FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission file number 000-28385
Protalex, Inc.
(Exact name of small business issuer as specified in its charter)
New Mexico 91-2003490
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
717 Encino Pl. N.E. Suite 17 Albuquerque, NM 87102
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (505) 243-8220
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date 16,695,034 as of October 14, 2003.
Transitional Small Business Disclosure Format (check one):
Yes No X
PART I
ITEM I - FINANCIAL STATEMENTS
Protalex, Inc.
(A Company in the Development Stage)
BALANCE SHEET
August 31, 2003
ASSETS
CURRENT ASSETS
Cash .......................................... $ 96,931
Prepaid expense ............................... 5,651
-----------
Total current assets ............................ $ 102,582
EQUIPMENT
Lab equipment ................................. 248,706
Office and computer equipment ................. 134,387
Furniture & fixtures .......................... 21,268
Leasehold improvements ........................ 10,685
-----------
415,046
Less accumulated depreciation ................. (301,653) 113,393
-----------
OTHER ASSETS
Intellectual technology property, net of
accumulated amortization of $3,892.............. $16,408
-----------
Total Assets $ 232,383
===========
LIABILITIES
CURRENT LIABILITIES
Accounts payable .............................. $ 214,584
Payroll and related liabilities ............... 61,133
Notes payable to individuals................... 100,000
Interest payable .............................. 205
Current maturities of capital lease ........... 19,716
-----------
Total current liabilities .............. $ 395,638
Capital lease obligation ........................ 35,993
-----------
Total liabilities ...................... 431,631
STOCKHOLDERS' DEFICIT
Common stock, no par value,
authorized 40,000,000 shares,
12,244,191 shares issued and outstanding .... 3,766,400
Common stock, contra .......................... (368,547)
Additional paid in capital ...................... 769,497
Deficit accumulated during
the development stage ....................... (4,366,598) (199,248)
---------- -----------
$ 232,383
===========
The accompanying notes are an integral part of this financial statement.
Protalex, Inc.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
For the three months ended August 31, 2003 and 2002, and From
Inception (September 17, 1999) through August 31, 2003
Three Three From Inception
Months Ended Months Ended Through
August 31, August 31, August 31,
2003 2002 2003
------------ ------------ ------------
Revenues ........................ $ -- $ -- $ --
Operating Expenses
Research and development ...... (257,234) (195,410) (2,660,095
Administrative ................ (317,663) (297,986) (1,281,062)
Professional fees ............. (37,759) (32,996) (314,975)
Depreciation and amortization . (1,876) (4,654) (78,240)
------------ ------------ ------------
Operating Loss ........ (614,532) (531,046) (4,334,372)
Other income (expense)
Interest income ............... 155 2,365 39,822
Interest expense .............. (2,112) (1,316) (63,030)
Loss on disposal .............. -- (2,292) (9,019)
------------ ------------ ------------
NET LOSS .............. $ (616,489) $ (532,289) $ (4,366,599)
============ ============ ============
Weighted average number of common
shares outstanding ............ 12,244,740 12,005,549 11,005,127
============ ============ ============
Loss per common share ........... $ (.05) $ (.04) $ (.40)
============ ============ ============
The accompanying notes are an integral part of these financial statements.
Protalex, Inc.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
For the Three Months Ended August 31, 2003 and 2002, and From
Inception (September 17, 1999) through August 31, 2003
Three Three From Inception
Months Ended Months Ended Through
August 31, August 31, August 31,
2003 2002 2003
----------- ----------- -----------
Cash flows from operating activities
Net loss ........................................... $ (616,489) $ (532,289) $(4,366,599)
Adjustments to reconcile net loss to net
cash provided by operating activities
Loss on disposal of equipment ............... -- 2,292 9,019
Depreciation and amortization .................. 13,676 29,140 318,942
Non cash compensation expense .................. 182,002 234,570 696,436
Non cash expenses ........................... -- -- 16,644
Decrease (increase) in prepaid expense ......... 1,221 (53,895) (5,651)
(Decrease) increase in payroll and
related liabilities ........................ 52,320 4,701 61,136
(Decrease) increase in interest payable ........ 190 (39) 205
Increase in accounts payable and credit
card payable .................................. 99,090 35,680 214,584
----------- ----------- -----------
Net cash used in operating activities ....... (267,990) (279,660) (3,055,284)
----------- ----------- -----------
Cash flows from investing activities
Acquisition of intellectual technology license
- fee portion .................................... -- -- (20,000)
Acquisition of equipment ........................... -- (10,526) (290,881)
Excess of amounts paid for public shell
over assets acquired to be accounted for
as a recapitalization ............................ -- -- (250,000)
Proceeds from disposal of equipment ................ -- 4,326 6,000
----------- ----------- -----------
Net cash used in investing activities ....... -- (6,200) (554,881)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from stock issuance ....................... -- 1,263,000 3,620,401
Principal payment on equipment notes payable and
capital leases....... (6,797) (10,705) (239,702)
Contribution by shareholders ....................... -- -- 183,569
Principal payment on note payable individual ....... -- -- (225,717)
Issuance of note payable to individuals ............ 100,000 -- 468,546
Acquisition of common stock ........................ (8,334) (16,666) (100,001)
----------- ----------- -----------
Net cash provided by financing activities ... 84,869 1,235,629 3,707,096
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH....................... (183,121) 949,769 96,931
Cash, beginning of period ............................ 280,052 261,867 --
----------- ----------- -----------
Cash, end of period .................................. $ 96,931 $ 1,211,636 $ 96,931
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
Protalex, Inc.
