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 February 28, 2009

OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-28385

Protalex, Inc.
(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)

145 Union Square Drive
New Hope, PA 18938
(Address of Principal Executive Offices and Zip Code)

215-862-9720
(Registrant’s Telephone Number, Including Area Code)


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. þ   Yes o   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. (Check one)

Large accelerated filer  ¨                                               Accelerated filer  ¨
 

 
Non-accelerated filer  ¨                                Smaller reporting companyý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes    þ  No

Number of shares outstanding of the issuer’s Common Stock, par value $0.00001 per share, as of April 10, 2009: 28,600,464 shares.
 


Protalex, Inc.

FORM 10-Q

February 28, 2009

INDEX
 
 
  
Page No.
PART I.
FINANCIAL INFORMATION
  
     
ITEM 1.
Financial Statements:
  
     
 
Balance Sheets at February 28, 2009 (Unaudited) and May 31, 2008
3
     
 
Statements of Operations for the nine and three months ended February 28, 2009 and February 29, 2008, and the period from September 17, 1999 (inception) to February 28, 2009 (Unaudited)
4
     
 
Statement of Changes in Stockholders’ Equity for the period from September 17, 1999 (inception) through February 28, 2009 (Unaudited)
5
     
 
Statements of Cash Flows for the nine months ended February 28, 2009 and February 29, 2008, and the period from September 17, 1999 (inception) to February 28, 2009 (Unaudited)
9
     
 
Notes to Unaudited Financial Statements
10
     
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
   
 
ITEM 4.
Controls and Procedures
18
     
PART II.
OTHER INFORMATION
  
     
ITEM 6.
Exhibits
19
 
   
  SIGNATURES
22
     
  Exhibit 31.1 Section 302 Certification of the CEO  
  Exhibit 31.2 Section 302 Certification of the CFO  
  Exhibit 32.1 Section 906 Certification of the CEO  
  Exhibit 32.2 Section 906 Certification of the CFO  
 
2

 
PART I - FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

PROTALEX, INC.
(A Company in the Development Stage)

BALANCE SHEETS
 
   
February 28,
   
May 31,
 
   
2009
   
2008
 
   
(Unaudited)
       
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 3,786,436     $ 8,442,809  
Prepaid expenses
    191,059       429,207  
                 
Total current assets
    3,977,495       8,872,016  
                 
PROPERTY & EQUIPMENT:
               
Lab equipment
    327,287       692,761  
Office and computer equipment
    195,987       195,987  
Furniture & fixtures
    40,701       40,701  
Leasehold improvements
    89,967       89,967  
                 
      653,942       1,019,416  
            Less accumulated depreciation and amortization
    (624,857 )     (823,649 )
      29,085       195,767  
OTHER ASSETS:
               
Deposits
    7,990       7,990  
Intellectual technology property, net of
               
   accumulated amortization of $9,498 and $8,733 as
               
   of February 28, 2009 and May 31, 2008, respectively
    10,802       11,567  
                 
             Total other assets
    18,792       19,557  
                 
                    Total Assets
  $ 4,025,372     $ 9,087,340  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
CURRENT LIABILITIES:
               
Accounts payable
  $ 582,836     $ 1,277,555  
Payroll and related liabilities
    22,261       35,262  
Accrued expenses
    23,057       15,000  
      Deferred rent
    1,641       1,458  
                 
Total liabilities
    629,795       1,329,275  
                 
STOCKHOLDERS' EQUITY
               
Common stock, par value $0.00001,
               
100,000,000 shares authorized;
28,600,464 shares issued and outstanding
    286       286  
Additional paid in capital
    45,580,869       45,112,084  
Deficit accumulated during the development stage
    (42,185,578 )     (37,354,305 )
                 
Total stockholders’ equity
    3,395,577       7,758,065  
                 
    $ 4,025,372     $ 9,087,340  

The accompanying notes are an integral part of these financial statements.
 
