10KSB 1 protalex10k53102.txt Form 10-KSB [As last amended in Release No. 33-7505, effective January 1, 1999, 63 F.R. 9632.] U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended May 31, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-28385 Protalex, Inc. (Name of small business issuer 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) 260-1726 Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None None Securities registered under Section 12(g) of the Exchange Act: Common Stock (Title of Class) (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent files in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year. $ 0 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) $14,769,871 as of August 16, 2002. Note: If determining whether a person is an affiliate will involve an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by non-affiliates on the basis of reasonable assumptions, if the assumptions are stated. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 12,308,226 as of August 16, 2002 Transitional Small Business Disclosure Format (check one): Yes No X 2 ITEM I - DESCRIPTION OF BUSINESS Overview Protalex, Inc. (the "Company") is a development stage company engaged in the development and marketing of a new class of organic chemical molecules, called "bioregulators," for the treatment of rheumatoid arthritis ("RA") and other autoimmune diseases. The use of bioregulatory compounds for the treatment of human disease represents a completely new approach to therapy. Unlike many existing pharmaceutical agents, which act upon the end products of complex metabolic pathways, bioregulators influence cellular activities at a more basic level. This results in restoration of tissue integrity and function, in many instances not only alleviating, but potentially reversing the pathologic process. The Company intends to bring this unique biotechnology to commercial realization, thereby establishing an entirely new category of pharmaceutical treatment of disease. The Company has since its inception focused primarily on the treatment of rheumatoid arthritis (RA) and animal studies of RA are continuing. Additionally, the Company is now starting the process of filing an investigational new drug application with the Food and Drug Administration (FDA) and has also begun planning full clinical trials. About Bioregulation The Company's discoveries and its proprietary products represent the first application of bioregulator technology to the treatment of disease. Since the 1960's, however, certain natural and synthetic molecules have been known to influence cell proliferation and differentiation in laboratory experiments. (Proliferation consists simply of an increase in cell number, while differentiation implies the ability to accomplish some function especially to respond to or initiate some change in the cell's environment.) Both proliferation and differentiation can be influenced by external stimuli, most of which are in the form of chemical "messages." Under normal circumstances, equilibrium is maintained within and among cells by the continual exchange of such messages. Cells may begin to function or proliferate abnormally under three circumstances: when they receive an erroneous signal from their environment, when their reception or processing of external messages is impaired, or when they receive abnormal genetic signals from within. Widespread abnormalities of cellular differentiation cause diseases of many kinds, while uncontrolled cellular proliferation causes cancer. The Company's bioregulators are compounds with the ability to act upon cells at a primitive level of function, "resetting" their internal mechanisms to allow resumption of normal behavior. 3 Some naturally occurring bioregulators have the property of stimulating cellular proliferation at certain concentrations, while promoting cellular differentiation at other concentrations. In the latter role, they can bring about increased production of antibodies in one cell line, or slow the growth of a tumor in another, apparently by helping restore normal function within cells and promoting cell-to-cell signaling. Bioregulators seem to act upon a wide variety of tissue types, suggesting that they affect simple activities common to all cells. Bioregulators represent a completely new approach to the treatment of disease. For example, rheumatoid arthritis is one of the "autoimmune" diseases, in which cells of the immune system erroneously identify other body tissues as "foreign". These immune cells then produce substances that attack other body tissues, such as the lining of the joints. Current therapy for rheumatoid arthritis is aimed at either suppressing the symptoms caused by this attack, or inactivating the substances produced by the immune cells. In contrast, the Company's bioregulators act upon the immune cells themselves, restoring normal cellular function. In this way, bioregulator treatment not only relieves symptoms of the disease, but also may promote reversal of the tissue damage that already has taken place. The Company's research has defined the concept of bioregulators and has produced proprietary compounds particularly suitable for therapeutic administration. The most active of these show intense cellular activity in miniscule doses. Clinical effectiveness in such a low dosage range is expected to yield exceptional safety and freedom from side effects. Experiments and Studies The best demonstration of the ability of bioregulators to re-equilibrate cell differentiation lie in the field of immunology. Here, both humoral and cellular immune responses can be modified by the appropriate concentration of a bioregulating agent. Cell proliferation also can be normalized by bioregulators in experiments dealing with natural senescence and tumor growth. Examples of each of these processes are outlined below. In Vitro Experiments IGG Production in HPBL. Bioregulators induce immune responsiveness in human peripheral blood lymphocytes in response to a number of antigenic stimuli. The number of antibody-producing cells can be amplified as much as 100 to 1000 times above untreated values. This technique can be used to produce highly monoclonal antibodies. Cell Senescence Studies. The life span of cells in culture can be extended by nearly 100% through the action of bioregulators. When senescence finally does take place, it affects all of the cells simultaneously, thus "rectangularizing" the usually gradual fall of the survival curve. In Vivo Experiments 4 Nude Mice. A mouse strain lacking in cellular immunity, nude mice characteristically show almost no production of T cells, which makes them highly susceptible to infection and early death. This situation mimics a genetic disease in humans called DiGeorge syndrome. Administration of bioregulators can partially reverse this deficit, restoring about 70% of the mice's T cell complement and almost doubling their life expectancy. The same effect can be obtained in mice whose thymus has been surgically removed in early life. Nude Rats With Heterologous Tumors. Another rodent strain with immune deficiency, the nude rat, often is used in experiments involving transplantation of tumors from other animals, but persist in the nude rat because of their inability to mount a rejection response. Administration of bioregulators in tumor-bearing rats results in regression of the neoplasm in about two-thirds of the animals. Dogs With Implanted Homologous Tumors. As part of study of bioregulators as potential "contrast agents" for nuclear magnetic resonance imaging, glial tumors were transplanted into the brains of dogs. This type of tumor normally progresses rapidly with irreversible neurological signs appearing between 2 and 3 weeks after transplantation. A bioregulator compound was injected 3 times a week for 3 weeks following transplantation. Complete tumor regression was seen in 100% of the treated animals. Inflammatory Arthritis Model. The Company's bioregulator altered the inflammatory process in mice induced with arthritis. This alteration was substantially different from a mere delaying of the onset of the disease. Naturally Occurring Disease Dogs and Cats With Spontaneous Tumors. Data continues to be collated on several dozen domestic dogs and cats that have been given the bioregulator treatment outline above for spontaneously occurring tumors of various types. Anecdotal reports have been received from veterinarians all over the country, indicating success with bioregulator treatment, but a controlled study with a consistent protocol is needed to validate this mode of therapy. Genetic Autoimmune Model. In this mouse model the Company's bioregulators positively affected several disease processes. Markets Human autoimmune diseases provide the first and most obvious target for bioregulator therapy. In these disorders, the immune system misidentifies the body's own tissues as "foreign," prompting an inappropriate and prolonged immune response that can damage tissues and organs throughout the body. Bioregulator treatment can be expected to restore normal immune homeostasis, with the result that the disease is not merely ameliorated, but permanently cured. RA will be the first autoimmune disease targeted and will be the primary and immediate focus of the Company. 