================================================================================
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 2005.
[ ] 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)
(936)582-5920
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the past
12 months (or for such a 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 10, 2005 102,297,879 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 March 31, 2005 and June 30, 2004 3
Statement of Operations for the three months and nine
months ended March 31, 2005 and 2004 4
Statement of Stockholders' Equity (Deficit) for the
nine months ended March 31, 2005 5
Statement of Cash Flows for the nine months ended
March 31, 2005 and 2004 6
Schedule of Investments as of March 31, 2005 7
Notes to Financial Statements 8
2
ENDOVASC, INC.
BALANCE SHEET
MARCH 31, 2005 AND JUNE 30, 2004
---------
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, JUNE 30,
ASSETS 2005 2004
------ ----------- ----------
Current assets:
Cash and cash equivalents $ 13 $ 116
Accounts receivable - 22
Subscription receivable 25 -
Other current assets 1 375
----------- ----------
Total current assets 39 513
Investments in portfolio companies at fair value
(cost of $132) 658 -
Property and equipment, net 42 114
Other assets, net 6 102
----------- ----------
Total assets $ 745 $ 729
=========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Current maturities of long-term debt $ 39 $ 52
Current portion of obligations under capital leases 21 30
Notes payable to shareholders 115 290
Accounts payable 265 539
Accrued liabilities 14 27
----------- ----------
Total current liabilities 454 938
Long-term obligations under capital leases 8 28
Convertible debentures 1 1
Deferred liabilities 41 53
----------- ----------
Total liabilities 504 1,020
----------- ----------
Commitment and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value, 200,000,000 shares authorized
Common stock-Endovasc Series, 93,908,084 and 70,203,634
shares issued and outstanding at March 31, 2005 and
June 30, 2004, respectively 94 70
Common stock-NDC Series, 14,158,593 shares issued and
outstanding at March 31, 2005 and June 30, 2004 14 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, 2005 and June 30,
2004, stated value $100 per share - -
Additional paid-in capital 26,279 25,218
Accumulated deficit (26,672) (25,593)
Unrealized appreciation on investments 526 -
----------- ----------
Total stockholders' equity (deficit) 241 (291)
----------- ----------
Total liabilities and stockholders' equity (deficit) $ 745 $ 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.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2005 AND 2004
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Income:
Revenue $ - $ - $ - $ 49
Management fees 21 - 60 -
Interest income - - - 1
Unrealized appreciation of port-
folio investments 100 - 100 -
------------ ------------ ------------ ------------
Total income 121 - 160 50
------------ ------------ ------------ ------------
Costs and expenses:
Operating, general and
administrative expenses 293 1,494 1,304 2,568
Research and development
costs - 378 77 1,247
Interest expense 4 2 6 13
------------ ------------ ------------ ------------
Total costs and expenses 297 1,874 1,387 3,828
------------ ------------ ------------ ------------
Loss before cumulative effect of
accounting change (176) (1,874) (1,227) (3,778)
Cumulative effect of conversion to
business development company, net
of income tax effect - - 674 -
------------ ------------ ------------ ------------
Net loss $ (176) $ (1,874) $ (553) $ (3,778)
============ ============ ============ ============
Weighted average shares
outstanding 89,463,361 80,257,983 81,159,154 74,618,260
============ ============ ============ ============
Basic and diluted loss per common
share before cumulative effect
of accounting change $ (0.00) $ (0.02) $ (0.02) $ (0.05)
Cumulative effect of conversion to
business development company - - 0.01 -
------------ ------------ ------------ ------------
Basic and diluted net loss per
common share $ (0.00) $ (0.02) $ (0.01) $ (0.05)
============ ============ ============ ============
<FN>
The accompanying notes are an integral
part of these financial statements.
