-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ff/MnI6DJD9bK25CODazRn3y8YzN7FdUT4SP58l2VLfhMQkF72KueHPyey6lTbCs 09pjztxTD5n1c59ngK2fyA== 0000897101-01-500788.txt : 20020412 0000897101-01-500788.hdr.sgml : 20020412 ACCESSION NUMBER: 0000897101-01-500788 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CELOX LABORATORIES INC CENTRAL INDEX KEY: 0000883720 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 363384240 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-19866 FILM NUMBER: 1801271 BUSINESS ADDRESS: STREET 1: 1311 HELMO AVE CITY: ST PAUL STATE: MN ZIP: 55128 BUSINESS PHONE: 6517301500 MAIL ADDRESS: STREET 1: 1311 HELMO AVE CITY: ST PAUL STATE: MN ZIP: 55128 FORMER COMPANY: FORMER CONFORMED NAME: CELOX CORPORATION DATE OF NAME CHANGE: 19930328 10KSB 1 protide014879_10ksb.txt PROTIDE PHARMACEUTICALS, INC. FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED AUGUST 31, 2001 Commission file number: 0-19866 PROTIDE PHARMACEUTICALS, INC. (Name of small business issuer in its charter) Minnesota 36-3384240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1311 Helmo Avenue, St. Paul, Minnesota 55128 (Address of principal executive offices) Issuer's telephone number: (651) 730-1500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. __X__ Yes _____ No Check if disclosure of delinquent filers 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. [ ] The registrant's sales for its most recent fiscal year were $203,564. The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on October 31, 2001 as reported on the Over-the-Counter Market, was approximately $385,300. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this number, as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of October 31, 2001, the registrant had outstanding 3,733,169 shares of Common Stock. Transitional Small Business Disclosure Format. _____ Yes __X__ No Exhibit Index is located on page 19. 1 PART I ITEM 1 - BUSINESS In January 2001 Celox Laboratories, Inc. and its wholly owned subsidiary, Protide Pharmaceuticals, Inc., merged with the surviving corporation named Protide Pharmaceuticals, Inc. A new ticker symbol, "PPMD," became effective January 12, 2001. Protide Pharmaceuticals, Inc. ("Protide" or the "Company") is a biotechnology company devoted to the discovery, development and commercialization of technologies and processes in clinical cell therapy and transfusion medicine, specifically in the areas of cancer, genetic disorders, cell engineering and transplantation. The focus of Protide is in the area of gene therapy, cell therapy and contract manufacturing for companies and educational institutions that are working in these areas. Celox Laboratories, Inc. will continue to market products that are sold for research purposes. Celox was formed in 1985 as a Company that researches, develops, manufactures, and markets cell biology products that are used in the propagation of cells derived from mammals, including humans, and other species. These specialized cell growth products are used primarily in academic, pharmaceutical and other commercial laboratories to improve the growth, productivity and quality of cell-derived medical and other biological products such as vaccines, monoclonal antibodies, interferons, and human growth factor. Since its inception, the Company has pursued a strategy of developing non-serum based products for the growth of human and other mammalian cells which management believes will have significant commercial potential. FORWARD LOOKING INFORMATION Information contained in this Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology such as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. There are certain important factors that could cause results to differ materially from those anticipated by some of these forward-looking statements. Investors are cautioned that all forward- looking statements involve risks and uncertainty. The factors, among others, that could cause actual results to differ materially include the Company's ability to execute its business plan, uncertainties relating to clinical trials, dependence on third parties and future capital needs. BACKGROUND To date, the Company has focused its efforts on commercial applications of cell biology -- the science of life processes at the cellular level. Cell biology involves the study of the molecular, physical, nutritional, and hormonal needs of cells. The cell is the basic sub-unit of every living system and thus exerts a significant influence on the functioning of the entire organism. Cells are complex, having their own power supplies, digestive systems, communication networks, and centers for producing biological products. The cell holds the key to solving major health problems such as cancer, Acquired Immune Deficiency Syndrome ("AIDS"), atherosclerosis, genetic disorders, diabetes, and mental illness. Having accumulated information concerning cells and cellular functions, scientists are able to manipulate cells outside the body in their efforts to address these major health problems. 2 The development of genetic engineering and the use of mammalian cells for the production of biological products has advanced cell culturing to new levels. The manipulation or culturing of cells for production of diagnostic and therapeutic products is an area of significant commercial growth for biotechnology companies and pharmaceutical firms. Products currently subject to research efforts include products to treat and detect AIDS, diabetes, cancer, growth disorders, and cardiovascular disease. The medical community now has access to once unavailable cellular products, such as monoclonal antibodies, interferons, and human growth factors. As a result, more emphasis is being placed on the development of cell culturing technology. Culturing of mammalian cells, tissues, and bacteria is now a widely used technique in the biological sciences, from the basic sciences of cell and molecular biology to the rapidly evolving area of biotechnology. The advent of growing cells IN VITRO (i.e., in cultures or outside the organism) has permitted extensive studies of specific human and other mammalian cellular functions. Isolated cells are being used increasingly in the study of biological phenomena such as chemical toxicity of therapeutic drugs, cancer cell growth and regulation, and for the production of cell-derived biological products. The types of cells that can be grown IN VITRO include muscle, cartilage, liver, lung, breast, skin, bladder, kidney, pancreatic islet cells, and genetically altered cells producing biological products. Recreating IN VIVO (i.e., in the organism) interactions in an IN VITRO environment requires special nutrients conducive to cell growth. Once the cells are separated from the complex tissue organization in which they normally thrive, cell biologists, using a cell growth medium as a base, can optimize the IN VITRO nutritional, hormonal, and physical factors that promote propagation. Culturing of human and other mammalian cells requires the use of a nutrient source of cell growth medium. Typically this growth medium includes a mixture of 80% to 90% basal medium that consists of amino acids, sugar, salts, vitamins, and 10% to 20% serum. Serum is derived from the whole blood of humans and other species and provides growth factors necessary for cells to continue to divide in culture. Although serum provides various proteins, enzymes, hormones, trace elements, and undefined regulators for cell growth, accumulated evidence suggests that many of these components are extraneous and may complicate the purification of cell-derived medical and biological products. Serum availability and pricing are volatile and serum can exhibit significant biological variability, including contaminants, thereby affecting researchers' experimental results and commercial manufacturers' budgeting and product consistency. Accordingly, if users are unable to purchase a project's entire serum requirement from the same lot, they may be required to test the quality of the serum throughout the duration of the project. Based on research conducted by the Company and its experience with the disadvantages of cell growth media containing human serum, fetal calf serum, horse or other animal serum, the Company developed serum-free supplements that optimize the growth of a variety of cell types. These supplements contain known concentrations of identified components that remain constant from production lot to lot and can eliminate potential contaminants such as viruses and bacteria. PRODUCTS AND SERVICES The Company distributes 20 different products. Products manufactured and sold by Protide Pharmaceuticals, Inc. include HemaPro(TM), which is a low protein, serum-free medium for clonogenic assays or EX VIVO expansion of human progenitor cells; Stemsol(TM), which is a sterile filtered, USP Grade Dimethyl Sulfoxide (DMSO) used in a cryopreservation solution for, among other things, peripheral-blood stem cells and cord blood preservations and DMSO/Dextran which is also a sterile filtered, USP Grade Dimethyl Sulfoxide (DMSO) with Dextran added as a buffer. It too is used in a cryopreservation solution for, among other things, peripheral-blood stem cells and cord blood preservations. The Company intends to obtain IN VITRO diagnostic status for HemaPro(TM). An additional proposed clinical product, ViaStem(TM), is undergoing additional preclinical testing. This product was developed to improve the preservation of critical cells (e.g., human stem cells and dendritic cells), which are required for bone marrow transplantation. Additional uses for ViaStem(TM) include cryopreservation of cord blood and platelets. 