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 a leading scientific journal, the prevalence of RA in the United States is approximately 1% (or about 2.5 million people), with approximately 200,000 new cases diagnosed yearly. Currently, no uniformly effective treatment for RA exists. Current treatments are costly, and in most cases must be continued for decades. In contract, the Company believes that bioregulator therapy will be much more cost effective and can be administered by weekly injections over the course of a few months. 5 The Company's decision to concentrate its efforts on RA, as opposed to other autoimmune diseases or cancers, is based upon two main considerations: * Evidence that bioregulators strongly influence the immune system in ways that should produce beneficial effects in patients with RA; * At this stage in the Company's development, the Company believes it is most appropriate to concentrate its efforts and resources on developing a treatment for a single, well defined, and serious disease for which adequate therapy currently is not available. The Company anticipates that its products will initially be used to treat patients with severe cases of RA, and particularly those individuals for whom other treatments have failed. Additionally, the Company believes that its experience with this class of patients will prove the Company believes that its experience with this class of patients will prove the efficacy and safety of its products, and will encourage the use of its products in less severely affected individuals in earlier stages of the disease. Competition In strictest terms, the Company has no direct competition in its field, since no other firms known to the Company have brought to market any therapeutic agents based upon bioregulator technology. However, the Company's products will compete with other pharmaceutical agents intended to treat RA. A number of pharmaceutical agents are currently being used, with varying degrees of success, to control the symptoms of RA and slow its progress. Available treatment options include: * Analgesic/anti-inflammatory preparations, ranging from simple aspirin to the recently introduced COX-2 inhibitors; * Immunosuppressive/antineoplastic drugs, including azathioprine and methotrexate; * TNF (Tumor Necrosis Factor) inhibitors, currently represented by Immunex Corporation's Enbrel-Registered Trademark; * "Immunoadsorption Therapy", 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; and * Colloidal gold given by injection, a time-honored treatment but one with extreme variability of effect and an unknown mechanism of action. In all, at least a dozen large and small pharmaceutical companies are active in this market, with Immunex Corporation and Pfizer, Inc. dominating the market as a result of their respective products, Enbrel-Registered Trademark and Celebrex-Registered Trademark. Despite intense media attention and enormous sales, the long-term efficacy of these compounds remains to be evaluated. 6 Operations The Company is currently engaged in developing the corporate base for commercialization of its bioregulator products, as well as planning production and marketing strategies. The Company's business operations are housed in an office in Albuquerque. The Company currently has no manufacturing facilities and may have to rely on others to manufacture compounds for the Company's use in research and development, pre-clinical trials, and clinical trials. The Company continues ongoing research aimed at clarifying the biologic functions of bioregulators, establishing their safety and efficacy in treating induced arthritis in animals, and determining appropriate dosage and treatment protocols. Reverse Merger In September 1999, Protalex, Inc., a New Mexico corporation ("Protalex"), acquired a majority of the issued and outstanding shares of common stock of Enerdyne from Don Hanosh, pursuant to a Stock Purchase Agreement between Protalex, Enerdyne and Mr. Hanosh. Under the Stock Purchase Agreement, in consideration for Mr. Hanosh's shares of common stock, Protalex executed a Promissory Note in the amount of $368,546.00 in favor of Mr. Hanosh, which has been paid in full. In November 1999, Protalex merged with and into Enerdyne pursuant to a Merger Agreement and Plan of Reorganization (the "Merger Agreement"), and Enerdyne changed its name to Protalex, Inc., thereby creating the Company. Under the Merger Agreement, each share of Protalex common stock outstanding immediately prior to the effective date of the merger was converted into 822 shares of the Company's common stock. After the merger, Protalex's former shareholders held approximately 92.28% of the shares of common stock of the Company, and Enerdyne's former shareholders held approximately 7.72% of the shares of common stock of the Company. Business and Marketing Strategy The Company has initiated private placements of stock to raise funds for completion of animal research, initiation of Phase I and Phase II human studies, and production and marketing of the Company's products on a commercial scale and has recently filed its first patent. Currently the Company estimates that it has enough cash to fund development activities and operations for the next 10 months. The Company expects if it is granted all regulatory approvals, that its bioregulator products will be competitive throughout the global market. Therefore, the Company intends to enter into collaborative arrangements with larger strategic partners to market and sell the Company's products in the United States and in foreign markets. The Company expects that these partners will 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, the Company will grant these partners exclusive or semi-exclusive rights to market certain of its products in particular geographical regions. 7 Government Regulation The Company's ongoing research and development activities, and its 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 the Company's products under the authority of the Federal Food, Drug and Cosmetics Act. In order to obtain FDA approval of the Company's new drugs, extensive pre-clinical and clinical tests must be conducted and a rigorous clearance process must be completed. Satisfaction of the FDA's safety and efficacy requirements may take several years and require the expenditure of substantial resources. The FDA approval process entails several steps. Initially, the Company must conduct pre-clinical trials. During pre-clinical trials, the Company must evaluate the safety and efficacy of its products through in vitro and in vivo laboratory animal testing. Subsequently the FDA will require, at a minimum, that the Company (i) prepare a pharmacological profile of the drug; (ii) determine the toxicity of the drug in at least two species of animals; and (iii) conduct short-term toxicity studies ranging from two weeks to three months, depending on the proposed clinical trials. Upon successful completion of pre-clinical trials, the Company must submit an Investigational New Drug Application ("IND") to the FDA before it can begin human clinical trials. The purpose of the IND is to confirm pre-clinical research data. Clinical studies are typically conducted in three sequential phases, although these phases may overlap. In Phase I trials, a drug is tested for safety in one or more doses in a small number of patients or volunteers. In Phase II trials, efficacy and safety are tested in up to several hundred patients. Phase III trials involve additional safety, dosage and efficacy testing in an expanded patient population at multiple test sites. The results of the pre-clinical and clinical trials are submitted to the FDA in the form of a New Drug Application ("NDA"). The approval of an NDA may take substantial time and effort. In addition, upon approval of an NDA the FDA may require post marketing testing and surveillance of the approved product, or place other conditions on their approvals. Sales of new drugs outside the United States are subject to foreign regulatory requirements that differ from country to country. Foreign regulatory approval of a product must generally be obtained before that product may be marketed in those countries. 