Form 10-KSB
[As last amended in Release No.33-7505, effective January 1, 1999, 63 F.R.9632.]
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28385
Protalex, Inc.
(Name of small business issuer in its charter)
New Mexico 91-2003490
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
P.O. Box 30952 Albuquerque, NM 87190
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (505) 260-1726
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent files in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. 10,669
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) $6,373,008 at August 9. 2000.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date 10,183,635
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
ITEM I - DESCRIPTION OF BUSINESS
Overview
Protalex, Inc. (the "Company") is a development stage company engaged in the
development and marketing of a new class of organic chemical molecules, called
"bioregulators," for the treatment of rheumatoid arthritis ("RA") and other
forms of arthritis. The Company's business is an extension of over three decades
of research by Dr. Paul Mann, an officer, director and shareholder of the
Company.
The use of bioregulatory compounds for the treatment of human disease represents
a completely new approach to therapy. Unlike many existing pharmaceutical
agents, which act upon the end products of complex metabolic pathways,
bioregulators influence cellular activities at a more basic level. This results
in restoration of tissue integrity and function, in many instances not only
alleviating, but potentially reversing the pathologic process. The Company
intends to bring this unique biotechnology to commercial realization, thereby
establishing an entirely new category of pharmaceutical treatment of disease.
The Company will initially focus on the treatment of RA. Research and
development efforts for RA are completed, with pre-clinical trials having began
in January 2000. The pre-clinical trials will be conducted by Dr. Paul Mann and
Dr. Arthur Bankhurst, a renowned rheumatologist at the University of New Mexico
and a director and shareholder of the Company, and should be completed in
approximately six months. Upon successful completion of the pre-clinical trials,
the Company will file an Investigational New Drug Application with the Food and
Drug Administration ("FDA"), and will begin planning clinical trials. The
Company believes that an existing, FDA-approved treatment for RA utilizes
principles of bioregulation, which should enable the Company to expedite the FDA
process by limiting the size and scope of the clinical trials.
About Bioregulation
The Company's discoveries and its proprietary products represent the first
application of bioregulator technology to the treatment of disease. Since the
1960's, however, certain natural and synthetic molecules have been known to
influence cell proliferation and differentiation in laboratory experiments.
(Proliferation consists simply of an increase in cell number, while
differentiation implies the ability to accomplish some function especially to
respond to or initiate some change in the cell's environment.)
Both proliferation and differentiation can be influenced by external stimuli,
most of which are in the form of chemical "messages." Under normal
circumstances, equilibrium is maintained within and among cells by the continual
exchange of such messages. Cells may begin to function or proliferate abnormally
under three circumstances: when they receive an erroneous signal from their
environment, when their reception or processing of external messages is
impaired, or when they receive abnormal genetic signals from within. Widespread
abnormalities of cellular differentiation cause diseases of many kinds, while
uncontrolled cellular proliferation causes cancer. The Company's bioregulators
are compounds with the ability to act upon cells at a primitive level of
function, "resetting" their internal mechanisms to allow resumption of normal
behavior.
Some naturally occurring bioregulators have the property of stimulating cellular
proliferation at certain concentrations, while promoting cellular
differentiation at other concentrations. In the latter role, they can bring
about increased production of antibodies in one cell line, or slow the growth of
a tumor in another, apparently by helping restore normal function within cells
and promoting cell-to-cell signaling. Bioregulators seem to act upon a wide
variety of tissue types, suggesting that they affect simple activities common to
all cells.
Bioregulators represent a completely new approach to the treatment of disease.
For example, rheumatoid arthritis is one of the "autoimmune" diseases, in which
cells of the immune system erroneously identify other body tissues as "foreign".
These immune cells then produce substances that attack other body tissues, such
as the lining of the joints. Current therapy for rheumatoid arthritis is aimed
at either suppressing the symptoms caused by this attack, or inactivating the
substances produced by the immune cells. In contrast, the Company's
bioregulators act upon the immune cells themselves, restoring normal cellular
function. In this way, bioregulator treatment not only relieves symptoms of the
disease, but also may promote reversal of the tissue damage that already has
taken place.
The Company's research has defined the concept of bioregulators and has produced
proprietary compounds particularly suitable for therapeutic administration. The
most active of these show intense cellular activity in miniscule doses. Clinical
effectiveness in such a low dosage range is expected to yield exceptional safety
and freedom from side effects.
Experiments and Studies
The best demonstration of the ability of bioregulators to re-equilibrate cell
differentiation lie in the field of immunology. Here, both humoral and cellular
immune responses can be modified by the appropriate concentration of a
bioregulating agent. Cell proliferation also can be normalized by bioregulators
in experiments dealing with natural senescence and tumor growth. Examples of
each of these processes are outlined below.
In Vitro Experiments
IGG Production in HPBL. Bioregulators induce immune responsiveness in human
peripheral blood lymphocytes in response to a number of antigenic stimuli. The
number of antibody-producing cells can be amplified as much as 100 to 1000 times
above untreated values. This technique can be used to produce highly monoclonal
antibodies.
Cell Sensecence Studies. The life span of cells in culture can be extended by
nearly 100% through the action of bioregulators. When senescence finally does
take place, it affects all of the cells simultaneously, thus "rectangularizing"
the usually gradual fall of the survival curve.
In Vivo Experiments
Nude Mice. A mouse strain lacking in cellular immunity, nude mice
characteristically show almost no production of T cells, which makes them highly
susceptible to infection and early death. This situation mimics a genetic
disease in humans called DiGeorge syndrome. Administration of bioregulators can
partially reverse this deficit, restoring about 70% of the mice's T cell
complement and almost doubling their life expectancy. The same effect can be
obtained in mice whose thymus has been surgically removed in early life.
Nude Rats With Heterologous Tumors. Another rodent strain with immune
deficiency, the nude rat, often is used in experiments involving transplantation
of tumors from another animals, but persist in the nude rat because of their
inability to mount a rejection response. Administration of bioregulators in
tumor-bearing rats results in regression of the neoplasm in about two-thirds of
the animals.
Nude Dogs With Implanted Homologous Tumors. As part of study of bioregulators as
potential "contrast agents" for nuclear magnetic resonance imaging, glial tumors
were transplanted into the brains of dogs. This type of tumor normally
progresses rapidly with irreversible neurological signs appearing between 2 and
3 weeks after transplantation. A bioregulator compound was injected 3 times a
week for 3 weeks following transplantation. Complete tumor regression was seen
in 100% of the treated animals.
Naturally Occurring Disease
Dogs and Cats With Spontaneous Tumors. Data is now being collated on several
dozen domestic dogs and cats that have been given the bioregular treatment
outline above for spontaneously occurring tumors of various types. Anecdotal
reports have been received from veterinarians all over the country, indicating
success with bioregulator treatment, but a controlled study with a consistent
protocol is needed to validate this mode of therapy. Such a study is now being
planned.
Markets
Human autoimmune diseases provide the first and most obvious target for
bioregulator therapy. In these disorders, the immune system misidentifies the
body's own tissues as "foreign," prompting an inappropriate and prolonged immune
response that can damage tissues and organs throughout the body. Bioregulator
treatment can be expected to restore normal immune homeostasis, with the result
that the disease is not merely ameliorated, but permanently cured.
RA will be the first autoimmune disease targeted and will be the primary and
immediate focus of the Company. RA is a serious autoimmune disorder that causes
the body's immune system to mistakenly produce antibodies that attack the lining
of the joints, resulting in inflammation and pain. RA can lead to joint
deformity or destruction, organ damage, disability and premature death.
According to a leading scientific journal, the prevalence of RA in the United
States is approximately 1% (or about 2.5 million people), with approximately
200,000 new cases diagnosed yearly.
