Filed Pursuant to Rule 424(b)(3)
Registration No. 333-125866
PROTALEX, INC.
3,513,909 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 2,593,788 shares of our common
stock, of which 19,393,221 shares are currently outstanding and 920,121 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 June 15, 2005, was $2.20.
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 July 15, 2005.
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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
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NOTICE ABOUT FORWARD-LOOKING STATEMENTS..................................................... 1
PROSPECTUS SUMMARY.......................................................................... 2
RISK FACTORS................................................................................ 4
PREVIOUS FINANCINGS......................................................................... 12
USE OF PROCEEDS............................................................................. 13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................... 13
DIVIDEND POLICY............................................................................. 13
BUSINESS.................................................................................... 14
LEGAL PROCEEDINGS........................................................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION................................... 20
MANAGEMENT.................................................................................. 23
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................. 28
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................. 28
DESCRIPTION OF SECURITIES................................................................... 31
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.............................................. 31
PLAN OF DISTRIBUTION........................................................................ 31
SELLING STOCKHOLDERS........................................................................ 32
LEGAL MATTERS............................................................................... 36
EXPERTS 36
AVAILABLE INFORMATION....................................................................... 36
INDEX TO FINANCIAL STATEMENTS............................................................... F-1
This prospectus contains trademarks and service marks of other companies that
are the property of their respective owners.
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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 meet those 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.
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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
Pemphigus, followed by 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 Pemphigus, RA and, potentially, other
autoimmune diseases. We have completed pre-clinical studies on PRTX-100 and have
filed an Investigational New Drug, or IND, application with the U.S. Food and
Drug Administration (FDA) on March 4, 2005. On March 31, 2005, the FDA placed us
on clinical hold pending additional product characterization. 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 located at 145 Union
Square Drive, New Hope, Pennsylvania 18938, and our telephone number is (215)
862-9720.
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 February 28, 2005, our
cumulative net loss was $10,727,755. 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. We estimate it will require approximately $43,000,000
to develop PRTX-100.
In September 2003 and May 2005, we raised $12,657,599 and $5,057,885,
respectively, through private placements 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. If our IND
application is approved, we anticipate that we will need to raise additional
capital before the end of calendar year 2006 to fund the ongoing FDA approval
process for PRTX-100 and development of other compounds. 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 March 4, 2005, the Company filed an IND with the FDA for Phase 1
human clinical trials of PRTX-100 for RA.
On March 31, 2005, the FDA verbally disclosed to the Company that it has
placed the Company's IND on clinical hold effective March 31, 2005, pending
additional product characterization.
On May 25, 2005, we raised $5,057,885 through the sale of 2,593,788
shares of our common stock at $1.95 per share, with warrants to purchase an
additional 786,788 shares of our common stock, at an exercise price of $2.25 per
shares. The warrants expire on May 25, 2010.
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THE OFFERING
Common stock offered by selling 2,593,788 shares.
stockholders (including shares underlying warrants)
Common stock to be outstanding after the offering 23,562,937 shares (1).
Use of proceeds We will not receive proceeds from the
resale of shares by the selling stockholders. If
all warrants issued in May 2005 held by the
selling stockholders are exercised, our proceeds
from the exercise of those warrants would be
approximately $2.07 million.
Over-the-Counter Bulletin Board symbol PRTX.OB
(1) Based on 19,393,221 shares of common stock outstanding as of June 16, 2005,
4,169,716 shares issuable upon exercise of warrants relating to financing
transactions in September 2001, September 2003 and May 2005 but excludes:
(i) up to 3,276,255 shares of common stock issuable upon exercise of
employee and director stock options.
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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
Pemphigus and RA products 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 February 28,
2005, our cumulative net loss was $10,727,755. Our net loss was $2,989,364 for
the fiscal year ended May 31, 2004 and $3,987,984 for the subsequent nine months
of fiscal 2005. 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
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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.
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 file our IND application or
otherwise 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.
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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
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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. If these
inventories are lost or damaged, or if Eurogentec cannot produce additional
inventory to complete the remaining phases of clinical trials, 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. If this product were approved by the
FDA for commercial sale, we would need to manufacture it in
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larger quantities. We have no manufacturing facilities at this time, 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 limited 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 Vice President of Finance, Chief Financial Officer, Treasurer and Corporate
Secretary. 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.
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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 products 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.
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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;
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- 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 three quarters of the fiscal year ended May 31, 2005, our stock
price ranged from a high of $2.95 to a low of $1.95. 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 2,593,788
shares of our common stock. These shares represent approximately 11% of our
total outstanding common stock assuming full exercise of the warrants issued in
May 2005 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
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information of the limited market for penny stocks. These requirements adversely
affect the market liquidity of our common stock.
PREVIOUS FINANCINGS
On May 25, 2005, we entered into the following material definitive
agreements:
(1) Warrant and Common Stock Purchase Agreement dated May 25, 2005 among
the Company and the several purchasers listed on Exhibit A thereof.
(2) Registration Rights Agreement dated May 25, 2005 by and among the
investors who were parties to the Warrant and Common Stock Purchase Agreement.
Pursuant to the purchase agreement, we commenced a financing transaction
in which we issued (x) 2,593,788 shares of common stock at $1.95 per share for
an aggregate cash consideration of $5,057,885 and (y) warrants to purchase
786,788 shares of common stock at an exercise price of $2.25 per share for
nominal consideration. These warrants expire on May 25, 2010 and provide for a
net issue exercise feature and antidilution protection for certain equity issued
below the exercise price. Pursuant to the purchase agreement, we may sell an
aggregate of $15,000,000 of shares of common stock at $1.95 per share and
corresponding warrants through June 30, 2005.