8 However, the FDA approval process is among the most restrictive in the world and typically takes a longer time to complete than foreign regulatory approval. Research and development efforts and pre-clinical trial for the Company's first product for the treatment of RA are complete. The Company has started to apply to the FDA to secure its approval for limited safety testing of the Company's product in humans. Following the successful completion of limited safety and efficacy trials, the Company expects to conduct full-scale studies of safety and efficacy (NDA) in patients with advanced and intractable RA. This full-scale study will be supervised by Dr. Arthur Bankhurst, a renowned rheumatologist, and should be completed in approximately two years. Dr. Bankhurst is a director and shareholder of the Company. Once the trials are finished, an application for FDA authorization to produce and market the product will be filed, with final approval estimated to take an additional six months. Patents, Trademarks, and Proprietary Technology The Company's success will depend on its ability to maintain its trade secrets and proprietary technology in the United States and in other countries, and on the Company to obtain patents for the bioregulatory technology. The Company is currently seeking patents for proteins for use as medications for human autoimmune disease. Patent protection will also be sought for the derivatives of proteins. The Company has filed an initial patent in April 2002 and will pursue additional patents as appropriate. Risks Related To The Company's Business This Registration Statement Contains Forward-Looking Statements Which May Differ From The Company's Actual Future Results. This registration statement contains forward-looking statements that involve substantial risks and uncertainties. These statements are identified by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate," and "continue" or similar words. Statements that contain these words should be read carefully because they discuss the Company's future expectations, contain projections of the Company's future results of operations or of the Company's financial condition, and state other "forward-looking" information. The Company believes it is important to communicate its expectations. However, there may be events in the future that the Company is not able to accurately predict which the Company has no control. The risk factors listed in this section, as well as any other cautionary language appearing in this registration statement, provide examples of risks, uncertainties and events that may cause the Company's actual results to differ materially from the expectations described in the Company's forward-looking statements. The occurrence of the events described in these risk factors and elsewhere in this registration statement could have an adverse effect on the Company's business, results of operations and financial condition. 9 The Company May Not Be Able To Continue As A Going Concern If It Does Not Attract Investment Capital Or Generate Operating Revenue. The Company is a development stage enterprise and does not have operating revenue, nor does it anticipate generating operating revenue in the foreseeable future. The ability of the Company to continue as a going concern is dependent initially on its ability to raise sufficient investment capital to fund all necessary operations and product development activities. Thereafter, in order to generate operating revenue the Company must develop products that gain regulatory approval and market acceptance. There can be no assurance that the Company will be able to raise sufficient investment capital or successfully develop and market its products. The Company Has A History Of Losses Since Its Merger With Enerdyne, And Will Continue To Incur Losses Until Its Sales Generate Sufficient Revenues. Since Enerdyne Corporation's acquisition of Protalex, Inc. (which is more fully described in "Corporate History"), the Company has incurred significant losses. The Company expects to continue to incur net losses until sales of its bioregulator products generate sufficient revenues to fund its continuing operations. The Company Is Uncertain Whether Its Bioregulator Products Can Be Developed Successfully, And It May Have To Incur Additional Expenses If It Experiences Problems In Development. The Company does not know whether bioregulator products can be successfully developed for administration as human medications. The Company's failure to demonstrate the safety and/or efficacy of its bioregulator product, at the human trial stage, would necessitate potentially expensive and time-consuming additional research. The Company's Bioregulator Product Is Limited To A Single Disease, Which Means The Company's Prospects May Be Limited If Its Product Does Not Successfully Treat The Disease. The Company is focused on the treatment of one disease, rheumatoid arthritis. If the results from the Company's animal studies and/or the human clinical trials related to that disease are inconclusive or show results no better than a substance with no medical effect, the Company would not have a commercially viable product. In this case, a great deal of additional research would be required, and it is unlikely that the Company would be able to attract further capital. The Company's Bioregulator Products May Not Be Accepted By The Medical Community, Which Would Result In Poor Product Sales. The Company's bioregulator product may be safe and effective for its intended use, but may not show sufficient superiority to other treatments currently in use to gain a significant share of the market. Additionally, the novelty of this form of treatment or its mode of administration may make bioregulator therapy less appealing than existing treatments to prescribing physicians or to their patients. Inadequate medical acceptance would result in poor product sales and decreased profitability, and could impair the Company's ability to continue to operate. The Company Is Uncertain Whether Its Existing Bioregulator Products Can Be Extended To Treat Diseases Other Than Rheumatoid Arthritis. While the Company will initially focus on the treatment of rheumatoid arthritis, its long-term plans call for the extension of bioregulator therapy to other types of human disease, such as cancer. The development of new bioregulator products (or expanding the indications for existing products to the treatment of new diseases) will be subject to many of the same hazards and risks discussed in this "Risk Factors" section. 10 The Company Is Exposed To Significant Costs And Risks Related To The Regulatory Approval Of Bioregulator Products, And Is At A Competitive Disadvantage Due To Its Need To Complete The Regulatory Process. Before the Company's products can be manufactured, marketed and sold to the public, the requirements of the FDA and similar governmental agencies in foreign countries must be met. The approval process typically entails considerable time and expense, and may delay marketing of the Company's products for a considerable period. The Company cannot predict when regulatory applications might be submitted, nor when final regulatory approval will be obtained. Also, the FDA could approve only certain uses of the Company's products or subject its products to additional testing or surveillance programs. Failure to obtain timely FDA approval will require the Company to spend more resources on additional applications, and would delay the generation of income from sales of the Company's products. In addition, the FDA approval process presents a competitive advantage to some of the Company's competitors who have already received FDA approval for their products. The Company Depends On Reimbursement From Third Parties, Who May Decrease Or Eliminate The Amount Of Reimbursement Paid To The Company. In today's medical economy, reimbursement for all types of medical care depends substantially on third party payors, including government authorities (e.g., the Medicare program), private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Managed healthcare is increasing in the United States, the number of HMOs is growing, and legislative proposals are being introduced to reform healthcare or reduce government medical insurance programs. As a part of their cost-control efforts, such entities may establish fiscal policies decreasing or eliminating the amount of reimbursement for the Company's products, making it difficult for the Company to sell its products at a sufficient profit to remain in business. The Company May Not Be Able To Manufacture Its Bioregulator Products In Commercial Quantities And May Have To Incur Significant Costs To Meet Its Manufacturing Requirements. Currently, the Company does not possess the facilities or equipment to manufacture its products. The Company intends to contract with a third party or parties to manufacture its products for commercial distribution. However, the Company does not know whether such third party or parties will be able to successfully manufacture sufficient quantities of the Company's products for these purposes. Therefore, the Company may have to invest substantial sums to construct facilities sufficient to meet its long-term manufacturing requirements. See "Operations." The Company May Not Be Able To Protect Or Maintain The Security Of Its Patents Or Other Proprietary Information. The Company intends to apply for, prosecute and maintain patents for this technology. Conceivably, the Company may be unsuccessful in obtaining patents and in avoiding infringements of patents granted to others. Even if patents are granted to the Company, the enforceability of patents issued to biotechnology and pharmaceutical firms is often highly uncertain, and existing law may not protect the Company's patents. Without patent protection, it is unlikely that the Company could successfully market its bioregulator products. Lacking a proprietary advantage, the Company would be unable to prevent marketing of its bioregulator products by more well-established competitors who would be able to dominate the market. In addition, the Company could incur substantial costs in defending any patent litigation brought against it or in asserting its patent rights in a suit against another party. See "Patents, Trademarks and Proprietary Technology." 