4
ENDOVASC, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED MARCH 31, 2005
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK COMMON STOCK SERIES A
ENDOVASC SERIES NDC SERIES PREFERRED STOCK ADDITIONAL
-------------------- ------------------- ------------------- PAID-IN ACCUMULATED
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES CAPITAL DEFICIT
-------- ---------- ------- ---------- --------- -------- ----------- -------------
Balance at June 30, 2004 $ 70 70,203,634 $ 14 14,158,593 $ - 208 $ 25,218 $ (25,593)
Stock issued for cash 19 18,933,390 - - - - 619 -
Stock issued for services 4 4,031,060 - - - - 366 -
Stock issued for payment of
accounts payable 1 425,000 - - - - 43 -
Stock issued for settlement
of lawsuit - 315,000 - - - - 33 -
Unrealized appreciation of
investments - - - - - - - (526)
Net loss - - - - - - - (553)
-------- ---------- ------- ---------- --------- -------- ----------- -------------
Balance at March 31, 2005 $ 94 93,908,084 $ 14 14,158,593 $ - $ 208 $ 26,279 $ (26,672)
======== ========== ======= ========== ========= ======== =========== =============
UNREALIZED
APPRECIATION TOTAL
------------- -------
Balance at June 30, 2004 $ - $ (291)
Stock issued for cash - 638
Stock issued for services - 370
Stock issued for payment of
accounts payable - 44
Stock issued for settlement
of lawsuit - 33
Unrealized appreciation of
investments 526 -
Net loss - (553)
------------- -------
Balance at March 31, 2005 $ 526 $ 241
============= =======
<FN>
The accompanying notes are an integral part of these financial statements.
5
ENDOVASC, INC.
CONDENSED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2005 AND 2004
__________
(IN THOUSANDS)
NINE MONTHS ENDED
-----------------------
MARCH 31,
2005 2004
---------- -----------
Cash flows used in operating activities:
Net loss $ (553) $ (3,778)
Adjustments to reconcile net loss to net
cash used in operating activities (156) 2,099
---------- -----------
Net cash used in operating activities (709) (1,679)
---------- -----------
Cash flows used in investing activities:
Capital expenditures - -
---------- -----------
Net cash used in investing activities - -
---------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 638 1,223
Proceeds from exercise of warrants - 407
Issuance of notes payable 5 377
Repayment of notes payable (18) (406)
Payments of obligations under capital leases (29) (41)
Proceeds from advances from stockholders 84 205
Repayments of notes to stockholder (74) (49)
---------- -----------
Net cash provided by financing activities 606 1,716
---------- -----------
Net (decrease) increase in cash and cash equivalents (103) 37
Cash and cash equivalents at beginning of period 116 120
---------- -----------
Cash and cash equivalents at end of period $ 13 $ 157
========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 6 $ 13
========== ===========
Cash paid for income taxes $ - $ -
========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
6
ENDOVASC, INC.
SCHEDULE OF INVESTMENTS
MARCH 31, 2005
__________
(IN THOUSANDS)
MARCH 31, 2005
TITLE OF SECURITY PERCENTAGE OF ---------------------
PORTFOLIO COMPANY INDUSTRY HELD BY COMPANY CLASS HELD FAIR VALUE COST
- ------------------------- ----------------- ----------------- -------------- ----------- --------
Liprostin, Inc. Biopharmaceutical Common stock 100.0% $ 400 $ 97
Angiogenix Limited, Inc. Biopharmaceutical Common stock 100.0% 50 30
Nutraceutical Development
Corporation Biopharmaceutical Common stock 100.0% 200 5
Endovasc-TissueGen
Research Sponsors, LLC Biopharmaceutical Common stock 49.9% 3 -
Endovasc-TissueGen-
Blumberg Research
Sponsors, LLC Biopharmaceutical Common stock 39.9% 5 -
----------- --------
$ 658 $ 132
=========== ========
<FN>
The accompanying notes are an integral
part of these financial statements.
7
ENDOVASC, INC.
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. On October 6, 2004 the Company filed its election with the SEC
(Form N-54A) to adopt business development company ("BDC") status under the
Investment Company Act of 1940 ("1940 Act"). A BDC is a specialized type of
investment company under the 1940 Act. A BDC may primarily be engaged in
the business of furnishing capital and managerial expertise to companies
that do not have ready access to capital through conventional financial
channels; such companies are termed "eligible portfolio companies". The
Company, as a BDC, may invest in other securities, however, such
investments may not exceed 30% of the Company's total asset value at the
time of such investment. The accompanying financial statements reflect the
accounts of Endovasc, Inc., and the related results of operations. In
accordance with Article 6 of Regulation S-X under the Securities Act of
1933 and Securities Exchange Act of 1934, the Company does not consolidate
portfolio company investments in which the Company has a controlling
interest.
The consolidated financial statements for the periods prior to the
Company's filing of its BDC election on October 6, 2004 include the
accounts of the Company, its subsidiaries and its joint venture investments
in which it exercises control. All intercompany accounts and transactions
during this period were eliminated in consolidation.
Accounting principles used in the preparation of the financial statements
beginning October 6, 2004 are different than those of prior periods and,
therefore, the financial position and results of operations of these
periods are not directly comparable. The primary differences in accounting
principles relate to the carrying value of investments.