3 Celox Laboratories, Inc. will continue to market the proprietary serum-free supplements: TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and VaxMax(TM) and two cell freezing solutions, Cellvation(TM) and a newly introduced product, pZerve(TM). VaxMax(TM), introduced in September of 1993, was developed specifically for use in the production of veterinary vaccines. Nephrigen(TM) was introduced in fiscal 1998 and is a serum-free growth medium developed specifically for the culturing of Human Embryonic Kidney (293) cells. As part of the Nephrigen(TM) system, the Company also introduced a non-enzymatic dissociation solution that is used instead of an enzyme such as trypsin. pZerve(TM) was introduced in 1999 and is used primarily for cryopreserving human cells. pZerve(TM) is used as a research product only, it is not for human use. PROTIDE PHARMACEUTICALS, INC. CLINICAL PRODUCTS HEMAPRO(TM) HemaPro(TM) was developed as a serum-free medium for use in clonogenic assays or EX VIVO expansion of human progenitor cells. HemaPro(TM) does not contain erythropoietin, recombinant growth factors, human serum or fetal bovine serum, thereby making it effective in studying stimulatory factors under controlled conditions. STEMSOL(TM) Stemsol(TM) is a sterile filtered, USP Grade Dimethyl Sulfoxide (DMSO) used in a cryopreservation solution for, among other things, peripheral-blood stem cells and cord blood preservations. DMSO/DEXTRAN DMSO/Dextran is also a sterile filtered, USP Grade Dimethyl Sulfoxide (DMSO) with Dextran added as a buffer. It too is used in a cryopreservation solution for, among other things, peripheral-blood stem cells and cord blood preservations. VIASTEM(TM) ViaStem(TM) is a cell solution that was developed as a new technology for ultra-low temperature preservation of critical cells like those required for bone marrow transplantations. The Company believes that ViaStem(TM) has the potential of preventing certain complications associated with current procedures, such as toxicity and nausea. Preliminary data indicates that ViaStem(TM) increases the viability and preservation of critical cells. Other potential applications for ViaStem(TM) include preservation of umbilical cord cells, dendritic cells, platelets, and red blood cells. ViaStem(TM) is undergoing additional pre-clinical testing and the Company anticipates beginning human trials during fiscal 2002. During May 2000 the Company submitted an application to the FDA to initiate human clinical trials for ViaStem(TM). This was the first submission ever made by the Company to the FDA for testing in human subjects. CELOX LABORATORIES, INC. PRODUCTS SERUM-FREE SUPPLEMENTS The Company has developed five technically advanced serum-free supplements to address the inadequacies of serum-based media. The Company's defined basal media supplements, TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and VaxMax(TM) are fortified, low-protein, multipurpose serum-free supplements formulated for the long-term culturing of a wide variety of cell types. These supplements contain chemically-defined, growth-promoting factors that enhance the growth, productivity, and purity of highly specialized cells that secrete biological products such as monoclonal antibodies, interferons, human growth factor, insulin, tissue, plasminogen, enzymes, and vaccines. These supplements also improve the biochemical analysis of nutrient and hormonal effects on the differentiation and function of cells. 4 TCM(TM) was formulated as a general serum replacement for a variety of cell types from species including rodent, dog, cat, rabbit, pig, monkey, and human. This product was designed for cost-effective use. TCM(TM) is not highly specific to a single cell type and is therefore effective in many research and manufacturing situations. TCM(TM) has a Drug Master File classification from the Food and Drug Administration (FDA), which makes it suitable for the manufacturing of biologicals (e.g., vaccines, monoclonal antibodies, etc.). TM-235(TM) is similar to TCM(TM), but contains additional proprietary components. This product was developed for cell lines that require more than 10% fetal calf serum and is slightly more expensive than TCM(TM). TCH(TM) was developed specifically for human hybridomas (cell secreting monoclonal antibodies) and other human cells of lymphoid origin (originating in the lymphatic or immune system). TCH(TM) contains no animal proteins and is compatible for use in the production of human biological products. Nephrigen(TM) was developed specifically for the culturing of Human Embryonic Kidney (293) cells. It is a cost-effective, low protein medium which provides the optimum growth conditions for high density, long-term culturing. Human embryonic kidney cells are frequently used for human adenovirus production, drug screening, toxicity testing and the production of recombinant proteins. Nephrigen(TM) is sold in a kit format with 2 x 500ml bottles of basal media along with a 20ml supplement. As part of the Nephrigen(TM) system, a non-enzymatic dissociation solution was introduced to be used instead of an enzyme such as trypsin. VaxMax(TM) is a cost-effective serum reducer specifically designed for use by manufacturers of veterinary vaccines. It was formulated to provide optimal cell growth and virus production. VaxMax(TM) has been used by veterinary vaccine manufacturers to enhance production while lowering overall costs. The Company sells TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and VaxMax(TM) at prices competitive with serum and other serum-free supplements. (See "Business -- Competition.") The reliability and rigorous quality control involved in manufacturing TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and VaxMax(TM) allow researchers to purchase as little as a one-week supply of supplements rather than enough for an entire project as is often necessary with serum-based media. The consistency of TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and VaxMax(TM) reduces the need to qualify the supplements prior to each use. TCM(TM), TM-235(TM), TCH(TM), Nephrigen(TM) and are concentrated to a level of fifty times in small-volume packages for easier shipment and storage than comparable amounts of serum, which are typically sold in non-concentrated form. VaxMax(TM) is concentrated to a level of one hundred times. CELLVATION(TM) Cellvation(TM) is a cryopreservative, or cell freezing medium, used in the storage of cells at ultra-low temperatures. Cellvation(TM) does not contain any type of serum or dimethyl sulfoxide, both of which have traditionally been used in cell freezing. Although the Company believes Cellvation(TM) is ideal for cells grown without serum, it may also be used for cells cultivated in serum. pZERVE(TM) pZerve(TM) was introduced in 1999 and is used primarily for cryopreserving human cells. pZerve(TM) does not contain any type of serum or dimethyl sulfoxide. pZerve(TM) is used as a research product only, it is not for human use. BASAL MEDIA FORMULATIONS The Company manufactures five products based on standard published formulations. Liquid basal media contains ultra-filtered water, essential and non-essential amino acids, vitamins, and inorganic and organic components. Generally, the basal medium plus a serum-free supplement provides the complete growth medium. 5 BUFFERED SALINE SOLUTIONS AND STERILE WATER The Company manufactures three standard buffered saline solutions, of which one product is available at standard concentration levels of one and ten times and sterile Type I water. Applications include cell rinsing, short- term storage, and washing solution for diagnostic tests. SPECIALIZED SOLUTIONS During the third quarter of fiscal 2000, the Company entered into an agreement to manufacture specialized solutions for the processing of pancreatic islet cells for transplants. MARKETS AND MARKETING The Company sells its products primarily to academic, pharmaceutical, and other commercial laboratories. In addition, the Company markets its products through distributors, direct mail, the Internet, new product releases, and advertisements in trade publications and scientific journals. The Company has distribution agreements for the sale of its products worldwide including the USA, Europe, Canada, Japan, Latin America, and the Pacific Rim. The Company has a non-exclusive worldwide distribution agreement with ICN Pharmaceuticals, Inc. (NYSE:ICN), Costa Mesa, CA. Under the agreement, ICN is marketing Celox' TCM(TM), TCH(TM), TM-235(TM) serum replacement products as well as Cellvation(TM). The Company has also entered into an agreement with ICN to custom manufacture certain of the Company's basal media and balanced salt solutions to ICN for worldwide distribution. ICN manufactures and markets a broad range of prescription and over-the-counter pharmaceuticals, medical diagnostic products and biotechnology research products in North and Latin America, Eastern and Western Europe and the Pacific Rim countries. In 1997, the Company began providing its proprietary products to Sigma Chemical Company (NASDAQ:SIAL), St. Louis, MO. under a private label distribution agreement. In 1997, the Company entered into a non-exclusive distribution agreement with TaKaRa Shuzo Co., Ltd., Biomedical Group, Kyoto, Japan. Under the agreement, TaKaRa will initially market Celox' proprietary product Cellvation(TM). TaKaRa's Biomedical Group leads the industry in several areas owing to the international scope of its research operations which span from the People's Republic of China to North America and Europe. TaKaRa will market Cellvation(TM) in Japan, Taiwan, Korea and People's Republic of China. The Company also has distribution of its products in Japan through Funakoshi Co., LTD, a well established Japanese distributor. In March 2000, the Company entered into an agreement with SciQuest.com, Inc. (NASDAQ:SQST) to sell its products online. This agreement was canceled in the third quarter of fiscal 2001 after SciQuest.com made changes to the agreement which were unfavorable to Protide. CUSTOMERS The Company markets its products to academic, pharmaceutical, biotechnology and diagnostic companies. In 2001, one major customer accounted for 16% of gross sales. In 2000, two major customers accounted for 14% and 11% respectively. The loss of some or all of these customers would have a material adverse, short-term effect on the Company. (See Note 10 of Notes to Financial Statements.) 