UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JULY 31, 2004
(Commission File No. 000-31653)
ENHANCE BIOTECH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4766094
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
712 Fifth Avenue, New York, NY 10019
- ---------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (646) 723-8940
---------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 3 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 [_]
Number of shares of Common Stock outstanding as of August 31, 2004: 28,704,861
----------
ENHANCE BIOTECH, INC
TABLE OF CONTENTS
Page
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited) 1-7
Item 2 Management's Discussion and Analysis or Plan of Operation 8-12
Item 3 Controls and Procedures 12
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits 13
Signatures 14-17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENHANCE BIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
July 31,2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 156,535
Other accounts receivable 7,117
-----------
TOTAL CURRENT ASSETS 163,652
Deferred financing fees 152,758
-----------
$ 316,410
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 507,347
Accrued expenses 418,951
Due to related parties 261,914
Notes payable to related parties 467,972
Amounts due to Directors and Officers 255,752
-----------
TOTAL LIABILITIES 1,911,936
-----------
STOCKHOLDERS' (DEFICIT)
Preferred stock, $.001 par value;
authorized 25,000,000 shares;
none issued
Common stock, $.001 par value;
authorized 75,000,000 shares;
28,704,861 issued and outstanding 28,705
Additional paid in capital 4,805,504
Deficit accumulated in the development stage (6,281,975)
Accumulated other comprehensive loss (147,760)
-----------
TOTAL STOCKHOLDERS' (DEFICIT) (1,595,526)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) $ 316,410
===========
The accompanying notes are an integral part of these financial statements
1
ENHANCE BIOTECH, INC
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Six Months From Inception
Ended Ended June 7, 1999
July 31, July 31, to July 31,
2004 2003 2004 2003 2004
------------ ------------ ------------ ------------ ------------
REVENUES $ 0 $ 0 $ 0 $ 0 $ 0
GENERAL AND ADMINISTRATIVE 477,494 144,367 1,081,538 307,783 3,424,512
RESEARCH AND DEVELOPMENT 616,161 347,516 1,287,117 751,503 2,857,463
------------ ------------ ------------ ------------ ------------
NET LOSS (1,093,655) (491,883) (2,368,655) (1,059,286) (6,281,975)
------------ ------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME/(LOSS):
Foreign currency
translation adjustments (23,972) 455 (2,270) 373 (147,760)
------------ ------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE LOSS (1,117,627) (491,428) (2,370,925) (1,058,913) (6,429,735)
============ ============ ============ ============ ============
NET (LOSS) PER COMMON SHARE,
BASIC AND DILUTED $ (0.04) $ (0.02) $ (0.08) $ (0.04)
============ ============ ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 28,590,472 24,193,350 28,038,624 24,303,455
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
2
ENHANCE BIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT)
(UNAUDITED)
OTHER TOTAL
COMMON STOCK ADDITIONAL ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT LOSS DEFICIT
---------- ------- --------------- ----------- -------------- --------------
June 7, 1999 - Contribution of capital $ 250 $ 250
Excess liabilities assumed over assets
acquired from Sporting Magic, Inc. (81,180) (81,180)
Shares issued in satisfaction of debt 1,875,000 1,875 98,125 100,000
Net loss (23,102) (23,102)
---------- ------- ------------ ------------ ---------- --------------
Balances May 31, 2000 1,875,000 $ 1,875 $ 17,195 $ (23,102) $ (4,032)
Net loss (218,041) (218,041)
---------- ------- ------------ ------------ ---------- --------------
Balances May 31, 2001 1,875,000 $ 1,875 $ 17,195 $ (241,143) $ (222,073)
Shares issued for cash 386,850 387 51,193 51,580
Shares issued in satisfaction of debt 150,000 150 19,850 20,000
Shares issued for services 7,500 7 993 1,000
Net loss (139,736) (139,736)
---------- ------- ------------- ------------ ---------- --------------
Balances May 31, 2002 2,419,350 $ 2,419 $ 89,231 $ (380,879) $ -- $ (289,229)
Net loss (456,756) (456,756)
Foreign currency translation adjustment (126,726) (126,726)
---------- ------- ------------- ------------ ---------- --------------
Balances January 31, 2003 2,419,350 $ 2,419 $ 89,231 $ (837,635) $(126,726) $ (872,711)
Shares issued in reorganization 21,774,000 21,774 (21,774) 0
Shares issued for services - June 26, 2003 136,500 136 136,364 136,500
Shares issued for services - August 7, 2003 375,000 375 374,625 375,000
Shares issued for cash - November 3, 2003 2,000,000 2,000 1,998,000 2,000,000
Shares issued for cash - January 31, 2004 516,667 517 774,483 775,000
Fair value of warrants 70,261 70,261
Net loss (3,075,685) (3,075,685)
Foreign currency translation adjustment (18,764) (18,764)
---------- ------- ------------ ------------ ---------- --------------
Balances January 31, 2004 27,221,517 $27,221 $ 3,421,190 $(3,913,320) $(145,490) $ (610,399)
---------- -------- ------------ ------------ ---------- --------------
Adjustment for 1.5: forward split 258,344 259 (259) 0
Shares issued for cash - April 30, 2004 870,000 870 869,130 870,000
Shares issued for cash - May 31 2004 255,716 256 255,460 255,716
Shares issued for conversion
of debt - May 31, 2004 99,284 99 99,185 99,284
Fair value of warrants 160,798 160,798
Net loss for the six months
ended July 31, 2004 (2,368,655) (2,368,655)
Foreign currency translation adjustment (2,270) (2,270)
---------- -------- ------------ ------------ ---------- --------------
Balances at July 31, 2004 28,704,861 28,705 4,805,504 (6,281,975) (147,760) (1,595,526)
========== ======= ============ ============ ========== ==============
The accompanying notes are an integral part of these financial statements.