8
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------------
The cumulative effect adjustment for the nine-month period ended March
31, 2005 reflects the effects of conversion to a business development
company as follows:
CUMULATIVE EFFECT OF
BUSINESS DEVELOPMENT
COMPANY CONVERSION
---------------------
Effect of recording investments at fair value $ 426
Adjustment for previously consolidated net liabilities 248
---------------------
$ 674
=====================
PORTFOLIO INVESTMENTS
---------------------
The Company currently has investments in five subsidiaries as follows:
Liprostin, Inc.
---------------
The Company has an investment in the wholly-owned, unconsolidated
subsidiary, Liprostin, Inc., which is engaged in the development of
liposome drug delivery systems. Liposomes, which are microscopic cell-like
spheres composed of a thin, durable lipid membrane surrounding a hollow
compartment, can be used to entrap and protect drugs from degradation in
the blood stream and can be engineered to regulate the transport of
molecules across their outer membrane.
Angiogenix Limited, Inc.
------------------------
The Company also has an investment in the wholly-owned, unconsolidated
subsidiary, Angiogenix Limited, Inc (Angiogenix). Angiogenix has an
exclusive licensing agreement (the "Stanford License Agreement") with the
Board of Trustees of the Leland Stanford University relating to US Patent
Application 60/146,233 (issued as US Patent No. 6,417,205 B1 on July 9,
2002) relating to the administration of Nicotine or Nicotine Receptor
Agonist (NRA) to induce the growth of new blood vessels ("angiogenesis").
Nutraceutical Development Corporation
-------------------------------------
The Company has an investment in the wholly-owned, unconsolidated
subsidiary, Nutraceutical Development Corporation ("NDC"). NDC was formed
to develop certain technologies now owned by the Company's other
subsidiaries for use in dietary products designed to enhance health and
provide beneficial biological effects ("nutraceuticals").
Endovasc-TissueGen Research Sponsors, L.C.C.
--------------------------------------------
The Company has a 49.9% investment in a joint venture 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.
9
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------------
Endovasc-TissueGen-Blumberg Research Sponsors, L.C.C
----------------------------------------------------
The Company has a 39.9% investment in a joint venture 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.
Prior to the Company's election to become a BDC on October 6, 2004,
the Company had the following consolidated subsidiaries and joint venture
investments.
Endovasc-TissueGen Research Sponsors, L.L.C.
--------------------------------------------
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 October 6, 2004
the Company has not purchased the promissory note. 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
$59 for the period from July 1, 2004 through October 6, 2004 and the
nine-month period ended March 31, 2004, respectively. Effective October 6,
2004, when the Company elected to become a BDC, the Partnership's net
liabilities of $44 were deconsolidated.
Endovasc-TissueGen-Blumberg Research Sponsors, L.L.C.
-----------------------------------------------------
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 October 6, 2004,
the Company has not purchased the promissory note. The activity of the
Joint Venture has been consolidated in the accompanying financial
statements. This activity includes expenses of $-0- and $168 for the period
from July 1, 2004 through October 6, 2004 and the nine-month period ended
March 31, 2004, respectively. Effective October 6, 2004, when the Company
elected to become a BDC, the Joint Venture's net liabilities of $203 were
deconsolidated.
10
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------------
Liprostin, Inc.
---------------
The Company's wholly-owned subsidiary Liprostin, Inc. is engaged in
the development of liposome drug delivery systems. Liposomes, which are
microscopic cell-like spheres composed of a thin, durable lipid membrane
surrounding a hollow compartment, can be used to entrap and protect drugs
from degradation in the blood stream and can be engineered to regulate the
transport of molecules across their outer membrane. This subsidiary was
inactive until September 17, 2004, when the Company transferred $321 of
assets and $224 of liabilities to the subsidiary. The net assets of $97
were deconsolidated upon the Company's election to become a BDC on October
6, 2004.
Angiogenix Limited, Inc.
------------------------
The Company's wholly-owned subsidiary Angiogenix Limited, Inc (Angiogenix)
was inactive until September 17, 2004, when the Company transferred $142 of
assets and $112 of liabilities to the subsidiary. The assets transferred
include an exclusive licensing agreement (the "Stanford License Agreement")
with the Board of Trustees of the Leland Stanford University relating to US
Patent Application 60/146,233 (issued as US Patent No. 6,417,205 B1 on July
9, 2002) relating to the administration of Nicotine or Nicotine Receptor
Agonist (NRA) to induce the growth of new blood vessels ("angiogenesis").
The net assets of $30 were deconsolidated upon the Company's election to
become a BDC on October 6, 2004.