6 RESEARCH AND DEVELOPMENT Although the Company has completed the research and development of its current products, the Company intends to refine these products, as necessary, to meet customer requirements and to take advantage of technological changes. Additionally, the Company intends to continue to identify factors that affect the growth, differentiation, and replication of cells, particularly human cells. In fiscal 1999 the Company introduced a new product--pZerve(TM). This product is primarily used for cryopreserving human cells. It is intended to be used as a research product only, it is not for human use. During the first quarter of fiscal 2001 the Company introduced the new product STEMSOL(TM). STEMSOL(TM) is a sterile filtered, USP Grade Dimethyl Sulfoxide (DMSO) used in a cryopreservation solution for, among other things, peripheral-blood stem cells and cord blood preservations. A companion product, DMSO/Dextran ,was introduced in the third quarter of fiscal 2001. For the years ended August 31, 2000 and 2001, the Company spent $144,935 and $151,347, respectively, on research and development. During fiscal year 2001, the Company's primary research and development efforts continued to focus on the completion of pre-clinical testing of ViaStem(TM)and development of other products utilized in stem cell therapy. The pre-clinical testing of ViaStem(TM) continues at the University of Minnesota. Research and developmental expenses will fluctuate based on the status of pre-clinical and clinical trials for ViaStem(TM). MANUFACTURING The manufacture of the Company's products requires sterilization of glassware and packaging, assembly of the chemical components, mixing, sterile filtration, aseptic packaging of the final product, and quality control testing. The assembly, mixing, filtration, and packaging take approximately two to three days, after which the supplements are quarantined for a minimum of three weeks until quality control testing has been completed. The Company tests its supplements for cell growth potential, purity, sterility, uniformity, and integrity. The materials used in the Company's products are available from many sources, although the Company utilizes a select group of vendors to ensure consistency. However, due to industry consolidation, there can be no assurance that the Company will continue to receive the material necessary for the production of its proprietary products that meets the specifications of the Company, USDA and the FDA, in the quantities needed or at competitive prices. The manufacturing process requires biological, chemical, and packaging supplies and equipment that are generally available from several suppliers. The Company packages and ships its products from its facility in St. Paul, Minnesota. The Company generally ships within 24 hours after receiving a purchase order. (See "Item 2 - Properties" for further discussion of Company facilities.) COMPETITION Competition in the biotechnology industry is intense and comes from independent cell biology companies, major pharmaceutical firms, and university-affiliated entities both in the United States and in foreign countries. Certain of these companies have extensive experience in the biotechnology industry and most have substantially greater financial, technical, marketing, and management resources than the Company. A significant amount of cell biology activity is carried out at universities and other nonprofit research organizations. These entities are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking protection for their technology and products. These institutions also compete with the Company in recruiting highly trained personnel. 7 The Company's defined serum-free supplements compete with serum and serum-free growth media products from a number of companies, including Gibco/Life Technologies, Inc.; Irvine Scientific, Inc.; and Boehringer Mannheim Corporation. The principal competitive factors for these products are performance, price, reliability, quality and packaging. The Company's products compete on the basis of all five factors, although management believes its principal competitive advantages are quality and performance. The Company's defined basal media supplements also compete with serum products, which have traditionally dominated the market for cell growth media. Manufacturers of these products include Gibco/Life Technologies, Inc.; J.R.H. Biosciences, Inc.; Hyclone Laboratories, Inc.; and Sigma Chemical Company. The Company believes that its products have a competitive advantage over serum-based products on the basis of performance, packaging, and price stability. Many of the same manufacturers also produce products that compete with the Company's basal media formulations, buffered saline solutions, and other cell biology reagents. TRADE SECRETS AND PROPRIETARY TECHNOLOGY The Company's ability to compete effectively with other producers may be materially dependent on the proprietary nature of its technologies. The Company pursues a policy of protecting its technological position through the use of trade secrets. Because patenting requires disclosure of technology to the public, and because the nature of certain technology renders policing of infringement difficult, the Company believes its proprietary technology is generally better protected by maintaining strict security and secrecy than by obtaining patents. There can be no assurance, however, that competitors will not independently develop substantially the equivalent information or techniques, or otherwise gain access to the Company's know-how, such as through the employment of scientific personnel who previously worked for the Company. To protect its trade secrets, the Company marks all of its proprietary documents confidential, distributes confidential information on a "need-to-know" basis only and uses employee confidentiality agreements. All of the Company's employees have signed, and future employees and consultants will sign, confidentiality agreements under which they agree not to use or disclose the Company's proprietary information. The Company intends to vigorously enforce those agreements. There can be no assurance, however, that these confidentiality agreements will be honored or that others will not independently develop similar technology. To the extent that such consultants apply technical information independently developed by them to projects undertaken by the Company, disputes may arise as to the proprietary rights to such information. The Company will also require that vendors, licensees, and joint venturers sign confidentiality agreements whenever appropriate. The Company believes that it owns or has the right to use all proprietary technology necessary to license, manufacture, and market its current cell biology products. It is possible that with respect to other applications of the Company's technology still being evaluated, licenses under patents held by others may be required and there can be no assurance that, if required, such licenses will be available to the Company on acceptable terms. VIASTEM(TM) PATENTS AND CLINICAL TRIALS In March 1995, the Company filed a patent application for ViaStem(TM) in the U.S. Patent and Trademark Office. The Company received the U.S. Patent in early December 1996. This patent provides protection of the Company's ViaStem(TM) technology through March of 2015. A second U.S. Patent was received in August 1998. This second patent broadened the patented uses of ViaStem(TM) in bone marrow transplantation and related therapies. The Company has also filed the documents needed for an International Patent Application as required by the Patent Cooperation Treaty. In October 1998 the Company received notice from the New Zealand and Australian Patent Office that a patent on ViaStem(TM) had been granted by each of the respective countries. In March 2000 notice was received from the Patent Office in Canada that a patent had been issued for ViaStem(TM). The Company received notice from the Russian Patent Office in May 2000 of the official issue date for the patent for ViaStem(TM) in Russia. In July 2001 Protide received notice from the Japan and Mexican Patent Offices that a patent on ViaStem(TM) had been granted by each of the respective countries. Initial reports from other countries that have reviewed the international patent application have been positive. Due to the unique nature of ViaStem(TM), the Company pursued the patent process for this product. 