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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON _______________, 2003
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
COMMISSION FILE NO. 1-14778
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DOR BIOPHARMA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 41-1505029
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
28101 BALLARD DRIVE, SUITE F
LAKE FOREST, IL 60045
847-573-8990
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
================================================================================
TITLE OF EACH CLASS OF NAME OF EACH EXCHANGE
SECURITIES TO BE REGISTERED ON WHICH REGISTERED
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Common Stock, par value $.001 per share American Stock Exchange
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE SECURITIES EXCHANGE ACT:
================================================================================
TITLE OF EACH CLASS OF NAME OF EACH EXCHANGE
SECURITIES TO BE REGISTERED ON WHICH REGISTERED
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None None
================================================================================
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $ 0
The aggregate market value of the common stock held by non-affiliates
(assuming, for this purpose, that executive officers, directors and holders of
10% or more of the common stock are affiliates), computed by reference to the
closing price of such stock as of March 15, 2003, was $29,102,823.
At March 15, 2003, 26,622,300 shares of the registrant's common stock
(par value $.001 per share) were outstanding.
Transitional Small Business Issuer: Yes [ ] No [X]
Documents Incorporated by Reference
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
This report contains statements of a forward-looking nature relating to future
events or our future financial performance. These statements are only
predictions and actual events or results may differ materially. In evaluating
such statements, you should carefully consider the various factors identified in
this report that could cause actual results to differ materially from those
indicated in any forward-looking statements, including those set forth in "Risk
Factors" in this Annual Report Form 10-KSB. See "Cautionary Note Regarding
Forward Looking Statements."
OVERVIEW
We are a pharmaceutical company specializing in the development of oral
and nasal delivery of vaccines and drugs. Through collaborations, we are
developing a proprietary oral and nasal vaccine delivery technology called the
Microvax((TM)) system, which we are applying to biodefense vaccines, including
nasal vaccines against ricin toxins and anthrax and an oral delivered vaccine
against botulinum toxin. In addition to our biodefense vaccines, we are
developing orBec(R), an oral therapeutic product, that is currently in a pivotal
Phase III clinical trial for the treatment of intestinal graft-vs-host disease,
a life threatening complication of bone marrow transplantation. Also, using
orBec(R), we are planning a Phase II clinical trial for the treatment of
irritable bowel syndrome. We are also developing oral drug delivery systems,
named the LPM(TM), PLP(TM), and LPE(TM) systems, for the delivery of proteins
and water insoluble drugs. We have preclinical animal data demonstrating the
oral delivery of the drug leuprolide, a FDA approved injectable anticancer
product. We also have preclinical animal data demonstrating the oral delivery of
the drug paclitaxel, a FDA approved injectable anticancer product.
Our business strategy is to (1) identify, acquire and exploit rights to
new technologies and compounds relating to biodefense and orally delivered
compounds to treat gastrointestinal disorders; (2) enhance the value of those
technologies through further out-sourced research and development, specifically
preclinical and clinical testing towards regulatory approval; (3) market our
therapeutics drugs through licensing agreements with major pharmaceutical
companies; (4) market our biodefense vaccine products directly to the U.S. and
European governmental agencies; and (5) work to develop additional promising
compounds utilizing contract research organizations and collaborations with
third parties such as our licensors at the University of Texas Southwestern
Medical Center.
We have assembled an experienced management team that oversees the
human clinical trials necessary to establish preliminary evidence of
effectiveness and seek partnerships with pharmaceutical and biotechnology
companies for late-stage development and marketing of our product candidates. We
also supplement our management team through a network of consultants and
contractors. By operating in this manner, we believe we can efficiently utilize
our capital resources to advance our drug and vaccine products to market. We
operate through various subsidiary companies: DOR Vaccines, Inc., which is the
successor in interest to Innovaccines Corporation, our former joint venture, and
formed the basis of our biodefense business initiative; Enteron Pharmaceuticals,
Inc. and Oradel Systems, Inc., which formed the basis of our biotherapeutics
initiative. Enteron is a majority owned subsidiary which holds the intellectual
property relating to orBec(R). Oradel is a wholly-owned subsidiary which holds
the intellectual property relating to the LPM(TM) drug delivery system. We plan
to continue to develop our later stage product opportunities while seeking to
manage our earlier stage product pipeline through collaborative licensing
arrangements.
During 2002, our management and board of directors implemented a
restructuring plan in which we reduced our headcount and capital expenditures.
As part of this plan we acquired our joint venture
Innovaccines Corporation from Elan Pharmaceuticals, Plc., which had been
developing the Microvax(TM) vaccine delivery system since 1998. This acquisition
provided us with a vaccine delivery platform to enter into the biodefense
vaccine industry. In September 2002, we began development of our first
biodefense initiative to develop a vaccine against ricin toxin, one of the
biological agents that could be potentially used in biological warfare. In
further refocusing our development plan, we began an initiative to acquire the
rights to key vaccines, including antigens as well as additional delivery
technologies. To date, we have focused these efforts on negotiating licenses for
the development of delivery technology related to nasal vaccine for anthrax and
a novel vaccine for botulinum toxin. In our restructuring plan, we have
continued clinical evaluation of orBec(R), our lead product, which is currently
being evaluated in a multi-center pivotal trial for the treatment of intestinal
graft-vs-host disease.
We were incorporated during 1984 as Immunotherapeutics, Inc., which was
later changed to Endorex Corporation and began our operations during 1985. We
changed our name to DOR BioPharma, Inc. in December 2001, following our
acquisition of Corporate Development Technology, Inc., a specialty
pharmaceutical company. Our corporate headquarters is located at 28101 Ballard
Drive, Suite F, Lake Forest, Illinois 60045. Our phone number is 847-573-8990
and our website is located at www.dorbiopharma.com.
INDUSTRY BACKGROUND
THE BIODEFENSE INDUSTRY
The potential use of biological agents in war or acts of terrorism is
accompanied by an increased realization that our country is poorly prepared to
prevent or treat the human damage that can be caused by these agents. The use of
these agents as weapons, even on a small scale, has the potential for social and
economic disruption and diversion of local and national resources to combat the
threat, treat primary disease and clean up environmental contamination. The U.S.
Center for Disease Control and Prevention has identified and classified over 30
of these biological threats in Categories A-C, based on the severity of the
threat as well as the seriousness of the diseases that could be caused by their
use in bioterrorist or biowarfare acts, with Category A being the highest
threat. For example, smallpox, anthrax, plague and botulinum toxin are all
Category A threats. Ricin is considered a Category B bioterror threat. For a
majority of these agents, there are no effective vaccines to prevent and no
effective treatments following exposure. Even where vaccines do exist, their
supply may be currently limited, as in the case of the smallpox vaccine, and
their use could pose significant safety risks. An effort and expenditure to
scale up and manufacture greater supplies of the vaccines that are now available
in only limited quantities will be required to vaccinate civilian and military
populations.
We believe that vaccines to prevent the biological and human damage
caused by these agents represent the best short and long-term alternative to
dismantling the threat of their use. The FDA has recognized that it will be
impossible to perform efficacy trials in humans with Category A-C biological
agents and has indicated that it will license a vaccine based on animal
correlates and limited human safety data. We envision a more rapid course to
licensure for vaccines for these agents than the coverage applicable to our
biotherapeutics products.
Where we believe the country is most vulnerable is in areas where no
vaccines or antidotes exist. In many cases, the nature of the protective immune
response in humans is not known or there have been no experimental vaccines that
have proven to be safe and effective in preclinical animal studies. The National
Institute of Health and other government agencies have recently increased their
budgets for research and development into new vaccines, diagnostics and
therapeutics for Category A-C biological agents. Recognizing that the course to
vaccine development, manufacture and regulatory approval can be long and
circuitous, we have initiated several programs for vaccine development based on
our
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Microvax(TM) vaccine delivery technology, with respect to vaccines where the
Microvax(TM) technology has proven to be safe and efficacious in preclinical
animal studies. Based on promising preclinical results, we are preparing to
enter into a manufacturing and testing stage for our Microvax(TM) systems with
several antigens. We have additionally selected for its first programs several
biological agents from both Category A and Category B in the Centers for Disease
Control and Prevention list, in which single antigens currently represent the
best alternatives as antigen candidates.
THE DRUG DELIVERY INDUSTRY
The drug delivery industry seeks to provide new, improved or
alternative methods for delivery of drugs that enhance patient compliance,
quality of life and ease-of-use. Additionally, major pharmaceutical companies
have extended the life of their effective market exclusivity periods for
existing pharmaceutical products by licensing new, differentiated forms of their
drugs and obtaining new patents based upon new formulations that are
administered via alternative methods. As the drug delivery industry has grown
and become more specialized, different companies have focused on core
technologies to deliver drugs in unique ways, including transdermal - through
the skin; nasal - through the nasal passages; implant - delayed release of
injections for weeks or months at a time; and oral - either liquid, pills or a
spray into the mouth. Generally, the regulatory hurdles for approval of a drug
delivery system are less stringent than those for a new chemical entity or new
pharmaceutical product because most drug delivery companies look at delivering
already approved and marketed drugs where the safety and efficacy of the drug
has been previously established.
Delivery of large molecule or macromolecular drugs based on peptides or
proteins, to humans are primarily available today only in injectable form,
although there are companies testing alternate routes such as oral, pulmonary,
nasal and transdermal. Injectable therapy has two major limitations. First, many
patients find injectable therapies unpleasant due to the pain associated with
the injection. When injectable therapy is necessary for subchronic and chronic
diseases, patient compliance often decreases, resulting in higher health costs
due to an increase in medical complications. Second, studies from the Center for
Disease Control have demonstrated that the drug itself is often only a small
part of the total cost of administering the treatment, which includes the cost
of medical personnel to administer the injection, the cost of the syringe, and
the cost to dispose of the syringe.
While all of the new delivery options may offer advantages for the
patient over the traditional injectable format, oral delivery is generally the
patient-preferred format due to simplicity of use. However, from a technical
perspective, oral delivery of drugs has been extremely difficult due to low
effectiveness and the fragility of these drugs to withstand degradation as they
move through the stomach and upper gastrointestinal tract.
We are developing drug delivery platforms based on the combination of
lipids and polymers, which are synthetic compounds that are used to modify the
properties of drug uptake and distribution in the body. These platforms, for
both water-soluble drug/peptide delivery and water-insoluble drug solubilization
and oral delivery, lend themselves to increased absorption of drugs/peptides
that are otherwise poorly absorbed by the gastrointestinal tract. By employing
proprietary lipid and polymer drug delivery systems that are able to encapsulate
these drugs, many of these agents may be made orally available at therapeutic
levels. While this class of drugs presents unique challenges to facilitating and
enhancing safe and effective oral delivery and therapy, we believe that our
expertise in lipids and polymers make us uniquely capable of improving the
stability and preservation of these drugs as they transit the gastrointestinal
tract and are absorbed into the vascular compartment.
We believe that our lipid based drug delivery systems constitute a
platform technology that has the potential to satisfy a number of criteria
necessary for a successful drug delivery system, including:
3
- flexibility for incorporating numerous drug types, including (both
water soluble and insoluble drugs, as well as drugs of various
molecular weight ranges and size);
- stability of the drug through the gastrointestinal tract;
- enhanced uptake of the drug
- compatibility of the delivery system with current manufacturing
techniques; and
- safety, tolerability and convenience for the patient
We have successfully demonstrated the effectiveness of selected drugs
when delivered using these lipids in animal models. We believe that oral
versions of peptide-based drugs and water insoluble drugs could provide product
differentiation, convenience and improved compliance. Daily oral delivery could
offer an attractive alternative to multiple weekly injections or slow release
injection formulations, particularly for chronic therapies.
Some classes of small molecule drugs also present delivery challenges
and opportunities, particularly water-insoluble drugs, examples of which are
cancer chemotherapy and immunosuppressants, a class of drugs used to suppress
the immune system after organ transplant. We are evaluating such drugs to
identify those that are compatible with our oral drug delivery systems for
future development and ultimately entrance into human clinical trials.
OUR PRODUCTS IN DEVELOPMENT
The following tables summarize the products that we are currently
developing:
BIODEFENSE PRODUCTS
-------------------
SELECT AGENT CURRENTLY AVAILABLE COUNTERMEASURE DOR BIODEFENSE VACCINE
------------ ---------------------------------- ----------------------
Ricin Toxin No vaccine or antidote currently Nasal Ricin Vaccine
FDA approved
Ricin Toxin No vaccine or antidote currently Injectable Ricin Vaccine
FDA approved
Botulinum Toxin No vaccine or antidote currently Oral Botulinum Toxin Vaccine
FDA approved
Anthrax BioThrax(R), 6 Injections over 18 months Nasal Anthrax Vaccine
THERAPEUTIC PRODUCTS
--------------------
PRODUCT THERAPEUTIC INDICATION STAGE OF DEVELOPMENT
------- ---------------------- --------------------
orBec(R) Treatment of moderate to severe intestinal Pivotal Phase III
graft versus host disease
orBec(R) Treatment of Irritable Bowel Syndrome Preclinical Animal Model
LPM(TM)Leuprolide Endometriosis, prostate cancer Preclinical
(Lipid Polymer Micelles)
LPE(TM)/PLP(TM)Paclitaxel Breast, ovarian and lung cancer Preclinical
(Lipid Polymer Emulsions/
Polymer Lipid Particles)
4
BIODEFENSE PRODUCTS
THE MICROVAX(TM) SYSTEM
Our proprietary vaccine delivery technology named Microvax(TM) permits
non-live vaccines to be delivered via oral and nasal routes, avoiding the need
for needles and trained medical personnel to administer vaccines. Unlike
injected vaccines, vaccines incorporating the Microvax(TM) technology can confer
protection in the lungs and gastrointestinal tract, the body's first line of
defense against potential bioterror agents. The Microvax(TM) system utilizes
well-characterized and safe materials to create biodegradable microspheres that
contain genetically engineered or killed vaccine antigens. Microvax(TM)
microspheres stimulate and confer protection to the common lymphatic mucosal
immune system consisting of the surface of the lungs, nasopharanx and
gastrointestinal and urogenitary tracts. Because of their release over time and
biodegradable design, Microvax(TM) micro spheres continue to provide immunity
for weeks to months with a single dose. The Microvax(TM) system is supported by
publications from university and military research groups that demonstrate the
ability of Microvax(TM) to protect animals from exposure to lethal doses of such
agents as ricin, anthrax and plague after oral or nasal vaccination.
The Microvax(TM) system is protected by worldwide issued patents under
license to us from Southern Research Institute and the University of Alabama for
use in orally administered vaccines. There are six U.S. patents and two patents
in Europe and corresponding international patents issued elsewhere in the world
that protect both the vaccine compositions and the processes and methods to make
them.
NASAL RICIN VACCINE
On September 11, 2002, we announced the initiation of development of
our first vaccine candidate utilizing the Microvax(TM) system, a vaccine against
ricin toxin.
Ricin toxin is a heat stable toxin that is easily isolated and purified
from the bean of the castor plant. As a bioterrorism agent, ricin toxin could be
used in small-scale, as well as large-scale, attacks and could be used as an
aerosol or to contaminate water and food supplies. The U.S. Centers for Disease
Control and Prevention have classified ricin as a category B biological agent.
Once exposed to ricin toxin, there is no effective therapy to reverse the course
of the toxin. Currently, there is no FDA approved vaccine to protect against the
possibility of the use of ricin toxin in a potential terrorist attack or the use
of ricin as a weapon on the battlefield. Importantly, there is neither any
approved nor any known antidote for ricin toxin exposure.
Using our Microvax(TM) delivery system, experimental nasal and oral
ricin vaccines were developed, studied and published by researchers at the
United States Army Medical Research Institute of Infectious Diseases at Fort
Detrick, Maryland. These vaccines, utilizing a non-toxic form of ricin, were
shown to be capable of protecting 100% of animals against exposure to a lethal
dose of ricin toxin one year after immunization.
We have executed an option agreement with the University of Texas
Southwestern Medical Center to license non-toxic ricin vaccine invented and
tested at University of Texas. The lead vaccine candidate consists of ricin
toxin which has been genetically engineered to eliminate its toxic activity.
We have begun a program to manufacture and test this ricin vaccine.
5
ORAL BOTULINUM VACCINE
We are developing an oral, nontoxic modified botulinum toxin vaccine by
exploiting a natural property of botulinum toxin to penetrate intestinal tissue.
Our vaccine is based on segments of botulinum toxin that are completely
non-toxic and induce immune responses that are capable of neutralizing botulinum
toxin. Our oral vaccine candidate has been shown to protect animals against a
lethal dose of botulinum. Botulinum toxin, produced by the bacterium Clostridium
botulinum, is an extremely potent toxin that attacks the nervous system, and is
the most poisonous biologic substance known to man. Exposure to botulinum toxin
can shut down breathing within hours. The Centers for Disease Control and
Prevention has classified botulinum toxin as a Category A agent, a high priority
agent that could be used as a bioweapon. Botulinum toxin poses a substantial
threat because of its extreme potency and lethality, its ease of production,
transport and misuse, and the potential need for prolonged intensive care of
affected persons. There is no currently available FDA approved vaccine
orantidoteto botulinum toxin exposure.
We have executed an exclusive option agreement with Thomas Jefferson
University to license the technology which is protected by one issued US Patent
and several pending U.S. and international patents. Our collaborators have also
recently reported that an intranasal form of the vaccine is capable of
protecting animals against up to 30,000 times the normal lethal dose of inhaled
botulinum toxin. Based on these encouraging preclinical results, we have begun a
development program, relying on Thomas Jefferson University for the development
work, to manufacture the vaccine for an initial human clinical trial that we
expect will confirm immunogenicity and safety.
NASAL ANTHRAX VACCINE
We are developing a nasally administered anthrax vaccine by utilizing a
form of a key antigen derived from the anthrax bacillus and microparticulate
delivery technology. The delivery technology is a variation of the Microvax(TM)
technology. A prototype version of this vaccine has been recently described by
investigators, who demonstrated that an nasally delivered anthrax vaccine was
capable of protecting animals against lethal exposure of anthrax spores We have
executed an exclusive option agreement to license patent applications covering
this technology as well as related know-how, subject to us entering into a
definitive license agreement with the U.K.'s Ministry of Defense. We are in the
process of initiating a collaborative research and development agreement with
the University of London to help us develop the intranasal anthrax vaccine. Upon
successful preclinical testing of the prototype vaccines, we expect to
manufacture the vaccine for clinical evaluation under a U.S. investigational new
drug application.
Anthrax, the disease caused by the spore-forming bacterium Bacillus
anthracis, occurs in the three distinct forms, cutaneous, gastrointestinal and
pulmonary, depending upon the routes of infection. Anthrax is described by the
Centers for Disease Control and Prevention as a Category A bioterror threat. The
current FDA approved anthrax vaccine, BioThrax(TM) (BioPort, Inc., Lansing, MI)
is administered by six injections, given over 18 months, followed by annual
boosters. These injections are painful, require a visit to a physician and are
associated with numerous side effects, such as, muscle aches, joint aches,
headaches, rash, chills, fever, nausea, loss of appetite, malaise or related
symptoms.
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THERAPEUTICS PRODUCTS
ORBEC(R) (ORAL BECLOMETHASONE DIPROPRIONATE)
We are developing an oral therapeutic product, orBec(R), a dual tablet
formulation of beclomethasone dipropionate, for the treatment of intestinal
graft-vs.-host disease, a life threatening complication associated with bone
marrow transplantation. orBec(R) uses beclomethasone dipropionate as its active
pharmacologic agent. Beclomethasone dipropionate is an off-patent potent drug
which has been previously approved by the FDA and sold as Beconase(R) by
GlaxoSmithkline only in an inhaled and nasal formulation for the treatment of
asthma, allergic rhinitis and nasal polyposis. Worldwide sales of Beconase(R)
and inhaled beclomethasone dipropionate make it one of the leading selling drugs
for the treatment and prevention of asthma.
ORBEC(R) FOR INTESTINAL GRAFT-VS.-HOST DISEASE
orBec(R) is currently the subject of a pivotal, 130 patient,
multi-center, placebo controlled phase III clinical trial, using orBec(R) vs.
standard of care for the treatment of intestinal graft-vs.-host disease. A
previous 68 patient randomized phase II clinical trial of orBec(R) in treatment
of intestinal graft-vs.-host disease demonstrated met its predetermined
statistically significant primary endpoint (p=.02). If the current phase III
clinical trial is successful, we should be able to file a New Drug Application
with the FDA for marketing approval of orBec(R) in the U.S. On February 28,
2003, we announced 50% enrollment in this clinical trial.
Due to the nature of this small patient population, the FDA has agreed
that only one phase III clinical trial would be necessary for FDA approval. The
FDA has also designated orBec(R) "Fast Track" status, allowing for an expedited
6 month review cycle following an New Drug Application submission. orBec(R) has
also been granted "Orphan Drug" status by the FDA for the treatment of
intestinal graft-vs-host disease and for the prevention of graft-vs.-host
disease. In Europe, the EMEA has designated orBec(R) an "Orphan Drug" for the
treatment of intestinal graft-vs.-host disease.
ORBEC(R) FOR IRRITABLE BOWEL SYNDROME
The Company is simultaneously testing and developing orBec(R) for much
larger patient populations such as inflammatory bowel disease and irritable
bowel syndrome that may allow it to file a Supplemental New Drug Application for
one or more of these indications in an efficient and cost effective manner.
According to published literature, irritable bowel syndrome affects
approximately 25 to 55 million patients per year in the U.S. We are currently
testing orBec(R) in post-colitis animal models of functional bowel pain, a model
which closely mimics the symptoms of irritable bowel syndrome. Following the
completion of positive preclinical experiments, we have plans to initiate a
phase II clinical trial using orBec(R) to treat irritable bowel syndrome.
Developing orBec(R) for larger disease segments, such as irritable bowel
syndrome, would allow greatly enhance the market potential for the product.
LPM(TM), LPE(TM) AND PLP(TM)
During 2002, we formed Oradel Systems, Inc., a wholly owned subsidiary
of the Company. We transferred all of our patent applications relating to the
LPM(TM), LPE(TM) and PLP(TM) delivery systems to Oradel in order to establish a
corporate partnership with another drug delivery company to further develop our
oral drug delivery system.
LPM(TM) LEUPROLIDE
We are developing an oral dosage formulation of the peptide drug,
leuprolide, a hormone-based drug that is among the leading drugs used to treat
endometriosis and prostate cancer, by utilizing a novel drug delivery system,
the LPM(TM) system, composed of safe and well characterized ingredients to
enhance
7
intestinal absorption. The LPM(TM) system incorporates biocompatible lipids and
polymers and it is potentially useful for a wide variety of molecular structures
of water-soluble drugs, particularly those based on peptides. Although both
small molecules and large molecules can be incorporated into our system, there
is a molecular size cutoff for a commercially viable oral bioavailability
enhancement, and this system is most effective with drugs/peptides. Using a
simple and scaleable manufacturing process, aqueous solutions of peptides can be
incorporated into lipid-polymer mixtures forming stable micelles.