Currently, no uniformly effective treatment for RA exists. Current treatments
are costly, and in most cases must be continued for decades. In contract, the
Company believes that bioregulator therapy will be much more cost effective and
can be administered by weekly injections over the course of a few months.
The Company's decision to concentrate its efforts on RA, as opposed to other
autoimmune diseases or cancers, is based upon three main considerations:
* Evidence from Dr. Mann's work that bioregulators strongly influence
the immune system in ways that should produce beneficial effects in
patients with RA;
* The Company believes that an existing, FDA-approved treatment for RA
actually utilizes principles of bioregulation; and
* At this stage in the Company's development, the Company believes it is
most appropriate to concentrate its efforts and resources on
developing a treatment for a single, well-defined, and serious disease
for which adequate therapy currently is not available.
The Company anticipates that its products will initially be used to treat
patients with severe cases of RA, and particularly those individuals for whom
other treatments have failed. Additionally, the Company believes that its
experience with this class of patients will prove the Company believes that its
experience with this class of patients will prove the efficacy and safety of its
products, and will encourage the use of its products in less severely affected
individuals in earlier stages of the disease.
Competition
In strictest terms, the Company has no direct competition in its field, since no
other firms have brought to market any therapeutic agents based upon
biomodulator or bioregulator technology. However, the Company's products will
compete with other pharmaceutical agents intended to treat RA. A number of
pharmaceutical agents are currently being used, with varying degrees of success,
to control the symptoms of RA and slow its progress. Available treatment options
include:
* Analgesic/anti-inflammatory preparations, ranging from simple aspirin
to the recently introduced COX-2 inhibitors;
* Immunosuppressive/antineoplastic drugs, including azathioprine and
methotrexate ;
* TNF (Tumor Necrosis Factor) inhibitors, currently represented by
Immunex Corporation's Enbrel-Registered Trademark;
* "Immunoadsorption Therapy,": now in limited use in Europe and the
United States, entailing weekly sessions during which a patient's
blood is separated and passed through a molecular filter; and
* Colloidal gold given by injection, a time-honored treatment but one
with extreme variability of effect and an unknown mechanism of action.
In all, at least a dozen large and small pharmaceutical companies are active in
this market, with Immunex Corporation and Monsanto Company dominating the market
as a result of their respective products, Enbrel-Registered Trademark and
Celebrex-Registered Trademark. Despite intense media attention and enormous
sales, the long-term efficacy of these compounds remains to be evaluated.
Operations
The Company is currently engaged in developing the corporate base for
commercialization of its bioregulator products, as well as planning production
and marketing strategies. The Company's business operations are housed in an
office in Albuquerque. The Company currently has no manufacturing facilities and
may have to rely on others to manufacture compounds for the Company's use in
research and development, pre-clinical trials, and clinical trials.
Alex, L.L.C., a New Mexico limited liability company and the Company's majority
shareholder ("Alex"), continues to support ongoing research aimed at clarifying
the biologic functions of bioregulators, and along with the Company,
establishing their safety and efficacy in treating induced arthritis in animals,
and determining appropriate dosage and treatment protocols. The bioregulator
technology which the Company intends to develop and bring to the market is
currently licensed from Alex.
Reverse Merger
In September 1999, Protalex, Inc., a New Mexico corporation ("Protalex"),
acquired a majority of the issued and outstanding shares of common stock of
Enerdyne from Don Hanosh, pursuant to a Stock Purchase Agreement between
Protalex, Enerdyne and Mr. Hanosh. Under the Stock Purchase Agreement, in
consideration for Mr. Hanosh's shares of common stock, Protalex executed a
Promissory Note in the amount of $368,546.00 in favor of Mr. Hanosh.
In November 1999, Protalex merged with and into Enerdyne pursuant to a Merger
Agreement and Plan of Reorganization (the "Merger Agreement"), and Enerdyne
changed its name to Protalex, Inc., thereby creating the Company. Under the
Merger Agreement, each share of Protalex common stock outstanding immediately
prior to the effective date of the merger was converted into 822 shares of the
Company's common stock. After the merger, Protalex's former shareholders held
approximately 92.28% of the shares of common stock of the Company, and
Enerdyne's former shareholders held approximately 7.72% of the shares of common
stock of the Company.
Business and Marketing Strategy
The Company has initiated a private placements of stock to raise funds for
completion of animal research, initiation of Phase I and Phase II human studies,
and production and marketing of the Company's products on a commercial scale.
Currently the Company estimates that it has enough cash to fund development
activities and operations for the next 12 months.
The Company expects that upon FDA approval, its bioregulator products will be
competitive throughout the global market. Therefore, the Company intends to
enter into collaborative arrangements with larger strategic partners to market
and sell the Company's products in the United States and in foreign markets. The
Company expects that these partners will be responsible for funding or
reimbursing all or a portion of the costs of pre-clinical and clinical trials
required to obtain regulatory approval. In return for such payments, the Company
will grant these partners exclusive or semi-exclusive rights to market certain
of its products in particular geographical regions.
Government Regulation
The Company's ongoing research and development activities, and its future
manufacturing and marketing activities, are subject to extensive regulation by
numerous governmental authorities, both in the United States and in other
countries. In the United States, the FDA regulates the approval of the Company's
products under the authority of the Federal Food, Drug and Cosmetics Act.
In order to obtain FDA approval of the Company's new drugs, extensive
pre-clinical and clinical tests must be conducted and a rigorous clearance
process must be completed. Satisfaction of the FDA's safety and efficacy
requirements may take several years and require the expenditure of substantial
resources.
The FDA approval process entails several steps. Initially, the Company must
conduct pre-clinical trials. During pre-clinical trials, the Company must
evaluate the safety and efficacy of its products through in vitro and in vivo
laboratory animal testing. At this stage the FDA will require, at a minimum,
that the Company (i) prepare a pharmacological profile of the drug; (ii)
determine the toxicity of the drug in at least two species of animals; and (iii)
conduct short-term toxicity studies ranging from two weeks to three months,
depending on the proposed clinical trials.
Upon successful completion of pre-clinical trials, the Company must submit an
Investigational New Drug Application ("IND") to the FDA before it can begin
human clinical trials. The purpose of the IND is to detail pre-clinical research
data, and provide documentation sufficient to allow the FDA to conclude that it
is reasonable to proceed with human trials of a drug.
Clinical studies are typically conducted in three sequential phases, although
these phases may overlap. In Phase I trials, a drug is tested for safety in one
or more doses in a small number of patients or volunteers. In Phase II trials,
efficacy and safety are tested in up to several hundred patients. Phase III
trials involve additional safety, dosage and efficacy testing in an expanded
patient population at multiple test sites.
The results of the pre-clinical and clinical trials are submitted to the FDA in
the form of a new Drug Application ("NDA"). The approval of an NDA may take
substantial time and effort. In addition, upon approval of an NDA the FDA may
require post marketing testing and surveillance of the approved product, or
place other conditions on their approvals.
In 1997, the FDA's Modernization Act (the "Act) was passed. The Act expanded
earlier laws passed to shorten the drug approval process and developed
guidelines regarding the testing and approval process for products intended to
treat serious or life-threatening illnesses. More specifically, the Act created
a fast-track process which facilitates and expedites the review and testing of
new drugs that are intended to treat serious or life threatening diseases, while
preserving appropriate guarantees for safety and effectiveness. The passage of
the Act reflects the recognition that both patients and physicians are willing
to accept greater risks and side effects from products that treat serious
diseases. The fast-track procedures apply to products intended to treat AIDS,
some cancers and other life threatening illnesses. In most cases, a drug is
usually given a fast-track designation at a relatively early stage in its
development.
Sales of new drugs outside the United States are subject to foreign regulatory
requirements that differ from country to country. Foreign regulatory approval of
a product must generally be obtained before that product may be marketed in
those countries.