8 On March 31, 2000, the Company entered into an agreement with Fairview-University Medical Center (FUMC), Minneapolis, MN. FUMC will provide collecting, processing and assaying of human peripheral blood stem cells as part of Protide's clinical investigation of ViaStem(TM). During May 2000 the Company submitted an application to the Food and Drug Administration (FDA) to initiate human clinical trials for ViaStem(TM). This was the first submission ever made by the Company to the FDA for testing in human subjects. In August 2000 the Company announced that it had received notice from the FDA that the clinical trial on had been placed on clinical hold pending further information. The Company intends to submit the additional requested information to the FDA in the near future. GOVERNMENT REGULATIONS Regulation by governmental authorities in the United States and other countries is a significant factor affecting the success of products resulting from biotechnological research. The Company is required to conform its operations to the FDA's "Good Manufacturing Practice" regulations. The FDA requires pre-manufacturing approval for certain new medical devices, drugs, or vaccines. This approval generally requires an unequivocal demonstration of the safety and efficacy of a new device, drug, or vaccine. The FDA approval process is generally costly and time-consuming. Because the Company does not currently produce or sell medical devices, drugs, or vaccines, it is not directly affected by these regulations, other than for the ViaStem(TM) product. However, if the Company's customers incorporate the Company's products into products that are medical devices, drugs, or vaccines, such customers will generally be required to obtain such approvals. During the second quarter of 1994, the Company received its first Drug Master File Classification from the FDA for the Company's TCM(TM) product. This classification will expedite the FDA approval process for customers who want to use the Company's TCM(TM) product in the manufacture of drugs or drug substances for human use. Although the Company's present products are not subject to regulations by the FDA or other governmental agencies, it is probable that future products such as ViaStem(TM) may be subject to such regulations. To the extent that the Company is dependent upon new product development, delays in obtaining any required FDA or other governmental approval may adversely affect the Company. The Company applied to the FDA for reclassification as a medical device company so that the Company's products may be used in wider commercial applications, particularly for the human health care market. In March 1993, the Company received this registration. Compliance with federal, state, and local laws, including environmental laws, does not require any material expenditures by the Company, and the Company does not believe that such laws have any material impact on the Company's operations of financial conditions. EMPLOYEES As of October 31, 2001, the Company employed a total of four (4) persons on a full-time basis, of whom two were involved in technical capacities and two in administrative functions, as well as part time and temporary employees. During the next 12 months, the Company anticipates hiring additional business development representatives, technical personnel, and other employees, as needed, based on growth and the introduction of new products. The Company also intends to continue to utilize temporary employees and consultants, as needed, in administrative and general laboratory positions. 9 ITEM 2 - PROPERTIES The Company's executive offices and laboratories are located in a new facility in St. Paul, Minnesota. The Company leases approximately 9,500 square feet of office, laboratory, and warehouse space in this facility. The Company moved into the St. Paul facility during March 1997. ITEM 3 - LEGAL PROCEEDINGS The Company is not presently involved in any material legal proceedings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 10 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS A. MARKET INFORMATION The Company's Common Stock had been traded on the National Association of Securities Dealers Automated Quotation System since March 9, 1992. Prior to this, there was no public market for the Company's Common Stock. Beginning August 15, 1996, the Company's Common Stock began trading on the Over-the-Counter (OTC) Market. Due to a failure to meet a NASDAQ requirement of at least $2,000,000 in net tangible assets, the Company was delisted from the NASDAQ Small Cap Market. The following table sets forth the range of high and low bid quotations of the Company's Common Stock as reported by the OTC. The quotes represent inter-dealer prices on the OTC Market. The OTC Market quotations reflect inter-dealer prices, without retail mark up or commission and may not necessarily represent actual transactions. STOCK PRICES HIGH LOW FISCAL YEAR 2000 November 30, 1999 (1st Quarter)........... $0.30 $0.25 February 29, 2000 (2nd Quarter)........... 2.25 0.13 May 31, 2000 (3rd Quarter)................ 2.63 0.50 August 31, 2000 (4th Quarter)............. 1.00 0.56 FISCAL YEAR 2001 November 30, 2000 (1st Quarter)........... 1.00 0.38 February 28, 2001 (2nd Quarter)........... 0.51 0.19 May 31, 2001 (3rd Quarter)................ 0.47 0.19 August 31, 2001 (4th Quarter)............. 0.51 0.18 FISCAL YEAR 2002 September 1, 2001 through October 31, 2001.......................... $0.40 $0.18 B. HOLDERS As of October 31, 2001, there were approximately 600 holders of the Company's Common Stock. C. DIVIDENDS The Company has not paid any dividends on its Common Stock to date and anticipates that, for the foreseeable future, it will follow a policy of retaining earnings in order to finance the expansion and development of its business. 11 ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following pertains to the results of operations and financial position of the Company for the two fiscal years ended August 31, 2000 and August 31, 2001 and should be read in conjunction with the financial statements included elsewhere herein. RESULTS OF OPERATIONS The Company had a net loss of $364,257 in fiscal 2001 compared to net loss of $307,346 in fiscal 2000 Comparable sales with increased operating expenses contributed to the increased loss for fiscal 2001. Net sales increased 1% or $2,128 to $203,564 in 2001 from $201,436 in 2000, primarily due to the timing of orders received from a manufacturing customer and the amount and timing of distributors orders. One customer accounted for sales of more than 10% of the Company's annual sales in 2001 compared to two customers in 2000. (See Note 10 of Notes to Financial Statements.) The Company also received interest income of $21,506 in 2001 compared to $25,890 in 2000 This is primarily due to the Company's cash position as a result of its March 1992 initial public offering and subsequent private placements. The decrease between years is due to the use of cash in operations. A portion of the proceeds from the March 1992 initial public offering had been invested in the Piper Jaffray Institutional Government Income Fund. Due to an unexpected decline in value of the Fund, which was attributed to the purchase of derivatives, class action litigation by investors began in 1994. In February 1995, Piper Jaffray Companies Inc. announced a $70 million (less attorney fees) settlement to settle such litigation, subject to court approval and acceptance of the settlement by a large percentage of the Funds' shareholders. In August 1995, a federal judge gave preliminary approval to this settlement, which would be a combination of $20 million in cash and $50 million in 8% notes payable. All payments were received from Piper Jaffray in accordance with the schedule outlined by the court. Litigation by investors against auditors of the Fund related to Fund losses was settled in June 2000. In October 2000, the Company received a check in the amount of $20,539 from the KPMG Litigation Settlement fund, which was recognized as other income in fiscal 2001. Marketing and general and administrative expenses increased by 20% or $60,714 from $299,066 in fiscal 2000 to $359,780 in fiscal 2001. The increase between the respective periods was due to the amount and timing of advertising and trade show expenses incurred in connection with the introduction of new products as well as increased salaries and wages and related health care premiums. Legal and professional fees also contributed to the increase as compared to the prior year. Cost of goods sold increased by $1,542 from fiscal 2000, and represented 47% of sales in fiscal 2001 compared to 46% of sales in fiscal 2000 The small increase in the cost of goods sold as a percentage of sales results from the mix of products sold during the comparable periods as new products were introduced and other products were discontinued. Research and development expenses increased by 4% or $6,412 to $151,347 in fiscal 2001. The increase between years results from the timing and amount of professional fees and other costs associated with the patent filing for ViaStem(TM) as well as salaries and wages related to advancing ViaStem(TM) through pre-clinical and clinical trials. The Company added two new products in fiscal 2001, Stemsol(TM) and DMSO/Dextran. The Company presently has 20 products. The basic and diluted loss per common share was ($0.10) in fiscal 2001 compared to ($0.09) in fiscal 2000. 