise of warrants - - 1,177
Proceeds from sale of convertible debentures - - 1,437
Net proceeds from issuance of preferred stock - - 2,263
Issuance of notes payable 5 257 1,104
Repayment of notes payable (5) (248) (879)
Payments of obligations under capital leases (5) (17) (134)
Proceeds from advances from stockholders 77 197 2,448
Repayment of notes to stockholder (55) (28) (429)
Purchase of treasury stock - - (22)
------------ ---------- ---------------
Net cash provided by financing activities 17 924 9,218
------------ ---------- ---------------
Net (decrease) increase in cash and cash equivalents (116) 144 -
Cash and cash equivalents at beginning of period 116 120 -
------------ ---------- ---------------
Cash and cash equivalents at end of period $ - $ 264 $ -
============ ========== ===============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 7 $ 3
============ ==========
Cash paid for income taxes $ - $ -
============ ==========
<FN>
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,
2004. 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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------------
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 (Note 9). In
addition, during the year ended June 30, 2004, the Company acquired a
controlling interest in two joint ventures that have been consolidated in
the accompanying financial statements (Note 10). The consolidated financial
statements include the accounts of the Company, its subsidiary and its
majority owned joint venture investments. All intercompany accounts and
transactions are eliminated in consolidation.
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.
STOCK-BASED COMPENSATION
-------------------------
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No.
25, Accounting for Stock Issued to Employees, and has adopted the
disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. Under the intrinsic value method,
the Company has only recorded stock-based compensation resulting from
options granted at below fair market value.
7
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
---------------------------------------------------------------------------
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 convertible preferred stock are excluded from the computation as their
effect would dilute the loss per share for all periods presented.
If the Company had reported net income for the quarters ended September 30,
2004 or 2003, the calculation of diluted net income per share would not
have included any additional common equivalent shares.
RESEARCH AND DEVELOPMENT
--------------------------
Research and development costs are expensed as incurred. These costs
consist of direct and indirect costs associated with specific projects.
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. During the
three months ended September 30, 2004 and 2003, the Company incurred net
losses of $(594) and $(820), respectively, and negative cash flows from
operations of $(133) and $(780), respectively. These factors along with a
$(695) negative working capital position at September 30, 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:
- 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 anticipates the generation of approximately $500 in
revenue from its Nutraceutical product in the fourth quarter of the
year ending June 30, 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.
8
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
3. GOING CONCERN CONSIDERATIONS, CONTINUED
------------------------------------------
- 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 September 30, 2004 and June 30, 2004 consists of
the following (in thousands):
SEPTEMBER 30, JUNE 30,
2004 2004
-------------- ---------
Other receivable $ - $ 30
Prepaid license 33 58
Prepaid supplies 278 278
Prepaid insurance 6 9
-------------- ---------
$ 317 $ 375
============== =========
Prepaid supplies include the capitalized costs of approximately 4,000 vials
of the drug Liprostin that the Company believes is a scale economically
feasible to the Company for commercial purposes and that the Company
believes will be viable for sales in the next twelve months.
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.
6. LITIGATION
----------
During the year ended June 30, 2004, a counterclaim under Cause No.
03-04-02939-CV (AAA Arbitration No. 79-181-00037-03TMS), "Marco D.
Carnevale vs. Endovasc Corporation" was filed against the Company in the
359th Judicial District Court of Montgomery County, Texas. Carnevale filed
a complaint against the Company for alleged breach of contract and damages.
Without the admission of any liability, during the three month period
ending September 30, 2004, the Company agreed to issue to Carnevale $33 of
cash or shares of common stock of the Company valued at $33 to settle the
claim. In September 2004, 315,000 shares of the common stock of the Company
were issued pursuant to the terms of the settlement agreement.