However, the FDA approval process is among the most restrictive in the world and
typically takes a longer time to complete than foreign regulatory approval.
Research and development efforts for the Company's first product for the
treatment of RA are near completion, with pre-clinical trials scheduled to begin
in January 2000. Upon completion of these studies, the Company will apply to the
FDA to secure its approval for limited safety testing of the Company's product
in humans. Following the successful completion of safety trials, the Company
will conduct a full-scale study of efficacy in patients with advanced and
intractable RA. This full-scale study will be conducted by Dr. Arthur Bankhurst,
a renowned rheumatologist at the University of New Mexico, and should be
completed in approximately two years. Dr. Bankhurst is a director and
shareholder of the Company. Once the trials are finished, an application for FDA
authorization to produce and market the product will be filed, with final
approval estimated to take an additional six months.
Patents, Trademarks, and Proprietary Technology
The bioregulator technology which the Company intends to develop and bring to
market is currently licensed by the Company from Alex, LLC, a New Mexico limited
liability company and the Company's majority shareholder ("Alex"). Alex's
Managing Members, each of who holds a 50% membership interest in Alex, are John
Doherty; the Company's President, and Paul Mann, the Company's Treasurer and
Secretary. Mr. Doherty and Dr. Mann are also members of the Company's Board of
Directors. The license agreement between the Company and Alex is described in
"Certain Relationships and Related Transactions."
The Company's success will depend on its ability to maintain its trade secrets
and proprietary technology in the United States and in other countries, and on
Alex's ability to obtain patents for the bioregulatory technology which it
licenses to the Company. Alex is currently seeking patents for proteins for use
as medications for human autoimmune disease. Patent protection will also be
sought for the derivatives of proteins which can also be found in other
bioregulators. Alex expects to submit its initial patent for proteins before the
end of 2000 and the additional patents shortly thereafter. In addition to patent
protection, Alex intends to seek trademark protection for the term
"bioregulator." Alex believes that this will assist in differentiating this new
field of science from current biomodulator theory.
Risks Related To The Company's Business
This Registration Statement Contains Forward-Looking Statements Which May Differ
From The Company's Actual Future Results. This registration statement contains
forward-looking statements that involve substantial risks and uncertainties.
These statements are identified by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate," and "continue" or similar words.
Statements that contain these words should be read carefully because they
discuss the Company's future expectations, contain projections of the Company's
future results of operations or of the Company's financial condition, and state
other "forward-looking" information. The Company believes it is important to
communicate its expectations. However, there may be events in the future that
the Company is not able to accurately predict or over which the Company has no
control.
The risk factors listed in this section, as well as any other cautionary
language appearing in this registration statement, provide examples of risks,
uncertainties and events that may cause the Company's actual results to differ
materially from the expectations described in the Company's forward-looking
statements. The occurrence of the events described in these risk factors and
elsewhere in this registration statement could have an adverse effect on the
Company's business, results of operations and financial condition.
The Company May Not Be Able To Continue As A Going Concern If It Does Not
Attract Investment Capital Or Generate Operating Revenue. The Company is a
development stage enterprise and does not have operating revenue, nor does it
anticipate generating operating revenue in the foreseeable future. The ability
of the Company to continue as a going concern is dependent initially on its
ability to raise sufficient investment capital to fund all necessary operations
and product development activities. Thereafter, in order to generate operating
revenue the Company must develop products that gain regulatory approval and
market acceptance. There can be no assurance that the Company will be able to
raise sufficient investment capital or successfully develop and market its
products.
The Company Has A History Of Losses Since Its Merger With Enerdyne, And Will
Continue To Incur Losses Until Its Sales Generate Sufficient Revenues. Since
Enerdyne Corporation's acquisition of Protalex, Inc. (which is more fully
described in "Corporate History"), the Company has incurred significant losses.
The Company expects to continue to incur net losses until sales of its
biomodulator products generate sufficient revenues to fund its continuing
operations.
The Company Is Uncertain Whether Its Bioregulator Products Can Be Developed
Successfully, And It May Have To Incur Additional Expenses If It Experiences
Problems In Development. The Company does not know whether bioregulator products
can be successfully developed for administration as human medications. Further
laboratory research followed by extensive animal testing will be needed before
beginning clinical trials. The Company's failure to demonstrate the safety
and/or efficacy of its bioregulator product, either at the preclinical or human
trial stage, would necessitate potentially expensive and time-consuming
additional research.
The Company's Bioregulator Product Is Limited To A Single Disease, Which Means
The Company's Prospects May Be Limited If Its Product Does Not Successfully
Treat The Disease. The Company is focused on the treatment of one disease,
rheumatoid arthritis. If the results from the Company's animal studies and/or
the human clinical trials related to that disease are inconclusive or show
results no better than a substance with no medical effect, the Company would not
have a commercially viable product. In this case, a great deal of additional
research would be required, and it is unlikely that the Company would be able to
attract further capital.
The Company's Bioregulator Products May Not Be Accepted By The Medical
Community, Which Would Result In Poor Product Sales. The Company's bioregulator
product may be safe and effective for its intended use, but may not show
sufficient superiority to other treatments currently in use to gain a
significant share of the market. Additionally, the novelty of this form of
treatment or its mode of administration may make bioregulator therapy less
appealing than existing treatments to prescribing physicians or to their
patients. Inadequate medical acceptance would result in poor product sales and
decreased profitability, and could impair the Company's ability to continue to
operate.
The Company Is Uncertain Whether Its Existing Bioregulator Products Can Be
Extended To Treat Diseases Other Than Rheumatoid Arthritis. While the Company
will initially focus on the treatment of rheumatoid arthritis, its long-term
plans call for the extension of bioregulator therapy to other types of human
disease, such as cancer. The development of new bioregulator products (or
expanding the indications for existing products to the treatment of new
diseases) will be subject to many of the same hazards and risks discussed in
this "Risk Factors" section.
The Company Is Exposed To Significant Costs And Risks Related To The Regulatory
Approval Of Bioregulator Products, And Is At A Competitive Disadvantage Due To
Its Need To Complete The Regulatory Process. Before the Company's products can
be manufactured, marketed and sold to the public, the requirements of the FDA
and similar governmental agencies in foreign countries must be met. The approval
process typically entails considerable time and expense, and may delay marketing
of the Company's products for a considerable period. The Company cannot predict
when regulatory applications might be submitted, nor when final regulatory
approval will be obtained. Also, the FDA could approve only certain uses of the
Company's products or subject its products to additional testing or surveillance
programs. Failure to obtain timely FDA approval will require the Company to
spend more resources on additional applications, and would delay the generation
of income from sales of the Company's products. In addition, the FDA approval
process presents a competitive advantage to some of the Company's competitors
who have already received FDA approval for their products.
The Company Depends On Reimbursement From Third Parties, Who May Decrease Or
Eliminate The Amount Of Reimbursement Paid To The Company. In today's medical
economy, reimbursement for all types of medical care depends substantially on
third party payors, including government authorities (e.g., the Medicare
program), private health insurers and other organizations, such as health
maintenance organizations ("HMOs"). Managed healthcare is increasing in the
United States, the number of HMOs is growing, and legislative proposals are
being introduced to reform healthcare or reduce government medical insurance
programs. As a part of their cost-control efforts, such entities may establish
fiscal policies decreasing or eliminating the amount of reimbursement for the
Company's products, making it difficult for the Company to sell its products at
a sufficient profit to remain in business.
The Company May Not Be Able To Manufacture Its Bioregulator Products In
Commercial Quantities And May Have To Incur Significant Costs To Meet Its
Manufacturing Requirements. Currently, the Company does not possess the
facilities or equipment to manufacture its products. The Company intends to
contract with a third party or parties to manufacture its products for
commercial distribution. However, the Company does not know whether such third
party or parties will be able to successfully manufacture sufficient quantities
of the Company's products for these purposes. Therefore, the Company may have to
invest substantial sums to construct facilities sufficient to meet its long-term
manufacturing requirements. See "Operations."