3


PROTALEX, INC.
(A Company in the Development Stage)

STATEMENTS OF OPERATIONS

For the nine and three month periods ended February 28, 2009 and February 29, 2008 and
From Inception (September 17, 1999) through February 28, 2009
(Unaudited)

   
Nine
   
Nine
   
Three
   
Three
   
From Inception
 
   
Months Ended
   
Months Ended
   
Months Ended
   
Months Ended
   
Through
 
   
February 28,
   
February 29,
   
February 28,
   
February 29,
   
February 28,
 
   
2009
   
2008
   
2009
   
2008
   
2009
 
                               
Revenues
  $     $     $     $     $  
                                         
Operating Expenses
                                       
     Research and development
    (2,866,890 )     (5,716,415 )     (1,002,553 )     (1,954,781 )     (27,129,718 )
     Administrative
    (1,800,483 )     (2,180,613 )     (569,142 )     (724,142 )     (13,909,861 )
     Professional fees
    (296,073 )     (534,918 )     (32,780 )     (172,814 )     (3,175,537 )
     Depreciation and amortization
    (3,127 )     (3,127 )     (1,019 )     (1,019 )     (162,797 )
                                         
Operating loss
    (4,966,573 )     (8,435,073 )     (1,605,494 )     (2,852,756 )     (44,377,913 )
                                         
Other income (expense)
                                       
    Interest income
    57,126       506,110       1,566       110,072       2,195,353  
    Interest expense
                            (70,612 )
    Gain on disposal of equipment
    78,174                         67,594  
                                         
Net loss
  $ (4,831,273 )   $ (7,928,963 )   $ (1,603,928 )   $ (2,742,684 )   $ (42,185,578 )
                                         
Weighted average number of common shares outstanding
    28,600,464       28,600,464       28,600,464       28,600,464       18,120,641  
                                         
Loss per common share – basic and diluted
  $ (.17 )   $ (.28 )   $ (.06 )   $ (.10 )   $ (2.33 )

The accompanying notes are an integral part of these financial statements.
 
4


PROTALEX, INC.
 (A Company in the Development Stage)

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

From Inception (September 17, 1999) through February 28, 2009
(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 10,000 shares for intellectual technology license at $.03 per share
    10,000     $ 300     $     $     $     $ 300  
September 30, 1999 — cost of public shell acquisition over net assets acquired to be accounted for as a Recapitalization
                      (250,000 )           (250,000 )
October 27, 1999 — issuance of 84 shares to individual for $25,000
    84       25,000                         25,000  
November 15, 1999 — reverse merger transaction with Enerdyne Corporation, net transaction amounts
    8,972,463       118,547             (118,547 )            
November 18, 1999 — February 7, 2000 — issuance of 459,444 shares to various investors at $0.36 per share
    459,444       165,400                         165,400  
January 1, 2000 — issuance of 100,000 shares in exchange for legal services
    100,000       15,000                         15,000  
May 1 - 27, 2000 — issuance of 640,000 shares to various investors at $1.00 per share
    640,000       640,000                         640,000  
May 27, 2000 — issuance of 1,644 shares to an individual in exchange for interest Due
    1,644       1,644                         1,644  
Net loss for the year ended May 31, 2000
     —        —        —        —       (250,689 )     (250,689 )
Balance, May 31, 2000
    10,183,635       965,891             (368,547 )     (250,689 )     346,655  
December 7, 2000 — issuance of 425,000 shares to various investors at $1.00 per share
    425,000       425,000                         425,000  
May 31, 2001 — Forgiveness of debt owed to shareholder
                40,000                   40,000  
Net loss for the year ended May 31, 2001
     —        —        —        —       (553,866 )     (553,866 )
Balance, May 31, 2001
    10,608,635       1,390,891       40,000       (368,547 )     (804,555 )     257,789  

The accompanying notes are an integral part of this financial statement.
 
5


PROTALEX, INC.
 (A Company in the Development Stage)

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)

From Inception (September 17, 1999) through February 28, 2009
(Unaudited)
 
