Attached files
| file | filename |
|---|---|
| EX-4.9 - PROTALEX INC | v195366_ex4-9.htm |
| EX-31.2 - PROTALEX INC | v195366_ex31-2.htm |
| EX-23.1 - PROTALEX INC | v195366_ex23-1.htm |
| EX-32.2 - PROTALEX INC | v195366_ex32-2.htm |
| EX-32.1 - PROTALEX INC | v195366_ex32-1.htm |
| EX-31.1 - PROTALEX INC | v195366_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
|
þ
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For Fiscal Year Ended May 31, 2010
OR
|
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the Transition Period from
to
Commission
File 000-28385
PROTALEX,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
91-2003490
|
|
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
Employer
Identification
Number)
|
|
|
133
Summit Avenue, Suite 22, Summit, NJ
|
18938
|
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(215)
862-9720
(Registrant’s
telephone number, including area code)
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)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨
No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes ¨
No þ
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. Yes þ No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated or a smaller reporting company filer. See
definition of “large accelerated filer,” ”accelerated filer” and smaller
reporting company in Rule 12b-2 of the Act. Check one:
Large
accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨
Smaller Reporting Company þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
No ¨
The
approximate aggregate market value of Common Stock held by non-affiliates of the
registrant was $4,122,029 as of November 30, 2009, the last business day of the
registrant’s most recently completed second fiscal quarter.
The
number of shares of the registrant’s Common Stock outstanding as of August 26,
2010 was 72,078,724.
DOCUMENTS
INCORPORATED BY REFERENCE
None.
PROTALEX,
INC.
FORM
10-K
May
31, 2010
TABLE
OF CONTENTS
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PART
I
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ITEM 1.
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BUSINESS
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2
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ITEM 1A.
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RISK FACTORS
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11
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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19
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ITEM 2.
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PROPERTIES
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19
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ITEM 3.
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LEGAL PROCEEDINGS
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19
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ITEM 4.
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[REMOVED AND RESERVED.]
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19
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PART II
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ITEM 5.
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MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
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19
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ITEM 6.
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SELECTED FINANCIAL DATA
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20
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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20
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
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23
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
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24
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ITEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
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24
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ITEM 9A(T).
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CONTROLS AND PROCEDURES
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24
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ITEM 9B.
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OTHER INFORMATION
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24
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PART III
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
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25
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ITEM 11.
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EXECUTIVE COMPENSATION
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28
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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31
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
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32
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ITEM 14.
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PRINCIPAL ACCOUNTING FEES AND
SERVICES
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33
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PART IV
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||
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ITEM 15.
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EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
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33
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EXHIBIT INDEX
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34
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SIGNATURES
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35
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Ex-31.1
Section 302 Certification of the CEO
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||
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Ex-31.2
Section 302 Certification of the CFO
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||
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Ex-32.1
Section 906 Certification of the CEO
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||
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Ex-32.2
Section 906 Certification of the CFO
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||
i
NOTICE
ABOUT FORWARD-LOOKING STATEMENTS
Various
statements made in this Annual Report on Form 10-K are forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements include those which express plan, anticipation,
intent, contingency, goals, targets or future development and/or otherwise are
not statements of historical fact. We have based these forward-looking
statements on our current expectations and projections about future events and
they are subject to risks and uncertainties known and unknown which could cause
actual results and developments to differ materially from those expressed or
implied in such statements. These forward-looking statements include statements
about the following:
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•
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the
status and anticipated timing of regulatory review and approval, if any,
for our product candidates;
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•
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our
product development efforts, including results from clinical
trials;
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•
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anticipated
dates of clinical trial initiation, completion and announcement of trial
results by us;
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•
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anticipated
clinical trial results and regulatory submission dates for our product
candidates by us;
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•
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analysis
and interpretation of data by regulatory
authorities;
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•
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anticipated
operating losses and capital
expenditures;
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•
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estimates
of the market opportunity and the commercialization plans for our product
candidates;
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•
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our
intention to rely on third parties for
manufacturing;
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•
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the
scope and duration of intellectual property protection for our
products;
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•
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our
ability to raise additional capital;
and
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•
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our
ability to acquire or in-license products or product
candidates;
|
In some
cases, you can identify forward-looking statements by terminology such as “may”,
“will”, “should”, “could”, “would”, “expect”, “plan”, “anticipate”, “believe”,
“estimate”, “target”, “goal”, “continue”, or the negative of such terms or other
similar expressions. Factors that might cause or contribute to differences
include, but are not limited to, those discussed in Item 1A. Risk Factors
of this Annual Report and discussed in our other Securities and Exchange
Commission (“SEC”) filings.
We urge
you to carefully review and consider the disclosures found in these filings, all
of which are available in the SEC EDGAR database at www.sec.gov. Given the
uncertainties affecting biotechnology companies in the development stage, you
are cautioned not to place undue reliance on any such forward-looking
statements, any of which may turn out to be wrong due to inaccurate assumptions,
unknown risks, uncertainties or other factors. We undertake no obligation to
(and expressly disclaim any such obligation to) publicly update or revise the
statements made herein or the risk factors that may relate thereto whether as a
result of new information, future events or otherwise.
The
following discussions should be read in conjunction with our audited Financial
Statements and related notes thereto, and the Risk Factors in Item 1A
included elsewhere in this Annual Report.
PART
I
ITEM 1.
BUSINESS
Overview
We are a
development stage company which has been engaged in developing a class of
biopharmaceutical drugs for treating autoimmune inflammatory diseases. Our
lead product PRTX-100, is formulated with highly-purified staphylococcal protein
A, which is an immune modulating protein produced by bacteria.
PRTX-100
has demonstrated effectiveness in animal models of autoimmune diseases as well
as demonstrated activity on cultured human immune cells at very low
concentrations, although the effectiveness of PRTX-100 shown in pre-clinical
studies using animal models may not be predictive of the results that we would
see in future human clinical trials. The safety, tolerability, and
pharmacokinetics (“PK”) of PRTX-100 in humans have now been characterized in
three clinical studies. A proof of concept study to evaluate safety and
potential efficacy of PRTX-100 in patients with active rheumatoid arthritis (RA)
is now underway in South Africa and is expected to be completed in the
second calendar quarter of 2011. We currently have no products on the
market.
In April
2009, we ceased all operations and terminated all employees in light of
insufficient funds to continue our clinical trials and related product
development. Our business was dormant until new management took control of
our operations in November 2009 following the change in control transaction more
fully described below. We are currently actively pursuing the commercial
development of PRTX-100 for the treatment of RA.
We
maintain an administrative office in Summit, New Jersey and currently outsource
all of our product development and regulatory activities, including clinical
trial activities, manufacturing and laboratory operations to third-party
contract research organizations and facilities.
Change
in Control Transaction
On
November 11, 2009 (the “Effective Date”), we consummated a financing
transaction, that resulted in a change in control in which we raised $3,000,000
of additional working capital pursuant to a Securities Purchase Agreement dated
that date (the “Purchase Agreement”) with Niobe Ventures, LLC (“Niobe”), a
Delaware limited liability company (the “Financing”). Pursuant to the
Purchase Agreement, we issued to the Niobe (i) 43,478,260 restricted shares of
our common stock at a purchase price of $0.046 per share (or $2,000,000 in the
aggregate) and (ii) a senior secured convertible promissory note in the
principal amount of $1,000,000 and convertible into shares of our common stock
at an initial conversion price equal to $0.046 per share (the “Secured
Note”).
The
Secured Note bears interest at a rate of 3% per annum and matures on November
13, 2012. In order to secure our obligations under the Secured Note, we
also entered into a Security Agreement dated the Effective Date (the “Security
Agreement”) granting Niobe a security interest in substantially all of our
personal property and assets, including our intellectual property. The
Secured Note is convertible at any time, at the option of the holder, subject
only to the requirement that we have sufficient authorized shares of common
stock after taking into account all outstanding shares of common stock and the
maximum number of shares issuable under all issued and outstanding convertible
securities. In addition, the Secured Note will automatically be converted
if (i) we raise in excess of $7.5 million of gross proceeds in an equity
offering, (ii) certain milestones are achieved in our Phase 1b and RA trial of
PRTX-100 in South Africa or (iii) we undertake certain fundamental transactions
as defined in the Secured Note (such as a merger, sale of all of our assets,
exchange or tender offer, or reclassification of our stock or compulsory
exchange). The Secured Note also provides for the adjustment of the
conversion price in the event of stock dividends and stock splits, among other
items, and provides for acceleration of maturity upon an event of default (as
defined in the Secured Note).
As
contemplated by the Purchase Agreement, all of our executive officers and all of
the members of our Board prior to the closing of the Financing, with the
exception of Frank M. Dougherty, resigned effective concurrently with the
closing of the Financing. Mr. Dougherty resigned effective upon the
expiration of the 10-day notice period required by Rule 14f-1 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). In
addition, effective upon the closing of the Financing, our Board appointed
Arnold P. Kling as a director and then elected him as president and elected Kirk
M. Warshaw as chief financial officer and secretary.
2
In
addition, on the Effective Date, we terminated (i) the Investor Rights Agreement
dated September 18, 2003 among us, vSpring SBIC L.P. (“vSpring”) and certain of
the investors set forth on Schedule A thereto (the “2003 IRA”) and the
Registration Rights Agreement dated May 25, 2005 among us, vSpring and certain
of the investors set forth on Schedule I thereto (the “2005 RRA”) in accordance
with their respective terms and (ii) stock options exercisable for an aggregate
of 1,233,571 shares of our common stock, approximately 41% of our then
outstanding stock options, all of which were held by three option holders,
Steven H. Kane, our former CEO, Marc L. Rose, our former CFO and
vSpring.
About
PRTX-100
PRTX-100
is a highly-purified form of the Staphylococcal bacterial protein known as
Protein A. PRTX-100 has the ability, at very low concentrations, to bind
to and to down regulate activation of human B-lymphocytes and macrophages which
are the key cells mediating inflammation in certain autoimmune diseases.
Laboratory studies indicate that the mechanism involves interaction with
specific intracellular signaling pathways. Pre-clinical studies also
demonstrate that very low doses of PRTX-100 have potent therapeutic effects in
certain models of immune-mediated inflammatory diseases.
Animal
Studies
Protalex’s
lead candidate PRTX-100 has proven effective in two standard mouse models of
autoimmunity:
Collagen-Induced Arthritis -
PRTX-100 has demonstrated reproducible efficacy in this well-established animal
model of RA. Mice received two injections of collagen in order to stimulate an
inflammatory response. One group was treated with various doses of PRTX-100, a
second group received Enbrel®, a leading commercially available treatment for
RA, and the control group was injected with vehicle saline solution. The mice
were observed for clinical symptoms, joint size and loss of function. The
results showed that very low doses of PRTX-100 and standard doses of Enbrel®
suppressed clinical symptoms including joint swelling over the first two to
three weeks of treatment, and slowed disease progression as compared with the
control group. Thereafter, the PRTX-100-treated mice continued to remain
disease-free whereas the mice treated with Enbrel® showed a resumption of joint
inflammation and tissue damage. This response to Enbrel® was expected because
the mice developed immune response to it because it is a foreign protein.
Overall, these results indicate that PRTX-100 is a potential treatment for RA in
humans. The data from these studies has served as a rationale for conducting
clinical trials in human patients.
BXSB Mice - These animals are
genetically predisposed to autoimmune diseases. This model is used to evaluate
drugs for autoimmune diseases such as Lupus and other autoimmune diseases. This
genetic model more closely approximates the human condition in that it is
complex, multi-factorial and usually treated by multiple drug regimens. In these
studies, mice were treated with PRTX-100 and sacrificed at regular intervals.
Their organs were weighed and sectioned for histological analysis and their
spleens were used for immunological assays. Spleen enlargement, or splenomegaly,
was significantly reduced in treated animals compared with the controls at
almost every time point, demonstrating the ability of PRTX-100 to delay the
onset and severity of this disease.
Completed
pre-clinical safety studies in animals have shown no drug-related toxicity at
doses up to 60-fold the proposed clinical dose. These studies were conducted in
New Zealand white rabbits and in cynomolgus monkeys. No differences were
observed in body weight gain or food consumption, nor in hematology, clinical
chemistry, urinalysis, or organ weight data in animals treated with PRTX-100
compared with controls treated with vehicle. These study results were an
important component of our IND application with the FDA.
We have
performed additional studies in non-human primates to determine the
pharmacokinetics of PRTX-100, and to evaluate the pharmacokinetics and safety of
a newer, lyophilized formulation of the drug.
Clinical Trials
Favorable
pre-clinical safety and efficacy studies for our lead compound, PRTX-100, laid
the foundation for the Investigational New Drug Application or IND for treating
RA. We submitted the IND to the United States Food and Drug Administration
or FDA in March 2005 and later in March 2005 the FDA verbally disclosed to us
that it had placed our IND on clinical hold, pending additional product
characterization. In August 2005, we formally replied to the FDA and in
September 2005, the FDA notified us that it had lifted the clinical hold on our
IND and that our proposed study could proceed. We commenced with our first
Phase I clinical trial in December 2005 and completed the Phase I clinical trial
in March 2006. This Phase I clinical trial was performed in healthy
volunteers, and was designed primarily to assess the safety and tolerability of
PRTX-100. This study demonstrated that PRTX-100 appeared safe and well
tolerated at the doses administered. There were no deaths or serious
adverse events. The PK profile was determined and found consistent with
that projected from pre-clinical models.
3
In May
2007, we filed an amendment to the IND with the FDA. This amendment
included the final Phase I safety study report, CMC update, and a protocol for
another Phase I clinical trial. In July and August 2007 a second phase I
study was performed under the IND, to further characterize the safety,
pharmacokinetic, and pharmaco-dynamic profile of a single-dose of PRTX-100 in
healthy volunteers at doses in the projected therapeutic range. Final results
indicated that the drug was safe and well tolerated. A Phase 1b randomized ,
double-blind, placebo controlled, multiple dose, dose escalation and
tolerability study of PRTX-100 in combination with methotrexate in patients with
active RA in South Africa was approved in August 2009 and is currently
underway.
Idiopathic Thrombocytopenic Purpura
- ITP is an uncommon autoimmune bleeding disorder characterized by too
few platelets in the blood. The affected individuals make antibodies
against their own platelets leading to the platelets' destruction, which in turn
leads to the abnormal bleeding. A small clinical trial in adult patients
with chronic ITP was designed to provide safety data on repeated weekly dosing
with PRTX-100. This clinical study was conducted under the Australian and
New Zealand Clinical Trial Notification procedure, not under US IND (the
“Australian Study”). After the approval of the clinical protocol by ethics
committees at six sites in Australia and one in New Zealand, the trial began
enrolling patients in the second quarter of 2008. A leading Australian
clinical research organization was contracted to manage and monitor this
clinical trial. The Australian Study was designed to evaluate the safety and
pharmacokinetics of up to four doses of PRTX-100, starting at the lowest dose,
and escalating upwards after safety review of the prior dose.
The
Australian Study proved extremely difficult to enroll due to on-going Phase III
studies and subsequent availability of two new and effective medicines for ITP.
Nine patients were dosed at the first two dose levels by the end of the first
quarter 2009. At this point further recruitment of patients was suspended.
No side effects or toxicities were noted with repeated weekly doses of PRTX-100
that were not seen with single doses in healthy volunteer trials. This
repeated-dose safety data formed the basis for the clinical trial application to
evaluate PRTX-100 in patients with rheumatoid arthritis.
Rheumatoid arthritis - RA is
a highly inflammatory polyarthritis often leading to joint destruction,
deformity and loss of function. In addition to characteristic symmetric swelling
of peripheral joints, systemic symptoms related to chronic inflammation can
commonly occur. Chronic pain, disability and excess mortality are
unfortunate sequelae. RA is the most common autoimmune disease, affecting
1 to 2 percent of the world’s population, with prevalence rising with age to
about 5% in women over 55.
PRTX-100
is modeled on an effective precedent medical device treatment approved for RA
which also exposed patients to low doses of staphylococcal protein A.
PRTX-100 shows measurable activity in a standard mouse model of autoimmune
arthritis. Accordingly, RA is felt to represent the most likely and
significant treatment indication for PRTX-100. While recent advances in
biologic treatments for RA (with monoclonal antibodies) have improved the
prognosis for many patients, many patients continue to live with debilitating RA
disease activity, due to either the cost, side-effects, or limited effectiveness
of these newer therapies.
In August
2010, we commenced a multi-center Phase 1b clinical trial of PRTX-100 on adult
patients with active RA in South Africa and dosed our first patient enrolled in
the study. We contracted a leading global biopharmaceutical services
organization, to manage and monitor this Phase 1b clinical trial in South
Africa. The first sequential dose escalation study in RA will enroll up to
40 patients and is expected to be completed in the second calendar quarter
of 2011. This clinical trial protocol was reviewed and approved by the
MCA, the regulatory agency in South Africa. This study is not being
performed under the US IND, but the clinical study report will be submitted to
the IND. This data could support a US IND study of PRTX-100 in RA
patients.
Manufacturing
We
currently contract the manufacturing of our lead drug substance PRTX-100 to
Eurogentec S.A. in Belgium where it is produced under Current Good Manufacturing
Practice, or cGMP, conditions. The product formulations, stability testing and
packaging of the final drug product for clinical supplies are conducted at
several other reputable FDA-approved companies in the United States. These
companies have provided the drug product for both toxicological testing and
clinical supplies. We believe that this entire process is scaleable to
commercial production but will require additional manufacturing resources.
The original three clinical trials of PRTX-100 were conducted with a liquid
formulation. The current RA trial is using a newer lyophilized formulation
designed to achieve better stability and longer product shelf-life.
Compared to therapeutic doses of other biologic products used to treat RA, we
believe the overall costs for these proposed therapeutic doses of PRTX-100 are
significantly less due to the low dose and the simplicity of drug substance
manufacture.
4
Markets
RA is our
current focus as a primary indication. RA is a serious autoimmune disorder that
causes the body’s immune system to mistakenly produce antibodies that attack the
lining of the joints, resulting in inflammation and pain. RA can lead to joint
deformity or destruction, organ damage, disability and premature death.
According to a Cowen and Company, LLC report entitled “Therapeutic Categories
Outlook” dated March 2009, RA affects about 1% of the U.S. population with a
female to male ratio of 2 to 1 and approximately 10% of RA patients enter
remission without treatment. Of the remaining 90%, one third has mild
disease, one-third has moderate disease and has some response to methotrexate
and one-third has significant disease and has no response to
methotrexate.
RA was
chosen as a target disease because it represents a well-defined, rapidly growing
market for which there is no current uniformly effective treatment. It is
estimated that despite treatment with current approved RA therapeutics, at least
a third of patients continue to have significant disability and limitations due
to their disease. Current treatments are costly, some are associated with
increased risk of cancer and opportunistic infections, and in most cases must be
continued for decades.
In
contrast, we believe that PRTX-100 could potentially provide these
patients with a choice of therapy that is efficacious, cost-effective, and has a
highly favorable benefit-risk ratio. Once further developed and approved,
we believe that our products could be used to treat patients with moderate to
severe cases of RA, and particularly those individuals for whom other treatments
have failed. Additionally, preliminary information gained in the
laboratory on the mechanism of action of PRTX-100 suggests potential efficacy in
a range of autoimmune diseases, including, but not limited to psoriasis,
myasthenia, ITP, and pemphigus.
Our
long-term strategy, should PRTX-100 demonstrate safety and clinical proof of
concept in RA, contemplates the pursuit of FDA approval to treat other
autoimmune diseases, where the drug’s ability to decrease the inflammatory
response will abrogate the underlying disease processes.
ITP is an
uncommon autoimmune bleeding disorder characterized by too few platelets in the
blood. Affected individuals may have bruising, small purple marks on the
skin called petechiae, bleeding from the gums after having dental work,
nosebleeds or other bleeding that is hard to stop, and in women, heavy menstrual
bleeding. Although bleeding in the brain is rare, it can be life
threatening if it occurs. The affected individuals make antibodies against
their own platelets leading to the platelets' destruction, which in turn leads
to the abnormal bleeding.
According
to the Platelet Disorders Support
Association, approximately 200,000 individuals are affected by ITP, with women
affected approximately three times as often as men. It can affect all ages
and ethnic groups, and about 50% of the new cases occur in children.
Standard treatment includes high dose intravenous immunoglobulins (IVIG),
corticosteroids and removal of the spleen. In 2008 two new treatments were
approved, both of which stimulate production of platelets by mimicking their
natural regulator, thrombopoetin. One of these, romiplostin is an
injectable protein. The other, eltrombopag, is an oral small-molecule
drug. These treatments have been very successful for refractory ITP
cases. Although most cases can be controlled with therapy, the treatments
can have significant side effects. Currently there is no single broadly
effective curative therapy. PRTX-100 could potentially offer these patients
another therapeutic option which is more cost effective, efficacious, and
results in fewer side effects.
Competition
We
believe, based on the pre-clinical trials and the result of the two Phase I
clinical trials, that our compound PRTX-100, has a potential competitive
advantage, as it may be safer and more efficacious than existing therapies, and
it comes with a significantly lower cost than competing biologic-based
therapies. This potential advantage has not yet been, and may not ever be,
validated in clinical trials. Current RA treatments are characterized by complex
manufacturing methods and have resulted in an average annual retail cost of
approximately $15,000 to $19,980 per patient, according to a Cowen and Company,
LLC report entitled “Therapeutic Categories Outlook” dated March 2009. A number
of pharmaceutical agents are currently being used, with varying degrees of
success, to control the signs and symptoms of RA and slow its progression.
