Registration No. 333-109846
Filed pursuant to Rule 424(b)(3)
PROTALEX, INC.
10,610,049 Shares of
Common Stock
This prospectus is part of a registration statement of Protalex, Inc. filed with the Securities and Exchange Commission. This prospectus relates to the resale by selling stockholders of up to 10,610,049 shares of our common stock, of which 7,445,654 shares are currently outstanding and 3,164,395 shares are issuable upon exercise of warrants granted to these selling stockholders. We will not receive any proceeds from the sale of the shares by these selling stockholders. The selling stockholders may sell common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions.
Our common stock is listed on the Over-the-Counter Bulletin Board, or OTCBB, under the symbol “PRTX.OB.” The last reported sales price per share of our common stock, as reported by the OTCBB on February 18, 2005, was $2.85.
Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is March 15, 2005.
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU SHOULD NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY ANY SHARES IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL. THE INFORMATION IN THIS PROSPECTUS IS CURRENT AS OF THE DATE ON THE COVER AND MAY NOT BE CURRENT AS OF ANY SUBSEQUENT DATE.
TABLE OF CONTENTS
| | Page |
| NOTICE ABOUT FORWARD-LOOKING STATEMENTS | 1 |
| PROSPECTUS SUMMARY | 2 |
| RISK FACTORS | 4 |
| PREVIOUS FINANCINGS | 12 |
| USE OF PROCEEDS | 12 |
| MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 13 |
| DIVIDEND POLICY | 13 |
| BUSINESS | 14 |
| LEGAL PROCEEDINGS | 19 |
| MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION | 19 |
| MANAGEMENT | 23 |
| CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS | 27 |
| SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 28 |
| DESCRIPTION OF SECURITIES | 30 |
| INDEMNIFICATION FOR SECURITIES ACT LIABILITIES | 30 |
| PLAN OF DISTRIBUTION | 30 |
| SELLING STOCKHOLDERS | 31 |
| LEGAL MATTERS | 34 |
| EXPERTS | 34 |
| AVAILABLE INFORMATION | 34 |
| INDEX TO FINANCIAL STATEMENTS | F-1 |
NOTICE ABOUT FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into this prospectus contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. To the extent that the information presented in this prospectus discusses financial projections, information or expectations about our business plans, results of operations, products or markets, or otherwise makes statements about future events, such statements are forward-looking. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “future,” “intends,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,” “expects,” “plans” and “proposes” and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward looking statements include, without limitation:
| • | statements about our product development and commercialization goals and expectations; |
| • | potential market opportunities; |
| • | our plans for and anticipated results of our clinical development activities; |
| • | the potential advantage of our product candidates; |
| • | statements about our future capital requirements, the sufficiency of our capital resources to meetthose requirements and the expected composition of our capital resources; and |
| • | other statements that are not historical facts. |
Forward-looking statements are based on the judgment of management at the time the statements are made. Inaccurate assumptions and known and unknown risks and uncertainties can affect the accuracy of forward-looking statements. These include, among others, the cautionary statements in the “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operation” sections of this prospectus. These cautionary statements identify important factors that could cause actual results to differ materially from those described in the forward-looking statements. When considering forward-looking statements in this prospectus, you should keep in mind the cautionary statements in the “Risk Factors” and “Management’s Discussion and Analysis or Plan of Operation” sections, and other sections of this prospectus.
You should not unduly rely on these forward-looking statements, which speak only as of the date of this prospectus. We undertake no obligation to publicly update any forward-looking statement to reflect new information, events or circumstances, whether anticipated or unanticipated, or to conform the statement to actual results or changes in our expectations.
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this prospectus. This summary does not contain all the information you should consider before investing in our securities. Before making an investment decision, you should read the entire prospectus carefully, including the “Risk Factors” section, the financial statements and the notes to the financial statements. Unless otherwise indicated or required by the context, as used in this prospectus, the terms “we,” “our,” “us” and “the Company” refer to Protalex, Inc.
Our Company
We are a development stage company engaged in developing a class of biopharmaceutical drugs for treating autoimmune and inflammatory diseases. Autoimmune diseases occur when the body’s immune system attacks itself. We are creating a class of human pharmaceuticals from organic molecules to regulate the immune system with persisting effects. Our initial autoimmune disease target is rheumatoid arthritis, which we refer to throughout this prospectus as RA. We plan to bring to market our lead product, PRTX-100, a drug designed to combat the effects of RA and, potentially, other autoimmune diseases. We have completed pre-clinical studies on PRTX-100 and, on March 4, 2005, we filed an Investigational New Drug, or IND, application with the U.S. Food and Drug Administration, or FDA, for Phase I human clinical trials of PRTX-100 in Rheumatoid Arthritis. If our IND application is approved, we will begin human clinical trials of PRTX-100.
Our predecessor corporation was incorporated on April 23, 1958, as “Ideal Homes, Inc.,” which changed its name to “Enerdyne Corporation” and became a public company. We acquired Enerdyne through a reverse merger in November 1999. Since that time, our focus has been on the development of autoimmune drugs, as discussed above. Our corporate headquarters is in New Hope, Pennsylvania.
Our continued existence and plans for future growth depend on our ability to obtain the capital necessary to develop a successful product through the issuance of additional debt or equity. As of November 30, 2004, our cumulative net loss was $9,209,517. We currently do not have a product in the market, and we need to obtain additional financing and develop an approved drug to sustain our existence. For example, we estimate it will require approximately $43,000,000 to develop PRTX-100.
In September 2003, we raised $12,657,599 through a private placement of our common stock and warrants to various institutional and other accredited investors. This capital has been used to continue our operations from September 2003 to the present. We anticipate that we will need to raise additional capital before the end of calendar year 2005 to fund the ongoing FDA approval process for PRTX-100 in RA and, potentially, other autoimmune diseases. The additional capital that would be required for us to continue our operations is discussed in the risk factor entitled “If we cannot raise additional capital on acceptable terms, we will be unable to complete planned clinical trials, obtain regulatory approvals or commercialize our product candidates” on page 5 of this prospectus. Details of our liquidity and capital resources are also discussed in “Management’s Discussion and Analysis or Plan of Operation” on page 20.
Recent Developments
On February 15, 2005, Dr. Eugene A. Bauer joined our board of directors, filling the vacancy created when our board of directors unanimously agreed to increase the size of the board from seven to eight members at a February 10, 2005 meeting.
On December 1, 2004, Protalex, Inc., a New Mexico corporation, or Protalex New Mexico, completed a merger with and into its newly-formed, wholly-owned subsidiary, Protalex, Inc., a Delaware corporation, or Protalex Delaware in order to reincorporate in the State of Delaware. The merger was effected pursuant to a Plan of Merger and Agreement entered into between Protalex New Mexico and Protalex Delaware on October 26, 2004. The reincorporation was submitted to a vote of, and approved by, Protalex New Mexico's shareholders at its annual meeting held on October 26, 2004. As a result of the reincorporation, our legal domicile is now Delaware.
On November 15, 2004, Marc L. Rose became our Vice President of Finance, Chief Financial Officer and Treasurer.
The Offering
Common stock offered by selling stockholders (including shares underlying warrants) | 10,610,049 shares. |
| | |
| Common stock to be outstanding after the offering | 19,963,828 shares (1). |
| | |
| Use of proceeds | We will not receive proceeds from the resale of shares by the selling stockholders. If all warrants issued in September 2003 held by the selling stockholders are exercised, our proceeds from the exercise of those warrants would be approximately $7.6 million. |
| | |
| Over-the-Counter Bulletin Board symbol | PRTX.OB |
| (1) | Based on 16,799,433 shares of common stock outstanding as of February 21, 2005 and 3,164,395 shares issuable upon exercise of warrants related to this offering, but excludes: (i) up to 3,351,255 shares of common stock issuable upon exercise of employee and director stock options, (ii) additional warrants to purchase 85,200 common stock at a price of $1.25 per share, and (iii) additional warrants to purchase 842,003 common stock at a price of $3.50 per share. |
RISK FACTORS
This investment involves a high degree of risk. Before you invest, you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks are realized, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.
Risks Related to Our Business
We have a history of significant losses, and we may never achieve or sustain profitability.
We are focused on product development and have not generated any revenues to date. We have incurred operating losses each year of our operations and we expect to continue to incur operating losses for the next several years. We may never become profitable. The process of developing our products requires significant clinical development and laboratory testing and clinical trials, as well as regulatory approvals. In addition, commercialization of our targeted RA product will require the establishment of sales, marketing and manufacturing capabilities, either through internal hiring or through contractual relationships with others. We expect our research and development and general and administrative expenses will increase over the next several years and, as a result, we expect our losses will increase. As of November 30, 2004, our cumulative net loss was $9,209,517. Our net loss was $2,989,364 for the fiscal year ended May 31, 2004 and $2,470,043 for the subsequent six months. Our continued operational loss may lower the value of our common stock and may jeopardize our ability to continue our operations.
If we fail to obtain regulatory approvals for PRTX-100 or any other drug we develop, we will not be able to generate revenues from the commercialization or sale of those drugs.
We must receive regulatory approval of each of our drugs before we can commercialize or sell that product. The pre-clinical laboratory testing, formulation development, manufacturing and clinical trials of any product we develop, as well as the distribution and marketing of these products, are regulated by numerous federal, state and local governmental authorities in the United States, principally the FDA, and by similar agencies in other countries. The development and regulatory approval process takes many years, requires the expenditure of substantial resources, is uncertain and subject to delays, and will thus delay our receipt of revenues, if any, from PRTX-100 or any other drug we develop. We cannot assure you that our clinical trials will demonstrate the safety and efficacy of PRTX-100 or any other drug we develop or will result in a marketable product.
No product can receive FDA approval unless human clinical trials show both safety and efficacy for each target indication in accordance with FDA standards. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage development. We therefore cannot assure you that the results from our pre-clinical trials for PRTX-100 or any other drug we develop will be predictive of results obtained in future clinical trials. Further, data obtained from pre-clinical and clinical activities are subject to varying interpretations that could delay, limit or prevent regulatory agency approval. We cannot assure you that our trials will establish the safety and efficacy of PRTX-100 or any other drug we develop sufficiently for us to obtain regulatory approval.
If we are unable to enroll enough patients to complete our clinical trials, regulatory agencies may delay their review of or reject our applications, which may result in increased costs and harm our ability to develop products.
Regulatory agencies may delay reviewing our applications for approval, or may reject them, based on our inability to enroll enough patients to complete our clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment may result in increased costs and delays, which could have a harmful effect on our ability to develop products. We may also encounter delays or rejections based on changes in regulatory agency policies during the period in which we develop a drug or the period required for review of any application for regulatory agency approval of a particular compound. We also may encounter delays if we are unable to produce clinical trial material in sufficient quantities and of sufficient quality to meet the schedule for our planned clinical trials. In addition, we rely on a number of third-parties, such as clinical research organizations, to help support the clinical trials by performing independent clinical monitoring, data acquisition and data evaluations. Any failure on the part of these third-parties could delay the regulatory approval process.
Our products, if approved, may fail to achieve market acceptance.
There can be no assurance that any products we successfully develop, if approved for marketing, will achieve market acceptance or generate significant revenues. We intend for our products, including PRTX-100, to replace or alter existing therapies or procedures, and hospitals, physicians or patients may conclude that these products are less safe or effective or otherwise less attractive than existing therapies or procedures. If our products do not receive market acceptance for any reason, it would adversely affect our business, financial condition and results of operations.
Further, our competitors may develop new technologies or products that are more effective or less costly, or that seem more cost-effective, than our products. We can give no assurance that hospitals, physicians, patients or the medical community in general will accept and use any products that we may develop.
If we cannot raise additional capital on acceptable terms, we will be unable to complete planned clinical trials, obtain regulatory approvals or commercialize our product candidates.
We will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our products to market and to establish commercial manufacturing, marketing and sales capabilities. Our future capital requirements will depend on many factors, including:
| | • | the progress of pre-clinical development and laboratory testing and clinical trials; |
| | • | time and costs involved in obtaining regulatory approvals; |
| | • | the number of products we pursue; |
| | • | costs in filing and prosecuting patent applications and enforcing or defending patent claims; and |
| | • | the establishment of selected strategic alliances and activities required for product commercialization. |
We anticipate that we will need to raise additional capital before the end of calendar year 2005 to fund the ongoing FDA approval process for PRTX-100 in RA and, potentially, other autoimmune diseases. In order to raise additional capital, we would seek funding through private or public sales of our securities. This funding may significantly dilute existing stockholders and, if we are able to obtain this funding from one or more strategic partners, they may limit our rights to our technology. No assurance can be given that we will be able to obtain additional financing on favorable terms, if at all. Were we unable to advance in the FDA approval process, our ability to sustain our operations would be significantly jeopardized.
If we are unable to protect our proprietary rights, we may not be able to compete effectively or to operate profitably.
Our commercial success depends, in large part, on our ability to obtain and maintain intellectual property protection for our technology covering our product candidates. Our ability to do so will depend on, among other things, complex legal and factual questions, and it should be noted that the standards regarding intellectual property rights in our industry are still evolving. We will be able to protect our proprietary rights from unauthorized use by third-parties only to the extent that our proprietary rights are covered by valid and enforceable patents or are effectively maintained as trade secrets.
We have tried to protect our proprietary position by filing a U.S. patent application related to PRTX-100. Because the patent position of pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own may not provide any protection against competitors. Our pending patent application or those we may file in the future may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed.
We also rely on trade secrets, know-how and technology, which are not protected by patents, to maintain our competitive position. We protect this information by entering into confidentiality agreements with parties that have access to it, such as our corporate partners, employees and consultants. Any of these parties may breach the agreements and disclose our confidential information, or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent was to be disclosed to or independently developed by a competitor, our business and financial condition could be harmed.
If other companies claim that we infringe their proprietary technology, we may incur liability for damages or be forced to stop our development and commercialization efforts.
Competitors and other third-parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. These lawsuits can be expensive and would consume time and other resources even if unsuccessful or brought without merit. Our competitors may have sought or may seek patents that cover aspects of our technology.
We are aware that a third-party has a pending patent application for technologies generally related to ours, and more patents for similar technologies may be filed in the future. These patent applications may remain confidential after filing. Due to these factors and the inherent uncertainty in the results from patent searches we conduct to determine whether our products may infringe third-parties’ patents, we may unknowingly violate third-party patent rights.
The owners or licensees of these and other patents may file one or more infringement actions against us. Any such infringement action could cause us to incur substantial costs defending the lawsuit and could distract our management from our business, even if the allegations of infringement or misappropriation are unwarranted. The defense of multiple claims could have a disproportionately greater impact. Furthermore, a party making this type of claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from making, using, selling, offering for sale or importing our products or prevent our customers from using our products. If a court determines, or if we independently discover, that any of our products or manufacturing processes violates third-party proprietary rights, we might not be able to reengineer the product or processes to avoid those rights, or obtain a license under those rights on commercially reasonable terms, if at all.
We may become involved in lawsuits to protect or enforce our patents that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate patent litigation against third-parties. In addition, we may become subject to interference or opposition proceedings conducted in patent and trademark offices to determine the priority of inventions. The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings, would be costly and divert our technical and management personnel from their normal responsibilities. An adverse determination of any litigation or defense proceedings could put our patent application at risk of not issuing.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could negatively affect our business and financial results.
If third-party manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed and our costs may rise.
We have relied on, and intend to rely in the future, in part, on third-party contract manufacturers to supply, store and distribute PRTX-100 and other potential products. Any products we develop may be in competition with other product candidates and products for access to these facilities. Thus, we may not be successful in contracting with third-party manufacturers, or they may not be able to manufacture these candidates and products in a cost-effective or timely manner. Additionally, our reliance on third-party manufacturers exposes us to the following risks, any of which could delay or prevent the completion of (x) our clinical trials, (y) the approval of our products by the FDA or (z) the commercialization of our products, resulting in higher costs or depriving us of potential product revenues:
| • | Contract manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. Their failure to establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in the availability of material for clinical study and may delay or prevent filing or approval of marketing applications for our products. Additionally, failure to achieve and maintain high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously hurt our business. |
| • | It may be difficult or impossible for us to find replacement manufacturers quickly on acceptable terms, or at all. For example, we have initially relied on a single contract manufacturer, Eurogentec S.A., to produce PRTX-100. Changing this manufacturer, or changing the manufacturer for any other products we develop, may be difficult. The number of potential manufacturers is limited, and changing manufacturers may require confirmation of the analytical methods of the manufacturing processes and procedures in accordance with FDA-mandated cGMPs. Such confirmation of the analytical methods may be costly and time-consuming. |
| • | Our contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business for the time required to produce, store and distribute our products successfully. |
Drug manufacturers are subject to ongoing periodic unannounced inspection by the FDA, the U.S. Drug Enforcement Agency, and corresponding state and foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. While we are obligated to audit the performance of third-party contractors, we do not have control over our third-party manufacturers’ compliance with these regulations and standards. Failure by our third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of the government to grant market approval of drugs, delays, suspension or withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect our business.
Eurogentec S.A. has produced and is storing sufficient inventory of PRTX-100 to conduct our Phase I and Phase II clinical trials for the treatment of RA. If these inventories are lost or damaged, or if Eurogentec cannot produce additional inventory to complete the remaining phases of clinical trials for the treatment of RA, the clinical development of our product candidate or its submission for regulatory approval could be delayed, and our ability to commercialize this product could be impaired or precluded.
We may not be able to manufacture our products in commercial quantities, which would prevent us from marketing our products.
To date, PRTX-100 has been manufactured in enough quantities to conduct our Phase I and Phase II clinical trials for the treatment of RA. If this product were approved by the FDA for commercial sale, we would need to manufacture it in larger quantities. We have limited manufacturing facilities, and we have no experience in the commercial manufacturing of drugs and limited experience in designing drug manufacturing equipment. Thus, we would need to either develop the capability of manufacturing on a commercial scale or engage third-party manufacturers with this capability. Significant scale-up of manufacturing may require certain additional validation studies, which the FDA must review and approve. Moreover, contract manufacturers often encounter difficulties in achieving volume production, quality control and quality assurance, as well as shortages of qualified personnel. For these reasons, a third-party manufacturer might not be able to manufacture sufficient quantities of PRTX-100 to allow us to commercialize it. If we are unable to increase the manufacturing capacity for PRTX-100, or any other product we may develop, we may experience delays in or shortages in supply when launching them commercially.
We have no experience selling, marketing or distributing our products and no internal capability to do so.
If we receive regulatory approval to commence commercial sales of PRTX-100, we will face competition with respect to commercial sales, marketing and distribution. These are areas in which we have no experience. To market our product directly, we must develop a direct marketing and sales force with technical expertise and supporting distribution capability. Alternatively, we may engage a pharmaceutical or other healthcare company with an existing distribution system and direct sales force to assist us. There can be no assurance that we will successfully establish sales and distribution capabilities either on our own or in collaboration with third-parties or gain market acceptance for our product. To the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third-parties. Those efforts may not succeed.
Competition in the pharmaceutical industry is intense; if we fail to compete effectively, our financial results will suffer.
We engage in a business characterized by extensive research efforts, rapid developments and intense competition. We cannot assure you that our products will compete successfully or that research and development by others will not render our products obsolete or uneconomical. Our failure to compete effectively would negatively affect our business, financial condition and results of operations. We expect that successful competition will depend, among other things, on product efficacy, safety, reliability, availability, timing and scope of regulatory approval and price. Specifically, other factors we expect will impact our ability to compete include the relative speed with which we can develop products, complete the clinical, development and laboratory testing and regulatory approval processes and supply commercial quantities of the product to the market.