                                     
Deficit
         
                                     
Accumulated
         
                     
Additional
     
Common
     
During The
         
     
Common Stock
     
Paid in
     
Stock-
     
Development
         
     
Shares
     
Amount
     
Capital
     
Contra
     
Stage
     
Total
 
August 13, 2001 — Contribution by Shareholders
                143,569                 $ 143,569  
November 7, 2001 — issuance of 881,600 Shares at $1.25 per share
    881,600     $ 1,102,000     $           $     $ 1,102,000  
November 26, 2001 — options issued to board member
                133,000                   133,000  
Net loss for the year ended May 31, 2002
     —        —        —        —       (1,280,465 )     (1,280,465 )
Balance, May 31, 2002
    11,490,235       2,492,891       316,569       (368,547 )     (2,085,020 )     355,893  
July 5, 2002 — issuance of 842,000 shares at $1.50 per share
    842,000       1,263,000                         1,263,000  
July 1, 2002 - May 1, 2003 – purchase of common stock from shareholder at $.70 per share
    (130,955 )     (91,667 )                       (91,667 )
January 15, 2003 - May 15, 2003 — common stock issued to Company president
    41,670       82,841                         82,841  
May 14, 2003 — common stock issued to employee
    5,000       11,250                         11,250  
June 1, 2002 - May 31, 2003 – compensation related to stock options issued to board members, employees and consultants
                287,343                   287,343  
Net loss for the year ended May 31, 2003
     —        —        —        —       (1,665,090 )     (1,665,090 )
Balance, May 31, 2003
    12,247,950       3,758,315       603,912       (368,547 )     (3,750,110 )     243,570  
June 15, 2003, common stock issued to Company president
    8,334       16,418                         16,418  
June 15, 2003, purchase of common stock from shareholder
    (12,093 )     (8,333 )                       (8,333 )
September 18, 2003 – issuance of 7,445,646 of common stock issued in private placement At $1.70 per share, net of transaction costs
    7,445,646       11,356,063                         11,356,063  
September 19, 2003 – repurchase and retired 2,994,803 shares for $300,000
    (2,994,803 )     (300,000 )                       (300,000 )
December 12, 2003 – issuance of 39,399 shares to terminated employees at $2.60 per share
    39,399       102,438                         102,438  
March 1, 2004 – common stock issued to employee at $2.55 per share
    50,000       127,500                         127,500  
May 31, 2004 – reclassify common stock contra to common stock
          (368,547 )           368,547              

The accompanying notes are an integral part of this financial statement.
 
6


PROTALEX, INC.
 (A Company in the Development Stage)

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)

From Inception (September 17, 1999) through February 28, 2009
(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
   
16,784,433
     
14,683,854
     
1,052,008
     
     
(6,739,474
   
8,996,388
 
November 30, 2004 – adjust March 1, 2004 common stock issued to employee
   
     
(20,000
)            
     
     
(20,000)
 
January 13, 2005 – common stock issued to employee at $2.55 per share
   
15,000
     
38,250
     
     
     
     
38,250
 
February 28, 2005 – Reclass Par Value for Reincorporation into DE as of 12/1/04
   
     
(14,701,935
)    
14,701,935
     
     
     
0
 
May 25, 2005 - issuance of 2,593,788 shares of common stock issued in private placement At $1.95 per share, net of transaction costs
   
2,593,788
     
25
     
4,851,168
     
     
     
4,851,193
 
June 1, 2004 – May 31, 2005 – compensation related to stock options issued to board members, employees and consultants
   
     
     
308,711
     
     
     
308,711
 
Net loss for the year ended May 31, 2005
   
     
     
     
     
(5,567,729
)    
(5,567,729
)
Balance, May 31, 2005
   
19,393,221
     
194
     
20,913,822
     
     
(12,307,203
)    
8,606,813
 
August 23, 2005 – common stock issued to employee
   
40,000
     
0
     
100,000
     
     
     
100,000
 
October 19, 2005 – common stock issued to employee
   
10,000
     
0
     
25,000
     
     
     
25,000
 
December 30, 2005 – issuance of 2,595,132      shares of common stock issued in private placement at $2.25 per share, net of transaction costs
   
2,595,132
     
26
     
5,510,941
     
     
     
5,510,967
 
June 1, 2005 – May 31, 2006 – warrants exercised
   
351,598
     
4
     
786,534
     
     
     
786,538
 
June 1, 2005– May 31, 2006 – compensation related to stock options issued to board members, employees and consultants
   
     
     
404,679
     
     
     
404,679
 
Net loss for the year ended May 31, 2006
   
 
              —
     
 
              —
     
 
              —
     
 
              —
     
 
  (6,104,402
)    
 
 (6,104,402
)
Balance, May 31, 2006
   
22,389,951
     
224
     
27,740,976
     
     
(18,411,605
)    
9,329,595
 

The accompanying notes are an integral part of this financial statement.
 