3
ENHANCE BIOTECH, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended July 31, From
2004 2003 Inception
------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(2,368,655) $(1,059,286) (6,281,975)
Adjustments to reconcile net (loss) to
net cash (used) in operating activities
Fair value of warrants 8,040 - 78,301
Issuance of common stock for services 136,500 512,500
Changes in operating assets and liabilities 850,744 924,058 1,443,964
--------- ---------- ---------
NET CASH (USED) IN OPERATING.ACTIVITIES........ (1,509,871) 1,272 (4,247,210)
--------- ------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock for Cash 1,125,716 0 3,952,296
Borrowings 467,972 0 617,256
Repayment of borrowings 0 0 (50,000)
--------- ------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,593,688 0 4,519,552
--------- -------- ---------
EFFECT OF EXCHANGE RATE CHANGES .................. (2,270) (373) (115,807)
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 81,547 899 156,535
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ........................... 74,988 0 0
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ................................. $156,535 $ 899 $156,535
========= ========= =========
NON-CASH FINANCING AND INVESTING ACTIVITIES
Conversion of debt to common stock ............... 99,284 0 219,284
========= ========= =========
Warrants issued for financing .................... 160,798 -- 231,059
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during year for:
Interest ............................... $ 0 $ 0 $ 0
========= ========= =========
Taxes .................................. $ 0 $ 0 $ 0
========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
ENHANCE BIOTECH, INC
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Re-organization
Effective April 29, 2003 pursuant to an acquisition agreement, dated February 6,
2003, between Enhance Lifesciences Inc., (ELSI) a privately held Delaware
corporation and Enhance Biotech, Inc. (the Company), the Company acquired 100%
of all the outstanding shares of ELSI in exchange for 21,774,000 shares of its
common stock representing 90% of the outstanding common shares. The acquisition
resulted in ELSI's management and Board of Directors assuming operational
control of the Company. Accordingly, the accompanying consolidated financial
statements include the historical operations of ELSI and the capital structure
of Enhance Biotech, Inc.
Basis of Presentation
The information contained in this report is unaudited, but in our opinion
reflects all adjustments necessary to make the financial position and results of
operations for the interim periods a fair presentation of our operations and
cash flows. All such adjustments are of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements,
prepared in accordance with accounting principles generally accepted in the
United States, have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
These statements should be read along with the Consolidated Financial Statements
and Notes that go along with the Company's audited consolidated financial
statements, as well as other financial information for the fiscal year ended
January 31, 2004 as presented in the Company's Annual Report on Form 10-KSB. The
results of operations and cash flows for the six months ended July 31, 2004 are
not necessarily indicative of the results that may be expected for the full
fiscal year ending January 31, 2005.
Principles of Consolidation
The consolidated financial statements include the accounts of Enhance Biotech,
Inc. (incorporated in Delaware on June 7, 1999) and its wholly owned
subsidiaries Enhance Lifesciences, Inc. (Delaware Corporation) and Enhance Life
Sciences, Ltd. (United Kingdom Corporation). All significant inter-company
accounts and transactions have been eliminated.
Going Concern
The accompanying consolidated financial statements have been prepared on the
basis of accounting principles applicable to a going concern, which assume that
the Company will continue in operation for at least one year and will be able to
realize its assets and discharge its liabilities in the normal course of
operations. However, as of July 31, 2004, the Company did not have significant
cash or other material assets, nor did it have an established source of revenues
sufficient to cover its operating costs and to allow it to continue as a going
concern. The Company's future capital requirements will depend on numerous
factors including, but not limited to, continued progress in developing its
products, market penetration and profitable operations from the sale of its
products. These financial statements do not reflect adjustments that would be
necessary if the Company were unable to continue as a going concern. While
management has been successful in raising capital and plans to raise additional
equity capital, there can be no assurance that these plans will be achieved.
Nature of Business
The Company's business strategy is to develop its existing pharmaceutical
products, acquire additional pharmaceutical, early-mid stage product candidates,
predominantly in the `life sciences' sector, selectively license its technology
and establish strategic collaborations to advance its product pipeline.
Concentrations of Credit Risk
The Company has no significant off-balance-sheet concentrations of credit risk
such as foreign exchange contracts, options contracts or other foreign hedging
arrangements.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents to the extent the funds are not being held for investment
purposes.
5
Research and Development
Costs and expenses that can be clearly identified as research and development
are charged to expense as incurred in accordance with FASB statement No. 2,
"Accounting for Research and Development Costs."
Foreign Currency Translation
The Company's primary functional currency is the British Pound. Assets and
liabilities are translated using the exchange rates in effect at the balance
sheet date. Expenses are translated at the average exchange rates in effect
during the year. Translation gains and losses not reflected in earnings are
reported in accumulated other comprehensive losses in stockholders' deficit.