Available treatment options include:
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·
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Analgesic/anti-inflammatory
preparations, ranging from simple aspirin to the COX-2
inhibitors;
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5
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·
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Immunosuppressive/antineoplastic
drugs, including azathioprine and
methotrexate;
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·
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TNF
(Tumor Necrosis Factor) inhibitors, also known as anti-TNF therapy,
currently represented by etanercept (Enbrel®), infliximab (Remicade®), and
adalimumab (Humira®);
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|
|
·
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Soluble
Interleukin-l (IL-I) Receptor Therapy, Anakinra (Kineret®);
and
|
|
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·
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Costimulatory
molecule inhibitor (abatacept, Orencia® Anti CD20 therapy, rituximab
(Rituxan®).
|
Many
large and small pharmaceutical companies are active in this market, with Amgen
Corporation, Johnson & Johnson, Inc. and Abbott Laboratories dominating the
market for biologic therapies with their respective products, Enbrel®, Remicade®
and Humira®. According to the Cowen and Company, LLC report dated March
2009 for RA in 2008 Enbrel® generated revenue of $2.09 billion; Remicade®
generated revenue of $1.55 billion; and Abbot’s Humira®, generated revenue of
$1.38 billion. Other recent entrants into the RA market are Orencia® from
Bristol-Myers Squibb and Rituxan® from Biogen Idec/Genentech which generated
revenue of $360 million and $300 million for RA in 2008,
respectively.
Post-marketing
experience has indicated an enhanced risk for serious and opportunistic
infections in patients treated with TNF inhibitors. Disseminated tuberculosis
due to reactivation of latent disease was also seen commonly within clinical
trials of TNF inhibitors. There is also a possibly increased risk of lymphoma in
patients treated with TNF inhibitors. TNF inhibitors are not recommended in
patients with demyelinating disease or with congestive heart failure. Transient
neutropenia or other blood dyscrasias have been reported with Enbrel® and the
other TNF inhibitors. There was also an increased risk of serious infections
with rituximab therapy in clinical trials, and abatacept has also been
associated with an increased risk of serious infections. Findings such as
these indicate that new and safer treatments for autoimmune diseases such as RA
are needed. We anticipate that PRTX-l00 and its other products will provide such
opportunity, but there can be no assurance that such results will occur, pending
the completion of extensive clinical trials.
As
mentioned above, several companies have marketed or are developing thrombopoetin
agonists for treatment of ITP. They include Amgen’s Nplate and GSK’s
Promacta, both now FDA approved, and Ligand Pharmaceutical’s LGD4665 currently
in clinical trials.
Government
Regulation and Product Approval
The FDA
and comparable regulatory agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the testing (preclinical
and clinical), manufacturing, labeling, storage, recordkeeping, advertising,
promotion, import, export, marketing and distribution, among other things, of
drugs and drug product candidates. If we do not comply with applicable
requirements, we may be fined, the government may refuse to approve our
marketing applications or allow us to manufacture or market our products, and we
may be criminally prosecuted. We and our manufacturers may also be subject
to regulations under other United States federal, state, local and foreign
laws.
In the
United States, the FDA regulates drugs under the Food Drug and Cosmetic Act, or
FDCA, and implementing regulations. The process required by the FDA before our
drug candidates may be marketed in the United States generally involves the
following (although the FDA is given wide discretion to impose different or more
stringent requirements on a case-by-case basis):
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completion
of extensive preclinical laboratory tests, preclinical animal studies and
formulation studies, all performed in accordance with the FDA’s Good
Laboratory Practice or GLP regulations and other
regulations;
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submission
to the FDA of an IND application which must become effective before
clinical trials may begin;
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performance
of multiple adequate and well-controlled clinical trials meeting FDA
requirements to establish the safety and efficacy of the product candidate
for each proposed indication;
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submission
of a Biological License Application or BLA to the
FDA;
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satisfactory
completion of an FDA pre-approval inspection of the manufacturing
facilities at which the product candidate is produced, and potentially
other involved facilities as well, to assess compliance with cGMP,
regulations and other applicable regulations;
and
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the
FDA review and approval of the BLA prior to any commercial marketing, sale
or shipment of the drug.
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The
testing and approval process requires substantial time, effort and financial
resources, and we cannot be certain that any approvals for our drug candidates
will be granted on a timely basis, if at all. Risks to us related to these
regulations are described in the Risk Factors in Item 1A of this
Report.
A
separate submission to the FDA, under an existing IND must also be made for each
successive clinical trial conducted during product development. The FDA must
also approve changes to an existing IND. Further, an independent institutional
review board, or IRB, for each medical center proposing to conduct the clinical
trial must review and approve the plan for any clinical trial before it
commences at that center and it must monitor the study until completed. The FDA,
the IRB or the sponsor may suspend a clinical trial at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk. Clinical testing also must satisfy extensive Good
Clinical Practice or GCP requirements and regulations for informed
consent.
Clinical
Trials
For
purposes of BLA submission and approval, clinical trials are typically conducted
in the following three sequential phases, which may overlap (although additional
or different trials may be required by the FDA as well):
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Phase I clinical trials
are initially conducted in a limited population to test the drug
candidate for safety, dose tolerance, absorption, metabolism, distribution
and excretion in healthy humans or, on occasion, in patients, such as
cancer patients. In some cases, particularly in cancer trials, a sponsor
may decide to conduct what is referred to as a “Phase 1b” evaluation,
which is a second safety-focused Phase I clinical trial typically
designed to evaluate the impact of the drug candidate in combination with
currently FDA-approved drugs.
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Phase II clinical trials
are generally conducted in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the drug candidate for specific targeted indications and to determine an
optimal dosage. Multiple Phase II clinical trials may be conducted by
the sponsor to obtain information prior to beginning larger and more
expensive Phase III clinical trials. In some cases, a sponsor may
decide to conduct what is referred to as a “Phase IIb” evaluation,
which is a second, confirmatory Phase II clinical trial that could,
if positive and accepted by the FDA, serve as a pivotal clinical trial in
the approval of a drug candidate.
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Phase III clinical
trials are commonly referred to as pivotal trials. When
Phase II clinical trials demonstrate that a dose range of the drug
candidate is effective and has an acceptable safety profile,
Phase III clinical trials are undertaken in large patient populations
to further evaluate dosage, to provide substantial evidence of clinical
efficacy and to further test for safety in an expanded and diverse patient
population at multiple, geographically dispersed clinical trial
sites.
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In some
cases, the FDA may condition continued approval of a BLA on the sponsor’s
agreement to conduct additional clinical trials with due diligence. In other
cases, the sponsor and the FDA may agree that additional safety and/or efficacy
data should be provided; however, continued approval of the BLA may not always
depend on timely submission of such information. Such post-approval studies are
typically referred to as Phase IV studies.
Biological
License Application
The
results of drug candidate development, preclinical testing and clinical trials,
together with, among other things, detailed information on the manufacture and
composition of the product and proposed labeling, and the payment of a user fee,
are submitted to the FDA as part of a BLA. The FDA reviews all BLAs submitted
before it accepts them for filing and may request additional information rather
than accepting a BLA for filing. Once a BLA is accepted for filing, the FDA
begins an in-depth review of the application.
7
During
its review of a BLA, the FDA may refer the application to an advisory committee
for review, evaluation and recommendation as to whether the application should
be approved. The FDA may refuse to approve a BLA and issue a not approvable
letter if the applicable regulatory criteria are not satisfied, or it may
require additional clinical or other data, including one or more additional
pivotal Phase III clinical trials. Even if such data are submitted, the FDA
may ultimately decide that the BLA does not satisfy the criteria for approval.
Data from clinical trials are not always conclusive and the FDA may interpret
data differently than we or our collaboration partners interpret data. If the
FDA’s evaluations of the BLA and the clinical and manufacturing procedures and
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter, which contains the conditions that must be met in order to
secure final approval of the BLA. If and when those conditions have been met to
the FDA’s satisfaction, the FDA will issue an approval letter, authorizing
commercial marketing of the drug for certain indications. The FDA may withdraw
drug approval if ongoing regulatory requirements are not met or if safety
problems occur after the drug reaches the market. In addition, the FDA may
require testing, including Phase IV clinical trials, and surveillance
programs to monitor the effect of approved products that have been
commercialized, and the FDA has the power to prevent or limit further marketing
of a drug based on the results of these post-marketing programs. Drugs may be
marketed only for the FDA-approved indications and in accordance with the
FDA-approved label. Further, if there are any modifications to the drug,
including changes in indications, other labeling changes, or manufacturing
processes or facilities, we may be required to submit and obtain FDA approval of
a new BLA or BLA supplement, which may require us to develop additional data or
conduct additional preclinical studies and clinical trials.
Orphan
Drug Designation and Exclusivity
The FDA
may grant orphan drug designation to drugs intended to treat a rare disease or
condition, which generally is a disease or condition that affects fewer than
200,000 individuals in the United States. Orphan drug designation must be
requested before submitting an BLA. If the FDA grants orphan drug designation,
which it may not, the identity of the therapeutic agent and its potential orphan
use are publicly disclosed by the FDA. Orphan drug designation does not convey
an advantage in, or shorten the duration of, the review and approval process. If
a product which has an orphan drug designation subsequently receives the first
FDA approval for the indication for which it has such designation, the product
is entitled to seven years of orphan drug exclusivity, meaning that the FDA may
not approve any other applications to market the same drug for the same
indication for a period of seven years, except in limited circumstances, such as
a showing of clinical superiority to the product with orphan exclusivity
(superior efficacy, safety, or a major contribution to patient care). Orphan
drug designation does not prevent competitors from developing or marketing
different drugs for that indication. We intend to seek orphan drug designation
for our products at the appropriate time.
Under
European Union medicines laws, the criteria for designating a product as an
“orphan medicine” are similar but somewhat different from those in the United
States. A drug is designated as an orphan drug if the sponsor can establish that
the drug is intended for a life-threatening or chronically debilitating
condition affecting no more than five in 10,000 persons in the European Union or
that is unlikely to be profitable, and if there is no approved satisfactory
treatment or if the drug would be a significant benefit to those persons with
the condition. Orphan medicines are entitled to ten years of marketing
exclusivity, except under certain limited circumstances comparable to United
States law. During this period of marketing exclusivity, no “similar”
product, whether or not supported by full safety and efficacy data, will be
approved unless a second applicant can establish that its product is safer, more
effective or otherwise clinically superior. This period may be reduced to six
years if the conditions that originally justified orphan designation change or
the sponsor makes excessive profits.
Fast
Track Designation
The FDA’s
fast track program is intended to facilitate the development and to expedite the
review of drugs that are intended for the treatment of a serious or
life-threatening condition and that demonstrate the potential to address unmet
medical needs. Under the fast track program, applicants may seek traditional
approval for a product based on data demonstrating an effect on a clinically
meaningful endpoint, or approval based on a well-established surrogate
endpoint. The sponsor of a new drug candidate may request the FDA to
designate the drug candidate for a specific indication as a fast track drug at
the time of original submission of its IND, or at any time thereafter prior to
receiving marketing approval of a marketing application. The FDA will determine
if the drug candidate qualifies for fast track designation within 60 days
of receipt of the sponsor’s request.
If the
FDA grants fast track designation, it may initiate review of sections of a BLA
before the application is complete. This so-called “rolling review” is available
if the applicant provides and the FDA approves a schedule for the submission of
the remaining information and the applicant has paid applicable user fees. The
FDA’s Prescription Drug User Fee Act or PDUFA review clock for both a standard
and priority BLA for a fast track product does not begin until the complete
application is submitted. Additionally, fast track designation may be withdrawn
by the FDA if it believes that the designation is no longer supported by
emerging data, or if the designated drug development program is no longer being
pursued.
8
In some
cases, a fast track designated drug candidate may also qualify for one or more
of the following programs:
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Priority
Review. As explained above, a drug candidate may be eligible
for a six-month priority review. The FDA assigns priority review status to
an application if the drug candidate provides a significant improvement
compared to marketed drugs in the treatment, diagnosis or prevention of a
disease. A fast track drug would ordinarily meet the FDA’s criteria for
priority review, but may also be assigned a standard review. We do not
know whether any of our drug candidates will be assigned priority review
status or, if priority review status is assigned, whether that review or
approval will be faster than conventional FDA procedures, or that the FDA
will ultimately approve the drug.
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Accelerated
Approval. Under the FDA’s accelerated approval regulations,
the FDA is authorized to approve drug candidates that have been studied
for their safety and efficacy in treating serious or life-threatening
illnesses and that provide meaningful therapeutic benefit to patients over
existing treatments based upon either a surrogate endpoint that is
reasonably likely to predict clinical benefit or on the basis of an effect
on a clinical endpoint other than patient survival or irreversible
morbidity. In clinical trials, surrogate endpoints are alternative
measurements of the symptoms of a disease or condition that are
substituted for measurements of observable clinical symptoms. A drug
candidate approved on this basis is subject to rigorous post-marketing
compliance requirements, including the completion of Phase IV or
post-approval clinical trials to validate the surrogate endpoint or
confirm the effect on the clinical endpoint. Failure to conduct required
post-approval studies with due diligence, or to validate a surrogate
endpoint or confirm a clinical benefit during post-marketing studies, may
cause the FDA to seek to withdraw the drug from the market on an expedited
basis. All promotional materials for drug candidates approved under
accelerated regulations are subject to prior review by the
FDA
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When
appropriate, we intend to seek fast track designation, accelerated approval or
priority review for our drug candidates. We cannot predict whether any of our
drug candidates will obtain fast track, accelerated approval, or priority review
designation, or the ultimate impact, if any, of these expedited review
mechanisms on the timing or likelihood of the FDA approval of any of our drug
candidates.
Satisfaction
of the FDA regulations and approval requirements or similar requirements of
foreign regulatory agencies typically takes several years, and the actual time
required may vary substantially based upon the type, complexity and novelty of
the product or disease. Typically, if a drug candidate is intended to treat a
chronic disease, as is the case with the drug candidate we are developing,
safety and efficacy data must be gathered over an extended period of time.
Government regulation may delay or prevent marketing of drug candidates for a
considerable period of time and impose costly procedures upon our activities.
The FDA or any other regulatory agency may not grant approvals for changes in
dosage form or new indications for our drug candidates on a timely basis, or at
all. Even if a drug candidate receives regulatory approval, the approval may be
significantly limited to specific disease states, patient populations and
dosages. Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a drug may result in restrictions on the drug
or even complete withdrawal of the drug from the market. Delays in obtaining, or
failures to obtain, regulatory approvals for our drug candidate would harm our
business. In addition, we cannot predict what adverse governmental regulations
may arise from future United States or foreign governmental action.
Other
Regulatory Requirements
Any drugs
manufactured or distributed by us or any potential collaboration partners
pursuant to future FDA approvals are subject to continuing regulation by the
FDA, including recordkeeping requirements and reporting of adverse experiences
associated with the drug. Drug manufacturers and their subcontractors are
required to register with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with ongoing regulatory requirements, including cGMP, which impose
certain procedural and documentation requirements upon us and our third-party
manufacturers. Failure to comply with the statutory and regulatory requirements
can subject a manufacturer to possible legal or regulatory action, such as
warning letters, suspension of manufacturing, sales or use, seizure of product,
injunctive action or possible civil penalties. We cannot be certain that we or
our present or future third-party manufacturers or suppliers will be able to
comply with the cGMP regulations and other ongoing FDA regulatory requirements.
If our present or future third-party manufacturers or suppliers are not able to
comply with these requirements, the FDA may halt our clinical trials, require us
to recall a drug from distribution, or withdraw approval of the BLA for that
drug.
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The FDA
closely regulates the post-approval marketing and promotion of drugs, including
standards and regulations for direct-to-consumer advertising, off-label
promotion, industry-sponsored scientific and educational activities and
promotional activities involving the Internet. A company can make only those
claims relating to safety and efficacy that are approved by the FDA. Failure to
comply with these requirements can result in adverse publicity, warning and/or
untitled letters, corrective advertising and potential civil and criminal
penalties.
Foreign
Regulation
In
addition to regulations in the United States, we will be subject to a variety of
foreign regulations governing clinical trials and commercial sales and
distribution of our future products. Whether or not we obtain FDA approval for a
product, we must obtain approval of a product by the comparable regulatory
authorities of foreign countries before we can commence clinical trials or
marketing of the product in those countries. The approval process varies from
country to country, and the time may be longer or shorter than that required for
FDA approval. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary greatly from country to
country.
Under
European Union regulatory systems, marketing authorizations may be submitted
either under a centralized or mutual recognition procedure. The centralized
procedure provides for the grant of a single marking authorization that is valid
for all European Union member states. The mutual recognition procedure provides
for mutual recognition of national approval decisions. Under this procedure, the
holder of a national marketing authorization may submit an application to the
remaining member states. Within 90 days of receiving the applications and
assessment report, each member state must decide whether to recognize
approval.
In
addition to regulations in Europe and the United States, we will be subject to a
variety of foreign regulations governing clinical trials and commercial
distribution of our future products.
Patents,
Trademarks, and Proprietary Technology
Our
success will also depend on our ability to maintain trade secrets and
proprietary technology in the United States and in other countries, and to
obtain and maintain patents for our bioregulatory technology. We filed an
initial usage patent application with the U.S. Patent and Trademark Office or
PTO, in April 2002. In October 2006, the PTO notified us of the allowance
of the patent and in May 2007, the PTO issued US Patent #7,211,258. In
November 2006, we filed a further usage patent application with the PTO for
PRTX-100 and in June 2010, the PTO notified us of the allowance of the patent,
which we expect will be issued sometime in the fourth quarter of 2010. We
have also filed for foreign protection relating to this patent in Canada, Japan
and the European Union.
Employees
We have
two part-time employees, our president and our chief financial officer. In
addition, we also have a Scientific Advisory Board which is staffed by highly
qualified consultants with the background and scientific expertise we need to
carry out our long-term business objectives. We believe that our
relationship with all of our employees and our Scientific Advisory Board is
generally good.
10
ITEM 1A.
RISK FACTORS
You should carefully consider the
risks, uncertainties and other factors described below, in addition to the other
information set forth in this Annual Report on Form 10-K, because they could
materially and adversely affect our business, operating results, financial
condition, cash flows and prospects, as well as adversely affect the value of an
investment in our Common Stock. Also, you should be aware that the risks and
uncertainties described below are not the only ones facing us. Additional risks
and uncertainties that we do not yet know of, or that we currently think are
immaterial, may also impair our business operations. You should also refer to
the other information contained in and incorporated by reference into this
Annual Report on Form 10-K, including our consolidated financial statements and
the related notes.
Risks Related to Our
Business
Auditors
have doubt as to our ability to continue in business.
In their
report on our May 31, 2010 financial statements, our auditors expressed
substantial doubt as to our ability to continue as a going concern. A
going concern qualification could impair our ability to finance our operations
through the sale of debt or equity securities. Our ability to continue as
a going concern will depend, in large part, on our ability to obtain additional
financing and generate positive cash flow from operations, neither of which is
certain. If we are unable to achieve these goals, our business would be
jeopardized and we may not be able to continue operations.
We
have a history of significant losses, and we may never achieve or sustain
profitability.
We have
been focused on product development and have not generated any revenues to date.
We have incurred operating losses each year of our operations and if we continue
to operate we expect to continue to incur operating losses for at least the next
several years. We may never become profitable. The process of developing our
products requires significant clinical development and laboratory testing and
clinical trials, as well as regulatory approvals. In addition, commercialization
of our targeted products will require the establishment of sales, marketing and
manufacturing capabilities, either through internal hiring or through
contractual relationships with others. We expect our research and development
and general and administrative expenses will increase over the next several
years and, as a result, we expect our losses will increase. As of May 31, 2010,
our cumulative net loss was $47,652,353. Our net loss was $3,067,842 for the
fiscal year ended May 31, 2010. Our continued operational loss may lower the
value of our common stock and may jeopardize our ability to continue our
operations.
If
we cannot raise additional capital on acceptable terms, we will be unable to
complete planned clinical trials, obtain regulatory approvals, commercialize our
product candidate or sustain our operations.
We will
require substantial future capital in order to continue to conduct the research
and development, clinical and regulatory activities necessary to bring our
products to market and to establish commercial manufacturing, marketing and
sales capabilities. If the Company is unable to raise sufficient
additional funds when required, it will likely be required to suspend or
cease current operations until such financing is obtained, if ever.. Our future
capital requirements will depend on many factors, including:
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the
progress of pre-clinical development and laboratory testing and clinical
trials;
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time
and costs involved in obtaining regulatory
approvals;
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the
number of indications we pursue;
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costs
in filing and prosecuting patent applications and enforcing or defending
patent claims; and
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the
establishment of selected strategic alliances and activities required for
product commercialization.
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As of
May 31, 2010, we had cash and cash equivalents of $2,350,084 and net
working capital of $1,652,355 compared to cash and cash equivalents of
$2,637,292 and working capital of $1,237,428 as of May 31, 2009. We
have suffered recurring losses from operations and negative cash
flows.
If in the
future we raise additional funds through the issuance of equity, equity-related
or debt securities, such securities may have rights, preferences or privileges
senior to those of our Common Stock. Furthermore, because of the low
trading price of our Common Stock, the number of shares of the new equity or
equity-related securities that may be required to be issued may cause
shareholders to experience significant dilution. In addition, the issuance of
debt securities could increase the liquidity risk or perceived liquidity risk
faced by us. We cannot, however, be certain that additional financing will be
available on acceptable terms or at all.
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If
we are unable to enroll enough patients to complete our clinical trials,
regulatory agencies may delay their review of, or reject our applications, which
may result in increased costs and harm our ability to develop
products.
In August
2010, we commenced a Phase 1b RA clinical trial of PRTX-100 on adult
patients with active RA in South Africa and began dosing patients enrolled in
the study. As of the date of this Report, ITP clinical trials have been
suspended pending completion of Phase 1b RA clinical trials and an evaluation of
our clinical trial programs. If we are not able to enroll enough patients
to complete the RA Phase 1b clinical trials, regulatory agencies may delay
reviewing our applications for approval, or may reject them, based on our
inability to enroll enough patients to complete our clinical trials.
Patient enrollment depends on many factors, including the size of the patient
population, the nature of the protocol, the proximity of patients to clinical
sites and the eligibility criteria for the study. Delays in planned patient
enrollment may result in increased costs and delays, which could have a harmful
effect on our ability to develop products. We may also encounter delays or
rejections based on changes in regulatory agency policies during the period in
which we develop a drug or the period required for review of any application for
regulatory agency approval of a particular compound. We also may encounter
delays if we are unable to produce clinical trial material in sufficient
quantities and of sufficient quality to meet the schedule for our planned
clinical trials. In addition, we rely on a number of third-parties, such as
clinical research organizations, to help support the clinical trials by
performing independent clinical monitoring, data acquisition and data
evaluations. Any failure on the part of these third-parties could delay the
regulatory approval process.