We expect competition to increase as technological advances are made and commercial applications broaden. In commercializing PRTX-100 and any additional products we develop using our technology, we will face substantial competition from large pharmaceutical, biotechnology and other companies, universities and research institutions.
Most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals than us. As well, some of our competitors have advantages over us in manufacturing and marketing pharmaceutical products. We are thus at a competitive disadvantage to those competitors who have greater capital resources and we may not be able to compete effectively.
If we are unable to retain key personnel and hire additional qualified scientific, sales and marketing, and other personnel, we may not be able to achieve our goals.
We depend on the principal members of our scientific and management staff, including Steven H. Kane, our president and chief executive officer, Dr. Hector Alila, our senior vice president of drug development, and Marc L. Rose, our chief financial officer. The loss of any of these individuals’ services might significantly delay or prevent the achievement of research, development or business objectives and could negatively affect our business, financial condition and results of operations. We do not maintain key person life insurance on any of these individuals.
Mr. Kane, who joined us in December 2002, Dr. Alila, who joined us in March 2004, and Mr. Rose, who joined us in November 2004, are key additions to our management team and will be critical to directing and managing our growth and development in the future. We are not aware of any present intention of any of these individuals to leave our company.
Our success depends, in large part, on our ability to attract and retain qualified scientific and management personnel such as these individuals. We face intense competition for such personnel and consultants. We cannot assure you that we will attract and retain qualified management and scientific personnel in the future.
Further, we expect that our potential expansion into areas and activities requiring additional expertise, such as further clinical trials, governmental approvals, contract manufacturing and marketing, will place additional requirements on our management, operational and financial resources. We expect these demands will require an increase in management and scientific personnel and the development of additional expertise by existing management personnel. The failure to attract and retain such personnel or to develop such expertise could reduce prospects for our success.
Risks Relating to Our Industry
Even if we obtain marketing approval, PRTX-100 will be subject to ongoing regulatory review.
If regulatory approval of PRTX-100 is granted, that approval may be subject to limitations on the indicated uses for which it may be marketed or contain requirements for costly post-marketing follow-up studies. As to products for which marketing approval is obtained, the manufacturer of the product and the manufacturing facilities will be subject to continual review and periodic inspections by the FDA and other regulatory authorities. In addition, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record keeping related to the product will remain subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product, manufacturer or facility may result in restrictions on the product or the manufacturer, including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies.
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 criminal prosecution.
Market acceptance of PRTX-100 will be limited if users are unable to obtain adequate reimbursement from third-party payors.
Government health administration authorities, private health insurers and other organizations generally provide reimbursement for products like PRTX-100, and our commercial success will depend in part on these third-party payors agreeing to reimburse patients for the costs of our product. Even if we succeed in bringing our proposed RA product to market, we cannot assure you that third-party payors will consider it cost-effective or provide reimbursement in whole or in part for its use.
Significant uncertainty exists as to the reimbursement status of newly approved health care products. PRTX-100 is intended to replace or alter existing therapies or procedures. These third-party payors may conclude that our product is less safe, effective or cost-effective than existing therapies or procedures. Therefore, third-party payors may not approve our product for reimbursement.
If third-party payors do not approve our product for reimbursement or fail to reimburse them adequately, sales will suffer as some physicians or their patients will opt for a competing product that is approved for reimbursement or is adequately reimbursed. Even if third-party payors make reimbursement available, these payors’ reimbursement policies may adversely affect our ability to sell our product on a profitable basis.
Moreover, the trend toward managed healthcare in the United States, the growth of organizations such as health maintenance organizations and legislative proposals to reform healthcare and government insurance programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reduced demand for our product, which could adversely affect our business, financial condition and results of operations.
In addition, legislation and regulations affecting the pricing of pharmaceuticals may change in ways adverse to us before or after the FDA or other regulatory agencies approve PRTX-100 for marketing. While we cannot predict the likelihood of any of these legislative or regulatory proposals, if any government or regulatory agencies adopt these proposals they could negatively affect our business, financial condition and results of operations.
We may be required to defend lawsuits or pay damages in connection with the alleged or actual harm caused by our products.
We face an inherent business risk of exposure to product liability claims in the event that the use of any of our products is alleged to have resulted in harm to others. This risk exists in clinical trials as well as in commercial distribution. In addition, the pharmaceutical and biotechnology industries in general have been subject to significant medical malpractice litigation. We may incur significant liability if product liability or malpractice lawsuits against us are successful. Furthermore, product liability claims, regardless of their merits, could be costly and divert our management’s attention from other business concerns, or adversely affect our reputation and the demand for our product. We currently maintain a $1,000,000 general liability insurance policy, but do not currently maintain product liability insurance because we are not currently conducting trials involving humans. We intend to expand our liability insurance coverage to any products for which we obtain marketing approval, however, such insurance may be unavailable, prohibitively expensive or may not fully cover our potential liabilities. If we are unable to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims or field actions, we may be unable to continue to market our products and develop new markets.
Rapid technological change could make our products obsolete.
Pharmaceutical technologies have undergone rapid and significant change. We expect that pharmaceutical technologies will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any compound, product or process we develop may become obsolete before we recover any expenses incurred in connection with their development. Rapid technological change could make our products obsolete, which could negatively affect our business, financial condition and results of operations.
Risks Related to Our Common Stock
Our common stock has experienced in the past, and may experience in the future, significant price volatility, which substantially increases the risk of loss to persons owning our common stock.
The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. The volatility of pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause this volatility in the market price of our common stock include:
| • | announcements of the introduction of new products by us or our competitors; |
| • | market conditions in the pharmaceutical and biotechnology sectors; |
| • | rumors relating to us or our competitors; |
| • | litigation or public concern about the safety of our potential products; |
| • | our quarterly operating results; |
| • | deviations in our operating results from the estimates of securities analysts; and |
| • | FDA or international regulatory actions. |
Because of the limited trading market for our common stock, and because of the significant price volatility, you may not be able to sell your shares of common stock when you desire to do so. In the fiscal year ended May 31, 2004, our stock price ranged from a high of $5.70 to a low of $1.45 per share, and during the first two quarters of the current fiscal year, our stock price ranged from a high of $2.95 to a low of $2.15. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss as a result of such illiquidity and because the price for our common stock may suffer greater declines due to its price volatility.
We may be the subject of securities class action litigation due to future stock price volatility.
In the past, when the market price of a stock has been volatile, holders of that stock have periodically instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management.
Future sales of common stock by our existing stockholders may cause our stock price to fall.
We are registering for resale by selling stockholders up to 10,610,049 shares of our common stock. These shares represent approximately 63% of our total outstanding common stock assuming full exercise of the warrants issued in September 2003 that are held by the selling stockholders. The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market after this offering or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate and thus inhibit our ability to raise additional capital when it is needed.
We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, the terms of any future debt or credit facility may preclude us from paying these dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
Our common stock is subject to the penny stock rules.
Our common stock is subject to Rule 15g-1 through 15g-9 under the Securities Exchange Act of 1934, as amended, which imposes certain sales practice requirements on broker-dealers which sell our common stock to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 (or $300,000 together with their spouses)). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. This rule adversely affects the ability of broker-dealers to sell our common stock and purchasers of our common stock to sell their shares of such common stock. Additionally, our common stock is subject to the SEC regulations for “penny stock.” Penny stock includes any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions. The regulations require that prior to any non-exempt buy/sell transaction in a penny stock, a disclosure schedule set forth by the SEC relating to the penny stock market must be delivered to the purchaser of such penny stock. This disclosure must include the amount of commissions payable to both the broker-dealer and the registered representative and current price quotations for the common stock. The regulations also require that monthly statements be sent to holders of penny stock which disclose recent price information for the penny stock and information of the limited market for penny stocks. These requirements adversely affect the market liquidity of our common stock.
PREVIOUS FINANCINGS
On September 18, 2003, we sold 7,445,654 shares of our common stock and warrants to purchase an additional 2,605,972 shares of our common stock to institutional and individual investors for an aggregate purchase price of $12,657,599. We also issued warrants to purchase 558,423 shares of our common stock to Merriman Curhan Ford & Co., a registered broker-dealer, in connection with this financing. Each of the warrants issued in connection with this offering has an exercise price of $2.40 per share and expires on September 18, 2008. The securities were issued pursuant to the exemptions from registration set forth in Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder. We obtained representations from each of the investors that they are “accredited investors” for purposes of Regulation D.
Pursuant to the Investor Rights Agreement entered into by Protalex and the investors in this private placement, we had the obligation to file a registration statement on Form SB-2 with the SEC. If that registration statement ceases to be effective for more than 45 days in any 365-day period, we must issue to the investors, on a pro rata basis (based upon the relative amount of securities covered by that registration statement then held by each such investor), additional shares of common stock equal to 0.05% of the shares originally issued, from the 46th day of the applicable 365-day period to the time that registration statement again becomes effective or until such time as all remaining shares under that registration statement may be sold under Rule 144(k) promulgated by the SEC under the Securities Act. In no event will we be required to issue more than 1,340,218 additional shares to these investors.
The Investor Rights Agreement also requires that we take all such actions as may be required under applicable law and our articles of incorporation and bylaws to cause our board of directors to consist of seven directors. We must also include, in the slate of board nominees recommended by the board, a person designated by vSpring SBIC, L.P. Mr. Dinesh Patel currently sits on the board as a designee of vSpring. We also have the obligation to use our best efforts to cause this person to continue to be elected to the board.
Under the terms of the Investor Rights Agreement, if there is a “Change of Control” at a time when vSpring (together with its affiliates) holds at least 1,029,412 shares of our common stock, then each of the investors in the September 2003 private placement can require us to repurchase all shares purchased by such investors, or any portion of such shares, at $2.04 per share. This repurchase must occur within 5 business days after the investor requests the repurchase. A “Change of Control” includes transfer of more than 49% of the voting power of Protalex, consolidation or merger, sale of substantially all of our assets and any liquidation, dissolution or winding up. This right of repurchase terminates on the earlier of either the closing of a firmly underwritten public offering resulting in gross proceeds of not less than $25 million, at a public offering price per share of not less than $6.50, or at the time when our common stock trades on a Nasdaq market or The American Stock Exchange for six months, with an average daily trading volume of 150,000 shares.
USE OF PROCEEDS
This prospectus relates to 10,610,049 shares of our common stock, which may be sold from time to time by the selling stockholders. We will not receive any part of the proceeds from the sale of common stock by the selling stockholders.
If all warrants issued in September 2003 that are held by the selling stockholders are exercised, our proceeds from the exercise of those warrants would be approximately $7.6 million. We intend to use any proceeds we receive from the exercise of those warrants for general corporate purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the fiscal periods indicated, the high and low closing bid prices for the common stock of Protalex for the last two fiscal years. Our common stock is traded on the OTCBB under the stock symbol “PRTX.OB.” The market represented by the OTCBB is extremely limited and the price for our common stock quoted on the OTCBB is not necessarily a reliable indication of the value of our common stock. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| | | High | | Low | |
Fiscal Year Ended May 31, 2003 | | | | | |
| First Quarter | | $ | 2.85 | | $ | 1.20 | |
| Second Quarter | | | 1.91 | | | 1.15 | |
| Third Quarter | | | 3.05 | | | 1.55 | |
| Fourth Quarter | | | 2.95 | | | 1.22 | |
| | | | | | | | |
Fiscal Year Ended May 31, 2004 | | | | | | | |
| First Quarter | | $ | 3.30 | | $ | 1.50 | |
| Second Quarter | | | 5.70 | | | 2.40 | |
| Third Quarter | | | 2.80 | | | 2.25 | |
| Fourth Quarter | | | 2.55 | | | 1.45 | |
| | | | | | | | |
Fiscal Year Ended May 31, 2005 | | | | | | | |
| First Quarter | | $ | 2.95 | | $ | 2.15 | |
| Second Quarter | | | 2.95 | | | 2.25 | |
Our common stock is subject to Rules 15g-1 through 15g-9 under the Exchange Act, which impose certain sales practice requirements on broker-dealers who sell our common stock to persons other than established customers and accredited investors (generally, individuals with net worths in excess of $1,000,000 or annual incomes exceeding $200,000 (or $300,000 together with their spouses)). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale.
As of February 21, 2005, we had 16,799,433 shares of common stock outstanding, which were held by approximately 419 stockholders of record. The transfer agent for our common stock is Wachovia Bank, 1525 West W.T. Harris Blvd., Bldg. 3C, 3rd Floor, Charlotte, NC 28262.
DIVIDEND POLICY
Our board of directors determines any payment of dividends. We have never declared or paid cash dividends on our common stock. We do not expect to authorize the payment of cash dividends on our shares of common stock in the foreseeable future. Any future decision with respect to dividends will depend on future earnings, operations, capital requirements and availability, restrictions in future financing agreements and other business and financial considerations.
BUSINESS
Overview
In September 1999, Protalex acquired a majority of the issued and outstanding shares of common stock of Enerdyne Corporation from Don Hanosh, pursuant to a Stock Purchase Agreement between Protalex, Enerdyne and Mr. Hanosh. In November 1999, Protalex merged with and into Enerdyne pursuant to a Merger Agreement and Plan of Reorganization, and Enerdyne changed its name to Protalex, Inc. After the merger, Protalex’s former stockholders held approximately 92% of the shares of common stock of the Company, and Enerdyne’s former stockholders held approximately 8% of the shares of common stock of the Company.
We are a development stage company engaged in developing a class of biopharmaceutical drugs for treating autoimmune and inflammatory diseases. Our lead product, PRTX-100, has demonstrated effectiveness in pre-clinical studies in regulating the immune system with persisting effects. However, the effectiveness of PRTX-100 shown in pre-clinical studies using animal models may not be predictive of the results that we will see in our clinical trials. We currently have no product on the market. The autoimmune disease initially targeted by us is Rheumatoid Arthritis, or RA. RA is an autoimmune disease that causes the inflammation of the membrane lining multiple joints, resulting in pain, stiffness, warmth, redness and swelling. The inflamed joint lining, the synovium, can invade and damage bone and cartilage. Inflammatory cells release enzymes and cytokines that may damage bone and cartilage. The involved joint can lose its shape and alignment, resulting in pain and loss of movement. According to the National Institute of Health, scientists estimate that RA affects approximately 2.1 million Americans. According to the Merck Manual of Health & Aging, RA affects about 1% of the population worldwide.
Our bioregulatory compounds are based on the principle of normalizing the activities of immune cells at a more basic level than traditional pharmaceutical agents, which act upon the end products of complex body functions. In autoimmune disease models, PRTX-100, which is a natural compound, has reversed the pathologic process resulting in a restoration and maintenance of normal healthy tissue. We intend to bring this biotechnology to bear on a range of serious autoimmune diseases that affect millions of sufferers worldwide, such as Pemphigus, Systemic Lupus Erythematosus, Psoriasis, Immune Thrombocytopenic Purpura, or ITP, Inflammatory Bowel Disease (Crohn’s disease and Ulcerative colitis), Insulin-dependent Diabetes Mellitus, and Multiple Sclerosis. To date, however, we have not conducted any pre-clinical trials related to the treatment of these diseases.
We have completed pre-clinical studies on PRTX-100 and, on March 4, 2005, we filed an IND application with the FDA for Phase I human clinical trials of PRTX-100 in RA. If our IND application is approved, we intend to begin conducting Phase I human clinical trials. We are also broadening our intellectual property and developing our management team, facilities and operational infrastructure for commercialization of our products. Our business and laboratory operations are located in New Hope, Pennsylvania. We also outsource some of our activities to premier contract organizations and facilities. For example, we have completed the manufacturing of PRTX-100 under Good Manufacturing Practices in quantities we believe are sufficient for upcoming human Phase I and Phase II clinical trials. We also plan to contract with a third-party site management organization to run our clinical trials in the United States.
Our in-house research includes demonstrating the efficacy of PRTX-100 in well established and characterized animal models of RA and other autoimmune diseases. For example, we are testing PRTX-100 in murine collagen induced arthritis (CIA) model of human RA. This is the model that was used to test the efficacy of the FDA approved drug, etanercept, or Enbrel™. PRTX-100 has also demonstrated its efficacy in an animal model of Systemic Lupus Erythematosus. Our scientists are also investigating the mechanism of action and developing a second-generation class of compounds. Laboratory staff are also developing analytical methods to screen derivative compounds for bioactivity, measure drug concentrations in the blood, and measure systemic effects to be used in evaluating the efficacy and safety data in human clinical trials.
Pre-clinical safety studies for PRTX-100 are being conducted and so far no evidence of abnormal clinical reactions or toxicity has been observed. These studies and the pre-clinical efficacy studies lay the foundation for the IND application for treating RA, which we submitted to the FDA in March 2005. IND-related activities may include additional manufacturing and formulation of PRTX-100 for animal toxicity testing and for Phase I and II human clinical trials, arranging for packaging and testing, designing clinical trial protocols, and planning the clinical trials with physicians who will be investigators in the trials. We expect the IND-related activities to occur during the next 12 months.
We have concluded five prior private placements of our common stock, raising a total of $16.1 million in the aggregate and carrying us through early research and pre-clinical trials. The most recent private placement in September 2003 raised approximately $12.7 million.We anticipate that we will need to raise additional capital before the end of calendar year 2005 to fund the ongoing FDA approval process for PRTX-100 in RA and, potentially, other autoimmune diseases. Were we unable to advance in the FDA approval process, our ability to sustain our operations would be significantly jeopardized.
As our lead product moves closer to the marketing stage, we intend to look for opportunities to enter into collaborative arrangements with larger strategic partners to market and sell our products in the United States and in foreign markets. We also intend to seek out partners who would be responsible for funding or reimbursing all or a portion of the costs of pre-clinical and clinical trials required to obtain regulatory approval. In return for such payments, we could grant these partners’ rights to market certain of our products in particular geographical regions. We are also evaluating the alternative approach of pursuing our programs independently with the intention of becoming a fully integrated biopharmaceutical company.
About Bioregulation
The immune system exists to protect the body from foreign agents such as bacteria and viruses. In a normal functioning system, a complex set of interactions results in the destruction of these outside bodies. An important aspect of this process is the ability to recognize self (normal tissue) from non-self (foreign agents). Autoimmune diseases such as RA, Pemphigus and others result when this self-recognition goes awry and the immune system mistakenly identifies normal tissue as foreign. In RA, the dysregulation of the immune system causes the joint lining to form invasive tissue that degrades cartilage and bone. With the current treatments available, prevention of long-term damage in RA requires ongoing indefinite drug therapy. The vast majority of FDA approved drugs for the treatment of RA carry significant side effects such as potential infections and development of cancer. They generally target specific products of the immune response that are formed well after the system has lost its ability to self-regulate. We believe our bioregulatory compound PRTX-100 has the potential to restore normal immune response by targeting the disease at its source.
We have discovered a method of “restoring” the immune system through the use of a natural compound called PRTX-100, which has been shown to have no side effects at treatment dosages in animal studies. It also has been shown to work very early in the immune response to prevent the activation of lymphoid cells and the secretion of pathogenic cytokines. In the animal model specifically designed to evaluate the efficacy of anti-arthritic drugs, PRTX-100 has not only inhibited the development of inflammation, but also repaired and/or reversed the tissue damage caused by inflammatory response.