Nutraceutical Development Corporation
-------------------------------------
The Company's wholly-owned subsidiary Nutraceutical Development Corporation
was formed to develop certain technologies for use in dietary products
designed to enhance health and provide beneficial biological effects
("nutraceuticals"). On September 17, 2004, the Company transferred $6 of
assets and $1 of liabilities to the subsidiary. The net assets of $5 were
deconsolidated upon the Company's election to become a BDC on October 6,
2004.
SIGNIFICANT ESTIMATES
---------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. While it is believed that such estimates are
reasonable, actual results could differ from those estimates.
As a business development company, the Company's investments are in
private companies with no publicly available market price. Business
development companies are required to carry investments at fair value.
Generally, the fair value of a private security will initially be based
primarily on its original cost to the Company. Management and the Company's
board of directors must evaluate the actual and expected future operations
of the portfolio companies, monitor market conditions and evaluate any new
financings or other significant events that the portfolio companies may
sustain in order to estimate a fair value for the investments in these
companies at least quarterly. If the Company's estimates of the future
differ from actual events in the future, for any reason,
11
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------------
the Company may fail to record an unrecognized gain or loss or may
record it later or earlier than it would with a perfect forecast of the
future. Because these investments are restricted and illiquid, even if the
Company correctly estimates a fair value for an investment today, that
investment could lose some or all of its value in the near future without
the Company realizing any benefit from its investments or recognizing any
cash proceeds from the sale of these investments. If, in the future, the
Company determines that a loss has occurred in any of its investments, that
loss will be reflected as a reduction in the value of its investments on
the Company's consolidated balance sheet, and the reduced values will
negatively impact earnings and be reflected as a loss on the statements of
operations.
INVESTMENTS
-----------
The Company's investments potentially subject the Company to various levels
of risk associated with economic changes, interest rate fluctuations,
political events, war and terrorism, and operating conditions beyond the
control of the Company. Consequently, management's judgment as to the level
of losses that currently exist or may develop in the future, if any,
involves the consideration of current and anticipated conditions and their
potential effects on the Company's investments. Due to the level of risk
associated with investment securities and the level of uncertainty related
to changes in the value of investment securities, it is at least reasonably
possible that changes in risks in the near term could materially impact the
value of the amounts reflected in the accompanying financial statements.
Investments are carried at fair value as determined in good faith by or
under the direction of the Board of Directors of the Company based on
information, including an independent valuation, and using valuation
methodologies considered appropriate and reliable by the Board. Generally,
the fair value of a private security will initially be based primarily on
its original cost to the Company. Cost will be the primary factor used to
determine fair value on an ongoing basis until significant developments or
other factors affecting the investment (such as results of the portfolio
company's operations, changes in general market conditions, subsequent
financings, independent valuations or the availability of market
quotations) provide a basis for value other than cost. For investments in
which the Company earns an interest for services rendered, the Board
estimates the fair value of the services as the initial basis for
estimating fair value of the securities received. The Board believes that
the methods used to value the investments reflected in the accompanying
financial statements have been valued appropriately and that the values
reflected herein have been calculated in accordance with generally accepted
valuation methods which result in valuations in the Company's financial
statements being recorded in accordance with generally accepted accounting
principles in the United States. However, losses may occur, which may be
material to the financial condition of the Company and proceeds, if any,
from the disposition of securities could differ significantly from the
values reflected herein. In particular, early stage and seed round
investments in private companies, which is the focus of the Company, are
typically in illiquid restricted securities with no current market and
therefore no market prices or comparables are available upon which to base
estimates. These portfolio companies are often development stage with no
operations and no positive cash flow. These factors, among others, make
determination of fair value more difficult and subject to significant
judgment errors by the Company's board of directors.
12
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------------
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
convertible preferred stock are excluded from the computation for the three
months ended March 31, 2004 and the nine month periods ended March 31, 2005
and 2004 as their effect would dilute the loss per share for these periods.
If the Company had reported net income during the three months ended March
31, 2005 and the nine month periods ended March 31, 2005 and 2004, the
calculation of diluted net income per share would have included 208
additional common equivalent shares. Common equivalent shares for the three
months ended March 31, 2005 totaled 208 shares from Series A cumulative
convertible preferred stock.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of investments and cash.
The Company places its cash with high credit quality financial
institutions. At times in the future, such amounts may exceed the FDIC
limits.
REVENUE RECOGNITION
-------------------
As a business development company, the Company's revenue will be recognized
primarily based on security transactions and related income. Security
transactions are accounted for on a trade date basis. Net realized gains or
losses on sales of securities are determined on the specific identification
method. Interest income and expenses are recognized on the accrual basis.