Pursuant to the Registration Rights Agreement, we are also obligated to
file a resale Registration Statement on Form SB-2 by July 22, 2005 which will
register the shares and the shares issuable upon exercise of the warrants with
the SEC, and cause that registration statement to be declared effective by
November 15, 2005. The registration statement on Form SB-2 of which this
prospectus is a part satisfies this obligation. In addition, the Purchasers are
entitled to certain demand and piggyback registration rights.
Included among the Purchasers was vSpring SBIC, L.P. (which we refer to
as vSpring), which, as of February 21, 2005, was a beneficial holder of 55.5% of
our common stock, and Steven H. Kane, our CEO, President and a Director.
On May 25, 2005, we also amended the following material definitive
agreements:
(1) 2003 Common Stock Purchase Warrants dated September 18, 2003.
(2) Shareholder Agreement between the Company and various common
stockholders dated September 18, 2003.
(3) Investor Rights Agreement between the Company and various common
stockholders dated September 18, 2003.
The 2003 warrants were amended to lower the exercise price from $2.40 to
$2.25 per share. In addition, certain additional equity issuances were excluded
from the 2003 warrants' antidilution provisions.
The Shareholder Agreement was amended and restated to provide for
several modifications, including the removal of Arthur Bankhurst and Donald Dean
from the stock transfer restrictive provisions and the addition of Marc Rose and
Thomas Stagnaro thereto.
The Investor Rights Agreement was amended to, among several
modifications, exclude certain additional equity issuances from the Investor
Rights Agreement's right of first refusal provisions.
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USE OF PROCEEDS
This prospectus relates to 2,593,788 shares of our common stock, plus an
additional 920,121 shares issuable upon exercise of warrants, 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 May 2005 that are held by the selling
stockholders are exercised, our proceeds from the exercise of those warrants
would be approximately $2.07 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 sale 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, 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
Third Quarter 2.95 1.95
Fourth Quarter 2.95 1.95
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 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.
As of June 16, 2005, we had 19,393,221 shares of common stock
outstanding, which were held by approximately 428 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.
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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 diseases initially
targeted by the Company are Pemphigus and RA.
Pemphigus is a rare, severe and life-threatening autoantibody-mediated
disease characterized by blistering and erosion of the skin and mucous
membranes. It affects approximately ten to fifteen thousand Americans and 40
thousand people worldwide. If not treated, Pemphigus is usually fatal, with
generalized infection being the most frequent cause of death. Treated, the
disorder tends to be chronic in most cases. Side effects of current treatments
(steroids, immuno-suppressants, antibiotics and chemotherapeutics) may be severe
or disabling.
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, for indications such as 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 are currently conducting pre-clinical studies with PRTX-100 and have
filed an IND application with the FDA on March 4, 2005. However, on March 31,
2005 the FDA verbally disclosed to the Company that it has placed our IND on
clinical hold, pending additional product characterization. Upon receiving FDA
approval, 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
Current Good Manufacturing Practices (cGMP) 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
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the FDA approved drug, etanercept, or Enbrel(TM). 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 are the foundation for the IND
application for treating RA. IND-related activities included 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 have concluded six prior private placements of our common stock,
raising a total of $21.2 million in the aggregate and carrying us through early
research and pre-clinical trials. The most recent private placement in May 2005
raised approximately $5.1 million. If we succeed in obtaining approval for our
IND application in the second quarter of calendar year 2005, then we anticipate
that we will need to raise additional capital before the end of calendar year
2006 to fund the ongoing FDA approval process for PRTX-100 in Pemphigus, RA and,
potentially, other autoimmune diseases. Were we unable to obtain approval of our
IND application or otherwise 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:
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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(TM), 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(TM) 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(TM) showed a resumption of joint inflammation and tissue damage.
This response to Enbrel(TM) 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 New Zealand white rabbits.
New Zealand white 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 March 4, 2005, we believe that this approach will ultimately accelerate
the development path and maximize success of PRTX-100 in patients. Other
IND-related activities included additional manufacturing and formulation of our
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.. Additionally we intend to conduct research and
pre-clinical activities with PRTX-100 and other compounds in RA, Pemphigus, 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 cGMP. The process is scaleable to commercial
production.
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MARKETS
Pemphigus will by the first autoimmune disease targeted by the Company.
Pemphigus is a rare, severe and life-threatening autoantibody-mediated disease
characterized by blistering and erosion of the skin and mucous membranes. It
affects approximately ten to fifteen thousand Americans and 40 thousand people
worldwide. If not treated, Pemphigus is usually fatal, with generalized
infection being the most frequent cause of death. Treated, the disorder tends to
be chronic in most cases. Side effects of current treatments (steroids,
immuno-suppressants, antibiotics and chemotherapeutics) may be severe or
disabling.
RA will continue to be our long term 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.
Another objective of the Company 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.
Additionally, our 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 autoimmune diseases. We intend to begin pre-clinical
studies in autoimmune diseases other than RA during the remainder of calendar
2005 and first half of 2006, 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:
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- 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(TM)), infliximab (Remicade(TM)), and adalimumab
(Humira(TM));
- Soluble Interleukin-l (IL-I) Receptor Therapy, Anakinra
(Kineret(TM)). Anakinra(TM), 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(R), 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(TM) and
Remicade(TM). According to Evaluate Pharma as of May 10, 2005, Enbrel(TM), a
soluble receptor construct that is administered subcutaneously, generated
estimated revenue of $2.6 billion in 2004, Remicade(TM), a chimeric monoclonal
antibody administered by intravenous infusion, generated estimated revenue of
$3.0 billion in 2004, and Abbot's Humira(TM), a recent entry into the RA market,
generated estimated revenue of $852 million in 2004.