(A Company in the Development Stage)
STATEMENT OF CASH FLOWS -CONTINUED
For the Three Months ended August 31, 2003 and 2002 and From
Inception (September 17, 1999) through August 31, 2003
From Inception
Period Ended Period Ended Through
August 31, 2003 August 31, 2002 August 31, 2003
Interest paid ....................................... $ 1,922 $ 1,316 62,825
=============== =============== ==============
Taxes paid .......................................... $ -- $ 50 $ 50
=============== =============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
10,000 shares of company stock were
issued as part of the cost of acquisition
of the intellectual technology license
at inception - value at $.03 per share ............ $ -- $ -- $ 300
=============== =============== ==============
100,000 shares of company stock were
issued in exchange for legal services
performed ......................................... $ -- $ -- $ 15,000
=============== =============== ==============
1,644 shares of company stock were
issued in exchange for interest payable ........... $ -- $ -- $ 1,644
=============== =============== ==============
Lab equipment was acquired through
issuance of installment contract to seller ........ $ -- $ -- $ 91,430
=============== =============== ==============
Lab equipment was acquired
through lease agreement with seller ........ $ -- $ -- $ 61,151
=============== =============== ==============
8,334 shares of company stock were
issued as compensation......................... $ 16,418 $ -- $ 110,509
=============== =============== ==============
The accompanying notes are an integral part of these financial statements.
NOTE A - NOTES TO INTERIM FINANCIAL STATEMENTS
The interim financial data is unaudited, however in the opinion of
management, the interim data includes all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results for the
interim period. The financial statements included herein have been prepared
by 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
Form 10-KSB/A for the year ended May 31, 2003. This quarterly report should
be read in conjunction with such annual report.
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 August 31, 2003, the Company had a total of 2,718,922
potentially dilutive securities.
3. Stock Based Compensation
The Company accounts for the options granted to employees using the
"intrinsic" method which records as compensation cost the difference between
exercise price of the options and the fair market value of Company stock on
the measurement (grant) date. Options to non-employees are accounted for
using the "fair value" method, which recognizes the value of the option as
an expense over the related service period with a corresponding increase to
paid-in capital. During the three month period ended August 31,2003,
the Company granted 100,000 options to an employee to purchase common stock
with exercise price of $1.50, expiring in 2013.
Had the Company determined compensation expense based on the fair value at
the measurement date for its stock options granted to employees under
Statement of Financial Accounting Standards No. 123, the Company's net loss
and loss per share would have increased to the proforma amounts indicated as
follows:
Three Three From Inception
Months Ended Months Ended Through
August 31, August 31, August 31,
2003 2002 2003
---------- ----------- -----------
Net loss, as reported .......... $ (616,489) $ (532,289) $(4,366,599)
Add: stock-based employee
compensation expense
included in reported
net loss .................. 182,002 234,750 602,345
Deduct: Stock-based employee
compensation expense
determined under fair-
value method for all
awards ................. (323,231) (426,843) (1,371,683)
----------- ----------- -----------
Pro forma net loss ............. $ (757,718) $ (724,382) $(5,135,937)
=========== =========== ===========
Loss per share, as reported .... $ (.05) $ (.04) $ (.40)
Proforma loss per share ........ $ (.06) $ (.06) $ (.47)
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: dividends
of $0 per year; expected volatility of 90% - 131% ; risk-free interest rate
of 4.16% - 5.11%; and an expected life of three-five years.
NOTE C - BOARD ACTIONS
1. On July 14, 2003, a unanimouis written consent of the Board of Directors was
passed to elect Kirk Raab to the Board of Directors and appoint him as Chairman
of the Board. Mr. Raab accepted the offer, which specified compensation of
$150,000 per year, and stock options in an amount totaling 3.5% of the
post-private placement shares outstanding with a strike price of $1.50 per
share. The private placement was completed in September 2003 and based on the
post-private placement shares then outstanding, less the shares redemption
described in Note D below, Mr. Raab was then granted a total of 584,333 options
with an exercise price of $1.50, of which 100,000 options vested immediately,
and the remainder vest at 1/48th per month over four years, with a life from the
grant date of 10 years. In the case of termination without cause, Mr. Raab will
continue to receive salary and vesting of options for a twelve month period.