Clinical
trials are expensive, time consuming and difficult to design and
implement. If clinical trials for PRTX-100 don’t provide positive results,
we may be required to abandon or repeat such clinical trials.
Human
clinical trials are expensive and difficult to design and implement, in part
because they are subject to rigorous requirements. The clinical trial
process is also time consuming. Even with adequate financing, we estimate
that our clinical trials for PRTX-100 will take several years to complete.
Furthermore, failure can occur at any stage of the trials, and we can encounter
problems that cause us to abandon or repeat clinical trials. The
commencement and completion of clinical trials may be delayed by several
factors, including:
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unforeseen
safety issues;
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determination
of dosing issues;
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lack
of effectiveness during clinical
trials
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slower
than expected rates of patient
recruitment
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inability
to monitor patients adequately or after treatment;
and
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inability
or unwillingness of medical investigators to follow our clinical
protocols.
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In
addition, we or the FDA and/or foreign regulatory agencies may suspend our
clinical trials at any time if it appears that we are exposing participants to
unacceptable health risks or if the FDA and/or foreign regulatory agencies find
deficiencies in our IND and/or country specific regulatory submissions or in the
conduct of these trials. Therefore, we cannot predict with any certainty
the schedule for future clinical trials.
If
we fail to obtain regulatory approvals for PRTX-100 or any other drug we
develop, we will not be able to generate revenues from the commercialization or
sale of those drugs.
We must
receive regulatory approval of each of our drugs before we can commercialize or
sell that product. The pre-clinical laboratory testing, formulation development,
manufacturing and clinical trials of any product we develop, as well as the
distribution and marketing of these products, are regulated by numerous federal,
state and local governmental authorities in the United States, principally the
FDA, and by similar agencies in other countries. The development and regulatory
approval process takes many years, requires the expenditure of substantial
resources, is uncertain and subject to delays, and will thus delay our receipt
of revenues, if any, from PRTX-100 or any other drug we develop. We cannot
assure you that our clinical trials will demonstrate the safety and efficacy of
PRTX-100 or any other drug we develop or will result in a marketable
product.
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No
product can receive FDA approval unless human clinical trials show both safety
and efficacy for each target indication in accordance with FDA and foreign
country standards. A number of companies in the pharmaceutical and biotechnology
industries have suffered significant setbacks in late stage clinical trials even
after achieving promising results in early stage development. We therefore
cannot assure you that the results from our clinical trials will be successful
or that the results from our pre-clinical trials for PRTX-100 or any other drug
we develop will be predictive of results obtained in future clinical
trials.
Further,
data obtained from pre-clinical and clinical trial activities are subject to
varying interpretations that could delay, limit or prevent regulatory agency
approval. We cannot assure you that our clinical trials will establish the
safety and efficacy of PRTX-100 or any other drug we develop sufficiently for us
to obtain regulatory approval.
Our
products, if approved, may fail to achieve market acceptance.
There can
be no assurance that any products we successfully develop, if approved for
marketing, will achieve market acceptance or generate significant revenues. We
intend for our products, including PRTX-100, to replace or alter existing
therapies or procedures, and hospitals, physicians or patients may conclude that
these products are less safe or effective or otherwise less attractive than
existing therapies or procedures. If our products do not receive market
acceptance for any reason, it would adversely affect our business, financial
condition and results of operations.
Further,
our competitors may develop new technologies or products that are more effective
or less costly, or that seem more cost-effective, than our products. We can give
no assurance that hospitals, physicians, patients or the medical community in
general will accept and use any products that we may develop.
If
we are unable to obtain, protect, and maintain our proprietary rights in
intellectual property, we may not be able to compete effectively or operate
profitably.
Our
commercial success also depends, in large part, on our ability to obtain and
maintain intellectual property protection for our technology covering our
product candidates and avoiding infringement of the proprietary technology of
others. Our ability to do so will depend on, among other things, complex legal
and factual questions, and it should be noted that the standards regarding
intellectual property rights in our industry are still evolving. However, we
will be able to protect our proprietary rights from unauthorized use by
third-parties only to the extent that our proprietary rights are covered by
valid and enforceable patents or are effectively maintained as trade
secrets.
We have
tried to protect our proprietary position by filing a U.S. patent application
related to PRTX-100. In July 2006, the PTO issued an office action final
rejection. In August 2006, we met with the patent examiner and his
supervisor and as a result of that meeting, the rejection was retracted.
In October 2006, the PTO notified us of the allowance of the patent and in May
2007, the PTO issued US Patent #7,211,258. In November 2006, we filed a
further usage patent application with the PTO for PRTX-100 and in June 2010, the
PTO notified us of the allowance of the patent, which we expect will be issued
sometime in the fourth quarter of 2010. Because the patent position of
pharmaceutical companies involves complex legal and factual questions, the
issuance, scope and enforceability of patents cannot be predicted with
certainty. Patents, if issued, may be challenged, invalidated or circumvented.
Thus, any patents that we own may not provide any protection against
competitors. Patents that we may file in the future or those we may license from
third parties, may not result in patents being issued. If issued, they may not
provide us with proprietary protection or competitive advantages against
competitors with similar technology. Furthermore, others may independently
develop similar technologies or duplicate any technology that we have developed,
or designed around any patents we may have issued to us. Moreover, the
laws of foreign countries do not protect intellectual property rights to the
same extent as the laws of the United States.
We also
rely on trade secrets, know-how and technology, which are not protected by
patents, to maintain our competitive position. We protect this information by
entering into confidentiality agreements with parties that have access to it,
such as potential investors, advisors employees and consultants. Any of these
parties may breach the agreements and disclose our confidential information, or
our competitors might learn of the information in some other way. If any trade
secret, know-how or other technology not protected by a patent was to be
disclosed to or independently developed by a competitor, our business and
financial condition could be adversely affected.
If
other companies claim that we infringe their proprietary technology, we may
incur liability for damages or be forced to stop our development and
commercialization efforts.
Competitors
and other third-parties may initiate patent litigation against us in the United
States or in foreign countries based on existing patents or patents that may be
granted in the future. These lawsuits can be expensive and would consume time
and other resources even if unsuccessful or brought without merit. Our
competitors may have sought or may seek patents that cover aspects of our
technology. We are aware that a third-party has a pending patent
application for technologies generally related to ours, and more patents for
similar technologies may be filed in the future. In the U.S., patent
applications may remain confidential after filing or published 18 months after
filing.
13
Owners or
licensees of patents may file one or more infringement actions against us. Any
such infringement action could cause us to incur substantial costs defending the
lawsuit and could distract our management from our business, even if the
allegations of infringement or misappropriation are unwarranted. The defense of
multiple claims could have a disproportionately greater impact. Furthermore, an
adverse outcome from this type of claim could subject us to a judgment that
requires us to pay substantial damages. A judgment could also include an
injunction or other court order that could prevent us from making, using,
selling, offering for sale or importing our products or prevent our customers
from using our products.
Alternatively,
we could be required to license disputed rights from the third party. If a court
determines, or if we independently discover, that any of our products or
manufacturing processes violates third-party proprietary rights, we might not be
able to reengineer the product or processes to avoid those rights, or obtain a
license under those rights on commercially reasonable terms, if at
all.
We
may become involved in lawsuits to protect or enforce our patents that would be
expensive and time consuming.
In order
to protect or enforce our patent rights, we may initiate patent litigation
against third-parties. In addition, we may become subject to interference or
opposition proceedings conducted in patent and trademark offices to determine
the priority of inventions. The defense of intellectual property rights,
including patent rights through lawsuits, interference or opposition
proceedings, and other legal and administrative proceedings, would be costly and
divert our technical and management personnel from their normal
responsibilities. An adverse determination of any litigation or defense
proceedings could put our patent application at risk of not
issuing.
Furthermore,
because of the substantial amount of discovery required in connection with
intellectual property litigation, there is a risk that some of our confidential
information could be compromised by disclosure during this type of litigation.
For example, during the course of this kind of litigation, confidential
information may be inadvertently disclosed in the form of documents or testimony
in connection with discovery requests, depositions or trial testimony. This
disclosure could negatively affect our business and financial
results.
If
third-party manufacturers of our products fail to devote sufficient time and
resources to our concerns, or if their performance is substandard, our clinical
trials and product introductions may be delayed and our costs may
rise.
We have
relied on, and intend to rely in the future, in part, on third-party contract
manufacturers to supply, store and distribute PRTX-100 and other potential
products. Any products we develop may be in competition with other product
candidates and products for access to these facilities. Thus, we may not
be successful in contracting with third-party manufacturers, or they may not be
able to manufacture these candidates and products in a cost-effective or timely
manner. Additionally, our reliance on third-party manufacturers exposes us
to the following risks, any of which could delay or prevent the completion of
(x) our clinical trials, (y) the approval of our products by the FDA or (z) the
commercialization of our products, resulting in higher costs or depriving us of
potential product revenues:
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·
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Contract
manufacturers are obliged to operate in accordance with FDA-mandated
cGMPs. Their failure to establish and follow cGMPs and to document
their adherence to such practices may lead to significant delays in the
availability of material for clinical study and may delay or prevent
filing or approval of marketing applications for our products.
Additionally, failure to achieve and maintain high manufacturing
standards, including the incidence of manufacturing errors, could result
in patient injury or death, product recalls or withdrawals, delays or
failures in product testing or delivery, cost overruns or other problems
that could seriously hurt our
business.
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·
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It
may be difficult or impossible for us to find replacement manufacturers
quickly on acceptable terms, or at all. For example, we have
initially relied on a single contract drug substance manufacturer,
Eurogentec S.A., to produce PRTX-100. Changing this manufacturer, or
changing the manufacturer for any other products we develop, may be
difficult, time consuming and expensive. The number of potential
manufacturers is limited, and changing manufacturers may require
confirmation of the analytical methods of the manufacturing processes and
procedures in accordance with FDA-mandated cGMPs. Such confirmation
of the analytical methods may be costly and
time-consuming.
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14
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·
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Our
contract manufacturers may not perform as agreed or may not remain in the
contract manufacturing business for the time required to produce, store
and distribute our products
successfully.
|
Drug
manufacturers are subject to ongoing periodic unannounced inspection by the FDA,
the U.S. Drug Enforcement Agency, and corresponding state and foreign agencies
to ensure strict compliance with cGMPs, other government regulations and
corresponding foreign standards. While we are obligated to audit the performance
of third-party contractors, we do not have control over our third-party
manufacturers’ compliance with these regulations and standards. Failure by our
third-party manufacturers or us to comply with applicable regulations could
result in sanctions being imposed on us, including fines, injunctions, civil
penalties, failure of the government to grant market approval of drugs, delays,
suspension or withdrawal of approvals, seizures or recalls of product, operating
restrictions and criminal prosecutions, any of which could significantly and
adversely affect our business.
We
believe Eurogentec S.A. has the capacity to produce a sufficient inventory of
PRTX-100 to conduct our proposed clinical trials. If these inventories are
lost or damaged, or if Eurogentec S.A. cannot or will not produce additional
inventory to complete the remaining phases of clinical trials, the clinical
development of our product candidate or its submission for regulatory approval
could be significantly delayed, and our ability to commercialize this product
could be impaired or precluded.
If we do
not having adequate clinical trial material available to complete our clinical
trails, which could also lead to a significant delay in continuing and /or
commencing our clinical trial programs, we may be unable to obtain FDA approval
and our ability to commercialize this product could be impaired or
precluded.
We
may not be able to manufacture our products in commercial quantities, which
would prevent us from marketing our products.
If any of
our potential products were approved by the FDA or foreign regulatory agencies
for commercial sale, we would need to manufacture them in larger quantities. We
have no manufacturing facilities at this time, and we have no experience in the
commercial manufacturing of drugs and limited experience in designing drug
manufacturing equipment. Thus, we would need to either develop the capability of
manufacturing on a commercial scale or engage third-party manufacturers with
this capability. Significant scale-up of manufacturing may require certain
additional validation studies, which the FDA must review and approve.
Moreover, contract manufacturers often encounter difficulties in achieving
volume production, quality control and quality assurance, as well as shortages
of qualified personnel. For these reasons, a third-party manufacturer
might not be able to manufacture sufficient quantities of PRTX-100 to allow us
to commercialize it. If we are unable to increase the manufacturing
capacity for PRTX-100, or any other product we may develop, we may experience
delays in or shortages in supply when launching them commercially.
We
have no experience selling, marketing or distributing our products and no
internal capability to do so.
If we
receive regulatory approval to commence commercial sales of PRTX-100, we will
face competition with respect to commercial sales, marketing and distribution.
These are areas in which we currently have no experience due to a lack of
management. To market our product directly, we must develop a direct marketing
and sales force with technical expertise and supporting distribution capability.
Alternatively, we may engage a pharmaceutical or other healthcare companies with
an existing distribution system and direct sales force to assist us. There can
be no assurance that we will successfully establish sales and distribution
capabilities either on our own or in collaboration with third-parties or gain
market acceptance for our product. To the extent we enter co-promotion or other
licensing arrangements, any revenues we receive will depend on the efforts of
third-parties. Those efforts may not succeed.
Competition
in the pharmaceutical industry is intense; if we fail to compete effectively,
our financial results will suffer.
We engage
in a business characterized by extensive research efforts, rapid developments
and intense competition. We cannot assure you that our products will compete
successfully or that research and development by others will not render our
products obsolete or uneconomical. Our failure to compete effectively would
negatively affect our business, financial condition and results of operations.
We expect that successful competition will depend, among other things, on
product efficacy, safety, reliability, availability, timing and scope of
regulatory approval and price. Specifically, other factors we expect will impact
our ability to compete include the relative speed with which we can develop
products, complete the clinical, development and laboratory testing and
regulatory approval processes and supply commercial quantities of the product to
the market.
15
We expect
competition to increase as technological advances are made and commercial
applications broaden. In commercializing PRTX-100 and any additional products we
develop using our technology, we will face substantial competition from large
pharmaceutical, biotechnology and other companies, universities and research
institutions.
Most of
our competitors have substantially greater capital resources, research and
development personnel, facilities and experience in conducting clinical trials
and obtaining regulatory approvals than us. As well, some of our
competitors have advantages over us in manufacturing and marketing
pharmaceutical products. We are thus at a competitive disadvantage to those
competitors who have greater capital resources and we may not be able to compete
effectively.
If
we are unable to hire additional qualified scientific, sales and marketing, and
other personnel, we will not be able to achieve our goals.
We depend
on the members of our management staff, Board, Scientific Advisory Board (“SAB”)
and third-party consultants to provide the expertise needed to carryout our
business objectives. The loss of any of these individuals’ services may
significantly delay or prevent the achievement of research, development or
business objectives and could negatively affect our business, financial
condition and results of operations if their replacements are not promptly
retained. We face intense competition for such personnel and consultants. Such
replacements are predicated, among other conditions, on our ability to raise
additional funding. We cannot assure you that we will attract and retain
qualified management and scientific personnel in the future, with or without
adequate additional financing. We do not maintain key person life insurance on
any of these individuals.
Further,
we expect that our potential expansion into areas and activities requiring
additional expertise, such as further clinical trials, governmental approvals,
contract manufacturing and marketing, will place additional requirements on our
management, operational and financial resources. We expect these demands will
require an increase in management and scientific personnel and the development
of additional expertise. The failure to attract and retain such personnel
or to develop such expertise would impact prospects for our
success.
Risks Relating to Our
Industry
Even
if we obtain marketing approval, PRTX-100 will be subject to ongoing regulatory
review.
If
regulatory approval of PRTX-100 is granted, that approval may be subject to
limitations on the indicated uses for which it may be marketed or contain
requirements for costly post-marketing follow-up studies. As to products for
which marketing approval is obtained, the manufacturer of the product and the
manufacturing facilities will be subject to continual review and periodic
inspections by the FDA and other regulatory authorities. In addition, the
labeling, packaging, adverse event reporting, storage, advertising, promotion
and record keeping related to the product will remain subject to extensive
regulatory requirements. The subsequent discovery of previously unknown problems
with the product, manufacturer or facility may result in restrictions on the
product or the manufacturer, including withdrawal of the product from the
market. We may be slow to adapt, or we may never adapt, to changes in existing
requirements or adoption of new requirements or policies.
If we
fail to comply with applicable regulatory requirements, we may be subject to
fines, suspension or withdrawal of regulatory approvals, product recalls,
seizure of products, operating restrictions and criminal
prosecution.
Market
acceptance of PRTX-100 will be limited if users are unable to obtain adequate
reimbursement from third-party payors.
Government
health administration authorities, private health insurers and other
organizations generally provide reimbursement for products like PRTX-100, and
our commercial success will depend in part on these third-party payors agreeing
to reimburse patients for the costs of our product. Even if we succeed in
bringing our proposed products to market, we cannot assure you that third-party
payors will consider it cost-effective or provide reimbursement in whole or in
part for its use.
Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. PRTX-100 is intended to replace or alter existing therapies or
procedures. These third-party payors may conclude that our product is less safe,
effective or cost-effective than existing therapies or procedures. Therefore,
third-party payors may not approve our product for
reimbursement.
16
If
third-party payors do not approve our product for reimbursement or fail to
reimburse them adequately, sales will suffer as some physicians or their
patients will opt for a competing product that is approved for reimbursement or
is adequately reimbursed. Even if third-party payors make reimbursement
available, these payors’ reimbursement policies may adversely affect our ability
to sell our product on a profitable basis.
Moreover,
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reduced demand for our product, which could
adversely affect our business, financial condition and results of
operations.
In
addition, legislation and regulations affecting the pricing of pharmaceuticals
may change in ways adverse to us before or after the FDA or other regulatory
agencies approve PRTX-100 for marketing. While we cannot predict the likelihood
of any of these legislative or regulatory proposals, if any government or
regulatory agencies adopt these proposals they could negatively affect our
business, financial condition and results of operations.
We
may be required to defend lawsuits or pay damages in connection with the alleged
or actual harm caused by our products.
We face
an inherent business risk of exposure to product liability claims in the event
that the use of any of our products is alleged to have resulted in harm to
others. This risk exists in clinical trials as well as in commercial
distribution. In addition, the pharmaceutical and biotechnology industries in
general have been subject to significant medical malpractice litigation. We may
incur significant liability if product liability or malpractice lawsuits against
us are successful. Furthermore, product liabilities claims, regardless of their
merits, could be costly and divert our management’s attention from other
business concerns, or adversely affect our reputation and the demand for our
product. We currently maintain a $2,000,000 general liability insurance
policy, a global $5,000,000 clinical liability insurance policy and as required,
country specific clinical liability insurance will be procured. We intend
to expand our liability insurance coverage to any products for which we obtain
marketing approval, however, such insurance may be unavailable, prohibitively
expensive or may not fully cover our potential liabilities. If we are unable to
maintain sufficient insurance coverage on reasonable terms or to otherwise
protect against potential product liability claims or field actions, we may be
unable to continue to market our products and develop new markets.
Developments by competitors may
render our products or technologies obsolete or
non-competitive.
The
biotechnology and pharmaceutical industries are intensely competitive and
subject to rapid and significant technological change. PRTX-100, should we
obtain regulatory approval, will have to compete with existing therapies.
In addition, a significant number of companies are pursuing the development of
products that target the same indications that we are targeting. We face
competition from both domestic and international companies. In addition,
companies pursuing different but related fields represent substantial
competition. Many of these organizations competing with us have
substantially greater capital resources, larger research and development staffs
and facilities, long drug development history in obtaining regulatory approvals
and greater manufacturing and marketing capabilities than we do. These
organizations also compete with us to attract qualified personnel and parties
for acquisitions, joint ventures or other strategic collaborations.
Risks Related to Our Common
Stock
Our
common stock has experienced in the past, and may experience in the future,
significant price volatility, which substantially increases the risk of loss to
persons owning our common stock.
The stock
market, particularly in recent years, has experienced significant volatility
particularly with respect to pharmaceutical and biotechnology stocks. The
volatility of pharmaceutical and biotechnology stocks often does not relate to
the operating performance of the companies represented by the stock. Factors
that could cause this volatility in the market price of our common stock
include:
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·
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announcements
of the introduction of new products by us or our
competitors;
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·
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market
conditions in the pharmaceutical and biotechnology
sectors;
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·
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rumors
relating to us or our competitors;
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·
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litigation
or public concern about the safety of our potential
products;
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·
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our
quarterly operating results;
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·
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deviations
in our operating results from the estimates of securities
analysts;
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17
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·
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FDA
or international regulatory
actions;
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·
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depth
and liquidity of the market for our common stock;
and
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·
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inability
to raise adequate financing.
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Because
of the limited trading market for our common stock, and because of the
significant price volatility, you may not be able to sell your shares of common
stock when you desire to do so. In the fiscal year ended May 31, 2010, our stock
price ranged from a high of $0.40 to a low of $0.05 per share. The
inability to sell your shares in a rapidly declining market may substantially
increase your risk of loss as a result of such illiquidity and because the price
for our common stock may suffer greater declines due to its price
volatility.
We
may be the subject of securities class action litigation due to future stock
price volatility.
In the
past, when the market price of a stock has been volatile, holders of that stock
have periodically instituted securities class action litigation against the
company that issued the stock. If any of our stockholders brought a lawsuit
against us, we could incur substantial costs defending the lawsuit. The lawsuit
could also divert the time and attention of our management.
Future
sales of common stock by our existing stockholders may cause our stock price to
fall.
The
market price of our common stock could decline as a result of sales by our
existing stockholders of shares of common stock in the market or the perception
that these sales could occur. These sales might also make it more difficult for
us to sell equity securities at a time and price that we deem appropriate and
thus inhibit our ability to raise additional capital when it is
needed.
We
have never paid dividends on our capital stock, and we do not anticipate paying
any cash dividends in the foreseeable future.
We have
paid no cash dividends on our capital stock to date and we currently intend to
retain our future earnings, if any, to fund the development and growth of our
business. In addition, the terms of any future debt or credit facility may
preclude us from paying these dividends. As a result, capital appreciation, if
any, of our common stock will be your sole source of gain for the foreseeable
future.