Another recent entrant into the RA market is a less well-known product
by Amgen Corporation, Anakinra (Kineret(TM)). 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(TM) or
Enbrel(TM). 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(TM) 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.
Currently, there are no products on the market specifically for the
treatment of Pemphigus, however, CellCept(TM) by Hoffman-La Roche, Inc. a
division of Roche Group is currently conducting pre-clinical trials for this
indication.
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.
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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 Biological License Application or BLA. The approval of a
BLA may take substantial time and effort. In addition, upon approval of a BLA,
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 and we have also filed for
foreign protection of this patent in Canada, Japan and the European Union.
Additional patent applications relating to the manufacturing process of PRTX-100
and new compounds are currently in process.
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 provide the overall compensation
necessary to retain such skilled employees.
FACILITIES
Our office and laboratory is located in 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.
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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, laid the foundation for the Investigational New Drug, or
IND, Application for treating RA. We submitted the IND application to the FDA on
March 4, 2005 and on March 31, 2005, the FDA verbally disclosed to the Company
that is has placed the Company's IND on clinical hold, pending additional
product characterization. Since that time, significant resources have been
allocated into the product characterization process and we expect to formally
reply to the FDA in the third calendar quarter of 2005. We also expect that
other 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 Pemphigus and other indications.
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.
Staffing plans during the second half of calendar 2005 include hiring a
Medical Director, a Clinical Project Manager, 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
$2,513,987 and $874,723 and for the nine and three months ended February 28,
2005, respectively, compared with $812,992 and $323,711 for the nine and three
months ended February 29, 2004. 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.
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Administrative expenses increased for the year ended May 31, 2004 over
the prior year from $640,927 to $1,393,347. For the nine and three months ended
February 28, 2005, administrative expenses were $1,034,929 and $429,075,
respectively, compared with $1,020,405 and $461,891 for the nine and three
months ended February 29, 2004. 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, along with hiring Marc L, Rose, Vice
President of Finance, Chief Financial Officer and Treasurer and Corporate
Secretary.
Professional fees increased for the year ended May 31, 2004 over the
prior year from $71,548 to $288,077. Professional fees were $525,512 and
$258,320 for the nine and three months ended February 28, 2005, respectively,
compared with $194,525 and $46,698 for the nine and three months ended February
29, 2004. Professional fees consist of legal, audit, tax, employee recruitment,
investment banking fees and the Scientific Advisory Board. The increase in
professional fees stem from on-going business activity, as well as legal fees
incurred in connection with the filing of the Company's Post-Effective Amendment
to Registration Statement on Form SB-2 related to its September 2003 offering.
The Company expects that these fees will continue to increase in the current
fiscal year as its business activities increase.
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.
Additionally, on May 25, 2005, we raised $5,057,885 through the sale of
2,593,788 shares of our common stock at $1.95 per share, with warrants to
purchase an additional 920,121 shares of our common stock, at an exercise price
of $2.25 per shares. The warrants expire on May 25, 2010.
As of February 28, 2005, our net working capital was $5,118,230 and our
total cash and cash equivalents were $5,860,208. We estimate that with this
level of cash and cash equivalents, we can satisfy our cash requirements for the
next 12 months. 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. However, if we succeed in obtaining approval
of our IND application in the third quarter of calendar year 2005, then we
anticipate that we will need to raise additional capital before the end of
calendar year 2006 to fund the ongoing FDA approval process for PRTX-100 in
Pemphigus, 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 obtain approval of our IND application or otherwise
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.
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- 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.
- Operating Lease - Copier. The Company has entered into a sixty three
(63) month operating lease with Ricoh Customer Finance Corporation for a
multi-function copier. The lease commenced on December 16, 2004 and will
expire on March 16, 2010.
PAYMENTS DUE BY PERIOD
----------------------
LESS
THAN 1 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ----- ---- --------- --------- -------
Employment Agreements-Officers 792,479 792,479 0 0 0
Directors Agreements 190,000 190,000 0 0 0
Operating Lease - Office Space 205,179 90,787 114,392 0 0
Operating Lease - Copier 15,187 2,490 8,964 3,484 249
Total 1,202,845 1,075,756 123,356 3,484 249
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
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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,
Treasurer and Corporate Secretary
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 Senior 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.