Dividend income is recorded on cumulative preferred equity securities on an
accrual basis to the extent that such amounts are expected to be collected
and on common equity securities on the record date for private companies or
on the ex-dividend date for publicly traded companies. The Company assesses
the collectibility of dividends and interest income receivables in
connection with its determination of the fair value of the related
security. To the extent that there are adverse future developments,
previously recognized dividend and interest income may not be realized.
Through March 31, 2005, the Company had not received any interest or
dividend income, or any other form of cash income or revenues, nor had it
sold any investments, thus the Company has not recognized any realized
gains or losses on its investments. When fees are paid to the Company by
portfolio companies in their stock, in accordance with generally accepted
accounting principles, the Company generally recognizes fee income to the
extent of par value in the case of a new company or fair value in the case
of an existing company, as determined by the Company's board of directors.
Fees paid in shares of the stock of portfolio companies are both restricted
and illiquid thus the Company may be unable to convert these shares of
stock to cash in the future. Increases or decreases in the fair value of
investments above or
13
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
2. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
----------------------------------------------------------------------
below accounting cost basis are not included in investment income but
are included in the Statement of Operations as unrealized gains or losses
until such time as the investment is liquidated or sold.
3. GOING CONCERN CONSIDERATIONS
----------------------------
In October 2004, the Company began operating as a business development
company, so that it is no longer a development stage company. Nevertheless,
the Company is subject to many of the risks associated with development and
early stage companies that lack working capital, operating resources and
contracts, cash and ready access to the credit and equity markets. The
Company hopes to obtain additional debt and equity financing from various
sources in order to finance its operations and to continue to grow through
investment opportunities. In the event the Company is unable to obtain
additional debt or equity financing, the Company will not be able to
continue its current level of operations. If the Company is unable to
continue its operations, the Company's assets will experience a significant
decline in value and the Company will need to rely on funding, if
available, in order to continue its limited operations.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to comply with the terms of its financing agreements, to
obtain additional financing or refinancing as may be required, and
ultimately to attain positive cash flows from operations and profits.
Through March 31, 2005, the Company has not earned cash profits from any
sources. The Company's investments in portfolio investment companies are
reflected on the accompanying balance sheets at the board of directors'
best estimate of fair value. Because the investments are illiquid, the
Company is limited in its ability to sell the investments in its portfolio
companies. The value of these investments may decline substantially
resulting in the Company receiving little or no cash value for their
services and investments in these portfolio companies.
4. OTHER CURRENT ASSETS
--------------------
Other current assets at March 31, 2005 and June 30, 2004 consists of
the following (in thousands):
MARCH 31, JUNE 30,
2005 2004
---------- ---------
Other receivable $ - $ 30
Prepaid license - 58
Prepaid supplies - 278
Prepaid insurance 1 9
---------- ---------
$ 1 $ 375
========== =========
14
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
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. The
Company will not elect to be treated for federal income tax purposes as a
regulated investment company under the Internal Revenue Code with the
filing of its federal corporate income tax return for 2005.
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, 2005, 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 March 31, 2005, 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 March 31, 2005, 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.
15
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
6. LITIGATION, CONTINUED
---------------------
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. There was a mediation hearing on December 14, 2004 and
no definitive agreement was reached. The cause will move forward into
binding arbitration during the latter part of 2005. 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.
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 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.
7. NOTE PAYABLE-SHAREHOLDER
------------------------
During the nine months ended March 31, 2005, the Company repaid $55 to
the Company's Chief Executive Officer, which reduced the note balance to
the CEO to $-0- at March 31, 2005.
During the nine months ended March 31, 2005, the Chief Financial Officer of
the Company advanced the Company $84 of which $19 was repaid which
increased the total balance owed to $115 as of March 31, 2005. 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's consolidated joint venture $185. The balance
outstanding of $185 was deconsolidated upon the Company's election to
become a BDC in October 2004.