Significance of Estimates
The preparation of these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America require
management to make estimates and assumptions that affect the reported amounts
and disclosures contained in these financial statements. Actual results could
differ from those estimates.
Stock Based Compensation
The Company has elected to adopt the disclosure only provisions of SFAS No. 148
and will continue to follow APB Opinion No. 25 and related interpretations in
accounting for stock options granted to its employees and directors.
Accordingly, employee and director compensation expense is recognized only for
those options whose price is less than the market value at the measurement date.
When the exercise price of the employee or director stock options is less then
the estimated fair value of the underlying stock on the grant date, the Company
records deferred compensation for the difference and amortizes this amount to
expense in accordance with FASB Interpretation No. 28, Accounting for Stock
Appreciation Rights and Other Variable Stock Options or Award Plans, over the
vesting period of the options.
Stock options and warrants issued to non-employees are recorded at their fair
value as determined in accordance with SFAS No. 123 and Emerging Issues Task
Force (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring or in Conjunction With Selling Goods or
Services, and recognized over the related service period. During fiscal 2004 and
the first six months of fiscal 2005, the Company issued 4,275,000 and 1,225,000
common stock warrants at exercise prices equal to the price of the common shares
sold in the respective equity financing rounds.
Loss per Share
In accordance with SFAS No. 128, Earnings Per Share, and SEC Staff Accounting
Bulletin (SAB) No. 98, basic net loss per common share is computed by dividing
net loss for the period by the weighted average number of common shares
outstanding during the period. Under SFAS No. 128, diluted net income (loss) per
share is computed by dividing the net income (loss) for the period by the
weighted average number of common and common equivalent shares, such as stock
options and warrants, outstanding during the period. Such common equivalent
shares have not been included in the computation of net loss per share as their
effect would have been anti-dilutive
Six Months Ended
July 31,
2004 2003
-------------------
Numerator - Net loss $ (2,368,655) $ (1,059,286)
Denominator - Weighted average shares outstanding 28,038,624 24,303,455
Net loss per share $ (0.08) $ (0.04)
Incremental common shares (not included in
denominator of diluted loss per share
because of their anti-dilutive nature)
$1.00 warrants issued with private
equity placements 5,500,000 --
$3.00 warrants issued in relation
to the financing agreement 1,500,000 --
6
Income Taxes
Income taxes are recorded in accordance with SFAS No. 109, Accounting for Income
Taxes. This statement requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the financial statements or tax returns. Measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and tax bases of
the Company assets and liabilities result in a deferred tax asset, SFAS No. 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such assets. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
The Company is subject to income taxes in the United States of America, United
Kingdom, and the state of New York. As of July 31, 2004 and 2003, the Company
had net operating loss carry forwards for income tax reporting purposes of
approximately $6,281,975 and $1,896,921, respectively, that may be offset
against future taxable income through 2024. Current tax laws limit the amount of
loss available to be offset against future taxable income when a substantial
change in ownership occurs. Therefore, the amount available to offset future
taxable income may be limited. No tax benefit has been reported in the financial
statements because the Company believes there is a 50% or greater chance the
carry-forwards will expire unused. Accordingly, the potential tax benefits of
the loss carry-forwards are offset by a valuation allowance of the same amount.
Fair Value of Financial Instruments
The Company's financial instruments include cash equivalents and accounts and
notes payable. Because of the short- term nature of these instruments, their
fair value approximates their recorded value. The Company does not have material
financial instruments with off-balance sheet risk.
Reclassifications
Certain amounts included in prior periods' financial statements have been
reclassified to conform to the current year's presentation.
NOTE 2 - EQUITY TRANSACTIONS
Effective January 29, 2004, the Company 1) increased the number of authorized
shares of its common stock to 75,000,000 and authorized 25,000,000 shares of
preferred stock and 2) enacted a 1.5 for 1 forward split applied to all the
common stock and warrants outstanding as of that date. All share and warrants
amounts in these financial statements have been retroactively restated to
reflect this forward stock split.
The first Private Placement for $2million commenced in May 2003 provided that a
further placement funding of $2million would be made available on similar terms
if certain milestones were achieved. On January 12, 2004, the Company secured
additional private placement funding with Bioaccelerate, Inc. for $2 million at
$1.00 per share with an equal number of warrants exercisable at $1.00 per share
and expiring January 2009. This private placement was completed on May 20, 2004.
As of January 31, 2004, 516,667 shares and an equal number of warrants were
sold. To comply with the forward split, the 516,667 shares of common stock and
warrants sold in this round private placement have been increased by 258,333
shares and warrants at no cost. During the quarter ended April 30, 2004, 870,000
shares of common stock, and an equal number of warrants, were sold in this round
of financing. The placement closed on May 20, 2004 after a further 355,000 post
split shares and an equal number of warrants were sold.
NOTE 3 - COMMITMENTS
The Company leases its office facilities in New York and London for aggregate
monthly rents of approximately $7,500 on a month-to-month basis.
In December 2003, the Company entered into an agreement with Bridgeport
Consultants to provide services in strategic planning and the preparation of
corporate profile information for potential investors. In addition to a $2,500
monthly fee, Bridgeport Consultants is to receive 10,000 shares of the Company's
restricted common stock at the successful completion of these services.