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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 and in April 2005, Mr. Rose was
elected Corporate Secretary. From March 2001 to November 2004, Mr. Rose served
as Vice President and Chief Financial Officer of the DentalEZ Group, a privately
held manufacturer of dental equipment and dental handpieces. From January 1998
to March 2001, Mr. Rose was Practice Manager of Oracle Consulting Services for
Oracle Corporation responsible for designing and implementing Oracle financial
and project applications. From September 1990 to January 1998, Mr. Rose held
several positions with the controllership organization of Waste Management, Inc
and from June 1988 to September 1990, was an auditor with Ernst & Young in
Philadelphia. 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 served as our Treasurer January through November
2004, and also as our corporate secretary from June 2002 to November 2004. 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
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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. Prior to
September 2000, Mr. Stagnaro spent several months as a private investor. 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 December 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, MD has been a board member since February 2005. He is
Chief Executive Officer of Neosil, Inc., an early stage dermatology
pharmaceutical company. In 1993 Dr. Bauer co-founded and until early 2005 was a
member of the Board of Directors of Connetics Corporation, a public company
(Nasdaq: CNCT) focused on therapeutic agents for skin diseases. He is also a
member of the Board of Directors of Neosil, Inc., and has served on several
not-for-profit boards of directors, including the boards of directors of
Stanford Hospital and Clinics, of the Lucile Salter Packard Children's Hospital,
and of UCSF Stanford Health Care. In 1988 Dr. Bauer became Chair of the
Department of Dermatology at Stanford University School of Medicine, a position
he held for 7 years. During his tenure as department chair, Dr. Bauer also
served as Program Director of the Stanford University General Clinical Research
Center 1997, Dr. Bauer was appointed Vice President for Medical Affairs and
subsequently Vice President for the Medical Center. A funded investigator for 25
years, Dr. Bauer served on review groups at the National Institutes of Health,
including as chair of the AMS Study Section, as chair of GMA-1 Study Section,
and as a member of the Advisory Council for the National Institute of Arthritis
and Musculoskeletal and Skin Disease. He has also served as a member of the
Board of Scientific Counselors of the Division of Cancer Biology, Diagnosis and
Centers of the National Cancer Institute. Dr. Bauer is a member of numerous
academic societies, including the Institute of Medicine of the National Academy
of Sciences to which he was elected in 1997. He has been the recipient of both
the Research Career Development and the MERIT awards from the NIH. He has
published approximately 175 scientific articles and has been honored for his
research and academic accomplishments by the Society for Investigative
Dermatology (the Montagna Award for outstanding research by a young investigator
and the Stephen Rothman Award, the Society's highest honor), by the American
Academy of Dermatology (the Sulzberger Award), by the Society for Investigative
Dermatology (President) and by Northwestern University (Alumni Merit Award). He
is Professor (Emeritus) in the School of Medicine and immediate past Vice
President for the Medical Center (1997-2001) and dean of the School of Medicine
(1995-
-25-
2001). An academic dermatologist, who received the M.D. degree from Northwestern
University in 1967, Dr. Bauer served a straight medical internship at Barnes in
St. Louis, Missouri. He was a resident and research fellow in dermatology at
Washington University School of Medicine in St. Louis from 1968 through 1972.
Following two years in the United States Navy, he returned to Washington
University in 1974 to join the faculty of the School of Medicine. At Washington
University, Dr. Bauer progressed to the rank of Professor of Medicine
(Dermatology) and served as Director of the Center for Research and Therapy of
Epidermolysis Bullosa.
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
-------------------
Other Restricted
Fiscal Annual Stock
Name & Principal Position Year Salary $ Bonus $ Compensation Awards $
------------------------- ---- -------- ------- ------------ --------
Steven H. Kane, President, Chief Executive 2004 $ 179,165 $ 176,576 $ 0 $ 20,835(2)
Officer and 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
$2.25. Mr. Kane received 8,334 shares of restricted stock on June 15, 2003.
The value of this stock was also computed using the closing price of
Protalex common stock on May 31, 2003.
(3) Mr. Doherty resigned as our President effective as of December 16, 2002. He
no longer serves as an officer of Protalex. He remains a director.
OPTION GRANTS IN THE FISCAL YEAR ENDED MAY 31, 2004
The following table sets forth information concerning the stock options
granted to each person named in the above "Summary Compensation Table" during
our fiscal year ended May 31, 2004, and the exercise price of all such options:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
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Percent of
Total
Number of Options/SARs
Securities Granted to Exercise Market
Underlying Employees in or Base Price on
Options/SARs Fiscal Year Price Date of
Granted (#) ( %) ($/Share) 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 Value of Unexercised In The Money
Unexercised Options at Year End 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 $27,083 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 Senior
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 monthly salary of $14,167.
Currently, he is paid at a rate of $16,250 per month. 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 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,
-27-
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 TRANSACTIONS
For the nine and three month periods ended February 28, 2005, the
Company incurred $10,060 and $5,128 respectively, of expenses related to air
travel to a partnership principally owned by the Chief Executive Officer of the
Company. As of February 28, 2005, $3,080 is included within Accounts Payable and
was subsequently paid on March 2, 2005.
For the nine and three month periods ended February 28, 2005, the
Company incurred $13,616 and $6,611 respectively, of expenses related to legal
services to a firm, which employs one of the Company's board members.
The Company has an agreement with its Chairman to pay $12,500 per month
as a director fee. For the nine and three month periods ended February 28, 2005,
the Company incurred $112,500 and $37,500 respectively for this director's fee.
The Company has an agreement with each of Carleton A. Holstrom and Dr.
Eugene Bauer to pay each of them $1,667 per month on a quarterly basis payable
in arrears as a director fee. For the nine and three month periods ended
February 28, 2005, the Company paid $5,000 and $5,000 respectively for to Mr.
Holstrom for this fee. For each of the nine and three months periods ended
February 28, 2005, the Company made no payments to Dr. Bauer for this fee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is the beneficial ownership of common
stock as of June 16, 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 June 16, 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 19,393,221
shares of common stock outstanding as of June 16, 2005, together with applicable
options and warrants
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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 387,076(1) 2.0%
Director
Steven H. Kane, President, Chief Executive 1,064,844(2) 5.5%
Officer and Director
John E. Doherty, Director and former 3,037,660(3) 15.7%
President
Frank M. Dougherty, Director 403,192(4) 2.1%
Hector Alila, Senior Vice President of Drug 107,292(5) *
Development
Marc L. Rose, Vice President of Finance, 29,583 (6) *
Chief Financial Officer, Treasurer and
Corporate Secretary
Carleton A. Holstrom, Director 100,000(7) *
Thomas Stagnaro, Director 265,000(8) 1.4%
Eugene A. Bauer, Director 100,000(9) *
Dinesh Patel, Director 12,646,093(10) 65.2%
vSpring SBIC, L.P.
2795 E. Cottonwood Pkwy, Suite 360
Salt Lake City, UT 84121 12,646,093(10) 65.2%
Integral Capital Partners VI, L.P.