8. NON-CASH INVESTING AND FINANCING ACTIVITIES
-------------------------------------------
SIX MONTHS ENDED
--------------------
DECEMBER 31,
2004 2003
--------- ---------
Non-cash investing and financing activities:
Common stock issued for services $ 370 $ 558
========= =========
Common stock issued for payment of accounts
payable and accrued liabilities $ 77 $ 37
========= =========
Conversion of note payable to shareholder to
common stock $ - $ 585
========= =========
16
ENDOVASC, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
__________
(IN THOUSANDS, EXCEPT SHARE DATA)
8. NON-CASH INVESTING AND FINANCING ACTIVITIES, CONTINUED
------------------------------------------------------
On October 6, 2004, upon the Company's election to become a BDC,
certain subsidiaries of the Company were deconsolidated and reported as an
investment. The assets that were deconsolidated and reported as an
investment by the Company include $45 of net lab equipment costs, $278 of
supplies, $87 of net license costs, $22 of accounts receivable, $2 of cash
and $33 of prepaid royalty fees. Liabilities that were deconsolidated
included $391 of accounts payable, and $196 of notes payable.
9. NDC TRACKING STOCK
------------------
As of March 31, 2005, 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, 2005 is $-0- of
expenses of NDC. Effective October 6, 2004, when the Company elected to
become a BDC, the subsidiary's net assets of $4,403 were deconsolidated.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information contained in this section should be read in conjunction with the
Selected Consolidated Financial and Other Data, the Selected Operating Data and
our Consolidated Financial Statements and notes thereto appearing elsewhere in
this Quarterly Report. This Quarterly Report, including the Management's
Discussion and Analysis of Financial Condition and Results of Operations,
contains forward-looking statements that involve substantial risks and
uncertainties. These forward-looking statements are not historical facts, but
rather are based on current expectations, estimates and projections about our
industry, our beliefs, and our assumptions. Words such as "anticipates",
"expects", "intends", "plans", "believes", "seeks", and "estimates" and
variations of these words and similar expressions are intended to identify
forward-looking statements. These statements are not guarantees of future
performance and are subject to risks, uncertainties, and other factors, some of
which are beyond our control and difficult to predict and could cause actual
results to differ materially from those expressed or forecasted in the
forward-looking statements including without limitation (1) any future economic
downturn could impair our customers' ability to repay our loans and increase our
non-performing assets, (2)economic downturns can disproportionately impact
certain sectors in which we concentrate, and any future economic downturn could
disproportionately impact the industries in which we concentrate causing us to
suffer losses in our portfolio and experience diminished demand for capital in
these industry sectors, (3) a contraction of available credit and/or an
inability to access the equity markets could impair our lending and investment
activities, (4) interest rate volatility could adversely affect our results, (5)
the risks associated with the possible disruption in our operations due to
terrorism and (6) the risks, uncertainties and other factors we identify from
time to time in our filings with the Securities and Exchange Commission,
including our Form 10-KSBs, Form 10-QSBs and Form 8-Ks. Although we believe that
the assumptions on which these forward-looking statements are based are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could be
incorrect. In light of these and other uncertainties, the inclusion of a
projection or forward-looking statement in this Quarterly Report should not be
regarded as a representation by us that our plans and objectives will be
achieved. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this Quarterly Report.
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.
INVESTMENTS
Investments are reported at fair market value. The most significant estimate
inherent in the preparation of our consolidated financial statements is the
valuation of its investment and the related unrealized appreciation or
depreciation.
Upon our conversion to a business development company, we employed an
independent business valuation expert to value our portfolio companies. The
Board of Directors determined all portfolio companies and investments at fair
market value under a good faith standard.
18
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
Endovasc 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, we have 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 convertible
preferred stock are excluded from the computation for the three months ended
March 31, 2005 and 2004 and the nine month periods ended March 31, 2005 and 2004
as their effect would dilute the loss per share for these periods. If the
Company had reported net income during the three months ended March 31, 2005 and
2004 and the nine-month periods ended March 31, 2005 and 2004, the calculation
of diluted net income per share would have included 208 additional common
equivalent shares. Common equivalent shares for the three months ended March,
31, 2005 totaled 208 shares from Series A cumulative convertible preferred
stock.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of investments and cash. The Company places its
cash with high credit quality financial institutions. At times in the future,
such amounts may exceed the FDIC limits.
OVERVIEW
Endovasc, Inc. is a Nevada corporation and the successor to a biopharmaceutical
company incorporated on June 10, 1996. Effective September 17, 2004, most of
our assets and liabilities were transferred to wholly owned subsidiaries, and we
became an internally managed "Non-diversified Closed-end Company" as defined by
Section 5 of the Investment Company act of 1940 (the "40 Act") that elected to
be treated as a "Business Development Company" pursuant to Section 54 of the 40
Act. We will not elect to be treated for federal income tax purposes as a
regulated investment company under the Internal Revenue Code with the filing of
its federal corporate income tax return for 2005.