7


PROTALEX, INC.
 (A Company in the Development Stage)

STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY - (continued)

From Inception (September 17, 1999) through February 28, 2009
(Unaudited)
 
                                     
Deficit
         
                                     
Accumulated
         
                     
Additional
     
Common
     
During The
         
     
Common Stock
     
Paid in
     
Stock-
     
Development
         
     
Shares
     
Amount
     
Capital
     
Contra
     
Stage
     
Total
 
 
July 7, 2006 – issuance of 6,071,013 shares of common stock issued in private placement at $2.50 per share, net of transaction costs
    6,071,013       61       14,217,660                   14,217,721  
June 1, 2006 – May 31, 2007 – warrants exercised
    133,500       1       300,373                   300,374  
June 1, 2006 – May 31, 2007 – stock options exercised
    6,000       0       15,200                   15,200  
June 1, 2006 – May 31, 2007 – share based compensation to board members, employees and consultants
                1,826,850                   1,826,850  
Net loss for the year ended May 31, 2007
     —              —        —       (8,451,942 )     (8,451,942 )
Balance, May 31, 2007
    28,600,464       286       44,101,059             (26,863,547 )     17,237,798  
June 1, 2007 – May 31, 2008 – share based compensation to board members, employees and consultants
                1,011,025                   1,011,025  
Net loss for the year ended May 31, 2008
                            (10,490,758 )     (10,490,758 )
Balance, May 31, 2008
    28,600,464       286       45,112,084             (37,354,305 )     7,758,065  
June 1, 2008 – February 28, 2009 – share based compensation to board members, employees and consultants
                468,785                   468,785  
Net loss for the nine months  ended  February 28, 2009
                            (4,831,273 )     (4,831,273 )
Balance, February 28, 2009
    28,600,464     $ 286     $ 45,580,869     $     $ (42,185,578 )   $ 3,395,577  

The accompanying notes are an integral part of this financial statement.
 
8

 
PROTALEX, INC.
 (A Company in the Development Stage)

STATEMENTS OF CASH FLOWS

For the nine month periods ended February 28, 2009 and February 29, 2008 and
From Inception (September 17, 1999) through February 28, 2009
(Unaudited)
 
   
Nine
   
Nine
   
From Inception
 
   
Months Ended
   
Months Ended
   
Through
 
   
February 28,
   
February 29,
   
February 28,
 
   
2009
   
2008
   
2009
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Net loss
  $ (4,831,273 )   $ (7,928,963 )   $ (42,185,578 )
   Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities
                       
   (Gain) on disposal of equipment, net
    (78,174 )           (67,594 )
   Depreciation and amortization
    45,621       140,987       900,524  
   Share based compensation expense
    468,785       847,882       5,372,185  
   Non cash expenses
                16,644  
(Increase)/decrease in:
                       
   Prepaid expenses and deposits
    238,148       71,038       (199,049 )
Increase/(decrease) in:
                       
   Accounts payable and accrued expenses
    (686,662 )     210,744       605,893  
   Payroll and related liabilities
    (13,001 )     6,719       22,261  
   Other liabilities
    183       (991 )     1,641  
                         
Net cash and cash equivalents used in operating activities
    (4,856,373 )     (6,652,584 )     (35,533,073 )
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
      Acquisition of intellectual technology license – fee portion
                (20,000 )
      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
    200,000             206,000  
                         
      Net cash and cash equivalents provided by (used in) investing activities
     200,000        —       (969,936 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Proceeds from stock issuance, including options and warrants exercised
                40,658,458  
Principal payment on equipment notes payable and capital leases
                (295,411 )
Contribution by shareholders
                183,569  
Principal payment on note payable to individuals
                (225,717 )
Issuance of note payable to individuals
                368,546  
Acquisition of common stock
                (400,000 )
                         
    Net cash and cash equivalents provided by financing activities
                40,289,445  
                         
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (4,656,373 )     (6,652,584 )     3,786,436  
                         
Cash and cash equivalents, beginning
    8,442,809       17,546,154        
                         
Cash and cash equivalents, ending
  $ 3,786,436     $ 10,893,570     $ 3,786,436  
                         
SUPPLEMENTAL SCHEDULE OF CASH
                       
FLOW INFORMATION:
                       
                         
Interest paid
  $     $     $ 66,770  
                         
Taxes paid
  $     $     $ 100  

The accompanying notes are an integral part of these financial statements.
 