12 In 2002, the Company will continue its efforts to increase sales volume through focused marketing activities and through sales of the newly introduced products. The sales and marketing activities will consist of seeking further relationships with independent sales organizations and distributors, expanding its distribution activities with ICN Pharmaceuticals, and the Sigma Chemical Company and increased contract manufacturing. Newly introduced products will be marketed by the Company and potentially will be made available to one or more distributors. In addition, the Company will continue to focus on the sales of its proprietary products, which have better margins than the basal media and balanced salt solutions. The Company expects operating costs to increase in 2002 due to the expected costs of the clinical tests for ViaStem(TM). However, there can be no assurance that sales will increase or that the Company will be profitable in the future. Management does not expect to realize an operating profit in fiscal 2002. LIQUIDITY AND CAPITAL RESOURCES During 2001, the Company's did not make any capital expenditures. The Company anticipates that capital expenditures for 2002 will be approximately $30,000 to fund additional sales, research and development, and manufacturing growth. This amount does not include any expenditures for clinical investigation. At August 31, 2001, the Company had cash and short-term investments totaling $412,200 This cash and short-term investment position is from the proceeds of the Company's March 1992 initial public offering as well as subsequent private placements in fiscal 1999 and 2000. Management believes that these funds will be sufficient to fund operating losses and capital expenditures for fiscal 2002. The Company is leasing approximately 9,500 square feet of office, laboratory and warehouse space in St. Paul, MN under a seven-year lease. The Company moved into the new facility during March 1997. As partial payment for tenant improvements in the new facility, the Company borrowed $100,000 from a local bank. The loan is secured by a certificate of deposit at the bank. The interest rate for this loan (currently at 5.5%) is tied to the certificate of deposit rate. The loan was renewed in fiscal 2001 for a one year term with a maturity in February 2002. The balance of the tenant improvements over this amount was paid with Company funds. During fiscal 1999 the Company raised $59,400 in additional capital by selling 55,000 units at $1.00 per unit to five accredited investors through a private placement. Each unit consisted of one share of common stock and a warrant to purchase an additional two shares of common stock at an exercise price of $0.04 per share. The units were sold at a premium to the share price on the OTC Bulletin Board at the time of the placement. During the second quarter of fiscal 2000 the Company raised $175,150 in additional capital by selling 145,000 units at $1.15 per unit to five investors through a private placement. Each unit consisted of one share of common stock and a warrant to purchase an additional two shares of common stock at an exercise price of $0.10 per share. During the third quarter of fiscal 2000 additional funds in the amount of $211,750 were raised by selling units at $1.15 per unit and common stock at $1.40 per share to other investors in a private placement. The additional funds raised will be primarily used for advancing ViaStem(TM) through the necessary testing before FDA approval can be obtained. The Company intends to pursue additional financing in fiscal 2002, subject to prevailing market conditions. There is no guarantee however, that the Company will be able to successfully raise an adequate amount of additional funds. In addition, there can be no assurance that the Company will be able to obtain the necessary FDA approvals for ViaStem(TM). The Company sold subscriptions for 157,659 shares of common stock with a warrant at $0.47 per unit in a private offering in August 2001. At this time, management is not aware of any factors that would have a materially adverse impact on cash flow beyond fiscal 2002, other than the potential for continuing losses and the potential expenses associated with clinical trials for ViaStem(TM). Management expects operating losses to continue in fiscal 2002. 13 EFFECTS OF INFLATION The Company believes inflation will not have a significant impact on the Company's operations. SEASONALITY The Company's operations are not subject to seasonal fluctuations. ITEM 7 - FINANCIAL STATEMENTS The information required by this item is incorporated by reference to the financial statements, reports, and notes beginning on page F-1. ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On August 10, 2001, a Form 8-K was filed reflecting a change in accounting firms from Arthur Andersen LLP to Wipfli Ullrich Bertelson LLP. The Form 8-K was amended in certain respects on August 24, 2001. The change in accountants was not due to a disagreement in accounting procedures or principles. 14 PART III ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The following table sets forth certain information regarding the director and executive officer of the Company as of October 31, 2001. Directors hold office until the next Annual Shareholder's meeting. NAME AGE POSITION ---- --- -------- Milo R. Polovina 45 Chairman of the Board, President Chief Executive Officer, Treasurer, and Secretary John C. Stoner, D.V.M. 68 Director MILO R. POLOVINA has been President, Chief Executive Officer, Treasurer, and Secretary of the Company and has served as a director since 1985. JOHN C. STONER, D.V.M. was elected as a director by the Board of Directors in July 2001 to fill a vacancy on the Company's Board of Directors. Dr. Stoner has been a business consultant since 1997. From 1989 to 1997, Dr. Stoner served as the Director for Commercial Development for Solvay Animal Health, Inc. located in Mendota Heights, Minnesota. Dr. Stoner has been engaged as a consultant by the Company in the past and will likely perform additional consulting services in the future. SCIENTIFIC ADVISORY BOARD Although the Company has a Scientific Advisory Board established to advise the Company on product opportunities and certain advances in biotechnology, the Company intends to establish a Scientific Advisory Board specifically dedicated to ViaStem(TM). The Company is currently seeking qualified applicants with backgrounds in transplantation medicine to serve on the ViaStem(TM) Advisory Board. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officers and directors, and persons who own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership on Form 3 and changes in Ownership on Forms 4 or 5 with the Securities and Exchange Commission (SEC). Such officers, directors, and ten percent shareholders are also required by SEC rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for such persons, the Company believes that, during the fiscal year ended August 31, 2001, all Section 16(a) filing requirements applicable to its officers, directors, and ten percent stockholders were complied with. 15 ITEM 10 - EXECUTIVE COMPENSATION The following table sets forth the cash and non-cash compensation for each of the last three fiscal years awarded to or earned by the Chief Executive Officer of the Company, the only officer whose annual compensation exceeded $100,000. SUMMARY COMPENSATION TABLE
Long-Term Annual Compensation Compensation ------------------- ------------ Name and Fiscal Salary Bonus Compensation Options Principal Position Year $ $ $(1) # ------------------ -------- ------ ----- ------------ ------- Milo R. Polovina 2001 135,600 0 -- 0 President, Chief 2000 132,800 0 -- 45,000 Executive Officer, 1999 135,838 0 -- 0 Treasurer, and Secretary
(1) The total amount of personal benefits paid to Mr. Polovina for fiscal 2001 was less than the lesser of (i) $50,000 or (ii) 10% of his total reported salary and bonus. No options were granted to Milo R. Polovina during fiscal 2001. No executive officer exercised options during fiscal 2001. The following table sets forth, for the Chief Executive Officer, the number and year-end value of unexercised options. (All such options were granted at the fair market value of the underlying shares as of the respective grant dates.) OPTION EXERCISES AND VALUE OF OPTIONS AT END OF FISCAL 2001
Number of Unexercised Value of Unexercised Options at End of In-the-Money Options Fiscal 2001 at End of Fiscal 2001(1) --------------------- ------------------------ Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Milo R. Polovina 205,000 ---- $6,375 ----