9
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
6. LITIGATION, CONTINUED
----------------------
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 September 30, 2004, a prediction cannot be made as
to the final outcome of the complaint and damages allegedly owed to Dow or
to the Company. However, management believes it will prevail and
accordingly, 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, one 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 September 30, 2004, a
prediction cannot be made as to the final outcome of the complaint and
damages allegedly owed to Creekmore. However, management believes it will
prevail and accordingly, 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 September 30, 2004, a
prediction cannot be made as to the final outcome of the complaint and
damages allegedly owed to LMH. However, management believes it will prevail
and accordingly, no amounts have been accrued for this contingency.
The Company is a defendant in an arbitration proceeding entitled vFinance
Investments and vFinance Capital and Endovasc, Ltd., Inc., AAA No. 32 M 181
0011602. vFinance claims an entitlement to certain fees and an unspecified
amount of damages for the value of the warrants to which they claim
entitlement. This matter was originally scheduled for mediation on
September 27, 2004 and has since been rescheduled for December 14, 2004.
The Company intends to defend its position vigorously as it believes it
will prevail and, accordingly, has not accrued any liability associated
with this case in the accompanying financial statements.
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.
10
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
7. NOTES PAYABLE-SHAREHOLDERS
---------------------------
During the three months ended September 30, 2004, the Company repaid $55 to
the Company's Chief Executive Officer, which reduced the note balance to
the CEO to $-0- at September 30, 2004.
During the three months ended September 30, 2004, the Chief Financial
Officer of the Company advanced the Company $77 which increased the total
balance owed to $127 as of September 30, 2004. The balance is due on
demand, non-interest bearing and is not collateralized.
During the year ended June 30, 2004, a stockholder of the Company advanced
the Company $185. The balance outstanding at September 30, 2004 of $185 is
due on demand, non-interest bearing and is not collateralized.
8. NON-CASH INVESTING AND FINANCING ACTIVITIES
-----------------------------------------------
THREE MONTHS ENDED
---------------------- INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
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 $ - $ - $ 1,697
========== ========== ==============
Common and preferred stock issued for
services and license and patent rights $ - $ 206 $ 2,634
========== ========== ==============
Common stock issued in settlement of
lawsuit and related liabilities $ - $ - $ 601
========== ========== ==============
Common stock issued for payment of account
payable and accrued liabilities $ 44 $ 33 $ 931
========== ========== ==============
Common stock issued for assets $ - $ - $ 197
========== ========== ==============
Conversion of note payable to shareholder
to common stock $ - $ 584 $ 2,190
========== ========== ==============
Conversion of dividends and other payable
to common stock $ - $ - $ 178
========== ========== ==============
Reduction of note payable to stockholder
and accrued liabilities through exercise
of stock options $ - $ - $ 275
========== ========== ==============
Issuance of notes payable for insurance $ - $ - $ 37
========== ========== ==============
11
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
8. NON-CASH INVESTING AND FINANCING ACTIVITIES, CONTINUED
-----------------------------------------------------------
THREE MONTHS ENDED
---------------------- INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004
---------- ---------- --------------
Issuance of notes payable for the purchase
of equipment $ - $ - $ 180
========== ========== ==============
Dividends declared on preferred stock $ - $ - $ 143
========== ========== ==============
Receipt of treasury stock for note payable
to stockholders $ - $ - $ 560
========== ========== ==============
Issuance of common stock for receivable $ - $ - $ 30
========== ========== ==============
9. NDC SUBSIDIARY
---------------
As of September 30, 2004, 14,158,593 shares of Endovasc Series NDC common
stock were issued and outstanding. Included in operating, general and
administrative expenses for the three months ended September 30, 2004 is
$-0- 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 an initial 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 September 30,
2004, the Company has not purchased the promissory note. Through additional
contributions, the Company has a controlling interest in the Partnership;
as a result, the activity of the Partnership has been consolidated in the
accompanying financial statements. The activity that was consolidated
includes expenses of less than $1 and $5 for the three month periods ended
September 30, 2004 and 2003, respectively. Inception to date, $129 of
expenses of the Partnership have been consolidated. As of September 30,
2004, current liabilities of the Partnership of $44 have been consolidated.
12
ENDOVASC, INC.