See Note D.
2. On August 13, 2003, the Board approved issuance of notes payable to two
directors of up to $100,000 each. In the same meeting, the Board approved
issuance of 100,000 options at $1.50 to CEO Steven Kane as compensation for
his efforts in the private placement in progress, and to change the date of
the annual meeting to the fourth Tuesday in October.
NOTE D - SUBSEQUENT EVENTS
1. On September 19, 2003, the Company closed a private placement,
raising a total of $12,657,599 in exchange for 7,445,646 shares of
common stock and 2,605,976 warrants exercisable at $2.40 per share,
expiring 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.
2. On September 19, 2003, the Company repurchased 2,994,803 shares of
common stock from former Chief Scientific Officer Paul Mann and
family members for $300,000.
3. On September 24, 2003, the Company repaid with interest the
promissory notes totaling $100,000 to two directors.
4. On October 2, 2003, William Hitchcock resigned from the Audit and
Compensation Committees. He remains as director of the Company.
The following discussion of the financial condition and results of
operations of Protalex, Inc. should be read in conjunction with the unaudited
financial statements and the related notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
Company's Form 10KSB/A for the year ended May 31, 2003. Our actual results may
differ materially from those contained in any forward-looking statements.
When you read this section of this Form 10-QSB, it is important that you
also read the unaudited consolidated financial statements and related notes
included elsewhere in this Form 10-QSB. This section of this Form 10-QSB
contains forward-looking statements that involve risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. We use
words such as "may," "will," "should," "expect," "plan," "intend," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms or other terminology to identify forward-looking statements. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons. These forward-looking statements
involve risks and uncertainties including, but not limited to, those referred to
in this report as well as in the Company's public filings with the SEC,
including the Company's Annual Report on Form 10-KSB for the year ended May 31,
2003, regarding the risk of gaining consumer acceptance, risks relating to the
Company's history of losses and liquidity and risks of international operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company's principal activities for the three months ended August 31, 2003
were to continue preparation for the Investigational New Drug Application (IND)
to be filed with the Food and Drug Administration (FDA) in first quarter of
calendar 2004, and to secure financing for continued operations. On September
19, 2003, the Company closed a private placement, raising $12.7 million, the
proceeds to be used in supporting Phase I and II clinical trials of its
Rheumatoid Arthritis (RA) drug. On July 14, 2003, the Company appointed Kirk
Raab as a Director and Chairman, further strengthening its core of knowledge and
experience in the pharmaceutical industry and FDA regulatory affairs. The
Company's contract lab is on schedule to produce a lot if its compound for
testing and formulation in fourth quarter of calendar 2003. Other IND-related
activities include designing clinical trial protocols, and designing an animal
`bridging study' to correlate the purchased compound used in animal trials with
the Company-manufactured product to be used in human clinical trials. In the
coming 12 months the Company is expecting significant progress in the
characterization of the active component of the Company's first product, which
will enable the synthesis of new compounds. This will allow more comprehensive
patent protection, as well as insight into future drugs. The Company is planning
pre-clinical studies in Lupus and Crohn's Disease in third quarter of calendar
year 2004, upon completion of significant milestones in the RA trials. The
Company anticipates that it will need to purchase an auto-sampling tray for the
existing HPLC machine, at a cost of $30,000, and a fume hood for the derivative
protein project, at a cost of $15,000. These purchases will be made in the first
quarter of calendar year 2004. Please refer to the Company's 10-KSB/A filed for
the year ended May 31, 2003 for more information on the Company's technology and
risk factors.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations for the three month periods ended August 31, 2003 and
2002 was $267,990 and $279,660, respectively. Increased research and
administrative expenses during the three month period ended August 31, 2003 were
offset by an increase in accounts payable. The Company continues to incur net
losses.
Operating loss increased to $616,489 for the three month period ended August 31,
2003 from $532,289 for the three month period ended August 31, 2002 primarily
due to increased administrative salaries related to the hiring of a new
President/CEO and Chairman. Research and FDA-related expenses to outside
laboratories increased due to pre-clinical trials and production of the
Company's drug in preparation for the IND application and inception of human
clinical trials.
CAPITAL SOURCES
Protalex, Inc. successfully completed a private placement in September 19, 2003,
receiving funds of $12,657,599 in exchange for 7,445,646 common shares of stock.
Issued along with these shares were 3,164,399 warrants exercisable at $2.40 per
share and expiring August 18, 2008.