9


 PROTALEX, INC.
(A Company in the Development Stage)

NOTES TO UNAUDITED FINANCIAL STATEMENTS

From Inception (September 17, 1999) through February 28, 2009

NOTE 1. NOTES TO INTERIM FINANCIAL STATEMENTS
 
The interim financial data 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 Protalex, Inc. (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 filed as part of the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 2008. This quarterly report should be read in conjunction with such annual report.

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. Additional financing or potential sublicensing of PRTX-100 will be required during the second quarter of calendar 2009 in order to continue to fund operations. As a result, our independent registered public accounting firm, Grant Thornton LLP, indicated in their report on our 2008 financial statements that there is substantial doubt about our ability to continue as a going concern. The Company is a development stage enterprise and does not anticipate generating operating revenue for the foreseeable future. The ability of the Company to continue as a going concern is dependent upon raising sufficient funds in the second quarter of calendar 2009 to continue the development of PRTX-100 through the regulatory process. There is no assurance that these plans will be realized in whole or in part. As further discussed in Note 3 to these financial statements, if the Company is unable to raise to sufficient funds, it may required to terminate, significantly curtail or cease its operations. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expense, and the disclosure of contingent assets and liabilities. Estimated amounts could differ from actual results.

Loss per Common Share

The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS No. 128). 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 net loss to common shareholders 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 February 28, 2009 and February 29, 2008, the Company had potentially dilutive securities consisting of warrants and stock options totaling 9,877,044 comprised of 3,928,896 warrants and 5,948,148 stock options and 10,972,206 comprised of 6,601,380 warrants and 4,370,826 stock options, respectively.

Share Based Compensation

Effective June 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standard No. 123 (revised), Accounting for Share-Based Payment  (“SFAS No. 123R”) 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 $468,785 and $847,882 for the nine months ended February 28, 2009 and February 29, 2008, respectively, compared to $97,955 and $169,751 for the three months ended February 28, 2009 and February 29, 2008, 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 of SFAS No. 123R, prior period results were 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 to date 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”) No. 107 “Valuation of Share-Based Payment Arrangements for Public Companies”, and No. 110, Share-Based Payment, in connection with the adoption of SFAS No. 123R.
 
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Prior to the adoption of SFAS No. 123R, the Company accounted for stock options granted to employees using the intrinsic value method under the guidance of APB No. 25, and provided pro forma disclosure as required by SFAS No. 123.  Stock options issued to non-employees were accounted for as required by SFAS No. 123.  Options to non-employees were accounted for using the fair value method, which recognizes the value of the option as an expense over the related service period with a corresponding increase to additional paid-in capital.

The Board of Directors adopted and the stockholders approved the 2003 Stock Option Plan in October 2003 and it was amended in October 2005. The plan was adopted to recognize the contributions made by the Company’s employees, officers, consultants, and directors, to provide those individuals with additional incentive to devote themselves to the Company’s future success, and to improve the Company’s ability to attract, retain and motivate individuals upon whom the Company’s growth and financial success depends. Under the plan, stock options may be granted as approved by the Board of Directors or the Compensation Committee. There are 4,500,000 shares reserved for grants of options under the plan, of which 3,790,893 have been issued and 4,000 were exercised. The Company has issued 2,163,255 stock options as stand alone grants, of which 2,000 were exercised prior to the adoption of the 2003 Stock Option Plan. 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.

SFAS No. 123R 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 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 the “simplified method” for plain vanilla options as allowed by SAB No. 107 and as further permitted by SAB No. 110. 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 over the option’s expected term. 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.