The Company May Not Be Able To Protect Or Maintain The Security Of Its Patents
Or Other Proprietary Information. The Company licenses its bioregulator
technology from Alex, L.L.C., and Alex intends to apply for, prosecute and
maintain patents for this technology. Conceivably, Alex may be unsuccessful in
obtaining patents and in avoiding infringements of patents granted to others.
Even if patents are granted to Alex, the enforceability of patents issued to
biotechnology and pharmaceutical firms is often highly uncertain, and existing
law may not protect Alex's patents.
Without patent protection, it is unlikely that the Company could successfully
market its bioregulator products. Lacking a proprietary advantage, the Company
would be unable to prevent marketing of its biomodulator products by more
well-established competitors who would be able to dominate the market. In
addition, the Company could incur substantial costs in defending any patent
litigation brought against it or in asserting its patent rights, including those
licensed to it by Alex, in a suit against another party. See "Patents,
Trademarks and Proprietary Technology."
The Company relies on trade secrets, know-how and continuing technological
advancement to develop and maintain its competitive position. The Company
requires that each of its employees enter into a confidentiality agreement that
contains provisions prohibiting the disclosure of confidential information to
anyone outside the Company. However, these confidentiality agreements may not be
honored and the Company may be unable to protect its rights to its unpatented
trade secrets. Dissemination of this proprietary information might allow others
to develop bioregulator products that would compete with those of the Company,
diminishing the Company's sales and market share.
The Company's Business Could Be Harmed By New Research Efforts and Product
Development By The Company's Competitors. Most of Whom Have Greater Resources
Than The Company. The Company is engaged in a sector of the economy
characterized by extensive research efforts and rapid technological development.
New drug discoveries are to be expected, including those directed at the disease
the Company has targeted. A number of the Company's competitors have
substantially more capital, research and development, regulatory, manufacturing,
marketing, human and other resources and experience than the Company. Such
competitors may develop products that are more effective or less costly than any
of the Company's current or future products and also may produce and market
their products more successfully than the Company. Large-scale successful
competition would reduce the Company's market share and profitability, and might
jeopardize the Company's ability to stay in business. See "Competition."
The Company Is Exposed To Significant Liability Associated With Its Bioregulator
Products, And May Not Be Able To Secure Insurance To Cover These Risks On
Acceptable Terms, If At All. While the Company believes that its bioregulator
product will be safe compared to other drugs, the Company still may incur
significant product liability exposure. When the Company develops a product
suitable for human administration, it intends to secure adequate product
liability coverage. However, insurers may not offer the Company product
liability insurance, may raise the price of such insurance or may limit the
coverage of such insurance. In addition, the Company may not be able to maintain
such insurance in the future on acceptable terms and such insurance may not
provide the Company with adequate coverage against potential liabilities either
for clinical trials or commercial sales. Successful product liability claims in
excess of the Company's insurance would affect the Company's ability to continue
to operate as a going concern.
The Company Is Exposed To Significant Environmental Risks Because Its
Bioregulator Research And Development Activities Involve Hazardous And
Radioactive Materials. The Company's research and development activities involve
the controlled use of hazardous materials, chemicals and radioactive compounds.
The Company is subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and certain waste products.
Although the Company believes that its planned safety procedures for the
handling and disposal of such materials comply with the standards prescribed by
such laws and regulations, it cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of such an accident,
the Company could be held liable for any damages that result and any such
liability could exceed the Company's resources. The Company may be required to
incur significant costs to comply with environmental laws and regulations in the
future. Current or future environmental laws or regulations may materially
adversely affect the Company's operations, business or assets.
Dependence upon Key Personnel; Management of Growth. The success of the
Company's operations during the foreseeable future will depend largely upon the
continued services of the following individuals: Mr. John Doherty, the Company's
President, Dr. Paul Mann, the Company's Treasurer and Secretary, and Dr. Jon
Aase, the Company's Vice-President. The loss of the services of Mr. Doherty, Dr.
Mann or Dr. Aase could have a material adverse impact on the Company. Mr.
Doherty, Dr. Mann and Dr. Aase have not entered into employment agreements with
the Company.
The Company's success will also depend in part on its ability to manage, attract
and retain qualified technical, management and sales personnel. Competition for
such personnel is intense. There can be no assurance that the Company will be
successful in attracting and retaining the personnel it required to conduct its
operations successfully. The Company's results of operations could be adversely
affected if the Company were unable to attract, manage and retain these
personnel or if its revenues fail to increase at a rate sufficient to absorb the
resulting increase in expenses. See "Employees."
Control By Principal Shareholders. As of May 31, 2000, each of Mr. Doherty and
Dr. Mann beneficially owned approximately 32.5% of the outstanding shares of the
Company's common stock through Alex, LLC, a New Mexico limited liability company
which is the Company's majority shareholder ("Alex"). Alex's Managing Members,
each of whom holds a 50% membership interest in Alex, are Mr. Doherty and Dr.
Mann. Accordingly, Mr. Doherty and Dr. Mann collectively have the ability to
control the election of all of the members of the Company's Board of Directors
and the outcome of corporate actions requiring majority shareholder approval.
Even as to corporate actions in which super-majority shareholder approval may be
required such as fundamental corporate transactions, Mr. Doherty and Dr. Mann
will collectively control the outcome of such actions.
Absence of Prior Trading Market; Potential Volatility of Stock Price. The market
price of the shares of the Company's common stock is highly volatile. Factors
such as fluctuation the Company's operating results, the introduction of new
products or services by the Company or its competitors, and general market
conditions may have a significant effect on the market price of the Company's
common stock.
Need for Additional Funding. The Company believes that its available short-term
assets and investment income will be sufficient to meets its operating expenses
and capital expenditures for 12 months. The Company does not know if additional
financing will be available when needed, or if it is available, if it will be
available on acceptable terms. Insufficient funds may prevent the Company from
implementing its business strategy or may require the Company to delay, scale
back or eliminate certain components of its business plan.
Employees
The Company currently has one full-time employee and two part-time employees,
each of whom joined the Company on November 1, 1999. The Company's employees are
non-union and none are represented by an organized labor union. The Company
believes its relationship with its employees is very good and it has never
experienced an employee-related work stoppage. The Company will need to hire and
retain highly-qualified experienced technical, management and sales personnel in
order to execute its business plan, carry out product development and secure
advantages over its competitors. No assurances can be given that the Company
will continue to be able to pay the higher salaries necessary to retain such
skilled employees.
Additional Information
The Company intends to provide an annual report to its security holders, and to
make quarterly reports available for inspection by its security holders. The
annual report will include audited financial statements.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's office is located at 1518 Cornell Drive N.E., Albuquerque, New
Mexico 87106. The Company is permitted to use this office free of charge
pursuant to an oral agreement with its President, Mr. John Doherty, who leases
the property on which the Company's office is located. The Company intends to
move to a larger facility once it secures additional financing.
ITEM 3 - LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year ended May 31, 2000.
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the OTC Bulletin Board under the symbol
"PRTX". The common stock of Enerdyne prior to the reverse merger was traded on
the OTC Bulletin Board under the symbol "ENDY".
The following table sets forth, for the fiscal periods indicated, the high and
low closing bid prices for the common stock of Enerdyne through November 15,
1999 and for Protolex, Inc. after that date. The Company's fiscal year-end is
May 31. The quotations may reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.