11 The Company relies on trade secrets, know-how and continuing technological advancement to develop and maintain its competitive position. The Company requires that each of its employees enter into a confidentiality agreement that contains provisions prohibiting the disclosure of confidential information to anyone outside the Company. However, these confidentiality agreements may not be honored and the Company may be unable to protect its rights to its unpatented trade secrets. Dissemination of this proprietary information might allow others to develop bioregulator products that would compete with those of the Company, diminishing the Company's sales and market share. The Company's Business Could Be Harmed By New Research Efforts and Product Development By The Company's Competitors, Most of Whom Have Greater Resources Than The Company. The Company is engaged in a sector of the economy characterized by extensive research efforts and rapid technological development. New drug discoveries are to be expected, including those directed at the disease the Company has targeted. A number of the Company's competitors have substantially more capital, research and development, regulatory, manufacturing, marketing, human and other resources and experience than the Company. Such competitors may develop products that are more effective or less costly than any of the Company's current or future products and also may produce and market their products more successfully than the Company. Large-scale successful competition would reduce the Company's market share and profitability, and might jeopardize the Company's ability to stay in business. See "Competition." The Company Is Exposed To Significant Liability Associated With Its Bioregulator Products, And May Not Be Able To Secure Insurance To Cover These Risks On Acceptable Terms, If At All. While the Company believes that its bioregulator product will be safe compared to other drugs, the Company still may incur significant product liability exposure. When the Company develops a product suitable for human administration, it intends to secure adequate product liability coverage. However, insurers may not offer the Company product liability insurance, may raise the price of such insurance or may limit the coverage of such insurance. In addition, the Company may not be able to maintain such insurance in the future on acceptable terms and such insurance may not provide the Company with adequate coverage against potential liabilities either for clinical trials or commercial sales. Successful product liability claims in excess of the Company's insurance would affect the Company's ability to continue to operate as a going concern. Dependence upon Key Personnel; Management of Growth. The success of the Company's operations during the foreseeable future will depend largely upon the continued services of the following individuals: Mr. John Doherty, the Company's President, Dr. Dennis Vik, the Company's Chief Scientist and Mr. Frederick Kuckuck a Company Vice President. The loss of the services of Mr. Doherty, Dr. Vik or Mr. Kuckuck could have a material adverse impact on the Company. Mr. Doherty Dr. Vik and Mr. Kuckuck have not entered into employment agreements with the Company. The Company's success will also depend in part on its ability to manage, attract and retain qualified technical, management and sales personnel. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining the personnel it required to conduct its operations successfully. The Company's results of operations could be adversely affected if the Company were unable to attract, manage and retain these personnel or if its revenues fail to increase at a rate sufficient to absorb the resulting increase in expenses. See "Employees." 12 Illiquidity of the Company's Public Shares; Potential Volatility of Stock Price. The market price of the shares of the Company's common stock is highly volatile, mainly due to the public market for the shares. Factors such as fluctuation the Company's operating results, the introduction of new products or services by the Company or its competitors, and general market conditions may also have a significant effect on the market price of the Company's common stock. Need for Additional Funding. The Company believes that its available short-term assets and investment income will be sufficient to meets its operating expenses and capital expenditures for 10 months. The Company does not know if additional financing will be available when needed, or if it is available, if it will be available on acceptable terms. Insufficient funds may prevent the Company from implementing its business strategy or may require the Company to delay, scale back or eliminate certain components of its business plan. Employees The Company currently has four full-time employees and one part-time employee. The Company's employees are non-union and none are represented by an organized labor union. The Company believes its relationship with its employees is very good and it has never experienced an employee-related work stoppage. The Company will need to hire and retain highly-qualified experienced technical, management and sales personnel in order to execute its business plan, carry out product development and secure advantages over its competitors. No assurances can be given that the Company will continue to be able to pay the higher salaries necessary to retain such skilled employees. Additional Information The Company does not intend to provide an annual report to its security holders, or to prepare quarterly reports available for inspection by its security holders. Security holders are encouraged to visit the SEC website for the latest filings and information about the Company. ITEM 2 - DESCRIPTION OF PROPERTY The Company's office and laboratory is located at 717 Encino NE, Suite 17, Albuquerque, New Mexico 87102. The Company leases this property pursuant to a three-year lease agreement. ITEM 3 - LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings. The Company is not aware of threatened legal proceedings to which any person, officer, affiliate of Protalex or any owner of more than 5% of Protalex stock is an adverse party to or has a material interest adverse to Protalex. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the year of the fiscal year ended May 31, 2002, except for the election of directors at the Company's annual shareholder meeting. 13 ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the OTC Bulletin Board under the symbol "PRTX". The following table sets forth, for the fiscal periods indicated, the high and low closing bid prices for the common stock of Protalex, Inc. for the last two years. The Company's fiscal year-end is May 31. The quotations are taken from Internet quotation sources. The quotations may reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions. High Low ---- --- Fiscal Year 2000 First Quarter 3.23 1.875 Second Quarter 3.937 2.062 Third Quarter 2.812 2.125 Fourth Quarter 3.187 1.950 Fiscal Year 2001 First Quarter 2.85 1.47 Second Quarter 3.40 2.00 Third Quarter 3.60 2.35 Fourth Quarter 3.18 2.60 14 At May 31, 2002 the Company had 11,490,035 shares of common stock outstanding, which were held by holders of record. The transfer agent for the Company's common stock is Standard Registrar & Transfer Agency, PO Box 14411, Albuquerque, NM 87111. The Company has nine market makers currently. Dividend Policy. No dividends have been declared or paid to date by the Company. The Company currently anticipates that it will retain all future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. Recent Sales of Unregistered Securities. In November 1999, the Company issued a total of 8,289,048 shares of its common stock to Protalex, Inc., a New Mexico corporation (Protalex), in connection with its acquisition of Protalex pursuant to a Merger Agreement and Plan of Reorganization. The Company issued these shares in reliance upon the exemption from registration in Section 4(2) of the Securities Act of 1933, as amended. Subsequent to November 1999, at various dates from November 18 