3600 South Lake Drive
St. Francis, WI 53235 1,687,500(11) 8.7%
SF Capital Partners Ltd.
3000 Sand Hill Road Big 3, Suite 240
Menlo Park, CA 94025 1,588,235(12) 8.2%
All officers and directors as a group (10 13,247,968(13) 78.9%
persons)
* Indicates less than 1%.
(1) Includes options to purchase 387,076 shares of Protalex common stock
exercisable within 60 days of June 16, 2005.
(2) Includes options to purchase 989,201 shares of Protalex common stock
exercisable within 60 days of June 16, 2005.
(3) Includes options to purchase 85,000 shares of Protalex common stock
exercisable within 60 days of June 16, 2005.
(4) Includes options to purchase 65,000 shares of Protalex common stock
exercisable within 60 days of June 16, 2005.
(5) Includes options to purchase 57,292 shares of Protalex common stock
exercisable within 60 days of June 16, 2005.
(6) Includes options to purchase 14,583 shares of Protalex common stock
exercisable within 60 days of June 16, 2005
(7) Includes options to purchase 100,000 shares of Protalex common stock
exercisable within 60 days of June 16, 2005.
-29-
(8) Includes options to purchase 265,000 shares of Protalex common
stock exercisable within 60 days of June 16, 2005.
(9) Includes options to purchase 100,000 shares of Protalex common
stock exercisable within 60 days of June 16, 2005.
(10) Includes warrants to purchase 1,047,255 shares of Protalex
common stock exercisable within 60 days of June 16, 2005, and
8,463,091 shares of Protalex common stock (including options
and warrants to purchase 2,655,126 shares of Protalex common
stock exercisable within 60 days of June 16, 2005) held by
Steven H. Kane, John E. Doherty, Frank M. Dougherty, G. Kirk
Raab, Thomas P. Stagnaro, Marc L. Rose, 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, as amended on
May 25, 2005, with Steven H. Kane, John E. Doherty, Frank M.
Dougherty, G. Kirk Raab, Thomas P. Stagnaro, Marc L. Rose,
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. 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.
(11) Includes warrants to purchase 437,500 shares of Protalex
common stock exercisable within 60 days of June 16, 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.
(12) Includes warrants to purchase 411,765 shares of Protalex
common stock exercisable within 60 days of June 1, 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
-30-
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.
(13) 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 June 16, 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 19,393,221 shares were issued and
outstanding as of June 16, 2005. We have reserved 7,830,971 shares of common
stock for issuance pursuant to outstanding options and warrants, including
3,661,255 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 therefore. 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, or otherwise, we have been
advised 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;
-31-
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- 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 our securities 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 2,593,788 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 920,121 shares of common stock upon
exercise of warrants. The warrants have an exercise price of $2.25 per share.
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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., (as to 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.
Three selling shareholders have affiliations with broker-dealers as
follows
- Terral Jordan's employer's wholly-owned subsidiary is a member
of the NASD.
- William M. Hitchcock is a registered representative of
Pembroke Financial Partners LLC, which is a NASD member firm.
- The Havens family also owns stock in A.G. Edwards and Morgan
Stanley, who are members of the NASD.
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 June 16, 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 19,393,221 shares of common
stock outstanding as of June 16, 2005, together with applicable options and
warrants for each stockholder.
NO. OF SHARES OWNED PRIOR SHARES OWNED AFTER
SHARES TO THE OFFERING THE OFFERING
OFFERED ---------------------------------------------------------
(INCLUDES
STOCK
UNDERLYING
WARRANTS) NUMBER PERCENTAGE NUMBER PERCENTAGE
- ---------------------------------------------------------------------------------------------------------------------
vSpring Capital. L.P 1,403,590(1) 12,600,060(28) 65.0% 0(29) *
Christoph Henkel 668,377(2) 747,789 3.9%% 79,412 *
Kinloch Rice Fields 334,188(3) 741,247 3.8% 397,059 2.0%
Sandra Pessin 195,500(4) 195,500 5.8% 0 *
Pacific Growth Equites 100,000(5) 100,000 * 0 *
Douglas Heller 66,838(6) 66,838 * 0 *
Josephine K. Doherty 66,838(7) 66,838 * 0 *
Eric N. Fellner 66,838(8) 201,838 1.0% 135,000 *
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George K. Hickox, Jr. 65,167(9) 65,167 * 0 *
Cape May Limited Partnership 65,167(10) 65,167 *
The Linclon Fund, L.P. 50,129(11) 288,365 1.5% 238,236 1.2%
David MacMillian 33,419(12) 160,478 * 127,059 *
William Hitchcock 33,419(13) 647,099 3.3% 613,680 3.2%
Maud Thilghman Walker 33,419(14) 110,086 * 76,667 *
Scott Holmes 33,419(15) 33,419 * 0 *
Steven and Mary Kane 33,419(16) 83,421 * 50,002 0
James Hanosh 33,419(17) 897,369 4.6% 863,950 4.4%
James R. Walker 33,419(18) 200,919 1.0% 167,500 *
Oakwood Holdings 33,419(19) 33,419 * 0 *
Jane Smith Turner Trust 33,333(20) 33,333 * 0 *
Craig Lunsman 26,067(21) 26,067 * 0 *
Robert Havens (Peter H. Havens Trust FBO 23,392(22) 43,392 * 20,000 *
Robert Havens)
Victoria Havens (Mary L. Smith Trust FBO 20,053(23) 40,053 * 20,000 *
Victoria L. Havens)
Louise Havens (Louise Havens Trust) 20,053(24) 99,553 * 73,500 *
Terral Jordan 16,710(25) 137,210 * 120,500 *
Sona Rajni Banker 13,375(26) 13,375 * 0 *
Jack Benoff 8,021(27) 8,021 * 0 *
* Indicates less than 1%.