High Low
------ ------
Fiscal Year 1997
First Quarter 0.125 0.125
Second Quarter 0.125 0.125
Third Quarter (1) N/A N/A
Fourth Quarter 0.125 0.125
Fiscal Year 1998
First Quarter (1) N/A N/A
Second Quarter 0.125 0.125
Third Quarter N/A N/A
Fourth Quarter 0.125 0.125
Fiscal Year 1999
First Quarter 0.125 0.125
Second Quarter (1) N/A N/A
Third Quarter 0.625 0.125
Fourth Quarter 1.5625 0.625
(1) No trading activity occurred for the common stock of Enerdyne during the
third quarter of fiscal year 1997, the first and third quarters of fiscal year
1998, and the second quarter of fiscal year 1999.
At May 31, 2000 the Company had 10,183,635 share of common stock outstanding,
which were held by 350 holders of record. The transfer agent for the Company's
common stock is Standard Registrar & Transfer Agency, PO Box 1411, Albuquerque,
NM 87191. The Company has nine market makers currently.
Dividend Policy. No dividends have been declared or paid to date by the Company.
The Company currently anticipates that it will retain all future earnings for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities. In November 1999, the Company issued a
total of 8,289,048 shares of its common stock to Protalex, Inc., a New Mexico
corporation (Protalex), in connection with its acquisition of Protalex pursuant
to a Merger Agreement and Plan of Reorganization. The Company issued these
shares in reliance upon the exemption from registration in Section 4(2) of the
Securities Act of 1933, as amended.
Subsequent to November 1999, at various dates from November 18 through January
12, 2000, the Company issued 459,444 shares of stock to various individuals all
at $0.36 per share. From May 1, 2000 to May 27, The Company issued 641,644
shares of stock to various individuals all at $1.00 per share. The Company also
issued 100,000 shares of restricted stock in exchange for legal services. The
Company issued these shares in reliance on the "sophisticated investor"
exemption and obtained signed subscription agreements attesting to financial net
worth and investment experience of the stock purchasers.
ITEM 6 - PROTALEX INC. - MANAGEMENT'S DISCUSSIONS AND ANALYSIS
The Company's principal activities presently consist of continued laboratory
work on its bio-regulator technology and ongoing animal studies. In May of this
year the Company completed its planned private placement of its common stock,
raising approximately $640,000. The majority of these funds will go toward the
Company's development efforts, both in the laboratory and through animal
studies. Approximately one-third of these funds will go to the animal studies.
Significantly less money will be spent on the in vitro or laboratory effort.
Related to its overall pharmaceutical development, the Company has entered into
an installment purchase agreement for an automated cell sorter. The remaining
funds will go to professional services and a smaller part for computers and
administration. As a result of this funding, the Company estimates that it has
cash reserves to fund operations for the next twelve months. The Company has
spent approximately $120,000 on research & development efforts through May 31,
2000.
In the longer term, the Company will continue to need to raise substantially
more capital. At present this amount is estimated to be approximately
$5,000,000, which would take the form of either an additional private placement
or a public offering of common stock. This financing would primarily be devoted
to the Company's human clinical trials. The Company does not expect any revenues
to be generated by operations during this period of time.
Management believes that even at this relatively early stage, the animal studies
support the Company's earlier work and extend the application of the
bio-regulator to a much more complex whole animal model. Alex LLC, the company
which has licensed exclusively and in perpetuity to bio-regulator technology to
the Company for the treatment of arthritis, will delay patent filings until
after the first animal study concludes in late October or early November.
Management agrees that this will allow for more comprehensive and defensible
patent coverage, which in turn will result in a more valuable license for the
Company.
Please refer to the Company's 10-SB filing (December 3, 1999) and amendments
thereto for more information on the Company's intellectual technology and risk
factors.
ITEM 7 - SEE FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
PROTALEX, INC.
May 31, 2000
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Protalex, Inc.
We have audited the accompanying balance sheet of Protalex, Inc. (a New Mexico
corporation in the development stage) as of May 31, 2000, and the related
statements of operations, stockholders' deficit and cash flows for the period
from September 17, 1999 (inception) through May 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Protalex, Inc. as of May 31,
2000, and the results of its operations and its cash flows for the period from
September 17, 1999 through May 31, 2000 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is in the development
stage and its ability to continue as a going concern is initially dependent on
its ability to raise adequate capital to fund necessary product development
activities and subsequently on the inflow of operating revenue derived from
developed products which must be regulatory approved and market accepted. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Atkinson & Co., Ltd.
Albuquerque, New Mexico
August 11, 2000
Protalex, Inc.
(A Company in the Development Stage)
BALANCE SHEET
May 31, 2000
ASSETS
CURRENT ASSETS
Cash .............................................. $ 560,487
Prepaid expense ................................... 500
---------
Total current assets ........................... $ 560,987
EQUIPMENT
Lab equipment ..................................... 121,440
Office and computer equipment ..................... 42,671
---------
164,111
Less accumulated depreciation ..................... 5,951 158,160
---------
OTHER ASSETS
Note receivable, individual ....................... 118,547
Interest receivable ............................... 10,669
Intellectual technology license, net of
accumulated amortization of $593 ................ 19,707 148,923
--------- ---------
$ 868,070
=========
LIABILITIES
CURRENT LIABILITIES
Professional fees payable ......................... $ 7,782
Payroll taxes payable ............................. 775
Interest payable .................................. 7,762
Current maturities of long-term liabilities ....... 210,279
Related party advance and license fee payable ..... 40,000
Accrued compensation .............................. 5,120
---------
Total current liabilities ..................... $ 271,718
LONG-TERM LIABILITIES, less current maturities
Note payable to individual ........................ 185,330
Equipment note payable ............................ 64,367 249,697
--------- ---------
Total liabilities ............................. 521,415
STOCKHOLDERS' DEFICIT
Common stock, no par value, authorized
40,000,000 shares, 10,422,135 shares
issued, 10,183,635 shares outstanding ............
238,500 shares in the treasury at -0- cost ....... 965,891
Common stock, contra .............................. (368,547)
Deficit accumulated during the
development stage ................................ (250,689) 346,655
--------- ---------
$ 868,070
=========
The accompanying notes are an integral part of this financial statement.
Protalex, Inc.
(A Company in the Development Stage)
STATEMENT OF OPERATIONS
From Inception (September 17, 1999) through May 31, 2000
From Inception
Period Ended Through
May 31, 2000 May 31, 2000
--------- ---------
Interest income .............................. $ 10,669 $ 10,669
Expenses
Professional fees .......................... 77,520 77,520
Research and development ................... 119,733 119,733
Administrative ............................. 27,813 27,813
Interest ................................... 25,991 25,991
Depreciation and amortization .............. 6,543 6,543
Payroll tax expense ........................ 3,758 3,758
--------- ---------
NET LOSS ............................ $(250,689) $(250,689)
========= =========
Loss per common share - Basic ................ $ (.03) $ (.03)
========= =========
Loss per common share - Diluted .............. $ (.03) $ (.03)
========= =========
The accompanying notes are an integral part of this financial statement.
Protalex, Inc.