Control
by existing stockholder
Niobe
beneficially owns over 60% of our outstanding common stock. As a result,
this stockholder is able to exercise control over matters requiring stockholder
approval, including the election of directors, and the approval of mergers,
consolidations and sales of all or substantially all of our assets.
Our
common stock is a "penny stock" which may restrict the ability of stockholders
to sell our common stock in the secondary market.
The SEC
has adopted regulations which generally define "penny stock" to be an equity
security that has a market price, as defined, of less than $5.00 per share, or
an exercise price of less than $5.00 per share, subject to certain exceptions,
including an exception of an equity security that is quoted on a national
securities exchange. Our common stock is not now quoted on a national
exchange but is traded on Nasdaq’s OTC Bulletin Board (“OTCBB”). Thus,
they are subject to rules that impose additional sales practice requirements on
broker-dealers who sell these securities. For example, the broker-dealer must
make a special suitability determination for the purchaser of such securities
and have received the purchaser's written consent to the transactions prior to
the purchase. Additionally, the rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the SEC relating to the penny
stock market. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered underwriter, and current quotations
for the securities, and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, among other requirements, monthly statements must be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. The "penny stock" rules,
may restrict the ability of our stockholders to sell our common stock and
warrants in the secondary market.
18
Our common stock is quoted on the
OTCBB which may have an unfavorable impact on our stock price and
liquidity.
Our
common stock is quoted on the OTCBB. The OTCBB is a significantly
more limited market than the New York Stock Exchange or NASDAQ
system. The quotation of our shares on the OTCBB may result in a less
liquid market available for existing and potential stockholders to trade shares
of our common stock, could depress the trading price of our common stock and
could have a long-term adverse impact on our ability to raise capital in the
future.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our
principal offices are located at 133 Summit Avenue, Suite 22, Summit, New Jersey
which are owned by Kirk M. Warshaw, LLC (the “LLC”), an affiliated company of
Kirk Warshaw, our chief financial officer. We occupy our principal
offices on a month to month basis. On March 1, 2010, we began paying
a monthly fee of $500 to the LLC for the use and occupancy, and administrative
services, related to our principal offices. We do not own or intend
to invest in any real property. We currently have no policy with
respect to investments or interests in real estate, real estate mortgages or
securities of, or interests in, persons primarily engaged in real estate
activities.
ITEM 3. LEGAL
PROCEEDINGS
None.
ITEM 4. [REMOVED
AND RESERVED.]
PART
II
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ITEM 5.
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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(a)
Market
Information. Our common stock is traded on the
OTCBB under the symbol “PRTX”. The following table sets forth, for the
periods indicated and as reported on the OTCBB, the high and low bid prices for
our common stock. Such quotations reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
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High
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Low
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|||||||
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2009
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||||||||
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First
Quarter
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$ | 0.90 | $ | 0.35 | ||||
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Second
Quarter
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0.81 | 0.16 | ||||||
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Third
Quarter
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0.26 | 0.04 | ||||||
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Fourth
Quarter
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0.26 | 0.02 | ||||||
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2010
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||||||||
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First
Quarter
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$ | 0.15 | $ | 0.055 | ||||
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Second
Quarter
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0.20 | 0.025 | ||||||
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Third
Quarter
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0.23 | 0.08 | ||||||
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Fourth
Quarter
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0.23 | 0.01 | ||||||
(b)
Holders. As
of August 26, 2010, there were approximately 397 holders of record of our
common stock. This does not reflect beneficial stockholders who hold their stock
in nominee or “street” name through various brokerage firms.
(c) Dividends. We
have never declared or paid cash dividends on our capital stock, and we do not
intend to pay cash dividends in the foreseeable future. We plan to retain any
earnings for use in the operation of our business and to fund future
growth.
19
ITEM 6. SELECTED
FINANCIAL DATA
As a
smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are
not required to provide the information required by this item.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You
should read this Management’s Discussion and Analysis of Financial Condition and
Results of Operations in conjunction with our 2010 Financial Statements and
accompanying Notes. The matters addressed in this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, may contain certain
forward-looking statements involving risks and uncertainties.
Overview
We are a
development stage company which has been engaged in developing a class of
biopharmaceutical drugs for treating autoimmune inflammatory
diseases. Our lead product PRTX-100, is formulated with
highly-purified staphylococcal protein A, which is an immune modulating protein
produced by bacteria.
PRTX-100
has demonstrated effectiveness in animal models of autoimmune diseases as well
as demonstrated activity on cultured human immune cells at very low
concentrations, although the effectiveness of PRTX-100 shown in pre-clinical
studies using animal models may not be predictive of the results that we would
see in future human clinical trials. The safety, tolerability, and
pharmacokinetics (“PK”) of PRTX-100 in humans have now been characterized in
three clinical studies. A proof of concept study to evaluate safety
and potential efficacy of PRTX-100 in patients with active rheumatoid arthritis
(RA) is now underway in South Africa and is expected to be completed in the
second calendar quarter of 2011. We currently have no products
on the market.
In April
2009, we ceased all operations and terminated all employees in light of
insufficient funds to continue our clinical trials and related product
development. Our business was dormant until new management took
control of our operations in November 2009 following the change in control
transaction more fully described below. We are currently actively pursuing the
commercial development of PRTX-100 for the treatment of RA.
We
maintain an administrative office in Summit, New Jersey and currently outsource
all of our product development and regulatory activities, including clinical
trial activities, manufacturing and laboratory operations to third-party
contract research organizations and facilities.
Change
in Control Transaction
On
November 11, 2009 (the “Effective Date”), we consummated a financing
transaction, that resulted in a change in control in which we raised $3,000,000
of additional working capital pursuant to a Securities Purchase Agreement dated
that date (the “Purchase Agreement”) with Niobe Ventures, LLC (“Niobe”), a
Delaware limited liability company (the “Financing”). Pursuant to the
Purchase Agreement, we issued to the Niobe (i) 43,478,260 restricted shares of
our common stock at a purchase price of $0.046 per share (or $2,000,000 in the
aggregate) and (ii) a senior secured convertible promissory note in the
principal amount of $1,000,000 and convertible into shares of our common stock
at an initial conversion price equal to $0.046 per share (the “Secured
Note”).
The
Secured Note bears interest at a rate of 3% per annum and matures on November
13, 2012. In order to secure our obligations under the Secured Note,
we also entered into a Security Agreement dated the Effective Date (the
“Security Agreement”) granting Niobe a security interest in substantially all of
our personal property and assets, including our intellectual
property. The Secured Note is convertible at any time, at the option
of the holder, subject only to the requirement that we have sufficient
authorized shares of common stock after taking into account all outstanding
shares of common stock and the maximum number of shares issuable under all
issued and outstanding convertible securities. In addition, the
Secured Note will automatically be converted if (i) we raise in excess of $7.5
million of gross proceeds in an equity offering, (ii) certain milestones are
achieved in our Phase 1b and RA trial of PRTX-100 in South Africa or (iii) we
undertake certain fundamental transactions as defined in the notes (such as a
merger, sale of all of our assets, exchange or tender offer, or reclassification
of our stock or compulsory exchange). The Secured Note also provides
for the adjustment of the conversion price in the event of stock dividends and
stock splits, among other items, and provides for acceleration of maturity upon
an event of default (as defined in the Secured Note).
20
As
contemplated by the Purchase Agreement, all of our executive officers and all of
the members of our Board prior to the closing of the Financing, with the
exception of Frank M. Dougherty, resigned effective concurrently with the
closing of the Financing. Mr. Dougherty resigned effective upon the
expiration of the 10-day notice period required by Rule 14f-1 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). In
addition, effective upon the closing of the Financing, our Board appointed
Arnold P. Kling as a director and then elected him as president and elected Kirk
M. Warshaw as chief financial officer and secretary.
In
addition, on the Effective Date, we terminated (i) the Investor Rights Agreement
dated September 18, 2003 among us, vSpring SBIC L.P. (“vSpring”) and certain of
the investors set forth on Schedule A thereto (the “2003 IRA”) and the
Registration Rights Agreement dated May 25, 2005 among us, vSpring and certain
of the investors set forth on Schedule I thereto (the “2005 RRA”) in accordance
with their respective terms and (ii) stock options exercisable for an aggregate
of 1,233,571 shares of our common stock, approximately 41% of our then
outstanding stock options, all of which were held by three option holders,
Steven H. Kane, our former CEO, Marc L. Rose, our former CFO and
vSpring.
Critical
Accounting Policies
Our
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. Note 4 to the financial
statements describes the significant accounting policies and methods used in the
preparation of our financial statements.
We have
identified the policies below as some of the more critical to our business and
the understanding of our financial position and results of operations.
These policies may involve a high degree of judgment and complexity in their
application and represent the critical accounting policies used in the
preparation of our financial statements. Although we believe our judgments and
estimates are appropriate and correct, actual future results may differ from
estimates. If different assumptions or conditions were to prevail, the results
could be materially different from these reported results. The impact and any
associated risks related to these policies on our business operations are
discussed throughout this Report where such policies affect our reported and
expected financial results.
The
preparation of our financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reporting period. These estimates have a material impact on our financial
statements and are discussed in detail throughout this Report.
As part
of the process of preparing our financial statements, we are required to
estimate income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax expense together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet. We must then assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. In the event that we determine that we would be
able to realize deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset valuation allowance would
increase income in the period such determination was made.
We
account for our stock option grants under the provisions of the accounting
guidance for Share-Based Payments. Such guidance requires the
recognition of the fair value of share-based compensation in the statements of
operations. The fair value of our stock option awards was estimated using a
Black-Scholes option valuation model. This model requires the input of highly
subjective assumptions and elections in adopting and implementing this guidance,
including expected stock price volatility and the estimated life of each award.
The fair value of share-based awards is amortized over the vesting period of the
award and we have elected to use the straight-line method for awards granted
after the adoption of this guidance.
Results
of Operations
Fiscal
year ended May 31, 2010 compared to fiscal year ended May 31, 2009
Research
and Development Expenses – Research and Development expenses decreased from
$3,490,956 in our 2009 fiscal year to $1,291,051 in our 2010 fiscal
year. The decrease of $2.2 million, or 63%, was primarily the result
of the ceasing of our operations from April 2009 until new management took
control of our operations in November 2009, as disclosed
above. During such period, we engaged fewer consultants, had no
personnel and incurred virtually no other research or development
expenses.
21
Administrative
Expenses - Administrative expenses decreased from $3,427,085 in our 2009 fiscal
year to $1,036,059 in our 2010 fiscal year. The decrease of $2.4
million, or 70%, was primarily the result of the ceasing of our operations from
April 2009 until new management took control of our operations in November 2009,
as disclosed above. During such period, we engaged fewer consultants,
had no personnel and incurred virtually no other research or development
expenses. Further, during our 2010 fiscal year 2010 we incurred personnel
expenses in the aggregate of approximately $137,000 compared to $1.2 million,
for the severance amounts due to our former officers, during the 2009 fiscal
year.
Professional
Fees - Professional fees increased from $365,670 in our 2009 fiscal year to
$629,948 in our 2010 fiscal year. The increase of approximately $264,000, or
72%, was due primarily to a significant increase in legal expenses associated
with the change in control transaction, described above, that occurred in
November 2009. Legal fees associated with the transaction and related
deal expenses totaled almost $350,000 as compared to $0 for the same period last
year.
Interest
income - Interest income decreased from $57,651 in our 2009 fiscal year to
$5,544 in our 2010 fiscal year. The decrease was primarily the result
of having much smaller balances in interest bearing cash balances throughout
fiscal year 2010 as compared to fiscal year 2009.
Net
Loss Outlook
We have
not generated any product sales revenues, have incurred operating losses since
inception and have not achieved profitable operations. Our
accumulated deficit from inception through May 31, 2010 was $47,652,353 and we
expect to continue to incur substantial losses in future periods. We expect that
our operating losses in future periods will be the result of continued research
and development expenses relating to PRTX-100, as well as costs incurred in
preparation for the potential commercialization of PRTX-100.
In
addition to additional financing, we are highly dependent on the success of our
research and development efforts and, ultimately, upon regulatory approval and
market acceptance of our products under development, particularly our lead
product candidate, PRTX-100. We may never receive regulatory approval for
any of our product candidates, generate product sales revenues, achieve
profitable operations or generate positive cash flows from operations, and even
if profitable operations are achieved, they may not be sustained on a continuing
basis.
Liquidity
and Capital Resources
Since
1999, we have incurred significant losses and we expect to experience operating
losses and negative operating cash flow for the foreseeable future.
Historically, our primary source of cash to meet short-term and long-term
liquidity needs has been the sale of shares of our common stock. We have issued
shares in private placements at discounts to then current market
price.
On
September 18, 2003, we raised $12,657,599 through the sale of 7,445,646 shares
of our common stock at $1.70 per share, with warrants to purchase an additional
3,164,395 shares of our common stock, at an exercise price of $2.40 per share.
These warrants expired on September 19, 2008. Net of transaction costs of
$1,301,536, our proceeds were $11,356,063.
On May
25, 2005, we raised $5,057,885 through the sale of 2,593,788 shares of our
common stock at $1.95 per share, with warrants to purchase an additional 920,121
shares of our common stock, at an exercise price of $2.25 per share. All of
these warrants expire on May 25, 2010. Net of transaction costs of
$206,717, our proceeds were $4,851,168.
On
December 30, 2005, we raised $5,839,059 through the sale of 2,595,132 shares of
our common stock at $2.25 per share, with warrants to purchase an additional
648,784 shares of our common stock, at an exercise price of $2.99 per share. We
also issued warrants to purchase 227,074 shares of our common stock, at an
exercise price of $2.99 per share, to the placement agent. All of these
warrants expire on December 30, 2010. Net of transaction costs of
approximately $328,118, our proceeds were $5,510,941.
In the
fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants
which resulted in $786,538 in cash proceeds.
22
On July
7, 2006, we raised $14,217,660, net of transaction costs of $959,874, through
the sale of 6,071,013 shares of our common stock at $2.50 per share, with
warrants to purchase an additional 1,517,753 shares of our common stock, at an
exercise price of $3.85 per share. We also issued warrants to purchase 531,214
shares of our common stock, at an exercise price of $3.85 per share, to the
placement agent. All of these warrants expire on July 7,
2011.
In the
first fiscal quarter of 2007, existing investors and option holders exercised
133,500 warrants and 6,000 options which resulted in $315,574 in cash
proceeds.
On
November 11, 2009, we raised $3,000,000; $2,000,000 from the sale of our common
stock and $1,000,000 from the issuance the Secured Note to Niobe.
On
December 2, 2009, we entered into a Credit Facility Agreement (the “Facility”)
with Niobe, which will provide up to $2.0 million of additional capital in the
form of secured loans from Niobe to us at any time prior to June 30, 2012
subject to our achievement of certain predetermined benchmarks.
To the
extent any further warrants are exercised, we intend to use the proceeds for
general working capital and corporate purposes.
Net
Cash Used In Operating Activities and Operating Cash Flow Requirements
Outlook
Our
operating cash outflows for the fiscal years ended May 31, 2010 and 2009 have
resulted primarily from research and development expenditures associated for
PRTX-100 and administrative purposes. We expect to continue to use cash
resources to fund operating losses and expect to continue to incur operating
losses in fiscal 2011 and beyond due to continuing research and development
activities.
Net
Cash Used In Investing Activities and Investing Requirements
Outlook
We do not
expect to be required to make any significant investments in information
technology and laboratory equipment to support our future research and
development activities. In August 2008, we sold laboratory equipment with net
proceeds of $200,000.
We may
never receive regulatory approval for any of our product candidates, generate
product sales revenues, achieve profitable operations or generate positive cash
flows from operations, and even if profitable operations are achieved, these may
not be sustained on a continuing basis. We have invested a significant portion
of our time and financial resources since our inception in the development of
PRTX-100, and our potential to achieve revenues from product sales in the
foreseeable future is dependent largely upon obtaining regulatory approval for
and successfully commercializing PRTX-100, especially in the United States. We
expect to continue to use our cash and investments resources to fund operating
and investing activities.
Off-Balance
Sheet Arrangements
As of May
31, 2010, we had no off-balance sheet arrangements such as guarantees, retained
or contingent interest in assets transferred, obligation under a derivative
instrument and obligation arising out of or a variable interest in an
unconsolidated entity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
As a
smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are
not required to provide the information required by this item.
23
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See the
index to the Financial Statements below, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective
on December 2, 2009, we dismissed Grant Thornton LLP (“GT”) from serving as our
independent registered public accounting firm and engaged Sherb & Co., LLP
(“Sherb”) as our new independent registered public accounting
firm. The Board unanimously approved and authorized the change,
directed the process of review of candidate firms to replace GT and made the
final decision to engage Sherb. There were no disagreements, adverse
opinions or disclaimer of opinion by GT at the time of the change or during the
fiscal year ended May 31, 2010.
ITEM 9A(T).
CONTROLS AND PROCEDURES
|
(a)
|
Evaluation
of Disclosure Controls and
Procedures
|
Our
management, with the participation of our president and chief financial officer,
carried out an evaluation of the effectiveness of our “disclosure controls and
procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report (the “Evaluation
Date”). Based upon that evaluation, the president and chief financial
officer concluded that as of the Evaluation Date, our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in the reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s rules and forms and (ii) is accumulated and communicated to our
management, including our president and chief financial officer, as appropriate
to allow timely decisions regarding required disclosure.
Our
management, including our president and chief financial officer, does not expect
that our disclosure controls and procedures or our internal controls will
prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems,
management’s evaluation of controls and procedures can only provide reasonable
assurance that all control issues and instances of fraud, if any, within
Protalex have been detected.
|
(b)
|
Management's
Report on Internal Control over Financial
Reporting
|
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Our management assessed the effectiveness of our internal control
over financial reporting as of May 31, 2010. In making this
assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Our management has concluded that, as
of May 31, 2010, our internal control over financial reporting is effective
based on these criteria. This annual report does not include an
attestation report of our registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject
to attestation by our registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only management's report in this
annual report.”
|
(c)
|
Changes
in Internal Control over Financial
Reporting
|
There
were no changes in our internal controls over financial reporting that occurred
during the last fiscal quarter covered by this report that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B. OTHER
INFORMATION
None.
24
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth information concerning our officers and directors as
of August 1, 2010:
|
Name
|
Age
|
Title
|
||
|
Arnold
P. Kling
|
52
|
President
and director
|
||
|
Kirk
M. Warshaw
|
52
|
Chief
financial officer, secretary and director
|
||
|
John
E. Doherty
|
|
56
|
|
Director
|
Arnold P.
Kling. Mr. Kling has served as our president and director
since November 2009. Mr. Kling is currently a Managing Director of GH
Venture Partners, LLC, a private equity and merchant banking boutique for which
he also served as a Managing Director and General Counsel from 1995 to
1999. From 1999 through August 2005, Mr. Kling was the President of
Adelphia Holdings, LLC, a merchant-banking firm, as well as the managing member
of several private investment funds. From 1993 to 1995 he was a
senior executive and general counsel of a Nasdaq listed licensing and multimedia
company. From 1990 through 1993, Mr. Kling was an associate and
partner in the corporate and financial services department of Tannenbaum,
Helpern, Syracuse & Hirschtritt LLP, a mid-size New York law
firm. Mr. Kling received a Bachelor of Science degree from New York
University in International Business in 1980 and a Juris Doctor degree from
Benjamin Cardozo School of Law in 1983. During the past five years,
Mr. Kling was a director of Enthrust Financial Services, Inc., n/k/a Rodman
& Renshaw Capital Group, Inc. (NASDAQ: RODM). Mr. Kling currently
also serves as a Director and President of R&R Acquisition, VI, Inc.,
R&R Acquisition, VII, Inc., R&R Acquisition, VIII, Inc., R&R
Acquisition IX, Inc., R&R Acquisition X, Inc., Rodman International
Enterprises I, Ltd., Rodman International Enterprise II, Ltd., and Rodman
International Enterprise III, Ltd. (each a publicly reporting, non-trading
company), Mattmar Minerals, Inc. (OTCBB: MTMS), 24Holdings, Inc. (OTCBB:TWFH)
and Newtown Lane Marketing, Incorporated (OTCBB: NTWN). Mr. Kling’s
professional experience and background with other companies and with us, as our
president and director since 2009, have given him the expertise needed to serve
as one of our directors.
Kirk M.
Warshaw. Mr. Warshaw has served as our chief financial
officer, secretary and director since November 2009. Mr. Warshaw is a
financial professional who, since 1990, has provided clients in a multitude of
different industries with advice on accounting, corporate finance, and general
business matters. Prior to starting his own consulting firm, from
1983 to 1990, he held the various titles of controller, Chief Financial Officer,
President, and chief executive officer at three separate financial institutions
in New Jersey. From 1980 through 1983, Mr. Warshaw was a Senior
Accountant at the public accounting firm of Deloitte, Haskins &
Sells. Mr. Warshaw is a 1980 graduate of Lehigh University and has
been a CPA in New Jersey since 1982. During the past five years, Mr.
Warshaw was a director of Empire Financial Holding Company, n/k/a Jesup &
Lamont, Inc. (NYSE AMEX: JLI). Mr. Warshaw is currently also the
Chief Financial Officer of R&R Acquisition, VI, Inc., R&R Acquisition,
VII, Inc., R&R Acquisition, VIII, Inc., R&R Acquisition IX, Inc.,
R&R Acquisition X, Inc., Rodman International Enterprises I, Ltd., Rodman
International Enterprise II, Ltd., and Rodman International Enterprise III, Ltd.
(each a publicly reporting, non-trading company), Mattmar Minerals, Inc. (OTCBB:
MTMS) and Newtown Lane Marketing, Incorporated (OTCBB: NTWN), and a Director and
the Chief Financial Officer of 24Holdings Inc. (OTCBB: TWFH). Mr.
Warshaw’s professional experience and background with other companies and with
us, as our chief financial officer and director since 2009, have given him the
expertise needed to serve as one of our directors.
John E.
Doherty. Mr. Doherty has served as our director November
2009. He is a private investor
and was involved with our early stage development. From September
2005 to present he has been a private investor. Prior to that, from
September 1999 to September 2005 he was a member of our Board, and also our
President and Chief Executive Officer from September 1999 to December
2002. Mr. Doherty’s professional experience and background with us
and other companies have given him the expertise needed to serve as one of our
directors.
