10KSB/A 1 protalex10ksba53103.txt FORM 10-KSB/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A (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, 2003 [ ] 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) 243-8220 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) 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.) $41,406,451 as of August 25, 2003. 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. 12,244,379 as of August 25, 2003. Transitional Small Business Disclosure Format (check one): Yes No X Documents Incorporated by Reference Portions of the Definitive Proxy Statement for the 2003 Annual Meeting of Stockholders (which will be filed within 120 days after the close of the Company's fiscal year ended May 31, 2003) are incorporated by reference. With the exception of those portions which are specifically incorporated by referenced in this 10-KSB Annual Report, the Proxy Statement for the 2003 Annual Meeting of Stockholders is not deemed to be filed as a part of this Report. ITEM I - DESCRIPTION OF BUSINESS Overview Protalex, Inc. ("Protalex" or the "Company") is a development stage company engaged in developing a class of human pharmaceuticals from organic molecules which in pre-clinical trials have demonstrated effectiveness in regulating the immune system with persisting effects. The autoimmune disease initially targeted by the Company is Rheumatoid Arthritis (RA). It currently has no product on the market. The Company was incorporated on April 23, 1958 and became Protalex pursuant to a reverse merger with Enerdyne in 1999. Protalex's bioregulatory compounds are based upon the principal of influencing cellular activities at a more basic level than traditional pharmaceutical agents, which act upon the end products of complex metabolic pathways. In autoimmune disease models, the Company's target drug has induced reversal of the pathologic process and has resulted in a restoration of tissue integrity and function. The Company intends to bring this biotechnology to bear on a range of serious autoimmune conditions with millions of sufferers worldwide. Pre-clinical trials demonstrating safety and efficacy in animals have been completed. The company is now preparing to file an Investigational New Drug (IND) application with the Food and Drug Administration (FDA) for human clinical trials expected to begin in 2004. In preparation for filing the IND, the Company is producing the drug at a contract laboratory, designing clinical trial protocols, and developing assays to measure drug concentrations and systemic effects in upcoming clinical trials. About Bioregulation The immune system exists to protect the body from foreign agents such as bacteria and viruses. In normal functioning, a complex set of interactions results in the destruction of these outside bodies. An important aspect of this process is the ability to recognize self (normal tissue) from non-self (foreign agents). Autoimmune diseases such as Rheumatoid Arthritis, Lupus, Crohn's, Insulin-Dependent Diabetes, and Multiple Sclerosis result when this self-recognition goes awry and the immune system mistakenly identifies normal tissue as foreign. In Rheumatoid Arthritis the dysregulation of the immune system causes the joint lining to form invasive tissue that degrades cartilage and bone. With the current treatments available, prevention of long-term damage in Rheumatoid Arthritis requires ongoing indefinite drug therapy. The vast majority of FDA approved drugs for the treatment of Rheumatoid Arthritis carry significant side effects. They generally target specific products of the immune response that are formed well after the system has lost its ability to self-regulate. Protalex's bioregulator on the other hand, addresses the fundamental pathogenic dysregulation that causes the initial abnormal response. Protalex has discovered a method of "resetting" the immune system by deactivating the immune response via the use of a bioregulator, which has been shown to have no side effects at treatment dosages and works very early in the immune response to prevent the activation of lymphoid cells and the secretion of pathogenic cytokines. In the animal model specifically designed to evaluate the efficacy of anti-arthritic drugs, the Company's bioregulator has not only inhibited the acute inflammation but also repaired and/or reversed the tissue damage caused by inflammatory response. Animal Studies Protalex's Bioregulator has proven effective in two clinical standard mouse autoimmune models: Collagen-Induced Arthritis - Mice received two injections of collagen in order to stimulate an inflammatory response, then one group was treated with Protalex's bioregulator, a second group received a leading commercially available treatment and the control group was injected with saline solution. The mice were scored daily on joint size and loss of function. The results showed that Protalex's bioregulator and the currently popular treatment performed similarly over the first 20 days of treatment, slowing disease progression as compared with the control group. After 20 days, the Protalex-treated mice improved and approached baseline "healthy" level, whereas the mice treated with the currently available RA treatment showed a resumption of joint inflammation and tissue damage until sacrifice at day 35. BXSB Mice - These animals are genetically-predisposed to autoimmune diseases, and this model is used to evaluate drugs for RA,as well as Lupus, Crohn's disease and other autoimmune diseases. This genetic model more closely approximates the human condition in that it is complex, multi-factoral and usually treated by multiple drug regimens. In these studies mice were treated three times per week and sacrificed at regular intervals; their organs were weighed and sectioned for histological analysis and their spleens were used for immunological assays. Spleen enlargement (splenomegaly) was lower than the controls at almost every point, demonstrating the ability of Protalex's drug to delay the onset and severity of this disease indicator. Protalex's treatment also reduced non-specific immunoglobulin production and specific auto-antibody production and readjusted T and B cell number and function. All these effects represent a whole animal change in this complex disease syndrome. Pre-clinical safety studies have shown no adverse events: Toxicological studies in New Zealand rabbits - Protalex's drug was injected three times per week over fifteen weeks into a rabbit species selected for comparability to humans in preparation for the FDA Phase I trials. All animals survived to scheduled euthanasia. No significant clinical or injection site reactions were observed. No toxicologically meaningful differences were observed in body weight gain or food consumption, nor in hematology, clinical chemistry, urinalysis or organ weight data. These study results are a crucial component of Protalex's IND Application. Markets RA will be the first autoimmune disease targeted and is the primary and immediate focus of the Company. RA was chosen as a target disease because it represents a well-defined, rapidly growing market for which currently available treatments are expensive and only marginally effective. 