Animal Studies
Protalex’s lead candidate PRTX-100 has proven effective in two clinical standard mouse autoimmune models:
Collagen-Induced Arthritis -- PRTX-100 has demonstrated reproducible efficacy in a well-established animal model of RA. Mice received two injections of collagen in order to stimulate an inflammatory response. One group was treated with various doses of PRTX-100, a second group received Enbrel™, a leading commercially available treatment for RA, and the control group was injected with vehicle saline solution. The mice were observed for clinical symptoms, joint size and loss of function. The results showed that very low doses of PRTX-100 and standard doses of Enbrel™ suppressed clinical symptoms including joint swelling over the first two to three weeks of treatment, and slowed disease progression as compared with the control group. Thereafter, the PRTX-100-treated mice continued to remain disease-free whereas the mice treated with Enbrel™ showed a resumption of joint inflammation and tissue damage. This response to Enbrel™ was expected because the mice developed immune response to it because it is a foreign protein. Overall, these results indicate that PRTX-100 is a potential treatment for RA in humans. The data from these studies will be used to serve as a rationale for conducting clinical trials in human patients.
BXSB Mice -- These animals are genetically predisposed to autoimmune diseases, and this model is used to evaluate drugs for autoimmune diseases such as Lupus, Crohn’s disease and other autoimmune diseases. This genetic model more closely approximates the human condition in that it is complex, multi-factorial and usually treated by multiple drug regimens. In these studies, mice were treated with PRTX-100 and sacrificed at regular intervals. Their organs were weighed and sectioned for histological analysis and their spleens were used for immunological assays. Spleen enlargement (splenomegaly) was significantly reduced in treated animals compared with the controls at almost every time point, demonstrating the ability of PRTX-100 to delay the onset and severity of this disease. Treatment with PRTX-100 also reduced non-specific immunoglobulin production and specific autoantibody production and restored the number and function of immune cells known as T and B lymphocytes. These results represent improvement in a whole animal setting in this complex disease syndrome.
Ongoing pre-clinical safety studies in animals have shown no drug-related toxicity. The studies were conducted in rabbits. Rabbits are a very sensitive model to show any potential toxicity of immunomodulatory drugs such as PRTX-100. All animals survived to scheduled euthanasia. No differences were observed in body weight gain or food consumption, nor in hematology, clinical chemistry, urinalysis, or organ weight data in animals treated with PRTX-100 compared with controls treated with vehicle. These study results will be a crucial component of our IND application with the FDA.
We have performed additional studies in non-human primates to determine the pharmacokinetics of PRTX-100. The results of those studies have indicated more favorable dosing schedules (longer half lives) than studies obtained from rodents. Since non-human primates are more closely related to humans, we decided to perform additional toxicology studies in monkeys to establish the toxicity and starting doses in humans. While these studies delayed the IND submission until the first quarter of calendar 2005, we believe that this approach will ultimately accelerate the development path and maximize success of PRTX-100 in patients. Other IND-related activities include additional manufacturing and formulation of Protalex's drug for Phase I and II clinical trials, arranging for packaging and testing, designing clinical trial protocols, and completing additional toxicology studies utilizing our manufactured drug. These IND and clinical trial-related activities are expected to occur during the next 12 months. Additionally we intend to conduct research and pre-clinical activities with PRTX-100 and other compounds in RA, Systemic Lupus Erythematosus (Lupus) and other related indications.
Manufacturing
We have in the past contracted the manufacturing of our lead drug substance PRTX-100 to Eurogentec S.A. in Belgium. The formulation, stability testing and packaging of the final product for clinical supplies are conducted at another reputable FDA-approved company in the United States. These companies have provided the product for both toxicological testing and clinical supplies. The drug is produced under Good Manufacturing Practices. The process is scaleable to commercial production.
Markets
RA will be the first autoimmune disease targeted by us and is our primary and immediate focus. RA was chosen as a target disease because it represents a well-defined, rapidly growing market for which currently available treatments are expensive, and many patients may not benefit from the existing drugs which can also cause serious side effects. Therefore, there is a significant unmet need in the RA patients who need alternative treatments. If approved, we anticipate that PRTX-100 will provide these patients with a choice of therapy that is efficacious, cost-effective, and has little or no side effects.
RA is a serious autoimmune disorder that causes the body’s immune system to mistakenly produce antibodies that attack the lining of the joints, resulting in inflammation and pain. RA can lead to joint deformity or destruction, organ damage, disability and premature death. According to the National Institute of Health and The Merck Manual of Health & Aging respectively, approximately 2.1 million Americans suffer from RA, with an estimated 1% of the world population suffering from RA. Navigant Consulting estimated that the RA market for 2004 would surpass $6.2 billion and estimates that it will increase to $14.8 billion by the end of 2009.
Currently, no uniformly effective treatment for RA exists. Current treatments are costly, and in most cases must be continued for decades. In contrast, we believe that bioregulator therapy such as PRTX-100 is potentially much more cost-effective and efficacious.
We anticipate that our products will initially be used to treat patients with severe cases of RA, and particularly those individuals for whom other treatments have failed. Additionally, we believe that our experience with this class of patients will prove the efficacy and safety of our products, and will encourage the use of our products in less severely affected individuals in earlier stages of the disease.
Our second major goal is the development of second-generation compounds to add to our pharmaceutical product portfolio. The characterization of the new compounds is underway and the patent application process is ongoing.
Our third goal is to pursue FDA approval to treat other autoimmune diseases, where our drug’s ability to decrease the inflammatory response will abrogate the underlying disease processes. The BXSB animal model is a generalized autoimmune model, so efficacy in pre-clinical trials shows promise in treating other conditions such as Pemphigus, an orphan autoimmune skin disease characterized by large thin-walled blisters. We intend to begin pre-clinical studies in autoimmune diseases other than RA during calendar 2005, upon the demonstration of efficacy in the RA clinical trials.
Competition
We believe, based on our pre-clinical trials, that our compound, PRTX-100, has a potential competitive advantage, as it requires lower doses and is more convenient, safer and more efficacious than existing therapies. This potential advantage has not yet been, and may not ever be, validated in clinical trials. Current RA treatments are characterized by complex manufacturing methods and have resulted in an average annual retail cost of approximately $15,600 to $34,000 per patient, according to an article entitled “Adalimumab: The First Entirely Human Monoclonal Antibody for Rheumatoid Arthritis,” by pharmacists Alicia Mack and Jessica Neely, as well as Thompson Micromedix respectively. A number of pharmaceutical agents are currently being used, with varying degrees of success, to control the symptoms of RA and slow its progression. Available treatment options include:
| | • | Analgesic/anti-inflammatory preparations, ranging from simple aspirin to the recently introduced COX-2 inhibitors; |
| | • | Immunosuppressive/antineoplastic drugs, including azathioprine and methotrexate; |
| | • | TNF (Tumor Necrosis Factor) inhibitors, also known as anti-TNF therapy, currently represented by etanercept (Enbrel™), infliximab (Remicade™), and adalimumab (Humira™); |
| | • | Soluble Interleukin-l (IL-I) Receptor Therapy, Anakinra (Kineret™). Anakinra™, a human recombinant IL-l receptor antagonist (hu rIL-lra) is approved by the FDA for the treatment of RA; and |
| | • | “Immunoadsorption Therapy,” also known as Prosorba®, now in limited use in Europe and the United States, entailing weekly sessions during which a patient’s blood is separated and passed through a molecular filter. The use of such extreme treatment modalities emphasizes the unmet need for a new treatment for patients who cannot respond to existing therapies. |
In all, at least a dozen large and small pharmaceutical companies are active in this market, with Amgen Corporation and Johnson & Johnson, Inc. dominating the market with their respective products, Enbrel™ and Remicade™. Enbrel™, a soluble receptor construct that is administered subcutaneously, generated revenue of $1.3 billion in 2003, according to an August 23, 2004 article by Prohost Research. Remicade™, a chimeric monoclonal antibody administered by intravenous infusion, generated revenue of $1.7 billion in 2003, according to Pharm Exec’s May 2004 article. Abbot’s Humira™, a recent entry into the RA market, generated revenue of $280 million during its first year of sales, according to an October 13, 2004 article by TheStreet.com, Inc.
Another recent entrant into the RA market is a less well-known product by Amgen Corporation, Anakinra (Kineret™). Despite intense media attention and significant sales, the long-term efficacy of these compounds remains to be evaluated. Post-marketing experience has indicated an enhanced risk for serious and opportunistic infections in patients treated with Remicade™ or Enbrel™. Disseminated tuberculosis due to reactivation of latent disease was also seen commonly with TNF inhibitor treatment. In some of the clinical trials, lymphomas were more commonly observed in patients treated with TNF inhibitors compared to placebo controls. TNF inhibitors are not recommended in patients with demyelinating disease or with congestive heart failure. Transient neutropenia or other blood dyscrasias have been reported with Enbrel™ and the other TNF inhibitors. Findings such as these indicate that new and safe treatments for autoimmune diseases such as RA are needed. We anticipate that PRTX-l00 and our other products will provide such opportunity, but there can be no assurance that such results will occur.
If a patent is issued under our U.S. patent application, that patent may be a potential barrier to entry that could prevent competitors from implementing the same procedures as ours. However, we may be unable to protect these proprietary rights. See the risk factor titled “If we are unable to protect our proprietary rights, we may not be able to compete effectively or to operate profitably” on page 6 of this prospectus.
Government Regulation
Our ongoing research and development activities, and our future manufacturing and marketing activities, are subject to extensive regulation by numerous governmental authorities, both in the United States and in other countries. In the United States, the FDA regulates the approval of our products under the authority of the Federal Food, Drug and Cosmetics Act.
In order to obtain FDA approval of our drugs, extensive pre-clinical and clinical tests must be conducted and a rigorous clearance process must be completed. Final approval by the FDA for safety and efficacy may take several years and require the expenditure of substantial resources.
Clinical studies are typically conducted in three sequential phases, although these phases may overlap. In Phase I trials, a drug is tested for safety in one or more doses in a small number of patients or volunteers. In Phase II trials, efficacy and safety are tested in up to several hundred patients. Phase III trials involve additional safety, dosage and efficacy testing in an expanded patient population at multiple test sites.
The results of the pre-clinical and clinical trials are submitted to the FDA in the form of a New Drug Application, or NDA. The approval of an NDA may take substantial time and effort. In addition, upon approval of an NDA, the FDA may require post marketing testing and surveillance of the approved product, or place other conditions on their approvals.
Sales of new drugs outside the United States are subject to foreign regulatory requirements that differ from country to country. Foreign regulatory approval of a product must generally be obtained before that product may be marketed in those countries.
We and any third-party manufacturers or suppliers must continually adhere to federal regulations setting forth requirements, known as current good manufacturing practices, or cGMP, and their foreign equivalents, which are enforced by the FDA and other national regulatory bodies through their facilities inspection programs. If our facilities, or the facilities of our manufacturers or suppliers, cannot pass a preapproval plant inspection, the FDA will not approve the marketing of our product candidates. In complying with cGMP and foreign regulatory requirements, we and any of our potential third-party manufacturers or suppliers will be obligated to expend time, money and effort in production, record-keeping and quality control to ensure that our products meet applicable specifications and other requirements.
Patents, Trademarks, and Proprietary Technology
Our success will depend on our ability to maintain trade secrets and proprietary technology in the United States and in other countries, and to obtain patents for our bioregulatory technology. We filed an initial usage patent application with the U.S. Patent and Trademark Office in April 2002 and prosecution of this patent application is ongoing. Additional patent applications relating to the manufacturing process of PRTX-100 and new compounds are currently in process. We have not sought any foreign protection of our technology.
Laboratory work has begun to characterize derivatives and develop synthetic analogs to PRTX-100, for which we will pursue additional patents as appropriate.
Employees
We currently have eight full-time employees. None of our employees is represented by an organized labor union. We believe our relationship with our employees is very good, and we have never experienced an employee-related work stoppage. We will need to hire and retain highly-qualified experienced technical, management and sales personnel in order to execute our business plan, carry out product development and secure advantages over our competitors. No assurances can be given that we will be able to pay the higher salaries necessary to retain such skilled employees.
Facilities
Our office and laboratory is located in a space at 145 Union Square Drive, New Hope, Pennsylvania 18938. We lease this property pursuant to a three-year lease agreement, which ends February 2007, with options to extend for an additional one or two years. Our facilities in New Hope cover approximately 3,795 square feet.
LEGAL PROCEEDINGS
We are not a party to any pending legal proceeding. We are not aware of threatened legal proceedings to which any person, officer, affiliate of ours or any owner of more than 10% of our stock is an adverse party to or has a material interest adverse to us.
MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes beginning at page F-1. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in this document. See “Notice About Forward-Looking Statements.”
Plan of Operation
Favorable pre-clinical safety and efficacy studies for our lead compound, PRTX-100, lay the foundation for the Investigational New Drug, or IND, Application for treating RA. We submitted our IND application to the FDA on March 4, 2005. We also expect that other IND and clinical trial-related activities will occur during the next 12 months, including arranging for packaging and testing, designing clinical trial protocols and completing additional toxicology studies utilizing our manufactured drug. Additionally, we intend to conduct research and pre-clinical activities with PRTX-100 and other compounds in RA and Pemphigus.
In the area of intellectual property and derivative drug development, our patent application was filed in April of 2002, and additional patent applications relating to the manufacturing process of PRTX-100 and new compounds are currently in process.
We recently hired Marc Rose as our Chief Financial Officer. Staffing plans during this fiscal year include hiring a Medical Director, Project Manager of Clinical Operations, and additional Research & Development Scientists and Laboratory Technicians. Continued growth in staffing is anticipated in our business plan, and specialized staffing requirements in the areas of scientific and FDA regulatory affairs will call for competitive salaries to attract and retain qualified personnel.
In the fourth quarter of calendar year 2004, we completed the redesign and remodeling of our current facility in New Hope, PA. Further expansion of laboratory space is anticipated with further growth of our company.
Research and Development, or R&D, costs increased for the year ended May 31, 2004 over the prior year from $909,246 to $1,339,190. R & D expenses were $1,639,264 and $919,718 and for the six and three months ended November 30, 2004, respectively, compared with $489,281 and $232,047 for the same periods of 2003. The increase in R&D expenses were due to increased activity to outside contract laboratories for pre-clinical trials, product manufacturing, and product qualification related costs, along with hiring Dr. Hector Alila, Senior Vice President of Drug Development in March 2004. R&D expenditures are expected to continue increasing in the current fiscal year, driven by payments to vendors and laboratories performing pre-clinical drug product manufacturing, FDA consultation and clinical trial site management.
Administrative expenses increased for the year ended May 31, 2004 over the prior year from $640,927 to $1,393,347. For the six and three months ended November 30, 2004, administrative expenses were $605,854 and $386,079, respectively, compared with $558,514 and $240,851 for the same periods of 2003. Stock based compensation, which is used to attract and reward qualified employees, consultants and board members and costs associated with hiring new employees, along with the expansion and upgrade of the clinical consultant team associated with our company, accounted for most of the increase in administrative expenses. We have also recruited additional members for our newly created Scientific Advisory Board.
Liquidity and Capital Resources
Since 1999, we have incurred significant losses, and we expect to experience operating losses and negative cash flow for the foreseeable future. Our primary source of cash to meet short-term and long-term liquidity needs is the sale of shares of our common stock. We issue shares in private placements at a discount to the then-current market price (as resales of privately-placed shares are restricted under the Securities Act, which reduces their liquidity and, accordingly, their value as compared to freely-tradable shares on the open market).
On September 19, 2003, we raised $12,657,599 through the sale of 7,445,654 shares of our common stock, with warrants to purchase an additional 3,164,395 shares of our common stock, at an exercise price of $2.40 per shares. The warrants expire on September 19, 2008.
As of November 30, 2004, our net working capital was $6,570,833 and our total cash and cash equivalents were $7,011,021. We have no planned material capital expenditures, significant payments due on long-term obligations, and other demands or commitments to be incurred beyond the next 12 months. We anticipate that we will need to raise additional capital before the end of calendar year 2005 to fund the ongoing FDA approval process for PRTX-100 in RA and, potentially, other autoimmune diseases. No assurance can be given that we will be able to obtain additional financing on favorable terms, if at all. Were we unable to advance in the FDA approval process, our ability to sustain our operations would be significantly jeopardized.
Off Balance Sheet Arrangements
We have entered into the following off-balance sheet arrangements:
| · | Employee Agreements-Officers. To attract and retain qualified management personnel, we have entered into employment agreements with three executive officers: Steven H. Kane, President and Chief Executive Officer, Hector W. Alila, Senior Vice President of Drug Development, and Marc L. Rose, Vice President of Finance, Chief Financial Officer and Treasurer. |
| · | Directors Agreements. To attract and retain qualified candidates to serve on the Board of Directors, we have entered into agreements with G. Kirk Raab, Chairman of the Board of Protalex, Carleton A. Holstrom, Chairman of the Audit Committee, and Eugene A. Bauer, under which Messrs. Raab Holstrom and Bauer receive annual payments aggregating $150,000, $20,000 and $20,000, respectively, as directors fees. |
| · | Operating Lease - Office Space. We have entered into a three year operating lease in New Hope, PA for 3,795 square feet of office and laboratory space. The lease commenced on January 9, 2004 and will expire on February 28, 2007. |
| | | | Payments due by period | |
| Contractual Obligations | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | |
| Employment Agreements-Officers | | | 683,753 | | | 683,753 | | | 0 | | | 0 | | | 0 | |
| Directors Agreements | | | 190,000 | | | 190,000 | | | 0 | | | 0 | | | 0 | |
| Operating Lease - Office Space | | | 223,337 | | | 108,945 | | | 114,392 | | | 0 | | | 0 | |
| Total | | | 1,097,090 | | | 982,698 | | | 114,392 | | | 0 | | | 0 | |
Critical Accounting Policies and Estimates
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Note B to our annual and interim financial statements beginning at page F-1 of this prospectus describes the significant accounting policies and methods used in the preparation of our financial statements.
Accounting policies critical to our business and the understanding of our results of operations are identified in Note B to the financial statements beginning at page F-1 of this prospectus. These policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. Although we believe our judgments and estimates are appropriate and correct, actual future results may differ from our estimates. If different assumptions or conditions were to prevail, the results could be materially different from our reported results. The impact and any associated risks related to these policies on our business operations are discussed throughout this prospectus where such policies affect our reported and expected financial results.
Use of Estimates
The preparation of our 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 of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates have a material impact on our financial statements.
As part of the process of preparing our financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. In the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.
Significant management judgment is required in determining the valuation allowance recorded against our net deferred tax assets, which consists of net operating loss carry-forwards. We have recorded a full valuation allowance of $2,696,000 as of May 31, 2004, due to uncertainties related to our ability to utilize our deferred tax assets before they expire. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable.