25
Scientific
Advisory Board
Our
Scientific Advisory Board (SAB) members work with our management team in the
planning, development and execution of scientific and business
strategies. It reviews, and advises management on our progress in
research and clinical development as well as new scientific
perspectives. The SAB is composed of well-respected, experienced
academic and industry leaders with diverse expertise and knowledge in a variety
of areas, including drug discovery, translational research, drug development,
and business development.
Edward Bernton, M.D., serves
as chairman of our SAB, has a background in pharmacology, clinical immunology,
and experimental medicine. Dr. Bernton currently is Sr. Dir, Clinical
Strategy, at Emergent Biosolutions (NYSE: EBS), a biopharmaceutical company
focused on the development, manufacturing and commercialization of vaccines and
therapeutic antibodies that assist the body’s immune system to prevent or treat
disease. He previously served as Medical Director of Protalex, Inc., and worked
as a consultant in clinical pharmacology and early-phase drug
development. His medical subspecialties include internal medicine,
allergy/immunology, and diagnostic laboratory immunology. He served
five years as Scientific Director for PAREXEL International Corporation’s
(Nasdaq: PRXL) Clinical
Pharmacology Network in North America. He has served as protocol
author or investigator on over 30 Phase I clinical trials including many
first-in-man studies for novel small molecules, biopharmaceutics, and
vaccines. Other past experience includes, serving three years as a
regulatory and product development consultant at Quintiles, a bio and
pharmaceutical services provider offering clinical, commercial, consulting and
capital solutions, serving three years as Chief Medical Officer or VP at various
Biotech start-ups and serving 12 years in both basic and clinical research in
pharmacology, immunology, infectious diseases, and vaccinology at Walter Reed
Army Institute of Research.
James W. Dowe III, serves as
vice chairman of our SAB, has over thirty years of experience in the various
stages of a company’s development. His corporate experience ranges
from being an active investor, CEO and/or Chairman of startups to public
companies. His primary focus has been in biotechnology, computer software and
investment management companies. Mr. Dowe started his career at the
White Sands Missile Range as a mathematician and a programmer, and later he
joined the Dikewood Corporation in New Mexico as a mathematician and
analyst. Subsequently, he became the Associate Director of the
Computing Center at the University of New Mexico. In 1980, Mr. Dowe founded and
later became the CEO and Chairman of Excalibur Technologies Corporation whose
search engine is recognized for its ability to index and retrieve mixed data
types including digital images, signals and multilingual text. Excalibur was
merged with the Media Systems Division of the Intel Corporation to form Convera
Corporation (CNVR). Mr. Dowe is the inventor of the Adaptive Pattern Recognition
Process (APRP) which is the basis of Convera’s technology. Mr. Dowe
was co-founder and a director of AZUR Environmental, a private company (acquired
by Strategic Diagnostics Inc. (Nasdaq: SDIX)) with an expertise in providing
cost-effective reliable solutions for monitoring water quality throughout the
world. Mr. Dowe graduated from New Mexico State University with a
Bachelor of Science degree in 1965 and served as an U.S. Naval officer during
the Vietnam War.
William E. Gannon, Jr., M.D.,
our Chief Medical Officer, serves as Chief Scientific Officer & Medical
Director for Capital City Technical Consulting (CCTC) in Washington, DC. In
addition to receiving his medical training and clinical work at Ross University,
Case Western Reserve and George Washington University, Dr. Gannon obtained an
M.B.A. in 1988 and has since built a wealth of experience in the management of
clinical trials including designing the trials and building operational teams to
ensure their successful completion. Dr. Gannon has held positions in
multinational Clinical Research Organizations, medical device, biotech and
pharmaceutical firms. In his most recent position prior to CCTC, Inc., Dr,
Gannon served as Vice President – Clinical & Medical Affairs in
biotechnology arena. Dr. Gannon’s primary focus has been on oncology therapeutic
and diagnostic applications, but possesses a board range of experience across
therapeutic categories. Dr. Gannon has managed clinical trials and operations as
well as the design, corporate and regulatory strategies, regulatory submissions
and execution of Phase I through Phase IV clinical trials in the U.S., Europe
and Asia. Additionally, Dr. Gannon is involved in philanthropy in the
Washington, DC area and currently serves on the Board of Directors for The
Mautner Project – The National Lesbian Health organization.
Board
Composition
Currently,
our Board consists of three members; however, only John E. Doherty qualifies as
“independent” under the rules and regulations of the SEC and the
NASDAQ. As contemplated by the Purchase Agreement, all of our
executive officers and all of the members of our Board prior to the closing of
the Financing, with the exception of Frank M. Dougherty, resigned effective
concurrently with the closing of the Financing. Mr. Dougherty
resigned effective upon the expiration of the 10-day notice period required by
Rule 14f-1 under the Exchange Act. Effective upon the closing of the
Financing, our Board appointed Arnold P. Kling as a director and then elected
him as president and elected Kirk M. Warshaw as chief financial officer and
secretary. In December 2009, Messrs. Warshaw and Doherty were
appointed to our Board.
26
Family
Relationships
None of
our directors or executive officers are related by blood, marriage or
adoption.
Board
Committees
Our Board
has the authority to appoint committees to perform certain management and
administrative functions. As of the date of this Report, given the
limited number of directors, our Board has not yet re-established any
committees. However, we expect that our Board will appoint new
directors in the future and once the Board has been expanded, we anticipate that
the Board will again establish separate audit, compensation and nominating and
corporate governance committees and may, from time to time, establish other
committees it deems appropriate.
Audit
Committee Financial Expert
Our
entire Board will act as our audit committee until such time it decides to
re-establish a separate audit committee. The Board has determined
that Mr. Warshaw qualifies as our “audit committee financial expert,” as that
term is defined in Item 407(d)(5) of Regulation S-K. Mr. Warshaw is
not independent for audit committee purposes under the definition contained in
Section 10A(m)(3) of the Exchange Act.
Director
Independence
Our Board
has determined that Mr. Doherty is “independent” in accordance with the NASDAQ’s
independence standards. In its application of such standards, the
Board takes into consideration all transactions with independent directors and
the impact of such transactions, if any, on any of its independent directors’
ability to continue to serve on the Board. To that end, for the
fiscal year ended May 31, 2010, the Board considered all the compensation paid
to Mr. Doherty, as disclosed below in “Item 11 – Executive Compensation –
Compensation of Directors,” and determined that such compensation was within the
limits of the independence standards set by the NASDAQ and did not impact his
ability to continue to serve as an independent director.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our directors and executive officers and
persons who beneficially own more than ten percent of our common stock
(collectively, the "Reporting Persons") to report their ownership of and
transactions in our common stock to the SEC. Copies of these reports are also
required to be supplied to us. To our knowledge, during the fiscal
year ended May 31, 2010 the Reporting Persons complied with all applicable
Section 16(a) reporting requirements.
Code
of Ethics
Our Board
adopted a code of ethics that applies to its directors, officers and employees
as well as those of our subsidiaries. Copies of our codes of ethics are publicly
available on our website at www.protalex.com. Requests for copies of our codes
of ethics should be sent in writing to Protalex, Inc., 133 Summit Avenue, Suite
22, Summit, NJ 18938.
27
ITEM 11. EXECUTIVE
COMPENSATION
Summary Compensation Table
The table
below summarizes the total compensation paid to or earned by each of the named
executive officers for the fiscal years ended May 31, 2010 and
2009:
|
Name and Principal
Position
|
Year
|
Salary
($) (1)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($) (2)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||||||||||
|
Arnold
P. Kling, President*
|
2010 | * | 39,000 | — | — | — | — | 39,000 | |||||||||||||||||||
|
Steven
H. Kane,
|
2010
|
||||||||||||||||||||||||||
|
Former
president and chief executive officer**
|
2009
|
350,000 | — | — | 107,040 | 30,021 | (3) | 487,061 | |||||||||||||||||||
|
Marc
L. Rose, CPA,
|
2010
|
||||||||||||||||||||||||||
|
Former
vice president and chief financial officer**
|
2009
|
201,250 | — | — | 35,680 | — | 236,930 | ||||||||||||||||||||
|
*
|
Elected
president as of the closing of the Financing on November 11,
2009.
|
|
**
|
Resigned
from all of his positions with Protalex as of the closing of the Financing
on November 11, 2009.
|
|
(1)
|
Effective,
April 16, 2009, salary payments ceased under Messrs. Kane and Rose
Employment Agreements pursuant to Settlement Agreements as disclosed in
our Form 10-Q filed on April 14,
2009.
|
|
(2)
|
Reflects
the value of stock options that was charged to income as reported in our
financial statements and calculated using the provisions of FASB ASC 718
“Share-based Payments.”
|
|
(3)
|
This
represents the dollar amount paid by the Company for Mr. Kane’s health
insurance that is outside the Company’s standard insurance payment policy
provided to all other employees.
|
Employment
Contracts, Termination of Employment and Change in Control
Arrangements
Effective
April 15, 2009, our former president and chief executive officer, Steven H.
Kane, pursuant to a Settlement Agreement voluntarily resigned and terminated his
employment. However, Mr. Kane continued to serve through November 11,
2009 as president and chief executive officer, at the pleasure of the Board,
without any further compensation except his severance. Mr. Kane
remained on the Board through November 11, 2009. On April 30, 2009, we
commenced paying Mr. Kane pursuant to his existing severance arrangement
thirty-six (36) equal bi-weekly installments of pay totaling Six Hundred
Thousand Dollars ($600,000) together with a sum during this period equal to the
existing premiums previously paid by us for Mr. Kane’s health and dental
insurance coverage. Mr. Kane agreed to cooperate with and assist us until he
otherwise notified our then Chairman, G. Kirk Raab, that he is ceasing such
assistance, to achieve and to participate in the following: (1) oversight of the
clinical trials in Australia; (2) assist with SEC filings; (3) facilitate
accounts payable; and (4) otherwise cooperate with the reasonable requests of
our then Chairman to provide information and assistance related to the
performance of his former duties. Effective concurrently with the
closing of the Financing on November 11, 2009, pursuant to an Option Termination
and Non-Solicitation Agreement dated November 11, 2009 with us, certain of Mr.
Kane’s stock options which were exercisable in the aggregate for 700,000 shares
of our common stock were terminated.
Effective
April 15, 2009, our former vice president of finance, chief financial officer,
treasurer and secretary, Marc L. Rose, pursuant to a Settlement Agreement
voluntarily resigned and terminated his employment with us. However, he
continued to serve in those positions through November 11, 2009 pursuant to a
Consulting Agreement. On April 30, 2009, we commenced paying Mr. Rose
pursuant to his existing severance arrangement twenty-four (24) equal bi-weekly
installments of severance pay totaling Two Hundred Thirty Thousand Dollars
($230,000) together with a sum equal to the existing premiums previously paid by
us for Mr. Rose’s health and dental coverage (“Severance
Payments”). On November 11, 2009, effective concurrently with the
closing of the Financing, he resigned from all of his positions with us, his
consulting arrangement with us was terminated, his Settlement Agreement with us
was amended (the “Amendment”) and all of his stock options were
terminated.
28
Pursuant
to the Amendment, Mr. Rose agreed to cooperate with and assist us until December
31, 2009 by responding to our requests to provide information and assistance
related to the performance of his former duties and we agreed to continue to
make equal bi-weekly installments of Severance Payments to him up to and through
December 31, 2009 and, a final lump sum payment of $67,083.33 on December 31,
2009.
Indemnification
Agreements
As of the
date of this report, we have entered into indemnification agreements with each
of our current directors and executive officers, each of member of our SAB and
each of our former executive officers and directors who resigned in November
2009 in connection with the closing of the Financing. It is
anticipated that future directors, officers and members of our SAB will enter
into an Indemnification Agreement with us in substantially similar
form. The Indemnification Agreement provides, among other things,
that we will indemnify and hold harmless each person subject to an
Indemnification Agreement (each, an “Indemnified Party”) to the fullest extent
permitted by applicable law from and against all losses, costs, liabilities,
judgments, penalties, fines, expenses and other matters that may result or arise
in connection with such Indemnified Party serving in his or her capacity as a
director of ours or serving at our direction as a director, officer, employee,
fiduciary or agent of another entity. The Indemnification Agreement further
provides that, upon an Indemnified Party’s request, we will advance expenses to
the Indemnified Party to the fullest extent permitted by applicable
law. Pursuant to the Indemnification Agreement, an Indemnified Party
is presumed to be entitled to indemnification and we have the burden of proving
otherwise. The Indemnification Agreement also requires us to maintain
in full force and effect directors’ liability insurance on the terms described
in the Indemnification Agreement. If indemnification under the Indemnification
Agreement is unavailable to an Indemnified Party for any reason, we, in lieu of
indemnifying the Indemnified Party, will contribute to any amounts incurred by
the Indemnified Party in connection with any claim relating to an indemnifiable
event in such proportion as is deemed fair and reasonable in light of all of the
circumstances to reflect the relative benefits received or relative fault of the
parties in connection with such event.
Outstanding Equity Awards at Fiscal Year
End
The table
below summaries the outstanding equity awards to our named executive officers as
of the fiscal year ended May 31, 2010:
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price ($)
|
Option
Expiration
Date
|
||||||||||||
|
Steven
H. Kane, Former president and cChief executive officer
|
863,242 | — | — | 1.50 |
12/16/2012
|
||||||||||||
| 100,000 | — | — | 1.50 |
8/13/2013
|
|||||||||||||
29
Compensation
of Directors
The table
below summaries the compensation paid to our directors for the fiscal year ended
May 31, 2010:
|
Name
|
Fees Earned
or
Paid in Cash
($)
|
Option
Awards
($) (2)
|
All
Other
Compensation
($)
|
Total
($)
|
||||||||||||
|
Kirk
M. Warshaw (1)
|
— | — | — | — | ||||||||||||
|
John
E. Doherty (1)
|
— | $ | 39,302 | — | $ | 39,302 | ||||||||||
|
G.
Kirk Raab *
|
— | — | — | — | ||||||||||||
|
Eugene
A. Bauer, M.D. *
|
— | — | — | — | ||||||||||||
|
Frank
M. Dougherty **
|
— | — | — | — | ||||||||||||
|
Carleton
A. Holstrom *
|
— | — | — | — | ||||||||||||
|
Dinesh
Patel, Ph.D. *
|
— | — | — | — | ||||||||||||
|
Thomas
P. Stagnaro *
|
— | — | — | — | ||||||||||||
|
Peter G. Tombros *
|
— | — | — | — | ||||||||||||
*
Resigned as a director on November 11, 2009 effective concurrently with the
closing of the Financing.
**
Resigned as a director in connection with the Financing effective on November
26, 2009 upon the expiration of the 10-day notice period in accordance with Rule
14f-1 of the Exchange Act.
(1)
Appointed to our Board on November 27, 2009. Mr. Warshaw is also
serves as our Chief Financial Officer.
(2)
Reflects the value of the stock option that was charged to income as reported on
our financial statements and calculated using the provisions of FASB ASC 718,
“Share-based Payments.” On January 15, 2010, our Board granted to Mr.
Doherty a stock option for one million shares of our common stock with an
exercise price of $0.10 per share and vests on December 29, 2012, but is subject
to earlier vesting upon our achieving of certain milestones.
Pursuant
to a Cash Waiver & Option Termination Agreement dated April 10, 2009, each
of our former outside directors, G. Kirk Raab, Carleton A. Holstrom, Eugene A.
Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro who were
entitled to a cash fee agreed to waive all such accrued and unpaid cash fees and
terminate any rights for further cash fees. For Mr. Raab, those cash
fees ceased as of April 1, 2009. For the other former directors,
those cash fees ceased as of February 1, 2009. In addition, each of
these directors agreed to terminate immediately all of their existing stock
options (vested and unvested) upon the closing of the Financing in November 11,
2009.
With the
exception of Mr. Dougherty, all of our former directors and executive officers
resigned on November 11, 2009 effective concurrently with the closing of the
Financing. Mr. Dougherty resigned effective upon the expiration of
the 10-day notice period required by Rule 14f-1 under the Exchange
Act. Except for the severance arrangements described above, we have
no further financial obligations to any former officer or director (other than
pursuant to indemnification agreements.)
30
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table lists, as of August 1, 2010, the number of shares of our common
stock beneficially owned by (i) each person or entity known to us to be the
beneficial owner of more than 5% of our outstanding common stock; (ii) each of
our named executive officers and directors; and (iii) all of our officers and
directors as a group. Unless otherwise indicated, the address of each
person listed below is in the care of Protalex, Inc., 133 Summit Avenue, Suite
22, Summit, New Jersey 18938.
|
Shares Beneficially
Owned(1)
|
||||||||
|
Name and Title
|
Number
|
Percent
|
||||||
|
Arnold
P. Kling, president and director (2)(6)
|
65,242,390 | 69.5 | % | |||||
|
Kirk
M. Warshaw, CFO, secretary and director
|
— | — | ||||||
|
John
E. Doherty, Director (3)
|
2,850,438 | 4.0 | % | |||||
|
Steven
H. Kane, former CEO and former director (4)
|
1,186,663 | 1.6 | % | |||||
|
Marc
L. Rose, CPA, former vice president, chief financial officer, treasurer
and secretary
|
15,000 | * | ||||||
|
Officers
and Directors as a group (3 persons) (5)
|
68,092,828 | 72.6 | % | |||||
|
5% Beneficial Owners
|
||||||||
|
Niobe Ventures LLC (6)
712 Fifth Avenue – 11th Floor
New York, NY 10019
|
65,217,390 | 69.5 | % | |||||
*Indicates
less than 1%.
|
(1)
|
Unless
otherwise indicated, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
the common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date indicated above upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable within 60 days of the date indicated
above, have been exercised.
|
|
(2)
|
Arnold
P. Kling, our president and a director, possesses sole voting and
dispositive control over the securities owned by Niobe Ventures, LLC and
therefore is deemed to be the beneficial owner of the securities held by
that entity.
|
|
(3)
|
Includes
options to purchase 10,000 shares and warrants to purchase 27,778 shares
of our common stock.
|
|
(4)
|
Includes
options to purchase 963,242 shares and warrants to purchase 7,778 shares
of our common stock.
|
|
(5)
|
Includes
21,739,130 shares of common stock issuable upon conversion of the Secured
Note deemed to be beneficially owned by Arnold P. Kling as the manager of
Niobe Ventures, LLC and warrants to purchase 3,778 shares of our common
stock beneficially owned by Frank M.
Dougherty.
|
|
(6)
|
Includes
21,739,130 shares of our common stock issuable upon conversion of the
Secured Note owned by Niobe Ventures,
LLC.
|
Change
in Control Since Last Fiscal Year
On
November 11, 2009, in connection with the closing of the Financing, Niobe
acquired control of our company through the acquisition of 43,478,260 shares of
our common stock (approximately 60% of our common stock issued and outstanding
immediately after closing of the Financing) at a price of $0.046 per share paid
in cash and the Secured Note, convertible into shares of our common stock at a
price per share of $0.046. The consideration was paid out of Niobe’s
working capital. For additional information relating to the
Financing, see the “Business” section, above. Prior to the closing of
the Financing, no investor (or group) beneficially owned more than 12.9% of our
common stock.
31
Securities
Authorized for Issuance under Equity Compensation Plans
Equity
Compensation Plan Information
|
Plan category
|
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
|
Weighted-average exercise
price of outstanding options,
warrants and rights
|
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a)
|
|||||||||
|
(a)
|
(b)
|
(c)
|
||||||||||
|
Equity
compensation plans approved by security holders – 2003 Stock Option
Plan
|
263,968 | $ | 1.50 | 4,232,032 | ||||||||
|
Equity
compensation plans not approved by security holders – Stand Alone Option
Grants
|
7,130,668 | $ | 0.37 | — | ||||||||
|
Total
|
7,394,636 | $ | 1.04 | 4,232,032 | ||||||||
During
the fiscal year ended May 31, 2010, options for an aggregate of 5,852,714 shares
of our common stock were granted under Equity Compensation Plans Not Approved by
Security Holders as compensation to our chief financial officer, a member of our
Board and the members of our SAB. These options are ten year options
with exercise prices ranging from $0.05 to $0.20, vest on the third anniversary
from the date of grant and are subject to earlier vesting upon the achievement
of each of three milestones including, upon commencement of the drug test trial,
upon demonstrated efficacy of the drug trial and finally, upon the execution of
a licensing or financing deal.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During
the years ended May 31, 2010, May 31, 2009 and May 31, 2008, we incurred $0,
$7,677, and $48,633, respectively, of expenses related to air travel to a
partnership principally owned by our former chief executive officer, Steven H.
Kane.
As
described herein above, on November 11, 2009 we raised $3,000,000 of additional
working capital in the Financing transaction with Niobe, a Delaware limited
liability company for which Arnold Kling, our president and director, is also an
executive officer. In the Financing, we issued to Niobe (i)
43,478,260 restricted shares of our common stock at a purchase price of $0.046
per share (or $2,000,000 in the aggregate) and (ii) a Secured Note in the
principal amount of $1,000,000 and convertible into shares of our common stock
at an initial conversion price equal to $0.046 per share.
On
December 2, 2009, we entered into an agreement with Niobe for a secured line
credit of up to $2.0 million at any time prior to June 30, 2012 subject to the
achievement of certain predetermined benchmarks. Any loan(s) made
pursuant to this credit facility will be evidenced by a senior secured
convertible note, bearing interest at a rate of 3% per annum, in the principal
amount of any such loan and convertible into shares of our common stock at an
initial conversion price equal to the then conversion price of the Secured Note
issued in the Financing. All loans pursuant to this credit facility
will mature on the later of the fifteenth month anniversary of such loan or
December 31, 2012. In connection with this credit facility we granted
Niobe a security interest in substantially all of our personal property and
assets, including our intellectual property to collateralize all amounts due to
it under this facility.
Currently,
we do not have written policies and procedures for the review, approval or
ratification of related person transactions. However, given our small size,
senior management and the audit committee (or full Board) are able to review all
transactions consistent with applicable securities rules governing our
transactions and proposed transactions exceeding the lesser of $120,000 or one
percent of the average of our total assets as of May 31, 2010 and 2009 in which
a related person has a direct or indirect material interest. Our
Board reviews related person transactions and has approval authority with
respect to whether a related person transaction is within our best
interest.