PORTFOLIO INVESTMENTS
1. Liprostin, Inc.
Liprostin, Inc. owns the intellectual property relative to the formation of
Liprostin(TM) and manages and directs the clinical trials required for the FDA.
2. Angiogenix Limited, Inc.
Angiogenix has an exclusive licensing agreement (the "Stanford License
Agreement") with the Board of Trustees of the Leland Stanford University
relating to US Patent Application 60/146,233 (issued as US Patent No. 6,417,205
B1 on July 9, 2002) relating to the administration of Nicotine or Nicotine
Receptor Agonist (NRA) to induce the growth of new blood vessels
("angiogenesis").
3. Nutraceutical Development Corporation
19
Nutraceutical Development Corporation was formed to develop certain technologies
now owned by our other subsidiaries for use in dietary products designed to
enhance health and provide beneficial biological effects ("nutraceuticals").
OTHER INVESTMENTS
1. Endovasc-TissueGen Research Sponsors, L.L.C.
In August 2003, we 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.
2. Endovasc-TissueGen-Blumberg Research Sponsors, L.L.C.
In November 2003, we 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.
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. We
held a teleconference with the FDA in April of 2005. This teleconference focused
on the Liprostin studies conducted as well as future studies that are necessary
in order for us to file a New Drug Application (NDA) with the FDA. We intend
to move Liprostin, Inc. forward with Phase III in the fall of 2005.
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, Angiogenix Limited, Inc. is focusing research on
alternative site-specific delivery methods for our drug candidates. The
original term of the Stanford licensing agreement called for the product to be
in commercialization by June of 2005. We are presently in negotiations with
Stanford to extend this timetable. Should Stanford not agree to this extension,
we will be faced with an unrealistic schedule that we will not be able to meet.
The asset valuation for Angiogenix Ltd. Inc has been reduced for this quarter to
reflect the possibility that Stanford will be unwilling to extend the
commercialization period.
Nutraceutical Development Company signed an exclusive licensing agreement with
Western Holdings, Inc., a division of Basic Research of Salt Lake city in July
of 2003. This agreement called for a payment of 10% royalties. An extension to
the agreement gave Western Holdings until June of 2005 to bring the product to
market. A trade show was held in Columbus Ohio in March of 2005 where they
launched our product. Because of a production problem no sales orders were
fulfilled during this quarter but they should be fulfilled in the fourth quarter
of fiscal 2005.
RESULTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS)
During the quarter ended March 31, 2005 our income increased to $121 compared
with income of $ -0- for the quarter ended March 31, 2004. This increase is a
result of
20
management fees from our portfolio companies and unrealized appreciation of our
investments in portfolio companies.
During the quarter ended March 31, 2005, operating, general and administrative
expenses were $293 compared to $1,494 for the quarter ending March 31, 2004.
The decrease is primarily due to a decrease in public relations and consulting
fees.
Research and development expenses totaled $ -0- during the quarter ending March
31, 2005, a decrease of $378 from $378 for the quarter ended March 31, 2004.
This decrease results from change in accounting method and the portfolio
companies reflecting R&D expenses.
NINE MONTH PERIODS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS)
During the nine months ended March 31, 2005 our income was comprised of $60 in
management fees charged to portfolio investment companies and $100 of unrealized
appreciation of portfolio investments. During the nine months ended March 31,
2004, our income was comprised of revenue under an external research agreement.
During the nine months ended March 31 2005, operating, general and
administrative expenses were $1,304 compared to $2,568 for the nine months
ending March 31, 2004. This decrease is primarily due to decreases in public
relations and consulting fees.
Research and development expenses totaled $77 during the nine months ending
March 31, 2005, a decrease of $1,170 from $1,247 for the nine months ended March
31, 2004. This decrease results from a change in accounting method and the
portfolio companies reflecting research and development expenses.
Cash flows used in operating activities for the nine months ending March 31,
2005 decreased $970 to $709 compared to $1,679 for the nine months ended March
31, 2004, primarily due to a decrease in cash spent on research and development.
The cumulative effect of conversion to a business development company resulted
in a one-time gain of $674 during the nine months ended March 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS)
We had a working capital deficit at March 31, 2005 of $(415), compared to a
deficit of $(425) at June 30, 2004. This decrease in primarily due to a
decrease in liabilities partially offset by a decrease in current assets.
In October 2004, we began operating as a business development company, so that
we are no longer an early stage drug development company. Nevertheless, we are
subject to many of the risks associated with development and early stage
companies that lack working capital, operating resources and contracts, cash and
ready access to the credit and equity markets. We hope to obtain additional
debt and equity financing from various sources in order to finance our
operations and to continue to grow through investment opportunities. In the
event we are unable to obtain additional debt or equity financing, we will not
be able to continue our current level of operations. If we are unable to
continue our operations, our assets will experience a significant decline in
value and we will need to rely on funding, if available, in order to continue
our limited operations.