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. More than 5 million people suffer from RA worldwide. Pharmaceuticals for RA represent an $8 billion market with a projected growth rate of 10% per year through the end of the decade. Currently, no uniformly effective treatment for RA exists. Current treatments are costly, and in most cases must be continued for decades. In contrast, the Company believes that bioregulator therapy will be much more cost effective and administered by weekly injections over the course of a few months. 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 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. The second major goal is the development of synthetic analogs to the Company's first pharmaceutical product. The characterization of the active component of the Company's first product is underway and the synthetic chemistry project will follow. This synthetic focus for the Company will provide more comprehensive patent protection, as well as insight into future drugs. The third goal of the Company is to pursue FDA approval to treat other autoimmune diseases, where its drug's ability to decrease the inflammatory response will abrogate the underlying disease processes. The BXSB animal model is a generalized autoimmune model, so efficacy in pre-clinical trials shows promise in treating other conditions. The Company is planning pre-clinical studies in Lupus and Crohn's Disease during 2004 and 2005, upon completion of significant milestones in the RA trials. Competition Because of the small treatment dosages and relatively simple production process, Protalex's compound has a potential competitive advantage. Current RA treatments are characterized by complex manufacturing methods, which have led to production problems and have resulted in an average annual retail cost of $13,000 to $30,000 per patient. 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. In all, at least a dozen large and small pharmaceutical companies are active in this market, with Immunex Corporation and Johnson & Johnson, Inc. dominating the market with their respective products, Enbrel-Registered Trademark and Remicade-Registered Trademark. Abbot's Humira-Registered Trademark is a recent entry into the RA market, with $150 million projected first year sales. Despite intense media attention and enormous sales, the long-term efficacy of these compounds remains to be evaluated. Operations The Company is currently executing a plan for FDA IND approval and inception of human trials in 2004, broadening its intellectual property and developing the corporate base for commercialization of its bioregulator products. The Company's business and laboratory operations are located in a leased space in Albuquerque, New Mexico. The Company contracts with Charles River Laboratories in the United States and Eurogentec in Belgium to conduct animal trials and to manufacture its drug for use in research and development (R&D) and clinical trials. The Company plans to contract with the site management organization Rheumatology Research International to run its clinical trials. The Company's in-house research includes elucidating the mechanism of action, characterizing the active subcomponent of its drug molecule, and developing synthetic derivatives. Lab staff also is designing assays to screen derivative compounds for activity, measure drug concentrations in the blood and measure systemic effects to be used in evaluating clinical trial data. Reverse Merger In September 1999, 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% of the shares of common stock of the Company, and Enerdyne's former shareholders held approximately 8% of the shares of common stock of the Company. Business and Marketing Strategy The Company has concluded four prior private placements of its common stock, raising $3.4 million and carrying the Company through early research and Pre-Clinical Trials. The current private placement, targeted to raise a minimum of $8.5 million, is intended to carry the Company through Phase II clinical trials. The Company believes this financing will close in September 2003. The Company expects that, if it is granted all regulatory approvals, its bioregulator products will be competitive throughout the global market. As its target drug moves closer to the marketing stage, 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. 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 drugs, extensive pre-clinical and clinical tests must be conducted and a rigorous clearance process must be completed. Final approval by the FDA for safety and efficacy may take several years and require the expenditure of substantial resources. The FDA approval process entails several steps. The Company has completed a major preliminary step, pre-clinical trials, in which the Company demonstrated the safety and efficacy of its products through in vitro and in vivo laboratory animal testing. Upon compilation of data from pre-clinical trials, and final formulation, packaging and stability testing of the Company's drug, the Company will submit an IND Application 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. The Company has discussed, with the FDA, the final requirements for its IND submission and initiation of human safety testing of the Company's RA bio-regulator. These requirements include a short "bridging study" to correlate the lots used in animal trials with the Company-manufactured product to be used in human clinical trials. Upon anticipated IND approval in 2004, the Company expects to begin human clinical trials of safety and efficacy 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 to obtain patents for its bioregulatory technology. The Company filed an initial usage patent in April 2002. Laboratory work has begun to characterize derivatives and develop synthetic analogs to its first drug, for which the Company will pursue additional patents as appropriate. The Company has completed a trademark search for the name "Protalex," and is proceeding with filing on an "Intent To Use" basis with its patent and trademark counsel, Pillsbury Winthrop, LLP. Risks Related To The Company's Business This 10KSB Statement Contains Forward-Looking Statements Which May Differ From The Company's Actual Future Results. This 10KSB 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 10KSB, 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 10KSB could have an adverse effect on the Company's business, results of operations and financial condition. 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. 