Attached files
file | filename |
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EX-32.2 - PROTALEX INC | v207619_ex32-2.htm |
EX-31.1 - PROTALEX INC | v207619_ex31-1.htm |
EX-31.2 - PROTALEX INC | v207619_ex31-2.htm |
EX-32.1 - PROTALEX INC | v207619_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended November 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number: 000-28385
(Exact
Name of Registrant as Specified in its Charter)
Delaware
|
91-2003490
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
Number)
|
133
Summit Avenue, Suite 22
Summit,
NJ 07901
(Address
of Principal Executive Offices and Zip Code)
215-862-9720
(Registrant’s
Telephone Number, Including Area Code)
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. x Yes ¨ No
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 he
registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of large accelerated filer,” “accelerated filer,” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
|
Non-accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes
x
No
Number of
shares outstanding of the issuer’s Common Stock, par value $0.00001 per share,
as of January 7, 2011:
14,415,745 shares.
PROTALEX,
INC.
Quarterly
Report on Form 10-Q
For
the Period Ended November 30, 2010
TABLE OF
CONTENTS
Page No.
|
||||
PART I.
|
FINANCIAL
INFORMATION
|
|||
ITEM 1.
|
Financial
Statements:
|
|||
Balance
Sheets at November 30, 2010 (Unaudited) and May 31, 2010
|
3
|
|||
Statements
of Operations for the three and six months ended November 30, 2010 and
2009, and the period from September 17, 1999 (inception) to November 30,
2010 (Unaudited)
|
4
|
|||
Statement
of Changes in Stockholders’ Equity (Deficit) for the period from September
17, 1999 (inception) through November 30, 2010 (Unaudited)
|
5
|
|||
Statements
of Cash Flows for the six months ended November 30, 2010 and
2009, and the period from September 17, 1999 (inception) to November 30,
2010 (Unaudited)
|
9
|
|||
Notes
to Unaudited Financial Statements
|
10
|
|||
ITEM 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
||
ITEM 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
27
|
||
ITEM 4.
|
Controls
and Procedures
|
27
|
||
PART II.
|
OTHER
INFORMATION
|
|||
ITEM 6.
|
Exhibits
|
27
|
||
SIGNATURES
|
28
|
FORWARD-LOOKING
STATEMENTS
Certain
statements made in this Quarterly Report on Form 10-Q are “forward-looking
statements” regarding the plans and objectives of management for future
operations and market trends and expectations. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. The forward-looking statements included
herein are based on current expectations that involve numerous risks and
uncertainties. Our plans and objectives are based, in part, on
assumptions involving the continued expansion of our business. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe that our
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Report will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. We undertake no obligation to
revise or update publicly any forward-looking statements for any
reason. The terms “we”, “our”, “us”, or any derivative thereof, as
used herein refer to Protalex, Inc., a Delaware corporation, and its
predecessors.
2
PART
I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
(A
Development Stage Company)
BALANCE
SHEETS
November
30,
|
May 31,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 791,776 | $ | 2,350,084 | ||||
Prepaid
expenses
|
71,247 | 39,004 | ||||||
Total
current assets
|
863,023 | 2,389,088 | ||||||
OTHER
ASSETS:
|
||||||||
Intellectual
technology property, net of accumulated amortization of $10,263 and
$10,008 as of November 30, 2010 and May 31, 2010,
respectively
|
9,017 | 9,527 | ||||||
Total
other assets
|
9017 | 9,527 | ||||||
Total
Assets
|
$ | 872,040 | $ | 2,398,615 | ||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 182,863 | $ | 182,861 | ||||
Payroll
and related liabilities
|
- | 156,994 | ||||||
Accrued
expenses
|
338,154 | 396,878 | ||||||
Total
current liabilities
|
521,017 | 736,733 | ||||||
LONG
TERM LIABILITIES:
|
||||||||
Senior
Secured Convertible Note – net of debt discount - related
party
|
693,435 | 591,063 | ||||||
Total
liabilities
|
1,214,452 | 1,327,796 | ||||||
STOCKHOLDERS'
EQUITY (DEFICIT)
|
||||||||
Preferred
stock, par value $0.00001, 1,000,000 shares authorized; none issued and
outstanding
|
- | - | ||||||
Common
stock, par value $0.00001, 100,000,000 shares authorized; 14,415,745
shares issued and outstanding, respectively
|
144 | 144 | ||||||
Additional
paid in capital
|
48,723,028 | 48,723,028 | ||||||
Deficit
accumulated during the development stage
|
(49,065,584 | ) | (47,652,353 | ) | ||||
Total
stockholders’ equity (deficit)
|
(342,412 | ) | 1,070,819 | |||||
Total
liabilities and stockholders’ equity (deficit)
|
$ | 872,040 | $ | 2,398,615 |
The
accompanying notes are an integral part of these unaudited financial
statements.