MANAGEMENT
The following table sets forth certain information with respect to each of our directors and executive officers as of February 21, 2005:
Name | | Age | | Position and Offices Held with the Company |
| G. Kirk Raab(1)(2) | | 69 | | Chairman of the Board |
| Steven H. Kane(1) | | 52 | | President, Chief Executive Officer and Director |
| Marc L. Rose | | 39 | | Vice President of Finance, Chief Financial Officer, and Treasurer |
| Dinesh Patel(3) | | 54 | | Director |
| John E. Doherty | | 50 | | Director |
| Frank M. Dougherty(1)(2) | | 57 | | Director |
| Carleton A. Holstrom(2)(3) | | 69 | | Director |
| Thomas P. Stagnaro(3) | | 62 | | Director |
| Hector Alila | | 51 | | Vice President of Drug Development |
| Eugene A. Bauer | | 62 | | Director |
| (1) | Member of the Nominating Committee. |
| (2) | Member of Compensation Committee. |
| (3) | Member of the Audit Committee. |
Set forth below is biographical information for each of the above:
G. Kirk Raab has served as Chairman of Board of Protalex since August 2003. From October 1995 to the present, Mr. Raab has served as Chairman of the Board of Connetics Corporation and Medgenies Inc. In addition, from June 1996 to the present Mr. Raab has served as Chairman of the Board of Applied Imaging Inc. Connetics and Applied Imaging are publicly traded companies. He also serves on the board of directors of Velos Medical Informatics, Inc. and The National Science and Technology Medals Foundation. From February 1990 to July 1995, Mr. Raab served as the President and Chief Executive Officer of Genentech, Inc. He originally joined Genentech in February 1985 as its President and Chief Operating Officer. Prior to joining Genentech, Mr. Raab worked for Abbott Laboratories for 10 years, most recently as President, Chief Operating Officer and a director. Mr. Raab served as the first Chairman of the Biotechnology Industry Organization and the California Health Care Institute. Mr. Raab graduated from Colgate University in 1959, and is a Trustee Emeritus. He is a member of Exeter College and was elected to the Chancellor’s Court of Benefactors of Oxford University in September 2002. He is a former trustee of KQED, the San Francisco Ballet, the San Francisco Symphony, UCSF Foundation and Golden Gate Planned Parenthood.
Steven H. Kane has been our President and Chief Executive Officer and has served on our board of directors since December 2002. He has over 25 years of experience in the health care industry. From April 1997 to July 2000 he was Vice President of North American Sales & Field Operations for Aspect Medical Systems, Inc. While at Aspect, he helped guide the company to a successful initial public offering in January 2000. Prior to Aspect, from 1990 to 1997, Mr. Kane was employed by Pyxis Corporation. From 1992 to 1997 he served as the Eastern Area Vice President of Pyxis, where he was instrumental in positioning the company for its successful initial public offering in 1992. Pyxis later was acquired by Cardinal Health for $1 billion. Prior to that Mr. Kane worked in sales management with Eli-Lilly and Becton Dickinson.
Marc L. Rose has been our Vice President of Finance, Chief Financial Officer and Treasurer since November 2004. From March 2001 to November 2004, Mr. Rose served as Vice President and Chief Financial Officer of DentalEZ Group. From January 1998 to March 2001, Mr. Rose was Practice Manager of Oracle Consulting Services for Oracle Corporation. Mr. Rose graduated from Drexel University in 1988 and is a certified public accountant in the Commonwealth of Pennsylvania.
Dinesh Patel has been the Managing Director and Founding Partner of vSpring Capital since August 2000. vSpring Capital is an early stage venture capital fund with $125 million under management. From June 1999 to the present, Dr. Patel has been the Founder, Chairman, President & CEO of Ashni Naturaceuticals, Inc., a company that specializes in the research, development and marketing of clinically tested and patent-protected naturaceutical products. From June 1999 to August 2003, Dr. Patel was co-founder and Chairman of Salus Therapeutics, Inc., a biotechnology company focused on the research and development of nucleic acid-based therapeutics, including antisense and gene therapy drugs. In August 2003 publicly-traded Genta, Inc. acquired Salus for $30 million. From 1985 through 1999, Dr. Patel served as Co-founder, Chairman of the Board of Directors, President & CEO, of TheraTech, Inc., a Salt Lake City, Utah based company that has been a pioneer in the development and manufacture of innovative drug delivery products. Under Dr. Patel’s guidance, TheraTech established strategic alliances with major pharmaceutical companies including Eli Lilly, Pfizer, Proctor & Gamble, Roche, and SmithKline Beecham. TheraTech went public in 1992 and became profitable in 1997. In January 1999, TheraTech was acquired for approximately $350 million by Watson Pharmaceuticals, a California based company. Dr. Patel has been the recipient of numerous awards, including US Small Business Administration’s Business Achiever Award, and Scientific and Technology Award (State of Utah) and Entrepreneur of the Year Award (Mountain West Venture Group). Dr. Patel got his undergraduate degree from India and his doctorate degree from University of Michigan. Dr. Patel is active in the Indian and local community serving on several boards and as an active donor for various charitable causes.
John E. Doherty has served as a director of Protalex since November 1999 and previously served as a director of Enerdyne since August 1999. He also served as our President from 1999 through 2002. From 1976 to 1994, Mr. Doherty was a vice president and principal of Doherty & Co., an investment banking firm. During this time and subsequently, he was involved in early and later stage financing of companies such as Thoratec Laboratories, SeraCar, Inc., and Excalibur Technologies. From 1994 to present, Mr. Doherty has been a private investor, as well as being involved with the early stage development of Protalex.
Frank M. Dougherty has served as a director of Protalex since October 2001. In addition Mr. Dougherty has been our Secretary and Treasurer since January 2004. Mr. Dougherty served as our corporate secretary from June 2002 to December 2002. Mr. Dougherty is a practicing attorney and from November 2001 to the present has been the founder and owner of Frank M. Dougherty P.C., a law firm in Albuquerque, New Mexico. He has practiced law since 1982. Prior to becoming a lawyer, Mr. Dougherty practiced as a CPA in Santa Fe, New Mexico. He has an undergraduate degree in economics from the University of Colorado, a graduate degree in accounting from the University of Arizona and a law degree from Texas Tech University.
Carleton A. Holstrom has been a director of Protalex since October 2004. From 1977 through 1987, Mr. Holstrom was the Chief Financial Officer of Bear, Stearns & Co. and its successor, the Bear Stearns Companies, Inc., and from 1987 to the present, he has been a Managing Director Emeritus. From 1996 to 1997, Mr. Holstrom was the Chief Financial Officer of Scientific Learning Corporation. From 1983 to the present, Mr. Holstrom has served on the Board of Directors of Custodial Trust Company of Princeton, New Jersey, and Scientific Learning Corporation of Oakland, California. From 1989 through 1995, Mr. Holstrom served on the Board of Governors of Rutgers University and was the Chair of the Board of Governors from 1994 through 1995. From 1983 through 1985, Mr. Holstrom served on the Board of Trustees of Rutgers University and was the Chair of that Board from 1998 through 1999. From 1995 through the present date, he has been an Emeritus Member of the Rutgers University Board of Trustees. From 1997 through 2000, Mr. Holstrom served on the Rutgers University Foundation Board of Overseers. He was the Chair of the Board of Overseers from 1979 through 1981. From 2000 to the present, he has served on the Rutgers University Foundation Board of Overseers in an emeritus capacity. From 1994 through the present date, Mr. Holstrom has served on the University of Wisconsin at Madison College of Letters and Sciences Board of Overseers. From 1989 through the present, he served on the University of Wisconsin Foundation Board of Directors and was the Vice Chair of that Foundation from 2000 through 2003. Mr. Holstrom has been a Director of the Woodrow Wilson National Fellowship Foundation from 2002 through the present date.
Thomas P. Stagnaro has served as a director of Protalex since July 2002. Mr. Stagnaro has been the President and Chief Executive Officer of Americas Biotech Distributor since August 2004. From September 2000 to July 2004, Mr. Stagnaro served as President and Chief Executive Officer of Agile Therapeutics, a private company focused on developing women’s healthcare products. Since November 1997, Mr. Stagnaro has served as a director on the board of INKINE Pharmaceutical. Mr. Stagnaro formerly was President and Chief Executive Officer of 3-Dimensional Pharmaceuticals from May 1996 to August 1998 and Univax Biologics from October 1989 to November 1995.
Hector Alila, D.V.M., Ph.D. has been Senior Vice President of Drug Development since March 2004. Dr. Alila has over 20 years of combined scientific research and pharmaceutical product development. Prior to joining Protalex, he was Vice President of Product Development at Cell Pathways (now merged with OSI Pharmaceuticals, Inc.) in Horsham, Pennsylvania from 1998 to 2003. He was responsible for the development of their two key products from preclinical phases to NDA submission. He was the Director of Preclinical Biology/Pharmacology at Gene-Medicine (now Valentis Inc.), The Woodlands, Texas, from 1994 to 1998. He was responsible for discovery and preclinical development of gene medicines for treatment of cancer, inflammation and spinal cord injury. Dr. Alila joined GeneMedicine from SmithKline Beecham, Pennsylvania, where he worked as a Senior Investigator and Project Leader from 1988 to 1994. Dr. Alila’s extensive background in drug discovery and development has resulted in submission of numerous IND applications and NDAs.
Eugene A. Bauer, M.D. has served as a director of Protalex since February 2005. Dr. Bauer is currently the Chief Executive Officer of Neosil Incorporated, a privately-held dermatology-focused specialty pharmaceutical company with several products in pre-clinical development. He was a Senior Client Partner with Korn/Ferry International. He served as Vice President for the Stanford University Medical Center from 1997 to 2001, and as Dean of the Stanford University School of Medicine from 1995 through 2001. Dr. Bauer was a founder of Connetics Corporation, a publicly-traded dermatology-focused therapeutics company. Since 1988 he has been Professor, Department of Dermatology, Stanford University School of Medicine, and was Chief of the Dermatology Service at Stanford University Hospital from 1988 to 1995. From 1982 to 1988, he was a professor at Washington University School of Medicine. He has served as Chairman of two National Institutes of Health study sections of the National Institute of Arthritis and Musculoskeletal and Skin Diseases and has served on a board of scientific counselors for the National Cancer Institute. Dr. Bauer currently serves as a director of Connetics Corporation, as well as serving as a director of three private companies. Dr. Bauer holds B.S. and M.D. degrees from Northwestern University.
Executive Compensation
Our compensation and benefits program is designed to attract, retain and motivate employees to operate and manage us for the best interests of our constituents. Executive compensation is designed to provide incentives for those senior members of management who bear responsibility for our goals and achievements. The compensation philosophy is based on a base salary, with opportunity for significant bonuses to reward outstanding performance, and a stock option program.
The following table sets forth the compensation we paid for services rendered in all capacities during the last three fiscal years to our Chief Executive Officer and our other highly compensated executive officer who served as such at the end of the fiscal year ended May 31, 2004. In accordance with the rules of the SEC, the compensation described in this table does not include medical, group life insurance or ether benefits which are available generally to our salaried employees.
SUMMARY COMPENSATION TABLE
| | | Annual Compensation | | | |
| Name & Principal Position | | Fiscal Year | | Salary $ | | Bonus $ | | Other Annual Compensation | | Restricted Stock Awards $ | |
| Steven H. Kane, President, Chief Executive Officer and | | | 2004 | | $ | 179,165 | | $ | 176,576 | | $ | 0 | | $ | 20,835 | (2) |
| Director | | | 2003 | (1) | $ | 0 | | $ | 0 | | $ | 0 | | $ | 104,107 | (2) |
| | | | | | | | | | | | | | | | | |
| John Doherty | | | 2003 | (3) | $ | 12,500 | | $ | 0 | | $ | 0 | | $ | 0 | |
| Former President and Director | | | 2002 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| | (1) | Mr. Kane was hired as Protalex’s Chief Executive Officer and President effective as of December 16, 2002. Prior to that date, he was not employed, in any capacity, by Protalex. |
| | (2) | Mr. Kane received 41,670 shares of restricted stock through May 31, 2003. The value of this restricted stock received by Mr. Kane is computed using the closing price of Protalex common stock on May 31, 2003, which was $2.25. Mr. Kane received 8,334 shares of restricted stock on June 15, 2003. The value of this stock was also computed using the closing price of Protalex common stock on May 31, 2003. |
| | (3) | Mr. Doherty resigned as our President effective as of December 16, 2002. He no longer serves as an officer of Protalex. He remains a director. |
Option Grants in the Fiscal Year Ended May 31, 2004
The following table sets forth information concerning the stock options granted to each person named in the above “Summary Compensation Table” during our fiscal year ended May 31, 2004, and the exercise price of all such options:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
| | | Number of Securities Underlying Options/SARs Granted (#) | | Percent of Total Options/SARs Granted to Employees in Fiscal Year ( %) | | Exercise or Base Price ($/Share) | | Market Price on Date of Grant | |
| John Doherty | | | 50,000 | | | 13 | % | $ | 2.75 | | $ | 2.50 | |
| Steven H. Kane | | | 100,000 | | | 26 | % | $ | 1.50 | | $ | 2.90 | |
| | | | 75,000 | | | 20 | % | $ | 1.96 | | $ | 2.30 | |
AGGREGATED OPTION EXERCISES IN THE FISCAL YEAR ENDED MAY 31, 2004 AND YEAR END OPTION VALUES.
The following table sets forth information concerning the exercise of stock options by each person named in the “Summary Compensation Table” during our fiscal year ended May 31, 2004, and the value of all exercisable and unexercisable options at May 31, 2004:
| | | Number of Securities Underlying Unexercised Options at Year End | | Value of Unexercised In The Money Options at Year End | |
| Name | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| John Doherty | | | 13,125 | | | 46,875 | | $ | 5,500 | | | -- | |
| Steven H. Kane | | | 528,705 | | | 528,537 | | $ | 356,000 | | $ | 369,000 | |
| | | | | | | | | | | | | | |
The values of unexercised in-the-money options at year-end in the table above were determined based on the fair market value as of May 31, 2004 minus the per share exercise price multiplied by the number of shares.
Employment Agreements
We have an employment agreement, effective as of December 16, 2002, with our current President and Chief Executive Officer, Steven H. Kane, whereby he was paid in stock totaling 8,334 shares per month from January 2003 to June 2003. Thereafter, he was paid $12,500 per month through December of 2003. Currently, he is paid at a rate of $20,833 per month. The agreement calls for, and he was issued, options to purchase 863,242 shares of Protalex common stock. The options vest over four years, at an exercise price of $1.50. Vesting started his first day of employment, December 16, 2002, but the first third of these options were not earned until after one year of employment. The remaining options vest monthly over the remaining three years. The agreement also set out two bonuses that were paid to Mr. Kane, grants an allowance for health care benefits and states that we will pay all expenses relating to the performance of Mr. Kane’s duties as CEO.
We have an employment agreement with Hector W. Alila, our current Vice President of Drug Development, which was effective as of March 1, 2004. Under the agreement, we granted Dr. Alila 50,000 shares of our common stock, made a one time payment of $10,000 and will pay a yearly salary of $170,000. In addition, Dr. Alila was issued options to purchase 150,000 shares of our common stock. These options vest over four years at a rate of 1/48 per month, consistent with the provisions of our Employee Stock Option Plan, or the 2003 plan and have a 10-year term, subject to the terms of the 2003 plan. Dr. Alila is eligible to participate in our annual executive bonus plan, as well as in any life, health, accident, disability, or hospitalization insurance plans, pension plans, or retirement plans as our board of directors makes available to our executives as a group. The agreement also provides for payment to Dr. Alila of up to 12 payments equal to his monthly base salary in the event Dr. Alila is terminated without cause.
Effective as of November 15, 2004, we entered into a letter agreement with Marc Rose, which provides for a monthly salary of $13,750.00 and a grant of options to acquire 100,000 shares of our common stock. These options vest over four years at a rate of 1/48 per month starting on May 15, 2005, retroactive to November 15, 2004, consistent with the provisions of the 2003 plan and have a 10-year term, subject to the terms of the 2003 plan. The letter agreement also provides for an award of 15,000 restricted shares of our common stock. Mr. Rose is eligible to participate in our annual executive bonus plan, as well as in any life, health, accident, disability, or hospitalization insurance plans, pension plans, or retirement plans as our board of directors makes available to our executives as a group. The agreement also provides for payment to Mr. Rose of up to 12 payments equal to his monthly base salary in the event Mr. Rose is terminated without cause.
Director Compensation
Directors received stock-based compensation for their services as directors during the fiscal year ended May 31, 2004. We issued 734,333 stock options to directors during such fiscal year, at exercise prices ranging from $1.50 to $2.75. In addition we have an agreement with Kirk Raab, the Chairman of the Board, Carleton A. Holstrom, Chairman of the Audit Committee, and Dr. Eugene Bauer, to make annual payments to each aggregating $150,000, $20,000 and $20,000, respectively, as directors fees.
Directors do not receive separate meeting fees, but are reimbursed for out-of-pocket expenses. We do not provide a retirement plan for our non-employee directors.
CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
The last of 12 monthly payments of $8,333 was made in June, 2003, concluding a stock buyback agreement with our former Treasurer, Secretary, director and Chief Scientist Dr. Paul Mann. Pursuant to the buyback agreement, we redeemed 142,857 shares of Dr. Mann’s, over 12 months, at $0.70 per share, for a total cost of $100,000.
As discussed above, we have an agreement with Kirk Raab, the Chairman of the Board, to pay $12,500 per month for his services. During the year ended May 31, 2004 we incurred $122,177 related to these services and during the two quarters ended November 30, 2004 we incurred $75,000 related to these services. Also discussed above, we have agreements with Carleton A. Holstrom, Chairman of the Audit Committee, and Dr. Bauer to pay each $20,000 yearly for their services. During the year ended May 31, 2004 and during the quarter ended November 30, 2004 we incurred no expenses related to these services.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is the beneficial ownership of common stock as of February 21, 2005, for our directors, the named executive officers listed in the Summary Compensation Table, our directors and executive officers as a group and each person or entity known by us to beneficially own more than five percent of the outstanding shares of our common stock.