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 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, although production processes for the key compounds are thoroughly documented, such third party or parties could encounter problems manufacturing sufficient quantities of the Company's products for these purposes. Therefore, the Company may have to make significant investments to construct or lease 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 has filed for one patent, and intends file additional patents and to prosecute and maintain patents for this technology. Conceivably, the Company may be unsuccessful in obtaining additional 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." 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, consultants, and contract laboratories 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. The Company Is Dependent Upon Key Personnel For Its Growth. The success of the Company's operations during the foreseeable future will depend largely upon the continued services of the following individuals: Mr. Steven Kane, the Company's President, and Dr. Dennis Vik, the Company's Chief Scientist. The loss of the services of Mr. Kane or Dr. Vik could have a material adverse impact on the Company. Dr. Vik has 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." Recently Enacted And Proposed Changes In Securities Laws And Regulations Are Likely To Increase Company Costs. The Sarbanes-Oxley Act of 2002 that became law in July 2002 requires changes in some of the Company's corporate governance, public disclosure and compliance practices. The Act also requires the SEC to promulgate new rules on a variety of subjects. The Company expect these developments to increase its legal and financial compliance costs. These developments may make it more difficult and more expensive to obtain director and officer liability insurance, and the Company may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These developments could make it more difficult to attract and retain qualified members of Protalex's board of directors, particularly to serve on the audit committee, and qualified executive officers. The Company is presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude of additional costs. The Company's Public Shares Are Illiquid And Their Price is Subject to Potential Volatility. 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. The Company Needs Additional Funding. The Company is dependent upon equity financing to fund research and development and commercialization of the drug. 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 six full-time employees. None of the Company's employees 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 be able to pay the higher salaries necessary to retain such skilled employees. ITEM 2 - DESCRIPTION OF PROPERTY The Company's office and laboratory is located in a space at 717 Encino NE, Suite 17, Albuquerque, New Mexico 87102. The Company leases this property pursuant to a three-year lease agreement, which ends April 30, 2004, with an option to purchase, at any time, the property for $70,000. 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 There were no matters submitted to a vote of security holders in the fourth quarter of the fiscal year ended May 31, 2003. ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Over-The-Counter 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 for the last two fiscal 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. Average daily volume was 1,043, and the annual average closing price was $1.85 for the year ended May 31, 2003. High Low ---- --- Fiscal Year 2002 First Quarter 2.88 1.69 Second Quarter 3.94 2.13 Third Quarter 3.30 2.19 Fourth Quarter 3.19 2.25 Fiscal Year 2003 First Quarter 2.85 1.17 Second Quarter 1.91 1.21 Third Quarter 3.05 1.35 Fourth Quarter 3.25 1.22 At May 31, 2003 the Company had 12,247,450 shares of common stock outstanding, which were held by 383 holders of record. The transfer agent for the Company's common stock is Standard Registrar & Transfer Agency, PO Box 14411, Albuquerque, NM 87111. Dividend Policy. No dividends have been declared or paid to date on any capital stock of 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 May 2000, the Company completed a private placement of 640,000 shares of its common stock, at an offering price of $1.00 a share to various investors. In this offering, the Company relied on Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), as an exemption to the registration requirements of the Securities Act. Subscription agreements executed by each investor attested to the fact they such investor was an accredited investor, as such term is defined in Regulation D, promulgated under the Securities Act. In November 2001, the Company sold 881,600 shares of unregistered common stock, pursuant to Section 4(2) of the Securities Act, at $1.25 per share to various investors. Each investor executed a subscription agreement, attesting to such investor's accredited status. On December 7, 2000, the Company issued 425,000 shares of its common stock to various investors, pursuant to a private placement exempt under Section 4(2) of the Securities Act. Each investor executed a subscription agreement confirming its accredited status. On November 26, 2001, the Company issued options to purchase up to 100,000 shares of restricted common stock of the Company, at an exercise prices of $1.50 a share, to William Hitchcock, a director of the Company, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on November 26, 2011. The options were issued pursuant to the exemption set forth in Section 4(2) of the Securities Act. On June 1, 2002, the Company issued options to purchase up to 125,000 shares of restricted common stock of the Company to Frederick Kuckuck, an employee of the Company, at an exercise prices of $1.50 a share, in exchange for his services as an employee of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on June 1, 2004. The options were issued pursuant to the exemption set forth in Section 4(2) of the Securities Act. In July 2002, the Company offered 842,000 units, comprised of one share of common stock and one warrant to purchase common stock, for $1.50 a unit. The units were sold, in varying amounts, to various investors. Each investor certified its accredited status in executed subscription agreements, upon which the Company based its reliance on the exemption in Section 4(2) of the Securities Act. On July 18, 2002, the Company issued options to purchase up to 100,000 shares of restricted common stock of the Company to Thomas Stagnaro, a director of the Company, at an exercise prices of $1.50 a share, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire July 18, 2012. The options were issued pursuant to the exemption set forth in Section 4(2) of the Securities Act. On October 24, 2002, the Company issued options to purchase up to 100,000 