3
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENTS
OF OPERATIONS
For the
three and six month periods ended November 30, 2010 and 2009 and
From
Inception (September 17, 1999) through November 30, 2010
(Unaudited)
Three
Months Ended
November 30,
2010
|
Three
Months Ended
November 30,
2009
|
Six
Months Ended
November 30,
2010
|
Six
Months Ended
November 30,
2009
|
From Inception
(September 17, 1999)
Through
November 30,
2010
|
||||||||||||||||
Revenues
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Operating
Expenses
|
||||||||||||||||||||
Research
and development (including depreciation and amortization)
|
557,511 | 148,922 | 888,282 | 342,187 | 29,933,116 | |||||||||||||||
Administrative
(including depreciation and amortization)
|
98,771 | 237,137 | 211,934 | 380,144 | 16,795,037 | |||||||||||||||
Professional
fees
|
144,602 | 310,146 | 213,233 | 453,275 | 4,088,315 | |||||||||||||||
Depreciation
and amortization
|
255 | 10,868 | 510 | 15,070 | 180,416 | |||||||||||||||
Operating
loss
|
(801,139 | ) | (707,073 | ) | (1,313,959 | ) | (1,190,676 | ) | (50,996,884 | ) | ||||||||||
Other
income (expense)
|
||||||||||||||||||||
Interest
income
|
946 | (1,597 | ) | 3,100 | (1,265 | ) | 2,204,523 | |||||||||||||
Interest
expense
|
(51,061 | ) | (10,845 | ) | (102,372 | ) | (10,845 | ) | (273,223 | ) | ||||||||||
Net
loss
|
$ | (851,254 | ) | $ | (719,515 | ) | $ | (1,413,231 | ) | $ | (1,202,786 | ) | $ | (49,065,584 | ) | |||||
Weighted
average number of common shares outstanding
|
14,415,745 | 7,576,468 | 14,415,745 | 6,632,896 | ||||||||||||||||
Loss
per common share – basic and diluted
|
$ | (0.06 | ) | $ | (0.09 | ) | $ | (0.10 | ) | $ | (0.18 | ) |
The
accompanying notes are an integral part of these unaudited financial
statements.