(1) Includes stock underlying a warrant to purchase 326,667 shares of
common stock at an exercise price of $2.25 per share.
(2) Includes stock underlying a warrant to purchase 155,556 shares of
common stock at an exercise price of $2.25 per share.
(3) Includes stock underlying a warrant to purchase 77,778 shares of
common stock at an exercise price of $2.25 per share.
(4) Includes stock underlying a warrant to purchase 45,500 shares of
common stock at an exercise price of $2.25 per share.
(5) Includes stock underlying a warrant to purchase 100,000 shares of
common stock at an exercise price of $2.25 per share. Pacific
Growth Equities acted in a consulting role in connection with the
May 2005 financing transaction.
(6) Includes stock underlying a warrant to purchase 15,556 shares of
common stock at an exercise price of $2.25 per share.
(7) Includes stock underlying a warrant to purchase 15,556 shares of
common stock at an exercise price of $2.25 per share.
(8) Includes stock underlying a warrant to purchase 15,556 shares of
common stock at an exercise price of $2.25 per share.
(9) Includes stock underlying a warrant to purchase 15,167 shares of
common stock at an exercise price of $2.25 per share.
(10) Includes stock underlying a warrant to purchase 15,167 shares of
common stock at an exercise price of $2.25 per share.
(11) Includes stock underlying a warrant to purchase 11,667 shares of
common stock at an exercise price of $2.25 per share.
(12) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
(13) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share. Mr.
Hitchcock previously served as Chairman of the Board of Protalex
from October 2001 to October 2003.
(14) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
-34-
(15) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
(16) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
(17) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
(18) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
(19) Includes stock underlying a warrant to purchase 7,778 shares of
common stock at an exercise price of $2.25 per share.
(20) Includes stock underlying a warrant to purchase 33,333 shares of
common stock at an exercise price of $2.25 per share. Jane Smith
Turner Trust was compensated with a finders' fee in connection
with the May 2005 financing transaction.
(21) Includes stock underlying a warrant to purchase 6,067 shares of
common stock at an exercise price of $2.25 per share.
(22) Includes stock underlying a warrant to purchase 5,444 shares of
common stock at an exercise price of $2.25 per share.
(23) Includes stock underlying a warrant to purchase 5,444 shares of
common stock at an exercise price of $2.25 per share.
(24) Includes stock underlying a warrant to purchase 4,667 shares of
common stock at an exercise price of $2.25 per share.
(25) Includes stock underlying a warrant to purchase 3,889 shares of
common stock at an exercise price of $2.25 per share.
(26) Includes stock underlying a warrant to purchase 3,113 shares of
common stock at an exercise price of $2.25 per share.
(27) Includes stock underlying a warrant to purchase 1,867 shares of
common stock at an exercise price of $2.25 per share.
(28) 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".
(29) Upon vSping SBIC, L.P.'s sale of its shares (including shares
underlying warrants) through this offering, vSpirng will no longer
be deemed to beneficially own the shares held by Steven H. Kane,
John E. Doherty, Frank M. Dougherty, G. Kirk Raab, Marc L. Rose
and Thomas P. Stagnaro
-35-
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.
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.
-36-
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-9
UNAUDITED FINANCIAL STATEMENTS
Balance Sheets at February 28, 2005 (unaudited) and May 31, 2004 F-17
Statements of Operations for the Three and Nine Months Ended February 28,
2005 and Three and Nine Months Ended February 29, 2004 (unaudited) and
From Inception (September 17, 1999) through February 28, 2005 (unaudited) F-19
Statements of Cash Flows for the Nine Months Ended February 28, 2005 and
February 29, 2004 (unaudited) and From Inception (September 17, 1999)
through February 28, 2005, (unaudited) F-20
Notes to Interim Financial Statements (unaudited) F-22
F-1
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 the 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the 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.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
July 23, 2004
F-2
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 14,683,854 3,758,315
40,000,000 shares, 16,784,433 and
12,247,950 shares issued and outstanding
as of May 31, 2004 and 2003, respectively
------------ ------------
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.
F-3
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
FROM INCEPTION
YEAR ENDED YEAR ENDED THROUGH
MAY 31, 2004 MAY 31, 2003 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.
F-4
Protalex, Inc.
(A Company in the Development Stage)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
From Inception (September 17, 1999) through May 31, 2004
DEFICIT
ACCUMULATED
ADDITIONAL COMMON IN THE
COMMON STOCK PAID IN STOCK- DEVELOPMENT
SHARES AMOUNT CAPITAL 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
F-5
DEFICIT
ACCUMULATED
ADDITIONAL COMMON IN THE
COMMON STOCK PAID IN STOCK- DEVELOPMENT
SHARES AMOUNT CAPITAL CONTRA 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.
F-6
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
FROM INCEPTION
YEAR ENDED YEAR ENDED THROUGH
MAY 31, 2004 MAY 31, 2003 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
------------ ------------ ------------
F-7
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.
F-8
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
1. Estimates
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.
2. Loss per Common Share
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,
F-9
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.
From Inception
Year Ended Year Ended Through May
May 31, 2004 May 31, 2003 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:
FROM INCEPTION
YEAR ENDED YEAR ENDED THROUGH
MAY 31, 2004 MAY 31, 2003 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
F-10
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.
6. Income Taxes
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
F-11
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.