shares of restricted common stock of the Company to Thomas Stagnaro, a director of the Company, at an exercise prices of $1.45 a share, in exchange for his services as a consultant to the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on October 24, 2012. The options were issued pursuant to the exemption set forth in Section 4(2) of the Securities Act. On December 16, 2002, the Company issued options to purchase up to 10,000 shares of restricted common stock of the Company to William Hitchcock, a director of the Company, at an exercise prices of $1.70 a share, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on December 16, 2012. On December 16, 2002, the Company issued options to purchase up to 10,000 shares of restricted common stock of the Company to Thomas Stagnaro, a director of the Company, at an exercise prices of $1.70 a share, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on December 16, 2012. On December 16, 2002, the Company issued options to purchase up to 10,000 shares of restricted common stock of the Company to Arthur Bankhurst, a director of the Company, at an exercise prices of $1.70 a share, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on December 16, 2012. On December 16, 2002, the Company issued options to purchase up to 10,000 shares of restricted common stock of the Company to Frank Dougherty, a director of the Company, at an exercise prices of $1.70 a share, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on December 16, 2012. On December 16, 2002, the Company issued options to purchase up to 10,000 shares of restricted common stock of the Company to John Doherty, a director of the Company, at an exercise prices of $1.70 a share, in exchange for his services as a director of the Company. The options were issued pursuant to a stand-alone Option Agreement and are fully vested. The options will expire on December 16, 2012. On January 15 to May 15, 2003, the Company issued 41,670 shares of common stock to its President, Steven Kane, in lieu of compensation. On May 14, 2003, the Company issued common stock to Joe Dervan, an employee, as compensation. ITEM 6 - PROTALEX INC. - MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION Pre-clinical safety studies for Protalex's target drug were completed in May, 2003 with no significant clinical reactions and no toxicologically meaningful differences between the test and control groups. These studies and the pre-clinical efficacy studies concluded in 2002 lay the foundation for the Investigational New Drug (IND) Application for treating Rheumatoid Arthritis (RA) to be submitted to the FDA in fourth quarter of calendar year 2003. IND-related activities include manufacturing Protalex's drug for Phase I and II clinical trials, arranging for packaging and testing, designing clinical trial protocols and designing an animal "bridging study" to compare the lots used in animal trials with the Company-manufactured product to be used in human clinical trials. These IND-related activites will occur during the next 12 months. The Company is planning to raise at least $8.5 million through a private placement it intends to closing within the near future. This financing will satisfy the Company's cash needs for the next 24 months. The proceeds of this private placement will be used to fund FDA Phase I/II clinical trials, execute a broader patent strategy and continue research into other autoimmune disease indications. After the July, 2002 Pre-IND meeting with the FDA, the Company had additional discussions with the FDA to further define the steps necessary for progression through Phase I and II clinical trials. Other ancillary projects arising out of discussions with the FDA include in-house laboratory work regarding drug formulation and stability and developing measures of immunogenicity. Protalex's contract laboratory in Europe, Eurogentec, is scheduled to produce an early lot of the Company's Drug for stability testing in third quarter of calendar year 2003, and a final lot to be released in first quarter of calendar year 2004, in time for Phase I clinical trials. In the area of intellectual property and derivative drug development, Protalex's usage patent was filed in April, 2002, and the next generation of Protalex compounds are currently being made and tested in our R&D program. Staffing plans for the coming fiscal year include hiring a Director of Clinical and Regulatory Affairs and a Laboratory Cell Technician in the first quarter of calendar year 2004. Continued growth in staffing is anticipated in the Company's business plan, and specialized staffing requirements in the areas of management, scientific and FDA regulatory affairs will call for competitive salaries to attract and retain qualified personnel. 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. Research and Development (R&D) costs decreased slightly from the previous year from $918,022 to $909,246. Decreases in laboratory payroll costs were offset by increased expenses to outside contract labs for pre-clinical trials. Monthly R&D costs are anticipated to double in the coming fiscal year, driven by larger payments to vendors and labs performing drug manufacture, FDA consultation and clinical trial site management. Administrative expenses increased over the prior year from $252,436 to $640,927 due to increased staffing and a shift in focus from conducting research to pursuing the regulatory process. Additional expenses include directors and officers insurance, costs associated with raising funds and additional administrative personnel, including an administrative assistant and a full-time Chief Financial Officer. The major factor in the increased administrative costs is the use of stock-based compensation to attract and reward qualified employees, consultants and board members. ITEM 7 - FINANCIAL STATEMENTS FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS PROTALEX, INC. (A COMPANY IN THE DEVELOPMENT STAGE) May 31, 2003 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The 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, 2003, and the related statement of operations, stockholders' equity, and cash flows for the year then ended. 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 audit. The financial statements of Protalex, Inc. as of May 31, 2002 and for the year then ended, including cumulative results of operations, statement of stockholders' equity and cash flows from inception (September 17, 1999) through May 31, 2002, were audited by other auditors whose report dated August 15, 2002, except for Note I for which the date is July 17, 2003, expressed an unqualified opinion with an explanatory paragraph addressing a substantial doubt about the Company's ability to continue as a going concern. We conducted our audit 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 that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Protalex, Inc. as of May 31, 2003, and the results of their operations and their cash flows for the year then ended 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. As discussed in Note A to the financial statements, the Company has suffered recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Grant Thornton LLP Albuquerque, New Mexico August 15, 2003 Protalex, Inc. (A Company in the Development Stage) BALANCE SHEET May 31, 2003 ASSETS CURRENT ASSETS Cash .......................................... $ 280,052 Prepaid expense ............................... 