4
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
From
Inception (September 17, 1999) through November 30, 2010
(Unaudited)
Deficit
|
||||||||||||||||||||||||
Accumulated
|
||||||||||||||||||||||||
Additional
|
Common
|
During The
|
||||||||||||||||||||||
Common Stock
|
Paid in
|
Stock-
|
Development
|
|||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
|||||||||||||||||||
September
17, 1999 — initial issuance of 3,000 shares for intellectual
technology license at $.15 per share
|
2,000 | $ | 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 17 shares to individual for $25,000
|
17 | 25,000 | — | — | — | 25,000 | ||||||||||||||||||
November
15, 1999 — reverse merger transaction with Enerdyne Corporation, net
transaction amounts
|
1,794,493 | 118,547 | — | (118,547 | ) | — | — | |||||||||||||||||
November
18, 1999 — February 7, 2000 — issuance of 91,889 shares to various
investors at $1.80 per share
|
91,889 | 165,400 | — | — | — | 165,400 | ||||||||||||||||||
January
1, 2000 — issuance of 20,000 shares in exchange for legal
services
|
20,000 | 15,000 | — | — | — | 15,000 | ||||||||||||||||||
May
1 - 27, 2000 — issuance of 128,000 shares to various investors at $5.00
per share
|
128,000 | 640,000 | — | — | — | 640,000 | ||||||||||||||||||
May
27, 2000 — issuance of 329 shares to an individual in exchange
for interest Due
|
329 | 1,644 | — | — | — | 1,644 | ||||||||||||||||||
Net
loss for the year ended May 31, 2000
|
— | — | — | — | (250,689 | ) | (250,689 | ) | ||||||||||||||||
Balance,
May 31, 2000
|
2,036,728 | 965,891 | — | (368,547 | ) | (250,689 | ) | 346,655 | ||||||||||||||||
December
7, 2000 — issuance of 85,000 shares to various investors at
$5.00 per share
|
85,000 | 425,000 | — | — | — | 425,000 | ||||||||||||||||||
May
31, 2001 — Forgiveness of debt owed to stockholder
|
— | — | 40,000 | — | — | 40,000 | ||||||||||||||||||
Net
loss for the year ended May 31, 2001
|
— | — | — | — | (553,866 | ) | (553,866 | ) | ||||||||||||||||
Balance,
May 31, 2001
|
2,121,728 | 1,390,891 | 40,000 | (368,547 | ) | (804,555 | ) | 257,789 |
The
accompanying notes are an integral part of this financial
statement.
5
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - (continued)
From
Inception (September 17, 1999) through November 30, 2010
(Unaudited)
|
Deficit
|
|||||||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||||||
|
Additional
|
Common
|
During
The
|
|||||||||||||||||||||
|
Common
Stock
|
Paid
in
|
Stock-
|
Development
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
||||||||||||||||||
August 13, 2001 — Contribution by
Stockholders
|
— | — | 143,569 | — | — | $ | 143,569 | |||||||||||||||||
November 7, 2001 — issuance of
176,320 Shares at $6.25 per share
|
176,320 | $ | 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
|
2,298,048 | 2,492,891 | 316,569 | (368,547 | ) | (2,085,020 | ) | 355,893 | ||||||||||||||||
July 5, 2002 — issuance of
168,400 shares at $7.50 per share
|
168,400 | 1,263,000 | — | — | — | 1,263,000 | ||||||||||||||||||
July 1, 2002 - May 1, 2003 –
purchase of common stock from stockholder at $3.50 per share
|
(26,191 | ) | (91,667 | ) | — | — | — | (91,667 | ) | |||||||||||||||
January 15, 2003 - May 15, 2003 —
common stock issued to Company president
|
8,334 | 82,841 | — | — | — | 82,841 | ||||||||||||||||||
May 14, 2003 — common stock
issued to employee
|
1,000 | 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
|
2,449,591 | 3,758,315 | 603,912 | (368,547 | ) | (3,750,110 | ) | 243,570 | ||||||||||||||||
June 15, 2003, common stock
issued to Company president
|
1,667 | 16,418 | — | — | — | 16,418 | ||||||||||||||||||
June 15, 2003, purchase of common
stock from stockholder
|
(2,419 | ) | (8,333 | ) | — | — | — | (8,333 | ) | |||||||||||||||
September 18, 2003 – issuance of
1,489,129 of common stock issued in private placement At $8.50 per share,
net of transaction costs
|
1,489,129 | 11,356,063 | — | — | — | 11,356,063 | ||||||||||||||||||
September 19, 2003 – repurchase
and retired 598,961 shares for $300,000
|
(598,961 | ) | (300,000 | ) | — | — | — | (300,000 | ) | |||||||||||||||
December 12, 2003 – issuance
of 7,880 shares to terminated employees at $13.00 per
share
|
7,880 | 102,438 | — | — | — | 102,438 | ||||||||||||||||||
March 1, 2004 – common stock
issued to employee at $12.75 per share
|
10,000 | 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.