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock issuable currently or within 60 days of February 21, 2005, upon exercise of options or warrants held by that person or group are deemed outstanding. These shares, however, are not deemed outstanding for computing the percentage ownership of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the stockholders named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them. Percentage ownership is based on 16,799,433 shares of common stock outstanding as of February 21, 2005, together with applicable options and warrants for each stockholder. Unless otherwise indicated, the address of each person listed below is in the care of Protalex, Inc., 145 Union Square Drive, New Hope, PA 18938.
| | | Shares Beneficially Owned | |
| Name & Address | | Number | | Percent | |
| G. Kirk Raab, Chairman of the Board and Director | | | 325,460 | (1) | | 1.9 | % |
| Steven H. Kane, President, Chief Executive Officer and Director | | | 786,914 | (2) | | 4.5 | % |
| John E. Doherty, Director and former President | | | 3,037,660 | (3) | | 18.0 | % |
| Frank M. Dougherty, Director | | | 401,192 | (4) | | 2.4 | % |
| Hector Alila, Vice President of Drug Development | | | 96,876 | (5) | | * | |
| Marc L. Rose, Vice President of Finance, Chief Financial Officer and Treasurer | | | 15,000 | | | * | |
| Carleton A. Holstrom, Director | | | 100,000 | (6) | | * | |
| Thomas Stagnaro, Director | | | 265,000 | (7) | | 1.6 | % |
| Eugene A. Bauer, Director | | | 100,000 | (8) | | * | |
| Dinesh Patel, Director | | | 10,882,565 | (9) | | 55.5 | % |
| vSpring SBIC, L.P. | | | | | | | |
2795 E. Cottonwood Pkwy, Suite 360 | | | | | | | |
Salt Lake City, UT 84121 | | | 10,882,565 | (9) | | 55.5 | % |
| Integral Capital Partners VI, L.P. | | | | | | | |
3600 South Lake Drive | | | | | | | |
St. Francis, WI 53235 | | | 1,687,500 | (10) | | 9.8 | % |
| SF Capital Partners Ltd. | | | | | | | |
3000 Sand Hill Road Big 3, Suite 240 | | | | | | | |
Menlo Park, CA 94025 | | | 1,588,235 | (11) | | 9.2 | % |
| All officers and directors as a group (10 persons) | | | 11,459,441 | (12) | | 57.0 | % |
* Indicates less than 1%.
| | (1) | Includes options to purchase 325,460 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (2) | Includes options to purchase 746,912 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (3) | Includes options to purchase 85,000 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (4) | Includes options to purchase 65,000 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (5) | Includes options to purchase 46,876 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (6) | Includes options to purchase 100,000 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (7) | Includes options to purchase 265,000 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (8) | Includes options to purchase 100,000 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
| | (9) | Includes warrants to purchase 720,588 shares of Protalex common stock exercisable within 60 days of February 21, 2005, and 8,103,153 shares of Protalex common stock (including options and warrants to purchase 2,071,637 shares of Protalex common stock exercisable within 60 days of February 21, 2005) held by Steven H. Kane, John E. Doherty, Frank M. Dougherty, G. Kirk Raab, Arthur D. Bankhurst, M.D., Integral Capital Partners VI, L.P. and SF Capital Partners Ltd. for which vSpring SBIC, L.P. shares voting power as described in the following sentence. vSpring SBIC, L.P. has entered into a Shareholder Agreement dated September 18, 2003 with Steven H. Kane, John E. Doherty, Frank M. Dougherty, G. Kirk Raab, Arthur D. Bankhurst, M.D., Integral Capital Partners VI, L.P. and SF Capital Partners Ltd., pursuant to which each such party executed proxies appointing vSpring SPEC, L.P. as their proxy to vote all of such party’s respective shares (i) to fix and maintain the number of directors at seven and (ii) to cause and maintain the election of a candidate designated by vSpring SBIC, L.P. on the Protalex board of directors. The proxy may not be exercised on any other matter, and each party may vote their shares on all other matters. |
| | | vSpring Management L.L.C., a Delaware limited liability company, is the general partner of vSpring SBIC, L.P. Management of the business affairs of vSpring SBIC, L.P., including decisions respecting disposition and/or voting of the shares of Protalex common stock held by vSpring SBIC, L.P., resides in a majority of the managing members of vSpring Management, L.L.C., such that no single managing member of vSpring Management has voting and/or dispositive power of such shares. The managing members of vSpring Management, L.L.C. are Paul Ahlstrom, Ed Ekstrom, Dr. Dinesh Patel, Scott Petty and Greg Warnock. In furnishing information relating to the beneficial ownership of vSpring SBIC, L.P.’s shares, Protalex is relying solely on information provided by vSpring SBIC, L.P. and vSpring Management L.L.C. in the Schedule 13D filed by such parties with the SEC on September 29, 2003. As noted above, Dinesh Patel, a member of our board of directors, is a managing member of vSpring Management, L.L.C., shares voting power in respect to vSpring Management L.L.C.’s shares and may be deemed to beneficially own the shares owned by vSpring Management L.L.C. |
| (10) | Includes warrants to purchase 437,500 shares of Protalex common stock exercisable within 60 days of February 21, 2005. Integral Capital Management VI, LLC, a Delaware limited liability company (“ICM6”) is the general partner of Integral Capital Partners VI, L.P., a Delaware limited partnership (“ICP6”). Management of the business affairs of ICM6, including decisions respecting disposition and/or voting of Protalex common stock, resides in a majority of the managers of ICM6, such that no single manager of ICM6 has voting and/or dispositive power of the Protalex common stock held by ICP6. The managing members of ICM6 are Roger B. McNamee, John A. Powell, Pamela K. Hagenah, Charles A. Morris, Brian T. Stansky and Glen T. Kacher. In furnishing information relating to the beneficial ownership of ICP6’s shares, Protalex is relying solely on information provided by ICM6 and ICP6 in the Schedule 13D filed by such parties with the SEC on September 26, 2003. |
| | (11) | Includes warrants to purchase 411,765 shares of Protalex common stock exercisable within 60 days of February 21, 2005 held directly by SF Capital Partners, Ltd., a British Virgin Islands company (“SF Capital”). Michael A. Roth and Brian J. Stark are the founding members and direct the management of Staro Asset Management, L.L.C., a Wisconsin limited liability company (“Staro”) which acts as investment manager and has sole power to direct the management of SF Capital. Through Staro, Messrs. Roth and Stark possess sole voting and dispositive power over all of the foregoing shares. In furnishing information relating to the beneficial ownership of SF Capital’s shares, Protalex is relying solely on information provided by Messrs. Roth and Stark. in the Schedule 13G filed by such parties with the SEC on November 6, 2003. |
| | (12) | Includes options to purchase 1,734,248 shares and warrants to purchase 1,569,823 shares of Protalex common stock exercisable within 60 days of February 21, 2005. |
DESCRIPTION OF SECURITIES
The following description of our common stock is a summary and is qualified in its entirety by the provisions of our certificate of incorporation, which has been filed with the SEC.
On December 1, 2004, Protalex, Inc., a New Mexico corporation, consummated a merger with and into its newly-formed, wholly-owned subsidiary, Protalex Delaware in order to reincorporate in the State of Delaware. Following our reincorporation, our authorized capital stock consists of 40,000,000 shares of $0.00001 par value common stock, of which 16,799,433 shares were issued and outstanding as of February 21, 2005. We have reserved 7,837,853 shares of common stock for issuance pursuant to outstanding options and warrants, including 3,746,255 shares reserved for issuance under existing stock option agreements and our 2003 Stock Option Plan. Each issued and outstanding share is fully paid and non-assessable. No pre-emptive rights exist with respect to any of our common stock. Holders of shares of our common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of shares of our common stock have no cumulative voting rights. Holders of shares of our common stock are entitled to share ratably in dividends, if any, as may be declared, from time to time by our board of directors in its discretion, from funds legally available therefor. In the event of a liquidation, dissolution or winding up of Protalex, the holders of shares of our common stock are entitled to their pro rata share of all assets remaining after payment in full of all liabilities.
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The General Corporation Law of the State of Delaware and our bylaws provide for indemnification of our directors for liabilities and expenses that they may incur in such capacities. In general, our directors and officers are indemnified with respect to actions taken in good faith and in a manner such person believed to be in our best interests, and with respect to any criminal action or proceedings, actions that such person has no reasonable cause to believe were unlawful. Furthermore, the personal liability of our directors is limited as provided in our articles of incorporation.
We maintain directors and officers liability insurance with an aggregate coverage limit of $1,000,000.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:
| | • | ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser; |
| | • | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; |
| | • | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
| | • | an exchange distribution in accordance with the rules of the applicable exchange; |
| | • | privately negotiated transactions; |
| | • | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; |
| | • | a combination of any such methods of sale; and |
| | • | any other method permitted pursuant to applicable law. |
The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades. The selling stockholders may pledge their shares of common stock to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares.
Broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling stockholders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved.
Each selling stockholder may be deemed to be an “underwriter” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. In the event the selling shareholders are deemed to be “underwriters” they must comply with applicable laws and may, among other things:
| • | not engage in any stabilization activities in connection with our common stock; |
| • | furnish each broker or dealer through which common stock may be offered, such copies of this prospectus, as amended from time to time, as may be required by such broker or dealer; and |
| • | not bid for or purchase any of our securities or attempt to induce any person to purchase any of oursecurities other than as permitted under the Exchange Act. |
We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders, but excluding brokerage commissions or underwriter discounts. We and the selling stockholders have agreed to indemnify each other against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
SELLING STOCKHOLDERS
The selling stockholders purchased an aggregate of 7,445,654 shares of common stock in a private placement offering under Section 4(2) and Section 506 of Regulation D under the Securities Act. The selling stockholders also received warrants to purchase an aggregate of 3,164,395 shares of common stock upon exercise of warrants. The warrants have an exercise price of $2.40 per share.
We have registered for resale the shares sold in the private placement and issuable on exercise of the warrants to permit the selling stockholders and transferees to resell the shares when they deem appropriate. Except with respect to vSpring SBIC, L.P., Integral Capital Partners VI, L.P., SF Capital Partners Ltd. (as to each of which additional information is provided previously under the section of this prospectus entitled “Security Ownership of Certain Beneficial Owners and Management”) and William Hitchcock, who served as our Chairman of the Board from October 2001 to October 2003, none of the selling stockholders or their respective affiliates has, or within the past three years has had, any position, office or other material relationship with us or any of our predecessor or affiliates, nor is in a position where it should be able to control us.
Ten selling shareholders have affiliations with broker-dealers as follows:
| • | Joseph R. Hardiman is a director and shareholder of Brown Advisory & Trust Co., which is an affiliate of Brown Advisory Securities, a member of the NASD. |
| • | Two members of Robert A. Mackie’s immediate family work for members of the NASD. |
| • | The managing member of Catalysis Partners, LLC is a registered representative of Strome Securities LP, a member of the NASD. |
| • | Terral Jordan employer’s wholly-owned subsidiary is a member of the NASD. |
| | • | Jon M. Plexico is an employee of Merriman Curhan Ford & Co. (“MCF”), which is an NASD member. As well, MCF is a publicly traded entity of which he owns shares and MCF is Mr. Plexico’s broker for conducting transactions. |
| | • | William M. Hitchcock is a registered representative of Pembroke Financial Partners LLC, which is a NASD member firm. |
| • | Edward B. Keaney is a Managing Director of MCF, which is an NASD member firm. |
| | • | The Havens family also owns stock in A.G. Edwards and Morgan Stanley, who are members of the NASD. |
| | • | SF Capital Partners Ltd. is affiliated with two NASD broker-dealers; Reliant Trading and Shepherd Trading Limited. |
| | • | Some of the limited partners of Integral Capital Partners VI, L.P. are associated with Morgan Stanley, however, such people own less than 10% collectively of the limited partnership interests. |
| | • | Mark E. Strome, who holds the shares as Strome Alpha Fund, LP, is the CEO and President of Strome Securities LP, a NASD member firm. |
| | • | Kenneth R. Werner, who holds the shares as Kenneth R. Werner Revocable Trust Dtd 7/20/96, is employed by MCF, which is an NASD member. Mr. Werner is a registered representative of MCF, which is a public company. |
In the purchase agreement, each of the selling stockholders, including those selling stockholders with broker-dealer affiliations, represented that it had acquired the shares for investment purposes only and with no present intention of distributing those shares, except in compliance with all applicable securities laws. In addition, each of the selling stockholders purchased the shares in the ordinary course of business and represented that it qualifies as an “accredited investor” as such term is defined in Rule 501 under the Securities Act.
The table below sets forth the name of each person who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by each person, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each person will own after the offering, assuming they sell all of the shares offered. We will not receive any proceeds from the resale of the common stock by the selling stockholders.
Beneficial ownership is determined in accordance with the rules of the SEC. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock issuable currently or within 60 days of February 21, 2005, upon exercise of options or warrants held by that person or group are deemed outstanding. These shares, however, are not deemed outstanding for computing the percentage ownership of any other person. Percentage ownership is based on 16,799,433 shares of common stock outstanding as of February 21, 2005, together with applicable options and warrants for each stockholder.
| | | | NO. OF SHARES OFFERED (INCLUDES STOCK UNDERLYING WARRANTS) | | | SHARES OWNED PRIOR TO THE OFFERING | | | SHARES OWNED AFTER
THE OFFERING | |
| | | | | | NUMBER | | | PERCENTAGE | | | NUMBER | | | PERCENTAGE | |
| vSpring SBIC, L.P. | | | 2,779,412(1 | ) | | 10,882,565(66 | ) | | 55.5 | % | | 0(67 | ) | | * | |
| Integral Capital Partners VI, L.P. | | | 1,687,500(2 | ) | | 1,687,500 | | | 9.8 | % | | 0 | | | * | |
| SF Capital Partners Ltd. | | | 1,588,235(3 | ) | | 1,588,235 | | | 9.2 | % | | 0 | | | * | |
| Merriman Curhan Ford & Co. | | | 558,423(4 | ) | | 558,423 | | | 3.2 | % | | 0 | | | * | |
| Strome Alpha Fund, LP | | | 270,000(5 | ) | | 510,000 | | | 3 | % | | 240,000 | | | 1.4 | % |
| Kinloch Rice Fields, LLC | | | 397,059(6 | ) | | 397,059 | | | 2.3 | % | | 0 | | | * | |
| The Lincoln Fund, L.P. | | | 238,236(7 | ) | | 238,236 | | | 1.4 | % | | 0 | | | * | |
| MedCap Partners, L.P. | | | 202,500(8 | ) | | 202,500 | | | 1.2 | % | | 0 | | | * | |
| David MacMillan | | | 127,059(9 | ) | | 247,059 | | | 1.5 | % | | 120,000 | | | * | |
| Matthew & Angela Hall Family Trust | | | 158,823(10 | ) | | 158,823 | | | * | | | 0 | | | * | |
| William Hitchcock | | | 135,000(11 | ) | | 613,680 | | | 3.6 | % | | 478,680 | | | 2.8 | % |
| Philip T. Sharples Trust U/A DTD 11/13/52 | | | 81,000(12 | ) | | 141,000 | | | * | | | 60,000 | | | * | |
| Terry J. Hennigan | | | 59,559(13 | ) | | 137,115 | | | * | | | 77,556 | | | * | |
| Henry W. Harris | | | 135,000(14 | ) | | 135,000 | | | * | | | 0 | | | * | |
| Eric Fellner | | | 135,000(15 | ) | | 135,000 | | | * | | | 0 | | | * | |
Philip P. Sharples 1994 Family Trust U/A DTD 5/16/94 | | | 81,000(16 | ) | | 181,000 | | | 1.1 | % | | 100,000 | | | * | |
| Prism Capital 5, L.P. | | | 119,117(17 | ) | | 119,117 | | | * | | | 0 | | | * | |
| James R. Walker | | | 67,500(18 | ) | | 167,500 | | | 1 | % | | 100,000 | | | * | |
| Holly E. Zug Trust Dtd. 8/5/97 | | | 40,500(19 | ) | | 120,500 | | | * | | | 80,000 | | | * | |
| Terral Jordan | | | 40,500(20 | ) | | 120,500 | | | * | | | 80,000 | | | * | |
| Mark P. Mason | | | 40,500(21 | ) | | 140,500 | | | * | | | 100,000 | | | * | |
| William P. Getty | | | 79,412(22 | ) | | 79,412 | | | * | | | 0 | | | * | |
| Richard L. Breaux | | | 79,412(23 | ) | | 79,412 | | | * | | | 0 | | | * | |
| The Lincoln Fund Tax Advantaged, L.P. | | | 79,412(24 | ) | | 79,412 | | | * | | | 0 | | | * | |
| Frank A. Bonsal, Jr. | | | 79,412(25 | ) | | 79,412 | | | * | | | 0 | | | * | |
| Alexander M. Laughlin | | | 79,412(26 | ) | | 79,412 | | | * | | | 0 | | | * | |
Edgewood Management Company Profit Sharing Plan | | | 79,412(27 | ) | | 79,412 | | | * | | | 0 | | | * | |
| Christoph Henkel | | | 79,412(28 | ) | | 79,412 | | | * | | | 0 | | | * | |
| Joseph R. Hardiman | | | 67,500(29 | ) | | 67,500 | | | * | | | 0 | | | * | |
| Louise A. Havens Living Trust | | | 13,500(30 | ) | | 73,500 | | | * | | | 60,000 | | | * | |
| Robert Anthony Mackie | | | 40,500(31 | ) | | 60,500 | | | * | | | 20,000 | | | * | |
| Brenton M. Wickam | | | 59,559(32 | ) | | 59,559 | | | * | | | 0 | | | * | |
| Bayard Walker, Jr. | | | 40,500(33 | ) | | 73,834 | | | * | | | 33,334 | | | * | |
| John Burd Defined Benefit Plan | | | 40,500(34 | ) | | 40,500 | | | * | | | 0 | | | * | |
| Brock Ganeles | | | 40,500(35 | ) | | 40,500 | | | * | | | 0 | | | * | |
| Hanne S. Castle | | | 40,500(36 | ) | | 40,500 | | | * | | | 0 | | | * | |
| Joanna K. Corrigan Irrevocable Trust | | | 40,500(37 | ) | | 40,500 | | | * | | | 0 | | | * | |
| Lawrence J. Chazen Revocable Trust dtd 1/31/90 | | | 39,706(38 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Jonathan D. Calloghan | | | 39,706(39 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Victor E. Parker, Jr. | | | 39,706(40 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Dixon R. Doll Sr. & Carol Doll Trust | | | 39,706(41 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Doll Family Partnership | | | 39,706(42 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Catalysis Partners, LLC | | | 39,706(43 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Matthew Crisp | | | 39,706(44 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Jon M. Plexico | | | 39,706(45 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Alan R. Sheriff | | | 39,706(46 | ) | | 39,706 | | | * | | | 0 | | | * | |
| Dennis Tran & Rosalie Duong | | | 37,800(47 | ) | | 37,800 | | | * | | | 0 | | | * | |
| Peter Lawson-Johnston | | | 33,750(48 | ) | | 33,750 | | | * | | | 0 | | | * | |
| Jonathan Merriman | | | 23,823(49 | ) | | 23,823 | | | * | | | 0 | | | * | |
| Kenneth R. Werner Revocable Trust Dtd 7/20/96 | | | 23,823(50 | ) | | 23,823 | | | * | | | 0 | | | * | |
| Anne S. Ritchie Holum | | | 22,950(51 | ) | | 22,950 | | | * | | | 0 | | | * | |
| Dorothy N. Ritchie-Valhouli | | | 22,950(52 | ) | | 22,950 | | | * | | | 0 | | | * | |
| J. Michael Ritchie | | | 22,950(53 | ) | | 22,950 | | | * | | | 0 | | | * | |
| Charles J. Kaspar III | | | 22,275(54 | ) | | 22,275 | | | * | | | 0 | | | * | |
| Robert E. Ford | | | 19,853(55 | ) | | 19,853 | | | * | | | 0 | | | * | |
| Gregory H. Williams | | | 19,853(56 | ) | | 19,853 | | | * | | | 0 | | | * | |
| Kevin J. Raidy | | | 19,853(57 | ) | | 19,853 | | | * | | | 0 | | | * | |
| Edward B. Keaney | | | 15,883(58 | ) | | 15,883 | | | * | | | 0 | | | * | |
| Dixon R. Doll Jr. & Sarah Doll | | | 13,500(59 | ) | | 13,500 | | | * | | | 0 | | | * | |
| Steven R. Sarracino | | | 13,500(60 | ) | | 13,500 | | | * | | | 0 | | | * | |
| Hans Hartvickson | | | 13,500(61 | ) | | 13,500 | | | * | | | 0 | | | * | |
| Craig E. Sultan | | | 13,500(62 | ) | | 13,500 | | | * | | | 0 | | | * | |
| John Sutcliffe | | | 13,500(63 | ) | | 13,500 | | | * | | | 0 | | | * | |
| Patrick J. McQuaid | | | 10,125(64 | ) | | 10,125 | | | * | | | 0 | | | * | |
| John Hiestand | | | 7,941(65 | ) | | 7,941 | | | * | | | 0 | | | * | |
* Indicates less than 1%.