According to IMS data, leuprolide, an FDA approved product, which
generated more than $800 million in U.S. sales, and is presently administered
solely by depot injection. In preclinical studies, we have demonstrated that
LPM(TM) has been able to demonstrate promising intestinal absorption enhancement
of leuprolide. Based on our promising preclinical data, we plan further
development of LPM(TM)-leuprolide through a corporate licensing partner, which
we expect will lead to clinical studies for the treatment of endometriosis.
Endometriosis is a condition in which the tissue that normally lines
the uterus grows in other areas of the body, causing pain, irregular bleeding,
and frequently, infertility. It is estimated that between 5 million and 5.5
million women in the U.S. and Canada have endometriosis, and in the U.S.
approximately 300,000 new cases are diagnosed annually. Our preclinical studies,
have demonstrated consistent bioavailability in both LHRH and leuprolide. We
plan to conduct appropriate toxicology and scale up studies to complete a filing
for an Investigational New Drug Application with the FDA by year-end to enable
us to initiate human clinical trials.
In addition to leuprolide, we plan to evaluate other classes of
water-soluble drugs/peptides with the LPM(TM) system. Two initial patent
applications covering broadly LPM(TM) for oral water-soluble drug/peptide
delivery have been filed in 2001.
LPE(TM) AND LPP(TM) SYSTEMS FOR WATER-INSOLUBLE DRUGS
We are developing two lipid-based systems, LPE(TM) and PLP(TM), to
support the oral delivery of small molecules of water insoluble drugs. Such
drugs include most kinds of cancer chemotherapeutics currently delivered
intravenously. The LPE(TM) system is in the form of an emulsion or an emulsion
pre-concentrate incorporating lipids, polymers and co-solvents, particularly
perillyl alcohol. We have filed for patent applications on the use of POH as a
solvent, surfactant and absorption enhancer for lipophilic compounds. The
polymers used in these formulations can either be commercially available or
proprietary polymerized lipids and lipid analogs.
We have utilized both LPE(TM) and PLP(TM) systems to develop an oral
dosage form of paclitaxel, the active ingredient in the anticancer product
Taxol(R). Three initial patent applications covering broadly LPE(TM) and PLP(TM)
for oral water-insoluble drug/peptide delivery have been filed.
THE DRUG APPROVAL PROCESS
GENERAL
Before marketing, each of our products must undergo an extensive
regulatory approval process conducted by the FDA and applicable agencies in
other countries. Testing, manufacturing, commercialization, advertising,
promotion, export and marketing, among other things, of the proposed products
are subject to extensive regulation by government authorities in the United
States and other countries. All products must go through a series of tests,
including advanced human clinical trials, which the FDA is allowed to suspend as
it deems necessary.
8
Our products will require, prior to commercialization, regulatory
clearance by the FDA and by comparable agencies in most foreign countries. The
nature and extent of regulation differs with respect to different products. In
order to test, produce and market certain therapeutic products in the United
States, mandatory procedures and safety standards, approval processes, and
manufacturing and marketing practices established by the FDA must be satisfied.
An Investigational New Drug Application, referred to as an IND, is
required before human clinical use in the United States of a new drug compound
or biological product can commence. The IND includes results of pre-clinical
animal studies evaluating the safety and efficacy of the drug and a detailed
description of the clinical investigations to be undertaken.
Clinical trials are normally done in three phases, although the phases
may overlap. Phase I trials are concerned primarily with the safety of the
product. Phase II trials are designed primarily to demonstrate effectiveness and
safety in treating the disease or condition for which the product is indicated.
These trials typically explore various doses and regimens. Phase III trials are
expanded clinical trials intended to gather additional information on safety and
effectiveness needed to clarify the product's benefit-risk relationship,
discover less common side effects and adverse reactions, and generate
information for proper labeling of the drug, among other things. The FDA
receives reports on the progress of each phase of clinical testing and may
require the modification, suspension or termination of clinical trials if an
unwarranted risk is presented to patients. When data is required from long-term
use of a drug following its approval and initial marketing, the FDA can require
Phase IV, or post-marketing, studies to be conducted.
With certain exceptions, once successful clinical testing is completed,
the sponsor can submit a new drug application for approval of a drug. The
process of completing clinical trials for a new drug is likely to take a number
of years and require the expenditure of substantial resources. Furthermore, the
FDA or any foreign health authority may not grant an approval on a timely basis,
or at all. The FDA may deny a New Drug Application, in its sole discretion, if
it determines that its regulatory criteria have not been satisfied or may
require additional testing or information. Among the conditions for marketing
approval is the requirement that the prospective manufacturer's quality control
and manufacturing procedures conform to good manufacturing regulations. In
complying with standards contained in these regulations, manufacturers must
continue to expend time, money and effort in the area of production, quality
control and quality assurance to ensure full technical compliance. Manufacturing
facilities, both foreign and domestic, also are subject to inspections by, or
under the authority of, the FDA and by other federal, state, local or foreign
agencies.
Even after initial FDA or foreign health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety and will be required to gain
approval for the use of a product as a treatment for clinical indications other
than those for which the product was initially tested. Also, the FDA or foreign
regulatory authority will require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand the
further marketing of the products. Further, if there are any modifications to
the drug, including any change in indication, manufacturing process, labeling or
manufacturing facility, an application seeking approval of such changes may be
required to be submitted to the FDA or foreign regulatory authority.
In the United States, the Federal Food, Drug, and Cosmetic Act, the
Public Health Service Act, the Federal Trade Commission Act, and other federal
and state statutes and regulations govern or influence the research, testing,
manufacture, safety, labeling, storage, record keeping, approval, advertising
and promotion of drug, biological, medical device and food products.
Noncompliance with applicable requirements can result in, among other things,
fines, recall or seizure of products, refusal to
9
permit products to be imported into the U.S., refusal of the government to
approve product approval applications or to allow the Company to enter into
government supply contracts, withdrawal of previously approved applications and
criminal prosecution. The FDA may also assess civil penalties for violations of
the Federal Food, Drug, and Cosmetic Act involving medical devices.
NEW BIODEFENSE LEGISLATION AND REGULATIONS
In June 2002, in response to the threat of bioterrorism, the FDA eased
regulatory requirements for new drug and biological products used to reduce or
prevent the toxicity of chemical, biological radiological, or nuclear
substances. They may be approved for use in humans based on evidence of
effectiveness derived only from appropriate animal studies and any additional
supporting data. With this change in FDA policy, we believe it is possible to
develop vaccines for biodefense without the need for human efficacy trials. More
recently, on January 28, 2003, President Bush announced a proposal now
introduced to Congress as the Project BioShield Act of 2003, a $6 billion
initiative to stimulate the private sector to rapidly contract, manufacture,
develop, stockpile and make available new advanced bioterror countermeasures on
behalf of the U.S. government. As a result of these proposed changes, we believe
we may have a vaccine available for delivery to the Centers for Disease Control
and Prevention Strategic National Stockpile and ready for investigational use
and initial payment within 18 months. As proposed by the Project BioShield Act
of 2003, upon subsequent FDA licensure of any delivered investigational
vaccines, if we entered into government contracts relating to those vaccines, we
would become eligible for additional premium product pricing.
MARKETING STRATEGIES
Our marketing strategy for therapeutic products is to add value to drug
compounds that have been approved by the FDA which have already reached the end
of their initial patent life (or are reaching the end of such patent life) by
developing proprietary therapeutic indications and/or proprietary new delivery
modalities to enhance patient ease of treatment and enhance treatment
compliance.
During 2003, we believe we will be able to identify a marketing partner
for orBec(R) for marketing in the U.S. and Europe for the initial therapeutic
indication of this drug, intestinal graft-vs.-host disease. Although this is a
niche market, the additional gastrointestinal disorders for which orBec(R) is
being evaluated represent substantially larger and more attractive market
segments for marketing partners. Our strategy for drug delivery technology
commercialization is to demonstrate initial clinical efficacy and safety in
human clinical trials (human "proof of concept" data) with novel oral
formulations of well-known and established drugs that have reached the end of
their patent life or that are nearing the end of their patent life. We believe
that we can then attract pharmaceutical partners that would like to extend the
commercial life of their products or compete effectively against the original
product about to go off-patent. By licensing DOR technology, our strategy is to
negotiate agreements with potential corporate partners for up-front payments,
milestone payments, a percentage of net product sales, or a combination of these
payment schemes. The revenues that we derive from these products and technology
will depend on the degree of success achieved by our corporate partners in
licensing, manufacturing, distributing, and marketing those products.
We intend to market our biodefense vaccine products directly to
government agencies. We believe that both military and civilian health
authorities of the U.S. government will increase their activities in the
stockpiling of therapeutics and vaccines to treat and prevent diseases and
conditions caused by the intentional release of bioterrorism agents. We intend
to develop stockpiles of vaccines of our lead products that we will sell
directly to the government. In some cases, the government may be willing to
purchase stockpiles before final approval by the FDA to further the testing of
the vaccine. We will also receive revenues from the sale of stockpiled vaccines
to foreign governments.
10
COMPETITION
The pharmaceutical industry and specifically the gastroenterology and
vaccine delivery segment of the industry, is highly competitive. Our competitors
are not only major pharmaceutical and biotechnology companies, most of whom have
considerably greater financial, technical, and marketing resources than we
currently have, but also other biotechnology and biopharmaceutical companies.
Another source of competing technologies is universities and other research
institutions, and we face competition from other companies to acquire rights to
those technologies.
BIODEFENSE VACCINE COMPETITION
We feel that we face intense competition in the area of biodefense from
various public and private companies, universities and governmental agencies,
such as the US Army may have their own proprietary technologies which may
directly compete with the Company's technologies. Avant Immunotherapeutics,
Inc., Bioport Corporation, VaxGen, Inc., Chimerix, Inc., ID Biomedical
Corporation, Human Genome Sciences, Inc., Avanir Pharmaceuticals, Inc., Antex
Biologics, Inc. and others all have announced vaccine or countermeasure
development programs for biodefense. Some of companies have substantially
greater human and financial resources at their disposal and many of them have
already received grant or government contracts to develop anti-toxins and
vaccines against bioterrorism. For example, Avant Immunotherapeutics, Inc. has
announced that they have received an $8 million contract to develop an oral
plague and oral anthrax vaccines. Vaxgen and Avecia Biotechnology, Inc. have
both received NIH contracts to develop a next generation injectable anthrax
vaccine. CpG Immunotherapeutics, Inc. has also received a $6 million Department
of Defense grant to develop vaccine enhancement technology. ID Biomedical
Corporation, has entered into an $8 million contract to develop a plague
vaccine. We have not yet been awarded any such funding. Another anthrax vaccine
candidate is currently marketed by Bioport Corporation, under the tradename of
BioThrax(R). Additionally, we face competition from other companies which have
existing governmental relationships, such as Dynport Vaccine Company, LLC, a
prime contractor to the U.S. Department of Defense. Dynport currently has a $300
million contract to develop vaccines for the U.S. Military, including anthrax,
and botulinum toxin vaccines.
We believe that our Microvax(TM) delivery system is able to deliver
vaccines in a needleless and cost effective route of administration to patients.
In the area of anthrax vaccines, the Company faces competition from Bioport
Corporation, the manufacturer of BioThrax(R), which is the only FDA approved
anthrax vaccine. It is an injectable vaccine, which requires 6 injections over
an 18-month period with annual booster injections. While effective, this form of
vaccination requires injections, which are typically administered in a hospital
and/or physician office and it is unpractical to vaccinate large populations
rapidly. The Company is also developing vaccines for which there aren't
commercial vaccines, antidotes or countermeasures, such as botulinum toxin, and
ricin toxin.
ORBEC(R) COMPETITION
Competition is intense in the gastroenterology and transplant areas
being addressed by our company. Companies are attempting to develop technologies
to treat graft-vs.-host disease by suppressing, through various mechanisms, the
immune system. Some companies, including Sangstat, Abgenix, and Protein Design
Labs, Inc., are developing monoclonal antibodies to treat graft-vs.-host
disease. Biotransplant, Novartis, Medimmune, and Ariad are developing both gene
therapy products and small molecules to treat graft-vs.-host disease. All of
these products are in various stages of development. For example, Norvartis
currently markets Cyclosporin, and Sangstat currently markets Thymoglobulin, for
transplant related therapeutics.
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Competition is also intense in the therapeutic area of irritable bowel
syndrome and Crohn's disease. Several companies, including Centocor, Immunex,
and Celgene, have products that are currently FDA approved. For example,
Centocor, a subsidiary of Johnson & Johnson, markets the drug product
Remicade(R) for Crohn's disease. Other drugs used to treat inflammatory bowel
disease include another orally-active corticosteroid called budesonide, which is
being marketed by AstraZeneca in Europe and Canada under the tradename of
Entocort. Entocort is structurally similar to beclomethasone dipropionate, and
the FDA approved Entocort for Crohn's disease late in 2001. In Italy, Cheisi
Pharmaceuticals markets an oral formulation of beclomethasone diproprionate, the
active ingredient of orBec(R) for ulcerative colitis and may seek marketing
approval for their product in countries other than Italy including the United
States. In addition, Salix Pharmaceuticals, Inc. markets an FDA-approved therapy
for ulcerative colitis.
Several companies have also established various colonic drug delivery
systems to deliver therapeutic drugs to the colon for treatment of Crohn's
disease. These companies include Ivax Corporation, Inkine Pharmaceutical
Corporation, and Elan Pharmaceuticals, Inc. Other approaches to treat
gastrointestinal disorders include antisense and gene therapy. Isis
Pharmaceuticals, Inc. is in the process of developing antisense therapy to treat
Crohn's disease.
We believe that the low dosage, tablet formulation for orBec(R),
combined with the low systemic side effects, along with the clinical success
demonstrated, will make orBec(R) an attractive alternative to existing therapies
for inflammatory diseases of the gastrointestinal tract and other pan-intestinal
diseases, such as irritable bowel syndrome.
PATENTS AND OTHER PROPRIETARY RIGHTS
Our goal is to obtain, maintain and enforce patent protection for our
products, formulations, processes, methods and other proprietary technologies,
preserve our trade secrets, and operate without infringing on the proprietary
rights of other parties, both in the United States and in other countries. Our
policy is to actively seek to obtain, where appropriate, the broadest
intellectual property protection possible for our product candidates,
proprietary information and proprietary technology through a combination of
contractual arrangements and patents, both in the U.S. and elsewhere in the
world.
We also depend upon the skills, knowledge and experience of our
scientific and technical personnel, as well as that of our advisors, consultants
and other contractors, none of which is patentable. To help protect our
proprietary know-how that is not patentable, and for inventions for which
patents may be difficult to enforce, we rely on trade secret protection and
confidentiality agreements to protect our interests. To this end, we require all
employees, consultants, advisors and other contractors to enter into
confidentiality agreements, which prohibit the disclosure of confidential
information and, where applicable, require disclosure and assignment to us of
the ideas, developments, discoveries and inventions important to our business.
We have been successful in obtaining "Orphan Drug" designations in the
U.S. and in Europe. Orphan Drug status provides for 7 seven years of marketing
exclusivity for orBec(R) for the use in the treatment of intestinal graft-vs.
host-disease. We have also been successful in obtaining "Orphan Drug"
designation in the US for the prevention of graft-vs.-host-disease.
Under the Waxman-Hatch Act, a patent which claims a product, use or
method of manufacture covering drugs and certain other products may be extended
for up to five years to compensate the patent holder for a portion of the time
required for development and FDA review of the product. The Waxman-Hatch Act
also establishes periods of market exclusivity, which are periods of time
ranging from 3 to 5 years following approval of a drug during which the FDA may
not approve, or in certain cases even
12
accept, applications for certain similar or identical drugs from other sponsors
unless those sponsors provide their own safety and effectiveness data.
ORBEC(R) LICENSE AGREEMENT
In October 1998, our subsidiary, Enteron Pharmaceuticals, Inc. entered
into an exclusive, worldwide, royalty bearing license agreement with George B.
McDonald, M.D., including the right to grant sublicenses, for the rights to the
intellectual property and know-how relating to orBec(R). Enteron also executed
an exclusive option to license patent applications for "Use of
Anti-Inflammatories to Treat Irritable Bowel Syndrome" from the University of
Texas Medical Branch-Galveston. Under the license, we would be obligated to make
performance-based milestone payments, upon the filing for approval and the
receipt of FDA approval, as well as royalty payments on net sales of orBec(R).
In addition, Dr. McDonald receives $40,000 per annum as a consultant to us.
MICROVAX(TM) INTELLECTUAL PROPERTY
During 1998, our former joint venture with Elan Pharmaceuticals, Inc.,
Innovaccines Corporation acquired broadly issued U.S. and International patents
relating to the musocal administration of vaccines. Microspheres of these
dimensions are preferentially absorbed by lymphoid tissues in the
gastrointestinal tract and other mucosal lymphoid tissue, resulting in higher
efficacy for orally and mucosally applied vaccines. Microsphere technology also
protects vaccines against inactivation by environmental factors. The United
States patents, assigned jointly to UAB and SRI #6,024,983, #5,942,252,
#5,853,763, #5,820,883, #5,814,344, and #5,811,128 protect the
microencapsulation technology and have terms that expire 2015 through 2018.
European patents EP 0 333 523 B1 and EP 0 266 119 protect the technology in
Europe until 2008 and equivalent patents are issued in other selected countries
of the world. During 2002, we acquired Elan's interest in Innovaccines and
reassigned the rights under these patents to a wholly owned subsidiary named DOR
Vaccines, Inc. During 2002, DOR Vaccines entered into a binding letter of intent
to expand it's license agreement with SRI to include nasal vaccine delivery.
Upon the execution of an amendment, we have agreed to provide $250,000 per annum
for 4 years in sponsored research support. The Company as also agreed to a
$50,000 per annum consulting agreement with one of the inventors of the
Microvax(TM) technology. We have also agreed to grant options to acquire 100,000
shares of our common stock to that individual.
During January 2003, we executed a binding letter of intent to
exclusively license patent applications covering the use of microencapsulated
anthrax and plague vaccines. These included patent application numbers WO
00/56282; WO 00/56362; WO 00/56361 and WO 01/70200. Upon execution of a royalty
bearing license agreement, we would be obligated to pay a license issue fee
$100,000, as well as a $25,000 license fee payable on the first anniversary of
the license agreement and an additional $25,000 license fee payable 18 months
later. We would also provide $100,000 of sponsored research support for a
one-year period.
RICIN VACCINE INTELLECTUAL PROPERTY
During January 2003, we executed a worldwide exclusive option to
license patent applications with the University of Texas Southwestern Medical
Center for the nasal, pulmonary and oral uses of a non-toxic ricin vaccine.
During February 2003, we executed a binding, 90 day right of first negotiation
agreement with UT Southwestern to obtain the injectable rights to the ricin
vaccine. Until January 2004, we may chose to exercise the option to license the
nasal, pulmonary, and oral rights to the non-toxic ricin vaccine with a license
fee payment of $100,000.
13
BOTULINUM TOXIN VACCINE INTELLECTUAL PROPERTY
We executed a letter of intent with Thomas Jefferson University to
exclusively license issued U.S. Patent No. 6,051,239 and corresponding
international patent applications broadly claiming the oral administration of
nontoxic modified botulinum toxins as vaccines. The intellectual property also
includes patent applications covering the inhaled and nasal routes of delivery
of the vaccine. Upon execution of the license agreement, we would have to pay a
license fee of $160,000, payable in $130,000 of restricted common stock and
$30,000 in cash. Upon the execution of the license agreement with TJU, we would
also enter into a one year sponsored research agreement in which we would
provide $300,000 in research support payable quarterly. Upon the execution of
the license agreement with Thomas Jefferson University, we would also enter into
a consulting agreement with Dr. Lance Simpson, the inventor of the botulinum
toxin vaccine for a period of three years under, which Dr. Simpson would receive
options to purchase 100,000 shares of our common stock, vesting over three
years.
EMPLOYEES
As of March 1, 2003, we had five employees, four of whom were full-time
employees.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, and Section 27A of the
Securities Act of 1933, that reflect our current expectations about our future
results, performance, prospects and opportunities. These forward-looking
statements are subject to significant risks, uncertainties, and other facets,
including those identified in "Risk Factors" below, which may cause actual
results to differ materially from those expressed in, or implied by, any
forward-looking statements. The forward-looking statements within this Form
10-KSB may be identified by words such as "believes," "anticipates," "expects,"
"intends," "may," "would," "will" and other similar expressions. However, these
words are not the exclusive means of identifying these statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Except as expressly required by the federal securities laws, we
undertake no obligation to publicly update or revise any forward-looking
statements to reflect events or circumstances occurring subsequent to the filing
of this form 10-KSB with the SEC or for any other reason. You should carefully
review and consider the various disclosures we make in this report and our other
reports filed with the SEC that attempt to advise interested parties of the
risks, uncertainties and other factors that may affect our business.
RISK FACTORS
You should carefully consider the risks, uncertainties and other
factors described below because they could materially and adversely affect our
business, financial condition, operating results and prospects and could
negatively impact the market price of our common stock. Also, you should be
aware that the risks and uncertainties described below are not the only ones
facing us. Additional risks and uncertainties that we do not yet know of, or
that we currently think are immaterial, may also impair our business operations.
You should also refer to the other information contained in and incorporated by
reference into this Annual Report on Form 10-KSB, including our financial
statements and the related notes.
14
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
WE HAVE HAD SIGNIFICANT LOSSES AND ANTICIPATE FUTURE LOSSES; IF
ADDITIONAL FUNDING CANNOT BE OBTAINED, WE MAY REDUCE OR DISCONTINUE OUR PRODUCT
DEVELOPMENT AND COMMERCIALIZATION EFFORTS AND WE MAY BE UNABLE TO CONTINUE OUR
OPERATIONS.
We are a development stage company that has experienced significant
losses since inception and have a significant accumulated deficit. We expect to
incur additional operating losses in the future and expect our cumulative losses
to increase. All of our products are currently in development, preclinical
studies or clinical trials, and we have not generated any revenues from sales or
licensing of these products. Through February 28, 2003, we have expended
approximately $1.6 million developing our current product candidates and for our
clinical trials, and we currently have commitments to spend approximately $1.1
million over the next two years in connection with development of our oral
delivery systems, licenses, employee agreements and severance arrangements, and
consulting agreements. Unless and until we are able to generate licensing
revenue from orBec(R), our leading product candidate, or another one of our
product candidates, we will require additional funding to meet these
commitments, sustain our research and development efforts, provide for future
clinical trials, and continue our operations. We may not be able to obtain
additional required funding on terms satisfactory to our requirements, if at
all. If we are unable to raise additional funds when necessary, we may have to
reduce or discontinue development, commercialization or clinical testing of some
or all of our product candidates or take other cost-cutting steps that could
adversely affect our ability to achieve our business objectives. If additional
funds are raised by our issuing equity securities, stockholders may experience
dilution of their ownership interests, and the newly issued securities may have
rights superior to those of the common stock. If additional funds are raised by
our issuing debt, we may be subject to limitations on our operations.