(A Company in the Development Stage)
STATEMENT OF STOCKHOLDERS' DEFICIT
From Inception (September 17, 1999) through May 31, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Common In The
Common Stock Stock- Development
Shares Amount Contra Stage Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
September 17, 1999 -- initial issuance
of 10,000 shares for intellectual
technology license at $.03 per share ..... 10,000 $ 300 $ -- $ -- $ 300
September 30, 1999 -- cost of public shell
acquisition over net assets acquired to be
accounted for as a recapitalization ..... -- -- (250,000) -- (250,000)
October 27, 1999 -- issuance of 84 shares
to individual for $25,000 ................ 84 25,000 -- -- 25,000
November 15, 1999 -- reverse merger
transaction with Enerdyne Corporation,
net transaction amounts .................. 8,972,463 118,547 (118,547) -- --
November 15, 1999 -- treasury shares -
Enerdyne $-0- cost ..................... 238,500 -- -- -- --
November 18, 1999 -- February 7, 2000
issuance of 459,444 shares to various
investors at $0.36 per share ............. 459,444 165,400 -- -- 165,400
January 1, 2000 -- issuance of 100,000
shares in exchange for legal services ... 100,000 15,000 -- -- 15,000
May 1 - 27, 2000 -- issuance of 640,000
shares to various investors at $1.00 per
share .................................... 640,000 640,000 -- -- 640,000
May 27, 2000 -- issuance of 1,644 shares
to individual in exchange for interest
due ..................................... 1,644 1,644 -- -- 1,644
Net loss for the period ................... -- -- -- (250,689) (250,689)
----------- ----------- ----------- ----------- -----------
10,422,135 $ 965,891 $ (368,547) $ (250,689) $ 346,655
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
Protalex, Inc.
(A Company in the Development Stage)
STATEMENT OF CASH FLOWS
Period from Inception (September 17, 1999) through May 31, 2000
From Inception
Period Ended Through
May 31, 2000 May 31, 2000
--------- ---------
Cash flows from operating activities
Net loss ......................................... $(250,689) $(250,689)
Adjustments to reconcile net loss to net
cash provided by operating activities
Depreciation and amortization ................. 6,543 6,543
Non cash expenses ............................. 16,644 16,644
(Increase) in interest receivable ............. (10,669) (10,669)
(Increase) in prepaid expense ................. (500) (500)
Increase in payroll taxes payable ............. 775 775
Increase in interest payable .................. 7,762 7,762
Increase in professional fees payable ......... 7,782 7,782
Increase in compensation payable .............. 5,120 5,120
Increase in related party advance
and licenses fee payable ..................... 40,000 40,000
--------- ---------
Net cash used in operating activities ...... (177,232) (177,232)
--------- ---------
Cash flows from investing activities
Acquisition of intellectual technology license
- fee portion ................................... (20,000) (20,000)
Acquisition of equipment .......................... (72,680) (72,680)
Excess of amounts paid for Public Shell
over assets acquired to be accounted for
as a recapitalization ........................... (250,000) (250,000)
Note receivable from individual ................... (118,547) (118,547)
Issuance of note payable to individual ............ 368,546 368,546
--------- ---------
Net cash used in investing activities ...... (92,681) (92,681)
--------- ---------
Cash flows from financing activities
Proceeds from stock issuance ...................... 830,400 830,400
--------- ---------
Net cash provided by financing activities .. 830,400 830,400
--------- ---------
NET INCREASE IN CASH ................................ 560,487 560,487
Cash, beginning of period ........................... -- --
--------- ---------
Cash, end of period ................................. $ 560,487 $ 560,487
========= =========
Interest paid ....................................... $ 16,585 $ 16,585
========= =========
Taxes paid .......................................... $ -- $ --
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
10,000 shares of company stock were issued
as part of the cost of acquisition of the
intellectual technology license at inception
- value at $.03 per share .......................... $ 300 $ 300
========= =========
100,000 shares of company stock were issued in
exchange for legal services performed .............. $ 15,000 $ 15,000
========= =========
1,644 shares of company stock were issued in
exchange for interest payable ...................... $ 1,644 $ 1,644
========= =========
Lab equipment was acquired through issuance
of installment contract to seller .................. $ 91,430 $ 91,430
========= =========
The accompanying notes are an integral part of this financial statement.
Protalex, Inc.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
From Inception (September 17, 1999) through May 31, 2000
NOTE A - DESCRIPTION OF OPERATIONS AND DEVELOPMENT STAGE STATUS
Protalex, Inc. (the Company or Protalex) is a development stage enterprise
incorporated on September 17, 1999 and based in Albuquerque, New Mexico. The
Company was formed to take all necessary steps to fully develop and bring to
commercial realization certain intellectual property and research of Alex, LLC
in connection with the use of bioregulatory compounds for the treatment of
human diseases. The Company has no operating revenue.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Concentration of Credit Risk
-------------------------------
Financial instruments potentially subjecting the Company to concentrations of
credit risk consist primarily of deposits in excess of FDIC limits. The
Company's demand deposits are placed with major financial institutions and the
Company does not believe that it is exposed to undue credit risk for any
demand deposits that may, from time to time, exceed the federally insured
limits.
2. Equipment and Depreciation
-----------------------------
Equipment is carried at cost. Depreciation has been provided by the Company in
order to amortize the cost of equipment over their estimated useful lives. The
Company uses the straight-line method for all classes of assets for book
purposes.
3. Estimates
------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires the Company to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and expense,
and the disclosure of contingent assets and liabilities. Estimated amounts
could differ from actual results.
4. (Loss) per Common Share
--------------------------
The Financial Accounting Standards Board (FASB) has issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128)
which is effective for periods ending after December 15, 1997. SFAS No. 128
provides for the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by dividing
(loss) to common shareholders by the weighted average number of common shares
outstanding (9,308,571) for the period. Diluted loss per share includes the
effects of options to purchase 40,000 shares of the Company's stock at $0.36
per share as if the options were exercised at the beginning of the period
using the "Treasury Stock" method.
5. Income Taxes
---------------
Income taxes are recognized using enacted tax rates, and are composed of taxes
on financial accounting income that is adjusted for the requirement of current
tax law and deferred taxes. Deferred taxes are the expected future tax
consequences of temporary differences between the financial statement carrying
amounts and tax bases of existing assets and liabilities. The Corporation does
not expect to have current income taxes payable or deferred tax balances for
the foreseeable future.
6. Other Comprehensive Income
-----------------------------
From September 17, 1999 (inception) through May 31, 2000, the Company had no
changes in equity which constitute components of other comprehensive income.
7. Research and Development
---------------------------
Research and development costs are expensed as incurred.
8. Fair Value of Financial Instruments
--------------------------------------
The fair value of the Company's financial instruments, principally cash and
debt, approximates their carrying value.
NOTE C - REVERSE MERGER
On November 15, 1999, Enerdyne Corporation ( Enerdyne or Public Shell)
acquired all of the outstanding common stock of Protalex, Inc. (Protalex) in
exchange for the issuance of additional shares of Enerdyne stock. The ratio of
exchange was 822 shares of Enerdyne stock issued for each share of Protalex
stock received. For accounting purposes, the acquisition has been treated as
an acquisition of Enerdyne by Protalex and as a recapitalization of Protalex
(Reverse Merger). The historical financial statement of operations presented
herein include only those of the accounting acquirer and that the retained
earnings (deficit) of only the accounting acquirer carries over consistent
with the requirements of reverse merger accounting. Concurrently with the
share exchange, Enerdyne changed its name to Protalex, Inc.