through January 12, 2000, the Company issued 459,444 shares of stock to various individuals all at $0.36 per share. From May 1 to May 27, 2000, the Company also issued 100,000 shares of restricted stock in exchange for legal services. In December of 2000, the Company issued 425,000 shares of restricted stock at $1 per share, in September of 2001, 881,600 shares of stock were issued at $1.25 per share and in July of 2002, 842,000 shares of stock and 842,000 warrants were issued at $1.50 a unit. The Company issued these shares in reliance on the "sophisticated investor" exemption and obtained signed subscription agreements attesting to financial net worth and investment experience of the stock purchasers. During the year and subsequent to May 31, 2002, the Company has issued stand-alone stock options to two directors and one employee in connection with their serving as directors and as an employee. ITEM 6 - PROTALEX INC. - MANAGEMENT'S DISCUSSIONS AND ANALYSIS INCLUDING PLAN OF OPERATION The Company's principal activities consist of preparing for the Company sponsored investigational new drug (IND) application, which the Company hopes to submit in the last quarter of 2002 or the first quarter of 2003. The IND application process seeks, along with other considerations, the necessary approvals from the FDA to conduct human trials. Initial meetings between the Company and the FDA have occurred in this regard. Laboratory research and animal work continue, thus strengthening and extending the Company's therapeutic approach and increasing available laboratory data. The Company has added pharmaceutical expertise to its board of directors and has named Dennis Vik as Chief Scientific Officer for all intellectual property activities. Dr. Paul Mann has left the Company and has assigned all rights to the initial patent application to the Company. Dr. Mann remains a shareholder of the Company. The Company raised $1,263,000 by issuing 842,000 common shares and 842,000 warrants convertible at $1.50 per share in a private placement in July 2002 to fund the ongoing continuation of the Company. The Company filed its first patent application in April 2002 in connection with its bioregulator technology. The Company believes that the recent private placement completed in July 2002 will assist in the Company-sponsored IND and help to continue to develop and execute a broader patent strategy. The Company intends to file further patents on its candidate drug designated PRTX-001. 15 Funding from the July 2002 private placement together with remaining current resources from the September 2001 placement will fund operations and necessary research and development over the next 10 months. The Company has acquired and will continue to acquire laboratory equipment. These acquisitions will help to keep down the high cost associated with third party contracting, and speed the process of learning more about the Company's core technology. The Company believes that all of these activities strengthen the Company's position in the marketplace. Please refer to the Company's 10-SB filing (December 3, 1999) and amendments thereto for more information on the Company's technology and risk factors. 16 ITEM 7 - FINANCIAL STATEMENTS FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PROTALEX, INC. (A COMPANY IN THE DEVELOPMENT STAGE) May 31, 2002 17 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Protalex, Inc. We have audited the accompanying balance sheet of Protalex, Inc. (a New Mexico corporation in the development stage) as of May 31, 2002, and the related statement of stockholders' deficit for the period from September 17, 1999 (inception) through May 31, 2002 and the related statements of operations and cash flows for the years ended May 31, 2002 and 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe 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, 2002 and 2001, and the results of its operations and its cash flows for the years then ended and the period from September 17, 1999 through May 31, 2002 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company is in the development stage and its ability to continue as a going concern is initially dependent on its ability to raise adequate capital to fund necessary product development activities and subsequently on the inflow of operating revenue derived from developed products which must be regulatory approved and market accepted. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Atkinson & Co., Ltd. Albuquerque, New Mexico August 15, 2002 18 Protalex, Inc. (A Company in the Development Stage) BALANCE SHEET May 31, 2002 ASSETS CURRENT ASSETS Cash .......................................... $ 261,867 Prepaid expense ............................... 1,602 ----------- Total current assets ................... $ 263,469 EQUIPMENT Lab equipment ................................. 178,496 Office and computer equipment ................. 157,643 Furniture & fixtures .......................... 21,268 Leasehold improvements ........................ 10,685 ----------- 368,092 Less accumulated depreciation ................. (195,018) 173,074 ----------- OTHER ASSETS Intellectual technology property, net of accumulated amortization of $2,623 .......... 17,677 ----------- $ 454,220 =========== 19 LIABILITIES CURRENT LIABILITIES Accounts payable .............................. $ 56,105 Accrued compensation .......................... 11,500 Payroll taxes payable ......................... 2,345 Interest payable .............................. 553 Current maturities of long-term liabilities ....................... 36,338 ----------- Total current liabilities .............. $ 106,841 LONG-TERM LIABILITIES, less current maturities Equipment note payable ........................ 2,986 ----------- Total liabilities ...................... 109,827 STOCKHOLDERS' DEFICIT Common stock, no par value, authorized 40,000,000 shares, 11,728,735 shares issued, 11,490,235 shares outstanding ............... 238,500 shares in the treasury at $0 cost .................................. 2,492,891 Common stock, contra .......................... (368,547) Additional paid in capital .................... 183,569 Deficit accumulated during the development stage ....................... (1,963,520) 344,393 ----------- ----------- $ 454,220 =========== The accompanying notes are an integral part of this financial statement. 20 Protalex, Inc. (A Company in the Development Stage) STATEMENT OF OPERATIONS From Inception (September 17, 1999) through May 31, 2002 From Inception Year Ended Year Ended Through May 31, 2002 May 31, 2001 May 31, 2002 ------------ ------------ ------------ Revenues ........................ $ -- $ -- $ -- Operating Expenses Research and development ...... (918,022) (452,102) (1,493,615) Administrative ................ (130,936) (42,223) (200,972) Professional fees ............. (91,289) (36,859) (205,668) Depreciation and amortization . (17,393) (11,261) (35,197) ------------ ------------ ------------ Operating Loss ........ (1,157,640) (542,445) (1,935,452) Other income (expense) Interest income ............... 7,381 12,228 30,278 Interest expense .............. (8,706) (23,649) (58,346) ------------ ------------ ------------ NET LOSS .............. $ (1,158,965) $ (553,866) $ (1,963,520) ============ ============ ============ Weighted average number of common shares outstanding ............ $ 11,105,140 $ 9,663,509 $ 9,820,145 ============ ============ ============ Loss per common share ........... $ (.10) $ (.06) $ (.20) ============ ============ ============ The accompanying notes are an integral part of these financial statements. 21 Protalex, Inc. (A Company in the Development Stage) STATEMENT OF STOCKHOLDERS' EQUITY From Inception (September 17, 1999) through May 31, 200
Deficit Accumulated Common Stoc Additional Common In The ------------------------- 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 15, 1999 -- treasury shares - Enerdyne $-0- cost .................. 238,500 -- -- -- -- -- 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 December 7, 2000 -- issuance of 425,000 shares to various investors at $1.00 per share ............................ 425,000 425,000 -- -- -- 425,000 November 7, 2001 - issuance of 881,600 at $1.25 per share ................... 881,600 1,102,000 -- -- -- 1,102,000 Additional paid in capital ............. -- -- 183,569 -- -- 183,569 Net loss from prior periods ............ -- -- -- -- (804,555) (804,555) Net loss for the year .................. -- -- -- -- (1,158,965) (1,158,965) ----------- ----------- ----------- ----------- ----------- ----------- 11,728,735 $ 2,492,891 $ 183,569 $ (368,547) $(1,963,520) $ 344,393 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 22 Protalex, Inc. (A Company in the Development Stage) STATEMENT OF CASH FLOWS Periods from Inception (September 17, 1999) through May 31, 2002