| | (1) | Includes stock underlying a warrant to purchase 720,588 shares of common stock at an exercise price of $2.40 per share. |
| | (2) | Includes stock underlying a warrant to purchase 437,500 shares of common stock at an exercise price of $2.40 per share. |
| | (3) | Includes stock underlying a warrant to purchase 411,765 shares of common stock at an exercise price of $2.40 per share. |
| | (4) | Includes stock underlying a warrant to purchase 558,423 shares of common stock at an exercise price of $2.40 per share. Merriman Curhan Ford & Co. acted as a broker-dealer for Protalex, in connection with Protalex’s September 2003 private placement. |
| | (5) | Includes stock underlying a warrant to purchase 70,000 shares of common stock at an exercise price of $2.40 per share. Strome Alpha Fund, LP is the transferee of shares originally issued to Mark E. Strome Ttee FBO Mark E. Strome Living Trust dated 1/15/97. |
| | (6) | Includes stock underlying a warrant to purchase 102,941 shares of common stock at an exercise price of $2.40 per share. |
| | (7) | Includes stock underlying a warrant to purchase 61,765 shares of common stock at an exercise price of $2.40 per share. |
| | (8) | Includes stock underlying a warrant to purchase 52,500 shares of common stock at an exercise price of $2.40 per share. |
| | (9) | Includes stock underlying a warrant to purchase 32,941 shares of common stock at an exercise price of $2.40 per share. |
| | (10) | Includes stock underlying a warrant to purchase 41,176 shares of common stock at an exercise price of $2.40 per share. |
| | (11) | Includes stock underlying a warrant to purchase 35,000 shares of common stock at an exercise price of $2.40 per share. Mr. Hitchcock previously served as Chairman of the Board of Protalex from October 2001 to October 2003. |
| | (12) | Includes stock underlying a warrant to purchase 21,000 shares of common stock at an exercise price of $2.40 per share. |
| | (13) | Includes stock underlying a warrant to purchase 15,441 shares of common stock at an exercise price of $2.40 per share. |
| | (14) | Includes stock underlying a warrant to purchase 35,000 shares of common stock at an exercise price of $2.40 per share. |
| | (15) | Includes stock underlying a warrant to purchase 35,000 shares of common stock at an exercise price of $2.40 per share. |
| | (16) | Includes stock underlying a warrant to purchase 21,000 shares of common stock at an exercise price of $2.40 per share. |
| | (17) | Includes stock underlying a warrant to purchase 30,882 shares of common stock at an exercise price of $2.40 per share. |
| | (18) | Includes stock underlying a warrant to purchase 17,500 shares of common stock at an exercise price of $2.40 per share. |
| | (19) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (20) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (21) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (22) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (23) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (24) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (25) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (26) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (27) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (28) | Includes stock underlying a warrant to purchase 20,588 shares of common stock at an exercise price of $2.40 per share. |
| | (29) | Includes stock underlying a warrant to purchase 17,500 shares of common stock at an exercise price of $2.40 per share. |
| | (30) | Includes stock underlying a warrant to purchase 3,500 shares of common stock at an exercise price of $2.40 per share. |
| | (31) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (32) | Includes stock underlying a warrant to purchase 15,441 shares of common stock at an exercise price of $2.40 per share. |
| | (33) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (34) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (35) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (36) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (37) | Includes stock underlying a warrant to purchase 10,500 shares of common stock at an exercise price of $2.40 per share. |
| | (38) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (39) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (40) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (41) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (42) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (43) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (44) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (45) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (46) | Includes stock underlying a warrant to purchase 10,294 shares of common stock at an exercise price of $2.40 per share. |
| | (47) | Includes stock underlying a warrant to purchase 9,800 shares of common stock at an exercise price of $2.40 per share. |
| | (48) | Includes stock underlying a warrant to purchase 8,750 shares of common stock at an exercise price of $2.40 per share. |
| | (49) | Includes stock underlying a warrant to purchase 6,176 shares of common stock at an exercise price of $2.40 per share. |
| | (50) | Includes stock underlying a warrant to purchase 6,176 shares of common stock at an exercise price of $2.40 per share. |
| | (51) | Includes stock underlying a warrant to purchase 5,950 shares of common stock at an exercise price of $2.40 per share. |
| | (52) | Includes stock underlying a warrant to purchase 5,950 shares of common stock at an exercise price of $2.40 per share. |
| | (53) | Includes stock underlying a warrant to purchase 5,950 shares of common stock at an exercise price of $2.40 per share. |
| | (54) | Includes stock underlying a warrant to purchase 5,775 shares of common stock at an exercise price of $2.40 per share. |
| | (55) | Includes stock underlying a warrant to purchase 5,147 shares of common stock at an exercise price of $2.40 per share. |
| | (56) | Includes stock underlying a warrant to purchase 5,147 shares of common stock at an exercise price of $2.40 per share. |
| | (57) | Includes stock underlying a warrant to purchase 5,147 shares of common stock at an exercise price of $2.40 per share. |
| | (58) | Includes stock underlying a warrant to purchase 4,118 shares of common stock at an exercise price of $2.40 per share. |
| | (59) | Includes stock underlying a warrant to purchase 3,500 shares of common stock at an exercise price of $2.40 per share. |
| | (60) | Includes stock underlying a warrant to purchase 3,500 shares of common stock at an exercise price of $2.40 per share. |
| | (61) | Includes stock underlying a warrant to purchase 3,500 shares of common stock at an exercise price of $2.40 per share. |
| | (62) | Includes stock underlying a warrant to purchase 3,500 shares of common stock at an exercise price of $2.40 per share. |
| | (63) | Includes stock underlying a warrant to purchase 3,500 shares of common stock at an exercise price of $2.40 per share. |
| | (64) | Includes stock underlying a warrant to purchase 2,625 shares of common stock at an exercise price of $2.40 per share. |
| | (65) | Includes stock underlying a warrant to purchase 2,059 shares of common stock at an exercise price of $2.40 per share. |
| | (66) | Includes those shares discussed in footnote 9 to the table included in the section of this prospectus entitled “Security Ownership of Certain Beneficial Owners and Management.” |
| | (67) | Upon vSpring SBIC, L.P.’s sale of their shares (including underlying warrants) through this offering, vSpring will no longer be deemed to beneficially own the shares held by Steven H. Kane, John E. Doherty, Frank M. Dougherty, G. Kirk Raab, Arthur D. Bankhurst, M.D., Integral Capital Partners VI, L.P. and SF Capital Partners Ltd. pursuant to the terms of the Shareholder Agreement. |
LEGAL MATTERS The validity of the shares of common stock being offered hereby will be passed upon for us by Reed Smith LLP, San Francisco, California and Philadelphia, Pennsylvania. EXPERTS Our audited financial statements at May 31, 2004 appearing in this prospectus and registration statement have been audited by Grant Thornton LLP, independent registered public accounting firm, as set forth on their report thereon appearing elsewhere in this prospectus, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION We have filed a registration statement on Form SB-2 under the Securities Act of 1933, as amended, relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement. This prospectus constitutes the prospectus of Protalex, Inc., filed as part of the registration statement, and it does not contain all information in the registration statement, as certain portions have been omitted in accordance with the rules and regulations of the SEC. We are subject to the informational requirements of the Securities Exchange Act of 1934, which requires us to file reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be inspected at public reference room of the SEC at Judiciary Plaza, 450 Fifth Street N.W., Washington D.C. 20549. Copies of such material can be obtained from the facility at prescribed rates. Please call the SEC toll free at 1-800-SEC-0330 for information about its public reference room. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC’s Internet website at http://www.sec.gov or our website at http://www.protalex.com. Information contained in our web site is not part of this prospectus. Our statements in this prospectus about the contents of any contract or other document are not necessarily complete. You should refer to the copy of our contract or other document we have filed as an exhibit to the registration statement for complete information. You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. The selling stockholders are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document. We furnish our stockholders with annual reports containing audited financial statements.
INDEX TO FINANCIAL STATEMENTS Protalex, Inc. (A Company in the Development Stage) Audited Financial Statements | | | | | Report of Independent Registered Accounting Firm | F-2 | | | | | Balance Sheets at May 31, 2004 and 2003 | F-3 | | | | | Statements of Operations for the Fiscal Years Ended May 31, 2004 and 2003 and From Inception (September 17, 1999) through May 31, 2004 | F-4 | | | | | Statements of Stockholders’ Equity (Deficit) for the Fiscal Years Ended May 31, 2004 and 2003 and From Inception (September 17, 1999) through May 31, 2004 | F-5 | | | | | Statements of Cash Flows for the Fiscal Years Ended May 31, 2004 and 2003 and From Inception (September 17, 1999) through May 31, 2004 | F-7 | | | | | Notes to Financial Statements | F-8 | | | | Unaudited Financial Statements | | | | | Balance Sheets at November 30, 2004 (unaudited) and May 31, 2004 | F-15 | | | | | Statements of Operations for the Three and Six Months Ended November 30, 2004 and 2003 (unaudited) and From Inception (September 17, 1999) through November 30, 2004 (unaudited) | F-16 | | | | | Statements of Cash Flows for the Six Months Ended November, 2004 and 2003 (unaudited) and From Inception (September 17, 1999) through November, 2004 (unaudited) | F-17 | | | | | Notes to Interim Financial Statements (unaudited) | F-18 |
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PROTALEX, INC. (A COMPANY IN THE DEVELOPMENT STAGE) May 31, 2004 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Protalex, Inc. We have audited the accompanying balance sheets of Protalex, Inc. (a New Mexico Corporation in the development stage) as of May 31, 2004 and 2003, and the related statement of operations, changes in stockholders' equity, and cash flows for the years then ended and for the cumulative period from inception through May 31, 2004, as it relates to the fiscal years ended May 31, 2004 and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Protalex, Inc. as of May 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended, and for the cumulative period from inception through May 31, 2004, as it relates to the fiscal years ended May 31, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America. Grant Thornton LLP Philadelphia, Pennsylvania July 23, 2004
Protalex, Inc. (A Company in the Development Stage) BALANCE SHEETS May 31, | | | 2004 | | 2003 | | ASSETS | | | | | | | CURRENT ASSETS: | | | | | | | Cash and cash equivalents | | $ | 9,292,783 | | $ | 280,052 | | | Employee advances | | | 11,493 | | | -- | | | Prepaid expenses | | | 10,548 | | | 6,872 | | | | | | | | | | | | Total current assets | | | 9,314,824 | | | 286,924 | | | | | | | | | | | | EQUIPMENT: | | | | | | | | | Lab equipment | | | 260,425 | | | 248,706 | | | Office and computer equipment | | | 153,266 | | | 134,387 | | | Furniture and fixtures | | | 25,556 | | | 21,268 | | | Leasehold improvements | | | 5,540 | | | 10,685 | | | | | | | | | | | | | | | 444,787 | | | 415,046 | | | Less accumulated depreciation | | | (342,723 | ) | | (288,231 | ) | | | | | | | | | | | | | | 102,064 | | | 126,815 | | | | | | | | | | | | OTHER ASSETS: | | | | | | | | | Deposits | | | 7,590 | | | -- | | | Intellectual technology property, net of accumulated amortization of $4,653 in 2004 and $3,638 in 2003 | | | 15,647 | | | 16,662 | | | | | | | | | | | | Total other assets | | | 23,237 | | | 16,662 | | | | | | | | | | | | TOTAL | | $ | 9,440,125 | | $ | 430,401 | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | | Current maturities of capital lease obligation | | $ | 20,487 | | $ | 21,341 | | | Accounts payable | | | 377,100 | | | 115,494 | | | Payroll taxes payable | | | 24,560 | | | 8,816 | | | Interest payable | | | -- | | | 15 | | | | | | | | | | | | Total current liabilities | | | 422,147 | | | 145,666 | | | Capital lease obligation, less current maturities | | | 20,046 | | | 41,165 | | | Other | | | 1,544 | | | -- | | | | | | | | | | | | Total liabilities | | | 443,737 | | | 186,831 | | | | | | | | | | | | STOCKHOLDERS' EQUITY: | | | | | | | | | Common stock, no par value, authorized 40,000,000 shares, 16,784,433 and 12,247,950 shares issued and outstanding as of May 31, 2004 and 2003, respectively | | | 14,683,854 | | | 3,758,315 | | | Common stock, contra | | | -- | | | (368,547 | ) | | Additional paid in capital | | | 1,052,008 | | | 603,912 | | | Deficit accumulated during the development stage | | | (6,739,474 | ) | | (3,750,110 | ) | | | | | | | | | | | Total stockholders' equity | | | 8,996,388 | | | 243,570 | | | | | | | | | | | | TOTAL | | $ | 9,440,125 | | $ | 430,401 | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Protalex, Inc. (A Company in the Development Stage)
STATEMENTS OF OPERATIONS For the years ended May 31, 2004 and 2003, and From Inception (September 17, 1999) through May 31, 2004 | | | Year Ended May 31, 2004 | | Year Ended May 31, 2003 | | From Inception Through May 31, 2004 | | | REVENUES | | $ | -- | | $ | -- | | $ | -- | | | OPERATING EXPENSES: | | | | | | | | | | | | Research and development | | | (1,339,190 | ) | | (909,246 | ) | | (3,682,906 | ) | | Administrative | | | (1,393,347 | ) | | (640,927 | ) | | (2,356,746 | ) | | Professional fees | | | (288,077 | ) | | (71,548 | ) | | (565,293 | ) | | Depreciation and amortization | | | (5,486 | ) | | (41,167 | ) | | (140,995 | ) | | | | | | | | | | | | | | Operating Loss | | | (3,026,100 | ) | | (1,662,888 | ) | | (6,745,940 | ) | | OTHER INCOME (EXPENSE): | | | | | | | | | | | | Interest income | | | 44,618 | | | 9,389 | | | 84,285 | | | Interest expense | | | (6,321 | ) | | (2,572 | ) | | (67,239 | ) | | Loss on disposal | | | (1,561 | ) | | (9,019 | ) | | (10,580 | ) | | | | | | | | | | | | | | NET LOSS | | $ | (2,989,364 | ) | $ | (1,665,090 | ) | $ | (6,739,474 | ) | | | | | | | | | | | | | | Weighted average number of common shares outstanding | | | 15,384,933 | | | 12,197,325 | | | 11,868,938 | | | | | | | | | | | | | | | Loss per common share -basic and diluted | | $ | (.19 | ) | $ | (.14 | ) | $ | (.57 | ) | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Protalex, Inc. (A Company in the Development Stage)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY From Inception (September 17, 1999) through May 31, 2004 | | | | Common Stock | | | | | | | | | Deficit Accumulated | | | | | | | | | Shares | | | Amount | | | Additional Paid in Capital | | | Common Stock- Contra | | | Stage | | | Total | | | September 17, 1999 - initial issuance of 10,000 shares for intellectual technology license at $.03 per share | | | 10,000 | | $ | 300 | | $ | -- | | $ | -- | | $ | -- | | $ | 300 | | | September 30, 1999 - cost of public shell acquisition over net assets acquired to be accounted for as a Recapitalization | | | -- | | | -- | | | -- | | | (250,000 | ) | | -- | | | (250,000 | ) | | October 27, 1999 - issuance of 84 shares to individual for $25,000 | | | 84 | | | 25,000 | | | -- | | | -- | | | -- | | | 25,000 | | | November 15, 1999 - reverse merger transaction with Enerdyne Corporation, net transaction amounts | | | 8,972,463 | | | 118,547 | | | -- | | | (118,547 | ) | | -- | | | -- | | | November 18, 1999 - February 7, 2000 - issuance of 459,444 shares to various investors at $0.36 per share | | | 459,444 | | | 165,400 | | | -- | | | -- | | | -- | | | 165,400 | | | January 1, 2000 - issuance of 100,000 shares in exchange for legal services | | | 100,000 | | | 15,000 | | | -- | | | -- | | | -- | | | 15,000 | | | May 1 - 27, 2000 - issuance of 640,000 shares to various investors at $1.00 per share | | | 640,000 | | | 640,000 | | | -- | | | -- | | | -- | | | 640,000 | | | May 27, 2000 - issuance of 1,644 shares to individual in exchange for interest Due | | | 1,644 | | | 1,644 | | | -- | | | -- | | | -- | | | 1,644 | | | Net loss for the year ended May 31, 2000 | | | -- | | | -- | | | -- | | | -- | | | (250,689 | ) | | (250,689 | ) | | | | | | | | | | | | | | | | | | | | | | Balance, May 31, 2000 | | | 10,183,635 | | | 965,891 | | | -- | | | (368,547 | ) | | (250,689 | ) | | 346,655 | | | December 7, 2000 - issuance of 425,000 shares to various investors at $1.00 per share | | | 425,000 | | | 425,000 | | | -- | | | -- | | | -- | | | 425,000 | | | May 31, 2001 - Forgiveness of debt owed to shareholder | | | -- | | | -- | | | 40,000 | | | -- | | | -- | | | 40,000 | | | Net loss for the year ended May 31, 2001 | | | -- | | | -- | | | -- | | | -- | | | (553,866 | ) | | (553,866 | ) | | | | | | | | | | | | | | | | | | | | | | Balance, May 31, 2001 | | | 10,608,635 | | | 1,390,891 | | | 40,000 | | | (368,547 | ) | | (804,555 | ) | | 257,789 | | | August 13, 2001 - Contribution by Shareholders | | | -- | | | -- | | | 143,569 | | | -- | | | -- | | | 143,569 | | | November 7, 2001 - issuance of 881,600 Shares at $1.25 per share | | | 881,600 | | | 1,102,000 | | | -- | | | -- | | | -- | | | 1,102,000 | |
Protalex, Inc. (A Company in the Development Stage)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY From Inception (September 17, 1999) through May 31, 2004 (Continued) | | | | Common Stock | | | | | | | | | Deficit Accumulated | | | | | | | | | Shares | | | Amount | | | Additional Paid in Capital | | | Common Stock- Contra | | | Development Stage | | | Total | | | November 26, 2001 - options issued to board member | | | -- | | | -- | | | 133,000 | | | -- | | | -- | | | 133,000 | | | Net loss for the year ended May 31, 2002 | | | -- | | | -- | | | -- | | | -- | | | (1,280,465 | ) | | (1,280,465 | ) | | | | | | | | | | | | | | | | | | | | | | Balance, May 31, 2002 | | | 11,490,235 | | | 2,492,891 | | | 316,569 | | | (368,547 | ) | | (2,085,020 | ) | | 355,893 | | | July 5, 2002 - issuance of 842,000 shares at $1.50 per share | | | 842,000 | | | 1,263,000 | | | -- | | | -- | | | -- | | | 1,263,000 | | | July 1, 2002 - May 1, 2003 - purchase of common stock from shareholder at $.70 per share | | | (130,955 | ) | | (91,667 | ) | | -- | | | -- | | | -- | | | (91,667 | ) | | January 15, 2003 - May 15, 2003 - common stock issued to Company president | | | 41,670 | | | 82,841 | | | -- | | | -- | | | -- | | | 82,841 | | | May 14, 2003 - common stock issued to employee | | | 5,000 | | | 11,250 | | | -- | | | -- | | | -- | | | 11,250 | | | June 1, 2002 - May 31, 2003 - options issued to board members and employees | | | -- | | | -- | | | 287,343 | | | -- | | | -- | | | 287,343 | | | Net loss for the year ended May 31, 2003 | | | -- | | | -- | | | -- | | | -- | | | (1,665,090 | ) | | (1,665,090 | ) | | | | | | | | | | | | | | | | | | | | | | | Balance, May 31, 2003 | | | 12,247,950 | | | 3,758,315 | | | 603,912 | | | (368,547 | ) | | (3,750,110 | ) | | 243,570 | | | June 15, 2003, common stock issued to Company president | | | 8,334 | | | 16,418 | | | -- | | | -- | | | -- | | | 16,418 | | | June 15, 2003, purchase of common stock from shareholder | | | (12,093 | ) | | (8,333 | ) | | -- | | | -- | | | -- | | | (8,333 | ) | | September 18, 2003 - issuance of 7,445,646 of common stock issued in private placement At $1.70 per share, net of transaction costs | | | 7,445,646 | | | 11,356,063 | | | -- | | | -- | | | -- | | | 11,356,063 | | | September 19, 2003 - repurchase and retired 2,994,803 shares for $300,000 | | | (2,994,803 | ) | | (300,000 | ) | | -- | | | -- | | | -- | | | (300,000 | ) | | December 12, 2003 - issuance of 39,399 shares to terminated employees at $2.60 per share | | | 39,399 | | | 102,438 | | | -- | | | -- | | | -- | | | 102,438 | | | March 1, 2004 - common stock issued to employee at $2.55 per share | | | 50,000 | | | 127,500 | | | -- | | | -- | | | -- | | | 127,500 | | | May 31, 2004 - reclassify common stock contra to common stock | | | -- | | | (368,547 | ) | | -- | | | 368,547 | | | -- | | | -- | | | June 1 , 2003 - May 31, 2004 - options issued to board members, employees and consultants | | | -- | | | -- | | | 448,096 | | | -- | | | -- | | | 448,096 | | | Net loss for the year ended May 31, 2004 | | | -- | | | -- | | | -- | | | -- | | | (2,989,364 | ) | | (2,989,364 | ) | | | | | | | | | | | | | | | | | | | | | | Balance, May 31, 2004 | | | 16,784,433 | | $ | 14,683,854 | | $ | 1,052,008 | | | -- | | $ | (6,739,474 | ) | $ | 8,996,388 | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Protalex, Inc. (A Company in the Development Stage) STATEMENTS OF CASH FLOWS For the years ended May 31, 2004 and 2003, and From Inception (September 17, 1999) through May 31, 2004 | | | Year Ended May 31, 2004 | | Year Ended May 31, 2003 | | From Inception Through May 31, 2004 | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | $ | (2,989,364 | ) | $ | (1,665,090 | ) | $ | (6,739,474 | ) | | Net loss | | | | | | | | | | | | Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: | | | | | | | | | | | | Loss on disposal of equipment | | | 1,561 | | | 9,019 | | | 10,580 | | | Depreciation and amortization | | | 64,631 | | | 108,641 | | | 369,897 | | | Non cash compensation expense | | | 694,452 | | | 381,434 | | | 1,208,886 | | | Non cash expenses | | | -- | | | -- | | | 16,644 | | | Increase in advances, prepaid expenses and deposits | | | (22,759 | ) | | (5,270 | ) | | (29,631 | ) | | Increase in accounts payable | | | 261,606 | | | 59,389 | | | 377,100 | | | Increase in payroll and related liabilities | | | 15,744 | | | 6,471 | | | 24,560 | | | Increase in other liabilities | | | 1,544 | | | -- | | | 1,544 | | | Decrease in interest payable | | | (15 | ) | | (538 | ) | | -- | | | | | | | | | | | | | | | Net cash and cash equivalents used in operating activities | | | (1,972,600 | ) | | (1,105,944 | ) | | (4,759,894 | ) | | | | | | | | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | Acquisition of intellectual technology license - fee portion | | | -- | | | -- | | | (20,000 | ) | | Acquisition of equipment | | | (40,426 | ) | | (15,236 | ) | | (331,307 | ) | | Excess of amounts paid for Public Shell over assets acquired to be accounted for as a recapitalization | | | -- | | | -- | | | (250,000 | ) | | Proceeds from disposal of equipment | | | -- | | | 6,000 | | | 6,000 | | | | | | | | | | | | | | | Net cash and cash equivalents used in investing activities | | | (40,426 | ) | | (9,236 | ) | | (595,307 | ) | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | Proceeds from stock issuance | | | 11,356,063 | | | 1,263,000 | | | 14,976,464 | | | Principal payment on installment purchase payable | | | (21,973 | ) | | (37,968 | ) | | (254,878 | ) | | Contribution by shareholders | | | -- | | | -- | | | 183,569 | | | Principal payment on note payable individual | | | -- | | | -- | | | (225,717 | ) | | Issuance of note payable to individual | | | -- | | | -- | | | 368,546 | | | Acquisition of common stock | | | (308,333 | ) | | (91,667 | ) | | (400,000 | ) | | | | | | | | | | | | | | Net cash and cash equivalents provided by financing activities | | | 11,025,757 | | | 1,133,365 | | | 14,647,984 | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 9,012,731 | | | 18,185 | | | 9,292,783 | | | Cash and cash equivalents, beginning | | | 280,052 | | | 261,867 | | | -- | | | | | | | | | | | | | | | Cash and cash equivalents, ending | | $ | 9,292,783 | | $ | 280,052 | | $ | 9,292,783 | | | | | | | | | | | | | | | Interest paid | | $ | 6,336 | | $ | 2,558 | | $ | 64,028 | | | | | | | | | | | | | | | Taxes paid | | $ | -- | | $ | -- | | $ | 50 | |
The accompanying notes are an integral part of these financial statements.
Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS From Inception (September 17, 1999) through May 31, 2004 NOTE A - DESCRIPTION OF OPERATIONS AND DEVELOPMENT STAGE STATUS Protalex, Inc. (the Company or Protalex) is a development stage enterprise incorporated on September 17, 1999 in Albuquerque, New Mexico. The Company's headquarters are located in New Hope, Pennsylvania. The Company was formed to take all necessary steps to fully develop and bring to commercial realization certain bioregulator technology for the treatment of human diseases. The Company has no operating revenue. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company is a development stage enterprise and does not anticipate generating operating revenue for the foreseeable future. The ability of the Company to continue as a going concern is dependent upon developing products that are regulatory approved and market accepted. There is no assurance that these plans will be realized in whole or in part. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expense, and the disclosure of contingent assets and liabilities. Estimated amounts could differ from actual results. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 128 “Earnings Per Share” (SFAS No. 128) which is effective for periods ending after December 15, 1997. SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing loss to common shareholders by the weighted average number of common shares outstanding for the period. All potentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive securities could potentially dilute earnings per share in the future. As of May 31, 2004, the Company had a total of 6,762,654 potentially dilutive securities. | 3. | Stock Based Compensation |
The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148 (“SFAS No. 148), “Accounting for Stock-Based Compensation - Transition and Disclosure.” The Company does not plan to adopt the fair value method of accounting of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123) for stock issued to employees. The company accounts for those options granted to employees using the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. In accordance with APB 25, the Company records compensation cost as the difference between the exercise price of the options and the fair market value of the Company stock on the measurement (grant) date. These costs are amortized to expense over the options vesting period. Options to non-employees are accounted for using the “fair value” method, which recognizes the value of the option as an expense over the related service period with a corresponding increase to paid-in capital. The following table illustrates the effect on net loss and earnings per share if the Company applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation. | | | Year Ended May 31, 2004 | | Year Ended May 31, 2003 | | From Inception Through May 31, 2004 | | | Net loss, as reported | | $ | (2,989,364 | ) | $ | (1,665,090 | ) | $ | (6,739,474 | ) | | Add: stock-based employee compensation expense included in reported net loss | | | 306,969 | | | 287,343 | | | 594,312 | | | Deduct: stock-based employee compensation Expense determined under fair-value method for all awards | | | (1,087,701 | ) | | (817,233 | ) | | (1,904,934 | ) | | | | | | | | | | | | | | Pro forma net loss | | $ | (3,770,096 | ) | $ | (2,194,980 | ) | $ | (8,050,096 | ) | | | | | | | | | | | | | | Loss per common share, as reported - basic and diluted | | $ | (.19 | ) | $ | (.14 | ) | $ | (.57 | ) | | Proforma loss per common share - basic and diluted | | $ | (.25 | ) | $ | (.18 | ) | $ | (.68 | ) | | | | | | | | | | | | |
The fair value of the options are estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions: | | | Year Ended May 31, 2004 | | Year Ended May 31, 2003 | | From Inception Through May 31, 2004 | | | Dividends per year | | | 0 | | | 0 | | | 0 | | | Volatility percentage | | | 95%-102 | % | | 85 | % | | 90%-131 | % | | Risk free interest rate | | | 2.07%-4.78 | % | | 4.25 | % | | 2.07%-5.11 | % | | Expected life (years) | | | 4 | | | 3-4 | | | 3-5 | |
| 4. | Cash and Cash Equivalents |
For the purposes of reporting cash flows, the Company considers all cash accounts, which are not subject to withdrawal restrictions or penalties, and highly liquid investments with original maturities of 90 days or less to be cash and cash equivalents. | 5. | Equipment, Intellectual Technology Property, Depreciation and Amortization |
Equipment is carried at cost. Depreciation has been provided by the Company in order to amortize the cost of equipment over their estimated useful lives, which is estimated to be over three to five years. The Company uses the straight-line method for all classes of assets for book purposes. Depreciation expense is $ 63,616, $107,626 and $365,244 for the years ended May 31, 2004, 2003 and from inception through May 31, 2004, respectively. Depreciation included in research and development expense totaled $59,145, $67,474 and $288,047 for the years ended May 31, 2004 and 2003 and from inception to May 31, 2004, respectively. The Company's intellectual technology property was originally licensed from a former related party. This intellectual technology property was then assigned to the Company upon the dissolution of the related party. The cost of the intellectual technology property is being amortized over a 20-year period. Amortization expense is $ 1,015, $1,015 and $4,653 for the years ended May 31, 2004, 2003 and from inception through May 31, 2004, respectively. The Company reviews the intellectual property for impairment on at least an annual basis in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets”. Amortization expense for the intellectual property will be $1,015 for each of the next five years. Income taxes are recognized using enacted tax rates, and are composed of taxes on financial accounting income that is adjusted for the requirement of current tax law and deferred taxes. Deferred taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company does not expect to have current income taxes payable or deferred tax balances for the foreseeable future. | 7. | Other Comprehensive Income |
From September 17, 1999 (inception) through May 31, 2004, the Company had no changes in equity which constitute components of other comprehensive income. | 8. | Research and Development - Research and development costs are expensed as incurred and also includes depreciation as reported above. |
| 9. | Fair Value of Financial Instruments - The fair value of the Company's financial instruments, principally cash and debt, approximates their carrying value. |
| 10. | Recent Accounting Pronouncements |
In November 2002, FASB Interpretation 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002, but has certain disclosure requirements effective for interim and annual periods ending after December 15, 2002. The Company has not historically issued guarantees and, as such, the adoption of FIN 45 did not have a material effect on the Company's financial statements. In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this statement did not have a significant impact on the Company's financial position, results of operations, or cash flows since the Company currently has no VIEs. In December 2003, the FASB issued FIN 46R with respect to VIEs created before January 31, 2003, which, among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities (SPE). The consolidation requirements apply to all SPEs in the first fiscal year or interim period ending after December 15, 2003. The Company adopted the provision of FIN46R effective February 27, 2004, and such adoption did not have a material impact on the financial statements since the Company currently has no SPEs. On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 affects the issuer's accounting for three types of freestanding financial instruments:
| - | mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets; |
| - | instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, including put options and forward purchase contracts; and |
| - | obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. |
SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial position, results of operations or cash flows. Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation. NOTE C - REVERSE MERGER On November 15, 1999, Enerdyne Corporation ( Enerdyne or Public Shell) acquired all of the outstanding common stock of Protalex, Inc. (Protalex) in exchange for the issuance of additional shares of Enerdyne stock. The ratio of exchange was 822 shares of Enerdyne stock issued for each share of Protalex stock received. For accounting purposes, the acquisition has been treated as an acquisition of Enerdyne by Protalex and as a recapitalization of Protalex (Reverse Merger). The historical financial statement of operations presented herein include only those of the accounting acquirer and the retained earnings (deficit) of only the accounting acquirer carries over consistent with the requirements of reverse merger accounting. Concurrently with the share exchange, Enerdyne changed its name to Protalex, Inc. The details of the reverse merger transaction are as follows: | | | Protalex, Inc. | | Enerdyne Corporation | | Transaction Adjustments | | Balance Sheet at November 16, 1999 | | Account Description | | | | | | | | | | | Cash | | $ | 23,531 | | $ | -- | | $ | -- | | $ | 23,531 | | | Note receivable shareholder | | | -- | | | 118,547 | | | -- | | | 118,547 | | | License | | | 20,300 | | | -- | | | -- | | | 20,300 | | | Investment in Enerdyne | | | 368,547 | | | -- | | | (368,547 | ) | | -- | | | Other current assets | | | 8,212 | | | -- | | | -- | | | 8,212 | | | Other current liabilities | | | (17,555 | ) | | -- | | | -- | | | (17,555 | ) | | Accounts payable Alex | | | (40,000 | ) | | -- | | | -- | | | (40,000 | ) | | Note payable | | | (368,546 | ) | | -- | | | -- | | | (368,546 | ) | | Common stock | | | (25,300 | ) | | (833,459 | ) | | 714,912 | | | (143,847 | ) | | Additional paid in capital | | | -- | | | (1,105,014 | ) | | 1,105,014 | | | -- | | | Treasury stock | | | -- | | | 430,424 | | | (430,424 | ) | | -- | | | Accumulated deficit | | | 30,811 | | | 1,389,502 | | | (1,389,502 | ) | | 30,811 | | | Common stock - contra | | | -- | | $ | -- | | | 368,547 | | | 368,547 | | | | $ | -- | | $ | -- | | $ | -- | | $ | -- | |
Additional information in connection with stock amounts and number of shares issued is as follows: | | | | | Enerdyne Corporation | | | | | Protalex, Inc. | | Shares | | Account Description | | Shares | | Amount | | Outstanding | | Treasury | | Amount | | | | | | | | | | | | | | | | Common stock | | $ | 10,084 | | $ | 25,300 | | $ | 1,578,907 | | $ | 238,500 | | $ | 833,459 | | | 822 to 1 stock recapitalization | | | (10,084 | ) | | -- | | | 8,289,048 | | | -- | | | -- | | | Cancellation of shares formerly held by Protalex in Enerdyne | | | -- | | | -- | | | (885,408 | ) | | -- | | | -- | | | Increase to record net assets of Enerdyne | | | -- | | | 118,547 | | | -- | | | -- | | | -- | | | Cancellation of common stock amounts for Enerdyne | | | -- | | | -- | | | -- | | | -- | | | (833,459 | ) | | Name change to Protalex, Inc. | | | -- | | | -- | | | -- | | | -- | | | -- | | | | $ | -- | | $ | 143,847 | | $ | 8,982,547 | | $ | 238,500 | | $ | -- | |
NOTE D - INCOME TAXES The provision for income taxes for the years ended May 31, 2004 and 2003 consist of the following. Total income tax benefit differs from the amounts computed by applying the statutory tax rate to loss before income taxes. | | | Years ended | | | | | May 31, 2004 | | May 31, 2003 | | | Statutory federal and statutory rates of 40% | | $ | 1,195,746 | | $ | 666,036 | | | Increase in valuation allowance | | | (1,195,746 | ) | | (666,036 | ) | | Actual tax benefit | | $ | -- | | $ | -- | |
For the years ended May 31, 2004 and 2003, the components of income tax (benefit) expense consist of the following: | Current: | | | | | | Federal | | $ | -- | | $ | -- | | State | | | -- | | | -- | | | | | | | | | | | | Deferred: | | | | | | | | Federal | | | 926,000 | | | 618,000 | | State | | | 163,000 | | | 109,000 | | Valuation allowance | | | (1,089,000 | ) | | (727,000 | ) | Income tax benefit | | $ | -- | | $ | -- | |
The components of the net deferred tax asset as of May 31, 2004 and 2003 are as follows: | Assets: | | | | | | Net operating losses | | $ | 2,311,000 | | $ | 1,459,000 | | Vacation accrual | | | 6,000 | | | 3,000 | | Warrants and options | | | 411,000 | | | 169,000 | | | | | | | | | | | Deferred tax assets | | | 2,728,000 | | | 1,631,000 | | | | | | | | | | | | Liability | | | | | | | | Equipment | | | (32,000 | ) | | (24,000 | ) | | | | | | | | | | | Net deferred tax asset | | | 2,696,000 | | | 1,607,000 | | | Less valuation allowance | | | (2,696,000 | ) | | (1,607,000 | ) | | | | | | | | | | | Deferred tax asset, net of valuation allowance | | $ | -- | | $ | -- | |
The net deferred taxes have been fully offset by a valuation allowance since the Company cannot currently conclude that it is more likely than not that the benefits will be realized. The net operating loss carryforward for income tax purposes of approximately $5,779,000 as of May 31, 2004 expires beginning in 2014 through 2019. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, utilization of the NOL and tax credit carryforwards may be limited. NOTE E - RELATED PARTIES During the year ended May 31, 2004, the Company incurred $10,505 of expenses related to air travel to a partnership principally owned by the President of the Company. In addition, the Company incurred $15,238 of expenses related to legal services paid to a law firm, which employs one of the Company's board members. The Company also has an agreement with its Chairman to pay $12,500 per month for his services. During the year ended May 31, 2004 the Company incurred $122,177 related to these services. NOTE F - CAPITAL LEASE OBLIGATIONS Protalex leases certain equipment under a capital lease. As of May 31, 2004 and 2003, the recorded amount of assets, net of related accumulated depreciation was $40,767 and $61,151, respectively. Future minimum lease payments and the related present value of the future obligation under the capital lease at May 31, 2004 are as follows: | | | | | | 2005 | | $ | 22,622 | | | 2006 | | | 20,736 | | | | | | | | | Total minimum obligations | | | 43,358 | | | Interest | | | (2,825 | ) | | | | | | | | Present value of minimum capital lease obligations | | | 40,533 | | | Current portion | | | (20,487 | ) | | Long-term capital lease obligations | | $ | 20,046 | |
NOTE G - STOCK OPTIONS Prior to January 22, 2004, all options were issued as “stand alone” options. On January 22, 2004, the board of directors of the Company approved the Protalex, Inc. 2003 Stock Option Plan., which provides for incentive and non-qualified stock options to purchase a total of 1,500,000 shares of the Company's Common Stock. Under the terms of the plan, incentive options may not be granted for less than the fair market value of the Common Stock at the date of the grant and non-qualified options shall not be granted for less than 85% of the fair market value of the Common Stock at the date of the grant. Vesting generally occurs ratably over four years and is exercisable over a period no longer than ten years after the grant date. As of May 31, 2004, options to purchase 150,000 shares of the Company's Common Stock were granted, with no options being exercisable. A summary of the common stock option activity for employees, directors and officers as of May 31, 2004 is as follows: | | | Weighted Average Exercise | | | | | | | | | Options | | Prices | | Exercisable | | | Balance, September 17, 1999 | | | -- | | $ | -- | | | -- | | | Granted, April 28, 2000 | | | 40,000 | | | .036 | | | 40,000 | | | Granted, November 26, 2001 | | | 100,000 | | | 1.25 | | | 100,000 | | | Expired, April 28, 2002 | | | (40,000 | ) | | .036 | | | (40,000 | ) | | Granted, June 1, 2002 | | | 125,000 | | | 1.50 | | | 125,000 | | | Granted, July 18, 2002 | | | 100,000 | | | 1.50 | | | 100,000 | | | Granted, October 24, 2002 | | | 100,000 | | | 1.45 | | | 100,000 | | | Granted, December 16, 2002 | | | 863,242 | | | 1.50 | | | 419,632 | | | Granted, December 16, 2002 | | | 50,000 | | | 1.70 | | | 50,000 | | | Granted, March 15, 2003 | | | 130,000 | | | 1.50 | | | -- | | | Granted, April 1, 2003 | | | 40,000 | | | 1.50 | | | 9,167 | | | Granted, July 1, 2003 | | | 40,000 | | | 1.50 | | | 8,332 | | | Granted, August 13, 2003 | | | 100,000 | | | 1.50 | | | 100,000 | | | Granted, September 19, 2003 | | | 584,333 | | | 1.50 | | | 185,767 | | | Granted, January 1, 2004 | | | 225,000 | | | 1.96 | | | 90,625 | | | Forfeited, January 22, 2004 | | | (130,000 | ) | | 1.50 | | | -- | | | Granted, March 1, 2004 | | | 150,000 | | | 2.17 | | | -- | | | | | | 2,477,575 | | | | | | 1,288,523 | |
The following summarizes certain information regarding stock options at May 31, 2004: | | | Total | | Exercisable | | Exercise Price Range | | Number | | Weighted Average Exercise Price | | Weighted Average Remaining Life (yrs) | | Number | | Weighted Average Exercise Price | | Weighted Average Remaining Life | | | | | | | | | | | | | | | | | | $1.25 - 1.75 | | | 2,102,575 | | $ | 1.49 | | | 8.64 | | | 1,197,898 | | $ | 1.48 | | | 8.64 | | | $1.75 - 2.25 | | | 375,000 | | $ | 2.04 | | | 9.58 | | | 90,625 | | $ | 1.96 | | | 9.58 | | | | | | 2,477,575 | | | | | | | | | 1,288,523 | | | | | | | |
NOTE H - DESCRIPTION OF LEASING ARRANGEMENTS The Company leases its office space under a non-cancellable operating lease. The lease term is for three years, with an option to extend for one or two years beyond the initial term. Rent expense for the years ended May 31, 2004 and 2003 were $37,571 and $23,870, respectively. Future minimum lease payments are as follows: Year Ending May 31, | | | | | 2005 | | $ | 91,036 | | | 2006 | | | 95,588 | | | 2007 | | | 65,816 | | Total | | $ | 252,440 | |
NOTE I - SALE AND REPURCHASE OF COMMON STOCK On September 18, 2003, the Company closed a private placement, raising a total of $11,356,063, net of transaction costs in exchange for 7,445,646 shares of common stock and 2,605,976 warrants exercisable at $2.40 per share, expiring on September 18, 2008. In addition, 558,423 warrants, exercisable at $2.40 per share, were issued to Merriman and Company, as part of their fee for acting as placement agent. On September 19, 2003, the Company repurchased and retired 2,994,803 shares of common stock from former Chief Scientific Officer Paul Mann and family members for $300,000. NOTE J - TERMINATION AGREEMENTS In December 2003, the Company terminated several employees, including its Chief Financial Officer, when it officially moved its headquarters to New Hope, Pennsylvania. The Employment Termination Agreement provided for severance pay, generally for three months, and the issuance of 39,399 shares of the Company's common stock.