IF WE ARE UNSUCCESSFUL IN DEVELOPING OUR PRODUCTS, OUR ABILITY TO
GENERATE REVENUES WILL BE SIGNIFICANTLY IMPAIRED.
To be profitable, our organization must, along with corporate partners
and collaborators, successfully research, develop and commercialize our
technologies or product candidates. Our current product candidates are in
various stages of clinical and pre-clinical development and will require
significant further funding, research, development, preclinical and/or clinical
testing, regulatory approval and commercialization testing, and are subject to
the risks of failure inherent in the development of products based on innovative
or novel technologies. Specifically, each of the following is possible with
respect to orBec(R) or any of our other product candidates:
- that we will not be able to maintain our current research and
development schedules;
- that we will encounter problems in clinical trials; or
- that the technology or product will be found to be ineffective or
unsafe.
If any of the risks set forth above occurs, or if we are unable to
obtain the necessary regulatory approvals as discussed below, we may not be able
to successfully develop our technologies and product candidates and our business
will be seriously harmed. Furthermore, for reasons including those set forth
below, we may be unable to commercialize or receive royalties from the sale of
orBec(R) or any other technology we develop, even if it is shown to be
effective, if:
- it is uneconomical or the market for the product does not develop
or diminishes;
15
- we are not able to enter into arrangements or collaborations to
manufacture and/or market the product;
- the product is not eligible for third-party reimbursement from
government or private insurers;
- others hold proprietary rights that preclude us from
commercializing the product;
- others have brought to market similar or superior products; or
- the product has undesirable or unintended side effects that
prevent or limit its commercial use.
OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION, WHICH CAN
BE COSTLY, TIME CONSUMING AND SUBJECT US TO UNANTICIPATED DELAYS.
All of our product offerings, as well as the processes and facilities
by which they are manufactured, are subject to very stringent United States,
federal, foreign, state and local government laws and regulations, including the
Federal Food, Drug and Cosmetic Act, the Environmental Protection Act, the
Occupational Safety and Health Act, and state and local counterparts to these
acts. These laws and regulations may be amended, additional laws and regulations
may be enacted, and the policies of the FDA and other regulatory agencies may
change.
The regulatory process applicable to our products requires pre-clinical
and clinical testing of any product to establish its safety and efficacy. This
testing can take many years and require the expenditure of substantial capital
and other resources. We may be unable to obtain, or we may experience
difficulties and delays in obtaining, necessary domestic and foreign
governmental clearances and approvals to market a product. Also, even if
regulatory approval of a product is granted, that approval may entail
limitations on the indicated uses for which the product may be marketed. For
example, clinical trials of OrBec(R) began in 2001 and are expected to continue
for at least one more year. We do not expect to complete clinical testing of any
of our product candidates within the next 6 months.
Following any regulatory approval, a marketed product and its
manufacturer are subject to continual regulatory review. Later discovery of
problems with a product or manufacturer may result in restrictions on such
product or manufacturer. These restrictions may include withdrawal of the
marketing approval for the product. Furthermore, the advertising, promotion and
export, among other things, of a product are subject to extensive regulation by
governmental authorities in the United States and other countries. If we fail to
comply with applicable regulatory requirements, we may be subject to fines,
suspension or withdrawal of regulatory approvals, product recalls, seizure of
products, operating restrictions and/or criminal prosecution.
WE WILL BE DEPENDENT ON GOVERNMENT FUNDING, WHICH IS INHERENTLY
UNCERTAIN, FOR THE SUCCESS OF OUR BIODEFENSE OPERATIONS.
We are subject to risks specifically associated with operating in the
biodefense industry, which is a new and unproven business area. We do not
anticipate that a significant commercial market will develop for our biodefense
products. Because we anticipate that the principal potential purchasers of our
products, as well as potential sources of research and development funds, will
be the U.S. government and governmental agencies, the success of our biodefense
division will be dependent in large part upon government spending decisions. The
funding of government programs is dependent on budgetary limitations,
congressional appropriations and administrative allotment of funds, all of which
are
16
inherently uncertain and may be affected by changes in U.S. government policies
resulting from various political and military developments.
OUR PRODUCTS, IF APPROVED, MAY NOT BE COMMERCIALLY VIABLE DUE TO HEALTH
CARE CHANGES AND THIRD PARTY REIMBURSEMENT LIMITATIONS.
Recent initiatives to reduce the federal deficit and to change health
care delivery are increasing cost-containment efforts. We anticipate that
Congress, state legislatures and the private sector will continue to review and
assess alternative benefits, controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, price controls on pharmaceuticals, and other fundamental
changes to the health care delivery system. Any changes of this type could
negatively impact the commercial viability of our products, if approved. Our
ability to successfully commercialize our product candidates, if they are
approved, will depend in part on the extent to which appropriate reimbursement
codes and authorized cost reimbursement levels of these products and related
treatment are obtained from governmental authorities, private health insurers
and other organizations, such as health maintenance organizations. In the
absence of national Medicare coverage determination, local contractors that
administer the Medicare program may make their own coverage decisions. Any of
our product candidates, if approved and when commercially available, may not be
included within the then current Medicare coverage determination or the coverage
determination of state Medicaid programs, private insurance companies or other
health care providers. In addition, third-party payers are increasingly
challenging the necessity and prices charged for medical products, treatments
and services.
WE MAY NOT BE ABLE TO RETAIN RIGHTS LICENSED TO US BY THIRD PARTIES TO
COMMERCIALIZE KEY PRODUCTS OR TO DEVELOP THE THIRD PARTY RELATIONSHIPS WE NEED
TO DEVELOP, MANUFACTURE AND MARKET OUR PRODUCTS.
We currently rely on license agreements from Southern Research
Institute, the University of Alabama Research Foundation, the University of
Texas Southwestern Medical Center, the University of Texas Medical Branch at
Galveston and George B. McDonald for the rights to commercialize key product
candidates. These agreements require that we use our best efforts to
commercialize at least two products in the next 5 years. Our failure to meet the
requirement would allow the licensors to terminate the licenses, whereas our
meeting this milestone would trigger payment obligations on our part. We may not
be able to retain the rights granted under these agreements or negotiate
additional agreements on reasonable terms, or at all. We have also entered into
letters of intent or option agreements with Southern Research Institute, the
University of Alabama Research Foundation, Thomas Jefferson University, Ministry
of Defence of the United Kingdom, the University of Texas Southwestern Medical
Center and the University of Texas Medical Branch--Galveston, under which we
plan to license issued patent and pending patent applications for technologies
relating to botulinum toxin, intranasal anthrax and ricin vaccines. Although
these letters of intent and option agreements provide for defined business
terms, we may not be able to come to definitive agreements with the institutions
and, as a result, may not obtain critical intellectual property rights on which
we expect to rely.
Furthermore, we currently have very limited product development
capabilities and no manufacturing, marketing or sales capabilities. For us to
research, develop and test our product candidates, we need to contract with
outside researches, in most cases with or through those parties that did the
original research and from whom we have licensed the technologies. If products
are successfully developed and approved for commercialization, then we will need
to enter into collaboration and other agreements with third parties to
manufacture and market our products. We may not be able to induce the third
parties to enter into these agreements, and, even if we are able to do so, the
terms of these agreements may not be favorable to us. Our inability to enter
into these agreements could delay or
17
preclude the development, manufacture and/or marketing of some of our product
candidates or could significantly increase the costs of doing so. In the future,
we may grant to our development partners rights to license and commercialize
pharmaceutical and related products developed under the agreements with them,
and these rights might limit our flexibility in considering alternatives for the
commercialization of these products. Furthermore, third-party manufacturers or
suppliers may not be able to meet our needs with respect to timing, quantity and
quality for the products.
Additionally, if we do not enter into relationships with third parties
for the marketing of our products, if and when they are approved and ready for
commercialization, we would have to build our own sales force. Development of an
effective sales force would require significant financial resources, time and
expertise. We may not be able to obtain the financing necessary to establish a
sales force in a timely or cost effective manner, if at all, and any sales force
we are able to establish may not be capable of generating demand for our product
candidates, if they are approved.
WE MAY SUFFER PRODUCT AND OTHER LIABILITY CLAIMS; WE MAINTAIN ONLY
LIMITED PRODUCT LIABILITY INSURANCE, WHICH MAY NOT BE SUFFICIENT.
The clinical testing, manufacture and sale of our products involves an
inherent risk that human subjects in clinical testing or consumers of our
products may suffer serious bodily injury or death due to side effects, allergic
reactions or other unintended negative reactions to our products. As a result,
product and other liability claims may be brought against us. We currently have
clinical trial and product liability insurance with limits of liability of $5
million, which may not be sufficient to cover our potential liabilities. Because
liability insurance is expensive and difficult to obtain, we may not be able to
maintain existing insurance or obtain additional liability insurance on
acceptable terms or with adequate coverage against potential liabilities.
Furthermore, if any claims are brought against us, even if we are fully covered
by insurance, we may suffer harm such as adverse publicity.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH OUR COMPETITORS IN THE
BIOTECHNOLOGY INDUSTRY.
The biotechnology industry is intensely competitive, subject to rapid
change and sensitive to new product introductions or enhancements. Virtually all
of our existing competitors have greater financial resources, larger technical
staffs, and larger research budgets than we have, as well as greater experience
in developing products and conducting clinical trials. Our competition is
particularly intense in the gastroenterology and transplant areas and is also
intense in the therapeutic area of inflammatory bowel disease. We face intense
competition in the area of biodefense from various public and private companies,
universities and governmental agencies, such as the U.S. Army may have their own
proprietary technologies which may directly compete with our technologies. In
addition, there may be other companies that are currently developing competitive
technologies and products or that may in the future develop technologies and
products that are comparable or superior to our technologies and products. We
may not be able to compete successfully with our existing and future
competitors.
WE MAY BE UNABLE TO COMMERCIALIZE OUR PRODUCTS IF WE ARE UNABLE TO
PROTECT OUR PROPRIETARY RIGHTS AND WE MAY BE LIABLE FOR SIGNIFICANT COSTS AND
DAMAGES IF WE FACE A CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD
PARTY.
Our success depends in part on our ability to obtain and maintain
patents, protect trade secrets and operate without infringing upon the
proprietary rights of others. For example, we currently hold the rights to a
patent for our Microvax(TM) technology in the field of mucosally and orally
administered vaccines. In the absence of patent and trade secret protection,
competitors may adversely affect our business by independently developing and
marketing substantially equivalent or superior products and
18
technology, possibly at lower prices. We could also incur substantial costs in
litigation and suffer diversion of attention of technical and management
personnel if we are required to defend ourselves in intellectual property
infringement suits brought by third parties, with or without merit, or if we are
required to initiate litigation against others to protect or assert our
intellectual property rights. Moreover, any such litigation may not be resolved
in our favor.
Although we have filed various patent applications covering the uses of
our product candidates, we may not be issued patents from the patent
applications already filed or from applications we may file in the future.
Moreover, the patent position of companies in the pharmaceutical industry
generally involves complex legal and factual questions, and recently has been
the subject of much litigation. Any patents we have obtained, or may obtain in
the future, may be challenged, invalidated or circumvented. To date, no
consistent policy has been developed in the United States Patent and Trademark
Office regarding the breadth of claims allowed in biotechnology patents.
In addition, because patent applications in the United States are
maintained in secrecy until patents issue, and because publication of
discoveries in the scientific or patent literature often lags behind actual
discoveries, we cannot be certain that we and our licensors are the first
creators of inventions covered by any licensed patent applications or patents or
that we or they are the first to file. The Patent and Trademark Office may
commence interference proceedings involving patents or patent applications, in
which the question of first inventorship is contested. Accordingly, the patents
owned or licensed to us may not be valid or may not afford us protection against
competitors with similar technology, and the patent applications licensed to us
may not result in the issuance of patents.
It is also possible that our patented technologies may infringe on
patents or other rights owned by others, licenses to which may not be available
to us. We are aware of at least one issued U.S. patent assigned to the U.S.
Government relating to one component of one of our vaccine candidates that we
may be required to license in order to commercialize those vaccine candidates.
We may not be successful in our efforts to obtain a license under such patent on
terms favorable to us, if at all. We may have to alter our products or
processes, pay licensing fees or cease activities altogether because of patent
rights of third parties.
In addition to the products for which we have patents or have filed
patent applications, we rely upon unpatented proprietary technology and may not
be able to meaningfully protect our rights with regard to that unpatented
proprietary technology. Furthermore, to the extent that consultants, key
employees or other third parties apply technological information developed by
them or by others to any of our proposed projects, disputes may arise as to the
proprietary rights to this information, which may not be resolved in our favor.
OUR BUSINESS COULD BE HARMED IF WE FAIL TO RETAIN OUR CURRENT PERSONNEL
OR IF THEY ARE UNABLE TO EFFECTIVELY RUN OUR BUSINESS.
We have only five employees: Dr. Ralph Ellison, our Chief Executive
Officer and President; Steve Kanzer, our Vice Chairman; William Milling, our
Controller, Treasurer and Corporate Secretary; Robert Brey, our Vice President
and Research and Development; and Robin Simuncek, our Clinical Project Manager
and Administrative Assistant. We depend upon these five employees to manage the
day-to-day activities of our business. Because we have such limited personnel,
the loss of any of them or our inability to attract and retain other qualified
employees in a timely manner would likely have a negative impact on our
operations. Furthermore, these few employees on whom our business depends have
very limited experience in managing and operating our business. Dr. Ellison was
hired in March 2003; Mr. Kanzer became our Vice Chairman in March, 2003; Mr.
Milling was hired in September 2002; and Mr. Brey was hired in December 2002. In
addition, Alexander Haig, our Chairman of the Board was
19
appointed in January 2003. Because of this inexperience in operating our
business, there is significant uncertainty as to how our management team will
perform. Furthermore, our management team may need to devote a significant
amount of time to learning about our business and its markets, which could limit
their effectiveness in managing our business for a period of time. We will not
be successful if this new management team cannot effectively manage and operate
our business.
WE HAVE CERTAIN RELATIONSHIPS THAT PRESENT CONFLICTS OF INTEREST.
Our Vice Chairman of the Board of Directors, Steve H. Kanzer, is
Chairman and Chief Executive Officer of Accredited Ventures, Inc., which in the
regular course of its business, identifies, evaluates and pursues investment
opportunities in biomedical and pharmaceutical products, technologies and
`companies. However, Accredited is under no obligation to make any additional
products or technologies available to us. Therefore, we may lose to Accredited
opportunities of which Mr. Kanzer is aware that would be beneficial to our
business. In addition, our officers and directors and officers or directors
appointed in the future may from time to time serve as officers, directors or
consultants of other biopharmaceutical or biotechnology companies and those
companies may have interests that conflict with our interests. As a result of
our recent management changes, which highlighted some of the actual and
potential conflicts, we have not yet developed policies to address the conflicts
of interest, but we plan to do so in the near future.
RISKS RELATED TO AN INVESTMENT IN OUR COMMON STOCK
OUR STOCK PRICE IS HIGHLY VOLATILE AND OUR STOCK IS THINLY TRADED.
The market price of our common stock, like that of many other
development stage public pharmaceutical and biotechnology companies, has been
highly volatile and may continue to be so in the future due to a wide variety of
factors, which include, actual or anticipated fluctuations in our results of
operations, announcements of innovations by us or our competitors, additions or
departures of key personnel or general market conditions. For example, when we
announced the we were entering the biodefense industry on January 6, 2003, our
stock price went from $0.58 per share to $1.05 per share in one day and has
fluctuated between $0.80 per share and $1.57 per share from that date through
March 28, 2003. From July 1, 2000 through December 31, 2002, the per share price
of our common stock ranged from a high of $9.44 per share to a low of $0.11 per
share, including a 2002 high of $2.10 per share and low of $0.11 per share. The
fluctuation in the price of our common stock has sometimes been unrelated or
disproportionate to our operating performance.
Since it commenced trading on the American Stock Exchange on August 6,
1998, our common stock has been thinly traded. The average trading volume for
our common stock has averaged approximately 33,716 shares per day from January
1, 2001 to March 25, 2003. The relatively illiquid market for our shares may
have an adverse effect on the market price for our shares and on stockholders'
ability to sell our common stock at the prevailing market price. A more active
trading market for our common stock may not develop.
OUR STOCK MAY NOT REMAIN LISTED ON THE AMERICAN STOCK EXCHANGE.
Because we continue to incur losses from continuing operations in
fiscal 2003, the stockholders' equity standard applicable to us of AMEX's
continued listing requirements will increase to $6 million for fiscal years
ending 2003 and beyond. Although not yet applicable, our net equity of $4.3
million as of December 31, 2002 would not allow it to meet these increased
requirements. If, for this reason or for any other reason, our stock were to be
delisted from the American Stock Exchange, we may not be able to list our common
stock on another national exchange or market. If our common stock is not listed
on a national exchange or market, the trading
20
national exchange or market, the trading market for our common stock may be even
more illiquid. Upon any such delisting, our common stock would become subject to
the penny stock rules of the SEC, which generally are applicable to equity
securities with a price of less than $5.00 per share, other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system. The penny
stock rules require a broker-dealer, before a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and
the nature and level of risks in the penny stock market. The broker-dealer also
must provide the customer with bid and ask quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, the penny stock rules require that, before
a transaction in a penny stock that is not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. As a result of these requirements, if our common
stock were to become subject to the penny stock rules it is likely that the
price of our common stock would decline and that our stockholders would find it
more difficult to sell their shares.
INVESTORS MAY SUFFER SUBSTANTIAL DILUTION.
We have a number of agreements or obligations that may result in
dilution to investors. These include:
- warrants to purchase a total of approximate 5.2 million shares of
our common stock at a current weighted average exercise price of
approximately $2.50.
- conversion rights and dividend rights of preferred stock,
consisting of 117,118 shares of Series B preferred stock ($8.0
million original liquidation value) bearing an 8% cumulative
payment-in-kind dividend and convertible at the liquidation value
into common stock at $7.38 per share;
- anti-dilution rights under the above warrants and preferred stock,
which can permit purchase of additional shares and/or lower
exercise/conversion prices under certain circumstances; and
- options to purchase approximately 6,077,042 shares of common stock
of a current weighted average exercise price of approximately
$0.95.
To the extent that anti-dilution rights are triggered, or warrants,
options or conversion rights are exercised, our stockholders will experience
substantial dilution and our stock price may decrease.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices and research and development center are located
in a leased facility of approximately 7,500 square feet in Lake Forest,
Illinois. The lease expires on December 31, 2003. We believe that our current
leased facilities are sufficient to meet our current and foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We did not submit any matters to a vote of the stockholders in the
fourth quarter of 2002.
22
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is traded on the American Stock Exchange under the
symbol "DOR." The table below sets forth the high and low sales prices, as
provided by the American Stock Exchange, for the period from January 1, 2001
through December 31, 2002. The amounts represent inter-dealer quotations without
adjustment for retail markup, markdowns or commissions and do not represent the
prices of actual transactions.
Price Range
-----------
Period High Low
------ ---- ---
Fiscal Year Ending December 31, 2001
First Quarter $1.75 $0.80
Second Quarter $1.30 $0.75
Third Quarter $1.40 $0.80
Fourth Quarter $1.10 $0.85
Fiscal Year Ending December 31, 2002
First Quarter $2.10 $0.95
Second Quarter $1.25 $0.25
Third Quarter $0.44 $0.11
Fourth Quarter $0.60 $0.35
As of March 1, 2003, we had approximately 1,100 registered stockholders
of record. We have never paid any cash dividends, and currently intend to retain
any earnings for use in our business and, therefore, do not anticipate paying
any cash dividends in the foreseeable future.
In December 2002, we completed a private placement in which we issued
and sold 3,093,569 shares of common stock, and warrants to purchase an
additional 1,546,789 shares. In this private placement we received total
proceeds of $1,082,750. The Warrants are exercisable for a period of 5 years at
$0.75 per share and are callable by us at $3.00 per share. Our net proceeds
after deducting commissions and expenses of Atlas Capital Services, LLC, which
acted as the placement agent for the private placement and Accredited Equities,
Inc., which acted as a dealer in connection with the private placement, were
approximately $290 thousand.
In connection with the 2002 private placement, we issued to the
placement agent and the dealer or their designees placement warrants allowing
the purchase of up to 397,169 shares of common stock at prices ranging from
$0.35 to $0.75 per share, until December 31, 2007. See "Item 12. -- Certain
Relationships and Related Transactions" in this Annual Report on Form 10-KSB.
We issued these securities in transactions exempt from registration
under the Securities Act of 1933 in reliance upon Rule 506 of Regulation D under
Section 4(2) of the Securities Act, as transactions not involving a public
offering. Each of the parties that acquired the securities represented to us
that it was an "accredited investor" under Rule 501(a) of Regulation D.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion and analysis provides information that we
believe is relevant to an assessment and understanding of our results of
operation and financial condition. You should read this
23
analysis in conjunction with our audited consolidated financial statements and
related note. This discussion and analysis contains statements of a
forward-looking nature relating to future events or our future financial
performance. These statements are only predictions, and actual events or results
may differ materially. In evaluating such statements, you should carefully
consider the various factors identified in this report which could cause actual
results to differ materially from those expressed in, or implied by, any
forward-looking statements, including those set forth in "Item 1. Business--Risk
Factors" in this Annual Report on Form 10-KSB. See "Item 1. Business--Cautionary
Note Regarding Forward-Looking Statements."
PLAN OF OPERATION
During 2002, we made significant progress in the development of several
of the company's core delivery technologies for both biotherapeutic drugs and
vaccines. During the first half of 2002, we continued development of several our
novel drug delivery platform technologies that are distinct and can be used for
the oral delivery of large molecule drugs and water-insoluble drugs. Both these
classes of drugs under today's delivery methods are absorbed poorly, if at all,
from the gastrointestinal tract. During 2002, we filed additional patents to
reinforce the filings initiated during 2001. We completed preclinical oral
absorption studies in dogs and identified a lead oral formulation for future
clinical evaluation of leuprolide, a drug used for the treatment of prostate
cancer in men and endometriosis in women. Currently, our plans are to seek
corporate partnerships to complete the preclinical toxicology and initiate human
clinical trials with the lead leuprolide formulation. We believe that the
current oral bioavailability data with leuprolide is extremely promising and
will be substantiated in human clinical trials.
In June of 2002, we implemented a restructuring plan in which we
significantly reduced our headcount and capital expenditures relating to early
stage product opportunities. In October 2002, we acquired our former joint
venture, Innovaccines Corporation from Elan Pharmaceuticals, Plc., and we
refocused our resources on our near-term product opportunities, such as orBec(R)
and our Microvax(TM) delivery system. In September 2002, we announced our intent
to develop the Microvax(TM) delivery system in conjunction with novel vaccines
to be used to combat biological agents listed by the Center for Disease control
as among the highest bioterrorism threats. We believe that significant
opportunities exist for the Microvax(TM) technology in the development of
vaccines for agents that can be used as weapons of bioterrorism or biowarfare.