32
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Audit
Fees
For the
year ended May 31, 2010, we were billed $36,000 by Sherb, our current
independent accountants, for professional services rendered for the audit of our
annual financial statements and the review of financial statements included in
our report on Form 10-Q for the second and third quarters and $15,718 by GT, for
professional services rendered for the review of financial statements included
in our reports on Form 10-Q for the first quarter. For the year ended
May 31, 2009, we paid $79,351 to GT, for professional services rendered for the
audit of our annual financial statements and review of financial statements
included in our quarterly reports on Form 10-Q or services that are normally
provided in connection with statutory and regulatory filings.
Audit-Related
Fees
None.
Tax
Fees
None.
All
Other Fees
Except as
described above, no other fees were billed by Sherb or GT for any other services
during the last two fiscal years.
Pre-Approval
of Audit and Permissible Non-Audit Services
As of the
date of this Report, given the limited number of directors, our Board has not
re-established any committees since the consummation of the
Financing. As a result, our Board pre-approves all audit and
permissible non-audit services provided by the independent
auditors. The services may include audit services, audit-related
services, tax services and other services. The independent auditors
and management are required to periodically report to the Board regarding the
extent of services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The
Board may also pre-approve particular services on a case-by-case
basis.
PART
IV
ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
(a) 1.
Financial Statements
Reference
is made to the Index to Financial Statements on page F-1 of this Annual Report
which is filed as part of this Annual Report and incorporated by reference
herein.
2.
Financial Statement Schedules
None.
(b) Exhibits
The
following exhibits are filed a part of, or incorporated by reference into this
Annual Report.
33
EXHIBIT
INDEX
|
3.1
|
Certificate
of Incorporation of the Company
|
Incorporated
by reference, to Exhibit 3.1 to the Company’s 8-K filing on December 6,
2004
|
||
|
3.2
|
Bylaws
of the Company
|
Incorporated
by reference, to Exhibit 3.2 to the Company’s 8-K filing on December 6,
2004
|
||
|
3.3
|
State
of Delaware, Certificate of Amendment of Certificate of
Incorporation
|
Incorporated
by reference, to Exhibit 3.3 to the Company 10-QSB filed on January 13,
2006
|
||
|
4.1
|
Warrant
and Common Stock Purchase Agreement dated December 22, 2005 among the
Company and the several purchasers thereunder
|
Incorporated
by reference, to Exhibit 4.5 to the Company’s SB-2 filed on January 27,
2006
|
||
|
4.2
|
Registration
Rights Agreement dated December 22, 2005 among the purchasers under the
Warrant and Common Stock Purchase Agreement of even date
therewith
|
Incorporated
by reference, to Exhibit 4.6 to the Company’s SB-2 filed on January 27,
2006
|
||
|
4.3
|
Form
of Warrant issued by the Company to the Selling Stockholders dated
December 22, 2005 of even date therewith
|
Incorporated
by reference, to Exhibit 4.7 to the Company’s SB-2 filed on January 27,
2006
|
||
|
4.4
|
Warrant
and Common Stock Purchase Agreement dated June 30, 2006 among the Company
and the several purchasers thereunder
|
Incorporated
by reference, to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on July 10, 2006.
|
||
|
4.5
|
Registration
Rights Agreement dated June 30, 2006 among the purchasers under the
Warrant and Common Stock Purchase Agreement of even date
therewith
|
Incorporated
by reference, to Exhibit 10.2 to the Company’s Current Report on Form 8-K
filed on July 10, 2006
|
||
|
4.6
|
Form
of Warrant issued by the Company to the Selling Stockholders dated June
30, 2006 of even date therewith
|
Incorporated
by reference, to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on July 10, 2006
|
||
|
4.7
|
Secured
Convertible Promissory Note dated November 11, 2009.
|
Incorporated
by reference, to Exhibit 4.1 to the Company’s Current Report on Form 8-K
filed on November 13, 2010
|
||
|
4.8
|
Form
of Option Agreement
|
Incorporated
by reference, to Exhibit 10.6 to the Company’s Annual Report on Form
10-KSB/A filed on September 24, 2003
|
||
|
4.9
|
Form
of Non-Qualified Stock Option Agreement with each of William Gannon,
Edward Bernton and Valerie Jackson
|
Filed
herewith
|
||
|
10.1
|
Frame
Contract between the Company and Eurogentec S.A.
|
Incorporated
by reference, to Exhibit 10.5 to the Company’s 10-KSB/A filed on September
24, 2003
|
||
|
10.2
|
Assignment
of Intellectual Property from Alex LLC to the Company
|
Incorporated
by reference, to Exhibit 10.8 to the Company’s 10-KSB/A filed on September
24, 2003.
|
||
|
10.3
|
Assignment
of Intellectual Property from Dr. Paul Mann to the Company
|
Incorporated
by reference, to Exhibit 10.8 to the Company’s Annual Report on Form
10-KSB/A filed on September 24, 2003.
|
||
|
10.4
|
Protalex,
Inc. 2003 Stock Option Plan Amended and Restated as of July 29,
2005
|
Incorporated
by reference to Appendix B to the Company’s Proxy Statement filed on
September 23, 2005.
|
||
|
10.5†
|
Service
Contract with AAIPharma Inc., dated January 29, 2007
|
Incorporated
by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form
10-QSB filed on April 13, 2007.
|
||
|
10.6
|
Settlement
Agreement with Steven H. Kane, dated April 14, 2009
|
Incorporated
by reference, to Exhibit 10.18 to the Company’s Annual Report on Form 10-K
filed on August 28, 2009.
|
||
|
10.7
|
Settlement
Agreement with Marc L. Rose, dated April 14, 2009
|
Incorporated
by reference, to Exhibit 10.19 to the Company’s Annual Report on Form 10-K
filed on August 28, 2009.
|
||
|
10.8
|
Indemnification
Agreement with Directors and Executive Officers dated August 28,
2009
|
Incorporated
by reference, to Exhibit 10.21 to the Company’s Annual Report on Form 10-K
filed on August 28, 2009.
|
||
|
10.9**
|
Final
Form of Indemnification Agreement with current Directors, Executive
Officers and the members of the Scientific Advisory Board
|
Incorporated
by reference, to Exhibit 10.3 to the Company’s Current Report on Form 8-K
filed on November 13, 2010
|
||
|
10.10
|
Note
and Common Stock Purchase Agreement dated November 11, 2009, between the
Company and Niobe Ventures, LLC.
|
Incorporated
by reference, to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed on November 13, 2010
|
||
|
10.11
|
Final
Form of Credit Facility Agreement dated as of December 2, 2009, between
the Company and Niobe Ventures, LLC
|
Incorporate
by reference to Exhibit 10.4 to the Company’s Current Report Form 8-K
filed on December 2, 2009
|
||
|
10.12
|
Final
Form of Amended and Restated Security Agreement dated as of December 2,
2009, between the Company and Niobe Ventures, LLC
|
Incorporate
by reference to Exhibit 10.5 to the Company’s Current Report Form 8-K
filed on December 2, 2009
|
||
|
10.13**
|
Form
of Non-Qualified Stock Option Agreement with Kirk M.
Warshaw.
|
Incorporate
by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10Q
filed on January 8, 2010
|
||
|
10.14**
|
Form
of Non-Qualified Stock Option Agreement with John Doherty.
|
Incorporate
by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10Q
filed on April 7, 2010
|
||
|
23.1
|
Consent
of Sherb & Co, LLP
|
Filed
herewith
|
||
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act
|
Filed
herewith
|
||
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act
|
Filed
herewith
|
||
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
Filed
herewith
|
||
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act
|
Filed
herewith
|
†Portions
of the exhibit have been omitted pursuant to a request for confidential
treatment. The confidential portions have been filed with the
SEC.
**This exhibit is a management
contract or compensatory plan or arrangement.
34
SIGNATURES
In accordance with Section 13 or
15(d) of the Exchange Act of 1934, the registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
|
Protalex
Inc.
|
||
|
Date:
August 27, 2010
|
||
|
By: /s/Arnold
P. Kling
|
||
|
Arnold
P. Kling, President
|
In accordance with 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.
Date:
August 27, 2010
|
By: /s/Arnold
P. Kling
|
||
|
Arnold
P. Kling, President and Director
|
||
|
(Principal
Executive Officer)
|
Date:
August 27, 2010
|
By:
/s/Kirk
M. Warshaw
|
|
|
|
Kirk
M. Warshaw, Chief Financial Officer and Director (Principal
Financial and Accounting Officer)
|
Date:
August 27, 2010
|
By: /s/John
E. Doherty
|
|
|
|
John
E. Doherty, Director
|
35
PROTALEX,
INC.
(A
Development Stage Company)
INDEX
TO FINANCIAL STATEMENTS
The
following Financial Statements, and the related Notes thereto, of Protalex, Inc.
and the Report of Independent Registered Public Accounting Firm are filed as a
part of this Annual Report on Form 10-K.
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Financial
Statements
|
|
|
Balance
Sheets at May 31, 2010 and 2009 (Audited)
|
F-3
|
|
Statements
of Operations for the Years Ended May 31, 2010 and 2009
(Audited),
|
|
|
and
from Inception (September 17, 1999) through May 31, 2010
(Unaudited)
|
F-4
|
|
Statement
of Changes in Stockholders’ Equity from Inception (September 17,
1999)
|
|
|
through
May 31, 2010 Inception to May 31, 2008 (Unaudited)
|
F-5
|
|
Statements
of Cash Flows for the Years Ended May 31, 2010 and 2009 (Audited)
and
|
|
|
from
Inception (September 17, 1999) through May 31, 2010
(Unaudited)
|
F-9
|
|
NOTES
TO FINANCIAL STATEMENTS
|
F-10
|
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders
and Directors
Protalex,
Inc.
(A
Development Stage Company)
Summit,
New Jersey
We have
audited the accompanying balance sheets of Protalex, Inc. (A Development Stage
Company) as of May 31, 2010 and 2009 and the related statements of operations,
changes in stockholders’ equity , and cash flows for each of the years then
ended May 31, 2010 and 2009 and for the period from September 17, 1999
(inception) to May 31, 2010. We did not audit the period September
17, 1999 (inception) to May 31, 2008. 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.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the 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, 2010
and 2009 and the results of its operations and its cash flows for each of the
years ended May 31, 2010 and 2009 in conformity with accounting principles
generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that Protalex,
Inc. will continue as a going concern. As more fully described in Note 3, the
Company has incurred recurring operating losses and will have to obtain
additional capital to sustain operations. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments to reflect the possible effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
|
/s/SHERB
& CO, LLP
|
|
|
Certified
Public Accountants
|
New York,
NY
August
25, 2010
F-2
PROTALEX,
INC.
(A
Development Stage Company)
BALANCE
SHEETS
|
|
May 31,
|
May 31,
|
||||||
|
2010
|
2009
|
|||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,350,084 | $ | 2,637,292 | ||||
|
Prepaid
expenses
|
39,004 | 193,757 | ||||||
|
Total
current assets
|
2,389,088 | 2,831,049 | ||||||
|
PROPERTY
& EQUIPMENT:
|
||||||||
|
Property
& equipment – net
|
- | 25,162 | ||||||
|
OTHER
ASSETS:
|
||||||||
|
Deposits
|
- | 7,990 | ||||||
|
Intellectual technology property,
net of accumulated
amortization of $10,008 and $9,753 as of May 31, 2010 and
May 31, 2009, respectively
|
9,527 | 10,547 | ||||||
|
Total
other assets
|
9,527 | 18,537 | ||||||
|
Total
Assets
|
$ | 2,398,615 | $ | 2,874,748 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
CURRENT
LIABILITIES:
|
||||||||
|
Accounts
payable
|
$ | 182,861 | $ | 398,734 | ||||
|
Payroll
and related liabilities
|
156,994 | 1,185,638 | ||||||
|
Accrued
expenses
|
396,878 | 8,057 | ||||||
|
Deferred
rent
|
- | 1,192 | ||||||
|
Total
current liabilities
|
736,733 | 1,593,621 | ||||||
|
LONG
TERM LIABILITIES:
|
||||||||
|
Senior
Secured Convertible Note – net of debt discount - related
party
|
591,063 | - | ||||||
|
Total
liabilities
|
1,327,796 | 1,593,621 | ||||||
|
STOCKHOLDERS'
EQUITY
|
||||||||
|
Common
stock, par value $0.00001,
|
||||||||
|
100,000,000
shares authorized;
72,078,724
and 28,600,464 shares issued and outstanding, respectively
|
721 | 286 | ||||||
|
Additional
paid in capital
|
48,722,451 | 45,865,352 | ||||||
|
Deficit
accumulated during the development stage
|
(47,652,353 | ) | (44,584,511 | ) | ||||
|
Total
stockholders’ equity
|
1,070,819 | 1,281,127 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 2,398,615 | $ | 2,874,748 | ||||
The
accompanying notes are an integral part of these financial
statements.
F-3
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENTS
OF OPERATIONS
For the
Years Ended May 31, 2010 and 2009 and
From
Inception (September 17, 1999) through May 31, 2010
|
Year Ended
May 31, 2010
|
Year Ended
May 31,2009
|
From Inception
(September 17, 1999)
Through May 31, 2010
|
||||||||||
|
(Unaudited)
|
||||||||||||
|
Revenues
|
$ | - | $ | - | $ | - | ||||||
|
Operating
Expenses
|
||||||||||||
|
Research
and development (including depreciation and amortization)
|
1,291,051 | 3,490,956 | 29,044,835 | |||||||||
|
Administrative
(including depreciation and amortization)
|
1,036,059 | 3,427,085 | 16,583,102 | |||||||||
|
Professional
fees
|
629,948 | 365,670 | 3,875,082 | |||||||||
|
Depreciation
and amortization
|
16,090 | 4,146 | 179,906 | |||||||||
|
Operating
loss
|
(2,973,148 | ) | (7,287,857 | ) | (49,682,925 | ) | ||||||
|
Other
income (expense)
|
||||||||||||
|
Interest
income
|
5,544 | 57,651 | 2,201,422 | |||||||||
|
Interest
expense
|
(100,238 | ) | - | (170,850 | ) | |||||||
|
Net
loss
|
$ | (3,067,842 | ) | $ | (7,230,206 | ) | $ | (47,652,353 | ) | |||
|
Weighted
average number of common shares outstanding
|
52,675,203 | 28,600,464 | ||||||||||
|
Loss
per common share – basic and diluted
|
$ | (0.06 | ) | $ | (0.25 | ) | ||||||
The
accompanying notes are an integral part of these financial
statements.
F-4
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
From
Inception (September 17, 1999) through May 31, 2010
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Common
|
During The
|
||||||||||||||||||||||
|
Common Stock
|
Paid in
|
Stock-
|
Development
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
|||||||||||||||||||
|
September
17, 1999 — initial issuance of 10,000 shares for intellectual technology
license at $.03 per share
|
10,000
|
$
|
300
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
300
|
|||||||||||||
|
September
30, 1999 — cost of public shell acquisition over net assets acquired to be
accounted for as a Recapitalization
|
—
|
—
|
—
|
(250,000
|
)
|
—
|
(250,000
|
)
|
||||||||||||||||
|
October
27, 1999 — issuance of 84 shares to individual for $25,000
|
84
|
25,000
|
—
|
—
|
—
|
25,000
|
||||||||||||||||||
|
November
15, 1999 — reverse merger transaction with Enerdyne Corporation, net
transaction amounts
|
8,972,463
|
118,547
|
—
|
(118,547
|
)
|
—
|
—
|
|||||||||||||||||
|
November
18, 1999 — February 7, 2000 — issuance of 459,444 shares to various
investors at $0.36 per share
|
459,444
|
165,400
|
—
|
—
|
—
|
165,400
|
||||||||||||||||||
|
January
1, 2000 — issuance of 100,000 shares in exchange for legal
services
|
100,000
|
15,000
|
—
|
—
|
—
|
15,000
|
||||||||||||||||||
|
May
1 - 27, 2000 — issuance of 640,000 shares to various investors at $1.00
per share
|
640,000
|
640,000
|
—
|
—
|
—
|
640,000
|
||||||||||||||||||
|
May
27, 2000 — issuance of 1,644 shares to an 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 – (Unaudited)
|
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 – (Unaudited)
|
10,608,635
|
1,390,891
|
40,000
|
(368,547
|
)
|
(804,555
|
)
|
257,789
|
||||||||||||||||
The
accompanying notes are an integral part of this financial
statement.
F-5
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)
From
Inception (September 17, 1999) through May 31, 2010
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Common
|
During The
|
||||||||||||||||||||||
|
Common Stock
|
Paid in
|
Stock-
|
Development
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
|||||||||||||||||||
|
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
|
—
|
—
|
133,000
|
||||||||||||||||||
|
Net
loss for the year ended May 31, 2002
|
—
|
—
|
—
|
—
|
(1,280,465
|
)
|
(1,280,465
|
)
|
||||||||||||||||
|
Balance,
May 31, 2002 – (Unaudited)
|
11,490,235
|
2,492,891
|
316,569
|
(368,547
|
)
|
(2,085,020
|
)
|
355,893
|
||||||||||||||||
|
July
5, 2002 — issuance of 842,000 shares at $1.50 per share
|
842,000
|
1,263,000
|
—
|
—
|
—
|
1,263,000
|
||||||||||||||||||
|
July
1, 2002 - May 1, 2003 – purchase of common stock from shareholder at $.70
per share
|
(130,955
|
)
|
(91,667
|
)
|
—
|
—
|
—
|
(91,667
|
)
|
|||||||||||||||
|
January
15, 2003 - May 15, 2003 — common stock issued to Company
president
|
41,670
|
82,841
|
—
|
—
|
—
|
82,841
|
||||||||||||||||||
|
May
14, 2003 — common stock issued to employee
|
5,000
|
11,250
|
—
|
—
|
—
|
11,250
|
||||||||||||||||||
|
June
1, 2002 - May 31, 2003 – compensation related to stock options issued to
board members, employees and consultants
|
—
|
—
|
287,343
|
—
|
—
|
287,343
|
||||||||||||||||||
|
Net
loss for the year ended May 31, 2003
|
—
|
—
|
—
|
—
|
(1,665,090
|
)
|
(1,665,090
|
)
|
||||||||||||||||
|
Balance,
May 31, 2003 – (Unaudited)
|
12,247,950
|
3,758,315
|
603,912
|
(368,547
|
)
|
(3,750,110
|
)
|
243,570
|
||||||||||||||||
|
June
15, 2003, common stock issued to Company president
|
8,334
|
16,418
|
—
|
—
|
—
|
16,418
|
||||||||||||||||||
|
June
15, 2003, purchase of common stock from shareholder
|
(12,093
|
)
|
(8,333
|
)
|
—
|
—
|
—
|
(8,333
|
)
|
|||||||||||||||
|
September
18, 2003 – issuance of 7,445,646 of common stock issued in private
placement At $1.70 per share, net of transaction costs
|
7,445,646
|
11,356,063
|
—
|
—
|
—
|
11,356,063
|
||||||||||||||||||
|
September
19, 2003 – repurchase and retired 2,994,803 shares for
$300,000
|
(2,994,803
|
)
|
(300,000
|
)
|
—
|
—
|
—
|
(300,000
|
)
|
|||||||||||||||
|
December
12, 2003 – issuance of 39,399 shares to terminated employees at $2.60 per
share
|
39,399
|
102,438
|
—
|
—
|
—
|
102,438
|
||||||||||||||||||
|
March
1, 2004 – common stock issued to employee at $2.55 per
share
|
50,000
|
127,500
|
—
|
—
|
—
|
127,500
|
||||||||||||||||||
|
May
31, 2004 – reclassify common stock contra to common stock
|
—
|
(368,547
|
)
|
—
|
368,547
|
—
|
—
|
|||||||||||||||||
The
accompanying notes are an integral part of this financial
statement.
F-6
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)
From
Inception (September 17, 1999) through May 31, 2010
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Common
|
During The
|
||||||||||||||||||||||
|
Common Stock
|
Paid in
|
Stock-
|
Development
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
|||||||||||||||||||
|
June
1, 2003 – May 31, 2004 – compensation related to stock options issued to
board members, employees and consultants
|
—
|
—
|
448,096
|
—
|
—
|
448,096
|
||||||||||||||||||
|
Net
loss for the year ended May 31, 2004
|
—
|
—
|
—
|
—
|
(2,989,364
|
)
|
(2,989,364
|
)
|
||||||||||||||||
|
Balance,
May 31, 2004 – (Unaudited)
|
16,784,433
|
14,683,854
|
1,052,008
|
—
|
(6,739,474
|
)
|
8,996,388
|
|||||||||||||||||
|
November
30, 2004 – adjust March 1, 2004 common stock issued to
employee
|
—
|
(20,000
|
)
|
—
|
—
|
(20,000
|
)
|
|||||||||||||||||
|
January
13, 2005 – common stock issued to employee at $2.55 per
share
|
15,000
|
38,250
|
—
|
—
|
—
|
38,250
|
||||||||||||||||||
|
February
28, 2005 – Reclass Par Value for Reincorporation into DE as of
12/1/04
|
—
|
(14,701,935
|
)
|
14,701,935
|
—
|
—
|
0
|
|||||||||||||||||
|
May
25, 2005 - issuance of 2,593,788 shares of common stock issued in private
placement At $1.95 per share, net of transaction costs
|
2,593,788
|
25
|
4,851,168
|
—
|
—
|
4,851,193
|
||||||||||||||||||
|
June
1, 2004 – May 31, 2005 – compensation related to stock options issued to
board members, employees and consultants
|
—
|
—
|
308,711
|
—
|
—
|
308,711
|
||||||||||||||||||
|
Net
loss for the year ended May 31, 2005
|
—
|
—
|
—
|
—
|
(5,567,729
|
)
|
(5,567,729
|
)
|
||||||||||||||||
|
Balance,
May 31, 2005 – (Unaudited)
|
19,393,221
|
194
|
20,913,822
|
—
|
(12,307,203
|
)
|
8,606,813
|
|||||||||||||||||
|
August
23, 2005 – common stock issued to employee
|
40,000
|
0
|
100,000
|
—
|
—
|
100,000
|
||||||||||||||||||
|
October
19, 2005 – common stock issued to employee
|
10,000
|
0
|
25,000
|
—
|
—
|
25,000
|
||||||||||||||||||
|
December
30, 2005 – issuance of 2,595,132 shares of common stock issued in private
placement at $2.25 per share, net of transaction costs
|
2,595,132
|
26
|
5,510,941
|
—
|
—
|
5,510,967
|
||||||||||||||||||
|
June
1, 2005 – May 31, 2006 – warrants exercised
|
351,598
|
4
|
786,534
|
—
|
—
|
786,538
|
||||||||||||||||||
|
June
1, 2005– May 31, 2006 – compensation related to stock options issued to
board members, employees and consultants
|
—
|
—
|
404,679
|
—
|
—
|
404,679
|
||||||||||||||||||
|
Net
loss for the year ended May 31, 2006
|
—
|
—
|
—
|
—
|
(6,104,402
|
)
|
(6,104,402
|
)
|
||||||||||||||||
|
Balance,
May 31, 2006 – (Unaudited)
|
22,389,951
|
224
|
27,740,976
|
—
|
(18,411,605
|
)
|
9,329,595
|
|||||||||||||||||
The
accompanying notes are an integral part of this financial
statement.