6
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - (continued)
From
Inception (September 17, 1999) through November 30, 2010
(Unaudited)
|
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
|
3,356,887 | 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 $12.75 per share
|
3,000 | 38,250 | — | — | — | 38,250 | ||||||||||||||||||
February 28, 2005 – Reclass Par
Value for Reincorporation into DE as of 12/1/04
|
— | (14,702,070 | ) | 14,702,070 | — | — | — | |||||||||||||||||
May 25, 2005 - issuance of
518,757 shares of common stock issued in private placement At $9.75 per
share, net of transaction costs
|
518,757 | 5 | 4,851,188 | — | — | 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
|
3,878,644 | 39 | 20,913,977 | — | (12,307,203 | ) | 8,606,813 | |||||||||||||||||
August 23, 2005 – common stock
issued to employee
|
8,000 | — | 100,000 | — | — | 100,000 | ||||||||||||||||||
October 19, 2005 – common stock
issued to employee
|
2,000 | — | 25,000 | — | — | 25,000 | ||||||||||||||||||
December 30, 2005 – issuance of
519,026 shares of common stock issued in private placement at $11.25 per
share, net of transaction costs
|
519,026 | 5 | 5,510,962 | — | — | 5,510,967 | ||||||||||||||||||
June 1, 2005 – May 31, 2006 –
warrants exercised
|
70,320 | 1 | 786,537 | — | — | 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
|
4,477,990 | 45 | 27,741,155 | — | (18,411,605 | ) | 9,329,595 |
The
accompanying notes are an integral part of this financial
statement.
7
(A
Development Stage Company)
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - (continued)
From
Inception (September 17, 1999) through November 30, 2010
|
Deficit
|
|||||||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||||||
|
Additional
|
Common
|
During The
|
|||||||||||||||||||||
|
Common Stock
|
Paid in
|
Stock-
|
Development
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Contra
|
Stage
|
Total
|
||||||||||||||||||
July
7, 2006 – issuance of 1,214,203 shares of common stock issued in private
placement at $12.50 per share, net of transaction costs
|
1,214,203 | 12 | 14,217,709 | — | — | 14,217,721 | ||||||||||||||||||
June
1, 2006 – May 31, 2007 – warrants exercised
|
26,700 | - | 300,374 | — | — | 300,374 | ||||||||||||||||||
June
1, 2006 – May 31, 2007 – stock options exercised
|
1,200 | - | 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)
|
5,720,093 | 57 | 44,101,288 | — | (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)
|
5,720,093 | 57 | 45,112,313 | — | (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
|
5,720,093 | 57 | 45,865,581 | — | (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 8,695,692 shares of common stock at
$.23
|
8,695,652 | 87 | 1,999,913 | — | — | 2,000,000 | ||||||||||||||||||
Net
loss for the year ended May 31, 2010
|
— | — | — | — | (3,067,842 | ) | (3,067,842 | ) | ||||||||||||||||
Balance,
May 31, 2010
|
14,415,745 | 144 | $ | 48,723,028 | $ | — | (47,652,353 | ) | 1,070,819 | |||||||||||||||
Net
loss for the six months ended November 30, 2010
|
— | — | — | — | (1,413,231 | ) | (1,413,231 | ) | ||||||||||||||||
Balance,
November 30, 2010 (Unaudited)
|
14,415,745 | $ | 144 | $ | 48,723,028 | $ | — | $ | (49,065,584 | ) | $ | (342,412 | ) |
The
accompanying notes are an integral part of this financial
statement.
8
PROTALEX,
INC.