In August 2003, the Company entered into an agreement with Warren Capital
Limited to provide consulting services regarding corporate finance, mergers and
acquisitions at a monthly fee of $2,500.
On July 1, 2003, the Company entered into an agreement with Queen Mary and
Westfield College to provide research and development services for the Company's
infertility program. The agreement is for three years and is payable in
quarterly installments of $54,000.
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES
On August 11, 2004 the company completed a senior secured credit facility with
Bioaccelerate Inc which provides for an up to $4million Loan facility to the
company. As an inducement to provide the facility the company granted
Bioaccelerate Inc 1,500,000 warrants at an exercise price of $3.00, with anti
dilution and other customary adjustments, expiring five years from completion of
the facility.
The note matures at the closing of either debt or equity financing in which the
Company receives at least $10,000,000 in gross proceeds. The note bears interest
at the "Applicable Federal Rate" defined in the IRS Code, approximately 1.5% per
annum at July 31, 2004.
The fair value of the 1.5 million warrants was computed at $160,798, using the
Black-Scholes model with volatility of 40%, a discount rate of 3.875%, 5 year
life and no dividends. In accordance with EITF 96-18, the fair value of the
warrants have been credited to additional paid in capital and in accordance with
FAS 91, the fair value of warrants is being amortized over the estimated life of
the notes.
NOTE 5 - SUBSEQUENT EVENT
On August 11, 2004, Enhance Biotech, Inc. ("Enhance") and privately-held Ardent
Pharmaceuticals Inc. ("Ardent") executed a definitive merger agreement. Ardent,
based in North Carolina's Research Triangle, has an extensive drug research and
development pipeline that includes a number of pre-clinical and clinical stage
drug candidates in the areas of moderate to severe pain, urinary incontinence,
premature ejaculation, depression, and cardio protection. The merger is expected
to be consummated in the Fall of 2004. As a consequence of the transaction,
Ardent will become a wholly-owned subsidiary of Enhance. Upon consummation of
the merger, holders of Ardent securities will own, on a fully-diluted basis,
approximately forty-five percent (45%) of the equity interest in Enhance, and
Enhance's current stockholders will own approximately fifty-five percent (55%)
of the equity interest in Enhance. The merger is subject to approval by the
shareholders of Ardent and satisfaction of customary terms and conditions.
7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Form 10-QSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. This filing includes statements regarding our plans,
goals, strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and based upon a reasonable basis when made, but there
can be no assurance that these expectations will be achieved or accomplished.
Sentences in this document containing verbs such as "believe," "plan," "intend,"
"anticipate," "target," "estimate," "expect," and the like, and/or future-tense
or conditional constructions ("will," "may," "could," "should," etc.) constitute
forward-looking statements that involve risks and uncertainties. Items
contemplating, or making assumptions about, actual or potential future sales,
market size, collaborations, trends or operating results also constitute such
forward-looking statements.
Although forward-looking statements in this Report on Form 10-QSB reflect the
good faith judgment of management, such statements can only be based on facts
and factors currently known by management. Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from the results and outcomes discussed in,
or anticipated by, the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes, include without
limitation, those discussed in our Annual Report on Form 10-KSB for the year
ended January 31, 2004. Readers are urged not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Report. We
undertake no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Report. Readers are urged to carefully review and consider the various
disclosures made by us in our Annual Report on Form 10-KSB for the year ended
January 31, 2004, which attempt to advise interested parties of the risks and
factors that may affect our business, financial condition, results of operation
and cash flows.
The following discussion should be read along with the Consolidated Financial
Statements and Notes to our audited financial statements for the fiscal year
ended January 31, 2004, as well as the other interim unaudited financial
information for the current fiscal year.
OVERVIEW
The Company currently has seven lead product candidates in various stages of
development, targeting male sexual dysfunction and dermatology - two of the
seven major therapeutic segments of the lifestyle drug market.
On February 11, 2004, the Company announced it had entered into an agreement
with Ehrreich Consulting Co., for FDA application and approval process services
for the Company's MSD and dermatological product candidates.
LI 401 Periodontal Disease - On February 5th 2004 the Company signed terms to
enter into an exclusive co-development and licensing agreement with DMI
Biosciences Inc, of Colorado, USA to develop a compound LI 401, for the
treatment of gingivitis and periodontal diseases. The full agreement for LI 401
was signed on July 18 2004.
LI 316 Male Fertility - On May 17th the company announced its discovery that the
two compounds involved in this product had proven to offer wider opportunity for
development than previously understood. In particular the applications in the
area of artificial insemination for agricultural use were potentially attractive
and the company is launching projects in this area in the belief that the final
product may increase control over the motility or lack thereof in a bovine sperm
sample. The internal laboratory program has clearly identified that there are
potential opportunities to enhance sperm yield and productivity in the industry
and early discussions with possible development partners has begun.
LI 303 Cellulite - July 30th the company announced that research in the lead and
follow on compounds under development for the cellulite condition had been shown
to demonstrate a unique combination mode of action in the laboratory. The
discovery, elucidated in-vitro, points to several distinct areas of activity for
LI 303 which, collectively, influence the behaviour of cells critical to the
development and establishment of the cellulite condition. The new data helps to
explain the molecular basis for the promising cosmetic effects reported in early
stage research, and differentiates the compound from current available
treatments. The resulting findings will enhance intellectual property in the
company's portfolio for this condition.