The details of the reverse merger transaction are as follows:
<TABLE>
<CAPTION>
Merged
Balance Sheet
Protalex, Enerdyne Transaction at November
Account Description Inc. Corporation Adjustments 16, 1999
--------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash ...................... $ 23,531 $ -- $ -- $ 23,531
Note receivable shareholder -- 118,547 -- 118,547
License ................... 20,300 -- -- 20,300
Investment in Enerdyne .... 368,546 -- (368,546) --
Other current assets ...... 8,212 -- -- 8,212
Other current liabilities . (17,555) -- -- (17,555)
Accounts payable Alex ..... (40,000) -- -- (40,000)
Note payable .............. (368,546) -- -- (368,546)
Common stock .............. (25,300) (833,459) 714,912 (143,847)
Additional paid in capital -- (1,105,014) 1,105,014 --
Treasury stock ............ -- 430,424 (430,424) --
Accumulated deficit ....... 30,812 1,389,502 (1,389,502) 30,812
Common stock - contra ..... -- -- 368,546 368,546
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
Additional information in connection with stock amounts and number of shares
issued is as follows:
<TABLE>
<CAPTION>
Protalex, Inc. Enerdyne Corporation
------------------------ ------------------------
Shares
------------------------
Account Description Shares Amount Outstanding Treasury Amount
---------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Common stock ......... 10,084 $ 25,300 1,578,907 238,500 $ 833,459
822 to 1 stock
recapitalization .... (10,084) -- 8,289,048 -- --
Cancellation of shares
Formerly held by
Protalex in Enerdyne -- -- (885,408) -- --
Increase to record net
assets of Enerdyne .. -- 118,547 -- -- --
Cancellation of common
stock amounts for
Enerdyne ............ -- -- -- -- (833,459)
Name change to
Protalex, Inc ....... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
-- $ 143,847 8,982,547 238,500 $ --
========== ========== ========== ========== ==========
</TABLE>
NOTE D - INTELLECTUAL TECHNOLOGY LICENSE
The Company has a technology license agreement with Alex, LLC (Alex), a New
Mexico Limited Liability Company, for commercial rights to develop
bioregulator type product(s). The Company issued 10,000 shares of Company
stock as partial payment for the license at the formation of the Company. The
Company recorded this nonmonetary transaction at a nominal amount (3 cents per
share) based on the business risk of the development stage venture at
inception. In addition, the Company agreed to pay a $20,000 license fee to
Alex. As the license is exclusive and perpetual, the Company will amortize the
license amount over a 20-year life on a straight-line basis. Due to the
development stage status of the Company, it will review the value of the
license for impairment on a quarterly basis.
NOTE E - INCOME TAXES
The Company has no taxable income and no income tax liability during the
reported period of operation.
The net loss reported on the statement of operations ($250,689) is available
to offset future taxable income. The net operating loss expires in 15 years if
not utilized during that time. No deferred tax asset has been recorded for the
NOL as an equivalent valuation allowance applies against it in recognition of
the Company's uncertainty as a going concern.
The merger transaction of Enerdyne and Protalex will be tax-free under
applicable provisions of the Internal Revenue Code. Under applicable federal
tax statutes and regulations the NOLs available to Enerdyne and carried
forward to the current year are lost as more than 50% beneficial ownership of
Enerdyne changed hands on September 30, 1999.
NOTE F - RELATED PARTIES
Advance and License Fees owing to Alex, LLC
Alex, LLC (Alex) is a New Mexico limited liability company and the majority
owner of the Company's stock. Alex advanced $20,000 to the Company's
securities lawyers principally in connection with the Company's reverse merger
transaction. This amount will be repaid by the Company to Alex and is recorded
as a payable. Also included in the payable is the $20,000 license fee payment
owed to Alex discussed in note D.
Significant Business Relationship with Alex, LLC
The Company anticipates working closely with Alex who is the Company's
majority owner. It is the intent of Mr. Doherty and Dr. Mann to conduct all
pure research in Alex and all subsequent development activities in the
Company. There is no formal research and development contract between the
entities at May 31, 2000. However, the Company anticipates reimbursing Alex
for certain research and laboratory expenses in the coming year.
NOTE G - NOTES RECEIVABLE
The Company has the following note receivable at May 31, 2000:
Note receivable from Don Hanosh in the amount of $118,547 plus interest due on
or before September 7, 2001. The unpaid balance shall bear interest at a rate
of nine percent per annum.
NOTE H - LONG-TERM DEBT
The Company has the following long-term debt at May 31, 2000:
9% note payable to an individual, due on
or before September 7, 2001. Interest
payments are due in quarterly installments
with the first payment due on March 7, 2000.
Note is guaranteed by certain directors of
Protalex, Inc. $ 368,546
11.5% installment purchase agreement,
due in monthly installments of $3,015,
including interest, through May 2003.
The note is collateralized by equipment. 91,430
----------
459,976
Less current maturities 210,279
----------
Long-term debt, less current maturities $ 249,697
==========
Maturities of long-term debt for each of the years succeeding May 31, 2000 are
as follows:
Year
----
2001 $ 210,279
2002 215,674
2003 34,023
----------
$ 459,976
==========
NOTE I - GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. The Company is a development stage enterprise
and does not have operating revenue nor anticipate generating operating
revenue for the foreseeable future. The ability of the Company to continue as
a going concern is dependent initially on its ability to raise sufficient
investment capital to fund all necessary operations and product development
activities. Secondly, the Company must develop products that are regulatory
approved and market accepted to generate operating revenue. There is no
assurance that these plans will be realized in whole or in part. The financial
statements do not include any adjustments that might result from the outcome
of these uncertainties.
NOTE J - STOCK OPTIONS
The Company granted stock options to three individuals and a corporate
associate to purchase 10,000 shares each of Company common stock at $0.36 per
share. The options are "stand alone" options. There is no Company stock option
plan currently.
The Company accounted for the options using the "intrinsic" method which
records as compensation cost the difference between exercise price of the
options and the fair market value of Company stock on the measurement (grant)
date. $5,120 of compensation expense was recorded on the Company books at May
31, 2000 to reflect an estimated portion of the options awarded for past
services of certain individuals and corporate associate. An additional $20,420
of compensation expense will be recorded in future periods ending April 28,
2002 to reflect an estimated portion of the options awarded for future
services of the individuals and associate.
An alternate method of accounting for stock options is the fair value method
based on an accepted valuation model. Compensation cost would not be
materially different if it was calculated using the fair value method.
NOTE K - SUBSEQUENT EVENTS
1. The Company entered into an agreement for a concise animal research
protocol on January 25, 2000 which requires future payments of $28,200
subsequent to May 31, 2000, concurrently upon completion of the project.
Completion of the project is expected to be November 2000.
2. A payment of $183,216 was made in June 2000 to reduce note payable to
individual. The Company purchased a certificate of deposit in the amount
of $250,000 in June 2000.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not had any changes in or disagreements with its accountants
since inception.
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The following table sets forth-certain information with respect to the Company's
directors and executive officers
Name Age Position
------------------------- ------- --------------------------------
John E. Doherty 46 President and Director
Paul L. Mann, Ph.D. 55 Treasurer, Secretary and Director
Jon M. Aase, M.D. 64 Vice President and Director
Arthur D. Bankhurst, M.D. 63 Director
James K. Strattman 41 Director
JOHN E. DOHERTY - Mr. Doherty has served as President and a director of the
Company since November 1999, and previously served as a director of Enerdyne
since August 1999. From 1976 to 1994, Mr. Doherty was a vice president and
principal of Doherty & Co., an investment banking firm. During this time he was
involved in the early and later stage financing of companies such as Thoratec
Laboratories, SeraCare, Inc., Excalibur Technologies, and Cypress Biosciences,
Inc. Mr. Doherty attended Tufts University in Boston, Massachusetts. From 1994
to the present, Mr. Doherty has been a private investor, and over the last year
and a half was involved with the early stage development of Protalex.
PAUL L. MANN, PH.D. - Dr. Mann has served a Treasurer, Secretary and director of
Enerdyne since August 1999. From October to November 1999, Dr. Mann was
Treasurer, Secretary and director of Protalex. Dr. Mann is the inventor of
bioregulator therapy. After earning his bachelors and masters degrees at the
University of Victory in New Zealand, he pursued his Ph.D. at Queens University
in Canada and as an Inserm Fellow at the Centre Haeyem/Pasteur Institute in
Paris. He engaged in further research at the National Institute of Health in
Bethesda, Maryland and at John Hopkins University School of Medicine. In 1981,
he joined the faculty at the University of New Mexico School of Medicine in
Albuquerque, where he now holds the rank of Associate Professor in the College
of Pharmacy and in the Department of Family Practice. His research into the
biology and function of bioregulator compounds spans 30 years, resulting in more
than 2 dozen publications.