6,872 ----------- Total current assets ............................ $ 286,924 EQUIPMENT Lab equipment ................................. 248,706 Office and computer equipment ................. 134,387 Furniture & fixtures .......................... 21,268 Leasehold improvements ........................ 10,685 ----------- 415,046 Less accumulated depreciation ................. (288,231) 126,815 ----------- OTHER ASSETS Intellectual technology property, net of accumulated amortization of $3,638.............. $16,662 ----------- Total Assets $ 430,401 =========== LIABILITIES CURRENT LIABILITIES Accounts payable .............................. $ 104,140 Credit card payable............................ 11,354 Payroll and related liabilities .............. 8,816 Interest payable .............................. 15 Current maturities of capital lease and long-term liabilities ....................... 21,341 ----------- Total current liabilities .............. $ 145,666 Capital lease obligation ........................ 41,165 ----------- Total liabilities ...................... 186,831 STOCKHOLDERS' DEFICIT Common stock, no par value, authorized 40,000,000 shares, 12,247,950 shares issued and outstanding .... 3,758,315 Common stock, contra .......................... (368,547) Additional paid in capital .................... 603,912 Deficit accumulated during the development stage ....................... (3,750,110) 243,570 ---------- ----------- $ 430,401 =========== The accompanying notes are an integral part of this financial statement. Protalex, Inc. (A Company in the Development Stage) STATEMENTS OF OPERATIONS For the years ended May 31, 2003 and 2002, and From Inception (September 17, 1999) through May 31, 2003 From Inception Year Ended Year Ended Through May 31, 2003 May 31, 2002 May 31,2003 ------------ ------------ ------------ Revenues ........................ $ -- $ -- $ -- Operating Expenses Research and development ...... (909,246) (918,022) (2,402,861) Administrative ................ (640,927) (252,436) (963,399) Professional fees ............. (71,548) (91,289) (277,216) Depreciation and amortization . (41,167) (17,393) (76,364) ------------ ------------ ------------ Operating Loss ........ (1,662,888) (1,279,140) (3,719,840) Other income (expense) Interest income ............... 9,389 7,381 39,667 Interest expense .............. (2,572) (8,706) (60,918) Loss on disposal .............. (9,019) -- (9,019) ------------ ------------ ------------ NET LOSS .............. $ (1,665,090) $ (1,280,465) $ (3,750,110) ============ ============ ============ Weighted average number of common shares outstanding ............ 12,197,325 11,105,140 10,925,124 ============ ============ ============ Loss per common share ........... $ (.14) $ (.12) $ (.34) ============ ============ ============ The accompanying notes are an integral part of these financial statements. Protalex, Inc. (A Company in the Development Stage) STATEMENTS OF STOCKHOLDERS' EQUITY From Inception (September 17, 1999) through May 31, 2003
Deficit Accumulated Common Stock 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 18, 1999 -- February 7, 2000 -- issuance of 459,444 shares to various investors at $0.36 per share . 459,444 165,400 -- -- -- 165,400 January 1, 2000 -- issuance of 100,000 shares in exchange for legal services 100,000 15,000 -- -- -- 15,000 May 1 - 27, 2000 -- issuance of 640,000 shares to various investors at $1.00 per share ............................ 640,000 640,000 -- -- -- 640,000 May 27, 2000 -- issuance of 1,644 shares to individual in exchange for interest due .................................. 1,644 1,644 -- -- -- 1,644 Net loss for the year ended May 31, 2000 -- -- -- -- (250,689) (250,689) ----------- ----------- ----------- ----------- ----------- ----------- Balance, May 31, 2000 ........... 10,183,635 965,891 -- (368,547) (250,689) 346,655 December 7, 2000 -- issuance of 425,000 shares to various investors at $1.00 per share ............................ 425,000 425,000 -- -- -- 425,000 May 31, 2001 -- Forgiveness of debt owed to shareholder ....................... -- -- 40,000 -- -- 40,000 Net loss for the year ended May 31, 2001 -- -- -- -- (553,866) (553,866) ----------- ----------- ----------- ----------- ----------- ----------- Balance, May 31, 2001 ......... 10,608,635 1,390,891 40,000 (368,547) (804,555) 257,789 August 13, 2001 -- Contribution by shareholders ........................... -- -- 143,569 -- -- 143,569 November 7, 2001 -- issuance of 881,600 Shares at $1.25 per share ............ 881,600 1,102,000 -- -- -- 1,102,000 November 26, 2001 -- options issued to board member ......................... -- -- -- -- -- 133,000 Net loss for the year ended May 31, 2002 -- -- -- -- (1,280,465) (1,280,465) ----------- ----------- ----------- ----------- ----------- ----------- Balance, May 31, 2002 ......... 11,490,235 2,492,891 316,569 (368,547) (2,085,020) 355,893 July 5, 2002 -- issuance of 842,000 at $1.50 per share ................... 842,000 1,263,000 -- -- -- 1,263,000 July 1, 2002 - May 1, 2003 -- purchase of common stock from shareholder at $.70 per share ....................... (130,955) (91,667) -- -- -- (91,667) January 15, 2003 - May 15, 2003 -- common stock issued to Company president ............................ 41,670 82,841 -- -- -- 82,841 May 14, 2003 -- common stock issued to employee ............................. 5,000 11,250 -- -- -- 11,250 June 1, 2002 - May 31, 2003 -- options issued to board members and employees -- -- 287,343 -- -- 287,343 Net loss for the year ended May 31, 2003 -- -- -- -- (1,665,090) (1,665,090) ----------- ----------- ----------- ----------- ----------- ----------- Balance, May 31, 2003 ........... 12,247,950 $ 3,758,315 $ 603,912 $ (368,547) $(3,750,110) $ 243,570 =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements. Protalex, Inc. (A Company in the Development Stage) STATEMENTS OF CASH FLOWS For the years ended May 31, 2003 and 2002, and From Inception (September 17, 1999) through May 31, 2003