F-7
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)
From
Inception (September 17, 1999) through May 31, 2010
|
Deficit
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Common
|
During The
|
||||||||||||||||||||||
|
Common Stock
|
Paid in
|
Stock-
|
Development
|
|||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
|||||||||||||||||||
|
July
7, 2006 – issuance of 6,071,013 shares of common stock issued in private
placement at $2.50 per share, net of transaction costs
|
6,071,013 | 61 | 14,217,660 | — | — | 14,217,721 | ||||||||||||||||||
|
June
1, 2006 – May 31, 2007 – warrants exercised
|
133,500 | 1 | 300,373 | — | — | 300,374 | ||||||||||||||||||
|
June
1, 2006 – May 31, 2007 – stock options exercised
|
6,000 | 0 | 15,200 | — | — | 15,200 | ||||||||||||||||||
|
June
1, 2006 – May 31, 2007 – share based compensation to board members,
employees and consultants
|
— | — | 1,826,850 | — | — | 1,826,850 | ||||||||||||||||||
|
Net
loss for the year ended May 31, 2007
|
— | — | — | — | (8,451,942 | ) | (8,451,942 | ) | ||||||||||||||||
|
Balance,
May 31, 2007 – (Unaudited)
|
28,600,464 | 286 | 44,101,059 | — | (26,863,547 | ) | 17,237,798 | |||||||||||||||||
|
June
1, 2007 – May 31, 2008 – share based compensation to board members,
employees and consultants
|
— | — | 1,011,025 | — | — | 1,011,025 | ||||||||||||||||||
|
Net
loss for the year ended May 31, 2008
|
— | — | — | — | (10,490,758 | ) | (10,490,758 | ) | ||||||||||||||||
|
Balance,
May 31, 2008 – (Unaudited)
|
28,600,464 | 286 | 45,112,084 | — | (37,354,305 | ) | 7,758,065 | |||||||||||||||||
|
June
1, 2008 – May 31, 2009 – shared-based compensation to board members,
employees and consultants
|
— | — | 753,268 | — | — | 753,268 | ||||||||||||||||||
|
Net
loss for the year ended May 31, 2009
|
— | — | — | — | (7,230,206 | ) | (7,230,206 | ) | ||||||||||||||||
|
Balance,
May 31, 2009
|
28,600,464 | 286 | 45,865,352 | — | (44,584,511 | ) | 1,281,127 | |||||||||||||||||
|
June
1, 2009 – May 31, 2010 – shared-based expense to employees and debt
holders
|
— | — | 335,741 | — | — | 335,741 | ||||||||||||||||||
|
November
11, 2009 – record beneficial conversion value attached to senior secured
convertible debt
|
— | — | 521,793 | — | — | 521,793 | ||||||||||||||||||
|
November
11, 2009 – issuance of 43,478,260 shares of common stock at
$.046
|
43,478,260 | 435 | 1,999,565 | — | — | 2,000,000 | ||||||||||||||||||
|
Net
loss for the year ended May 31, 2010
|
— | — | — | — | (3,067,842 | ) | (3,067,842 | ) | ||||||||||||||||
|
Balance,
May 31, 2010
|
72,078,724 | $ | 721 | $ | 48,722,451 | $ | — | $ | (47,652,353 | ) | $ | 1,070,819 | ||||||||||||
The
accompanying notes are an integral part of this financial
statement.
F-8
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENTS
OF CASH FLOWS
For the
Year Ended May 31, 2010 and 2009 and From Inception (September 17, 1999) through
May 31, 2010
|
Year
|
Year
|
From
Inception
(September 17,
1999)
|
||||||||||
|
Ended
|
Ended
|
Through
|
||||||||||
|
May 31,
|
May 31,
|
May 31,
|
||||||||||
|
2010
|
2009
|
2010
|
||||||||||
|
( Unaudited )
|
||||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
loss
|
$ | (3,067,842 | ) | $ | (7,230,206 | ) | $ | (47,652,353 | ) | |||
|
Adjustments
to reconcile net loss to net cash and cash equivalents used in operating
activities
|
||||||||||||
|
(Gain)
on disposal of equipment, net
|
(13,953 | ) | (78,174 | ) | (81,544 | ) | ||||||
|
Depreciation
and amortization
|
129,856 | 49,799 | 1,034,558 | |||||||||
|
Equity
based expense
|
335,741 | 753,268 | 6,009,050 | |||||||||
|
(Increase)/decrease
in:
|
||||||||||||
|
Prepaid
expenses and deposits
|
154,753 | 235,450 | (46,994 | ) | ||||||||
|
Increase/(decrease)
in:
|
||||||||||||
|
Accounts
payable and accrued expenses
|
172,948 | (885,764 | ) | 579,739 | ||||||||
|
Payroll
and related liabilities
|
(1,028,644 | ) | 1,150,376 | 156,994 | ||||||||
|
Other
liabilities
|
(1,192 | ) | (266 | ) | — | |||||||
|
Net
cash and cash equivalents used in operating activities
|
(3,318,333 | ) | (6,005,517 | ) | (40,000,550 | ) | ||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Acquisition
of intellectual technology license – fee portion
|
— | — | (20,000 | ) | ||||||||
|
Refund
of security deposits
|
7,990 | — | 7,990 | |||||||||
|
Acquisition
of equipment
|
— | — | (905,936 | ) | ||||||||
|
Excess
of amounts paid for public shell over assets acquired to be accounted for
as a recapitalization
|
— | — | (250,000 | ) | ||||||||
|
Proceeds
from disposal of equipment
|
23,135 | 200,000 | 229,135 | |||||||||
|
Net
cash and cash equivalents provided by (used in) investing
activities
|
31,125 | 200,000 | (938,811 | ) | ||||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Proceeds
from stock issuance, including options and warrants
exercised
|
2,000,000 | — | 42,658,458 | |||||||||
|
Principal
payment on equipment notes payable and capital leases
|
— | — | (295,411 | ) | ||||||||
|
Contribution
by shareholders
|
— | — | 183,569 | |||||||||
|
Principal
payment on note payable to individuals
|
— | — | (225,717 | ) | ||||||||
|
Issuance
of note payable to individuals
|
1,000,000 | — | 1,368,546 | |||||||||
|
Acquisition
of common stock
|
— | — | (400,000 | ) | ||||||||
|
Net
cash and cash equivalents provided by financing activities
|
3,000,000 | — | 43,289,445 | |||||||||
|
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(287,208 | ) | (5,805,517 | ) | 2,350,084 | |||||||
|
Cash
and cash equivalents, beginning
|
2,637,292 | 8,442,809 | — | |||||||||
|
Cash
and cash equivalents, ending
|
$ | 2,350,084 | $ | 2,637,292 | $ | 2,350,084 | ||||||
|
SUPPLEMENTAL
SCHEDULE OF CASH FLOW INFORMATION:
|
||||||||||||
|
Interest
paid
|
$ | — | $ | — | $ | 66,770 | ||||||
|
Taxes
paid
|
$ | — | $ | — | $ | 100 | ||||||
The
accompanying notes are an integral part of these financial
statements.
F-9
PROTALEX,
INC.
(A
Development Stage Company)
NOTES
TO FINANCIAL STATEMENTS
Year
Ended May 31, 2010 and 2009
|
1.
|
ORGANIZATION
AND BUSINESS ACTIVITIES
|
We are a
development stage company which has been engaged in developing a class of
biopharmaceutical drugs for treating autoimmune inflammatory
diseases. Our lead product PRTX-100, is formulated with
highly-purified staphylococcal protein A, which is an immune modulating protein
produced by bacteria. The Company is a development stage enterprise
and does not anticipate generating operating revenue for the foreseeable
future.
PRTX-100
has demonstrated effectiveness in animal models of autoimmune diseases as well
as demonstrated activity on cultured human immune cells at very low
concentrations, although the effectiveness of PRTX-100 shown in pre-clinical
studies using animal models may not be predictive of the results that we would
see in future human clinical trials. The safety, tolerability, and
pharmacokinetics (“PK”) of PRTX-100 in humans have now been characterized in
three clinical studies. A proof of concept study to evaluate safety
and potential efficacy of PRTX-100 in patients with active rheumatoid arthritis
(RA) is now underway in South Africa and is expected to be completed in the
second calendar quarter of 2011. We currently have no products
on the market.
In April
2009, we ceased all operations and terminated all employees in light of
insufficient funds to continue our clinical trials and related product
development. Our business was dormant until new management took
control of our operations in November 2009 following the change in control
transaction more fully described below. We are currently actively pursuing the
commercial development of PRTX-100 for the treatment of RA.
We
maintain an administrative office in Summit, New Jersey and currently outsource
all of our product development and regulatory activities, including clinical
trial activities, manufacturing and laboratory operations to third-party
contract research organizations and facilities.
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 ability of the
Company to continue as a going concern is dependent upon developing products
that are regulatory approved and market accepted. There is no assurance that
these plans will be realized in whole or in part. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
|
2.
|
CHANGE
OF OWNERSHIP TRANSACTION
|
On
November 11, 2009 (the “Effective Date”), we consummated a financing
transaction, that resulted in a change in control in which we raised $3,000,000
of additional working capital pursuant to a Securities Purchase Agreement dated
that date (the “Purchase Agreement”) with Niobe Ventures, LLC (“Niobe”), a
Delaware limited liability company (the “Financing”). Pursuant to the
Purchase Agreement, we issued to the Niobe (i) 43,478,260 restricted shares of
our common stock at a purchase price of $0.046 per share (or $2,000,000 in the
aggregate) and (ii) a senior secured convertible promissory note in the
principal amount of $1,000,000 and convertible into shares of our common stock
at an initial conversion price equal to $0.046 per share (the “Secured
Note”).
The
Secured Note bears interest at a rate of 3% per annum and matures on November
13, 2012. In order to secure our obligations under the Secured Note,
we also entered into a Security Agreement dated the Effective Date (the
“Security Agreement”) granting Niobe a security interest in substantially all of
our personal property and assets, including our intellectual
property. The Secured Note is convertible at any time, at the option
of the holder, subject only to the requirement that we have sufficient
authorized shares of common stock after taking into account all outstanding
shares of common stock and the maximum number of shares issuable under all
issued and outstanding convertible securities. In addition, the
Secured Note will automatically be converted if (i) we raise in excess of $7.5
million of gross proceeds in an equity offering, (ii) certain milestones are
achieved in our Phase 1b and RA trial of PRTX-100 in South Africa or (iii) we
undertake certain fundamental transactions as defined in the notes (such as a
merger, sale of all of our assets, exchange or tender offer, or reclassification
of our stock or compulsory exchange). The Secured Note also provides
for the adjustment of the conversion price in the event of stock dividends and
stock splits, among other items, and provides for acceleration of maturity upon
an event of default (as defined in the Secured Note).
F-10
As
contemplated by the Purchase Agreement, all of our executive officers and all of
the members of our Board prior to the closing of the Financing, with the
exception of Frank M. Dougherty, resigned effective concurrently with the
closing of the Financing. Mr. Dougherty resigned effective upon the
expiration of the 10-day notice period required by Rule 14f-1 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). In
addition, effective upon the closing of the Financing, our Board appointed
Arnold P. Kling as a director and then elected him as president and elected Kirk
M. Warshaw as chief financial officer and secretary.
In
addition, on the Effective Date, we terminated (i) the Investor Rights Agreement
dated September 18, 2003 among us, vSpring SBIC L.P. (“vSpring”) and certain of
the investors set forth on Schedule A thereto (the “2003 IRA”) and the
Registration Rights Agreement dated May 25, 2005 among us, vSpring and certain
of the investors set forth on Schedule I thereto (the “2005 RRA”) in accordance
with their respective terms and (ii) stock options exercisable for an aggregate
of 1,233,571 shares of our common stock, approximately 41% of our then
outstanding stock options, all of which were held by three option holders,
Steven H. Kane, our former CEO, Marc L. Rose, our former CFO and
vSpring.
The
securities issued in the Financing were issued in reliance upon the exemption
from the registration requirements of the Securities Act of 1933, as amended
(the “Act”) pursuant to Section 4(6) and Rule 506 of Regulation D
thereof. The offer, sale and issuance of such securities were made
without general solicitation or advertising. The securities were
offered and issued only to “accredited investors” as such term is defined in
Rule 501 under the Act.
|
3.
|
GOING
CONCERN
|
Since
inception, the Company has incurred an accumulated deficit of $47,652,353
through May 31, 2010. For the years ended May 31, 2010 and 2009, the Company had
net losses of $3,067,842 and $7,230,206, respectively. The
Company has used $3,318,333 and $6,005,517 of cash in operating activities for
the years ended May 31 2010 and 2009, respectively. As of May 31,
2010, the Company had cash and cash equivalents of $2,350,084 and net working
capital of $1,652,355. The Company has incurred negative cash flow from
operating activities since its inception. The Company has
spent, and subject to obtaining additional financing, expects to continue to
spend, substantial amounts in connection with executing its business strategy,
including continued development efforts relating to PRTX-100.
The
Company has no significant payments due on long-term
obligations. However, the Company anticipates entering into
significant contracts to perform product manufacturing and clinical trials in
fiscal year 2010 and 2011 and that it will need to raise additional capital in
future fiscal years to fund the ongoing FDA approval process. If the Company is
unable to obtain approval of its future IND applications or otherwise advance in
the FDA approval process, its ability to sustain its operations would be
significantly jeopardized.
The most
likely sources of additional financing include the private sale of the Company’s
equity or debt securities. Additional capital that is required by the Company
may not be available on reasonable terms, or at all.
|
4.
|
BASIS
OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
and expense, and the disclosure of contingent assets and liabilities. Estimated
amounts could differ from actual results.
F-11
Loss
per Common Share
The
Financial Accounting Standards Board (FASB) has issued accounting guidance
“Earnings Per Share” that provides for the calculation of “Basic” and “Diluted”
earnings per share. Basic earnings per share include no dilution and is computed
by dividing the loss to common stockholders 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, 2010, the Company had a total of 11,323,532
potentially dilutive securities comprised of 3,928,896 warrants and 7,394,636
stock options.
Share-Based
Compensation
Effective
June 1, 2006, the Company adopted the FASB accounting guidance for fair value
recognition provisions of the “Accounting for Share-Based Payment” using the
modified prospective method. This standard requires the Company to
measure the cost of employee services received in exchange for equity share
options granted based on the grant-date fair value of the
options. The cost is recognized as compensation expense over the
vesting period of the options. Under the modified prospective method,
compensation cost included in operating expenses was $335,741 and
$753,268, for the years ended May 31, 2010 and 2009 , respectively
and included both the compensation cost of stock options granted prior to but
not yet vested as of June 1, 2006 and compensation cost for all options granted
subsequent to May 31, 2006. In accordance with the modified
prospective application transition method, prior period results are not
restated. Incremental compensation cost for a modification of the terms or
conditions of an award is measured by comparing the fair value of the modified
award with the fair value of the award immediately before the
modification. No tax benefit was recorded as of May 31, 2010 in
connection with these compensation costs due to the uncertainty regarding
ultimate realization of certain net operating loss carryforwards. The
Company has also implemented the SEC interpretations in Staff Accounting
Bulletin (“SAB”) for “ Share-Based Payments”, in connection with the adoption of
FASB accounting guidance.
The Board
of Directors adopted and the stockholders approved the 2003 Stock Option Plan on
October 2003 and it was amended in October 2005. The plan was adopted to
recognize the contributions made by the Company’s employees, officers,
consultants, and directors, to provide those individuals with additional
incentive to devote themselves to the Company’s future success, and to improve
the Company’s ability to attract, retain and motivate individuals upon whom the
Company’s growth and financial success depends. Under the plan, stock options
may be granted as approved by the Board of Directors or the Compensation
Committee. There are 4,500,000 shares reserved for grants of options under the
plan, of which 444,000 have been issued and 4,000 were exercised. The Company
has issued 1,358,922 stock options as stand alone grants, of which 2,000 were
exercised. Stock options vest pursuant to individual stock option agreements. No
options granted under the plan are exercisable after the expiration of ten years
(or less in the discretion of the Board of Directors or the Compensation
Committee) from the date of the grant. The plan will continue in effect until
terminated or amended by the Board of Directors.
The
accounting guidance requires the use of a valuation model to calculate the fair
value of each stock-based award. The Company uses the Black-Scholes model to
estimate the fair value of stock options granted based on the following
assumptions:
Expected Term or Life. The
expected term or life of stock options granted issued represents the expected
weighted average period of time from the date of grant to the estimated date
that the stock option would be fully exercised. The weighted average expected
option term was determined using a combination of the “simplified method” for
plain vanilla options as allowed by the accounting guidance. The “simplified
method” calculates the expected term as the average of the vesting term and
original contractual term of the options.
Expected Volatility. Expected
volatility is a measure of the amount by which the Company’s stock price is
expected to fluctuate. Expected volatility is based on the historical daily
volatility of the price of our common shares. The Company estimated the expected
volatility of the stock options at grant date.
Risk-Free Interest Rate. The
risk-free interest rate is based on the implied yield on U.S. Treasury
zero-coupon issues with remaining terms equivalent to the expected term of our
stock-based awards.
F-12
As of May
31, 2010, there were 7,394,636 stock options outstanding. At May 31,
2010, the aggregate unrecognized compensation cost of unvested options, as
determined using a Black-Scholes option valuation model was approximately
$502,725 (net of estimated forfeitures) will be recognized over a weighted
average period of 4.5 years. For the year ended May 31, 2010, the
Company granted 5,852,714 stock options, with a fair value of $154,925 for the
portion vested (net of estimated forfeitures), and 255,000 options were
forfeited or expired. The remaining amount of options will be valued
once they vest upon the future events.
The fair
value of the options is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
|
Year Ended
May, 31, 2010
|
Year Ended
May, 31, 2009
|
From Inception
Through
May 31, 2010
|
||||||||||
|
Dividends
per year
|
0 | 0 | 0 | |||||||||
|
Volatility
percentage
|
97.5 | % | 96%-112 | % | 90%-112 | % | ||||||
|
Risk
free interest rate
|
3.47 | % | 3.11%-3.51 | % | 2.07%-5.11 | % | ||||||
|
Expected
life (years)
|
5-9 | 6.25-9 | 3-9 | |||||||||
|
Weighted
Average Fair Value
|
$ | .09 | $ | .39 | $ | 1.04 | ||||||
Cash
and Cash Equivalents
For the
purposes of reporting cash flows, the Company considers all cash accounts which
are not subject to withdrawal restrictions or penalties, and highly liquid
investments with original maturities of 60 days or less to be cash and cash
equivalents. The cash and cash equivalent deposits are not insured by The
Federal Deposit Insurance Corporation (“FDIC”).
Intellectual
Technology Property, Amortization
The
Company’s intellectual technology property was originally licensed from a former
related party. This intellectual technology property was then assigned to the
Company upon the dissolution of the related party. The cost of the intellectual
technology property is being amortized over a 20-year period. Amortization
expense is $1,020, $1,020 and $10,773 for the years ended May 31, 2010, 2009 and
from inception through May 31, 2010, respectively. The Company reviews the
intellectual property for impairment on at least an annual basis in accordance
with the accounting guidance for “Goodwill and Other Intangible Assets”; no
impairment charge was recorded as of May 31, 2010. Amortization
expense for the intellectual property will be $1,020 for each of the next five
years.
Income
Taxes
Income
taxes are recognized using enacted tax rates, and are composed of taxes on
financial accounting income that is adjusted for the requirement of current tax
law and deferred taxes. Deferred taxes are accounted for using the liability
method. Under this method, deferred tax assets and liabilities are recognized
based on the difference between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The Company does
not expect to have current income taxes payable or deferred tax asset balances
for the foreseeable future.
The FASB
accounting guidance for, Accounting for Income Taxes
and establishes the criterion that an individual tax position has to meet for
some or all of the benefits of that position to be recognized in the Company’s
financial statements. On initial application, ASC 740 must be applied
to all tax positions for which the statute of limitations remains open. Only tax
positions that meet the more-likely-than-not recognition threshold at the
adoption date will be recognized or continue to be recognized. The cumulative
effect of applying this accounting guidance is to be reported as an adjustment
to retained earnings at the beginning of the period in which it is
adopted.
Research
and Development
Research
and development costs are expensed as incurred and also include depreciation as
reported above.
F-13
Financial
Instruments
The
Company adopted FASB ASC 820-Fair Value Measurements and Disclosure or ASC 820
for assets and liabilities measured at fair value on a recurring basis. ASC 820
establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value
measurements establishes a framework for measuring fair value and expands
disclosure about such fair value measurements. The adoption of ASC 820 did not
have an impact on the Company’s financial position or operating results, but did
expand certain disclosures.