From Inception Year Ended Year Ended Through May 31, 2002 May 31, 2001 May 31, 2002 ----------- ----------- ----------- Cash flows from operating activities Net loss ........................................... $(1,158,965) $ (553,866) $(1,963,520) Adjustments to reconcile net loss to net cash provided by operating activities Depreciation and amortization .................. 111,102 78,980 196,625 Non cash expenses .............................. -- -- 16,644 Decrease in interest receivable ................ -- 10,669 -- Decrease (increase) in prepaid expense ......... 15,539 (16,641) (1,602) (Decrease) increase in payroll taxes payable ... (2,307) 3,877 2,345 (Decrease) increase in interest payable ........ (2,451) (4,758) 553 (Decrease) increase in professional fees payable (192) (7,592) -- (Decrease) increase in accrued compensation .... (6,422) 12,804 11,500 Increase in accounts payable ................... 56,105 -- 56,105 Increase (decrease) in related party advance and licenses fee payable ...................... -- (40,000) -- ----------- ----------- ----------- Net cash used in operating activities ....... (987,591) (516,527) (1,681,350) ----------- ----------- ----------- Cash flows from investing activities Acquisition of intellectual technology license - fee portion .................................... -- -- (20,000) Acquisition of equipment ........................... (38,116) (164,849) (275,645) Excess of amounts paid for Public Shell over assets acquired to be accounted for as a recapitalization ............................ -- -- (250,000) Note receivable from individual .................... -- 118,547 -- ----------- ----------- ----------- Net cash used in investing activities ....... (38,116) (46,302) (545,645) ----------- ----------- ----------- Cash flows from financing activities Proceeds from stock issuance ....................... 1,102,000 425,000 2,357,400 Principal payment on installment purchase payable .. (170,249) (24,687) (194,936) Additional paid-in-capital ......................... 143,569 40,000 183,569 Principal payment on note payable individual ....... -- (225,717) (225,717) Issuance of note payable to individual ............. -- -- 368,546 ----------- ----------- ----------- Net cash provided by financing activities ... 1,075,320 214,596 2,488,862 ----------- ----------- ----------- NET INCREASE (DECREASE) IN CASH ...................... 49,613 (348,233) 261,867 Cash, beginning of period ............................ 212,254 560,487 -- ----------- ----------- ----------- Cash, end of period .................................. $ 261,867 $ 212,254 $ 261,867 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 23 Protalex, Inc. (A Company in the Development Stage) STATEMENT OF CASH FLOWS -CONTINUED Periods from Inception (September 17, 1999) through May 31, 2002
From Inception Period Ended Period Ended Through May 31, 2002 May 31, 2001 May 31, 2002 Interest paid ....................................... $ 10,157 $ 28,407 $55,149 =============== =============== ============== Taxes paid .......................................... $ -- $ 50 $ 50 =============== =============== ============== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING 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 =============== =============== ==============
The accompanying notes are an integral part of these financial statements. 24 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS From Inception (September 17, 1999) through May 31, 2002 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 and based in Albuquerque, New Mexico. The Company was formed to take all necessary steps to fully develop and bring to commercial realization certain bioregular technology for the treatment of human diseases. The Company has no operating revenue. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Concentration of Credit Risk Financial instruments potentially subjecting the Company to concentrations of credit risk consist primarily of deposits in excess of FDIC limits. The Company's demand deposits are placed with major financial institutions and the Company does not believe that it is exposed to undue credit risk for any demand deposits that may, from time to time, exceed the federally insured limits. 2. Equipment, 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. The Company uses the straight-line method for all classes of assets for book purposes. The technology property is amortized over a 20-year life on a straight-line basis. Depreciation and amortization expense is $111,102, $78,980 and $196,625 for the year ending May 31, 2002, May 31, 2001 and for inception through May 31, 2002, respectively. Certain depreciable amounts have been classified as R & D expense on the financial statements. 3. Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. 25 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED 4. Loss per Common Share The Financial Accounting Standards Board (FASB) has issued Statements 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. 5. 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 the expected future tax consequences of temporary differences between the financial statement carrying amounts and tax bases of existing assets and liabilities. The Company does not expect to have current income taxes payable or deferred tax balances for the foreseeable future. 6. Other Comprehensive Income From September 17, 1999 (inception) through May 31, 2002, the Company had no changes in equity which constitute components of other comprehensive income. 7. Research and Development Research and development costs are expensed as incurred. 8. Fair Value of Financial Instruments The fair value of the Company's financial instruments, principally cash and debt, approximates their carrying value. 26 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 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 that 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:
Merged Balance Sheet Protalex, Enerdyne Transaction at November Account Description Inc. Corporation Adjustments 16, 1999 --------------------------- ---------- ---------- ---------- ---------- Cash $ 23,531 $ - $ - $ 23,531 Note receivable shareholder - 118,547 - 118,547 License 20,300 - - 20,300 Investment in Enerdyne 368,546 - (368,546) - Other current assets 8,212 - - 8,212 Other current liabilities (17,555) - - (17,555) Accounts payable Alex (40,000) - - (40,000) Note payable (368,546) - - (368,546) Common stock (25,300) (833,459) 714,912 (143,847) Additional paid in capital - (1,105,014) 1,105,014 - Treasury stock - 430,424 (430,424) - Accumulated deficit 30,812 1,389,502 (1,389,502) 30,812 Common stock - contra - - 368,546 368,546 ---------- ---------- ---------- ---------- $ - $ - $ - $ - ========== ========== ========== ==========
27 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE C - REVERSE MERGER - CONTINUED Additional information in connection with stock amounts and number of shares issued is as follows:
Protalex, Inc. Enerdyne Corporation ----------------------- -------------------------------------- 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 - INTELLECTUAL TECHNOLOGY PROPERTY The Company's information technology was originally licensed from a former related party. This intellectual property was then assigned to the Company upon the dissolution of the related party. The cost of the technology property is being amortized over a 20-year period. The intellectual property is reported net of accumulated amortization of $2,623. The Company reviews the intellectual property for impairment on at least an annual basis. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142. "Goodwill and Other Intangible Assets." The provisions of SFAS No. 142 are required to be applied by the Company beginning in FY 2002. The Company has not evaluated the impact of this accounting standard on its financial reporting. Any change in the method of accounting for intangible assets would not have a material effect on the financial statement. 28 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE E - INCOME TAXES The Company has no taxable income and no income tax liability during the reported period of operation. The net loss reported on the statement of operations ($1,158,965) as well as the net loss carried from 2001 ($804,555) is available to offset future taxable income. The net operating losses (NOL) expires in 15 years and 14 years, respectively, if not utilized during that time. No deferred tax asset has been recorded for the NOL as an equivalent valuation allowance applies against it in recognition of the Company's uncertainty as a going concern. The merger transaction of Enerdyne and Protalex is tax-free under applicable provisions of the Internal Revenue Code. Under applicable federal tax statutes and regulations the NOLs available to Enerdyne are lost as more than 50% beneficial ownership of Enerdyne changed hands on September 30, 1999. NOTE F - RELATED PARTIES On July 17, 2001, a shareholder group contributed funds that allowed the Company to pay off its remaining balance due to an individual incurred in the Company's reverse merger transaction. No shares or notes payable to shareholder were issued in the transaction. The Company recorded additional paid-in-capital in the amount of $142,830 plus interest to reflect contributed funds and debt payoff. 