From Inception Year Ended Year Ended Through May 31, 2003 May 31, 2002 May 31, 2003 ----------- ----------- ----------- Cash flows from operating activities Net loss ........................................... $(1,665,090) $(1,280,465) $(3,750,110) Adjustments to reconcile net loss to net cash provided by operating activities Loss on disposal of equipment ............... 9,019 -- 9,019 Depreciation and amortization .................. 108,641 111,102 305,266 Non cash compensation expense .................. 381,434 133,000 514,434 Non cash expenses ........................... -- -- 16,644 Decrease (increase) in prepaid expense ......... (5,270) 15,539 (6,872) (Decrease) increase in payroll and related liabilities ........................ 6,471 (20,229) 8,816 (Decrease) increase in interest payable ........ (538) (2,451) 15 Increase in accounts payable and credit card payable .................................. 59,389 55,913 115,494 ----------- ----------- ----------- Net cash used in operating activities ....... (1,105,944) (987,591) (2,787,294) ----------- ----------- ----------- Cash flows from investing activities Acquisition of intellectual technology license - fee portion .................................... -- -- (20,000) Acquisition of equipment ........................... (15,236) (38,116) (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 ................ 6,000 -- 6,000 ----------- ----------- ----------- Net cash used in investing activities ....... (9,236) (38,116) (554,881) ----------- ----------- ----------- Cash flows from financing activities Proceeds from stock issuance ....................... 1,263,000 1,102,000 3,620,401 Principal payment on installment purchase payable .. (37,968) (170,249) (232,905) Contribution by shareholders ....................... -- 143,569 183,569 Principal payment on note payable individual ....... -- -- (225,717) Issuance of note payable to individual ............. -- -- 368,546 Acquisition of common stock ........................ (91,667) -- (91,667) ----------- ----------- ----------- Net cash provided by financing activities ... 1,133,365 1,075,320 3,622,227 ----------- ----------- ----------- NET INCREASE IN CASH ................................. 18,185 49,613 280,052 Cash, beginning of period ............................ 261,867 212,254 -- ----------- ----------- ----------- Cash, end of period .................................. $ 280,052 $ 261,867 $ 280,052 =========== =========== ===========
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 years ended May 31, 2003 and 2002 and From Inception (September 17, 1999) through May 31, 2003
From Inception Period Ended Period Ended Through May 31, 2003 May 31, 2002 May 31, 2003 Interest paid ....................................... $ 2,558 $ 28,407 57,707 =============== =============== ============== 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 $ -- $ 61,151 =============== =============== ============== 46,670 shares of company stock were issued as compensation......................... $ 94,091 $ -- $ 94,091 =============== =============== ==============
The accompanying notes are an integral part of these financial statements. Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS From Inception (September 17, 1999) through May 31, 2003 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 bioregulator technology for the treatment of human diseases. The Company has no operating revenue. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company is a development stage enterprise and does 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. In August, 2003, documents were issued to initiate a Private Placement to raise $8,500,000. The placement is expected to close in mid-September, 2003. 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. 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 Basic earnings per share includes no dilution and is computed by dividing loss to common shareholders by the weighted average number of common shares outstanding for the period. All potentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive securities could potentially dilute earnings per share in the future. As of May 31, 2003, the Company had a total of 2,568,922 potentially dilutive securities. 3. Stock Based Compensation The Company accounts for the options granted to employees using the "intrinsic value" method, pursuant to Accounting Principles Board Opinion no. 25, 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. 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: From Inception Year Ended Year Ended Through May 31, May 31, May 31, 2003 2002 2003 ---------- ---------- ----------- Net loss, as reported .......... $(1,665,090) $(1,280,465) $(3,750,110) Add: stock-based employee compensation expense included in reported net loss .................. 287,343 133,000 420,343 Deduct: Stock-based employee compensation expense determined under fair- value method for all awards ................. (817,233) (231,219) (1,048,452) ----------- ----------- ----------- Pro forma net loss ............. $(2,194,980) $(1,378,684) $(4,378,219) =========== =========== =========== Loss per share, as reported .... $ (.13) $ (.11) $ (.34) Proforma loss per share ........ $ (.18) $ (.13) $ (.40) 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 percent; risk-free interest rate of 4.16-5.11 percent; and an expected life of three-five years. 4. 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 intellectual technology property is amortized over a 20-year life on a straight-line basis. Depreciation and amortization expense is $108,641, $111,102 and $305,266 for the year ended May 31, 2003, 2002 and from inception through May 31, 2003, respectively. Depreciation included in research and development expense totalled $67,474, $93,709 and $228,902 for the years ended May 31, 2003 and 2002 and from inception to May 31, 2003, respectively. 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, 2003, 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. 9. Recent Accounting Pronouncements In June 2002, the FASB issued Statement 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. This statement requires entities to recognize costs associated with exit or disposal activities when liabilities are incurred rather than when the entity commits to an exit or disposal plan, as currently required. Examples of costs covered by this guidance include one-time employee termination benefits, costs to terminate contracts other than capital leases, costs to consolidate facilities or relocate employees, and certain other exit or disposal activities. This statement is effective for fiscal years beginning after December 31, 2002, but early adoption is encouraged. The Company has elected to early adopt this statement for the year ended May 31, 2003. The Company does not anticipate that adoption of this statement will have material effect on its financial or results of operations. In December 2002, the FASB issued Statement 148 (SFAS 148), ACCOUNTING FOR STOCK-BASED COMPENSATION -- TRANSITION AND DISCLOSURE: AN AMENDMENT OF FASB STATEMENT 123 (SFAS 123), to provide alternative transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the pro forma effect on reported