11. Reclassifications
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:
ENERDYNE TRANSACTION BALANCE SHEET AT
PROTALEX, INC. CORPORATION ADJUSTMENTS 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)
F-12
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)
------------ ------------
F-13
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
----------
F-14
Total minimum obligations 43,358
Interest (2,825)
----------
Present value of minimum capital lease 40,533
obligations
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 WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE NUMBER EXERCISE PRICE REMAINING LIFE (YRS) NUMBER EXERCISE PRICE 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
========= =========
F-15
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.
F-16
Protalex, Inc.
(A Company in the Development Stage)
BALANCE SHEETS
February 28, 2005 May 31, 2004
----------------- ------------
(Unaudited) (Audited)
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,860,208 $ 9,292,783
Prepaid expenses and employee advances 22,883 22,041
------------ ------------
Total current assets 5,883,091 9,314,824
------------ ------------
PROPERTY & EQUIPMENT:
Lab equipment 305,442 260,425
Office and computer equipment 157,787 153,266
Furniture & fixtures 25,556 25,556
Leasehold improvements 27,060 5,540
------------ ------------
515,845 444,787
Less accumulated depreciation (382,811) (342,723)
------------ ------------
133,034 102,064
------------ ------------
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 14,882 15,647
------------ ------------
Total other assets 22,472 23,237
------------ ------------
TOTAL $ 6,038,597 $ 9,440,125
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligation $ 21,561 $ 20,487
Accounts payable 719,634 377,100
Payroll and related liabilities 21,968 24,560
Accrued expenses 1,698 --
------------ ------------
Total current liabilities 764,861 422,147
Capital lease obligation, less current portion 3,738 20,046
Other 4,638 1,544
------------ ------------
Total liabilities 773,237 443,737
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, par value at $0.00001, 40,000,000 shares authorized,
16,799,433 and 16,784,433 shares issued and outstanding as
F-17
of February 28, 2005 and May 31, 2004, respectively 168 14,663,854
Additional paid in capital 15,992,947 1,072,008
Deficit accumulated during
the development stage (10,727,755) (6,739,474)
------------ ------------
Total stockholders' equity 5,265,360 8,996,388
------------ ------------
TOTAL $ 6,038,597 $ 9,440,125
============ ============
The accompanying notes are an integral part of these financial statements.
F-18
Protalex, Inc.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
For the nine and three month periods ended February 28, 2005 and February 29,
2004, and From Inception (September 17, 1999) through February 28, 2005
(Unaudited)
Nine Nine Three Three From
Months Months Months Months Inception
Ended Ended Ended Ended Through
February 28, February 29, February 28, February 29, February 28,
2005 2004 2005 2004 2005
------------ ------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ -- $ --
Operating Expenses
Research and development (2,513,987) (812,992) (874,723) (323,711) (6,196,893)
Administrative (1,034,929) (1,020,405) (429,075) (461,891) (3,391,675)
Professional fees (525,512) (194,525) (258,320) (46,698) (1,090,805)
Depreciation and amortization (3,991) (4,180) (1,258) (796) (144,986)
------------ ------------ ------------ ------------ ------------
Operating Loss (4,078,419) (2,032,102) (1,563,376) (833,096) (10,824,359)
Other income (expense)
Interest income 92,563 27,695 45,926 -- 176,848
Interest expense (2,128) (5,329) (491) (1,339) (69,367)
Loss on disposal of equipment -- (1,561) -- (1,561) (10,580)
------------ ------------ ------------ ------------ ------------
Net Loss $ (3,987,984) $ (2,011,297) $ (1,517,941) $ (835,996) $(10,727,755)
============ ============ ============ ============ ============
Weighted average number of common
shares outstanding 16,791,933 14,913,238 16,791,933 16,729,563 12,542,606
============ ============ ============ ============ ============
Loss per common share - basic and diluted $ (.24) $ (.13) $ (.09) $ (.05) $ (.86)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-19
Protalex, Inc.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
For the nine month periods ended February 28, 2005 and February 29,
2004, and From Inception (September 17, 1999) through February 28, 2005
(Unaudited)
From
Nine Nine Inception
Months Ended Months Ended Through
February 28, February 29, February 28,
2005 2004 2005
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,987,984) $ (2,011,297) (10,727,755)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities
Loss on disposal of equipment -- 1,561 10,580
Depreciation and amortization 40,853 50,849 410,750
Non cash compensation expense 256,955 462,021 1,466,138
Non cash expenses -- -- 16,644
Increase in:
Prepaid expense and employee advances (842) (34,939) (30,473)
Interest receivable -- (27,500) --
Increase (decrease) in:
Accounts payable and accrued expenses 342,534 76,240 719,634
Payroll and related liabilities (894) 17,246 23,666
Other liabilities 3,094 (15) 4,638
------------ ------------ ------------
Net cash and cash equivalents used in operating
activities (3,346,284) (1,465,834) (8,106,178)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intellectual technology license - fee portion -- -- (20,000)
Acquisition of equipment (71,057) (39,786) (402,364)
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
------------ ------------ ------------
Net cash and cash equivalents used in investing activities (71,057) (39,786) (666,364)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuance -- 11,372,481 14,976,464
Principal payment on equipment notes payable
and capital leases (15,234) (17,066) (270,112)
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 (15,234) 11,047,081 14,632,750
------------ ------------ ------------
F-20
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (3,432,575) 9,541,461 5,860,208
Cash and cash equivalents, beginning 9,292,783 280,052 --
------------ ------------ ------------
Cash and cash equivalents, end $ 5,860,208 $ 9,821,513 $ 5,860,208
============ ============ ============
SUPPLEMENTAL SCHEDULE OF CASH
FLOW INFORMATION:
Interest paid $ 2,128 $ 5,329 $ 66,156
============ ============ ============
Taxes paid $ -- $ -- $ 50
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-21
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. The impact to the Stockholders' Equity
as of February 28, 2005 as a result of the reincorporation was to
adjust Common Stock to its legal par value as follows:
STOCKHOLDERS' EQUITY Prior to Reincorporation Subsequent to
(No Par Value) Reincorporation
(Par Value $0.00001)
Common stock, par value $0.00001,
40,000,000 shares authorized, 16,799,433 shares
issued and outstanding as February 28, 2005 $ 14,702,104 $ 168
Additional paid in capital 1,291,011 15,992,947
Deficit accumulated during
the development stage (10,727,755) (10,727,755)
------------ ------------
Total stockholders' equity $ 5,265,360 $ 5,265,360
============ ============
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ESTIMATES
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.