We are developing an oral therapeutic product, orBec(R) (oral
beclomethasone diproprionate), a dual tablet formulation for the treatment of
intestinal graft-vs.-host disease, a life threatening complication associated
with bone marrow transplantation. Beclomethasone diproprionate is an off-patent
drug which has been previously approved by the FDA and sold as Beconase(R) by
GlaxoSmithkline only in an inhaled and nasal formulation for the treatment of
asthma, allergic rhinitis and nasal polyposis. Worldwide sales of Beconase(R)
and inhaled beclomethasone diproprionate make it one of the top selling drugs
for the treatment and prevention of asthma. The Phase III trial for orBec(R) has
enrolled more than half of the 130 patients needed to complete the trial. We
anticipate that the trial will be fully enrolled by the end of 2003 and that a
new drug application can be filed with the FDA soon thereafter, pending
favorable results. We are simultaneously testing orBec(TM) for its potential to
be used in other indications such as irritable bowel syndrome and plan to file
investigational new drug applications with the FDA during 2003 in other patient
populations where orBec(TM) has shown to be effective in corresponding
preclinical studies.
By identifying and acquiring the most advanced research available and
collaborating with the inventors for further research and formulation work, we
plan to develop several of our biodefense vaccines during 2003. We have
identified and are in the process of licensing intellectual property rights to a
ricin vaccine candidate developed at the University of Texas Southwest Medical
Center. We believe
24
that this candidate is the best technology for a ricin vaccine, since it
consists of a non-toxic, safe, genetically engineered derivative of ricin toxin
that has been shown to elicit effective immune responses in mice. Ricin is
potentially deadly biological agent that has been recently found in London and
Paris and is one of the agents that can be used in bioterrorism attacks. Based
on promising preclinical results, we have begun a development program to
manufacture and test an investigational stockpile of this ricin vaccine. We have
submitted several grant applications to the National Institutes of Health in
November and December 2002 and in January 2003 to help fund our efforts in the
producing a form of this vaccine that can be taken by inhalation through the
nose. Separately, we are seeking funding for the development of ricin vaccine
under the pending Project Bioshield Act of 2003. We are initially planning to
produce an injectable form of this vaccine to demonstrate safety and
immunogenicity in a small clinical trial and concurrently are developing the
candidate using the Microvax(TM) delivery technology for a nasal vaccination.
Investigators at Fort Detrick who demonstrated that nasal vaccination with
another ricin vaccine candidate is feasible have used the Microvax(TM) delivery
technology. We plan to use subcontractors for the scale-up and manufacture of
the ricin vaccine antigen, which the part of ricin toxin that induces immunity,
and for the manufacturer of Microvax(TM) formulations. We are also currently
planning to utilize a nasal delivery device in conjunction with the clinical
testing of the nasal form of ricin vaccine. We believe that the best vaccine
against possible ricin intoxication will be one that stimulates immunity in the
lungs and the gastrointestinal tract, since it will likely protect tissues
against direct damage by ricin.
During 2003, we are also planning to develop a vaccine to protect
against botulinum toxin poisoning. Botulinum is the most potent biological toxin
known to man and is classified by the Center for Disease Control as one of the
highest threats for bioterrorism. The current vaccine consists of a mixture of
different types of detoxified botulinum toxins and lacks substantial efficacy.
Only limited and experimental quantities of this particular vaccine are
available. In February 2003, we entered into a letter of intent to licensing and
sponsored research and development arrangements with Thomas Jefferson University
for the development of oral botulinum vaccines. The technology relies on
genetically engineered and non-toxic fragments of botulinum toxin, which retain
the capacity to penetrate mucosal tissues and induce antibodies in the
bloodstream that inactivate native botulinum toxin and protect against
intoxication. We are planning to develop three candidate antigens, which are the
part of botulinum that induces immunity, relating to types A, B, and E botulinum
toxins. These are the most potent forms of botulinum toxins and are the ones
that we believe could have the most impact as agents of bioterrorism.
We are developing the Microvax (TM) system in conjunction with the
nasal ricin vaccine and also a novel vaccine for anthrax, using a non-live
subunit of the anthrax bacterium. The Microvax(TM) vaccine delivery system is a
technology based on over ten years of research and development, which has been
shown by many independent investigators to be effective in enhancing surface,
cellular and systemic immune responses with numerous vaccines and therapeutic
drugs. Vaccines can be entrapped within the microspheres composed of
biodegradable polymers, as well as attached to the particle surface. Vaccines
delivered by the oral and nasal routes of delivery avoid the need for needles or
the use of live viruses or bacterium. Unlike injected vaccines, Microvax(TM)
vaccines have been shown to provide protection in the lungs and gastrointestinal
tract, the body's first line of defense against potential bioterror agents, thus
making them well suited as biodefense vaccines. We have acquired exclusive
license to the technology for the development of orally and nasally administered
vaccines from the Southern Research Institute and the University of Alabama. The
Microvax(TM) technology is the subject of six patents issued in the US, two
patents issued in Europe and equivalents in other countries.
We are developing a vaccine against anthrax utilizing the Microvax(TM)
system that can be administered orally or nasally utilizing a non-live subunit
of anthrax, the protective part of anthrax that is the principal component of
the licensed anthrax vaccine. Anthrax is considered by the Center for Disease
Control as one of the highest threats for bioterrorism. The current vaccine is
associated with undesirable
25
side effects and has to be administered by injections in six doses. We believe
that an orally or nasally administered vaccine will be safer and elicit
protective antibodies in the lungs, which could neutralize spores and prevent
their transfer into the rest of the body. Recently, a prototype Microvax(TM)-PA
vaccine has been evaluated and been shown to elicit protection in mice after two
doses of an nasally administered vaccine. We are developing further prototypes
of Microvax(TM) with a non-live subunit of anthrax and consider our current
candidates to be the leading ones for the next generation of anthrax vaccines
that could be self-administered with fewer doses than the current injected
vaccines. We have recently signed a letter of intent to license patent
applications and technology that we think will complement the Microvax(TM)
technology for the development of select nasal vaccines. Our intranasal anthrax
vaccine demonstrated that an experimental microencapsulated nasally delivered
anthrax vaccine was capable of protecting 100% of animals against lethal
challenge to anthrax spores with only two doses of the vaccine. We are currently
negotiating under a binding letter of intent to collaborate with investigators
are involved in developing vaccines and therapies for select agents. Using an
nasal microparticle system, including some enhancements such as binding the
vaccine to the outer shell of the microcapsules, researchers demonstrated that
an nasally delivered anthrax vaccine was capable of protecting 100% of animals
against lethal challenge to anthrax spores with only two doses of the vaccine.
In June 2002, the FDA eased regulatory requirements for certain new
drug and biological products, including ricin, anthrax, and botulinum vaccines,
that can be used to reduce or prevent the toxicity of chemical, biological
radiological or nuclear substances. They may be approved for use in humans based
on evidence of effectiveness derived only from appropriate animal studies and
any additional supporting data. More recently, on January 28, 2003, President
Bush announced a proposal, now introduced to Congress as the Project BioShield
Act of 2003, for a $6 billion initiative to stimulate the private sector to
rapidly contract, manufacture, develop, stockpile and make available new
advanced bioterror countermeasures on behalf of the U.S. Government. As a result
of these proposals, we believe we may have products available for delivery to
the Center for Disease Control's Strategic National Stockpile and ready for
investigational use and initial payment within 18 months. As proposed by the
Project BioShield Act of 2003, upon subsequent FDA licensure of any delivered
investigational vaccines, if we enter into government contracts resulting to the
vaccines, we would become eligible for additional premium product pricing.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
expense, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate these estimates. Currently, the most significant
estimate or judgment that we make is whether or not to capitalize or expense
patent and license costs. We make this judgment based on whether the technology
has alternative future uses, as defined in SFAS 2, "Accounting for Research and
Development Costs". Accordingly, we capitalized all outside legal and filing
costs incurred in the procurement and defense of patents, as well as amounts
paid to Southern Research Institute and Elan allowing us to increase the range
of our license on the Southern Research patents.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
We are a development stage company and to date have not generated any
material revenues from operating activities. Although our product portfolio
includes a phase III drug that we believe may be
26
attractive to potential pharmaceutical partners, we have no active discussions
under way with any such potential partners.
For the 12 months ended December 31, 2002, we had a net loss applicable
to common stockholders of $6,422,466 as compared to a $16,117,676 net loss
applicable to common stockholders for the 12 months ended December 31, 2001, a
decrease of $9,695,210, or 60.0%. Net loss applicable to common stockholders
included the impact of preferred stock dividends, which totaled $1,456,385 in
2002, as compared to $1,486,501 in 2001. The small decrease in preferred stock
dividends was due to the conversion of Series C preferred stock to common stock
in November 2002.
Results for 2001 reflected a $10,181,000 non-recurring expense for the
write-off of acquired in-process research and development costs associated with
the merger with CTD in November 2001. See note 5 in the Notes to Consolidated
Financial Statements in this Annual Report on Form 10-KSB.
The 2002 results reflect a continued shift of research and development
activities from joint venture R&D to in-house proprietary R&D activities through
the first six months of the year. During the first six months of the year, our
R&D spending increased by $1,072,495 as compared to the first half of 2001. This
increase was intended to accelerate the development of our pre-clinical drug
delivery activities. However, during the second half of 2002 our R&D spending
decreased by $599,803 as compared to the second half of 2001. This decrease is a
result of our restructuring June 2002, in which, we laid off our entire research
staff. Almost All R&D spending in the last half of the year is for our orBec(TM)
trial. This led to an overall, increase in R&D expense of $472,692 or 19% to
$2,943,493 in 2002 from $2,470,801 in 2002. Based on our current business model
applied in the restructuring, we anticipate that our R&D expenditures will
continue at a level much closer to that incurred in the last half of 2002.
General and administrative expenses for the 12 months ended December
31, 2002 were $2,988,020 as compared to $1,973,455 for the 12 months ended
December 31, 2001, an increase of $1,014,565, or 51.4% The majority of this
difference was due to increased administrative spending, including salaries,
travel and consultants in the first six months of the year, as well as
professional fees related to defense of the stockholder initiated consent
solicitation in May and severance charges related to the restructuring. This
restructuring reduced our general and administrative headcount from eleven
people to two, therefore our General and Administrative spending was greatly
diminished in the last half of the year, going from $2,058,646 in the first six
months of 2002 to 929,374 in the last half of 2002. We expect our 2002 general
and administrative expenses to be at a level much closer to that incurred in the
last half of 2002.
Equity in earnings/(losses) from joint ventures, representing our two
joint venture operations with Elan, for the 12 months ended December 31, 2002
was a gain of $868,859 as compared to a loss of $401,699 for the same period in
2001, an increase of approximately $1,270,528. The earnings were mostly a result
of a closing out the joint ventures, causing a reduction in our liability to the
joint venture, in addition to incurring no additional expenses. As the joint
ventures are now closed out, we do expect to have any earnings or losses in this
category in 2003.
Interest income for the 12 months ended December 31, 2002 was $105,676
as compared to $424,032 for the 12 months ended December 31, 2001, a decrease of
$318,356 or 75.1%. This decrease was primarily due to the reduction in the cash
balance available for investment and the sharp reduction in interest rates
during 2002.
27
FINANCIAL CONDITION
As of December 31, 2002 we had cash, cash equivalents and marketable
securities of $4,147,164 as compared to $9,942,053 as of December 31, 2001 and
working capital of $3,046,775 as compared to $6,766,704 as of December 31, 2001.
For the 12 months ended December 31, 2002, our cash used in operating activities
or "net cash burn," was approximately $6 million, which we believe will be
substantially lower in 2002 due to the decrease in personnel, and overhead that
occurred in the June 2002 restructuring.
The following table summarizes our expected expenditures under existing
product development agreements and license agreements we expect to enter into
pursuant to letters of intent and option agreements:
2003 EXPENDITURES*
LICENSOR DESCRIPTION 2ND QUARTER 3RD QUARTER 4TH QUARTER TOTAL
Thomas Jefferson University License fee $ 30,000 $ $ $ 30,000
(1,2)
Thomas Jefferson University (2) Sponsored research 75,000 75,000 75,000 225,000
Ministry of Defense (3,2) License fee 100,000 -- -- 100,000
Ministry of Defense (2) Sponsored research 25,000 25,000 25,000 75,000
University of Texas (2) License fee 100,000 -- -- 110,000
Southern Research Institute License fee 175,000 -- -- 175,000
(4,2)
Southern Research Institute (2) Sponsored research 250,000 -- -- 250,000
Southern Research Institute (2) Scientific advisory fee 12,500 12,500 12,500 37,500
Southern Research Institute (5) Royalty 320,000 320,000
--------- --------- --------- -----------
TOTAL $ 777,500 $ 112,500 $ 432,500 $ 1,322,500
========= ========= ========= ===========
* There are no expenditures for licenses in the first quarter.
(1) We paid a $10,000 non-refundable fee in February 2003 for a binding
letter of intent.
(2) Contract is currently proposed and changes may take place before
being finalized.
(3) We paid a $25,000 non-refundable fee in January 2003 for a binding
letter of intent.
(4) We paid a $175,000 non-refundable fee in December 2002 as a down
payment for the agreement.
(5) The current contract calls for a $140,000 dollar payment in
December; the remaining amount would be payable is under a proposed
new contract
In 2002 we spent approximately $1.2 million on orBec(R), in 2003 we
anticipate spending an additional $452,000 and approximately $1 million after
2003. We also spent $330,000 in 2002 on our current and proposed license
agreements, however since these are either new or not finalized, we do not have
a reliable estimate as to the future costs, beyond the table shown above.
As of December 31, 2002, we have a total of $579,742 as a liability,
which represents the entire remaining amounts payable in connection with our
Newco and Innovaccines joint ventures. We are required to make payments of
$231,897 in June 2003, $231,897 in June 2004 and $115,948 in December 2004. Both
Newco and InnoVaccines have been closed, and we acquired all rights and property
in InnoVaccines in exchange for 500,000 shares of our stock valued at $250,000.
28
The following summarizes our contractual obligations at December 31,
2002, not including the product development and license related amounts
reflected in the table above, and the effect those obligations are expected to
have on our liquidity and cash flow in future periods.
CONTRACTUAL OBLIGATIONS (1) TOTAL 2003 2004
Non-cancelable operating lease obligations $ 62,978 $ 62,978 $ --
Debt (2) 729,967 377,151 352,816
-------- -------- ---------
Total contractual obligations $792,945 $440,129 $352,816
======== ======== ========
(1) None of these contractual obligations extend beyond 2004.
(2) Debt consists of payments due to Elan as part of the dissolution of
the joint ventures, and the final year of a bank loan used to
purchase equipment in 2001.
We supplemented our cash position in December with a private placement
netting approximately $970 thousand after placement fees and expenses. The
shares were offered at $0.35 each with 0.5 warrants attached to each share,
where 1 warrant equals the right to buy one share of common stock at a price of
$0.75. We believe our current cash position of $4,147,164 will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures for
at least the next 12 months. However, within this period, possibly in the very
near term, we may decide to seek additional capital in the private and/or public
equity markets to support a higher level of growth, to respond to competitive
pressures, to develop new products and services and to support new strategic
partnership expenditures. After that 12-month period, if cash generated from
operations are insufficient to satisfy our liquidity requirements, we may need
to raise additional funds through public or private financing, strategic
relationships or other arrangements. If we receive additional funds through the
issuance of equity securities, stockholders may experience significant dilution
and these equity securities may have rights, preferences or privileges senior to
those of our common stock. Further, we may not be able to obtain additional
financing when needed or on terms favorable to our stockholders or us. If we are
unable to obtain additional financing when needed, or to do so on acceptable
terms, we may be unable to develop our products, take advantage of business
opportunities or respond to competitive pressures.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements listed in Part III Item 13, with the reports
of independent accountants, are included in this Form 10-KSB on pages F-1, et
seq.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
In June, 2002, following an aborted attempt by Mr. Kanzer to remove
certain directors and replace them with his own nominees, we completed a
restructuring of our operations. In connection with that restructuring, Dr.
Colin Bier, who was then serving as our Chairman and Chief Executive Officer,
and Michael Rosen, who was serving as our President and Chief Operating Office
and as a director, resigned their positions. In addition, the employment of our
other executive officers terminated, and a number of the other members of our
Board of Directors resigned. Steve H. Kanzer, currently our Vice
29
Chairman of the Board, served, without additional consideration, as our Interim
President from June 30, 2002 through January 4, 2003. David Kent then served as
of Chief Executive Officer and President from January 4, 2003 through March 15,
2003, when he was replaced by Dr. Ralph Ellison, our current Chief Executive
Officer and President. The following table contains information regarding the
current members of the Board of Directors and executive officers of the Company:
NAME AGE POSITION DIRECTOR SINCE
General Alexander M. Haig, Jr. 76 Chairman of the Board 2002
Steve H. Kanzer, CPA., Esq. 39 Vice Chairman of the Board 1996
Ralph M. Ellison, M.D., M.B.A. 41 Chief Executive Officer and President --
Robert N. Brey, Ph.D. 50 Vice President, Research and Development --
William Milling, CPA 36 Controller, Secretary and Treasurer --
Larry J. Kessel, M.D. 48 Director 2002
Arthur Asher Kornbluth, M.D. 42 Director 2002
Evan Myrianthoupoulos 38 Director 2002
Paul Rubin, M.D. 49 Director 1997
Peter Salomon, M.D., FACG 43 Director 2002
ALEXANDER M. HAIG, JR., Chairman of the Board
Mr. Haig currently serves as our non-employee Chairman of the Board.
Since 1984, Mr. Haig has been Chairman and President of Worldwide Associates,
Inc., a Washington D.C. based international advisory firm. He served as
Secretary of State (1981-82), President and Chief Operating Officer of United
Technologies Corporation (1978-81),and Supreme Allied Commander in Europe
(1974-79). Before that, he was White House Chief of Staff, Vice Chief of Staff,
Vice Chief of Staff of the U.S. Army, and Deputy National Security Advisor. Mr.
Haig currently serves on the Board of Directors of MGM Mirage, Inc.; Indevus
Pharmaceuticals, Inc.; SDC International, Inc.; and Metro-Goldwyn_Mayer, Inc. He
is also the host of his own weekly television program, "World Business Review".
Mr. Haig is also a consultant to the company.
STEVE H. KANZER, CPA., ESQ., Vice Chairman of the Board
Mr. Kanzer currently serves as our non-employee Vice Chairman after
having served as our Interim President from June 30, 2002 through January 4,
2003 and a member of the board of directors since 1996. He was a co-founder of
Paramount Capital, Inc. in 1991 and served as Senior Managing Director - Head of
Venture Capital of Paramount Capital until December 2000. While at Paramount
Capital, Mr. Kanzer was involved in the formation and financing of numerous
biotechnology companies, including us and Corporate Technology Development, Inc.
Mr. Kanzer was Chief Executive Officer of CTD from 1997 until its acquisition by
us in November 2001. Since December 2000, he has served as Chairman of
Accredited Ventures Inc. and Accredited Equities Inc., respectively, a venture
capital and NASD member firm specializing in the biotechnology industry. He also
serves as President of several private biotechnology companies. From 1997 until
December 2000, Mr. Kanzer was founding President of PolaRx Biopharmaceuticals,
Inc., a privately held pharmaceutical company developing arensic trioxide as a
treatment for acute leukemia. PolaRx was subsequently acquired by Cell
Therapeutics, Inc., a public biotechnology company, which currently markets
arsenic trioxide under the name Trisenox(R). From 1995
30
until June 1999, Mr. Kanzer was a founder and Chairman of Discovery
Laboratories, Inc., a public biotechnology company.
RALPH M. ELLISON, M.D., M.B.A., Chief Executive Officer and President
Dr. Ellison became our Chief Executive Officer and President in January
2003. He was a co-founder, Chief Executive Officer and Director of PolaRx
Biopharmaceuticals, Inc., an oncology focused drug development company that
developed Trisenox(R) (arsenic trioxide) for the treatment of cancer. Following
the successful completion of PolaRx's pivotal phase III clinical trial, PolaRx
was acquired by Cell Therapeutics, Inc., a public biopharmaceutical company
based in Seattle, Washington. During his tenure as the Chief Executive Officer
of PolaRx, Dr. Ellison was responsible for all aspects of PolaRx's drug
development program from IND filing through the end of phase III testing.
Trisenox(R) currently holds the record as the fastest drug developed and
approved the FDA. Dr. Ellison then worked closely with Cell Therapeutics during
the preparation and filing of the new drug application for Trisenox(R), which
was ultimately approved by the FDA for the treatment of relapsed acute
promyelocytic leukemia (APL), a life-threatening cancer of the blood.
Trisenox(R) is currently in clinical trials to treat more than 10 types of
cancer, including multiple myeloma, myelodysplasia and chronic myeloid leukemia.
Before to founding PolaRx, Dr. Ellison started and ran a contract research
organization, which was a division of RTL, INC., a drug testing facility based
in New York. At RTL he spent five years designing, implementing and completing
clinical trials for both large and small pharmaceutical companies. Dr. Ellison's
experience includes the development of anticancer compounds, antifungals,
analgesics, anti-inflammatories, antibiotics and drug delivery systems Dr.
Ellison holds a degree of Doctor of Medicine from the University of the
Witwatersrand in South Africa and a Masters of Business Administration from the
University of Cape Town South Africa.
ROBERT N. BREY, PH.D., Vice President, Research and Development
Since 1996, Dr. Brey has held various positions within our company,
including Vice President, Vaccine Development and Vice President, Research and
Development, as well as principal vaccine consultant. He also has held
scientific, management and project management positions in the Lederle-Praxis
division of American Cyanamid, now a division of Wyeth, which has developed a
commercially successful vaccine for Haemophilius influenzae meningitis, and a
vaccine for pneumonia. While at Lederle-Praxis, Dr. Brey was manager of
Molecular Biology research for vaccines and project manager for development of
oral vaccines from 1985 through 1993, including projects for non-typable
Haemophilus, Salmonella, B. pertussis and malaria. From 1993 through 1994, Dr.
Brey served as director of research and development of Vaxcel, a company formed
to exploit adjuvant technology and formulations for improved vaccines. From 1994
through 1996, Dr. Brey established an independent consulting group, Vaccine
Design Group, to identify and develop novel vaccine technologies and platforms.
From 1996 through 1998, in addition to serving as our Vice President, he served
as Corporate Vice President of InnoVaccines Corporation, our joint venture with
Elan Pharmaceutical Technologies. Before entering into drug and vaccine
delivery, he held senior scientific positions at Genex Corporation from 1982
through 1986, one of the first biotechnology companies formed to exploit genetic
engineering. He has been instrumental in the development of several commercial
human vaccines, including HibTiter and pediatric combinations. Dr. Brey received
an undergraduate degree in biology from Trinity College in Hartford,
Connecticut, his Ph.D. in microbiology from the University of Virginia and
performed postdoctoral studies at MIT with Nobel laureate Salvador Luria. Dr.
Brey is an inventor or co-inventor of 10 U.S. several patents in the area of
vaccines. He is currently editing several theme issues of Advanced Drug Delivery
Review on the topic of biodefense vaccines.