At the end of April Dr David Scales, an experienced drug developer, ex Director
of Toxicological Science and Head of World-wide Regulatory Affairs for GSK,
member of several biotech start up teams in the UK, and current Head of Drug
Development at UK listed oncology specialists Antisoma plc joined the Board of
Enhance as an independent Director.
On May 20th 2004 the company announced it had met the development milestones
required by Bioaccelerate resulting in the release the remaining funding from
the agreement of November 2003 completing the $4m round.
8
MALE SEXUAL DYSFUNCTION
The Company's male sexual dysfunction product portfolio includes two primary
compounds: LI 301 for premature ejaculation and LI 316 for Male Fertility
Enhancement.
LI 301 Premature Ejaculation - On March 23, 2003, the Company entered into a
Co-Development Agreement with DMI BioSciences, Inc. of Colorado, USA, to jointly
develop and commercialize product(s) comprising or utilizing the compound family
LI 301, for the delay of ejaculation in humans. The Company has the exclusive
international rights to develop, market and distribute LI 301 and any subsequent
compounds related to the delay of ejaculation in humans. Phase II(a) double
blind, randomized, crossover trials were successfully completed in Utrecht,
Holland. Thirty (30) couples participated and Kendle International BV, acted as
the Company's CRO. LI 301 is an orally bio-available compound delivered in a
fast melt mechanism with taste masking enabling it to be taken anytime without
water. It has a novel mode of action combining both the light effect of a
Selective Serotonin Reuptake Inhibitor ("SSRI") and u-opioid. LI 301 is active
in the system for up to seven hours once administered, enabling patients to
relax and partners to feel unpressured by time limitations. The Company
anticipates entering a partnership in the later stages of development and
believes the data pack from the Phase II trails will provide added value to this
process during fiscal year 2004.
Forthcoming plans for fiscal year 2004, involve a definitive dose ranging
clinical trial of significant size to commence in Q3 2004, in the Netherlands.
During this quarter the product required for trial was committed to manufacture
and the protocol and trial design were finalised. It is expected recruitment
will start in September and the first subjects will be dosed in November 2004.
The Company intends to commence Phase III clinical studies late in 2004.
LI 316 Male Fertility Enhancement - On July 1, 2003, the Company entered into a
Co-Development Agreement with Queen Mary and Westfield College, University of
London ("QMUL"), for a three-year program to isolate and license suitable
elements of research and development into novel treatments for male infertility.
Two product candidates designated LI 316(a) a sperm inhibitor and LI 316(b) a
sperm stimulant, have been isolated. Work progressed to the point that three
clear development objectives were defined and negotiations began on license
arrangements for product candidates identified under the Co-Development
Agreement. Final licensing agreements for LI 316(a) and LI 316(b) product
candidates are scheduled for Q3, 2004.
Work continues under the laboratory development program, moving the project
forward in two of three projected development areas as planned, and providing
the foundation for the third area of product development. Each product candidate
- - LI 316(a) sperm inhibitor and LI 316(b) sperm stimulant, are applicable in
distinct areas of male fertility enhancement. The three development areas are as
follows:
o Artificial Insemination of Commercially Farmed Livestock - initially
targeting the bovine market with secondary markets including other
commercially farmed livestock such as pigs and sheep. The objective is
improving the yield of sperm for these markets and increasing the
efficiency of the Artificial Inseminator working in the field.
o Application in the Human In Vitro Fertilization Clinic - as a natural
product alternative to the present methodologies that use man made mediums
for the transport and operational use of sperm, particularly in the
Intracytoplasmic Sperm Injection ("ICSI") process of managed fertility.
o Application as an Enhancement in Human Intercourse - for couples
prone to male factor infertility from immotile or poorly motile
sperm.
Laboratory work conducted under the first development area has already
demonstrated the positive effect of LI 316a sperm inhibitor in stopping and
holding safely in suspended animation bovine sperm that can then be rejuvenated
by intervention with LI 316b stimulator at a later time. During the first
quarter of 2004 this work has continued in partnership with a major commercial
Artificial Insemination group active in the European and United States markets
progressing the plans to run clinical trials during the second quarter of fiscal
2004. Laboratory results at QMUL have indicated that the product could both
increase the yield of healthy semen surviving storage, transit and handling from
bull to cow, as well as potentially providing more flexibility of time to work
with the sperm in relation to cows coming into estrous. This aspect of the LI
316 development project is projected to provide early license income in the next
eighteen to twenty-four months. The planned trials with an external laboratory
have been delayed by some weeks due to practical issues of access time and will
commence with a laboratory exercise in September at the semen farm. This is
designed to confirm that the findings from QMUL laboratory research remain
applicable in the live environment, prior to moving to field trials subject to
the success of this first stage laboratory programme.