29 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE G - LONG-TERM DEBT The Company has the following long-term debt at May 31, 2002: 11.5% installment purchase agreement, due in monthly installments of $3,015, including interest, through June 2003. The note is collateralized by equipment. $ 39,324 Less current maturities (36,338) ------------- Long-term debt, less current maturities $ 2,986 ============= Maturities of long-term debt for each of the years succeeding May 31, 2002 are as follows: Year ---- 2003 $ 36,338 2004 2,986 ------------- $ 39,324 ============= NOTE H - GOING CONCERN UNCERTAINTY The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company is a development stage enterprise and does not have operating revenue nor anticipate generating operating revenue for the foreseeable future. The ability of the Company to continue as a going concern is dependent initially on its ability to raise sufficient investment capital to fund all necessary operations and product development activities. Secondly, the Company must develop products that are regulatory approved and market accepted to generate operating revenue. 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. 30 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE I - STOCK OPTIONS All options issued are "stand alone" options. There is no Company stock option plan currently. The Company accounted for the options 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 expected life of the option with a corresponding increase to paid-in capital. On April 28, 2000, the Company granted stock options to three individuals and a corporate associate to purchase 10,000 shares each of Company common stock at $0.36 per share. During the year ended May 31, 2002, these options expired without being exercised. In accordance with accounting principles generally accepted in the United States of America, the accrued compensation costs of these options were reversed against payroll expense in the current period. On November 26, 2001, the Company issued a stock option to one of its non-employee directors. The option vested immediately, has a ten-year term and has an exercise price of $1.25 per share. The Company accounted for the option in accordance with APB Opinion No. 25 and has recognized compensation expense based on the "intrinsic value" method. This method records compensation cost as the difference between the exercise price of the option and the fair market value of the Company's stock on the measurement (grant) date. $11,500 of compensation expense was recorded during the year ended May 31, 2002. An additional $103,500 will be recognized in future periods over the expected life of the option. Had the Company determined compensation expense based on the fair value at the measurement date for its stock option 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: From Inception Year Ended Year Ended Through May 31, 2002 May 31, 2001 May 31, 2002 ------------ ------------ ------------- Net loss, as reported $ (1,158,965) $ (553,866) $ (1,963,520) Proforma net loss (1,166,361) (553,866) (1,970,916) Loss per share, as reported (.10) (.06) (.20) Proforma loss per share (.11) (.06) (.20) 31 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE I - STOCK OPTIONS - CONTINUED The fair value of the option is 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 83 percent; risk-free interest rate of 5.05 percent; and an expected life of five years. A summary of the common stock option activity for employees, directors and officers is as follows: Weighted Average Exercise Options Prices Exercisable -------- --------- ----------- Balance, September 17, 1999 ........... -- $ -- -- Granted, April 28, 2000 ............... 40,000 0.36 40,000 Exercised ............................. -- -- -- -------- Balance, May 31, 2001 ................. 40,000 0.36 40,000 Granted, November 26, 2001 ............ 100,000 1.25 100,000 Expired, April 28, 2002 ............... (40,000) .36 (40,000) Exercised ............................. -- -- -- -------- Balance, May 31, 2002 ................. 100,000 $ 1.25 100,000 ======== NOTE J - DESCRIPTION OF LEASING ARRANGEMENTS The Company leases its laboratory and office space under a noncancellable operating lease. The lease term is for 36 months and 4 days, from April 27, 2001 through April 30, 2004. While the agreement provides for minimum lease payments, the lease is non-renewable. The lease does provide an option to purchase at any time during the lease period for an agreed upon $70,000. The following is a schedule of future minimum lease payments required under the lease: 2002 $ 14,104 2003 16,925 2004 15,515 32 Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED From Inception (September 17, 1999) through May 31, 2002 NOTE K - SUBSEQUENT EVENTS 1. On July 5, 2002, the Company closed a private placement of $1,263,000 by issuing 842,000 shares of common stock. 2. On July 5, 2002, the Company issued 842,000 stock warrants. No stock warrants have been exercised as of the date of this filing. 3. On various dates subsequent to May 31, 2002, the Company issued stock options for a total of 358,680 shares exercisable at $1.50 per share. The options expire at varying dates from three to ten years from date of grant. 4. On June 21, 2002, Dr. Paul Mann resigned as Director, Treasurer and Secretary. A patent assignment was executed from Paul Mann to the Company. 33 ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has not had any changes in or disagreements with its accountants since inception. ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS The following table sets forth certain information with respect to the Company's directors and executive officers as of August 2002: Name Age Position ------------------------ --- ------------------------------------- John E. Doherty 48 President and Director William Hitchcock 63 Chairman and Director Frank M. Dougherty 54 Secretary and Director Frederick W. Kuckuck 37 Vice President Arthur D. Bankhurst, M.D. 65 Chief Clinical Officer and Director Dennis Vik, Ph.D. 45 Chief Scientific Officer Thomas Stagnaro 59 Director Donald K. Dean 41 Treasurer and Chief Financial Officer 34 JOHN E. DOHERTY - Mr. Doherty has served as President and a director of the Company since November 1999, and previously served as a director of Enerdyne since August 1999. From 1976 to 1994, Mr. Doherty was a vice president and principal of Doherty & Co., an investment banking firm. During this time he was involved in the early and later stage financing of companies such as Thoratec Laboratories, SeraCare, Inc. and Excalibur Technologies. Mr. Doherty attended Tufts University in Boston, Massachusetts. From 1994 to the present, Mr. Doherty has been a private investor, and over the last year and a half was involved with the early stage development of Protalex. THOMAS STAGNARO - Mr. Stagnaro is President and CEO of Agile Therapeutics, a private company focused on developing women's healthcare products. Mr. Stagnaro formerly was president and CEO of 3-Dimensional Pharmaceuticals and Univax Biologics. Mr. Stagnaro began his career with Serle Laboratories and has held increasingly important positions during his 30 years in the pharmaceutical industry. Tom has raised over $200 million for three developmental stage companies and took Univax Biologics public in 1972. His present company, Agile Therapeutics, is a development-stage research-based firm founded in 1997 that is involved in developing novel products for transdermal delivery of pharmaceutical agents. Mr. Stagnaro was appointed to the Board during the year. ARTHUR D. BANKHURST, M.D. - Dr. Bankhurst has served as a director of the Company since November 1999, and previously served as a director of Enerdyne since August 1999. Dr. Bankhurst earned his bachelors degree in biochemistry from the Massachusetts Institute of Technology, and his M.D. from Case Western Reserve University. He served as a research fellow at the Hall Institute of Medical Research in Melbourne, Australia and as a senior research fellow at the WHO Research Unit in Geneva, Switzerland. He joined the faculty of the University of New Mexico in 1971, and now holds a joint professorship in internal medicine and microbiology. Dr. Bankhurst's professional accomplishments in the fields of arthritis and immunology are reflected in his being named Senior Investigator for the Arthritis foundation from 1974-1979, as well as serving as associate editor of several prestigious medical journals. These journals include The Journal of Immunology (1984-1987), Diagnostic Immunology (1984-1988), and Clinical Immunology and Immunopathology (1988-present). With more than 140 publications to his credit, Dr. Bankhurst has a