31
WILLIAM MILLING, CPA, Controller, Treasurer and Secretary
Before joining DOR BioPharma in September 2002, Mr. Milling spent six
years with CCH, a legal publishing company, in various positions in the finance
area. His final position was that of Accounting Administrator where he worked
with integrating acquired companies and setting up new policies and corporate
structures. He also spent two years at Northwestern Memorial Hospital working in
the finance area associated with construction of their new $800 million
hospital. Mr. Milling graduated from Eastern Illinois University and passed the
CPA examination in Illinois.
LARRY J. KESSEL, M.D., Director
Dr. Kessel is president of a five physician practice specializing in
Internal Medicine and Geriatrics since 1984. He graduated Magna Cum Laude with a
B.S. degree from the University of Pittsburgh as an honors major in Biology and
subsequently graduated with an MD degree from Temple Medical School. He
completed a formal residency in Internal Medicine at Abington Memorial Hospital,
and is board certified in Internal Medicine with added qualifications as a
diplomat in Geriatric Medicine. He is an active staff attending and Clinical
Instructor at Chestnut Hill Hospital (University of Pennsylvania affiliate) and
Roxborough Memorial Hospital in Philadelphia Pennsylvania. Dr Kessel is a Board
Reviewer for the American Board of Internal Medicine, as well as a fellow of the
American College of Physicians. He also serves on the advisory board of
Independence Blue Cross. Dr. Kessel Presently serves as a director to Cypress
Biosciences, Inc of San Diego, California, NovaDel Pharma Inc., of Flemington,
New Jersey. He previously served on the Board of Genta Inc.
ARTHUR ASHER KORNBLUTH, M.D., Director
Dr. Kornbluth is a Board Certified Gastroenterologist and Associate
Clinical Professor of Medicine at Mount Sinai Medical Center and School of
Medicine in New York City, an internationally recognized leading center in the
clinical research and management of inflammatory bowel disease. Dr. Kornbluth is
an active clinical investigator and practicing clinician with a large practice
specializing in the management of patients with complex inflammatory bowel
disease. He has published extensively in peer-reviewed journals regarding the
pharmacologic and biologic treatments of inflammatory bowel disease. He is the
author of several book chapters regarding the diagnosis and management of
inflammatory bowel disease. He is the principal author of the American College
of Gastroenterology's "Ulcerative Colitis Practice Guidelines in Adults." He has
taught and lectured extensively throughout the United States and has received
numerous awards as a medical educator. Dr. Kornbluth received his undergraduate
degree from Brooklyn College and his medical degree from Downstate Medical
Center. He completed his postgraduate training in internal medicine at the
Albert Einstein College of Medicine where he was chosen as chief medical
resident. He performed his gastroenterology fellowship at the Mount Sinai
Medical Center in New York City. He is a member of the American Gastroenterology
Association, the American College of Gastroenterology, the Alpha Omega Alpha
Honor Medical Society for which he was selected as both an educator and
clinician at the Mount Sinai School of Medicine. He is a member of the Crohn's
and Colitis Foundation of America and is a member of the that foundation's
Clinical Research Alliance, has served on their Clinical Trials Protocol Review
Committee and currently serves on the Clinical Research Agenda Task Force.
EVAN MYRIANTHOPOULOS, Director
Mr. Myrianthopoulos is currently the President of CVL Advisors, LLC, a
financial consulting firm he founded that specializes in the biotechnology
sector. Before founding CVL Advisors, Mr. Myrianthopoulos was a co-founder of
Discovery Laboratories, Inc., a public specialty pharmaceutical company
developing respiratory therapies. While at Discovery, Mr. Myrianthopoulos held
the positions
32
of Chief Financial Officer and Vice President of Finance. Before co-founding
Discovery, Mr. Myrianthopoulos was a Technology Associate at Paramount Capital
Investments, L.L.C., a New York City based biotechnology venture capital and
investment banking firm.
PAUL RUBIN, M.D., Director
Dr. Rubin is a member of the board of DOR BioPharma, Inc. and has
served as a member of the board of directors of the Company since November 1997.
Dr. Rubin is currently the Chief Executive Officer and President of Critical
Therapeutics, Inc. Before joining Critical Therapeutics, he was Executive Vice
President for Drug Development at Sepracor, Inc., having been the Senior Vice
President since 1996. He was responsible for managing research and development
programs for Sepracor's improved chemical entities portfolio, which includes the
management of Discovery Research, Regulatory, Clinical, Preclinical, and Project
Management teams. Dr. Rubin has also played a key role in the evaluation of
external technology and licensing opportunities. From 1993 to 1996, Dr. Rubin
was the Vice President and Worldwide Director of Early Clinical Development and
Clinical Pharmacology at Glaxo Wellcome. Before joining Glaxo, Dr. Rubin held
various executive research positions at Abbott Laboratories. Dr. Rubin received
his M.D. from Rush Medical College in Chicago and completed his residency in
Internal Medicine at the University of Wisconsin Hospitals and clinics in
Madison, Wisconsin.
PETER SALOMON, M.D., F,A.C.G., Director
Dr. Salomon is a Board Certified gastroenterologist and has been in
private practice with Gastroenterology Associates of South Florida for the last
11 years. An active clinical researcher in the treatment of Crohn's disease, Dr.
Salomon has had several thousand patients suffering from inflammatory bowel
disease. Dr. Salomon has authored numerous peer-reviewed publications on the
subject of Crohn's disease and is co-author of the chapter of a leading
gastroenterology textbook, Sleisinger & Fordtran's, Gastrointestinal & Liver
Diseases. Dr. Salomon received his undergraduate degree from New York University
in 1981 and his Medical Degree from New York University in 1985. Dr. Salomon
received his training in Internal Medicine and Gastroenterology at The Mount
Sinai Hospital in New York, where he also held a grant from the Crohn's and
Colitis Foundation to perform research in inflammatory bowel disease. Dr.
Salomon has previously been a member of the Board of Directors of Genta Inc. and
PolaRx and has been a scientific advisor to Cypress Biosciences Inc.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
We are required to identify each person who was an officer, director or
beneficial owner of more than 10% of its registered equity securities during its
most recent fiscal year and who failed to file on a timely basis reports
required by Section 16(a) of the Securities Exchange Act of 1934. Based solely
on our review of the copies of such reports received by us, and representatives
from certain reporting persons, we believe, that during the year ended December
31, 2002, our directors, executive officers and beneficial owners of more than
10% of our capital stock have complied with all such filing requirements
applicable to them, except that: (a) William Milling filed one late Form 3 and
one late Form 4 reporting one transaction; (b) Steve Kanzer filed one late Form
4 reporting one transaction; (c) Peter Salomon filed one late Form 4 reporting
one transaction; (d) Paul Rubin filed one late Form 4 reporting one transaction;
(e) Larry Kessel filed one late Form 4 reporting one transaction and (f) Arthur
Asher Kornbluth filed one late Form 4 reporting one transaction.
33
ITEM 10. EXECUTIVE COMPENSATION.
The following table contains information concerning the compensation
paid during the Company's fiscal years ended December 31, 2000, 2001 and 2002,
to the two persons who served as our Chief Executive Officers during 2002, and
the two other most highly compensated (based on combined salary and bonus)
persons who served as executive officers during the year exceeded $100,000 for
the year (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
SECURITIES ALL OTHER
UNDERLYING COMPENSATION($)
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS (5)
Steve H. Kanzer 2002 -- -- 250,000 --
Interim President (3) 2001 -- -- -- --
2000 -- -- -- --
Colin Bier, Ph.D 2002 $103,124 $ 47,948 -- $152,066
Former Chairman & CEO(1) 2001 $ 24,863 -- 700,000 --
2000 -- -- -- --
Michael S. Rosen 2002 $116,691 $ 25,000 -- $266,050
Former President & COO (2) 2001 $254,600 $ 25,000 160,000 --
2000 $249,600 $ 25,000 -- --
Panos Constantides(4) 2002 $ 90,099 $ 39,000 -- $114,646
Former Vice President Research and Development 2001 $163,000 -- 60,000 --
2000 -- -- -- --
----------
(1) Dr. Bier joined our company in November 2001 and resigned from the Company
on June 30, 2002.
(2) Mr. Rosen resigned from our company on June 30, 2002.
(3) Mr. Kanzer assumed the role of Interim President from June 31, 2002 through
January 4, 2003 for no compensation. Mr. Kanzer received 250,000 options in
connection with his role as a director.
(4) Mr. Constananides joined our company in February of 2001, and left in July
2002.
(5) All other compensation consists solely of severance payments and
obligations to pay.
The following table contains information concerning options granted to
the Named Executive Officers during the fiscal year ended December 31, 2002. No
SARs were granted during 2002.
34
OPTION GRANTS IN LAST FISCAL YEAR
PERCENTAGE OF TOTAL EXERCISE EXPIRATION
NUMBER OF OPTIONS GRANTED TO PRICE DATE
SECURITIES UNDERLYING EMPLOYEES ($/SHARE)
OPTIONS GRANTED (#) IN FISCAL YEAR(1) (2)
Steve Kanzer(3) 250,000 30.5% $ 0.20 10/23/12
Colin Bier -- -- -- --
Michael S. Rosen -- -- -- --
Panos P. Constantinides(4) 30,000 0.8% $ 1.29 10/31/02
----------
(1) Based on options to purchase an aggregate of 821,000 shares of our common
stock granted to employees and non-employee board members in the fiscal
year ended December 31, 2002, including all options granted to the Named
Executive Officers in all capacities.
(2) The exercise price of each grant is equal to the fair market value of the
Company, Inc.'s common stock on the date of the grant.
(3) Mr. Kanzer's options were fully vested on the date of grant
(4) Mr. Constantinides' options are for his services to the Company in all
capacities and were granted in 2002 and expired on October 31,2002, 90 days
after the termination of his employment.
The following table contains information concerning stock options held
as of December 31, 2002 by each of the Named Executive Officers: None of the
Named Executive Officers exercised any options during 2002. There were no SARs
exercised in, or outstanding at the end of, 2002.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/02 (#) AT 12/31/02 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
------------------------------------ ------------------------- -------------------------
Steve Kanzer 666,800/-- 50,000/--
Colin Bier 213,572/-- --/--
Michael S. Rosen 835,000/-- --/--
Panos P. Constantinides --/-- --/--
------------
(1) Based on the difference between the closing price on December 31, 2002 of
$0.47, as reported on the American Stock Exchange, and the exercise price
of outstanding options.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Following the implementation of our restructuring plan, the Company
entered into Separation Agreements and General Release Agreements with Dr. Colin
Bier, our former Chairman and Chief Executive Officer, and Michael S. Rosen, our
former President and Chief Operating Officer. Pursuant to these agreements, our
former executives were to receive six month's severance and any options to
purchase our Common Stock, that were vested at the time of termination, for one
year following the execution of their agreements. In the event that these
executives did not obtain other employment with a pay rate at least as much as
they had been receiving from us, they were entitled to receive an additional
severance beginning six months after termination and paid bi-monthly for six
months.
On September 20, 2002, the Company entered into a letter agreement with
William Milling, CPA, our Controller, Secretary and Treasurer. Under this
agreement, we agreed to pay Mr. Milling a base salary of $95,000 per year and we
granted Mr. Milling options to purchase 200,000 shares of our common stock
vesting over 3 years.
On October 7, 2002, the Company entered into a letter agreement with
Robin Simuncak, our Director of Clinical Affairs. Under the this agreement, we
agreed to pay Ms. Simuncak a base salary of $90,000 per year and we granted Ms.
Simuncek options to purchase 100,000 shares of our common stock vesting over 3
years.
35
On December 10, 2002, the Company entered into a letter agreement with
Robert N. Brey, Ph.D., our Vice President of Research and Development. Under
this agreement, we agreed to pay Dr. Brey a base salary of $155,000 per year and
we granted Dr. Brey options to purchase 100,000 shares of our common stock
vesting over 3 years.
During March 2003, we entered into a three year employment agreement
with Ralph M. Ellison M.D., M.B.A. Pursuant to this Employment Agreement we
agreed to pay Mr. Ellison a base salary of $200,000 per year. Upon the
completion of an equity financing for, Dr. Ellison would receive an increase in
base salary to $300,000 per year, as well as a bonus of 30% of his base salary.
We agreed to issue options to purchase 2,000,000 shares of our Common Stock,
with one third immediately vesting and the remainder vesting over three years.
Upon termination without "just cause" as defined by this agreement, we would pay
Dr. Ellison 6 months severance, as well as any unpaid bonuses and all options
would immediately become vested.
BOARD OF DIRECTORS AGREEMENTS
On December 23, 2002, we entered into a letter agreement with General
Alexander M. Haig, Jr. to serve as the Chairman of the Board of Directors of the
Company. We agreed to pay General Haig a retainer of $50,000 per year, and issue
2,000,000 options to purchase Common Stock.
DIRECTOR COMPENSATION
Directors who are compensated as full-time employees receive no
additional compensation for service on our Board of Directors or its committees.
During 2002, each director who is not a full-time employee was paid $1,000 for
each board or committee meeting attended ($500 if such board meeting was
attended telephonically). This rate applied until the October 23, 2002 Board
meeting. At that meeting, the rate was changed to $2,000 per meeting for each
meeting attended ($1,000 if such meeting was attended telephonically).
We maintain a stock option grant program pursuant to the nonqualified
stock option plan, whereby members of the our Board of Directors who are not
full-time employees receive an initial grant of fully vested options to purchase
50,000 shares of common stock, and subsequent yearly grants of fully vested
options to purchase 50,000 shares of common stock after re-election to our Board
of Directors. In addition, the Board of Directors received a one-time grant of
fully vested options to purchase 100,000 shares of common stock on October 23,
2002.
In 2002, Mr. Haig received, instead of the regular initial grant,
options to purchase an aggregate of 2,000,000 shares of our common stock, of
which options to purchase 900,000 shares of common stock are subject to
stockholder approval of an amendment to our option plan, in connection with our
retention of him as Chairman of the Board (See "Item 11. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters, Equity
Compensation Plan Information.").
In addition, Mr. Kanzer also received additional options to purchase
100,000 shares of common stock in consideration for additional services provided
to us and Mr. Haig will receive an additional $50,000 for consulting services
outside of his service as Chairman of the Board.
36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The table below provides information regarding the beneficial ownership
of the Common Stock and Series B Convertible Preferred Stock as of March 21,
2003. The table reflects ownership by: (1) each person or entity who owns
beneficially 5% or more of the shares of our outstanding common stock or series
B preferred stock; (2) each of our directors, (3) each of the Named Executive
Officers, and (4) our directors and officers as a group. Except as otherwise
indicated, and subject to applicable community property laws, we believe the
persons named in the table have sole voting and investment power with respect to
all shares of common stock held by them. Except as otherwise indicated, each
stockholder's percentage ownership of our common stock in the following table is
based on 26,457,112 shares of common stock outstanding.
SHARES OF SERIES B
SHARES OF CONVERTIBLE
COMMON STOCK PREFERRED STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS BENEFICIALLY OWNED PERCENT OF CLASS
------------------------ ------------------ ---------------- ------------------ ----------------
Aries Select, Ltd.(1) 2,326,652 8.76% - -
Nomura Bank (2) 1,390,358 5.26% - -
TVM Techno Venture Management (3) 1,310,663 4.95% - -
Aries Select I LLC (4) 1,052,747 3.97% - -
Elan International Services, Ltd.(5) 3,347,750 12.54% 108,442 100%
Lindsay A. Rosenwald, M.D.(6) 5,882,680 21.07% - -
Paramount Capital Asset 3,399,684 12.85% - -
Management, Inc.(7)
Steve H. Kanzer (8) 1,912,712 6.91% - -
Alexander M. Haig, Jr. (9) 1,100,000 7.03% - -
Ralph M. Ellison, M.D., M.B.A. (10) 881,286 3.24% - -
Paul Rubin M.D. (11) 204,000 * - -
Arthur Asher Kornbluth, M.D. (12) 150,000 * - -
Evan Myrianthopoulos (13) 215,454 * - -
Peter Salomon, M.D.(14) 315,000 1.18% - -
Larry Kessel, M.D.(15) 364,286 1.37% - -
William Milling (16) 75,000 * - -
Robert Brey (17) 115,000 * - -
All directors and executive officers as 6,232,738 19.80% - -
a group (10 persons)
Except as otherwise set forth therein, each stockholder's percentage
ownership in the following table is based on 26,457,112 shares of Common Stock
outstanding.
---------------
*Less than 1%.
(1) Number of shares beneficially owned includes 112,159 shares of common
stock issuable upon exercise of warrants until April 16, 2003. The address
of Aries Select, Ltd. is 787 Seventh Avenuek, New York, NY 10019
(2) The address of Nomura Book is Kasamari Strasse I, CH 8021, Zurich,
Switzerland.
(3) As reported on a Schedule 13G filed with the SEC on February 14, 2003 by
TVM Medical Ventures GmbH & Co. KG. According to the Schedule 13G, TVM
Medical Ventures GmbH & Co. KG has sole voting and
37
dispositive power with respect to 1,310,663 shares. The address of TVM
Medical Ventures GmbH & Co. KG is 101 Arch Street, Suite 1950, Boston, MA
02110.
(4) Number of shares beneficially owned includes 56,533 shares of common stock
issuable upon exercise of warrants until April 16, 2003. The address of
Aries Select I LLC is 787 Seventh Avenue, New York, NY 10019.
(5) Number of shares beneficially owned includes 1,564,101 shares of common
stock issuable upon conversion of Series B preferred stock, and 230,770
shares of common stock issuable upon exercise of warrants until January
21, 2004. The Address of Elan International is 102 St. James Court, Fletts
Smith, SC, 04 Bermuda.
(6) Lindsay A. Rosenwald, M.D., is the Chairman and Chief Executive Officer of
Paramount Capital Asset Management, Inc. ("PCAM"). PCAM is the investment
manager of Aries Select, Ltd and is the managing member of Aries Select I
LLC. Dr. Rosenwald and PCAM share the power to vote and/or dispose of the
shares held by Aries Select, Ltd. and Aries Select I LLC. The securities
beneficially owned by Dr. Rosenwald include 1,392,783 shares of common
stock issuable upon exercise of warrants exercisable until April 16, 2008,
66,931 shares of Common Stock issuable upon exercise of warrants
exerciseable until October 2007, 2,326,652 shares beneficially owned by
Aries Select I LLC, 1,052,747 shares beneficially owned by Aries Select,
Ltd. and 20,284 shares beneficially owned by Aries Select II LLC. The
securities beneficially owned by Dr. Rosenwald also include 682,774 shares
of common stock owned by Paramount Capital Drug Development Holdings, LLC
and 13,572 shares of common stock owned by each of June Street Corporation
and Huntington Street Corporation. The address of Dr. Ronsenwald is 787
Seventh Avenue, New York, NY 10019.
(7) Includes the 2,326,652 of common stock shares beneficially owned by Aries
Select, Ltd. and the 1,52,748 shares beneficially owned by Aries Select I
LLC and 20,284 shares of common stock beneficially owned by Aries Select
II, LLC. The address of Paramount Capitol Asset Management, Inc. is 787
Seventh Avenue, New York, NY 10019.
(8) Includes 403,095 shares of common stock owned by Mr. Kanzer, 285,714 total
shares of common stock upon the exercise of warrants exerciseable until
December 31, 2007 which are held by Accredited Venture Capital, LLC, a
company controlled by Mr. Kanzer, 80,913 shares of common stock issuable
upon the exercise of warrants exercisable until December 31, 2007, and
1,000,133 shares of common stock issuable upon the exercise options within
60 days of March 21, 2003. The address of Mr. Kanzer is 28101 N. Ballard
Drive, Suite F, Lake Forest, IL 60045.
(9) Includes 1,100,000 shares of common stock issuable upon the exercise of
options within 60 days of March 21, 2003. Excludes 900,000 shares of
common stock issuable upon the exercise of options issued pending
stockholder approval. The address of Mr. Haig is c/o Worldwide Associates,
Inc., 1155 15 Street, N.W. Suite 800, Washington, D.C. 20005.
(10) Includes 142,857 shares of common stock owned by Ralph M. Ellison, M.D.,
MBA, 71,429 shares issuable upon the exercise of warrants until December
31, 2007, and 667,000 shares of common stock issuable upon the exercise of
options within 60 days of March 21, 2003. The address of Mr. Ellison is
28101 N. Ballard Drive, Suite F, Lake Forest, IL 60045.
(11) Includes 204,000 options to purchase common stock within 60 days of March
15, 2003. The address of Mr. Rubin is c/o Critical Therapeutics, 675
Massachusetts Ave., 14th Floor, Cambridge, MD 02139.
(12) Includes 150,000 options to purchase common stock within 60 days of March
15, 2003. The address of Mr. Kornbluth is c/o Mt. Sinai Medical Center,
1751 York Avenue, New York, NY 10178.
(13) Includes 150,000 shares of common stock issuable upon the exercise of
options and 65,454 shares of common stock issuable upon the exercise of
warrants until December 31, 2007. The address of Mr. Myrianthopoulos is
c/o COL Advisors 305 Fifth Aenue, Suite 5411, New York, NY 10018.
(14) Includes 150,000 shares of common stock issuable upon the exercise of
options within 60 days of March 21, 2003, and 5,000 shares issuable upon
the exercise of warrants exercisable until December 31, 2007. Excludes
150,000 shares of common stock issuable upon exercise options issued
pending stockholder approval. The address of Peter Salomon is c/o
Gastroenterology Consultants, 951 N.W. 13th St., Boca Raton, FL 33486.
38
(15) Includes 150,000 shares of common stock issuable upon the exercise of
options within 60 days of March 15, 2003, and 21,429 shares issuable upon
the exercise of warrants exercisable until December 31, 2007. Excludes
150,000 shares of common stock issuable upon exercise options issued
pending stockholder approval. The address of Mr. Kossel is 4114 Hain
Drive, Lafayette Hill, PA 19444-1514.
(16) Includes options to purchase 75,000 of common stock within 60 days of
March 15, 2003. The address of Mr. Milling is 28101 W. Ballard Drive,
Suite F, Lake Forest, IL 60045.
(17) Includes options to purchase 115,000 Shares of common stock within 60 days
of March 15, 2003. The address of Mr. Brey is 28101 W. Ballard Drive,
Suite F, Lake Forest, IL 60045.
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2002, we maintained our 1995 Amended and Restated
Omnibus Incentive Plan, which was approved by our stockholders. In December
2002, our board of directors approved an amendment to our 1995 Plan to increase
the number of shares available for issuance under the 1995 Plan to 11,000,000
and increased the number of shares available for issuance to a single
participant under the 1995 Plan to 2,500,000. Because that amendment, and
options issued based upon that amendment, are subject to stockholder approval,
the additional shares and those options are included in the category "Equity
Compensation Plans Not Approved by Security Holders" and a summary description
of the 1995 Plan is provided below.
(a) (b) (c)
Number of securities
remaining available for
Number of securities to be Weighted - average exercise future issuance under
issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
Plan Category warrants and rights rights reflected in column(a))
------------- --------------------------- --------------------------- -----------------------
Equity compensation plans 4,721,462 $0.95 0
approved by security holders
Equity compensation plans not 1,342,375 $0.35 5,600,000
approved by security holders
Total 6,063,837 $0.82 5,600,000
1995 OMNIBUS INCENTIVE PLAN
Our 1995 Omnibus Incentive Plan was initially adopted in April 1995.