ASC 820
defines fair value as the price that would be received upon sale of an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Additionally, ASC 820 requires the use of
valuation techniques that maximize the use of observable inputs and minimize the
use of unobservable inputs. These inputs are prioritized below:
Level 1:
Observable inputs such as quoted market prices in active markets for identical
assets or liabilities
Level 2:
Observable market-based inputs or unobservable inputs that are corroborated by
market data
Level 3:
Unobservable inputs for which there is little or no market data, which require
the use of the reporting entity’s own assumptions.
The
Company values its financial instruments as required by estimating their fair
value. The estimated fair value amounts have been determined by the Company,
using available market information or other appropriate valuation methodologies.
However, considerable judgment is required in interpreting market data to
develop estimates of fair value. Consequently, the estimates are not necessarily
indicative of the amounts that could be realized or would be paid in a current
market exchange.
The
Company’s financial instruments primarily consist of cash and cash equivalents,
convertible debt, accounts payable and accruals.
Cash and
cash equivalents include money market securities and commercial paper that are
considered to be highly liquid and easily tradable. These securities are valued
using inputs observable in active markets for identical securities and are
therefore classified as Level 1 within the fair value hierarchy.
As of the
balance sheet dates, the estimated fair values of the financial instruments were
not materially different from their carrying values as presented due to the
short maturities of these instruments and that the interest rates on the
borrowings approximate those that would have been available for loans of similar
remaining maturity and risk profile at respective year ends.
New
Accounting Pronouncements
In
October 2009, the FASB issued guidance for amendments to FASB Emerging Issues
Task Force on EITF Issue No. 09-1 “Accounting for Own-Share Lending Arrangements
in Contemplation of a Convertible Debt Issuance or Other Financing” ( Subtopic
470-20 ) “Subtopic”. This accounting standards update establishes the accounting
and reporting guidance for arrangements under which own-share lending
arrangements issued in contemplation of convertible debt issuance. This
Statement is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2009. Earlier adoption is not
permitted. Management believes this Statement will have no impact on the
consolidated financial statements of the Company once adopted.
In
December 2009, the FASB issued guidance for Consolidations – Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (
Topic 810 ). The amendments in this update are a result of incorporating the
provisions of SFAS No. 167, Amendments to FASB Interpretation No. 46(R). The
provisions of such Statement are effective for fiscal years, and interim periods
within those fiscal years, beginning on or after November 15, 2009. Earlier
adoption is not permitted. The presentation and disclosure requirements shall be
applied prospectively for all periods after the effective date. Management
believes this Statement will have no impact on the consolidated financial
statements of the Company once adopted.
F-14
In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about Fair Value
Measurements, which enhances the usefulness of fair value measurements. The
amended guidance requires both the disaggregation of information in certain
existing disclosures, as well as the inclusion of more robust disclosures about
valuation techniques and inputs to recurring and nonrecurring fair value
measurements. The amended guidance is effective for interim and annual reporting
periods beginning after December 15, 2009, except for the disaggregation
requirement for the reconciliation disclosure of Level 3 measurements, which is
effective for fiscal years beginning after December 15, 2010 and for interim
periods within those years. The Company does not anticipate that this
pronouncement will have a material impact on its results of operations or
financial position.
Effective
January 29, 2010, the Company adopted FASB ASC Topic No. 815 – 40, Derivatives
and Hedging - Contracts in Entity’s Own Stock (formerly Emerging Issues
Task Force Issue No. 07-5, Determining Whether an Instrument or Embedded Feature
is Indexed to an Entity’s Own Stock ). The adoption of FASB ASC Topic No. 815
–40’s requirements can affect the accounting for warrants and many convertible
instruments with provisions that protect holders from a decline in the stock
price (or “down-round” provisions). As a result of the Company issuing a
convertible note on January 29, 2010, the Company adopted ASC Topic No. 815 –
40, Derivatives and Hedging - Contracts in Entity’s Own Stock (formerly Emerging
Issues Task Force Issue No. 07-5, Determining Whether an Instrument or Embedded
Feature is Indexed to an Entity’s Own Stock ). As such, the embedded feature
convertible option on the January 29, 2010 convertible note are classified as
liabilities as of January 29, 2010 as these exercise price reset features and
are not deemed to be indexed to the Company’s own stock. The Company does not
anticipate that this pronouncement will have a material impact on its results of
operations or financial position.
Management
does not believe that any other recently issued, but not yet effective,
accounting standards could have a material effect on the accompanying
consolidated financial statements. As new accounting pronouncements are issued,
the Company will adopt those that are applicable under the
circumstances.
|
5.
|
REVERSE
MERGER
|
On
November 15, 1999, Enerdyne Corporation or Enerdyne acquired all of the
outstanding common stock of Protalex, Inc. 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 or Reverse Merger. The historical
statement of operations presented herein include only those of the accounting
acquirer and the retained earnings or 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:
|
Account Description
|
Protalex, Inc.
|
Enderdyne
Corporation
|
Transaction
Adjustments
|
Balance Sheet at
November 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 | ||||||||||||
| $ | — | $ | — | $ | — | $ | — | |||||||||
F-15
|
6.
|
INCOME
TAXES
|
For the
years ended May 31, 2010 and 2009, the components of income tax benefit
(expense) consist of the following:
|
Year Ended
May 31, 2010
|
Year Ended
May 31, 2009
|
|||||||
|
Current:
|
||||||||
|
Federal
|
$ | — | $ | — | ||||
|
State
|
— | — | ||||||
|
Deferred:
|
||||||||
|
Federal
|
1,043,000 | 2,458,000 | ||||||
|
State
|
184,000 | 434,000 | ||||||
|
Tax
credits
|
83,000 | 225,000 | ||||||
|
Permanent
timing difference
|
(180,000 | ) | (421,000 | ) | ||||
|
Increase
in valuation allowance
|
(1,130,000 | ) | (2,696,000 | ) | ||||
|
Income
tax benefit
|
$ | — | $ | — | ||||
Income
tax as a percentage of income for the year ended May 31, 2010 and 2009 differ
from statutory federal income tax rates due to the following:
|
Year Ended
May 31, 2010
|
Year Ended
May 31, 2009
|
|||||||
|
Statutory
federal income tax rate
|
(34 | )% | (34 | )% | ||||
|
State
income taxes, net of federal income tax impact
|
(6 | )% | (6 | )% | ||||
|
Change
in valuation allowance
|
42 | % | 42 | % | ||||
|
General
business credit/other
|
(2 | )% | (2 | )% | ||||
| 0 | % | 0 | % | |||||
The
components of the net deferred tax asset as of May 31, 2010 and 2009 are as
follows:
|
|
May 31, 2010
|
May 31, 2009
|
||||||
|
Assets:
|
||||||||
|
Net
operating losses
|
$ | 16,860,000 | $ | 15,380,000 | ||||
|
Vacation
accrual
|
66,000 | 401,000 | ||||||
|
Equipment
|
-0- | 30,000 | ||||||
|
General
business credit
|
1,913,000 | 1,830,,000 | ||||||
|
Deferred
tax assets
|
18,839,000 | 17,641,000 | ||||||
|
Liability:
|
||||||||
|
Gross
deferred tax asset
|
18,,839,000 | 17,641,000 | ||||||
|
Less
valuation allowance
|
(18,839,000 | ) | (17,641,000 | ) | ||||
|
Deferred
tax asset, net of valuation allowance
|
$ | — | $ | — | ||||
The gross
deferred tax assets 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 $39,215,000 as of May 31, 2010 expires beginning in
2020 through 2030. 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. As a result of these provisions, utilization of the NOL and tax credit
carryforwards may be limited. Most of the deferred tax
asset of net operating loss carryforwards and tax credits are subject to a
Section 382 limitation on the amount to be utilized in a given
year.
The
Company adopted the provisions of the FASB issued accounting guidance, Accounting for Uncertainty in Income
Taxes. Previously, the Company had accounted for tax
contingencies in accordance with the FASB issued accounting guidance, Accounting for Contingencies.
As required by the accounting guidance, Accounting for Income Taxes,
the Company recognizes the financial statement benefit of a tax position only
after determining that the relevant tax authority would more likely than not
sustain the position following an audit. For tax positions meeting the
more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit that has a greater
than 50 percent likelihood of being realized upon ultimate settlement with the
relevant tax authority. As of May 31, 2010, the Company has no uncertain tax
positions to be disclosed.
F-16
The
Company is subject to US federal income tax as well as income taxes of state
jurisdiction. The Company is not currently under examination by any Federal or
state jurisdiction. The federal statute of limitations and state are opened from
inception forward.
Management believes that the accrual for tax liabilities is adequate for all
open years. This assessment relies on estimates and assumptions and may involve
a series of complex judgments about future events. On the basis of present
information, it is the opinion of the Company’s management that there are no
pending assessments that will result in a material adverse effect on the
Company’s financial statements over the next twelve months. The Company
recognizes any interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses for all periods presented. The
Company has not recorded any material interest or penalties during any of the
years presented.
|
7.
|
RELATED
PARTIES
|
Niobe,
our majority stockholder and the holder of our $1 million senior secured
convertible note, is controlled by our President and Director, Arnold P.
Kling.
During
the years ended May 31, 2010, May 31, 2009 and May 31, 2008, the Company
incurred $0, $7,677, and $48,633, respectively, of expenses related to air
travel to a partnership principally owned by Steve Kane, the former Chief
Executive Officer of the Company.
The
Company had an agreement with its former Chairman to pay $12,500 per month as a
director fee. During the year ended May 31, 2010 the Company incurred
$0 for this director’s fee. During the years ended May 31, 2009 and
May 31, 2008, the Company incurred $125,000 and $150,000, respectively, in each
year for this director’s fee.
The
Company had an agreement with Carleton A. Holstrom, Eugene A. Bauer, MD, Peter
G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro to pay each $1,667 per
month payable on a quarterly basis in arrears as a director fee which agreement
for each director was terminated effective as of April 1, 2009 as described
below. During the years ended May 31, 2010, May 31, 2009 and May 31, 2008,
the Company incurred $0, $56,678, and $60,000 respectively for these directors’
fees.
Pursuant
to a Cash Waiver & Option Termination Agreement dated April 10, 2009, each
of the outside directors of the Company, G. Kirk Raab, Carleton A. Holstrom,
Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P.
Stagnaro, who were entitled to a Director's cash fee agreed to waive all such
accrued and unpaid Director cash fees and terminate any rights to receive any
future cash fees. For Mr. Raab, those cash fees ceased as of April 1, 2009. For
the other directors, those cash fees ceased as of February 1, 2009. In addition,
each of these directors agreed to terminate immediately all of their existing
Company stock options (vested and unvested).
As
previously disclosed in the Form 10-K filed on August 28, 2009, Kane and Rose
voluntarily terminated their employment. As of the date of this Report, Kane and
Rose are the Chairman/CEO and Chief Financial Officer, respectively, of Patient
Safety Technologies, Inc. At May 31, 2010 and 2009, the Company had
accrued severance obligations of $156,994 and $845,406, respectively, for
severance obligations to Kane covering salary, payroll taxes and health
benefits. As also disclosed in our Form 8-K dated July 2, 2009, the
Company subsequently entered into a consulting agreement with Rose providing for
certain consulting fees through December 31, 2009.
During
the year ended May 31, 2010, the Company issued an aggregate of 4,752,714
options to John Doherty, one of our Directors, and Kirk M Warshaw, our Chief
Financial Officer and Director. The 4,752,714 options issued during the year
ended May 31, 2010 are ten year options with exercise prices ranging from $0.05
to $0.10. These options vest in three tranches, upon commencement of
the drug test trial, upon demonstrated efficacy of the drug trial and finally,
upon the execution of a licensing or financing deal. The first
tranche of options have been valued at $122,045 for which $122,045 of
compensation expense has been recorded. The options
vesting with the achievement of the second and third milestones will be valued
upon the achievement of such milestones.
F-17
|
8.
|
STOCK
OPTIONS
|
Prior to
January 22, 2004, all options were issued as “stand alone” options. On January
22, 2004, the board of directors of the Company approved the Protalex, Inc. 2003
Stock Option Plan., and on October 25, 2005, the stockholders approved an
amendment to the Protalex, Inc. 2003 Stock Option Plan to increase the
authorized number of shares under the Plan from 1,500,000 to 4,500,000 which
provides for incentive and non-qualified stock options to purchase a total of
4,500,000 shares of the Company’s Common Stock. Under the terms of the plan,
incentive options may not be granted at exercise prices less than the fair
market value of the Common Stock at the date of the grant and non-qualified
options shall not be granted at exercise prices equal to less than 85% of the
fair market value of the Common Stock at the date of the grant. Beginning
January 1, 2005, all stock options are granted at fair market value. Vesting
generally occurs ratably over forty eight months and is exercisable over a
period no longer than ten years after the grant date. As of May 31, 2010,
options to purchase 7,394,636 shares of the Company’s Common Stock were
outstanding, of which 1,358,922 were issued and 4,000 were exercised under the
Company’s 2003 Stock Option Plan and the remaining 6,035,714 were issued and
2,000 were exercised as stand alone options. As of May 31, 2009,
1,277,954 are exercisable.
The
5,852,714 options issued during the year ended May 31, 2010 are ten year options
with exercise prices ranging from $0.05 to $0.20. These options vest
in three tranches, upon commencement of the drug test trial, upon demonstrated
efficacy of the drug trial and finally, upon the execution of a licensing or
financing deal. The first tranche of options have been valued at
$154,925 for which $154,925 of compensation expense has been
recorded. The options vesting with the achievement of the second and
third milestones will be valued upon the achievement of such milestones. The
balance of the option expense recorded related to options issued by prior
management in the amount of $180,816.
A summary
of the common stock option activity for employees, directors, officers and
consultants as of May 31, 2010 and for the two years then ended is as
follows:
|
Shares
|
Weighted
Average Exercise
Price
|
Weighted
Average Remaining
Contractual Term
(Years)
|
||||||||||
|
Outstanding
at May 31, 2008
|
4,342,418 | $ | 1.91 | 6.2 | ||||||||
|
Granted
|
1,685,000 | $ | 0.49 | — | ||||||||
|
Exercised
|
0 | — | — | |||||||||
|
Forfeited
|
(545,793 | ) | $ | 0.53 | — | |||||||
|
Expired
|
(2,184,813 | ) | $ | 1.67 | — | |||||||
|
Outstanding
at May 31, 2009
|
3,296,812 | $ | 1.57 | 6.0 | ||||||||
|
Granted
|
5,852,714 | $ | 0.09 | — | ||||||||
|
Exercised
|
0 | — | — | |||||||||
|
Forfeited
|
(405,811 | ) | $ | 1.17 | — | |||||||
|
Expired
|
(1,349,079 | ) | $ | 1.52 | — | |||||||
|
Outstanding
at May 31, 2010
|
7,394,636 | $ | 0.41 | 4.65 | ||||||||
|
Exercisable
at May 31, 2010
|
1,541,922 | $ | 1.64 | — | ||||||||
The
outstanding and exercisable stock options as of May 31, 2010 and 2009 had an
intrinsic value of $0 and $0, respectively.
The
following summarizes certain information regarding stock options at May 31,
2010:
|
Total
|
Exercisable
|
|||||||||||||||||||||||
|
Exercise Price
Range
|
Number
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Life
(years)
|
Number
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Life
(years)
|
||||||||||||||||||
|
$0.00
– 0.45
|
5,852,714 | $ | 0.09 | 5.0 | -0- | $ | 0.00 | -0- | ||||||||||||||||
|
$0.91
– 1.35
|
100,000 | $ | 1.25 | 1.6 | 100,000 | $ | 1.25 | 1.6 | ||||||||||||||||
|
$1.36
– 1.80
|
1,256,922 | $ | 1.50 | 3.1 | 1,256,922 | $ | 1.50 | 3.1 | ||||||||||||||||
|
$1.81
– 2.25
|
10,000 | $ | 2.15 | 6.0 | 10,000 | $ | 2.15 | 6.0 | ||||||||||||||||
|
$2.26
– 2.70
|
50,000 | $ | 2.60 | 5.2 | 50,000 | $ | 2.60 | 5.2 | ||||||||||||||||
|
$2.70
– 3.15
|
125,000 | $ | 2.89 | 6.0 | 125,000 | $ | 2.89 | 6.0 | ||||||||||||||||
| 7,394,636 | $ | 0.41 | 4.65 | 1,541,922 | $ | 1.64 | 3.34 | |||||||||||||||||
F-18
9.
SENIOR SECURED CONVERTIBLE NOTE - RELATED PARTY
On
November 11, 2009, the Company issued the Secured Note to Niobe, its majority
stockholder which is controlled by the Company’s President and Director, Arnold
P. Kling. The Secured Note bears interest at a rate of 3% per annum
and matures on November 13, 2012. In order to secure its obligations
under the Secured Note, the Company also entered into a Security Agreement dated
November 11, 2009 (the “Security Agreement”) granting Niobe a security interest
in substantially all of our personal property and assets, including our
intellectual property.
The
Company evaluated the conversion feature of the recently issued convertible loan
and determined under the accounting guidance for “Accounting for Convertible
Securities with Beneficial Conversion Features” and that a value should be
attributed to the embedded conversion feature. On November 11, 2009,
the date of issuance of the Secured Note, the fair market value of each of the
Company’s shares was $0.07. The Company has determined that the
maximum allocation to the conversion feature should be $521,793 and will reduce
the face amount of the convertible debt carried on our balance
sheet. This discount will be amortized over 36 months and will serve
to increase the interest expense of the Secured Note during its term. The
unamortized portion of the of the debt discount at May 31, 2010 was
$408,937.
On
December 2, 2009, the Company entered into a Credit Facility Agreement dated
December 2, 2009 (the “Facility”) with Niobe which will provide up to $2.0
million of additional capital in the form of secured loans from Niobe at any
time prior to June 30, 2012 subject to the achievement of certain predetermined
benchmarks.
Any loan
made pursuant to the Facility will be evidenced by a senior secured convertible
note, bearing interest at a rate of 3% per annum, in the principal amount of any
such loan and convertible into shares of common stock at an initial conversion
price equal to the then conversion price of the Secured Note. Each
such loan shall mature on the later of the fifteenth month anniversary of such
loan or December 31, 2012.
In
connection with the Facility, on December 2, 2009, the Security Agreement
securing our obligations under the Secured Note was amended and restated to also
secure any incremental obligations under the Facility (the “Amended Security
Agreement”). Pursuant to the Amended Security Agreement, Niobe has a
security interest in substantially all of our personal property and assets,
including its intellectual property to collateralize all amounts due to it under
the Secured Note and the Facility.
|
10.
|
SALE
AND REPURCHASE OF COMMON
STOCK
|
The data
presented for stockholders' equity for the period of September 2003 to May 31,
2008 is unaudited.
On
September 18, 2003, we raised $12,657,599 through the sale of 7,445,646 shares
of our common stock at $1.70 per share, with warrants to purchase an additional
3,164,395 shares of our common stock, at an exercise price of $2.40 per share.
The warrants expire on September 19, 2008. Net of transaction costs of
$1,301,536, our proceeds were $11,356,063.
On May
25, 2005, we raised $5,057,885 through the sale of 2,593,788 shares of our
common stock at $1.95 per share, with warrants to purchase an additional 920,121
shares of our common stock, at an exercise price of $2.25 per share. The
warrants expire on May 25, 2010. As part of this transaction, the
exercise price for the warrants from the September 2003 transaction were lowered
from $2.40 per share to $2.25 per share. Net of transaction costs of
$206,717, our proceeds were $4,851,168.
On
December 30, 2005, we raised $5,839,059 through the sale of 2,595,132 shares of
our common stock at $2.25 per share, with warrants to purchase an additional
648,784 shares of our common stock, at an exercise price of $2.99 per share. We
also issued warrants to purchase 227,074 shares of our common stock, at an
exercise price of $2.99 per share, to the placement agent. All the
warrants expire on December 30, 2010. Net of transaction costs of
approximately $328,118, our proceeds were $5,510,941.
In the
fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants
which resulted in $786,538 in cash proceeds.
F-19
On July
7, 2006, we raised $14,217,660, net of transaction costs of $959,874, through
the sale of 6,071,013 shares of our common stock at $2.50 per share, with
warrants to purchase an additional 1,517,753 shares of our common stock, at an
exercise price of $3.85 per share. We also issued warrants to purchase 531,214
shares of our common stock, at an exercise price of $3.85 per share, to the
placement agent. All the warrants expire on July 7,
2011.
In the
first fiscal quarter of 2007, existing investors and option holders exercised
133,500 warrants and 6,000 options which resulted in $315,574 in cash
proceeds.
On
November 11, 2009 (the “Effective Date”), we consummated a financing transaction
in which we raised $3,000,000 of additional working capital pursuant to a
Securities Purchase Agreement dated that date (the “Purchase Agreement”) with
Niobe Ventures, LLC (the “Investor” or “Niobe”), a Delaware limited liability
company (the “Financing”). Pursuant to the Purchase Agreement, we
issued to the Investor (i) 43,478,260 restricted shares of our common stock at a
purchase price of $0.046 per share (or $2,000,000 in the aggregate) and (ii) a
senior secured convertible promissory note in the principal amount of $1,000,000
and convertible into shares of our common stock at an initial conversion price
equal to $0.046 per share (the “Secured Note”).
In
December 2006, the FASB issued accounting guidance "Accounting for Registration
Payment Arrangements", which specifies that the contingent obligation to make
future payments or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in accordance with the
accounting guidance, "Accounting for Contingencies." For our private
placement transactions in September 2003, May 2005, December 2005 and July 2006,
the Company granted registration rights which included payment arrangements of
liquidated damages under certain circumstances, as noted in each respective
registration rights agreement, including in the event an effective registration
statement registering the resale of shares of common stock issuable upon
exercise of the warrants does not remain effective. The Company generally uses
its best efforts or all commercially reasonable efforts to maintain effective
registration statements. The Company completed its evaluation, and
believes that an obligation to transfer consideration under its registration
payment arrangement for all registrations since inception is not
probable.
11.
SUBSEQUENT EVENTS
In August
2010, the Company commenced a multi-center Phase 1b clinical trial of PRTX-100
on adult patients with active RA in South Africa and dosed its first patient
enrolled in the study.
The
Company has evaluated subsequent events and has determined that there were no
other subsequent events to recognize or disclose in these financial
statements.
. . .
F-20