(A
Development Stage Company)
STATEMENTS
OF CASH FLOWS
Six Months
|
Six Months
|
From
Inception
(September 17,
1999)
|
||||||||||
Ended
|
Ended
|
Through
|
||||||||||
November 30,
|
November 30,
|
November 30,
|
||||||||||
2010
|
2009
|
2010
|
||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
Net
loss
|
$ | (1,413,231 | ) | $ | (1,202,786 | ) | $ | (49,065,584 | ) | |||
Adjustments
to reconcile net loss to net cash and cash equivalents used in operating
activities
|
||||||||||||
(Gain)
on disposal of equipment, net
|
— | — | (81,544 | ) | ||||||||
Depreciation
and amortization
|
510 | 15,070 | 1,035,068 | |||||||||
Equity
based expense
|
102,374 | 130,457 | 6,111,424 | |||||||||
(Increase)/decrease
in:
|
||||||||||||
Prepaid
expenses and deposits
|
(32,243 | ) | 115,531 | (79,237 | ) | |||||||
Increase/(decrease)
in:
|
||||||||||||
Accounts
payable and accrued expenses
|
(58,724 | ) | (178,281 | ) | 521,015 | |||||||
Payroll
and related liabilities
|
(156,994 | ) | (604,148 | ) | — | |||||||
Other
liabilities
|
— | — | — | |||||||||
Net
cash and cash equivalents used in operating activities
|
(1,558,308 | ) | (1,724,157 | ) | (41,558,858 | ) | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
Acquisition
of intellectual technology license – fee portion
|
— | — | (20,000 | ) | ||||||||
Refund
of security deposits
|
— | — | 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
|
— | 11,565 | 229,135 | |||||||||
Net
cash and cash equivalents provided by (used in) investing
activities
|
— | 11,565 | (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 stockholders
|
— | — | 183,569 | |||||||||
Principal
payment on note payable to individuals
|
— | — | (225,717 | ) | ||||||||
Issuance
of notes 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
|
(1,558,308 | ) | 1,287,408 | 791,776 | ||||||||
Cash
and cash equivalents, beginning
|
2,350,084 | 2,637,292 | — | |||||||||
Cash
and cash equivalents, ending
|
$ | 791,776 | $ | 3,924,700 | $ | 791,776 | ||||||
SUPPLEMENTAL
SCHEDULE OF CASH FLOW INFORMATION:
|
||||||||||||
Interest
paid
|
$ | — | $ | — | $ | 66,770 | ||||||
Taxes
paid
|
$ | — | $ | — | $ | 100 |
The
accompanying notes are an integral part of these unaudited financial
statements.
9
(A
Company in the Development Stage)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
From
Inception (September 17, 1999) through November 30, 2010
NOTE 1.
ORGANIZATION AND BUSINESS ACTIVITIES
Protalex,
Inc., a Delaware corporation (“we,” “us,” our,” or “Company”) is a development
stage company which has been engaged in developing a class of biopharmaceutical
drugs for treating autoimmune inflammatory diseases. We were
incorporated on September 17, 1999 in New Mexico and reincorporated in the
State of Delaware on December 1, 2004. 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. In August 2010, the Company commenced a
multi-center Phase 1b clinical trial of PRTX-100 in South Africa on adult
patients with active rheumatoid arthritis (RA) and dosed its first patient
enrolled in the study (the “RA Study”). The RA Study is a proof of
concept study to evaluate safety and potential efficacy of PRTX-100 in patients
with active RA, will enroll up to 40 patients in four cohorts, and is
expected to be completed in the third calendar quarter of 2011. We
currently have no products.
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 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.
NOTE 2.
CHANGE OF OWNERSHIP TRANSACTION
On
December 8, 2010, the Company put into effect a reverse stock split of the
outstanding shares of its common stock, with a par value of $0.00001 per share
(“Common Stock”), on the basis of one new share of Common Stock for each five
shares of Common Stock outstanding. Unless otherwise noted, all
references in these financial statements and notes to financial statements to
number of shares, price per share and weighted average number of shares
outstanding of Common Stock prior to this reverse stock split have been adjusted
to reflect the reverse stock split on a retroactive basis.
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) 8,695,652 restricted shares of our common stock at a
purchase price of $0.23 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 $0.23 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 the Investor 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).