The 1995 Plan was subsequently amended in July 1996, October 1997, February
1998, February 2001 and December 2002 to effect increases to the share reserve
and certain other amendments; all such amendments, other than the December 2002
amendment, have been approved by the stockholders. An aggregate of 11,000,000
shares of common stock have been reserved for issuance over the term of the 1995
Plan, subject to stockholder approval of the December 2002 Amendment. The
purpose of the 1995 Plan is to attract and retain employees, consultants and
directors and to provide these persons with incentives and rewards for superior
performance. The 1995 Plan consists of four separate equity incentive programs:
(1) the Discretionary Option Grant Program, (2) the Salary Investment Option
Grant Program, (3) the Automatic Option Grant Program for non-employee board
members and (4) the Director Fee Option Grant Program for non-employee board
members. Under the Discretionary Option Grant Program, our compensation
committee has complete discretion to issue options and the terms these options
will be issued upon. Under the Salary Investment Option Grant Program, our
compensation committee has complete discretion to issue options to employees who
choose to reduce their base salary by at least $10,000. Under the
39
Automatic Option Grant Program, eligible non-employee board members receive a
series of option grants over their period of board service. Under the Director
Fee Option Grant Program, our compensation committee has complete discretion to
issue options to non-employee directors who choose to all or a portion of their
cash retainer fee.
ADDITIONAL OPTION ISSUED TO ALEXANDER HAIG
In connection with our retention of Mr. Haig as out Chairman of the
Board, we issued to him options to purchase a total of 1,544,420 shares of our
common stock under the 1995 Plan, of which options to purchase a total of
900,000 shares of common stock are subject to stockholder approval of the
amendment to the 1995 Plan, as disclosed above. In addition to those options
issued to Mr. Haig under the 1995 Plan, we issued to Mr. Haig an option to
purchase 442,375 shares of our common stock as a further inducement to him to
accept the position of Chairman of the Board. That option, which is not issued
under the 1995 Plan nor subject to approval by our stockholders, is fully-vested
exercisable for ten years at an exercise price of $0.35 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 2002, we completed a private placement of 3,093,569 shares
of our common stock and warrants to purchase 1,546,789 shares of our common
stock. In this private placement we received total proceeds of $1,082,750.
Purchasers in this private placement included David M. Kent, our former Chief
Executive Officer and President, Ralph M. Ellison our current Chief Executive
Officer, and Steve H. Kanzer, Lawrence Kessel and Peter Salomon, each of whom is
a member of our Board of Directors. In addition, we issued warrants to purchase
463,073 shares of our common stock to certain individuals and entities,
including warrants to purchase 80,913 shares to Mr. Kanzer, in consideration for
placement services rendered in connection with this private placement.
On January 4, 2003, the Company entered into a two-year employment
agreement with David M. Kent. Pursuant to the agreement, we agreed to pay a base
salary of $180,000 per year. The Company agreed to issue options to purchase
600,000 shares of our common stock, with one third immediately vesting and the
remainder vesting over two years. If the price of our common stock trades above
$3 and $5 dollars per share, Mr. Kent would be entitled to accelerated vesting
of the options. In the event that Mr. Kent is terminated within the first year
of employment, we would be obligated to pay three months severance. In the event
that Mr. Kent were terminated after the first year of employment, we would be
obligated to pay six months' severance. On March 7, 2003, Mr. Kent resigned from
the Company and entered into a separation agreement and general release in which
we agreed to pay Mr. Kent six months' severance and Mr. Kent has one year to
exercise the 200,000 vested options received pursuant to the his employment
agreement.
In connection with our 2002 private placement of units, Evan
Myrianthopoulos, one of our Directors acted as a finder to introduce certain
investors to the Company. Mr. Myrianthopoulos received $15,375 cash compensation
and 65,454 Warrants to acquire our Common Stock.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) The following financial statements and exhibits are filed as part of this
report:
(1) Financial Statements:
(i) Independent Accountants' Report.
40
(ii) Balance Sheets as of December 31, 2002 and December 31, 2001.
(iii) Statement of Operations for the periods ended December 31, 2002
and 2001 and cumulative from February 15, 1985 (date of
inception) to December 31, 2002.
(iv) Statement of Cash Flows for the periods ended December 31, 2002
and 2001 and cumulative from February 15, 1985 (date of
inception) to December 31, 2002.
(v) Statement of Stockholders' Equity for the period from
February 15, 1985 (date of inception) to December 31, 2002.
(vi) Notes to Financial Statements.
(2) Exhibits
3.1 Amended and Restated Certificate of Incorporation.(2)
3.2 By-laws.(3)
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Subscription Agreement by and between the Company and
each investor dated as of April 11, 2000.(4)
4.3 Form of Amendment and Supplement to Subscription Agreement
entered into by each investor as of April 11, 2000.(4)
4.4 Form of Second Amendment and Supplement to Subscription
Agreement entered into by each investor as of April 11,
2000.(4)
4.5 Form of Investor Warrant issued to each investor dated as of
April 12, 2000.(4)
4.6 Form of Finder Warrant issued to Paramount Capital, Inc. dated
as of April 12, 2000.(4)
4.7 Warrant issued to Aries Fund dated as of May 19, 1997.(4)
4.8 Warrant issued to Aries Domestic Fund, L.P. dated as of May 19,
1997.(4)
4.9 Warrant issued to Paramount Capital, Inc. dated as of October
16, 1997.(5)
4.10 Warrant issued to Paramount Capital, Inc. dated as of October
16, 1997.(5)
4.11 Warrant issued to Elan International Services, Ltd. dated
January 21, 1998.(6)
4.12 Form of Warrant to be issued to CTD warrant holders.(12)
10.1 Patent License Agreement dated December 16, 1996 between the
Company and Massachusetts Institute of Technology.(7)
41
10.2 Purchase Agreement among Dominion Resources, Inc., The Aries
Fund, a Cayman Island Trust, The Aries Domestic Fund, L.P., and
the Company dated as of June 13, 1996.(4)
10.3 Purchase Agreement dated as of June 26, 1996 between the
Company, The Aries Fund and The Aries Domestic Fund, L.P.(7)
10.4 Amended and Restated 1996 Omnibus Incentive Plan.(8)
10.5* Amended and Restated 1995 Omnibus Incentive Plan, as approved
by shareholders of the Company on November 29, 2001.(14)
10.6 Lease dated December 19, 1997 between the Company and Howard M.
Ruskin.(5)
10.7 Joint Development and Operating Agreement, dated as of January
21, 1998, between the Company, Elan Corporation, plc, Orasomal
Technologies, Inc. and Endorex Vaccine Delivery Technologies,
Inc.(5)
10.8 Securities Purchase Agreement, dated as of January 21, 1998,
between the Company and Elan International Services, Ltd.(6)
10.9 Registration Rights Agreement, dated as of January 21, 1998,
between the Company and Elan International Services, Ltd.(6)
10.10+ License Agreement, dated as of January 21, 1998, between Elan
Pharmaceuticals, plc, and Endorex Vaccine Delivery
Technologies, Inc.(6)
10.11+ License Agreement, dated as of January 22, 1998, between
Orasomal Technologies, Inc., Endorex Vaccine Delivery
Technologies, Inc. and the Company.(6)
10.12 Securities Purchase Agreement, dated as of October 21, 1998,
between the Company and Elan International Services, Ltd.(9)
10.13 Registration Rights Agreement, dated as of October 21, 1998,
between the Company and Elan International Services, Ltd.(9)
10.14+ License Agreement, dated as of October 21, 1998, between the
Company, Elan Corporation, plc, Endorex Newco. Ltd., and Elan
Medical Technologies Ltd.(9)
10.15+ Joint Development and Operating Agreement, dated as of October
21, 1998, between the Company, Elan Corporation, plc, Elan
International Services, Ltd. and Endorex Newco, Ltd.(9)
10.17+ Development License and Supply Agreement, dated February 2,
2000, between the Company Newco, Ltd. and Schein Pharmaceutical
(Bermuda), Ltd.(10)
10.20* Employment Agreement dated October 21, 2001 between the Company
and Michael Rosen.(14)
42
10.21* Employment Agreement between the Company and Steve Koulogeorge
dated September 19, 2000.(8)
10.22* Employment Agreement between the Company and Panayiotis
Constantinides dated January 4, 2001.(8)
10.23* Employment Agreement between the Company and John McCracken
dated February 21, 2001.(8)
10.24 Financial Advisory Agreement between the Company and Paramount
Capital, Inc. dated as of October 18, 2001.(14)
10.25 Form of Affiliate Agreement dated as of August 15, 2001 by and
between the Company and the affiliates of CTD.(13)
10.26 Escrow Agreement to be entered into by and among the Company,
the stockholders of CTD, Peter O. Kliem, and Wells Fargo Bank
Minnesota, National Association.(13)
10.27 Amendment No. 1 to Escrow Agreement dated November 29, 2001 by
and among the Company, Paramount Capital Drug Development
Holdings LLC, Peter Kliem and Wells Fargo.(13)
10.28* Employment Agreement between the Company and Colin Bier dated
November 29, 2001.(14)
10.29* Consulting Agreement entered into by and among the Company, CTD
and Nicholas Stergiopoulos dated as of November 29, 2001.(14)
10.30* Noncompetition and Nonsolicitation Agreement entered into by
and among the Company, CTD and Steve H. Kanzer dated as of
November 29, 2001.(14)
10.31 Master Loan and Security Agreement, dated as of December 23,
1998, between FINOVA Technology Finance, Inc. and the
Company.(14)
10.32 Amendment dated as of December 30, 1999, to the Patent License
Agreement dated December 16, 1996 between the Company and
Massachusetts Institute of Technology.(7)
10.33 Termination and Release Agreement, dated March 7, 2002, by and
between Schein Pharmaceutical (Bermuda) Ltd., and Endorex
Newco.(1)
10.34* Termination agreement between the Company and Colin Bier dated
June 16, 2002.
10.35* Termination agreement between the Company and Michael Rosen
Dated June 14, 2002.
10.36 Letter of intent between the Company, Southern Research
Institute, and the University of Alabama to increase licensed
rights to patents dated December 20, 2002.
43
10.37 Termination of the Endorex Newco joint venture between the
Company , Elan Corporation, Elan international services, and
Elan Pharmaceutical Investments dated December 12, 2002.
10.38* Amendment to the 1995 Omnibus Incentive Plan (subject to
stockholder approval).
10.39* Option Agreement with General Alexander M. Haig Jr.
10.40* Employment agreement between the Company and Ralph Ellison
dated March 13, 2003
10.41 Letter of Intent between the Company and Thomas Jefferson
University for sponsored research
10.42 Consulting agreement between the Company and The School of
Pharmacy, University of London
10.43 Consulting agreement between the Company and Lance Simpson of
Thomas Jefferson University
21.1 Subsidiaries of the Company
23.1 Consent of Ernst & Young LLP.
99.1 Certification of the Chief Executive Officer pursuant to
section 906 of the Sabanes Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer pursuant to
section 906 of the Sabanes Oxley Act of 2002.
----------
*Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this annual report.
+ Endorex was granted Confidential Treatment of portions of this exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference from our Quarterly Report on Form 10-QSB for the
fiscal quarter ended June 30, 2002.
(2) Incorporated by reference to our Quarterly Report on Form 10-QSB, for the
fiscal quarter ended June 30, 2001.
(3) Incorporated by reference to our Registration Statement on Form S-1, as
amended (File No. 33-13492).
(4) Incorporated by reference to our Registration Statement on Form S-3 (File
No. 333-36950), as amended on December 29, 2000.
(5) Incorporated by reference to our Quarterly Report on Form 10-QSB, as
amended, for the fiscal quarter ended September 30, 1997.
(6) Incorporated by reference to our Annual Report on Form 10-KSB, as amended,
for the fiscal year ended December 31, 1997.
(7) Incorporated by reference to our Annual Report on Form 10-KSB, as amended,
for the transition period ended December 31, 1996.
(8) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000, as amended.
(9) Incorporated by reference to our Quarterly Report on Form 10-QSB for the
fiscal quarter on Form 10-QSB for the fiscal quarter ended September 30,
1998.
(10) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999, as amended.
(11) Incorporated by reference to our current report on Form 8-K filed on
November 9, 2000.
(12) Incorporated by reference to our Registration Statement on Form S-4 filed
on October 2, 2001.
(13) Incorporated by reference to our current report on Form 8-K filed on
December 14, 2001.
44
(14) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001, as amended.
(b) Reports on Form 8-K
We did file any current reports on Form 8-K during the fourth quarter
of 2002.
ITEM 14. CONTROLS AND PROCEDURES
(a) Our Chief Executive Officer and Controller (our principal executive
officer and principal financial officer, respectively) have concluded, based on
their evaluation as of a date within 90 days prior to the date of the filing of
this report, that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports filed or
submitted by us under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by us in such reports is
accumulated and communicated to the our management, including our Chief
Executive Officer and Controller, as appropriate to allow timely decisions
regarding required disclosure.
(b) There were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation."
45
DOR BioPharma, Inc.
Consolidated Balance Sheets
DECEMBER 31
2002 2001
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,147,164 $ 9,942,053
Receivable from related party -- 44,447
Prepaid expenses 104,333 49,941
------------ ------------
Total current assets 4,251,497 10,036,441
Leasehold improvements and equipment, net of accumulated
amortization of $1,162,247 and $976,860 262,921 365,219
Licenses and patent costs, net of accumulated amortization of $46,100
and $15,091 1,097,341 284,419
Amortizable intangible assets, net of accumulated amortization of
$137,710 and $8,611 226,441 355,540
------------ ------------
Total assets $ 5,838,200 $ 11,041,619
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 698,120 $ 856,187
Accrued compensation 124,480 205,969
Due to joint ventures -- 2,042,833
Current portion of long-term debt 382,122 164,748
------------ ------------
Total current liabilities 1,204,722 3,269,737
Long-term debt 347,845 52,098
------------ ------------
Total liabilities 1,552,567 3,321,835
Series C exchangeable convertible preferred stock, $.05 par value
Authorized 200,000 shares; 0 and 104,435 issued and outstanding, at
liquidation value -- 10,348,733
Stockholders' equity (deficit):
Preferred stock, $.001 par value. Authorized 4,600,000 shares; none issued
and outstanding -- --
Series B convertible preferred stock, $.05 par value. Authorized 200,000
shares; 117,118 and 108,443 issued and outstanding, at liquidation value 11,711,822 10,844,280
Common stock, $.001 par value. Authorized 50,000,000 shares; 26,794,642 and
20,944,384 issued, 26,622,300 and 20,825,742 outstanding 26,795 20,945
Additional paid-in capital 61,315,985 48,983,361
Common stock to be issued, 375,498 and 1,350,000 shares 436,812 1,687,500
Unearned compensation (50,148) --
Deficit accumulated during the development stage (68,687,366) (63,721,285)
------------ ------------
4,753,900 (2,185,199)
Less: Cost of 172,342 and 118,642 shares of common stock in treasury (468,267) (443,750)
------------ ------------
Total stockholders' equity (deficit) 4,285,633 (2,628,949)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 5,838,200 $ 11,041,619
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
F-1
DOR BioPharma, Inc.
Consolidated Balance Sheets
CUMULATIVE PERIOD
FEBRUARY 15, 1985
YEAR ENDED (INCEPTION) TO
DECEMBER 31 DECEMBER 31,
2002 2001 2002
------------ ------------ ----------------
SBIR contract revenue $ -- $ -- $ 100,000
Expenses:
SBIR contract research and development -- -- 86,168
Proprietary research and development 2,943,493 2,470,801 20,247,299
General and administrative 2,988,020 1,973,455 18,033,519
Write-off of acquired in-process research and
development -- 10,181,000 10,181,000
------------ ------------ ------------
Total expenses 5,931,513 14,625,256 48,547,986
------------ ------------ ------------
Loss from operations (5,931,513) (14,625,256) (48,447,986)
Equity in earnings (losses) of joint
ventures 868,859 (401,699) (22,179,091)
Other income -- 7,588 262,890
Interest income 105,676 424,032 3,571,296
Interest expense (9,103) (35,840) (358,253)
------------ ------------ ------------
Net loss (4,966,081) (14,631,175) (67,151,144)
Preferred stock dividends (1,456,385) (1,486,501) (6,323,686)
------------ ------------ ------------
Net loss applicable to common
stockholders $ (6,422,466) $(16,117,676) $(73,474,830)
============ ============ ============
Basic and diluted net loss per share applicable
to common shareholders $ (0.29) $ (1.20)
Basic and diluted weighted average common shares
outstanding 22,498,894 13,450,579
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
DOR BioPharma, Inc.