As of February 28, 2009, there were 5,948,148 stock options outstanding.  At February 28, 2009, the aggregate unrecognized compensation cost of unvested options, as determined using a Black-Scholes option valuation model was approximately $845,000 (net of estimated forfeitures) and will be recognized over a weighted average period of 1.76 years.  During the nine and three months ended February 28, 2009, the Company granted 1,685,000 and 0 stock options and 79,270 and 48,678 options were forfeited or expired, respectively. 

   
Nine Months
Ended
February 28, 2009
   
Nine Months
Ended
February 29, 2008
   
From Inception through
February 28, 2009
 
                   
Dividends per year
    0       0       0  
Volatility percentage
    96%-112 %     95%-96 %     90%-131 %
Risk free interest rate
    3.11%-3.51 %     3.10% -4.13 %     2.07%-5.11 %
Expected life (years)
    6.25-10       6.25-10       3-10  
Weighted average fair value
  $ .49     $ 1.04     $ 1.56  
 
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The following summarizes certain information regarding stock options as of and for the period ended February 28, 2009:
 
     
Shares
     
Weighted
Average Exercise
Price
     
Weighted Average Remaining Contractual Term (Years)
 
Outstanding at May 31, 2008
    4,342,418     $ 1.91       6.2  
Granted
    1,685,000     $ 0.49       9.4  
Exercised
                 
Forfeited
    (63,678 )   $ 0.81        
Expired
    (15,592 )   $ 4.14        
Outstanding at February 28, 2009
    5,948,148     $ 1.51       6.5  
Exercisable at February 28, 2009
    4,374,936     $ 1.80       6.5  

The outstanding and exercisable stock options as of February 28, 2009 had an intrinsic value of $0 and $0, respectively.

           
Total
               
Exercisable
       
Exercise Price Range
   
 
 
Number
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Life
(years)
   
 
Number
   
Weighted Average
Exercise Price
   
Weighted Average
Remaining Life
(years)
 
$ 0.00 – 0.45       1,500,001     $ 0.45       9.4       316,778     $ 0.45       9.4  
$ 0.46 – 0.90       150,000     $ 0.85       9.5       37,500     $ 0.85       9.5  
$ 0.91 – 1.35       516,321     $ 1.27       7.4       369,558     $ 1.28       7.4  
$ 1.36 – 1.80       2,061,255     $ 1.50       4.0       2,061,255     $ 1.50       4.0  
$ 1.81 – 2.25       213,000     $ 2.13       5.5       206,497     $ 2.13       5.5  
$ 2.26 – 2.70       861,000     $ 2.50       6.4       778,049     $ 2.52       6.4  
$ 2.71 – 3.15       646,571     $ 2.84       7.0       605,299     $ 2.84       7.0  
          5,948,148     $ 1.51       6.5       4,374,936     $ 1.80       6.5  

NOTE 3. LIQUIDITY

Since inception, the Company has incurred an accumulated deficit of $42,185,578 through February 28, 2009. As of February 28, 2009, the Company had cash and cash equivalents of $3,786,436 and net working capital of $3,347,700. The Company has incurred negative cash flow from operating activities since its inception. The Company has spent, and expects to continue to spend, substantial amounts in connection with executing its business strategy, including the continued development efforts relating to PRTX-100. As a result, as of the date of this report, we have insufficient funds to cover our future operating expenses beyond the second calendar quarter of 2009.  These matters raise substantial doubt about the ability of the Company to continue as a going concern.

Management anticipates that the Company’s capital resources will be adequate to fund its operations into the second calendar quarter of 2009. Additional financing or potential sublicensing of PRTX-100 will be required during the second quarter of calendar quarter of 2009 in order to continue to fund operations. The most likely sources of additional financing include the private sale of the Company’s equity or debt securities, including bridge loans to the Company from third party lenders.

Additional capital that is required by the Company may not be available on reasonable terms, or at all. If adequate financing is not available, the Company may be required to terminate or significantly curtail or cease its operations, or enter into arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, or potential markets that the Company would not otherwise relinquish.
 
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NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2008, the FASB issued FASB Staff Position No. FAS 142-3,Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The FSP is intended to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted accounting principles.  The new standard is effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning after December 15, 2008.  We are currently evaluating the impact, if any of FSP FAS 142-3 upon adoption on our financial statements.