10
PROTALEX,
INC.
(A
Company in the Development Stage)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
From
Inception (September 17, 1999) through November 30, 2010
NOTE 2.
CHANGE OF OWNERSHIP TRANSACTION (continued):
As
contemplated by the Purchase Agreement, all of our executive officers and all of
the members of our Board of Directors (the “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 of the
Company.
In
addition, on the Effective Date, we (i) terminated 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) cancelled stock options exercisable for an
aggregate of 246,714 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 (“Kane”), Marc L. Rose, our former CFO (“Rose”)
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.
NOTE 3.
BASIS OF PRESENTATION
The
interim financial data contained in this Report is unaudited; however in the
opinion of management, the interim data includes all adjustments, consisting of
normal recurring adjustments, necessary for a fair statement of the results for
the interim period. The financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures included herein are adequate to make the information presented not
misleading. The results of operations in interim periods are not
necessarily indicative of the results that may be expected for the full
year.
Information
regarding the organization and business of the Company, accounting policies
followed by the Company and other important information is contained in the
notes to the Company's financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended May 31, 2010. This quarterly
report should be read in conjunction with such annual report.
NOTE 4.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues and expense, and the disclosure of contingent assets and liabilities.
Estimated amounts could differ materially from actual results.
11
PROTALEX,
INC.
(A
Company in the Development Stage)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
From
Inception (September 17, 1999) through November 30, 2010
Loss
per Common Share
The
Financial Accounting Standards Board (FASB) has issued guidance for
“Earnings Per Share” which provides for the calculation of “Basic” and “Diluted”
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing net loss to common stockholders by the weighted average
number of common shares outstanding for the period. All potentially dilutive
securities consisting of employee stock options and warrants 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
November 30, 2010 and 2009, the Company had potentially dilutive securities
consisting of warrants and stock options totaling 2,080,682 comprised of 601,755
warrants and 1,478,927 stock options as of November 30, 2010 and 1,145,164
comprised of 785,779 warrants and 359,384 stock options as of November 30,
2009.
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 $0 and $0, for the six
months ended November 30, 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 our 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 by the Board of Directors or the Compensation
Committee. There are 900,000 shares reserved for grants of options under
the plan, of which 88,800 have been issued and 800 have been exercised. The
Company has issued 271,784 stock options as standalone grants, of which 400 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.
12
PROTALEX,
INC.
(A
Company in the Development Stage)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
From
Inception (September 17, 1999) through November 30, 2010
NOTE 4.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued):
As of
November 30, 2010, there were 1,478,927 stock options outstanding. At
November 30, 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 4.0 years. The remaining amount of options will
be valued once they vest upon the future events. During the six
months ended November 30, 2010, the Company granted no stock options and no
options were forfeited or expired.
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:
Six Months Ended
November 30, 2010
|
Six Months Ended
November 30, 2009
|
From Inception
Through
November 30, 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
|
$ | .45 | $ | .175 | $ | 5.20 |
NOTE
5. GOING CONCERN
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.
From
inception through November 30, 2010, the Company has incurred an accumulated
deficit of $49,065,584. As of November 30, 2010, the Company had cash
and cash equivalents of $791,776 and net working capital of $342,006. 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 2011 and that it will need to raise additional capital 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.
NOTE 6.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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.
13
PROTALEX,
INC.
(A
Company in the Development Stage)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
From
Inception (September 17, 1999) through November 30, 2010
NOTE 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.
As
previously disclosed in the May 31, 2009 Form 10-K filed on August 28, 2009, Mr.
Steve Kane and Mr. Marc Rose voluntarily terminated their
employment. At May 30, 2010 and November 30, 2010, the Company had
accrued severance obligations of $156,994 and $0, respectively, for severance
obligations to Mr. Kane covering salary, payroll taxes and health
benefits.