Consolidated Statements of Stockholders' Equity
Common Stock (Deficit)
Common Stock to be Issued Preferred Stock Accumulated
----------------------------------------------- Additional During the Other
Par Stated Stated Paid-In Development Comprehensive
Shares Value Shares Value Shares Value Capital Stage Income
----------------------------------------------------------------------------------------
Common stock issued for cash in
February 1985 at $1.50 per share 667 $ 1 $ -- $ -- $ -- -- $ 999 $ -- $ --
Common Stock issued for cash in
October 1986 at $750.00 per share 666 1 -- -- -- -- 499,999 -- --
Excess of fair market value over
option price of nonqualified stock
option granted in 1986 -- -- -- -- -- -- 13,230 -- --
Common stock issued in May 1987 at
$750.00 per share for legal
services performed for the company 7 -- -- -- -- -- 5,000 -- --
Net Proceeds from initial public stock
offering in June 1987 at $6,000 per
share, less insurance costs 333 -- -- -- -- -- 1,627,833 -- --
Nonqualified stock options exercised
in 1987 48 -- -- -- -- -- 33,808 -- --
Amortization of unearned
compensation in 1987 -- -- -- -- -- -- -- -- --
Excess of fair market value over
option price of nonqualified stock
options granted in 1987 -- -- -- -- -- -- 75,063 -- --
Treasury Stock Total
------------------ Unearned Note Stockholders'
Equity Cost Compensation Receivable Equity
---------------------------------------------------------------
Common stock issued for cash in
February 1985 at $1.50 per share -- -- -- -- 1,000
Common Stock issued for cash in
October 1986 at $750.00 per share -- -- -- -- 500,000
Excess of fair market value over
option price of nonqualified stock
option granted in 1986 -- -- -- -- 13,230
Common stock issued in May 1987 at
$750.00 per share for legal
services performed for the company -- -- -- -- 5,000
Net Proceeds from initial public stock
offering in June 1987 at $6,000 per
share, less insurance costs -- -- -- -- 1,627,833
Nonqualified stock options exercised
in 1987 -- -- (28,188) -- 5,620
Amortization of unearned
compensation in 1987 -- -- 7,425 -- 7,425
Excess of fair market value over
option price of nonqualified stock
options granted in 1987 -- -- -- -- 75,063
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
DOR BioPharma, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock (Deficit)
Common Stock to be Issued Preferred Stock Accumulated
----------------------------------------------- Additional During the Other
Par Stated Stated Paid-In Development Comprehensive
Shares Value Shares Value Shares Value Capital Stage Income
----------------------------------------------------------------------------------------
Nonqualified stock options exercised in
1988 18 $ -- -- $ -- -- $ -- $ 256 $ -- $ --
Stock warrants exercised in 1988 1 -- -- -- -- -- 12,000 -- --
Common stock redeemed and retired in 1988 (10) -- -- -- -- -- (150) -- --
Excess of fair market value over option
price of nonqualified stock options
granted in 1988 -- -- -- -- -- -- 36,524 -- --
Amortization of unearned compensation in
1988 -- -- -- -- -- -- -- -- --
Nonqualified stock options exercised in
1989 71 -- -- -- -- -- 1,060 -- --
Common stock redeemed and retired in
1989 (12) -- -- -- -- -- (175) -- --
Excess of fair market value over option
price of nonqualified stock options
granted in 1989 -- -- -- -- -- -- 113,037 -- --
Net proceeds from secondary public stock
offering in April 1989 at $525 per
share, less issuance cost 2,174 2 -- -- -- -- 980,178 -- --
Amortization of unearned compensation in
1989 -- -- -- -- -- -- -- -- --
Common stock issued for cash in October
1990 through January 1991 at $9.00 per
share 5,694 6 -- -- -- -- 51,244 -- --
Excess of fair market value over option
price of nonqualified stock options
granted in 1990 -- -- -- -- -- -- 30,635 -- --
Treasury Stock Total
--------------------- Unearned Note Stockholders'
Equity Cost Compensation Receivable Equity
------------------------------------------------------------------
Nonqualified stock options exercised in
1988 -- $ -- $ -- $ -- $ 256
Stock warrants exercised in 1988 -- -- -- -- 12,000
Common stock redeemed and retired in 1988 -- -- -- -- (150)
Excess of fair market value over option
price of nonqualified stock options
granted in 1988 -- -- -- -- 36,524
Amortization of unearned compensation in
1988 -- -- 19,113 -- 19,113
Nonqualified stock options exercised in
1989 -- -- -- -- 1,060
Common stock redeemed and retired in
1989 -- -- -- -- (175)
Excess of fair market value over option
price of nonqualified stock options
granted in 1989 -- -- -- -- 113,037
Net proceeds from secondary public stock
offering in April 1989 at $525 per
share, less issuance cost -- -- -- -- 980,180
Amortization of unearned compensation in
1989 -- -- 1,650 -- 1,650
Common stock issued for cash in October
1990 through January 1991 at $9.00 per
share -- -- -- -- 51,250
Excess of fair market value over option
price of nonqualified stock options -- -- -- -- 30,635
The accompanying notes are an integral part
of the consolidated financial statements
F--4
DOR BioPharma, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock (Deficit)
Common Stock to be Issued Preferred Stock Accumulated
----------------------------------------------- Additional During the
Par Stated Stated Paid-In Development
Shares Value Shares Value Shares Value Capital Stage
--------------------------------------------------------------------------
Common stock issued for cash in February
1991 through April 1991 at $9.00 per 2,772 $ 3 -- $ -- -- $ -- $ 24,947 $ --
share --
Common stock issued for cash and services
in November 1991 at $1.50 per share 15,333 15 -- -- -- -- 22,985 --
Common stock issued for cash and note in
December 1991 at $0.75 per share 296,949 297 -- -- -- -- 200,018 --
Excess of fair market value over option
price of nonqualified stock options
granted in 1991 -- -- -- -- -- -- 16,570 --
Nonqualified stock options exercised in 1991 1 -- -- -- -- -- 1 --
Payments on note receivable in 1992 -- -- -- -- -- -- -- --
Net proceeds from secondary public stock
offering in August 1992 at $112.50 per
share, less issuance costs 66,666 66 -- -- -- -- 6,230,985 --
Nonqualified stock options exercised in 1992 2,000 2 -- -- -- -- 28 --
Excess of fair market value over option
price of nonqualified stock options
granted in 1993 -- -- -- -- -- -- 126,000 --
Amortization of unearned compensation in --
-- -- -- -- -- -- --
Nonqualified stock options exercised in 1993 67 -- -- -- -- -- 57 --
Collection of note receivable in 1993 -- -- -- -- -- -- -- --
Other Treasury Stock Total
Comprehensive ------------------ Unearned Note Stockholders'
Income Shares Cost Compensation Receivable Equity
--------------------------------------------------------------------------------
Common stock issued for cash in February
1991 through April 1991 at $9.00 per $ -- -- $ -- $ -- $ -- 24,950
share
Common stock issued for cash and services
in November 1991 at $1.50 per share -- -- -- -- -- 23,000
Common stock issued for cash and note in
December 1991 at $0.75 per share -- -- -- -- (50,315) 150,000
Excess of fair market value over option
price of nonqualified stock options
granted in 1991 -- -- -- -- -- 16,570
Nonqualified stock options exercised in 1991 -- -- -- -- -- 1
Payments on note receivable in 1992 -- -- -- -- 11,300 11,300
Net proceeds from secondary public stock
offering in August 1992 at $112.50 per
share, less issuance costs -- -- -- -- -- 6,231,051
Nonqualified stock options exercised in 1992 -- -- -- -- -- 30
Excess of fair market value over option
price of nonqualified stock options
granted in 1993 -- -- -- (126,000) -- --
Amortization of unearned compensation in
-- -- -- 40,750 -- 40,750
Nonqualified stock options exercised in 1993 -- -- -- -- -- 57
Collection of note receivable in 1993 -- -- -- -- 39,015 39,015
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
DOR BioPharma, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock (Deficit)
Common Stock to be Issued Preferred Stock Accumulated
----------------------------------------------- Additional During the Other
Par Stated Stated Paid-In Development Comprehensive
Shares Value Shares Value Shares Value Capital Stage Income
----------------------------------------------------------------------------------------
Acquisition of treasury stock in 1994 -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Forfeiture of nonqualified stock
options granted in 1994 -- -- -- -- -- -- (22,402) -- --
Amortization of unearned compensation
in 1994 -- -- -- -- -- -- -- -- --
Acquisition of treasury stock in 1995 -- -- -- -- -- -- -- -- --
Forfeiture of nonqualified stock
options granted in 1995 -- -- -- -- -- -- (1,379) -- --
Amortization of unearned compensation
in 1995 -- -- -- -- -- -- -- -- --
Common stock issued at $0.975 per share
in 1996 333,333 333 -- -- -- -- 324,667 -- --
Common stock issued at $3.00 per share
in 1996 333,333 333 -- -- -- -- 999,667 -- --
Nonqualified stock options exercised in
1996 145,283 146 -- -- -- -- 379,003 -- --
Warrants exercised at $1.20 per share
in 1997 1,173 1 -- -- -- -- 1,407 -- --
Proceeds on exercise of stock options
in 1997 -- -- -- -- -- -- 5,000 -- --
Warrants issued in 1997 -- -- -- -- -- -- 5,407,546 -- --
Net proceeds for private placement at
$2.3125 per share, less issuance
cost in 1997 8,648,718 8,650 -- -- -- -- 15,122,943 -- --
Treasury Stock Total
------------------ Unearned Note Stockholders'
Shares Cost Compensation Receivable Equity
---------------------------------------------------------------
Acquisition of treasury stock in 1994 41,975 $(300,000) $ -- $ -- $ (300,000)
Forfeiture of nonqualified stock
options granted in 1994 -- -- 22,402 -- --
Amortization of unearned compensation
in 1994 -- -- 49,348 -- 49,348
Acquisition of treasury stock in 1995 76,667 (143,750) -- -- (143,750)
Forfeiture of nonqualified stock
options granted in 1995 -- -- 1,379 -- --
Amortization of unearned compensation
in 1995 -- -- 12,121 -- 12,121
Common stock issued at $0.975 per share
in 1996 -- -- -- -- 325,000
Common stock issued at $3.00 per share
in 1996 -- -- -- -- 1,000,000
Nonqualified stock options exercised in
1996 -- -- -- -- 379,149
Warrants exercised at $1.20 per share
in 1997 -- -- -- -- 1,408
Proceeds on exercise of stock options
in 1997 -- -- -- -- 5,000
Warrants issued in 1997 -- -- -- -- 5,407,546
Net proceeds for private placement at
$2.3125 per share, less issuance
cost in 1997 -- -- -- -- 15,131,593
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
DOR BioPharma, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock
Common Stock to be Issued Preferred Stock Additional
-------------------------------------------------------------------------- Paid-In
Shares Par Value Shares Stated Value Shares Stated Value Capital
---------------------------------------------------------------------------------------
Net proceeds from issuance of
common stock and warrants
in January 1998 307,692 $ 308 - $ - $ - $ - $1,871,537
Proceeds from exercise of stock
options in 1998 25,000 25 - - - - 61,725
Purchase and retirement of common
stock in 1998 (133,335) (134) - - - - (129,866)
Net proceeds from issuance of
Series B preferred stock at
$100 per share in
March 1998 - - - - 80,100 8,010,000 -
Accrued preferred stock dividends
in 1998 - - - - 5,986 598,666 (713,187)
Proceeds from exercise of stock
options in 1999 334 4 - - - - 347
Common stock dividends issued
in 1999 819,319 819 - - - - 1,535,403
Accrued preferred stock dividends
in 1999 - - - - 6,887 688,634 (1,285,412)
Net proceeds from private placement
at $4.725 per share, less
issuance costs in 2000 1,809,520 1,810 - - - - 7,772,738
Issuance of options issued in exchange
for financial advisory services
in 2000 - - - - - - 87,373
Issuance of options issued in exchange
for consulting services in 2000 - - - - - - 12,787
Amortization of unearned compensation
in 2000 - - - - - - -
Proceeds from exercise of stock options
in 2000 71,722 69 - - - - 215,685
Noncash exercise of warrants in 2000 104,963 104 - - - - (104)
Accrued preferred stock dividends
in 2000 - - - - 7,437 743,700 (1,382,200)
Net loss from inception, February 15,
1985 to December 31, 2000 - - - - - - -
Unrealized gain on marketable
securities in 2000 - - - - - - -
Comprehensive loss - - - - - - -
---------------------------------------------------------------------------------------
Balance at December 31, 2000 12,860,500 12,861 - - 100,410 10,041,000 40,365,410
(Deficit)
Accumulated
During the Other Treasury Stock
Development Comprehensive ------------------------ Unearned Note
Stage Income Shares Cost Compensation Receivable
------------------------------------------------------------------------------------
Net proceeds from issuance of
common stock and warrants
in January 1998 - $ - $ - $ - $ - $ -
Proceeds from exercise of stock
options in 1998 - - - - - -
Purchase and retirement of common
stock in 1998 - - - - - -
Net proceeds from issuance of
Series B preferred stock at
$100 per share in
March 1998 - - - - - -
Accrued preferred stock dividends
in 1998 - - - - - -
Proceeds from exercise of stock
options in 1999 - - - - - -
Common stock dividends issued
in 1999 (1,536,222) - - - - -
Accrued preferred stock dividends
in 1999 - - - - - -
Net proceeds from private placement
at $4.725 per share, less
issuance costs in 2000 - - - - - -
Issuance of options issued in exchange
for financial advisory services
in 2000 - - - - (87,373) -
Issuance of options issued in exchange
for consulting services in 2000 - - - - (12,787) -
Amortization of unearned compensation
in 2000 - - - - 95,307 -
Proceeds from exercise of stock options
in 2000 - - - - - -
Noncash exercise of warrants in 2000 - - - - - -
Accrued preferred stock dividends
in 2000 - - - - - -
Net loss from inception, February 15,
1985 to December 31, 2000 (47,553,888) - - - - -
Unrealized gain on marketable
securities in 2000 - 75 - - - -
Comprehensive loss - - - - - -
------------------------------------------------------------------------------------
Balance at December 31, 2000 (49,090,110) 75 118,642 (443,750) (4,853) -
Total
Stockholders'
Equity
----------------
Net proceeds from issuance of
common stock and warrants
in January 1998 $ 1,871,845
Proceeds from exercise of stock
options in 1998 61,750
Purchase and retirement of common
stock in 1998 (130,000)
Net proceeds from issuance of
Series B preferred stock at
$100 per share in
March 1998 8,010,000
Accrued preferred stock dividends
in 1998 (114,521)
Proceeds from exercise of stock
options in 1999 351
Common stock dividends issued
in 1999 -
Accrued preferred stock dividends
in 1999 (596,778)
Net proceeds from private placement
at $4.725 per share, less
issuance costs in 2000 7,774,548
Issuance of options issued in exchange
for financial advisory services
in 2000 -
Issuance of options issued in exchange
for consulting services in 2000 -
Amortization of unearned compensation
in 2000 95,307
Proceeds from exercise of stock options
in 2000 215,754
Noncash exercise of warrants in 2000 -
Accrued preferred stock dividends
in 2000 (638,500)
Net loss from inception, February 15,
1985 to December 31, 2000 (47,553,888)
Unrealized gain on marketable
securities in 2000 75
----------------
Comprehensive loss (47,553,813)
----------------
Balance at December 31, 2000 880,633
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
DOR BioPharma, Inc.
Consolidated Statements of Stockholders' Equity (continued)
Common Stock
Common Stock to be Issued Preferred Stock Additional
-------------------------------------------------------------------------- Paid-In
Shares Par Value Shares Stated Value Shares Stated Value Capital
---------------------------------------------------------------------------------------
Issuance of common stock for the
acquisition of CTD 8,083,884 8,084 1,350,000 1,687,500 - - 10,100,771
Additional costs related to 2000
private placement - - - - - - (21,871)
Issuance of options issued in exchange
for advisory services and consulting
fees - - - - - - 25,552
Amortization of unearned compensation - - - - - - -
Accrued preferred stock dividends - - - - 8,033 803,280 (1,486,501)
Net loss - - - - - - -
Unrealized loss on marketable securities - - - - - - -
Comprehensive loss - - - - - - -
---------------------------------------------------------------------------------------
Balance at December 31, 2001 20,944,384 20,945 1,350,000 1,687,500 108,443 10,844,280 48,983,361
Issuance of common stock, net 3,593,569 3,593 - - - - 1,220,476
Issuance of options issued in exchange
for advisory services and consulting
fees - - - - - - 368,836
Amortization of unearned compensation - - - - - - -
Accrued preferred stock dividends - - - - 8,675 867,542 (1,456,385)
Conversion of redeemable preferred
stock to common stock 1,245,187 1,245 - - - - 10,936,331
Issuance of restricted stock for
consulting services - - 37,000 13,690 - - -
Acquisition of treasury stock - - - - - - -
Release of shares to be issued 1,011,502 1,012 (1,011,502) (1,264,378) - - 1,263,366
Net loss - - - - - - -
---------------------------------------------------------------------------------------
Balance at December 31, 2002 26,794,642 $26,795 375,498 $ 436,812 117,118 $11,711,822 $61,315,985
=======================================================================================
(Deficit)
Accumulated
During the Other Treasury Stock Total
Development Comprehensive ----------------------- Unearned Note Stockholders'
Stage Income Shares Cost Compensation Receivable Equity
--------------------------------------------------------------------------------------------
Issuance of common stock for the
acquisition of CTD - - - - - - 11,796,355
Additional costs related to 2000
private placement - - - - - - (21,871)
Issuance of options issued in exchange
for advisory services and consulting
fees - - - - (25,552) - -
Amortization of unearned compensation - - - - 30,405 - 30,405
Accrued preferred stock dividends - - - - - - (683,221)
Net loss (14,631,175) - - - - - (14,631,175)
Unrealized loss on marketable securities - (75) - - - - (75)
--------------
Comprehensive loss - - - - - - (14,631,250)
--------------------------------------------------------------------------------------------
Balance at December 31, 2001 (63,721,285) - 118,642 (443,750) - - (2,628,949)
Issuance of common stock, net - - - - - - 1,224,069
Issuance of options issued in exchange
for advisory services and consulting
fees - - - - (368,836) - -
Amortization of unearned compensation - - - - 318,688 - 318,688
Accrued preferred stock dividends - - - - - - (588,843)
Conversion of redeemable preferred
stock to common stock - - - - - - 10,937,576
Issuance of restricted stock for
consulting services - - - - - - 13,690
Acquisition of treasury stock - - 53,700 (24,517) - - (24,517)
Release of shares to be issued - - - - - - -
Net loss (4,966,081) - - - - - (4,966,081)
--------------------------------------------------------------------------------------------
Balance at December 31, 2002 $(68,687,366) $ - 172,342 $(468,267) $(50,148) $ - $ 4,285,633
============================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
DOR BioPharma, Inc.
Consolidated Statement of Cash Flows
CUMULATIVE PERIOD
FEBRUARY 15, 1985
YEAR ENDED (INCEPTION) TO
DECEMBER 31 DECEMBER 31,
2002 2001 2002
------------ ------------ --------------
OPERATING ACTIVITIES:
Net loss $ (4,966,081) $(14,631,175) $(67,151,144)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 345,495 188,526 1,908,601
Gain on sale of marketable securities -- -- (110,244)
Noncash stock compensation 332,378 30,405 1,118,556
Equity in (earnings) losses of joint ventures (868,859) 401,699 22,179,091
Amortization of fair value of warrants -- -- 3,307,546
Gain on sale of assets -- -- (4,530)
Write-off patent issuance cost -- -- 439,725
Write-off of acquired research and
development -- 10,181,000 10,181,000
Change in operating assets and liabilities:
Receivable from related party 44,447 82,091 --
Prepaid expenses (54,392) 12,884 (100,311)
Accounts payable and accrued expenses (158,067) 68,821 643,164
Accrued compensation (81,489) 58,764 124,480
Due to joint ventures (594,232) (369,579) (1,635,466)
------------ ------------ ------------
Total adjustments (1,034,719) 10,654,611 38,051,612
------------ ------------ ------------
Net cash used in operating activities (6,000,800) (3,976,564) (29,099,532)
INVESTING ACTIVITIES:
Cash received in acquisition of CTD, net -- 1,392,108 1,392,108
Patent issuance costs (593,931) (34,835) (1,387,991)
Investment in joint ventures -- -- (3,638,171)
Organizational costs incurred -- -- (135)
Purchases of leasehold improvements and equipment
(83,089) (139,656) (1,870,198)
Proceeds from assets sold -- -- 4,790
Purchases of marketable securities -- -- (11,004,080)
Proceeds from sale of marketable securities -- 2,014,909 11,114,324
------------ ------------ ------------
Net cash provided by (used in) investing
activities (677,020) 3,232,526 (5,389,353)
The accompanying notes are an integral part
of the consolidated financial statements.
F-9
DOR BioPharma, Inc.
Consolidated Statement of Cash Flows (continued)
CUMULATIVE PERIOD
FEBRUARY 15, 1985
YEAR ENDED (INCEPTION) TO
DECEMBER 31 DECEMBER 31,
2002 2001 2002
------------ ------------ ------------------
FINANCING ACTIVITIES:
Net proceeds from issuance (costs incurred related
to issuance) of common stock 974,069 (21,871) 38,751,468
Proceeds from exercise of options -- -- 417,092
Proceeds from borrowings under line of credit -- -- 1,150,913
Repayment of amounts due under line of credit, notes
payable and capital lease obligations (66,621) (123,304) (1,063,504)
Repayment of long-term receivable -- -- 50,315
Repayment of note payable issued in exchange for legal
services -- -- (71,968)
Purchase and retirement of common stock -- -- (130,000)
Purchase of common stock for treasury (24,517) -- (468,267)
------------ ------------ ------------
Net cash provided by (used in) financing activities 882,931 (145,175) 38,636,049
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (5,794,889) (889,213) 4,147,164
Cash and cash equivalents at beginning of period 9,942,053 10,831,266 --
------------ ------------ ------------
Cash and cash equivalents at end of year $ 4,147,164 $ 9,942,053 $ 4,147,164
============ ============ ============
Supplemental disclosure of cash flow:
Cash paid for interest $ 9,103 $ 35,840
Non-cash transactions:
Issuance of preferred stock dividends in kind $ 1,456,385 $ 1,486,501
Issuance of common stock, options and warrants
in acquisition -- 12,214,207
Capital lease acquisitions -- 17,195
Issuance of note payable for joint venture termination 579,742 --
Issuance of common stock for patent rights 250,000 --
The accompanying notes are an integral part
of the consolidated financial statements.
F-10
BioPharma, Inc.
Notes to Consolidated Financial Statements
December 31, 2002
1. ORGANIZATION AND NATURE OF BUSINESS
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include DOR BioPharma, Inc. and its
subsidiaries (DOR or the Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
NATURE OF BUSINESS
DOR is a pharmaceutical company specializing in the development of oral and
nasal delivery of vaccines and drugs for unmet medical needs. The Company is
developing a proprietary oral and intranasal vaccine delivery technology called
the MicrovaxTM system, which they are applying to the delivery of intranasal and
oral biodefense vaccines. Utilizing this MicrovaxTM system, the Company is
developing intranasal vaccines against ricin toxin and anthrax. The Company is
also developing an oral vaccine against botulinum toxin.
In addition to its biodefense vaccines, the Company is developing orBec(R) (oral
beclomethasone diproprionate), an oral therapeutic product that is currently in
a pivotal Phase III clinical trial for the treatment of intestinal graft-vs-host
disease, a life threatening complication of bone marrow transplantation. Using
orBec(R), the Company is also planning a Phase II clinical trial for the
treatment of irritable bowel syndrome.
2. DEVELOPMENT STAGE ENTERPRISE
The Company's activities to date principally have been conducting research and
development in conjunction with developing new products. Consequently, as shown
in the accompanying financial statements, the Company has not realized
substantial revenue and has a deficit accumulated during the development stage
for the period from inception, February 15, 1985, through December 31, 2002 of
$68,687,366. The Company will continue to be a development stage company, as
defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting
and Reporting by Development Stage Enterprises," until it begins sales of its
anticipated products.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in the biotechnology drug delivery industry and does not
have any reportable operating segments.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of 90 days
or less when purchased to be cash equivalents.
F-11
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
RESEARCH AND DEVELOPMENT COSTS
In accordance with SFAS No. 2, "Accounting for Research and Development Costs,"
research and development costs are charged to expense when incurred. Research
and development includes costs such as clinical trial expenses, contracted
research and license agreement fees with no alternative future use, supplies and
materials, salaries and employee benefits, equipment depreciation and
allocations of various corporate costs. Purchased in-process research and
development expense (IPR&D) represents the value assigned or paid for acquired
research and development for which there is no alternative future use as of the
date of acquisition. In accordance with SFAS No. 2, as clarified by Financial
Accounting Standards Board Interpretation No. 4, amounts assigned to IPR&D
meeting the above stated criteria are charged to expense.
LICENSES AND PATENT COSTS
Patent costs, principally legal fees, are capitalized and, upon issuance of the
patent, are amortized on a straight-line basis over the shorter of the estimated
useful life of the patent or the regulatory life. Licenses of technology with
alternative future use are capitalized and are amortized on a straight-line
basis over the shorter of the estimated useful life or the regulatory life.
Licenses of technology with no alternative future use are expensed as incurred.
The useful lives of licenses and patent costs at December 31, 2002 ranged from
15 to 17 years.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS
Equipment, leasehold improvements, licenses and patent costs, and amortizable
intangible assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the expected undiscounted cash flows is less than the carrying value of
the related asset or group of assets, a loss is recognized for the difference
between the fair value and the carrying value of the related asset or group of
assets. Such analyses necessarily involve significant judgment.
NET LOSS PER SHARE
In accordance with accounting principles generally accepted in the United
States, basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods (excluding shares that are not yet issued). The effect of
stock options, warrants and convertible preferred stock is antidilutive for all
periods presented.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the current tax payable for the period plus or minus the change during the
period in deferred tax assets and liabilities. No current or deferred income
F-12
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
taxes have been provided through December 31, 2002 because of the net operating
losses incurred by the Company since its inception.
STOCK BASED COMPENSATION
The Company has stock-based compensation plans (see Note 8). SFAS No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plans. Had compensation cost been determined
based upon the fair value at the grant date for awards under the plans based on
the provisions of SFAS No. 123, the Company's SFAS No. 123 pro forma net loss
and net loss per share would have been as follows:
YEAR ENDED DECEMBER 31
2002 2001
-------------------------------
Net loss applicable to common stockholders:
As reported $ (6,422,466) $(16,117,676)
Add: Stock-based employee compensation expense related to stock
options determined under fair value based method (577,326) (1,273,694)
-------------------------------
SFAS No. 123 Pro forma $ (6,999,792) $(17,391,370)
===============================
Net loss per share:
As reported, basic and diluted $ (0.29) $ (1.20)
SFAS No. 123 pro forma, basic and diluted (0.31) (1.29)
The weighted average fair value of options granted with an exercise price equal
to the fair market value of the stock was $0.26 and $0.83 for 2002 and 2001,
respectively.
The fair value of options in accordance with SFAS 123 was estimated using the
Black-Scholes option-pricing model and the following weighted-average
assumptions: dividend yield 0%, expected life of four years, volatility of 148%
and 105% in 2002 and 2001, respectively and average risk-free interest rates in
2002 and 2001 of 4.0% and 4.5%, respectively.
Stock compensation expense for options granted to nonemployees has been
determined in accordance with SFAS 123 and Emerging Issues Task Force (EITF)
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services," and
represents the fair value of the consideration received, or the fair value of
the equity instruments issued, whichever may be more reliably measured. For
options that vest over future periods, the fair value of options granted to
non-employees is periodically remeasured as the options vest.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Accounting principles generally accepted in the United States require that fair
values be disclosed for the Company's financial instruments. The carrying
amounts of the Company's financial instruments, which include cash and cash
equivalents, current liabilities and debt obligations are considered to be
representative of their respective fair values.
F-13
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RISK AND UNCERTAINTIES
The Company is subject to risks common to companies in the biotechnology
industry, including, but not limited to, litigation, product liability,
development of new technological innovations, dependence on key personnel,
protections of proprietary technology, and compliance with FDA regulations.
NEW ACCOUNTING PRONOUNCEMENTS
During 2002, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," and SFAS No.
148, "Accounting for Stick-Based Compensation - Transition and Disclosure." The
provisions of SFAS No. 144, which was adopted on January 1, 2002, were applied
by the Company and did not have a material impact on the Company's consolidated
financial statements. SFAS No. 146 will be effective for exit or disposal
activities initiated after December 31, 2002. Adoption of this statement is not
expected to have a material impact on the Company's consolidated financial
statements. Effective December 31, 2002, the Company made the disclosures
required under SFAS No. 148.