results of applying the fair value based method for entities that use the intrinsic value method of accounting. The pro forma effect disclosures are also required to be prominently disclosed in interim period financial statements. This statement is effective for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002, with earlier application permitted. The Company does not plan a change to the fair value based method of accounting for stock-based employee compensation and has included the disclosure requirements of SFAS 148 in these notes to financial statements. In November 2002, FASB Interpretation 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS (FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. A company previously did not record a liability when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to guarantees the Company issues or modifies subsequent to December 31, 2002, but has certain disclosure requirements effective for interim and annual periods ending after December 15, 2002. The Company has historically not issued guarantees and does not anticipate FIN 45 will have a material effect on its financial statements. In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), CONSOLIDATION OF VARIABLE INTEREST ENTITIES. FIN 46 clarifies the application of Accounting Research Bulletin 51, CONSOLIDATED FINANCIAL STATEMENTS, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest ("variable interest entities"). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company is in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon its financial condition or results of operations. 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:
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 368,547 - (368,547) - Other current assets 8,212 - - 8,212 Other current liabilities (17,555) - - (17,555) Accounts payable Alex (40,000) - - (40,000) Note payable (368,546) - - (368,546) Common stock (25,300) (833,459) 714,912 (143,847) Additional paid in capital - (1,105,014) 1,105,014 - Treasury stock - 430,424 (430,424) - Accumulated deficit 30,811 1,389,502 (1,389,502) 30,811 Common stock - contra - - 368,547 368,547 ---------- ---------- ---------- ---------- $ - $ - $ - $ - ========== ========== ========== ==========
Additional information in connection with stock amounts and number of shares issued is as follows:
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 intellectual technology property was originally licensed from a former related party. This intellectual technology property was then assigned to the Company upon the dissolution of the related party. The cost of the intellectual technology property is being amortized over a 20-year period. The intellectual technology property is reported net of accumulated amortization of $3,638. The Company reviews the intellectual property for impairment on at least an annual basis in accordance with SFAS No. 142 "Goodwill and Other Intangible Assets". NOTE E - INCOME TAXES No provision for federal or state income tax expense has been recorded due to the Company's losses. Total income tax benefit differs from the amounts computed by applying the statutory tax rate to loss before income taxes. May 31, 2003 May 31, 2002 ------------ ----------- Expected benefit at the US statutory rate of 34% $ 566,130 $ 512,186 Valuation allowance (566,130) (512,186) --------- --------- Actual tax benefit $ - $ - --------- --------- For the year ended May 31, 2003, the components of income tax (benefit) expense consist of the following: Current: Federal $ - $ - State - - --------- --------- - - --------- --------- Deferred: Federal 618,000 748,000 State 109,000 132,000 Valuation allowance (727,000) (880,000) --------- --------- - - --------- --------- Income tax benefit $ - $ - ========= ========= Deferred taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The components of the net deferred tax asset as of May 31, 2003 are as follows: Assets: Net operating losses $1,459,000 $ 834,000 Vacation accrual 3,000 3,000 Warrants and options 169,000 54,000 ---------- ---------- Deferred tax assets 1,631,000 891,000 ---------- ---------- Liability: Equipment (24,000) (11,000) ---------- ---------- Net deferred tax asset 1,607,000 880,000 Less valuation allowance (1,607,000) (880,000) ---------- ---------- Deferred tax asset, net of valuation allowance $ - $ - ---------- ---------- The net deferred taxes have been fully offset by a valuation allowance since the Company cannot currently conclude that it is more likely than not that the benefits will be realized. The net operating loss carryforward for income tax purposes of approximately $1,500,000 expires beginning in 2014 through 2018. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, utilization of the NOL and tax credit carryforwards may be limited. NOTE F - RELATED PARTIES On August 13, 2001, a stockholder 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 stockholder were issued in the transaction. The Company recorded additional paid-in-capital in the amount of $143,569 to reflect the funds contributed to retire the debt. NOTE G - CAPITAL LEASE AND EQUIPMENT NOTE PAYABLE Protalex leases certain equipment under a capital lease. As of May 31, 2003, the recorded amount of assets and related accumulated depreciation leased under capital leases totaled $61,151 and $0 respectively. Future minimum lease payments and the related present value of the future obligation under the capital lease at May 31, 2003 are as follows: 2004 $ 22,620 2005 22,620 2006 20,735 -------- Total minimum obligations 65,975 Interest (6,455) -------- Present value of minimum capital lease obligations 59,520 Current portion (18,355) -------- Long-term capital lease obligations $ 41,165 ======== In addition to the capital lease obligation as of May 31, 2003, the Company owes $2,986 in connection with a note payable on equipment. This note has been paid in full subsequent to May 31, 2003. NOTE H - STOCK OPTIONS All options issued are "stand alone" options. There is no currently 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 vesting period of the option with a corresponding increase to paid-in capital in accordance with SFAS No. 123. Protalex, Inc. (A Company in the Development Stage) NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) From Inception (September 17, 1999) through May 31, 2003 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 --------- --------- 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) --------- --------- Balance, May 31, 2002 ................. 100,000 $ 1.25 100,000 Granted, July 18, 2002 ................ 233,680 $ 1.50 233,680 Granted, June 1, 2002 ................. 125,000 $ 1.50 125,000 Granted, October 24, 2002 ............. 100,000 $ 1.45 100,000 Granted, December 16, 2002 ............ 913,242 $ 1.51 50,000 Granted, April 1, 2002................. 40,000 $ 1.50 -- Granted, March 15, 2003................ 130,000 $ 1.50 -- --------- --------- 1,641,922 608,680 --------- --------- The following summarizes certain information regarding stock options at May 31, 2003:
Total Exercisable -------------------------------------------------- ------------------------------------------------- Exercise Price Weighted Average Weighted Average Weighted Average Weighted Average Range Number Exercise Price Remaining Life (yrs) Number Exercise Price Remaining Life ------------ --------- ---------------- -------------------- --------- ---------------- ---------------- $1.25 - 1.45 200,000 $1.35 8.95 200,000 $1.35 8.95 $1.50 - 1.70 1,441,922 $1.51 8.67 408,680 $1.52 6.70 --------- --------- 1,641,922 608,680
NOTE I - 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 contains an option to purchase at any time during the lease period for $70,000. Minimum lease payments under this lease total $15,532 for the year ending May 31, 2004. NOTE J - SUBSEQUENT EVENTS In July, 2003, the Board elected Kirk Raab to the Board and appointed him Chairman. Mr. Raab will be compensated at a rate of $150,000 per year, or may elect to take some or all of his compensation in the form of stock options at a first year strike price of $1.50. As an inducement for accepting the position as a director and Chairman, Mr. Raab will be issued stock options in the amount 3.5% of the issued and outstanding shares after the completion of the September 2003 Private Placement. In August, 2003, the Board voted to issue 100,000 stock options to Steven Kane as a performance bonus for his work done to date. The options vest immediately, have a life of 10 years and have a strike price of $1.50. On August 22, 2003, the Company entered into a stock redemption agreement with former Chief Scientist Paul Mann and three family members to redeem all of their outstanding 2,994,803 shares of stock for a total of $300,000. In a separate agreement, Paul Mann agreed to execute patent assignments and other necessary applications for foreign patents related to the U.S. Patent filed in April, 2002. In August 2003, an officer and a board member loaned the Company a total of $100,000. The two loans, each for $50,000, bear interest at 5% per annum, are unsecured and are payable on demand. In August, 2003, documents were issued to initiate a Private Placement to raise $8,500,000. The placement is expected to close in mid-September, 2003. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On February 24, 2003, the Company's prior principal independent accountant, Atkinson & Co. resigned. Atkinson & Company completed the audit of the Company's May 31, 2001 and the May 31, 2002 year end financial statements. Their audit opinion on those final statements, dated August 11, 2001 and August 15, 2002, respectively, included an explaining paragraph regarding the Company's ability to continue as a going concern. Otherwise, the audit reports of Atkinson & Company on the Registrant's financial statements for the fiscal year ended May 31st, 2001 and 2002 did not contain any adverse opinion or disclaimer of opinion, nor were they modified as to audit scope or accounting principles. The Company had no disagreements with its prior accountants. The Company's audit committee has approved Atkinson & Co.'s decision to resign and the engagement of Grant Thornton LLP on February 24, 2003. ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The information required as to this Item is incorporated herein by reference from the data under the caption "Information Concerning Nominees and Continuing Directors" and "Executive Officers" in the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders. ITEM 10 - EXECUTIVE COMPENSATION The information required as to this Item is incorporated herein by reference from the data under the captions "Executive Compensation and Other Information," "Report on Executive Compensation and Employment Agreements" in the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders. ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required as to this Item is incorporated herein by reference from the data under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required as to this Item is incorporated herein by reference from the data under the caption "Certain Relationships and Related Transactions" in the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders. 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 Incorporated by reference, to of the Company, as amended the Company's 10-SB filing December 3, 1999 3.2 Bylaws of the Company Attached 10.1 Continuing and Unconditional Incorporated by reference, to Guaranty executed by the Company's 10-SB filing John E. Doherty December 3, 1999 10.2 Continuing and Unconditional Incorporated by reference, to Guaranty executed by the Company's 10-SB filing James K. Strattman December 3, 1999 10.3 Form of Confidential Disclosure Incorporated by reference, to Agreement the Company's 10-SB filing December 3, 1999 10.4 Executed offers of employment and Board appointment of Kirk Raab Attached 10.5 Contracts: Laboratory Lease Agreement, Equipment Lease Agreement, and Product Formulation Contracts Attached 10.6 Option Agreement Form Attached 10.7 Promissory notes with two Directors Attached 16 Consent from prior Certifying accountants Attached 99.1 Certifications Attached Reports on Form 8-K. A report on Form 8-K was filed on February 24, 2003 which detailed a change in the Company's certifying accountants. ITEM 14 - CONTROLS AND PROCEDURES Within the 90 days prior to the date of this report, Protalex carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the President and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic filings with the Securities and Exchange Commission. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. ITEM 15 - (RESERVED) ITEM 16 - PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required as to this Item is incorporated herein by reference from the data under the captions "Audit Fees," "Audit-Related Fees," "Tax Fees" and "All Other Fees" in the Proxy Statement to be used in connection with the solicitation of proxies to be voted at our Annual Meeting of Stockholders. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 29, 2003 PROTALEX, INC. By: Steven H. Kane -------------------------- Steven H. Kane, President SIGNATURE TITLE DATE --------- ----- ---- Steven H. Kane President and Director August 29, 2003 --------------- Steven H. Kane Frank Daugherty Director August 29, 2003 --------------- Frank Daugherty William Hitchcock Chairman and Director August 29, 2003 ----------------- William Hitchcock Donald Dean Chief Financial Officer August 29, 2003 ----------- Donald Dean Arthur D. Bankhurst Director August 29, 2003 ------------------------ Arthur D. Bankhurst, M.D. Thomas Stagnaro Director August 29, 2003 --------------- Thomas Stagnaro John Doherty Director August 29, 2003 ------------ John Doherty