Our continuation as a going concern is dependent upon our ability to generate
sufficient cash flow to meet our obligations on a timely basis, to comply with
the terms of our financing agreements, to obtain additional financing or
refinancing as may be required, and ultimately to attain positive cash flows
from operations and profits. Through March 31, 2005, we have not earned cash
profits from any sources. Our investments in our portfolio investment companies
are reflected on the accompanying balance sheets at the board of directors' best
estimate of fair value. Because the investments are illiquid, we are limited in
our ability to sell the investments in our portfolio companies. The value of
these investments may decline substantially resulting in us receiving little or
no cash value for our services and investments in these portfolio companies.
21
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, we must raise additional funds
as noted above and ultimately achieve profit from our operations.
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2005, we carried out an evaluation, under the supervision and
with the participation of management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)
and Rule 15d-15(e)). Based upon that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures are effective at a reasonable level in timely alerting them to
material information relating to Endovasc that is required to be included in our
filings with the Securities and Exchange Commission. There has been no change
in our internal control over financial reporting that occurred during the most
recent fiscal quarter that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
Our management, including the Chief Executive Officer and Chief Financial
Officer, do not expect that our 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 us in the District Court of Montgomery
County, Texas, 359th Judicial District for alleged 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. We have also
filed our own counter-claim against Dow for breach of contract and damages. On
March 31, 2005, a prediction cannot be made as to the final outcome of the
complaint and damages allegedly owed to Dow or to us.
On November 7, 2003, Cause No. 03-11-08112-CV, "Greg Creekmore vs. Endovasc,
Inc. and Endovasc, LTD., Inc.," was filed against us in the District Court of
Montgomery County, Texas, 284th Judicial District, for alleged breach of an
employment contract between the parties. Creekmore seeks payment of $114,000
plus interest, 1 million shares of our common stock and reimbursement of court
costs including reasonable attorney's fees allowed by law. This case is being
vigorously defended against the allegations made by Creekmore. On March 31,
2005, 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 parties in the United States
District Court for the Southern District of Texas Houston Division. Lorenz M.
Hofmann, Ph.D. and LMH Associates, Inc. ("LMH") allege a breach of contract and
damages. LMH seeks payment of $91,859. This case is being vigorously defended
against the allegations made by LMH. We have also filed a counter-claim against
LMH for breach of contract and damages. On March 31, 2005, a prediction cannot
be made as to the final outcome of the complaint and damages allegedly owed to
LMH.
We are a defendant in an arbitration proceeding entitled vFinance Investments
and vFinance Capital and Endovasc, Ltd., Inc., AAA No. 32 M 181 0011602.
vFinance claims
22
an entitlement to certain fees and an unspecified amount of damages for the
value of the warrants to which they claim entitlement. There was a mediation
hearing on December 14, 2004, and no definitive agreement was reached. The
cause will move forward into binding arbitration during the latter part of 2005.
We intend to defend our position vigorously as we believe we will prevail and,
accordingly, have not accrued any liability associated with this case in the
accompanying financial statements.
In November, 2004, we filed a law suit against our former CEO & President, David
P. Summers in the 284th District Court of Montgomery County, Texas. The suit
filed on our behalf alleges a civil conspiracy, breach of fiduciary duty and
breach of contract and rescission by David P. Summers and seeks restitution and
damages in excess of $3.5 million.
We are 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 our
financial position, results of operations or cash flows.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A form 1-E filing was made on October 25, 2004 which indicated our intent to
raise capital under regulation E.
During the three months ended March 31, 2005, 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.
During the three months ended March 31, 2005, we issued 2,241,060 shares of
common stock to five individuals for services, which we valued at $0.06 per
share, with an aggregate value of $134,463. These transactions were exempt from
registration pursuant to Section 4(2) of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. Other Information
None.
ITEM 6. EXHIBITS
(a) Exhibits
Listed below are the exhibits which are filed as part of this report
(according to the number assigned to them in Item 601 of Regulation S-B):
23
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.
None.
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 20, 2005 By: /s/ Diane Dottavio
--------------- -------------------------------
Diane Dottavio
Chief Executive Officer
Date: May 20, 2005 By: /s/ M. Dwight Cantrell
--------------- -------------------------------
M. Dwight Cantrell
Chief Financial Officer
24