During
the year ended May 31, 2010, the Company issued an aggregate of 950,543 options
to John Doherty, one of our Directors, and Kirk M. Warshaw, our Chief Financial
Officer and Director. No options were issued during the six months
ended November 30, 2010.
NOTE 8.
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 $0.35. 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.
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.
14
PROTALEX,
INC.
(A
Company in the Development Stage)
NOTES
TO UNAUDITED FINANCIAL STATEMENTS
From
Inception (September 17, 1999) through November 30, 2010
NOTE 9.
SUBSEQUENT EVENTS
On
December 8, 2010, the Company effected a reverse stock split of the outstanding
shares of its common stock, with a par value of $0.00001 per share (“Common
Stock”), on the basis of one new share of Common Stock for each five shares of
Common Stock outstanding. Unless otherwise noted, all references in
these financial statements and notes to financial statements to number of
shares, price per share and weighted average number of shares outstanding of
Common Stock prior to this reverse stock split have been adjusted to reflect the
reverse stock split on a retroactive basis.
On
December 8, 2010, the Company authorized one million shares of a “blank-check”
class of preferred stock.
In
December 2010, the Company was informed that the Japan Patent Office approved
its patent application and issued Japanese Letters Patent, Japanese patent
#4598404. The Japanese patent has an expiration date of March 6,
2023.
The
Company has evaluated subsequent events and has determined that there were no
other subsequent events to recognize or disclose in these financial
statements.
15
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. In August 2010, the Company commenced a
multi-center Phase 1b clinical trial of PRTX-100 in South Africa on adult
patients with active rheumatoid arthritis (RA) and dosed its first patient
enrolled in the study (the “RA Study”). The RA Study is a proof of
concept study to evaluate safety and potential efficacy of PRTX-100 in patients
with active RA, will enroll up to 40 patients in four cohorts, and is
expected to be completed in the third calendar quarter of 2011. We
currently have no products.
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 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) 8,695,652 restricted shares of our common
stock at a purchase price of $0.23 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 $0.23 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.
16
In
addition, on the Effective Date, we (i) terminated 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) cancelled stock options exercisable for an
aggregate of 246,714 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.
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Clinical Trials
Favorable
pre-clinical safety and efficacy studies for our lead compound, PRTX-100, laid
the foundation for the filing of 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.
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. The RA
Study, 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 commenced dosing patients in August 2010.
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 the RA Study which is a multi-center Phase 1b
clinical trial of PRTX-100 on adult patients with active RA in South Africa and
dosed our first patient. We contracted a leading global
biopharmaceutical services organization, to manage and monitor the RA
Study. The first sequential dose escalation study in RA will enroll
up to 40 patients in four cohorts and is expected to be completed in the third
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.
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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.
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.
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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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Analgesic/anti-inflammatory
preparations, ranging from simple aspirin to the COX-2
inhibitors;
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Immunosuppressive/antineoplastic
drugs, including azathioprine and
methotrexate;
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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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Soluble
Interleukin-l (IL-I) Receptor Therapy, Anakinra (Kineret®);
and
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Costimulatory
molecule inhibitor (abatacept, Orencia® Anti CD20 therapy, rituximab
(Rituxan®).
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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.
21
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 a 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.
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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.
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 October 2010, the PTO issued US
patent #7,807,170. We have also filed for foreign protection relating
to this patent in Canada, Japan and the European Union. In December
2010, we were informed that the Japan Patent Office approved our patent
application and issued Japanese Letters Patent, Japanese patent
#4598404. The Japanese patent has an expiration date of March 6,
2023.
Employees
We have
three part-time employees, our president, our chief financial officer, and an
administrative person responsible for maintaining critical records regarding our
clinical study. 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.
Critical
Accounting Policies
Our
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. Note 2 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.
24
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
Research and Development Expenses
- Research and Development expenses (“R&D Expenses”) were $557,511
and $888,282 and $148,922 and $342,187 for the three and six months ended
November 30, 2010 and 2009, respectively. The increase in R&D Expenses
for the three and six month periods ended November 30, 2010 compared to the same
prior year periods was primarily the result of the start of the aforementioned
clinical trial in South Africa.