2. LOSS PER COMMON SHARE
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 February 28, 2005, the Company had a total of 7,442,653
potentially dilutive securities issued and oustanding.
F-22
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 accounts for 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 (see Note C - Recent
Accounting Pronouncements pertaining to SFAS No. 123-Revised). 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 for the indicated periods if the Company applied the fair value
recognition provision of SFAS No. 123 to stock-based employee
compensation
From
Nine Nine Three Three Inception
Months Ended Months Ended Months Ended Months Ended Through
February 28, February 29, February 28, February 29, February 28,
2005 2004 2005 2004 2005
---- ---- ---- ---- ----
Net loss, as reported $ (3,987,984) $ (2,011,297) $ (1,517,941) $ (835,996) $(10,727,755)
Add: Stock-based employee
compensation expense
included in reported
net loss 219,003 395,582 67,487 74,495 813,318
Deduct: Stock-based employee
compensation expense
determined under fair
value method for all
Awards (1,166,164) (899,496) (617,679) (277,389) (3,071,098)
------------ ------------ ------------ ------------ ------------
Pro forma net loss $ (4,945,145) $ (2,551,211) $ (2,068,133) $ (1,038,890) $(12,985,535)
============ ============ ============ ============ ============
Loss per share, as reported - basic
and diluted $ (.24) $ (.13) $ (.09) $ (.05) $ (.86)
Pro forma loss per share basic and diluted $ (.29) $ (.17) $ (.12) $ (.06) $ (1.04)
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
Nine Nine Three Three Inception
Months Ended Months Ended Months Ended Months Ended Through
February 28, February 29, February 28, February 29, February 28,
2005 2004 2005 2004 2005
---- ---- ---- ---- ----
F-23
Dividends per year 0 0 0 0 0
Volatility percentage 103% 90%-131% 103% 90%-131% 90%-131%
Risk free interest rate 2.57-3.52% 4.16%-5.11% 3.52% 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.
On January 13, 2005, the Company issued options to purchase up to
100,000 shares of common stock of the Company to a new employee, at an
exercise price of $2.55 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 January
2015.
On January 13, 2005, the Company issued options to purchase up to
230,000 shares of common stock of the Company to several employees, at
an exercise price of $2.55 a share. The options were issued pursuant to
the Company's 2003 Stock Option Plan and vest over a forty-eight month
period from the issue date. The options will expire January 2015.
On January 13, 2005, the Company issued options to purchase up to
125,000 shares of common stock of the Company to several members of the
board of directors, at an exercise price of $2.55 a share. The options
were issued pursuant to the Company's 2003 Stock Option Plan and vested
immediately. The options will expire January 2015.
On January 13, 2005, the Company issued 15,000 shares of restricted
common stock to an employee, as part of his agreement for employment.
On February 15, 2005, the Company issued options to purchase up to
100,000 shares of common stock of the Company to a new member of the
board of directors, at an exercise price of $2.80 a share. The options
were issued pursuant to the Company's 2003 Stock Option Plan and vested
immediately. The options will expire February 2015.
On April 13, 2005, the Company issued options to purchase up to 50,000
shares of common stock of the Company to an outside Consultant, at an
exercise price of $2.60 a share. The options were issued pursuant to
the Company's 2003 Stock Option Plan and vest over a forty-eight month
period from the issue date. The options will expire April 2015.
F-24
NOTE C - RECENT ACCOUNTING PRONOUNCEMENTS
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 all share-based awards granted
and then amortize that estimated fair value to expense over the
requisite service. SFAS No. 123-Revised is effective for the Company
for all periods beginning after December 15, 2005. The Company
currently accounts for options issued to its employees 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 for
options issued to employees.
NOTE D - RELATED PARTIES
For the nine and three month periods ended February 28, 2005, the
Company incurred $10,060 and $5,128 respectively, of expenses related
to air travel to a partnership principally owned by the Chief Executive
Officer of the Company. As of February 28, 2005, $3,080 is included
within Accounts Payable and was subsequently paid on March 2, 2005.
For the nine and three month periods ended February 28, 2005, the
Company incurred $13,616 and $6,611 respectively, of expenses related
to legal services to a firm, which employs one of the Company's board
members.
The Company has an agreement with its Chairman to pay $12,500 per month
as a director fee. For the nine and three month periods ended February
28, 2005, the Company incurred $112,500 and $37,500 respectively for
this director's fee.
The Company has an agreement with each of Carleton A. Holstrom and Dr.
Eugene Bauer to pay each of them $1,667 per month on a quarterly basis
payable in arrears as a director fee. For the nine and three month
periods ended February 28, 2005, the Company paid $5,000 and $5,000
respectively for to Mr. Holstrom for this fee. For each of the nine and
three months periods ended February 28, 2005, the Company made no
payments to Dr. Bauer for this fee.
NOTE E - RECLASSIFICATIONS
Certain amounts in the fiscal year 2004 financial statements have been
reclassified to conform to the fiscal year 2005 presentation.
F-25