(A DEVELOPMENT STAGE CORPORATION)
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
----------
(IN THOUSANDS, EXCEPT SHARE DATA)
10. JOINT VENTURE AGREEMENTS, CONTINUED
-----------------------------------
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 an initial 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 September 30, 2004, the
Company has not purchased the promissory note. Through additional
contributions, the Company has a controlling interest in the Joint Venture;
as a result, the activity of the Joint Venture has been consolidated in the
accompanying financial statements. This activity includes expenses of $-0-
for the three month periods ended September 30, 2004 and 2003. Inception to
date, $221 of expenses of the Joint Venture have been consolidated. As of
September 30, 2004, current liabilities of $205 have been consolidated.
11. SUBSEQUENT EVENTS
------------------
In November, 2004, the Company filed a law suit against its former CEO &
President, David P. Summers in the 284th District Court of Montgomery
County, Texas. The suit filed on behalf of the Company alleges a civil
conspiracy, breach of fiduciary duty and breach of contract and recision by
David P. Summers and seeks restitution and damages in excess of $3.5
million.
On October 6, 2004, the Company filed a Form N-54A with the Securities and
Exchange Commission notifying the SEC of its election to become a business
development company. As part of this election, the Company has certified
that it will be operated for the purpose of making investments in
securities described in sections 55(a) (1) through (3) of the Investment
Company Act of 1940 and that it will make available significant managerial
assistance with respect to issuers of such securities to the extent
required by the Act.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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, 2004.
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, 2004), 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
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and has adopted the disclosure-only
alternative of SFAS No. 123, Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure. Under the intrinsic value method, the Company has only recorded
stock-based compensation resulting from options granted at below fair market
value.
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
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
September 30, 2004.
14
OVERVIEW
- --------
We are in the development stage and have had limited operating revenues
since our inception on June 10, 1996. From June 10, 1996 through September 30,
2004, we had an accumulated deficit $26,187,000.
Endovasc filed an Investigational New Drug (IND) application for
Liprostin(TM) in October 1999. In support of the application a protocol was
submitted for the use of Liprostin(TM) in combination with angioplasty for
patients suffering from intermittent claudication or critical limb ischemia. In
accordance with this protocol, a small pilot study was conducted in 2003. Based
on this pilot study, a new protocol was designed and submitted to the FDA in
September 2003 for a Phase II clinical trial for patients with Peripheral
Arterial Occlusive Disease who are not candidates for angioplasty.
The Phase II clinical trial consisting of 73 patients was initiated in
December 2003 and concluded in July 2004. The results of this trial for
peripheral arterial occlusive disease will be presented to the FDA in the fall
of 2004. We intend to move forward with Phase III in the first quarter of 2005.
In November 2000, we submitted an application for consideration of a major
research grant for animal studies of Nicotine Receptor Agonist. In April 2001,
we were 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 us to receive the maximum funding allowed under the agreement. Identity
of the grantor was requested to remain anonymous until such time as release of
the results from the studies. Due to delays pertaining to the animal research,
extensions were granted until October 2004.
We submitted Phase I and 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 Angiogenix(TM). We also
sponsored research which was completed during the fiscal year 2004. The first
was conducted by Dr. Yong-Jian Geng at the Texas Heart Institute to study the
effects of nicotine on stem cell development. The second was conducted by Dr.
Liping Tang at the University of Texas at Arlington, Texas to study the
angiogenic effect of a new nicotine delivery system in two mouse models of
ischemia. Currently we are focusing our research on alternative site-specific
delivery methods for our drug candidates.
In September 2003, 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 year ended June 30, 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 September 30, 2004, 14,158,593 shares of Endovasc Series
NDC common stock were issued and outstanding.
On October 6, 2004, the Company filed a Form N-54A with the Securities and
Exchange Commission notifying the SEC of its election to become a business
development company. As part of this election, the Company has certified that
it will be operated for the purpose of making investments in securities
described in sections 55(a) (1) through (3) of the Investment Company Act of
1940 and that it will make available significant managerial assistance with
respect to issuers of such securities to the extent required by the Act. Our
Board of Directors believe their corporate structure is ideally suited to
operations as a BDC under the Act. We are organized as a holding company, with
subsidiaries that require additional capital to become further developed and
commercialized. Angiogenix, Liprostin(TM) and Nutraceutical Development
Corporation will all benefit from the availability of capital investment funds
made possible through a BDC.