There are
significant risks and uncertainties inherent in the preclinical and clinical
studies associated with our research and development program. These studies may
yield varying results that could delay, limit or prevent a program’s advancement
through the various stages of product development and significantly impact the
costs to be incurred, and time involved, in bringing a program to completion. As
a result, the costs to complete such programs, as well as the period in which
net cash outflows from such programs are expected to be incurred, are not
reasonably estimable.
Administrative Expenses -
Administrative expenses were $98,771 and $211,934 and $237,137 and $380,144 for
the three and six months ended November 30, 2010 and 2009, respectively.
The decrease in Administrative expenses for the three and six month periods
ended November 30, 2010 compared to the same prior year period was due to
decreased employee compensation and occupancy expenses.
Professional Fees -
Professional expenses were $144,602 and $213,233 and $310,146 and $453,275 for
the three and six months ended November 30, 2010 and 2009,
respectively. The decrease for the three and six month periods ended
November 30, 2010 compared to the same prior year period was due to a decrease
in legal, accounting, and consulting expenses as compared to the same period
last year.
Net
Loss Outlook
We have
incurred operating losses since inception, have not generated any product sales
revenues, and have not achieved profitable operations. Our accumulated deficit
from inception through November 30, 2010 was $49,065,584 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.
25
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 1,489,129 shares
of our common stock at $8.50 per share, with warrants to purchase an additional
632,879 shares of our common stock, at an exercise price of $12.00 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 518,757 shares of our common
stock at $9.75 per share, with warrants to purchase an additional 184,024 shares
of our common stock, at an exercise price of $11.25 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 519,026 shares of
our common stock at $11.25 per share, with warrants to purchase an additional
129,757 shares of our common stock, at an exercise price of $14.95 per share. We
also issued warrants to purchase 45,415 shares of our common stock, at an
exercise price of $14.95 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 70,320 warrants
which resulted in $786,538 in cash proceeds.
On July
7, 2006, we raised $14,217,660, net of transaction costs of $959,874, through
the sale of 1,214,203 shares of our common stock at $12.50 per share, with
warrants to purchase an additional 303,551 shares of our common stock, at an
exercise price of $19.25 per share. We also issued warrants to purchase 106,243
shares of our common stock, at an exercise price of $19.25 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
26,700 warrants and 1,200 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 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 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 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. Currently, however, the exercise
price of all of our outstanding warrants as disclosed above are significantly in
excess of the price at whicht our stock has been trading over the trailing 12
month period prior to the date of this Report.
Net
Cash Used In Operating Activities and Operating Cash Flow Requirements
Outlook
Our
operating cash outflows for the six months ended November 30, 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 2010 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.
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.
26
Off-Balance
Sheet Arrangements
As of
November 30, 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 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a
smaller reporting company we are not required to provide the information
required by this Item.
ITEM 4.
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures
Our
management, with the participation of both of our president and chief financial
officer, carried out an evaluation of the effectiveness of our “disclosure
controls and procedures” (as defined in the Securities Exchange Act of 1934 (the
“Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period
covered by this Report (the “Evaluation Date”). Based upon that
evaluation, both of our 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 our chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
(b)
|
Changes
in Internal Control over Financial
Reporting
|
There
were no changes in our internal controls over financial reporting that occurred
during the period covered by this Report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II – OTHER INFORMATION
ITEM 6.
EXHIBITS
Exhibit No.
|
Description
|
|
31.1
|
Certification
of the President pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
of the President pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
27
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date:
January 7, 2011
|
PROTALEX,
INC.
|
By:
/s/ Arnold P. Kling
|
|
Arnold
P. Kling, President
|
|
(Principal
Executive
Officer)
|
Date:
January 7, 2011
|
|
By:
/s/ Kirk M. Warshaw
|
|
Kirk
M. Warshaw, Chief Financial Officer
|
|
(Principal
Financial
Officer)
|
28