national reputation as an investigator, and has participated in a number of multi-center trials of anti-arthritis drugs. WILLIAM M. HITCHCOCK - Mr. Hitchcock is a partner of Pembroke Financial Partners, LLC, an NASD securities firm. Involved in the investment business since 1960, Mr. Hitchcock formerly was affiliated with Lazard Brothers in the UK and Lehman Brothers in the US. Currently, he is a director of Plains Resources, Inc. oil and gas exploration company, and Thoratec Corporation, a medical device company. Mr. Hitchcock brings to the Company many years of experience in financing and guiding the growth of young companies. Mr. Hitchcock was appointed to the Board during the year. FRANK M. DOUGHERTY - Mr. Dougherty is a practicing attorney and founder and owner of Frank M. Dougherty P.C., a law firm in Albuquerque, New Mexico. Mr. Dougherty serves as the Company's secretary. He has an undergraduate degree in economics from University of Colorado, a graduate degree in accounting from the University of Arizona and a law degree from Texas Tech University. Mr. Daugherty was appointed to the Board during the year. 35 FREDERICK W. KUCKUCK - Mr. Kuckuck, age 37, has a Bachelor's degree in Biology and Psychology from the University of California, Santa Cruz, and a Masters degree in Business Administration with an emphasis on the management of technology from the University of New Mexico. His prior experience includes 12 years managing federally regulated laboratories in the environmental and medical device fields. He has authored several publications related to drug discovery instrumentation, with four patents pending. DENNIS VIK, PhD. - Dennis Vik earned his Ph.D. in Immunology from Harvard University in Cambridge, Massachusetts in 1986. He also earned an MBA from the Anderson School of Management in 2000. Prior to becoming the Chief Scientific Officer for Protalex, Dr. Vik was employed as a research associate, and later, assistant member of the Department of Immunology at Scripps Clinic and Research Foundation in La Jolla, California from 1986 until 1992. Dr. Vik was Assistant Professor of Microbiology at the University of New Mexico School of Medicine from 1992 until 1999. Dr. Vik received the National Research Service Award from 1988 to 1990 and is a member of the American Association of Immunologists. Dr. Vik has published extensively in the field of immunology. DONALD DEAN - Mr. Dean, age 41, has served as accountant for Protalex for the past two years, and was appointed CFO for Protalex in November 2001. He earned his B.A. in International Management from the University of New Mexico's Anderson School of Management. Mr. Dean was Pacific Rim Manager for Hanna International in Portland, Oregon for three years, and after working in Japan from 1989 to 1990, returned to the University of New Mexico to complete a Masters degree in Business Administration. Mr. Dean has run his own accounting and e-commerce consulting business since 1993. ITEM 10 - EXECUTIVE COMPENSATION Executive Officer Compensation The Company did not pay its Chief Executive Officer any compensation during the fiscal year ended May 31, 2002. Employment Agreements The Company does not have employment agreements with any of its executive officers. Director Compensation The Company did not compensate its directors in fiscal 2002. 36 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding beneficial ownership of the Company's common stock as of August 16, 2002, (i) by each person who is known by the Company to own beneficially more than 5% of its common stock, (ii) by each of the Company's directors, and (iii) by all of the Company's executive officers and directors as a group. Except as provided below, each person's address is c/o Protalex, Inc. P.O. Box 30952, Albuquerque, New Mexico 87190. Directors and Executive Officers Name and Address of Amount and Nature Percentage of Beneficial Owner of Beneficial Owner Class (1) ------------------- ------------------- ------------- John E. Doherty, President 2,952,660 23.9894 Frank M. Dougherty, Secretary 60,000 0.4875 William Hitchcock 90,000 0.7313 Arthur D. Bankhurst 276,192 2.2440 Donald K. Dean, Treasurer 100,000 0.8125 --------- ------- 3,478,852 28.2647 ========= ======= Other beneficial owners > 5% Name and Address of Amount and Nature Percentage of Beneficial Owner of Beneficial Owner Class (1) ------------------- ------------------- ------------- CEDE & Co. 1,126,432 9.1519 PO Box 20 Bowling Green Station New York, NY 10004 Paul L. Mann 1,445,021 11.7403 423 Girard NE Albuquerque, NM 87106 Leslie McCament-Mann 1,468,830 11.9338 3308 Loma Vista Pl. NE Albuquerque, NM 87106 James J. Hanosh, Jr. 820,316 6.6648 12300 Rd 21 Cortez, CO 81321 (1) Based on a total of 12,308,226 outstanding shares of the Company's common stock. 37 ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On July 17, 2001 a shareholder group contributed funds that allowed the Company to pay off its remaining balance due to an individual incurred in the Company's reverse merger transaction. No shares or notes payable to shareholders were issued in the transaction. The Company recorded additional paid-in capital in the amount of $142,830 plus interest to reflect the contributed funds and debt pay-off. Dr. Paul Mann, former Treasurer, Secretary, Director and Chief Scientist, has left the Company, terminating from those positions in June 2002 shortly after the Company's year-end. Dr. Mann entered into a stock buyback agreement with the Company whereby the Company will purchase 142,857 shares of Dr. Mann's stock directly from him at $0.70 per share, payable in 12 monthly installments of $8,333. On November 26, 2001, the Company issued a stock option to William Hitchcock in conjunction with his acceptance of a Protalex directorship. He received an option for 100,000 shares, which was exercisable immediately at $1.25 per share. The term of the option is 10 years. A subsequent stock option was granted to William Hitchcock on July 18, 2002 for his efforts and involvement in the last private placement of the Company. The option was for 133,680 shares exercisable immediately at $1.50 per share. On June 1, 2002, the Company issued a stock option to Frederick Kuckuck, an employee. He received an option for 125,000 shares, which was exercisable immediately at $1.50 per share. The term of the option is 3 years. On July 18, 2002, the Company issued a stock option to Thomas P. Stagnaro in conjunction with his acceptance of a Protalex directorship. He received an option for 100,000 shares, which was exercisable immediately at $1.50 per share. The term of the option is 10 years. Mr. Don K. Dean, Treasurer and Chief Financial Officer of Protalex, Inc., is the Brother-in-Law of Mr. John E. Doherty, President. 38 ITEM 13 - INDEX TO EXHIBITS 2.1 Stock Purchase Agreement among Incorporated by reference, to Protalex, Inc., Don Hanosh and the Company's 10-SB filing Enerdyne Corporation December 3, 1999 2.2 Merger Agreement and Plan of Incorporated by reference, to Re-organization between Protalex, the Company's 10-SB filing Inc. and Enerdyne Corporation December 3, 1999 3.1 Articles of Incorporation, as Incorporated by reference, to amended the Company's 10-SB filing December 3, 1999 10.1 Promissory Note in favor of Incorporated by reference, to Don Hanosh the Company's 10-SB filing December 3, 1999 10.2 Continuing and Unconditional Incorporated by reference, to Guaranty executed by the Company's 10-SB filing John E. Doherty December 3, 1999 10.3 Continuing and Unconditional Incorporated by reference, to Guaranty executed by the Company's 10-SB filing James K. Strattman December 3, 1999 10.5 Form of Confidential Disclosure Incorporated by reference, to Agreement the Company's 10-SB filing December 3, 1999 99.1 Certifications Attached Reports on Form 8-K. No reports on Form 8-K were filed during the year. A report on Form 8-K was filed subsequent to year-end on August 24, 2002, which detailed the departure of Paul Mann, previous Chief Scientific Officer. 39 SIGNATURES In accordance with Section 13 or 15(D) of the Exchange Act the registrant caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. PROTALEX, INC. Date: August 29, 2002 By: John E. Doherty --------------- -------------------------- John E. Doherty, President SIGNATURE TITLE DATE --------- ----- ---- John E. Doherty President and Director August 29, 2002 --------------- John E. Doherty Frank M. Dougherty Secretary and Director August 29, 2002 ------------------ Frank M. Dougherty Frederick William Kuckuck Vice President August 29, 2002 ------------------------- Frederick William Kuckuck William Hitchcock Chairman and Director August 29, 2002 ----------------- William Hitchcock Donald Dean Chief Financial Officer August 29, 2002 ----------- Donald Dean Arthur D. Bankhurst Chief Clinical Officer August 29, 2002 ------------------------ and Director Arthur D. Bankhurst, M.D. Thomas Stagnaro Director August 29, 2002 --------------- Thomas Stagnaro 40