ADEQUACY OF CAPITAL
As of August 31, 2003, the Company's net working capital was a $(293,056) and
its total cash and cash equivalents was $96,931. The Company expects to
experience operating losses and negative cash flow for the foreseeable future.
The Company projects that funds raised in the September, 2003 private placement
will be sufficient to sustain the company for at least 18 months. The ability to
raise additional debt or equity financing is dependent upon the Company reaching
milestones and advancing in the FDA approval process. No assurance can be given
that the Company will be able to obtain additional financing on favorable terms,
if at all. In addition, the report we received from our independent auditors
covering our fiscal year ended May 31, 2003 financial statements contains an
explanatory paragraph that states that our recurring losses and negative cash
flows from operations raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of that uncertainty.
RESULTS OF OPERATIONS - THREE MONTHS ENDED AUGUST 31, 2003 COMPARED TO THE
THREE MONTHS ENDED AUGUST 31, 2002
Research and development expenses increased $61,824, or 32%, from $195,410 for
the quarter ended August 28, 2002 to $257,234 for the quarter ended August 31,
2003. The increase is primarily due to services from FDA-related consultants,
animal testing laboratories, and a production facility manufacturing the
Company's drug. These higher expenses were partially offset by a decrease in lab
wages, lab materials, and depreciation expenses. Administrative expenses
increased $19,677, or 7%, from $297,986 for the quarter ended August 31, 2002 to
$317,663 for the quarter ended August 31, 2003. The increase was due to
compensation expenses associated with the addition of two administrative
positions.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 18, 2003, the Company sold 7,445,646 shares of common stock of the
Company and warrants to purchase an additional 2,605,976 shares of common stock
of the Company to institutional and individual investors for an aggregate
purchase price of $12,657,599. The Company also issued warrants to purchase
558,423 shares of Company common stock to Merriman Curhan Ford & Co., a
registered broker-dealer, in connection with this financing. Each of the
warrants has an exercise price of $2.40 per share and expires on September 18,
2008. The securities were issued pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933, as amended, or Regulation D
promulgated thereunder. The Company obtained representations for each of the
investors that they are "accredited investors" for purposes of Regulation D. The
Company has reserved 1,641,922 shares of common stock for issuance pursuant to
stand alone option agreements entered into by the Company.
ITEM 3 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
Disclosure controls and procedures are designed and implemented to insure that
all material information relating to a company is made known to its president,
chief financial officer, and such other persons who are responsible for
preparing and filing periodic reports with the Securities and Exchange
Commission. On October 14, 2003, Steven H. Kane, Chief Executive Officer and
Donald K. Dean, Chief Financial Officer, representing all of the officers and
directors of Protalex, Inc., evaluated Protalex's disclosure controls and
procedures and concluded that such controls were adequate as of that date.
Changes in Internal Control:
There have been no significant changes in Protalex's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
6.A Index of Exhibits - From 10-K
- --------------------------------------------------------------------------
2.1 Stock Purchase Agreement Incorporated by reference,
among Protalex, Inc., to the Company's 10-SB
Don Hanosh and Enerdyne filing December 3, 1999
Corporation
- --------------------------------------------------------------------------
Merger Agreement and Plan Incorporated by reference
of Re-organization to the Company's 10-SB
between Protalex, Inc. filing December 3, 1999
and Enerdyne Corporation
- --------------------------------------------------------------------------
3.1 Articles of Incorporation, Incorporated by reference
as amended to the Company's 10-SB/A
filing September 24, 2003
- --------------------------------------------------------------------------
3.2 Bylaws Incorporated by reference
to the Company's 10-SB/A
filing September 24, 2003
- --------------------------------------------------------------------------
99.1 Periodic Report Certifications Attached
By the Chief Executive Officer
Of Quarterly Report on Form
10-QSB, for the period ended
August 31, 2003
- --------------------------------------------------------------------------
99.2 Periodic Report Certifications Attached
By the Chief Financial Officer
Of Quarterly Report on Form
10-QSB, for the period ended
August 31, 2003
- --------------------------------------------------------------------------
Exhibit
Number Exhibit Name
(b) A report on Form 8-K was filed on September 22, 2003, which
detailed the repurchase of stock from a former Chief
Scientific Officer.
A report on Form 8-K was filed on October 8, 2003, which
detailed the resignation of William Hitchcock as a member of
the Compensation Committee and as Chairman of the Audit
Committee.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTALEX, INC.
Date: October 14, 2003 PROTALEX, INC.
By: Steven H. Kane
--------------------------
Steven H. Kane, President
Date: October 14, 2003 PROTALEX, INC.
By: Donald Dean
------------------------------------
Donald Dean, Chief Financial Officer