JON M. AASE, M.D. - Dr. Aase has served as Vice President and a director of the
Company since November 1999, and previously served as a director of Enerdyne
since August 1999. Dr. Aase graduated from Pomona College in Claremont,
California and received his medical degree from Yale University in New Haven,
Connecticut. After a pediatric internship at the University of Minnesota and
residency at the University of Washington, he spent two years studying the
native population of Alaska as a fellow of the National Institute of Child
Health and Human Development. He then returned to Seattle for a two-year
fellowship in dysmorphology (the study of birth defects) with Dr. David W.
Smith. IN 1974, Dr. Aase joined the faculty of the University of New Mexico
School of Medicine, where he served as chief of the dysmorphology division for
16 years. His bibliography contains more than 40 published articles and a
textbook, DIAGNOSTIC DYSMORPHOLOGY (Plenum, New York, 1990). Dr. Aase is now a
Clinical Professor of Pediatrics at the University of New Mexico. Dr. Aase is
the brother-in-law of Mr. Doherty.
ARTHUR D. BANKHURST, M.D. - Dr. Bankhurst has served as a director of the
Company since November 1999, and previously served as a director of Enerdyne
since August 1999. Dr. Bankhurst earned his bachelors degree in biochemistry
from the Massachusetts Institute of Technology, and his M.D. from Case Western
Reserve University. He served as a research fellow at the Hall Institute of
Medical Research in Melbourne, Australia and as a senior research fellow at the
WHO Research Unit in Geneva, Switzerland. He joined the faculty of the
University of New Mexico in 1971, and now holds a joint professorship in
internal medicine and microbiology. Dr. Bankhurst's professional accomplishments
in the fields of arthritis and immunology are reflected in his being named
Senior Investigator for the Arthritis foundation from 1974-1979, as well as
serving as associate editor of several prestigious medical journals. These
journals include The Journal of Immunology (1984-1987), Diagnostic Immunology
Diagnostic Immunology (1984-1988), and Clinical Immunology and Immunopathology
(1988-present). With more than 140 publications to his credit, Dr. Bankhurst has
a national reputation as an investigator, and has participated in a number of
multi-center trials of anti-arthritis drugs.
JAMES K. STRATTMAN - Mr. Strattman has served as a director of the Company since
November 1999, and previously served as a director of Enerdyne since August
1999. Mr. Strattman is currently employed at Excalibur Technologies Corporation,
a publicly traded software company. He has held several senior executive
positions, including Director of Engineering and Director of Business
Development. During the last ten years, Mr. Strattman has provided venture
capital investments to several public companies through private placements.
ITEM 10 - EXECUTIVE COMPENSATION
Executive Officer Compensation
The Company did not pay any of its executive officers, including its Chief
Executive Officer, any compensation during the fiscal year ended May 31, 2000.
Employment Agreements
The Company does not have employment agreements with any of its executive
officers.
Director Compensation
The Company does not compensate its directors.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of May 31, 2000, (i) by each person
who is known by the Company to own beneficially more than 5% of its common
stock, (ii) by each of the Company's directors, and (iii) by all of the
Company's officers and directors as a group. Except as provided below, each
person's address is c/o Protalex, Inc. P.O. Box 30952, Albuquerque, New Mexico
87190.
Name and Address of Amount and Nature Percentage of
of Beneficial Owner Beneficial Owner Class (1)
------------------- ----------------- -------------
John E. Doherty (2) 3,312,660 32.5292
Paul L. Mann (2) 3,312,660 32.5292
John M. Aase 276,192 2.7121
Arthur D. Bankhurst 276,192 2.7121
James K. Strattman 456,728 4.4849
--------- -------
7,634,432 74.9677
========= =======
(1) Based on a total of 10,183,635 outstanding shares of the Company's common
stock.
(2) Figures shown for Mr. Doherty and Dr. Mann reflect their respective 50%
ownership of Alex, LLC, a New Mexico limited liability company, which holds
6,625,320 shares of the Company's common stock.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Alex, LLC, a New Mexico limited liability company ("Alex"), holds approximately
65% of the Company's outstanding common stock. Alex's Managing Members, each of
who holds a 50% membership interest in Alex are Mr. John Doherty, the Company's
President, and Dr. Paul Mann, the Company's Treasurer and Secretary. Mr. Doherty
and Dr. Mann are also members of the Company's Board of Directors.
The bioregulator technology which the Company intends to develop and bring to
market is currently licensed by the Company from Alex pursuant to a Technology
License Agreement. Under the Technology License Agreement, the Company has the
right to use the bioregulator technology to research, design, develop, market
and sell products which incorporate the bioregulator technology and which are
used for the therapeutic treatment of rheumatoid arthritis and other forms of
arthritis. In exchange for this right, the Company is required to pay Alex a
$20,000 non-refundable license fee. In addition, at the Company's formation it
issued to Alex 10,000 shares of its common stock, at an aggregate value of $300,
as partial payment for the license. The Company is not obligated to pay Alex any
royalties or other compensation based on the sale or distribution of the
Company's bioregulator products.
The Technology License Agreement also provides that if Alex is issued a patent
for the bioregulator technology it licenses to the Company, the Company will be
allowed to continue using the patented bioregulator technology, either by way of
an amendment to the Technology License Agreement or an agreement by Alex not to
enforce its patent rights against the Company.
In September 1999, Alex advanced $20,000 to the Company's counsel in connection
with the acquisition of Protalex by Enerdyne and the preparation of this
registration statement.
The Company leases an office facility under an oral agreement with Mr. Doherty,
pursuant to whom Mr. Doherty does not charge the Company rent.
ITEM 13 - INDEX TO EXHIBITS
2.1 Stock Purchase Agreement among Incorporated by reference, to the
Protalex, Inc., Don Hanosh and Company's 10-SB filing December 3, 1999
Enerdyne Corporation
2.2 Merger Agreement and Plan of Incorporated by reference, to the
Re-organization between Protalex, Company's 10-SB filing December 3, 1999
Inc. and Enerdyne Corporation
3.1 Articles of Incorporation, Incorporated by reference, to the
as amended Company's 10-SB filing December 3, 1999
3.2 Bylaws, as amended Incorporated by reference, to the
Company's 10-SB filing December 3, 1999
10.1 Promissory Note in favor Incorporated by reference, to the
of Don Hanosh Company's 10-SB filing December 3, 1999
10.2 Continuing and Unconditional Incorporated by reference, to the
Guaranty executed by Company's 10-SB filing December 3, 1999
John E. Doherty
10.3 Continuing and Unconditional Incorporated by reference, to the
Guaranty executed by Company's 10-SB filing December 3, 1999
James K. Strattman
10.4 Technology license Agreement Incorporated by reference, to the
Company's 10-SB filing December 3, 1999
10.5 Form of Confidential Incorporated by reference, to the
Disclosure Agreement Company's 10-SB filing December 3, 1999
27 Financial Data Schedule attached
No reports on Form 8-K were filed during the year.
SIGNATURES
In accordance with Section 13 or 15(D) of the Exchange Act the registrant caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
PROTALEX, INC.
Date: August 23, 2000 By: John E. Doherty
--------------------------
John E. Doherty, President
SIGNATURE TITLE DATE
------------------------- --------------------------------- ---------------
John E. Doherty
---------------
John E. Doherty President and Director August 23, 2000
Paul L. Mann
-------------------
Paul L. Mann, Ph.D. Treasurer, Secretary and Director August 23, 2000
John M. Aase
-----------------
Jon M. Aase, M.D. Vice President and Director August 23, 2000
Arthur D. Bankhurst
-------------------------
Arthur D. Bankhurst, M.D. Director August 23, 2000
James K. Strattman
------------------
James K. Strattman Director August 23, 2000