Laboratory work conducted under the second development area demonstrated the
initial positive effect of LI 316(a) sperm inhibitor in stopping and holding
safely in suspended animation human sperm that can then be rejuvenated in
intervention with LI 316(b) stimulator at a later time. Initial indications are
strong that the performance is very similar in human and bovine sperm. Further
work is to be done to confirm these common characteristics and clinical
participation will be followed with two London-based fertility clinics. It is
expected that the compounds can provide in vitro fertilization clinicians
greater flexibility and the benefit of using natural products in the process of
handling the sperm and carrying out fertilization of eggs in vitro. Further
development of the product into a fertility enhancement for couples struggling
with the problems of sperm motility and related issues will be a progression
from the foundation laid during year ended January 31, 2004. A working research
relationship and practical handling arrangements are being sought with suitable
clinical partners in London and a further site is to be sought in the USA for a
fertility clinic willing to participate in the research and to assist in dealing
with the ethical issues involved in the use of human sperm samples for any
clinical trial process. It is expected that establishing arrangements and the
right environment for effective research work on this aspect of the LI 316
product's capability will involve most of the next quarter. During the quarter
to July 04 the work on the human area continued in the laboratory to underwrite
the initial findings in common with animal results. In addition the basis of a
forward plan for this aspect of the work was created in greater detail for the
next two years development. This will be reviewed and implemented early in the
New Year. 9
9
SKINCARE
The Company's Skincare portfolio includes four (4) primary compounds: LI 312 for
Psoriasis and Atopic Dermatitis, LI 412 for Eczema Itch, LI 303 for Cellulite
and LI 236 for Anti-Aging.
LI 312 Psoriasis / Atopic Dermatitis - On March 25, 2003, the Company entered
into a Co-Development Agreement with DMI Bioscience, Inc. of Colorado, USA, for
the exclusive development and international marketing of the compound LI 312, a
new chemical entity with the potential for a family of products targeting atopic
dermatitis and psoriasis. The license is for the joint research, development and
commercialization of products comprising or utilizing the DMI Bioscience
compound designated LI 312, for therapeutic treatment of dermatological
conditions and diseases in humans by topical application.
On March 24 2004, the Company entered into an agreement with Covance Inc. to
conduct clinical trials of the Company's LI 313 group of compounds for the
treatment of severe dermatitis and psoriasis, through their UK-based facilities.
A pre-clinical program is scheduled to commence in June 2004, following and
subject to availability of compound manufactured to suitable standards for
regulatory approval. Preparation and manufacture of material to the required
standards has continued during the first quarter of 2004 at DMI Synthesis Ltd.,
a UK subsidiary of DMI Biosciences. It is expected that the current program will
result in the necessary assay for contract manufacturing providers, as well as
the initial batches for clinical trial later in the second quarter of the year
enabling preclinical programs to commence. . Meanwhile discussions have been
held with suitable manufacturers for the long term production of the compound
and the selection of manufacturing partner(s) is scheduled to be confirmed
during the second half of 2004. The work continued over the quarter with the
chemistry program to develop the manufacturing assay and a viable package to
hand on to the manufacturers such that a stable and consistent product is
created.
LI 412 ECZEMA ITCH - The LI 412 compound is derived from work carried out by the
Company and is unencumbered by a license agreement. On April 15, 2004, the
Company entered into an agreement with SoleRx LLC, a developer of proprietary
therapeutic candidates for dermatology inflammation, to advance the development
of product candidates in the Company's LI 412 group of compounds for the
treatment of urticaria itch. During the first quarter issues of protection of
intellectual property were researched and a strategy going forward defined while
the planning of the process for reformulation and development of a proof of
concept trial plan was also continued. The program for the last quarter
completed the planning stage and enabled the companys to define the development
path and patent strategies with clarity.
LI 303 Cellulite - On July 7, 2002, the Company entered into a Co-Development
and Licensing Agreement with Stegram Pharmaceuticals Ltd., a UK-based early
stage drug development company, for the joint development and exclusive
international license of LI 303 as a prescription product for the treatment of
cellulite. Technical information covered under the agreement, includes
application of a number of compounds for the treatment of cellulite with
laboratory work carried out in the UK and United States. The co-development
program led to the selection of LI 303 as the lead compound group, and further
development of the supporting data on mode of action, as well as other
performance and design factors including dose indications. Results have
demonstrated interesting characteristics for topical application, leading to an
extension of the laboratory work to determine the full range of
biopharmaceutical activity for the LI 303 compound.
The extended program scheduled for completion in 2004 has reached a significant
stage with completion of the laboratory results from the work on a number of
compounds enabling the targeting of two key ones to take forward in development.
One, a therapeutic switch, offers shorter term opportunity for development on a
solid product history from other conditions while the other, a new chemical
entity, will require longer terms development and confirmation of its
suitability for regulatory approval in the longer term. Initial work will focus
on the development of the therapeutic switch for a topical formulation to be
applied in a proof of principle Phase IIa trial. Advice on a strategy for the
protection of intellectual property was taken during the quarter and planning of
further clinical work was undertaken too. The last quarter saw the final
compilation of materials, search results and writing of intellectual property
protection based upon the significant results concerning the unique combination
mechanism of action.
LI 236 ANTI-AGING - On June 3, 2003, the Company entered into a Co-Development
and Licensing Agreement with Stegram Pharmaceuticals Ltd., for the joint
development and exclusive international license of LI 236 for the treatment of
aging symptoms in skin, hair and sleep patterns. The LI 236 product candidate
has been the focus of initial preparation for a development program scheduled to
move forward during fiscal year 2004. During quarter one, meetings were held
with the licensors and some key individuals with specific relevant science
background for the condition. The input has been assimilated into the ongoing
development plan and further advice on regulatory issues will be sought too. The
quarter to July 2004 saw the program under ongoing planning and review for
implementation.