In December 2007, the FASB issued SFAS No. 141R (revised 2007) Business Combinations (“SFAS 141R”). SFAS 141R states that all business combinations (whether full, partial or step acquisitions) will result in all assets and liabilities of an acquired business being recorded at their fair values. Certain forms of contingent considerations and certain acquired contingencies will be recorded at fair value at the acquisition date. SFAS 141R also states acquisition costs will generally be expensed as incurred and restructuring costs will be expensed in periods after the acquisition date. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.  We are currently evaluating the impact, if any, of SFAS 141R upon adoption on our financial statements.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“SFAS 160”). SFAS 160 requires a company to clearly identify and present ownership interests in subsidiaries held by parties other than the company in the consolidated financial statements within the equity section but separate from the company’s equity. It also requires the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in ownership interest be accounted for similarly, as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary be measured at fair value. This statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited. We are currently evaluating the impact, if any, of SFAS 160 upon adoption on our financial statements.

In December 2007, the FASB ratified the Emerging Issue Task Force (“EITF”) Issue 07-01, Accounting for Collaborative Arrangements (“EITF 07-01”). EITF 07-01 clarifies the accounting for contractual arrangements wherein two or more parties come together to participate in a joint operating activity which is conducted based on provisions of a contract. EITF 07-01 provides guidance on income statement classification of revenues and expenses related to such activities, and specifies disclosures that should be made with respect to such activities. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of EITF 07-01 on its financial statements.

In June 2007, the FASB ratified EITF Issue 07-03: Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF 07-03”). EITF 07-03 provides guidance for accounting for non-refundable payments paid to conduct research and development on behalf of the reporting entity. EITF 07-03 specifies that such payments should be initially capitalized, then expensed as the goods are received or the services have been performed. If the entity does not expect to the goods to be delivered or the services to be rendered, the costs should be expensed at that time. EITF 07-03 was effective for the Company beginning June 1, 2008. The adoption of EITF 07-09 did not have a material impact on our financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS No. 157”). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. On February 12, 2008, the FASB issued FASB Staff Position No. 157-2 Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 for non-financial assets and liabilities, except those that are recognized or disclosed in financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FASB Staff Position No. 157-3 Determining the Fair Value of a Financial Asset in a Market That Is Not Active, (“FSP 157-3”) which clarifies the application of SFAS 157 when the market for a financial asset is inactive. The guidance in FSP 157-3 is effective immediately and did not have a material effect on the Company’s financial statements. The Company does not expect the adoption of SFAS No. 157 to have a material impact on the financial statements.
 
13


NOTE 5. RELATED PARTIES

For the nine and three month periods ended February 28, 2009, the Company incurred $7,227 and $1,390 of expenses related to air travel to a partnership principally owned by the Chief Executive Officer of the Company. For the nine and three month periods ended February 29, 2008, the Company incurred $22,115 and $4,275 of expenses related to air travel to a partnership principally owned by the Chief Executive Officer of the Company.

The Company has an agreement with its Chairman to pay $12,500 per month as a director fee.  For the nine and three month periods ended February 28, 2009, the Company incurred $112,500 and $37,500 respectively, for this director’s fee.  For the nine and three month periods ended February 29, 2008, the Company incurred $112,500 and $37,500 respectively, for this director’s fee.

The Company has an agreement with Carleton A. Holstrom, Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro to pay each $1,667 per month payable on a quarterly basis in arrears as a director fee. For the nine and three month periods ended February 28, 2009, the Company incurred $56,668 and $10,000 for these directors’ fees. For the nine and three month periods ended February 29, 2008, the Company incurred $60,000 and $25,000 for these directors’ fees. 

NOTE 6. SUBSEQUENT EVENT

Pursuant to a Cash Waiver & Option Termination Agreement dated April 10, 2009, each of the outside Directors of the Company, G. Kirk Raab, Carleton A. Holstrom, Eugene A. Bauer, MD, Peter G. Tombros, Frank M. Dougherty and Thomas P. Stagnaro who are currently entitled to a Director's cash fee have agreed to waive all such accrued and unpaid Director cash fees and terminate any rights for further cash fees. For Mr. Raab, those cash fees ceased as of April 1, 2009. For the other Directors, those cash fees ceased as of February 1, 2009. In addition, each of these Directors has agreed to terminate immediately all of their existing stock options in the Company (vested and unvested).