4. INVESTMENT IN JOINT VENTURES AND PREFERRED STOCK
In 1998, the Company formed two joint ventures with Elan International Services,
Ltd. (Elan) as follows:
INNOVACCINES CORPORATION
InnoVaccines was established in January 1998 pursuant to agreements between the
Company and Elan. At closing, the Company issued to Elan 307,692 shares of
common stock and a six-year warrant to purchase an additional 230,770 shares of
common stock at an exercise price of $10.00 per share for an aggregate recorded
value of $2.0 million. In addition, Elan purchased $8.0 million of DOR Series B
convertible preferred stock, which is convertible into common stock at a price
of $7.38 per share, subject to adjustment, with automatic conversion at such
point that the common stock trades at over 100,000 shares per day at a closing
price of at least $9.75 per share for 20 out of 30 consecutive trading days. The
Series B convertible preferred stock pays an 8% annual in-kind dividend, which
was $867,542 and $803,280 in 2002 and 2001, respectively.
InnoVaccines was owned 80.1% by DOR and 19.9% by Elan. Although DOR was the
majority shareholder, the joint development agreement of InnoVaccines gave
management participation to both DOR and Elan equally. Therefore, because the
minority shareholder, Elan, had substantive participating veto rights, DOR
accounted for its investment in the joint venture using the equity method of
accounting in accordance with EITF-96-16 "Investor's Accounting for an Investee,
When the Investor Has a Majority of the Voting Interest but the Minority
Shareholder or Shareholders Have Certain Approval or Veto
F-14
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
Rights." InnoVaccines licensed certain technology from Elan and certain other
technology from DOR. DOR and Elan originally invested $8.0 and $2.0 million in
the joint venture, respectively.
At closing, InnoVaccines paid Elan an initial $10.0 million license payment. As
the technology did not yet represent a commercial product, the joint venture
recorded an expense in 1998 for the initial license fee. The Company recorded
its $8.0 million share of the license fee expense in accordance with the equity
method.
InnoVaccines contracted with both DOR and Elan, which performed research and
development on behalf of the joint venture. Elan and DOR each funded research
and development related to InnoVaccines technology equally from the inception of
the joint venture through March 31, 1999, in accordance with the joint
development and operating agreement. Such payments were not funded through the
joint venture and DOR expensed its payments. Subsequent to April 1, 1999, DOR
and Elan were responsible for funding joint venture expenditures in proportion
to their respective ownership levels through the joint venture entity (as a
loan). During the years ended December 31, 2002 and 2001, DOR incurred research
and development and general and administrative expenditures aggregating $0 and
$.4 million, respectively, which were billed to InnoVaccines.
DOR and Elan also incurred approximately $139,000 and $246,000 of expenditures
during the years ended December 31, 2002 and 2001, respectively, related to
certain licenses that DOR and Elan acquired for further development on behalf of
InnoVaccines. Elan and DOR each agreed to pay 50% of the license costs outside
of the joint venture entity. The receivable from related party of $44,447 at
December 31, 2001 on the accompanying consolidated balance sheet represented
reimbursements that were received from Elan in 2002. The Company's portion of
the license costs through the dissolution of the joint venture, $69,732 in 2002
and $123,103 in 2001, was included in equity in losses from joint ventures in
the accompanying statements of operations. In November 2002, the Company
purchased Elan's ownership interest in the license for 500,000 shares of common
stock, recorded at $250,000, which was capitalized because the technology at the
time of purchase was determined to have alternative future use.
ENDOREX NEWCO, LTD.
Newco was established in October 1998 pursuant to agreements between DOR and
Elan. At closing, DOR and Elan paid $8.4 million and $2.1 million to purchase
Newco's common stock, respectively. In addition, Elan purchased $8,410,500 of
DOR Series C Convertible Preferred Stock. The Series C Preferred Stock was
exchangeable at Elan's option for an additional 30.1% ownership interest of
Newco's common stock, which caused the classification of the Series C Preferred
Stock to be outside of equity. The Series C Preferred Stock automatically
converted to common stock at the conversion price of $8.86 on October 21, 2002.
Conversion of Series C Preferred Stock caused total stockholders' equity to
increase by the liquidation value of the Series C Preferred Stock. The Series C
Preferred Stock paid a 7% annual in-kind dividend, which was $588,843 and
$683,221 in 2002 and 2001, respectively.
Newco was owned 80.1% by DOR and 19.9% by Elan. Although DOR was the majority
shareholder, the joint development agreement of Newco gave management
participation to both DOR and Elan equally. Therefore, because the minority
shareholder, Elan, had substantive participating veto rights, DOR accounted for
its investment in the joint venture using the equity method of accounting in
accordance with EITF-96-16. At closing, Newco paid Elan an initial $10.0 million
license payment. Because the technology did not represent a commercial product,
Newco recorded an expense in 1998 for the initial
F-15
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
license fee expense. The Company recorded its $8.0 million share of the license
fee in accordance with the equity method.
The Newco joint venture entity contracted with both DOR and Elan, which
performed research and development on behalf of the joint venture. During 2002
and 2001, Elan and DOR were required to fund Newco expenditures according to
their respective ownership interests. During the years ended December 31, 2002
and 2001, DOR incurred research and development and general and administrative
expenditures aggregating $0 and $45,000, respectively, related to the joint
venture and billed to Newco.
Newco entered into an agreement with Schein Pharmaceuticals (Bermuda) Ltd.
(Schein) for the manufacture of the MEDIPAD. In 2001, Schein terminated the
agreement and agreed to pay Newco $300,000 as a settlement. DOR recorded its
portion of the settlement amount, $240,000, as a reduction of joint venture
related expenses.
DISSOLUTION OF THE ELAN JOINT VENTURES
On June 29, 2002, DOR and Elan signed a definitive agreement for the dissolution
of InnoVaccines and Newco. In connection with this settlement, the Company's
balance of $2,042,833 due to joint ventures (which had been recorded as a
current liability) at December 31, 2001 was restructured into payments totaling
$1,104,242: $524,500 paid immediately in cash and the remaining $579,742 payable
under a note with scheduled payments of principal and interest of $231,897 (June
30, 2003), $231,897 (June 30, 2004) and $115,948 (December 30, 2004),
respectively (see Note 10). The resulting gain of $938,591 on the refinancing of
the Company's payable has been reflected as "equity in earnings (losses) in
joint ventures" in the accompanying statement of operations.
UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR JOINT VENTURES
Condensed, unaudited financial statement information of the joint ventures is
stated below. The joint ventures had no revenues in any period.
DECEMBER 31
2002 2001
-------------------------
InnoVaccines net loss $ - $(586,828)
Newco net income - 44,421
-------------------------
Total net loss $ - $(542,407)
=========================
Reconciliation of joint venture net losses to equity in losses
from joint ventures recorded by DOR:
Total joint venture net losses $ - $(542,407)
DOR mark-up (a) - 155,872
Elan minority interest - 107,939
InnoVaccines costs incurred by DOR, outside of joint venture (69,732) (123,103)
Gain on dissolution of joint ventures 938,591 -
-------------------------
Equity in earnings (losses) from joint venture - DOR $ 868,859 $(401,699)
=========================
F-16
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
(a) The Company invoiced the joint venture at cost, plus a mark-up that was
agreed to by Elan and was intended to approximate overhead costs.
5. ACQUISITION
On November 29, 2001, the Company acquired all of the capital stock of CTD, a
development stage company. A director of DOR was also President, Chief Executive
Officer and a director of CTD. Additionally, stockholders of DOR were also
shareholders of CTD. Pursuant to the Merger Agreement, an aggregate of 9,433,884
shares of DOR common stock valued at $1.25 per share were issued in exchange for
all of the issued and outstanding capital stock of CTD; however, 1,350,000 of
the shares were held in escrow to cover any potential damages for breach of
contract by CTD and were to be issued through March 31, 2003. In 2002, the
Company released 1,011,502 shares from escrow and the remainder were released in
March 2003. The escrowed shares were included in the cost of CTD on the date of
purchase because the issuance of the escrowed shares was considered probable. In
addition, options and warrants to purchase 566,121 shares of DOR common stock
were issued to replace existing vested CTD options and warrants and were valued
at $421,852. As part of the acquisition, the Company incurred $1,500,000 and
$417,852 in direct acquisition costs and equity issuance costs, respectively.
The total purchase price of $14,132,059 was allocated based on the fair market
value of the assets acquired and liabilities assumed as follows:
Cash $ 3,309,960
Prepaid expenses 4,022
Intangible assets 364,151
Accounts payable (144,926)
Acquired IPR&D 10,181,000
Equity issuance costs 417,852
------------
Total $ 14,132,059
============
The acquisition was accounted for as a purchase and, accordingly, the results of
operations have been included in the consolidated financial statements from
November 29, 2001, the effective date of the acquisition. The purchase price has
been allocated to the acquired assets and assumed liabilities on the basis of
their estimated fair values at the acquisition date, with intangible assets
determined in an independent appraisal. Intangible assets acquired consisted of
contractual rights of $364,151 and IPR&D of $10,181,000. Contractual rights
relate to a potential future milestone payment and were calculated based upon
the estimated, probability-of-success-adjusted after-tax cash flows expected to
be generated, using a 25% discount rate. The contractual rights are being
amortized over a period of three years. IPR&D consists of the present value of
the estimated after-tax cash flows expected to be generated by the purchased
technology, which, at the acquisition dates, had not yet completed clinical
trials with the FDA for their intended purpose and had no alternative future use
at the purchase date. In valuing the purchased in-process technologies, the
Company used probability-of-success-adjusted cash flows and a 25% discount rate.
Cash inflows from the in-process products were assumed to commence between 2003
and 2005. Based on current information, the Company believes that the revenue
projections underlying the purchase price allocation are substantially accurate.
As with all pharmaceutical products, the probability of commercial success for
any research and development project is highly uncertain.
F-17
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
6. LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Office and lab equipment is stated at cost. Depreciation is computed on a
straight-line basis over five years. Leasehold improvements are amortized
utilizing the straight-line method over the term of the lease. Depreciation
expense was $186,387 and $175,794 for the periods ended December 31, 2002 and
2001, respectively. Leasehold improvements and equipment consisted of the
following at December 31:
DECEMBER 31
2002 2001
---------------------------------
Leasehold improvements $ 262,985 $ 262,985
Laboratory equipment 927,189 857,560
Office equipment 234,994 220,534
---------------------------------
1,425,168 1,341,079
Accumulated depreciation (1,162,247) (975,860)
---------------------------------
$ 262,921 $ 365,219
=================================
7. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS
In December 2002, the Company sold an aggregate of 3,093,569 shares of common
stock in a private placement. Gross proceeds were $1,085,844 (net after
commissions was $974,069). Commissions were paid to related parties who were
agents for the private placement. Several directors and officers of the Company
were investors in the private placement.
Investors in the December 2002 private placement also received warrants for the
purchase of 1,546,789 shares of DOR common stock. The warrants issued to these
investors are immediately exercisable at $.75 per share and expire December 31,
2007. Also, as part of the compensation received for its assistance in the
private placement, the placement agents/dealers received warrants to purchase an
aggregate 463,073 shares of DOR common stock. These warrants are immediately
exercisable at $.35 - $.75 per share and expire December 31, 2007. The Company
has the right to call the warrants if the closing bid price of DOR's common
stock equals or exceeds $3.00 per share for at least 10 consecutive days.
In connection with an April 2000 private placement, the Company issued warrants
to the investors for the purchase of 452,383 shares of its common stock. The
warrants issued to these investors are immediately exercisable at $5.91 per
share and expire in April 2005. Also, as part of the compensation received for
its assistance in the private placement, the placement agent received warrants
to purchase 226,190 shares of DOR common stock. These warrants are immediately
exercisable at $5.25 per share, expire in October 2007 and the Company has the
right to call the warrants if the closing bid price of DOR's common stock equals
or exceeds $13.125 per share for at least 20 consecutive trading days.
In connection with a 1997 private placement, the Company issued warrants for the
purchase of 864,865 shares of DOR common stock at an exercise price of $1.65 per
share to the placement agent, and certain of its affiliates and employees. The
Company also issued warrants to purchase 1,297,297 shares of DOR common stock at
an exercise price of $1.65 per share to certain employees of the placement
agent. The
F-18
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
warrants are exercisable and expire on April 16, 2003. Through December 31,
2002, 148,161 of these warrants have been exercised.
STOCK COMPENSATION TO NON-EMPLOYEES
During 2002, the Company agreed to issue 37,000 shares of common stock in
consideration for the termination of a consulting agreement. The shares were not
yet issued at December 31, 2002; accordingly, they are included in common stock
to be issued.
The Company granted 50,000 warrants to purchase DOR common stock to a consultant
during 2002 exercisable at a price of $0.40 through November 2003. The Company
also granted another consultant 130,000 warrants to purchase DOR common stock
exercisable at a price of $0.35 through December 14, 2007.
8. STOCK OPTION PLANS
The Amended and Restated 1995 Omnibus Plan (the Plan) is divided into three
separate equity programs: 1) the Discretionary Option Grant Program, under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of common stock, 2) the Salary Investment Option
Grant Program, under which eligible employees may elect to have a portion of
their base salary invested each year in options to purchase shares of common
stock, 3) the Automatic Option Grant Program, under which eligible nonemployee
Board members will automatically receive options at periodic intervals to
purchase shares of common stock, and 4) the Director Fee Option Grant Program,
under which non-employee Board members may elect to have all, or any portion, of
their annual retainer fee otherwise payable in cash applied to a special option
grant.
The rollforward of shares available for grant is as follows:
DECEMBER 31
2002 2001
----------------------------
Shares available for grant at beginning of year 1,101,238 708,697
Increase in shares available based upon the annual Evergreen provision 208,257 127,419
Amendment to increase shares available in plan 6,500,000 2,165,664
Options granted under the Plan (3,087,420) (1,629,500)
Options forfeited 960,625 88,000
Options assumed in CTD acquisition - (359,042)
----------------------------
Shares available for grant at end of year 5,682,700 1,101,238
============================
The Company also issued 442,375 options to a member of the Board of Directors
which were not issued under the Plan. The amendment to increase shares available
in the plan by 6,500,000 options is subject to stockholder approval. If the
market price of the Company's common stock exceeds the option price on the date
stockholder approval is obtained, the Company will be required to record
compensation expense as the options vest for options granted from the amendment
to increase shares by 6,500,000.
F-19
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
Option activity for the years ended December 31, 2002 and 2001 was as follows:
Weighted-Average
Options Exercise
Options Price
---------------------------------
Balance at December 31, 2000 1,511,125 $2.73
Granted 1,629,500 1.04
Assumed in CTD merger 359,042 0.74
Forfeited (88,000) 3.51
---------------------------------
Balance at December 31, 2001 3,411,667 1.69
Granted 3,626,000 0.33
Forfeited (960,625) 1.27
---------------------------------
Balance at December 31, 2002 6,077,042 $0.95
=================================
The weighted-average exercise price, by price range, for outstanding options at
December 31, 2002 is:
Weighted-Average
Remaining Contractual
Life Outstanding Options Options Exercisable
-----------------------------------------------------------------------
Price Range $0.20 - $0.40 9.94 3,495,000 3,157,813
Price Range $0.74 - $0.91 8.70 873,042 753,042
Price Range $1.25 - $2.00 6.24 463,500 446,125
Price Range $2.47 - $6.75 4.99 1,245,500 1,214,850
9. INCOME TAXES
The types of temporary differences between tax bases of assets and liabilities
and their financial reporting amounts that give rise to the deferred tax asset
(liability) and their approximate tax effects are as follows:
DECEMBER 31
2002 2001
------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 21,712,000 $ 15,810,000
Research and development credit carryforwards 1,910,000 1,890,000
Work opportunity credit carryforwards 260,000 260,000
Orphan drug credit carryforwards 2,552,000 1,547,000
Licensing fees - 3,906,000
Other - 65,000
------------------------------
26,434,000 23,478,000
Valuation allowance (26,434,000) (23,478,000)
------------------------------
Net deferred tax assets $ - $ -
==============================
At December 31, 2002, the Company had net operating loss carryforwards of
approximately $52.7 million for U.S. Federal and state tax purposes, which
expire beginning in 2007. In the event of a change
F-20
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
in ownership greater than 50% in a three-year period, utilization of the net
operating losses may be subject to a substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code of 1986 and
similar state provisions.
10. LONG-TERM DEBT
Long-term debt is as follows:
DECEMBER 31
2002 2001
---------------------
Note payable to Elan (see Note 4) $579,742 $ -
Note payable to a bank 150,225 216,846
---------------------
729,967 216,846
Less current portion 382,122 164,748
---------------------
$347,845 $ 52,098
=====================
The note payable to a bank has monthly principal and interest payments of
$12,878 with a final payment on December 31, 2003. The note bears interest at
prime less .25% (4.0% at December 31, 2002) and borrowings are secured by a
short-term certificate of deposit which is included in cash and cash
equivalents.
11. LEASE COMMITMENTS
The Company leases its corporate office under an operating lease through
December 2003, which provides for annual minimum rent and additional rent based
on increases in operating costs and real estate taxes. Rent expense was $61,262
in 2002 and $63,967 in 2001.
Future minimum lease payments under the non-cancelable operating lease will be
$62,978 in 2003.
12. LICENSE AGREEMENTS
During 1998, Innovaccines (see Note 4), the Company's former joint venture with
Elan, acquired a license to broadly issued U.S. and International patents
relating to the oral administration of vaccines. Specifically, these patents
claim the use of microencapsulation for oral and mucosal administration of
vaccines using biocompatible microspheres below 10 microns in diameter. During
2002, the Company acquired Elan's interest in the patent license for 500,000
shares of common stock. Also during 2002, the Company entered into a binding
letter of intent with Southern Research Institute (SRI) to expand its license to
include intranasal vaccine delivery, which is considered by the Company to be
better suited for biodefense vaccines. The Company capitalized the fair value of
500,000 shares ($250,000) of common stock to Elan, as well as a $175,000 payment
to the Southern Research Institute for the expanded license because the acquired
technology is considered to have alternative future uses. Upon execution of a
royalty bearing license agreement, the Company will pay an additional license
fee of $175,000. The Company would also agree to provide $250,000 of sponsored
research during each of the calendar years 2003 to 2006 and would enter into a
three year scientific advisory agreement with a consultant for $50,000 per year.
F-21
DOR BioPharma, Inc.
Notes to Consolidated Financial Statements (continued)
As part of the acquisition of CTD in 2001 (see Note 5), the Company and its
subsidiaries acquired the license to certain patents and "know-how," as defined
in the respective license agreements with various individuals and corporations.
Under the agreements, the Company is required to pay royalties ranging from 2%
to 33% of the selling prices for products or processes that are covered by the
licensed patents. There were no royalties in 2002 or 2001.
In connection with the sale of substantially all assets of a CTD subsidiary in
1999, the Company may receive a maximum of $3,000,000 upon the approval by the
Food and Drug Administration of various treatments.
13. SUBSEQUENT EVENTS (UNAUDITED)
MINISTRY OF DEFENSE LETTER OF INTENT
During January 2003, the Company executed a binding letter of intent to
exclusively license patent applications from the Ministry of Defense of the
United Kingdom covering the use of technology for delivery of vaccines for which
the Company paid $25,000 upon signing the letter of intent. Upon execution of a
royalty bearing license agreement, the Company will be obligated to pay license
fees of $100,000 upon license execution, $25,000 payable on the first
anniversary of the license agreement and $25,000 payable eighteen months
thereafter. The Company would also agree to provide $100,000 of sponsored
research support for a one-year period.
UNIVERSITY OF TEXAS SOUTHWESTERN MEDICAL CENTER OPTION AGREEMENT
During January 2003, the Company executed a worldwide exclusive option to
license patent applications from the University of Texas Southwestern Medical
Center (UT Southwestern) for the intranasal, pulmonary and oral uses of a
recombinant non-toxic ricin vaccine for which the company paid an option fee of
$50,000. During February 2003, the Company executed a binding, 90 day right of
first negotiation agreement with UT Southwestern to obtain the injectable rights
to the ricin vaccine. Until January 2004, the Company may choose to exercise the
option to license the intranasal, pulmonary, and oral rights to the recombinant
non-toxic ricin vaccine for a license fee payment of $100,000.
THOMAS JEFFERSON UNIVERSITY LETTER OF INTENT
During February 2003, the Company executed a letter of intent agreement with
Thomas Jefferson University (Jefferson Agreement) to exclusively license certain
U.S. and international patent applications related to the oral administration of
nontoxic modified botulinum toxins as vaccines for which the Company paid a
$10,000 option fee. The intellectual property also includes patent applications
covering the inhaled and intranasal routes of delivery of the vaccine. Upon
execution of the Jefferson Agreement, the Company will have to pay a license fee
of $160,000, payable in $130,000 of unregistered common stock of the Company and
$30,000 cash. Upon the execution of the license agreement, the Company would
also enter into a one-year Sponsored Research Agreement in which the Company
would provide $300,000 in research support. Upon the execution of the license
agreement, the Company would also enter into a consulting agreement with Dr.
Lance Simpson, the inventor of the botulinum toxin vaccine, for a period of
three years under which Dr. Simpson would receive options to purchase 100,000
shares of the Company's common stock vesting over three years.
F-22
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
DOR BioPharma, Inc.
(A Development Stage Enterprise)
We have audited the accompanying consolidated balance sheets of DOR
BioPharma, Inc. (the Company, a development stage enterprise) as of December 31,
2002 and 2001, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended, and for the
period February 15, 1985 (inception) through December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2002 and 2001 and the consolidated results of its
operations and its cash flows for the years then ended and for the period
February 15, 1985 (inception) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Milwaukee, Wisconsin Ernst & Young LLP
February 21, 2003
F-23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
DOR BIOPHARMA, INC.
By: /s/ Ralph M. Ellison
---------------------------------------
Ralph M. Ellison, Chief Executive
Officer and President
Date: March 31, 2003
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated, on March 31, 2003.
Signature Title
--------- -----
/s/ General Alexander M. Haig, Jr. Chairman of the Board
-------------------------------------------------------
General Alexander M. Haig, Jr.
/s/ Ralph M. Ellison Chief Executive Officer and President (principal
------------------------------------------------------- executive officer)
Ralph M. Ellison
/s/ Steve M. Kanzer Vice-Chairman of the Board
-------------------------------------------------------
Steve M. Kanzer
/s/ William D. Milling Controller, Treasurer and Corporate Secretary
------------------------------------------------------- (principal financial and accounting officer)
William D. Milling
/s/ Larry Kessel Director
-------------------------------------------------------
Larry Kessel
/s/ Arthur Asher Kornbluth Director
-------------------------------------------------------
Arthur Asher Kornbluth
/s/ Evan Myrianthopoulos Director
-------------------------------------------------------
Evan Myrianthopoulos
/s/ Peter Salomon Director
-------------------------------------------------------
Peter Salomon
/s/ Paul D. Rubin Director
-------------------------------------------------------
Paul D. Rubin
CERTIFICATION
I, Ralph M. Ellison M.D., certify that:
1. I have reviewed this annual report on Form 10-KSB of DOR BioPharma
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 03/31/2003
/s/ Ralph M. Ellison M.D.
--------------------------
Ralph M. Ellison M.D.
CEO and President
I, William D. Milling, certify that:
1. I have reviewed this annual report on Form 10-KSB of DOR BioPharma
Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 03/31/2003
/s/ William D. Milling
-------------------------
William D. Milling
Controller
(principal financial and accounting officer)