(1) Calculated on the basis of the fair market value of the underlying securities at August 31, 2001, ($0.20) minus the exercise price per share (ranging from $0.125 to $1.50). STOCK OPTIONS AND WARRANTS The Company has issued certain Common Stock warrants and has a stock option plan which permits the granting of incentive stock options or non-qualified options to key employees and outside directors. Options are granted at 100 percent of the market value at the date of grant and are exercisable over periods up to ten years from grant date in various stages. A stock option plan, initiated prior to the Company's initial public offering (IPO), reserved 200,000 shares of Common Stock available for future issuance. Additionally, certain options that were issued prior to the IPO are currently outstanding. No options or warrants have been exercised under the plan during Fiscal 2000 or 2001. At both August 31, 2001 and 2000, options for 292,000 shares were exercisable. The total options outstanding at August 31, 2001 are 307,000, with exercise prices of $0.125 to $1.50 per share. 16 EXECUTIVE EMPLOYMENT AGREEMENT In January 1995, the Company entered into a revised employment agreement with Mr. Milo R. Polovina. The agreement provides that Mr. Polovina will serve as Chairman of the Board, Chief Executive Officer, and President of the Company for a period of ten years and will receive a minimum annual base salary of $126,000. The agreement automatically extends for an additional period of one year on each anniversary of the agreement; provided, however, that if the agreement is terminated for any reason other than (i) a change in control, (ii) voluntary resignation, (iii) death, (iv) disability, (v) retirement, or (vi) cause, Mr. Polovina will be entitled to receive his annual base salary and related benefits for a period of five calendar years following the termination. Mr. Polovina is also eligible for an annual bonus, determined in the discretion of the Board of Directors, which shall in no event exceed one-half of his annual salary. This agreement also contains a provision relating to compensation in the event of a change in control of the Company followed by a termination of Mr. Polovina's employment. A "Change in Control" will occur if any person, other than Mr. Polovina, becomes the beneficial owner of securities representing 30% or more of the combined voting power of the outstanding securities of the Company, the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation, or if the persons who were directors of the Company immediately prior to the change in control cease to constitute a majority of the Board of the Directors of the Company or of its successor. Upon a change in control, if Mr. Polovina's employment is terminated by the Company for reasons other than disability or cause (as defined), he will receive his annual composition pursuant to the agreement for the ten-year term then remaining. In addition, in such a situation, Mr. Polovina will be entitled to require the Company to purchase his shares in the Company at their then fair market value. DIRECTOR COMPENSATION Non-employee directors receive reimbursement for travel expenses up to $75 related to each Board of Directors meeting attended, and for each committee meeting held at a date other than a date on which a Board meeting is held. Under the Company's Director Stock Option Program (the "Program"), the Company has granted stock options to non-employee directors and intends to continue to grant stock options to attract additional directors. Under the Program, each non-employee director is granted an initial option for 15,000 shares of Common Stock for serving on the Board of Directors. These options vest at 5,000 shares per year for three years commencing one year from the date of grant. The exercise price of any options granted will be not less than the fair market value of the underlying Common Stock on the date of grant. Directors are also eligible to receive supplemental options on an annual basis. 17 ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of October 31, 2001 by: (i) each director of the Company, (ii) all directors and executive officers as a group, (iii) the Chief Executive Officer, and (iv) each shareholder who own more than 5% of the outstanding shares of Common Stock. Except as otherwise indicated, the Company believes each person listed below possesses sole voting and investment power with respect to the shares indicated. Beneficial ownership means the shareholder has voting or investment power with respect to the shares. Shares of Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person. NAME AND ADDRESS SHARES BENEFICIALLY OWNED OF BENEFICIAL OWNER NUMBER PERCENT ------------------- ------ ------- DIRECTORS AND EXECUTIVE OFFICERS Milo R. Polovina 821,600(1) 20.6 St. Paul, MN 55128 John C. Stoner 0 Chaska, MN 55318 All directors and executive officers 821,600 20.6 as a group (2 persons) PRINCIPAL HOLDERS Arnold & Joy Ann Espeseth 191,800 5.1 Winger, MN 56592 Gregory E. Meyer 319,000 8.6 Monmouth Beach, NJ 07750 Samuel & Josephine Poser 198,686 5.3 Columbus, WI 53925 James E. Veiman 434,500 11.6 Hugo, MN 55038 ------------------------- (1) Includes (a) 559,100 shares of stock owned by Mr. Polovina; (b) 2,500 shares owned by Mr. Polovina's wife, an employee of the Company; (c) 3,000 shares owned beneficially for Mr. Polovina's children; (d) options granted to Mr. Polovina for exercise within 60 days to purchase 205,000 shares; and (e) options granted to Mr. Polovina's wife for exercise within 60 days to purchase 52,000 shares. ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Polovina has an employment agreement with the Company. (See "Executive Compensation -- Executive Employment Agreement".) 18 PART IV ITEM 13 - EXHIBITS, AND REPORTS ON FORM 8-K A. Documents filed: 1. FINANCIAL STATEMENTS. The following documents are filed as part of this report on Form 10-KSB: PAGE ---- Report of Independent Public Accountants............... F-1 Balance Sheets -- August 31, 2001 and 2000............. F-2 Statements of Operations -- Years ended August 31, 2001 and 2000............................. F-4 Statements of Shareholders' Equity -- Years ended August 31, 2001 and 2000................. F-5 Statements of Cash Flows -- Years ended August 31, 2001 and 2000............................. F-6 Notes to Financial Statements.......................... F-7 2. EXHIBITS. 3.1 Articles of Incorporation* 3.2 By-Laws* 10.2 Employment Agreement with Milo R. Polovina dated September 25, 1991* 10.3 Stock Plan* 10.4 Director Stock Option Program* 10.5 Employee Stock Purchase Plan+ 10.6 Lease agreement with Oakdale Properties LLC located at 1311 Helmo Avenue, St. Paul, Minnesota, dated December 6, 1996** 10.7 Revised employment agreement with Milo R. Polovina dated January 1995+ 25 Power of Attorney (included on signature page) ------------------ * Incorporated by reference to the Company's Registration Statement on Form S-18 (No. 33-42573C), which became effective on March 9, 1992. + Incorporated by reference to Company's Form 10-KSB dated 8/31/95. ** Incorporated by reference to Company's Form 10-QSB dated 2/28/97. B. Reports on Form 8-K: On August 10, 2001, a Form 8-K was filed reflecting a change in accounting firms from Arthur Andersen LLP to Wipfli Ullrich Bertelson LLP. The Form 8-K was amended in certain respects on August 24, 2001. The change in accountants was not due to a disagreement in accounting procedures or principles. 19 PROTIDE PHARMACEUTICALS, INC. St. Paul, Minnesota FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION Years Ended August 31, 2001 and 2000 PROTIDE PHARMACEUTICALS, INC. FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION Years Ended August 31, 2001 and 2000 - -------------------------------------------------------------------------------- TABLE OF CONTENTS INDEPENDENT AUDITOR'S REPORT.................................................F-1 FINANCIAL STATEMENTS Balance Sheets..........................................................F-2 Statements of Operations................................................F-4 Statements of Stockholders' Equity......................................F-5 Statements of Cash Flows................................................F-6 Notes to Financial Statements...........................................F-7 [LOGO] WIPFLI ------------------ CPAs & CONSULTANTS INDEPENDENT AUDITOR'S REPORT Board of Directors Protide Pharmaceuticals, Inc. St. Paul, Minnesota We have audited the balance sheet of Protide Pharmaceuticals, Inc. as of August 31, 2001, and the related statements of operations and 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 Protide Pharmaceuticals, Inc. as of August 31, 2000, were audited by other auditors whose report dated September 22, 2000, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 2001 financial statements referred to above present fairly, in all material respects, the financial position of Protide Pharmaceuticals, Inc. as of August 31, 2001, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Wipfli Ullrich Bertelson LLP September 25, 2001 Chippewa Falls, Wisconsin F-1 PROTIDE PHARMACEUTICALS, INC. BALANCE SHEETS August 31, 2001 and 2000 - --------------------------------------------------------------------------------
ASSETS 2001 2000 - ------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $197,200 $ 63,935 Short-term investments 215,000 560,867 Note receivable - Related party 0 6,633 Accounts receivable - Trade 26,448 33,816 Inventories 52,711 53,191 Other 7,667 13,361 - ------------------------------------------------------------------------------------------------- Total current assets 499,026 731,803 - ------------------------------------------------------------------------------------------------- Property and equipment: Leasehold improvements 138,426 138,426 Laboratory and production equipment 226,937 226,937 Furniture and office equipment 94,822 94,822 - ------------------------------------------------------------------------------------------------- Totals 460,185 460,185 Less - Accumulated depreciation 383,622 354,522 - ------------------------------------------------------------------------------------------------- Net property and equipment 76,563 105,663 - ------------------------------------------------------------------------------------------------- Other assets - Intangibles 48,340 51,852 - ------------------------------------------------------------------------------------------------- TOTAL ASSETS $623,929 $889,318 =================================================================================================