Protalex, Inc. (A Company in the Development Stage)
BALANCE SHEETS
| | | November 30, 2004 | | May 31, 2004 | | | | | (Unaudited) | | (Audited) | | ASSETS | | | | | | | | | | | | | | CURRENT ASSETS: | | | | | | Cash and cash equivalents | | $ | 7,011,021 | | $ | 9,292,783 | | Prepaid expenses and employee advances | | | 30,597 | | | 22,041 | | | | | | | | | | | Total current assets | | | 7,041,618 | | | 9,314,824 | | | | | | | | | | | | PROPERTY & EQUIPMENT: | | | | | | | | Lab equipment | | | 275,443 | | | 260,425 | | Office and computer equipment | | | 157,787 | | | 153,266 | | Furniture & fixtures | | | 25,556 | | | 25,556 | | Leasehold improvements | | | 5,540 | | | 5,540 | | | | | | | | | | | | | | | 464,326 | | | 444,787 | | Less accumulated depreciation | | | (366,899 | ) | | (342,723 | ) | | | | | | | | | | | | | | 97,427 | | | 102,064 | | | OTHER ASSETS: | | | | | | | | Deposits | | | 7,590 | | | 7,590 | | | | | | | | | | Intellectual technology property, net of accumulated amortization of $5,163 and $4,653 as of November 30, 2004 and May 31, 2004, respectively | | | 15,137 | | | 15,647 | | | | | | | | | | | Total other assets | | | 22,727 | | | 23,237 | | | | | | | | | | | TOTAL | | $ | 7,161,772 | | $ | 9,440,125 | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | CURRENT LIABILITIES: | | | | | | | | Current maturities of capital lease obligation | | $ | 21,196 | | $ | 20,487 | | Accounts payable | | | 390,393 | | | 377,100 | | Payroll and related liabilities | | | 32,161 | | | 24,560 | | Accrued expenses | | | 27,035 | | | -- | | | | | | | | | | | Total current liabilities | | | 470,785 | | | 422,147 | | | | | | | | | | | Capital lease obligation, less current portion | | | 9,267 | | | 20,046 | | Other | | | 3,860 | | | 1,544 | | | | | | | | | | | Total liabilities | | | 483,912 | | | 443,737 | | | | | | | | | | | | STOCKHOLDERS' EQUITY | | | | | | | | | | | | | | | | | Common stock, no par value,authorized 40,000,000 shares, 16,784,433 and 16,784,433 shares issued and outstanding as of November 30, 2004 and May 31, 2004, respectively | | | 14,663,854 | | | 14,663,854 | | Additional paid in capital | | | 1,223,523 | | | 1,072,008 | | Deficit accumulated during | | | | | | | | the development stage | | | (9,209,517 | ) | | (6,739,474 | ) | | | | | | | | | | Total stockholders’ equity | | | 6,677,860 | | | 8,996,388 | | | | | | | | | | | | TOTAL | | $ | 7,161,772 | | $ | 9,440,125 | |
The accompanying notes are an integral part of these financial statements.
Protalex, Inc. (A Company in the Development Stage)
STATEMENTS OF OPERATIONS
For the six and three month periods ended November 30, 2004 and 2003, and From Inception (September 17, 1999) through November 30, 2004 (Unaudited) | | | | | | | | | | | | | | | | Six | | Six | | Three | | Three | | From | | | | | Months Ended | | Months Ended | | Months Ended | | Months Ended | | | | | | | November 30, | | November 30, | | November 30, | | November 30, | | November 30, | | | | | 2004 | | 2003 | | 2004 | | 2003 | | 2004 | | | | | | | | | | | | | | | | Revenues | | $ | -- | | $ | -- | | $ | -- | | $ | -- | | $ | -- | |
| Operating Expenses | | | | | | | | | | | | | Research and development | | | (1,639,264 | ) | | (489,281 | ) | | (919,718 | ) | | (232,047 | ) | | (5,322,170 | ) | | Administrative | | | (605,854 | ) | | (558,514 | ) | | (386,079 | ) | | (240,851 | ) | | (2,962,600 | ) | | Professional fees | | | (267,192 | ) | | (147,827 | ) | | (178,991 | ) | | (110,068 | ) | | (832,485 | ) | | Depreciation and amortization | | | (2,733 | ) | | (3,384 | ) | | (1,337 | ) | | (1,508 | ) | | (143,728 | ) | | | | | | | | | | | | | | | | | | | Operating Loss | | | (2,515,043 | ) | | (1,199,006 | ) | | (1,486,125 | ) | | (584,474 | ) | | (9,260,983 | ) | | | | | | | | | | | | | | | | | | | | Other income (expense) | | | | | | | | | | | | | | | | | Interest income | | | 46,637 | | | 27,695 | | | 21,042 | | | 27,540 | | | 130,922 | | Interest expense | | | (1,637 | ) | | (3,990 | ) | | (973 | ) | | (1,878 | ) | | (68,876 | ) | Loss on disposal | | | -- | | | -- | | | -- | | | -- | | | (10,580 | ) | | | | | | | | | | | | | | | | | | | Net Loss | | $ | (2,470,043 | ) | $ | (1,175,301 | ) | $ | (1,466,056 | ) | $ | (558,812 | ) | $ | (9,209,517 | ) | | | | | | | | | | | | | | | | | | | Weighted average number of commonshares outstanding | | | 16,784,433 | | | 14,005,239 | | | 16,784,433 | | | 15,804,677 | | | 12,341,632 | | | | | | | | | | | | | | | | | | | | | Loss per common share - basic and diluted | | $ | (.15 | ) | $ | (.08 | ) | $ | (.09 | ) | $ | (.04 | ) | $ | (.75 | ) |
The accompanying notes are an integral part of these financial statements.
Protalex, Inc. (A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
For the six month periods ended November 30, 2004 and 2003, and From Inception (September 17, 1999) through November 30, 2004 Unaudited | | | | | | | From | | | | | Six | | Six | | Inception | | | | | Months Ended | | Months Ended | | Through | | | | | November 30, | | November 30, | | November 30, | | | | | 2004 | | 2003 | | 2004 | | | | | | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
Net loss | | $ | (2,470,043 | ) | $ | (1,175,301 | ) | $ | (9,209,517 | ) | Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities | | | | | | | | | | | Loss on disposal of equipment | | | -- | | | -- | | | 10,580 | | Depreciation and amortization | | | 24,686 | | | 34,132 | | | 394,583 | | Non cash compensation expense | | | 151,515 | | | 285,087 | | | 1,360,401 | | Non cash expenses | | | -- | | | -- | | | 16,644 | | Increase in: | | | | | | | | | | | Prepaid expense and employee advances | | | (8,556 | ) | | (19,729 | ) | | (38,187 | ) | | Interest receivable | | | -- | | | (27,500 | ) | | -- | | Increase (decrease) in: | | | | | | | | | | | Accounts payable and accrued expenses | | | 40,328 | | | 86,076 | | | 417,428 | | Payroll and related liabilities | | | 7,601 | | | 82,908 | | | 32,161 | | Other liabilities | | | 2,316 | | | (15 | ) | | 3,860 | | | | | | | | | | | | | | | Net cash and cash equivalents used in operating activities | | | (2,252,153 | ) | | (734,342 | ) | | (7,012,047 | ) | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | Acquisition of intellectual technology license -fee portion | | | -- | | | -- | | | (20,000 | ) | Acquisition of equipment | | | (19,539 | ) | | (10,241 | ) | | (350,846 | ) | Excess of amounts paid for public shell overassets acquired to be accounted for as a Recapitalization | | | -- | | | -- | | | (250,000 | ) | Proceeds from disposal of equipment | | | -- | | | -- | | | 6,000 | | Net cash and cash equivalents used in investing activities | | | (19,539 | ) | | (10,241 | ) | | (614,846 | ) | | | | | | | | | | | | | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | Proceeds from stock issuance | | | -- | | | 11,372,481 | | | 14,976,464 | | Principal payment on equipment notes payableand capital leases | | | (10,070 | ) | | (13,372 | ) | | (264,948 | ) | Contribution by shareholders | | | -- | | | -- | | | 183,569 | | Principal payment on note payable individual | | | -- | | | (100,000 | ) | | (225,717 | ) | Issuance of note payable to individuals | | | -- | | | 100,000 | | | 368,546 | | Acquisition of common stock | | | -- | | | (308,334 | ) | | (400,000 | ) | | | | | | | | | | | | | Net cash and cash equivalents (used in) provided by financing activities | | | (10,070 | ) | | 11,050,775 | | | 14,637,914 | | | | | | | | | | | | | | NET (DECREASE) INCREASE IN CASH ANDCASH EQUIVALENTS | | | (2,281,762 | ) | | 10,306,192 | | | 7,011,021 | | | | | | | | | | | | | | | Cash and cash equivalents, beginning | | | 9,292,783 | | | 280,052 | | | -- | | | | | | | | | | | | | | | Cash and cash equivalents, end | | $ | 7,011,021 | | $ | 10,586,244 | | $ | 7,011,021 | |
SUPPLEMENTAL SCHEDULE OF CASHFLOW INFORMATION: | | | | | | | | Interest paid | | $ | 1,637 | | $ | 4,005 | | $ | 65,665 | | | | | | | | | | | | | | Taxes paid | | $ | -- | | $ | -- | | $ | 50 | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
NOTE A - NOTES TO INTERIM FINANCIAL STATEMENTS
The interim financial data is unaudited; however in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim period. The financial statements included herein have been prepared by Protalex, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading.
The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company's financial statements filed as part of the Company's Annual Report on Form 10-KSB for the fiscal year ended May 31, 2004. This quarterly report should be read in conjunction with such annual report.
On December 1, 2004, the Company reincorporated from New Mexico to Delaware. Additional information regarding the Company’s reincorporation can be found in the Company’s Current Report on Form 8-K dated December 1, 2004 and filed with the Securities and Exchange Commission on December 6, 2004.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions affecting the reported amounts of assets, liabilities, and expense, and the disclosure of contingent assets and liabilities. Estimated amounts could differ from actual results.
The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128) which is effective for periods ending after December 15, 1997. SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing loss to common shareholders by the weighted average number of common shares outstanding for the period. All potentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive securities could potentially dilute earnings per share in the future. As of November 30, 2004, the Company had a total of 6,892,654 potentially dilutive securities.
| 3. | Stock Based Compensation |
The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” The Company does not plan to adopt the fair value method of accounting of Statement of Financial Accounting Standards No. 123 (SFAS No. 123) for stock options issued to employees (see Note C -Recent Accounting Pronouncements pertaining to SFAS No. 123-Revised). The Company accounts for those options granted to employees using the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations. In accordance with APB 25, the Company records compensation cost as the difference between the exercise price of the options and the fair market value of the Company stock on the measurement (grant) date. These costs are amortized to expense over the options’ vesting period. Options to non-employees are accounted for using the "fair value" method, which recognizes the value of the option as an expense over the related service period with a corresponding increase to additional paid-in capital.
The following table illustrates the effect on net loss and earnings per share if the Company applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation.
| | | | | | | | | | | From | | | | | Six | | Six | | Three | | Three | | Inception | | | | | Months Ended | | Months Ended | | Months Ended | | Months Ended | | Through | | | | | November 30, | | November 30, | | November 30, | | November 30, | | November 30, | | | | | 2004 | | 2003 | | 2004 | | 2003 | | 2004 | | | Net loss, as reported | | $ | (2,470,043 | ) | $ | (1,175,301 | ) | $ | (1,466,056 | ) | $ | (558,812 | ) | $ | (9,209,517 | ) | | | | | | | | | | | | | | | | | | | Add: stock-based employee Compensation expense included in reported net loss | | | 151,515 | | | 285,087 | | | 92,919 | | | 103,085 | | | 745,831 | | | | | | | | | | | | | | | | | | | | Deduct: Stock-based employeeCompensation expense determined under fair-value method for all Awards | | | (548,485 | ) | | (622,107 | ) | | (388,311 | ) | | (298,876 | ) | | (2,453,419 | ) | | | | | | | | | | | | | | | | | | | | Pro forma net loss | | $ | (2,867,013 | ) | $ | (1,512,321 | ) | $ | (1,761,447 | ) | | (754,603 | ) | | (10,917,105 | ) | | | | | | | | | | | | | | | | | | | Loss per share, as reported basicand diluted | | $ | (.15 | ) | $ | (.08 | ) | $ | (.09 | ) | $ | (.04 | ) | $ | (.75 | ) | | | | | | | | | | | | | | | | | | | Pro forma loss per share basic andDiluted | | $ | (.17 | ) | $ | (.11 | ) | $ | (.11 | ) | $ | (.05 | ) | $ | (.88 | ) |
. The fair value of the options are estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:
| | | | | | | | | | | From | | | | | Six | | Six | | Three | | Three | | Inception | | | | | Months Ended | | Months Ended | | Months Ended | | Months Ended | | Through | | | | | November 30, | | November 30, | | November 30, | | November 30, | | November 30, | | | | | 2004 | | 2003 | | 2004 | | 2003 | | 2004 | | | | | | | | | | | | | | | | Dividends per year | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | Volatility percentage | | | 103 | % | | 90%-131 | % | | 103 | % | | 90%-131 | % | | 90%-131 | % | | Risk free interest rate | | | 2.57 | % | | 4.16%-5.11 | % | | 2.57 | % | | 4.16%-5.11 | % | | 2.07%-5.11 | % | | Expected life (years) | | | 4 | | | 3-5 | | | 4 | | | 4 | | | 3-5 | |
On July 22, 2004, the Company issued options to purchase up to 15,000 shares of restricted common stock of the Company to an employee, as part of an agreement for employment, at an exercise price of $2.21 a share. The options were issued pursuant to the Company’s 2003 Stock Option Plan and vest over a forty-eight month period based on date of employment. The options will expire July 2014.
On October 26, 2004, the Company issued options to purchase up to 30,000 shares of restricted common stock of the Company to three employees, as part of an agreement for employment, at an exercise price of $2.30 a share. The options were issued pursuant to the Company’s 2003 Stock Option Plan and vest over a forty-eight month period based on date of employment. The options will expire October 2014.
On October 26, 2004, the Company issued options to purchase up to 100,000 shares of restricted common stock of the Company to a new member of the board of directors, at an exercise price of $2.30 a share. The options were issued pursuant to the Company’s 2003 Stock Option Plan and vested immediately. The options will expire October 2014.
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities" or “VIEs”). Variable interest entities within the scope of FIN 46 are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this statement did not have a significant impact on the Company's financial position, results of operations, or cash flows since the Company currently has no VIEs. In December 2003, the FASB issued FIN 46R with respect to VIEs created before January 31, 2003, which, among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of special purpose entities. The consolidation requirements apply to all special purpose entities in the first fiscal year or interim period ending after December 15, 2003. The Company adopted the provision of FIN46R effective February 27, 2004, and such adoption did not have a material impact on the financial statements since the Company currently has no special purpose entities.
On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (SFAS 150). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 affects the issuer's accounting for three types of freestanding financial instruments:
| - | mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets; |
| - | instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, including put options and forward purchase contracts; and |
| - | obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. |
SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company's financial position, results of operations or cash flows.
In December 2004, the FASB revised SFAS No. 123. SFAS No. 123-Revised supersedes APB 25 and related interpretations, and will require all companies to estimate the fair value of incentive stock options granted and then amortize that estimated fair value to expense over the options’ vesting period. SFAS No. 123-Revised is effective for all periods beginning after December 15, 2005. The Company currently accounts for its stock option plans under the recognition and measurement principles of APB 25 and related interpretations. The Company is required to adopt SFAS No. 123-Revised by the third quarter of fiscal year 2006. See Note B. 3, “Stock Based Compensation,” for pro forma information if the Company had elected to adopt the requirements of the previously issued SFAS No. 123.
NOTE D - RELATED PARTIES
For the six and three month periods ended November 30, 2004, the Company incurred $4,932 and $1,138 respectively, of expenses related to air travel to a partnership principally owned by the Chief Executive Officer of the Company. For the six and three month periods ended November 30, 2004, the Company incurred $7,005 and $5,030 respectively, of expenses related to legal services to a firm, which employs one of the Company’s board members. The Company also has an agreement with its Chairman to pay $12,500 per month as a director fee. For the six and three month periods ended November 30, 2004, the Company incurred $75,000 and $37,500 respectively for directors fee. As of November 30, 2004, $25,000 was included in accrued expenses for the amount owed to the Chairman.
NOTE E - RECLASSIFICATIONS
Certain amounts in the fiscal year 2004 financial statements have been reclassified to conform to the fiscal year 2005 presentation.
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