ITEM 2.

The following discussion should be read in conjunction with the Company’s unaudited financial statements and related notes included in Item 1, “Financial Statements,” of this Quarterly Report on Form 10-Q, as well as the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008.  This discussion, as well as the remainder of this Quarterly Report on Form 10-Q, may contain forward-looking statements that are not historical facts and that are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward looking statements can be identified by the use of words such as “believe,” “expect,” “may,” “will,” “should,” “intend,” “anticipate” or the negative thereof or comparable terminology, and include discussions of matters such as anticipated financial performance, liquidity and capital resources, business prospects, technological developments, new and existing products, regulatory approvals and research and development activities.  These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expected. Please see the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2008 and other documents filed with the Securities and Exchange Commission for additional disclosures regarding potential risk factors that may cause the Company’s actual results and experience to differ materially from those contained in such forward-looking statements.

Overview

We are a development stage company engaged in developing a class of biopharmaceutical drugs for treating autoimmune and inflammatory diseases. Our lead product, PRTX-100, has demonstrated effectiveness in pre-clinical studies in regulating the immune system with persisting effects.  However, the effectiveness of PRTX-100 shown in pre-clinical studies using animal models may not be predictive of the results that we will see in our clinical trials.  We currently have no product on the market. We are initially targeting the autoimmune diseases idiopathic thrombocytopenic purpura, or ITP, and Rheumatoid Arthritis, or RA.

Favorable pre-clinical safety and efficacy studies for our lead compound, PRTX-100, laid the foundation for the Investigational New Drug Application, or IND, for treating RA.  We submitted the IND to the United States Food and Drug Administration, or FDA, in March 2005. 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 the Phase I clinical trial in December 2005 and completed the Phase I clinical trial in March 2006.  This Phase I trial was performed in healthy volunteers, and was designed primarily to assess the safety and tolerability of PRTX-100. The basic safety data demonstrated that PRTX-100 was safe and well tolerated.  There were no deaths or serious adverse events.  The pharmacokinetic, or PK, profile was favorable and the pre-clinical PK data were confirmed by the data in this Phase I clinical trial.  In May 2007, we filed an amendment to the IND with the FDA.  This amendment included the final Phase I safety study report, Chemistry, Manufacturing and Control or CMC update, and a protocol for the Phase I study conducted in July 2007.
 
14


RA is an autoimmune disease that causes the inflammation of the membrane lining multiple joints, resulting in pain, stiffness, warmth, redness and swelling. The inflamed joint lining, the synovium, can invade and damage bone and cartilage. Inflammatory cells release enzymes and cytokines that may damage bone and cartilage. The involved joint can lose its shape and alignment, resulting in pain and loss of movement.  In July 2007, we commenced with an additional Phase I clinical trial designed to gain more detailed information on biomarkers, including gene expression profiling and platelet functional assessments which will allow for more optimized patient selection and targeting in the upcoming Phase II study. The trial extended the clinical investigation of PRTX-100 tolerability, PK, and pharmacodynamics, or PD, at higher dose ranges. Dosing was completed in July 2007 and final results indicated that the drug was safe and well tolerated.  A Phase Ib randomized, double-blind, placebo-controlled, multiple dose, dose escalation safety and tolerability study of PRTX-100 in combination with methotrexate in patients with active RA in Russia, South Africa and Australia is scheduled to commence enrollment in the second quarter of calendar 2009.

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. For ITP, we contracted with Trident Clinical Research Pty Ltd, a leading Australian clinical research organization, to manage and monitor our first-in-patient ITP Phase 1b clinical trial. This clinical trial is designed to provide initial multiple dose safety and PK data as well as preliminary efficacy information. We have been approved for six sites in Australia and one in New Zealand, all regional referral centers for treatment of chronic ITP, to conduct a repeated dose study of PRTX-100 in chronic ITP patients. This clinical trial began enrolling patients in the second calendar quarter of 2008 and is expected to continue enrolling patients through the second calendar quarter of 2009.

In the area of intellectual property and derivative drug development, our patent application was filed in April 2002 and in May 2007 the United States Patent and Tradem