LI 401 PERIODONTAL DISEASE - On February 5th 2004 the Company signed terms to
enter into an exclusive co-development and licensing agreement with DMI
Biosciences Inc, of Colorado, USA to develop a compound LI 401, for the
treatment of gingivitis and periodontal diseases. The development program is
advanced to the point Phase IIa trials are being planned now for the third
quarter of the current year to be run ion the UK with a renowned University
Dental School. The first quarter of 2004 saw arrangements confirmed in principle
with the selected dental school, a UK, CRO to assist in management of the
program under the new regulatory controls of the European Clinical Trials
Directive and a manufacturer of the product selected and provided with a
preliminary understand ding of the program. Each of these entities are expected
to be contracted formally in the next quarter and to contribute to the
preparation of a protocol for the clinical trials targeted for the third
quarter.
10
According to plan during the last quarter the details of the protocol for
clinical trial were agreed and reviewed with contract research bodies and the
Dental School who is going to run the trials. I addition terms and timetables
were negotiated with the Dental school and are subject to a final agreement
being settled. It is expected the product will be manufactured with a contracted
supplier over the next quarter and proof of principle trials will begin
recruitment in November 04.
DIVESTMENT & OUTLICENSING
For year ending January 31, 2004, the Company elected to divest product
candidate LI 226 for Arthritis and out-license LI 247 for Depression.
LI 226 Arthritis - On November 27, 2002, the Company entered into a Licensing
Agreement with Kingston Scientific Partnership, for the exclusive license of LI
226 for the treatment of arthritis. It was anticipated that during fiscal year
2004, the LI 226 compound for the treatment of Arthritis will be divested to a
suitable target, reflecting the decision to focus the Company's resources on the
key areas of Skincare and MSD. During the first quarter ended April 30, 2004, no
further expenditure or development time was made on the LI 226 compound and
discussions were held with the licensor resulting in the rescinding of the
license agreement back to Kingston at no further cost to either party.
LI 247 Depression - On March 21, 2003, the Company entered into a Licensing
Agreement with CLL Pharma S.A., of Nice, France, for the exclusive license of LI
247 for the treatment of depression. It is anticipated that during fiscal year
2004, the Company will continue to seek a suitable sub-licensee to take this
product to market from the present stage of readiness where a bioequivalence
trial will be required to complete the clinical program. During the first
quarter ended April 30, 2004, no further expenditure or development time was
made on the LI 247 compound.
LI 401 Periodontal Disease - The final agreement for the joint development of
this compound, for treatment of gingival activity by means of a medicated
mouthwash, with DMI Biosciences was signed in July providing Enhance with an
exclusive global arrangement based upon milestone payments and royalties over
the life of the compound and derived products.
COMPANY STATUS
The Company has made significant progress in developing its product portfolio,
and has multiple products in clinical trials with other compounds following on
in development. We have continued to incur losses as expected during this
emerging stage. We anticipate that the success of our immediate product
development strategy will permit us to further develop our other products and
potential products currently in our portfolio. A major element of the Company's
product development strategy is to use third-party or contract research
organizations ("CROs") to assist in the conduct of safety and efficacy testing
and clinical studies, to assist the Company in guiding products through the FDA
and EMEA regulatory review and approval processes, and to manufacture and
distribute any FDA and EMEA approved products. The Company believes that
maintaining a limited infrastructure will enable it to develop products
efficiently and cost effectively. However consideration will be given to
opportunities to strengthen the resources and portfolio in certain areas that
may prove viable commercially and add value to the overall business in the
future.
The reader should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks and complications frequently encountered by
similarly situated companies. To address these risks, we must, among other
things:
o advance our lead product candidates and technology platforms;
o obtain required government and other public and private approvals on a
timely basis;
o enter into corporate partnerships;
o license additional technology;
o maintain a proprietary position in our technologies and products; and
o attract and retain key personnel.
The Company may not be successful in addressing these risks. If we are unable to
do so, our business prospects, financial condition and results of operations
would be materially adversely affected. The likelihood of our success must be
considered in light of the development cycles of pharmaceutical and
biopharmaceutical products and technologies and the competitive and regulatory
environment in which we operate.
11
RESULTS OF OPERATIONS
During the second quarter ended July 31, 2004, work continued on the product
development programs as planned and the individual items are detailed below. In
the six months ended July 31, 2004, compared to the six months ended July 31,
2003: General and administrative expenses increased from $ 307,783 in the six
months ended July 31, 2003, to $ 1,081,538 in fiscal 2005. The main reason for
the increase was the increasing of scale in certain development activities
within the Company's infrastructure to support its planned growth. Such costs
were primarily consulting fees, in particular for regulatory, licensing and
patent advice.
Research & Development expenses for the six months ended July 31, 2003, were $
751,503 compared with $ 1,287,117 in the six months to July 31, 2004 The
majority of these expenses were in connection with the development of several of
our product candidates, in particular the compounds, LI 316 a&b for fertility,
LI 312 for psoriasis and severe atopic dermatitis, LI 303 for cellulite, and LI
412 for eczema itch. As a result of the continuing expenditure on research and
development of the company and its products the cumulative loss from operations
since inception increased to $ 6,281,975.