F-2 PROTIDE PHARMACEUTICALS, INC. BALANCE SHEETS August 31, 2001 and 2000 - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 - ---------------------------------------------------------------------------------------------------------- Current liabilities: Note payable - Bank $ 72,157 $ 73,926 Accounts payable: Trade 12,174 7,277 Other 20,000 0 Accrued and other liabilities: Payroll, bonuses, and vacation 25,608 26,789 Taxes other than income taxes 7,955 10,134 - ---------------------------------------------------------------------------------------------------------- Total current liabilities 137,894 118,126 - ---------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock - $.01 par value: Authorized - 40,000,000 Issued and outstanding - 3,733,169 shares in 2001 and 3,683,169 in 2000 37,332 36,832 Common stock subscribed - 157,659 shares in 2001 1,577 0 Additional paid-in capital 5,768,669 5,691,646 Accumulated deficit (5,321,543) (4,957,286) - ---------------------------------------------------------------------------------------------------------- Total stockholders' equity 486,035 771,192 - ---------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 623,929 $ 889,318 ==========================================================================================================
See accompanying notes to financial statements. F-3 PROTIDE PHARMACEUTICALS, INC. STATEMENTS OF OPERATIONS Years Ended August 31, 2001 and 2000 - --------------------------------------------------------------------------------
2001 2000 - ------------------------------------------------------------------------------------------- Sales $ 203,564 $ 201,436 Cost of sales 94,661 93,119 - ------------------------------------------------------------------------------------------- Gross profit on sales 108,903 108,317 - ------------------------------------------------------------------------------------------- Operating expenses: Research and development 151,347 144,935 Marketing and sales 127,849 90,030 General and administrative 231,931 209,036 - ------------------------------------------------------------------------------------------- Total operating expenses 511,127 444,001 - ------------------------------------------------------------------------------------------- Loss from operations (402,224) (335,684) Other income (deductions): Interest expense (4,078) (4,303) Interest and dividends 21,506 25,890 Other 20,539 6,751 - ------------------------------------------------------------------------------------------- Net loss ($ 364,257) ($ 307,346) =========================================================================================== Basic and diluted net loss per common share ($ 0.10) ($ 0.09) =========================================================================================== Weighted average number of shares outstanding 3,726,658 3,271,292 ===========================================================================================
See accompanying notes to financial statements. F-4 PROTIDE PHARMACEUTICALS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended August 31, 2001 and 2000 - --------------------------------------------------------------------------------
COMMON STOCK COMMON STOCK SUBSCRIBED ADDITIONAL ------------------------- ---------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL - ----------------------------------------------------------------------------------------------------------------------------- Balances at August 31, 1999 2,909,169 $ 29,092 0 $ 0 $ 5,312,486 ($4,649,940) $ 691,638 Shares issued 774,000 7,740 0 0 379,160 0 386,900 Net loss 0 0 0 0 0 (307,346) (307,346) - ----------------------------------------------------------------------------------------------------------------------------- Balances at August 31, 2000 3,683,169 36,832 0 0 5,691,646 (4,957,286) 771,192 Shares issued 50,000 500 0 0 4,500 0 5,000 Shares subscribed 0 0 157,659 1,577 72,523 0 74,100 Net loss 0 0 0 0 0 (364,257) (364,257) - ----------------------------------------------------------------------------------------------------------------------------- Balances at August 31, 2001 3,733,169 $ 37,332 157,659 $ 1,577 $ 5,768,669 ($5,321,543) $ 486,035 =============================================================================================================================
See accompanying notes to financial statements. F-5 PROTIDE PHARMACEUTICALS, INC. STATEMENTS OF CASH FLOWS Years Ended August 31, 2001 and 2000 - --------------------------------------------------------------------------------
2001 2000 - ------------------------------------------------------------------------------------------------ Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net loss ($364,257) ($307,346) - ------------------------------------------------------------------------------------------------ Adjustments to reconcile net loss to net cash used in operating activities: Provision for depreciation and amortization 32,612 36,616 Changes in operating assets and liabilities: Accounts receivable 7,368 (13,163) Inventories 480 4,715 Other assets 5,694 (7,560) Accounts payable 24,897 (5,551) Accrued and other liabilities (3,360) 8,857 - ------------------------------------------------------------------------------------------------ Total adjustments 67,691 23,914 - ------------------------------------------------------------------------------------------------ Net cash used in operating activities (296,566) (283,432) - ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Net (increase) decrease in short-term investments 345,867 (182,353) Proceeds from note receivable - related party 6,633 2,491 Capital expenditures 0 (8,676) - ------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 352,500 (188,538) - ------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net decrease in short-term debt (1,769) (1,819) Proceeds from issuance of common stock 5,000 386,900 Proceeds from issuance of common stock subscriptions 74,100 0 - ------------------------------------------------------------------------------------------------ Net cash provided by financing activities 77,331 385,081 - ------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 133,265 (86,889) Cash and cash equivalents at beginning 63,935 150,824 - ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end $ 197,200 $ 63,935 ================================================================================================ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for interest $ 4,078 $ 4,303
See accompanying notes to financial statements. F-6 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPAL BUSINESS ACTIVITY Protide Pharmaceuticals, Inc. (the Company) is a biotechnology company incorporated under the laws of the state of Minnesota. The Company is devoted to the discovery, development, and commercialization of technologies and processes in clinical cell therapy and transfusion medicine, specifically in the areas of cancer, genetic disorders, cell engineering and transplantation. The focus of Protide is in the area of gene therapy, cell therapy, and contract manufacturing for companies and educational institutions that are working in these areas. The Company has experienced recurring losses since inception and has an accumulated deficit of approximately $5,322,000 at August 31, 2001. The Company expects to incur a loss in fiscal year 2002, which will be funded using existing cash and short-term investments. Current and anticipated projects require additional capital. The Company may require funds to conduct marketing, research, preclinical studies, clinical trials, and other such activities relating to the commercialization of potential products. However, the Company's access to capital funding is uncertain. If adequate funds are not available, the Company may be required to: a. Delay, reduce the scope of, or eliminate one or more programs. b. Obtain funds from collaborative partners, or others, that may require the Company to relinquish technologies, product candidates or products that the Company would otherwise seek to develop or commercialize. c. Raise additional capital by issuing equity securities, which may result in further dilution to stockholders and new investors with rights superior to existing stockholders, if it is even possible to raise equity capital. If required future financing is unavailable for any reason, the Company may be forced to discontinue operations. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of the accompanying financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. F-7 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) CASH EQUIVALENTS The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost, determined on the first-in, first-out (FIFO) method, or market. PROPERTY, EQUIPMENT, AND DEPRECIATION Property and equipment are valued at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of property and equipment are reflected in income. Depreciation is computed on the straight-line and accelerated methods for financial reporting purposes, based on the estimated useful lives of the assets, which range from five to seven years. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically assesses the potential for impairment of its long-lived assets (primarily property, equipment, and patents). If any such impairment exists, the related assets will be written down to fair value in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." No impairment losses have been incurred through August 31, 2001. INTANGIBLES Costs associated with obtaining patents are capitalized and amortized on a straight-line basis over 17 years. Capitalized patent costs are shown net of accumulated amortization of $12,797 and $9,285 as of August 31, 2001 and 2000, respectively. INCOME TAXES Deferred income taxes have been provided under the liability method. Deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates which will be in effect when these differences are expected to reverse. Deferred tax expense is the result of changes in the deferred tax asset and liability. F-8 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) REVENUE RECOGNITION Revenue is recognized when product is shipped to the customer. Bill and hold sales, in which delivery is delayed at the customer's request, are recognized when conditions for such revenue recognition are met, principally when the completed product is ready for delivery and transfer of the risks and rewards of ownership to the buyer has occurred. BASIC AND DILUTED LOSS PER COMMON SHARE Basic loss per common share is computed based upon the weighted average number of common shares outstanding during the year, while diluted loss per share considers the effect of common stock equivalents. Basic and diluted loss per share is the same since all common stock equivalents are antidilutive. NOTE 2 INVENTORIES Inventories consist of the following: 2001 2000 ----------------------------------------------------------------------- Raw materials $43,110 $41,017 Finished products 9,601 12,174 ----------------------------------------------------------------------- Total inventory $52,711 $53,191 ======================================================================= NOTE 3 NOTE PAYABLE - BANK At August 31, 2001, the Company has a $72,157 bank note, secured by a certificate of deposit held at the same bank, which matures January 2002. The interest rate is 5.5%. NOTE 4 INCOME TAXES The provision (credit) for income taxes consists of the following: 2001 2000 ----------------------------------------------------------------------- Deferred tax credit ($142,000) ($104,000) Valuation allowance 142,000 104,000 ----------------------------------------------------------------------- Total provision for income taxes $ 0 $ 0 ======================================================================= F-9 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4 INCOME TAXES (Continued) Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. As of August 31, 2001 and August 31, 2000, deferred tax assets were comprised of the following: 2001 2000 ----------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 1,646,000 $ 1,502,000 Capital loss carryforwards 0 316,000 Tax credit carryforwards 70,000 40,000 Valuation allowance (1,716,000) (1,858,000) ----------------------------------------------------------------------- Deferred tax asset $ 0 $ 0 ======================================================================= Due to the Company's loss experience, a valuation allowance has been established to offset all future tax benefits resulting from operating and other income tax carryforwards. The Company's capital loss carryforward expired in 2001. The provision for income taxes varies from the amount of income tax determined by applying the applicable federal statutory income tax rate to pretax income as a result of the following differences: PERCENT OF PRETAX INCOME ----------------- 2001 2000 ----------------------------------------------------------------------- Statutory federal income tax rates 34% 34% Decrease in rate resulting from: Tax credits (1) (1) Net operating loss carryforwards valuation allowance (33) (33) ----------------------------------------------------------------------- Effective tax rates 0% 0% ======================================================================= For income tax purposes, net operating loss carryforwards of approximately $4,480,000 federal and $2,976,000 Minnesota exist which expire in various amounts through 2021. Investment credit carryovers of $70,000 expire in various amounts through 2016. F-10 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5 STOCK OPTIONS The Company had granted options to purchase 349,300 shares of common stock. The Company has also adopted a stock option plan under which 200,000 shares of common stock have been reserved for future issuance. The weighted average fair value of options granted in fiscal 2001 was $0.36. The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2001: risk-free interest rate of 3.95% and expected lives of five years for the options. Options granted, exercised, and forfeited during 2001 and 2000 are as follows: WEIGHTED-AVERAGE SHARES EXERCISE PRICE PER SHARE ----------------------------------------------------------------------- BALANCE, August 31, 1999 212,000 $0.125 to 1.50 Granted 85,000 0.125 Canceled or expired (5,000) 1.00 ----------------------------------------------------------------------- BALANCE, August 31, 2000 292,000 0.125 to 1.50 Granted 15,000 0.47 ----------------------------------------------------------------------- BALANCE, August 31, 2001 307,000 0.125 to 1.50 ======================================================================= The Company follows the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized since the grant price is equal to fair value at the grant dates. Had compensation cost been determined pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," there would be no significant effect on net loss or on the basic and diluted loss per common share. F-11 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6 COMMON STOCK The Company sold subscriptions for 157,659 shares of common stock with a warrant at $0.47 per share in a private offering in August 2001. In December 2000, 50,000 warrants were exercised at $.10 per share for proceeds of $5,000. The Company sold 270,000 shares of common stock at $1.15 per share in private offerings in February and March of 2000. In connection with the private offerings, warrants were issued to purchase an additional 540,000 shares of common stock at an exercise price of $0.10 per share. In February and March 484,000 warrants were exercised for proceeds of $48,400. The Company sold 20,000 shares of common stock at $1.40 per share in a private offering in March 2000. NOTE 7 LEASES The Company leases its office facility under an operating lease agreement expiring in January 2004 with an option for two, five-year renewals. Future minimum payments under this noncancelable operating lease consisted of the following: OPERATING LEASE ----------------------------------------------------------------------- 2002 $ 73,700 2003 73,700 2004 30,700 ------------ Total minimun lease payments $178,100 ============ Rental expense for all operating leases was $103,600 and $100,200 in 2001 and 2000, respectively. F-12 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8 RELATED PARTY TRANSACTIONS The Company advanced $11,000 under a promissory note to the chief executive officer of the Company during 1999 at an interest rate of six percent, payable upon demand. The balance outstanding at August 31, 2000 was $6,633. The note was paid in full during 2001. The Company has entered into an employment agreement with its chief executive officer, for a period of ten years, providing for an annual base salary of not less than $126,000, an annual bonus (not to exceed one-half annual salary), and performance stock options awarded at the discretion of the board of directors. No bonus was authorized in fiscal years 2001 or 2000. During fiscal year 2000, 45,000 performance stock options were issued at an option price of $0.125. No performance stock options were issued during fiscal year 2001. NOTE 9 CONTINGENCIES In the ordinary course of conducting business, the Company occasionally becomes involved in legal proceedings relating to contracts, environmental issues, or other matters. While any proceeding or litigation has an element of uncertainty, management of the Company believes that the outcome of any pending or threatened actions will not have a material adverse effect on the business or financial condition of the Company. NOTE 10 MAJOR CUSTOMERS In 2001, one major customer accounted for 16 % of gross sales aggregating $31,800. In 2000, two major customers accounted for 14% and 11% of gross sales aggregating $27,400 and $21,900, respectively. NOTE 11 CONCENTRATION OF RISK The Company maintains its cash in bank deposit accounts at various financial institutions. The balances, at times, may exceed federally insured limits. At August 31, 2001, the Company exceeded the insured limit by approximately $186,000. F-13 PROTIDE PHARMACEUTICALS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 12 RECLASSIFICATIONS Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 classifications. NOTE 13 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods, and assumptions for the Company's financial instruments are summarized as follows: Cash, Cash Equivalents, and Short-Term Investments -------------------------------------------------- The carrying values approximate the fair value for these assets. Short-Term Debt --------------- The carrying value approximates the fair value for the note payable. F-14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROTIDE PHARMACEUTICALS, INC. By: /s/ Milo R. Polovina ------------------------------- Milo R. Polovina Chairman of the Board and President and CEO Date: November 21, 2001 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Milo R. Polovina as attorney-in-fact for him in any and all capacities, to sign any amendments to this Report on Form 10-KSB and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, may do or cause to be done by virtue of hereof. Pursuant to the requirements of the Exchange Act, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Milo R. Polovina Chairman of the Board, November 21, 2001 - --------------------------- President, CEO and Director Milo R. Polovina (principal executive officer and principal financial officer) /s/ John C Stoner, D.V.M. Director November 21, 2001 - --------------------------- John C. Stoner, D.V.M. -----END PRIVACY-ENHANCED MESSAGE-----