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RESULTS OF OPERATIONS
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THREE MONTH PERIOD ENDED SEPTEMBER 30, 2004 AND 2003 (IN THOUSANDS)
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During the quarter ended September 30, 2004, the Company's net revenues
decreased to $-0- compared with revenues of $49 for the quarter ended September
30, 2003. The decrease in revenue is the result of no billings toward research
grants in the quarter ended September 30, 2004.
During the quarter ending September 30, 2004, operating, general and
administrative expenses were $501 compared to $372 for the quarter ending
September 30, 2003. The increase is primarily due to an increase in legal fees
associated with additional lawsuits in progress during the quarter ended
September 30, 2004.
Research and development expenses totaled $86 during the quarter ending
September 30, 2004, a decrease of $408 from $494 for the quarter ended September
30, 2003. This decrease is the result of the conclusion of the Phase II
Liprostin clinical trials in July 2004.
Cash flows used in operating activities for the quarter ending September
30, 2004 decreased $647 to $(133), compared to $(780) for the quarter ended
September 30, 2003, primarily due to a decrease in operating capital available
for operations.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
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The Company had a working capital deficit at September 30, 2004 of $(695),
compared to a deficit of $(425) at June 30, 2004. This increase in the working
capital deficit is primarily related to the increase in accounts payable and a
decrease in cash.
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 to perform 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, 2004, 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
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As of September 30, 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 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
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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
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During the year ended June 30, 2004, a counterclaim under Cause No.
03-04-02939-CV (AAA Arbitration No. 79-181-00037-03TMS), "Marco D. Carnevale vs.
Endovasc Corporation" was filed against the Company in the 359th Judicial
District Court of Montgomery County, Texas. Carnevale filed a complaint against
the Company for alleged breach of contract and damages. Without the admission
of any liability, during the three month period ending September 30, 2004, the
Company agreed to issue to Carnevale $33 of cash or shares of common stock of
the Company valued at $33 to settle the claim. In September 2004, 315,000
shares of the common stock of the Company were issued pursuant to the terms of
the settlement agreement.
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
September 30, 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
September 30, 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 September 30, 2004, a prediction cannot be made as to the final
outcome of the complaint and damages allegedly owed to LMH.
The Company is a defendant in an arbitration proceeding entitled vFinance
Investments and vFinance Capital and Endovasc, Ltd., Inc., AAA No. 32 M 181
0011602. vFinance claims an entitlement to certain fees and an unspecified
amount of damages for the value of the warrants to which they claim entitlement.
This matter was originally scheduled for mediation on September 27, 2004, but
has since been rescheduled for December 14, 2004. The Company intends to defend
its position vigorously as it believes it will prevail and, accordingly, has not
accrued any liability associated with this case in the accompanying financial
statements.
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In November, 2004, the Company filed a law suit against its former CEO &
President, David P. Summers in the 284th District Court of Montgomery County,
Texas. The suit filed on behalf of the Company alleges a civil conspiracy,
breach of fiduciary duty and breach of contract and recision by David P. Summers
and seeks restitution and damages in excess of $3.5 million.
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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During the three months ended September 30, 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 50,000 shares of common stock for services to one individual,
which we valued at $0.15 per share, with an aggregate value of $7,500. This
transaction was exempt from registration pursuant to Section 4(2) of the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(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.
On November 5, 2004, we reported Item 5.02, Departure of directors or
principal officers, election of directors, appointment of principal
officers.
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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: November 19, 2004 By: /s/ Diane Dottavio
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Diane Dottavio
Chief Executive Officer
Date: November 19, 2004 By: /s/ M. Dwight Cantrell
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M. Dwight Cantrell
Chief Financial Officer
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