Liquidity & Capital Resources - A second round private placement funding was
agreed Bioaccelerate, Inc on January 12, 2004, for $2 million on similar terms
to the first round and the placement closed on May 20, 2004. The Company will be
using these funds to accelerate the development of its lead products. This
investment has enabled the Company to achieve significant milestones in its lead
development programs over the last twelve months. These included completing and
reporting on a Phase II(a) trial in premature ejaculation and preparing to move
to a definitive dose ranging trial commencing later in 2004. It will also enable
the continuation of the development program for LI 301 in Psoriases which will
continue to be conducted with Covance the public CRO. In addition the investment
going forward will allow for further clinical programs for the dermatological
compounds under development, including the cellulite compounds highlighted for
the newly defined combination mode of action discovered as well as the next
phase of clinical trials in the lead compound LI 301. We believe this further
funding will be sufficient to support our business plan until longer term can be
arranged. Should we come up against any unforeseen problems, the Company will
revisit its budget and adjust the scheduling and costs of the development
programs accordingly to allow the Company to operate until sufficient long term
funding is achieved. However, a key element of our business strategy is to
continue to acquire, obtain licenses for, and develop new technologies and
products that we believe offer unique market opportunities and/or complement our
existing product lines.
SUBSEQUENT EVENT
As previously announced transaction, on August 11, 2004, Enhance Biotech, Inc.
("Enhance", trading symbol: EBOI.PK) and privately-held Ardent Pharmaceuticals
Inc. ("Ardent") executed a definitive merger agreement. Ardent, based in North
Carolina's Research Triangle, has an extensive drug research and development
pipeline that includes a number of pre-clinical and clinical stage drug
candidates in the areas of moderate to severe pain, urinary incontinence,
premature ejaculation, depression, and cardio protection. The merger is expected
to be consummated in the Fall of 2004. As a consequence of the transaction,
Ardent will become a wholly-owned subsidiary of Enhance. Upon consummation of
the merger, holders of Ardent securities will own, on a fully-diluted basis,
approximately forty-five percent (45%) of the equity interest in Enhance, and
Enhance's current stockholders will own approximately fifty-five percent (55%)
of the equity interest in Enhance. The merger is subject to approval by the
shareholders of Ardent and satisfaction of customary terms and conditions.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have, as of the end of
the period covered by this Report, reviewed our process of gathering, analyzing
and disclosing information that is required to be disclosed in our periodic
reports (and information that, while not required to be disclosed, may bear upon
the decision of management as to what information is required to be disclosed)
under the Exchange Act of 1934, including information pertaining to the
condition of, and material developments with respect to, our business,
operations and finances. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our process provides for timely
collection and evaluation of information that may need to be disclosed to
investors.
Changes in Internal Controls Over Financial Reporting
There have been no significant changes in the Company's internal controls over
financial reporting that occurred during the quarter ended July 31, 2004, that
have materially affected, or are reasonably likely to materially affect our
internal control over financial reporting.
12
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising
out of our operations in the normal course of business. We currently are not a
party to any legal proceedings, the adverse outcome of which, in management's
opinion, individually or in the aggregate, would have a material adverse effect
on our results of operations or financial position.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Effective January 29, 2004, the Company 1) increased the number of authorized
shares of its common stock to 75,000,000 and authorized 25,000,000 shares of
preferred stock and 2) enacted a 1.5 for 1 forward split applied to all the
common stock and warrants outstanding as of that date. All share and warrants
amounts in these financial statements have been retroactively restated to
reflect this forward stock split.
On January 12, 2004, the Company secured an additional private placement with
Bioaccelerate, Inc. for $2 million at $1.00 per share with an equal number of
warrants exercisable at $1.00 per share and expiring January 2009. This private
placement was completed on May 20, 2004. As of January 31, 2004, 516,667 shares
and an equal number of warrants were sold. To comply with the forward split, the
516,667 shares of common stock and warrants sold in this round private placement
have been increased by 258,333 shares and warrants at no cost. During the
quarter ended April 30, 2004, 870,000 shares of common stock, and an equal
number of warrants, were sold in this round of financing. The placement closed
on May 20, 2004 after a further 355,000 post split shares and an equal number of
warrants were sold.
On August 11, 2004, the Company issued 1,500,000 warrants in connection with the
$4,000,000 credit facility with Bioaccelerate.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On 5th February, 2004 the Company sent out to its shareholders a Proxy to vote
to change its charter to increase the authorized number of common shares to
75,000,000 shares and to authorize 25,000,000 shares of preferred stock. The
Company also asked the shareholders to vote to authorize a 1.5 for 1 forward
split. A majority of the shareholders approved these actions and the reverse
split was deemed effective by the NASD on 5th March, 2004.
ITEM 5. OTHER INFORMATION
There is no other information to report that is material to the Company's
financial condition not previously reported.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit No. Description
- ---------- ---------------------------------------------------------------------
32 Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14
and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.1 Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14
and 15d-14, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
/s/ Christopher Every
------------------------------
Christopher Every
Chief Executive Officer
September 20, 2004
14