UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB/A-2
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
PRO-PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its Charter)
Nevada 04-3562325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
189 Wells Avenue, Suite 200, Newton, Massachusetts 02459
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (617) 559-0033
Securities to be registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None Not Applicable
Securities to be registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value per Share
(Title of Class)
TABLE OF CONTENTS
Part I 1
Item 1. Description of Business 1
Item 2. Plan of Operation 25
Item 3. Description of Property 26
Item 4. Security Ownership of Certain Beneficial Owners and Management 26
Item 5. Directors and Executive Officers, Promoters and Control Persons 28
Item 6. Executive Compensation 29
Item 7. Certain Relationships and Related Transactions 30
Item 8. Description of Securities 31
Part II 31
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters 31
Item 2. Legal Proceedings 32
Item 3. Changes in and Disagreements with Accountants 32
Item 4. Recent Sales of Unregistered Securities 32
Item 5. Indemnification of Directors and Officers 33
Part F/S 35
Part III 37
Item 1. Index to Exhibits 37
Item 2. Description of Exhibits 38
NOTE: The Registration Statement on Form 10-SB of the Registrant is being
amended by this Amendment No. 2 solely to reflect restatement of the financial
statements of Pro-Pharmaceuticals, Inc., a Massachusetts corporation and
predecessor to the Registrant, for the following periods: (1) audited financial
statements for the period from inception (July 10, 2000) through December 31,
2000; and (2) unaudited financial statements for the three months ended March
31, 2001 and period from inception (July 10, 2000) through March 31, 2001. For
current information, please see the Registrant's Annual Report on Form 10-KSB
for the year ended December 31, 2001, as filed with the Commission.
PART I
Item 1. Description of Business
Forward-Looking Statements
This Form 10-SB contains "forward-looking" statements that involve risks
and uncertainties. Forward-looking statements include statements about the
desired or believed utility and market for our potential products, future of the
biotechnology and biopharmaceutical industry, statements about future business
plans and strategies, and most other statements that are not historical in
nature. Because forward-looking statements involve risks and uncertainties,
there are factors, including those discussed below, that could cause actual
results to be materially different from any future results, performance or
achievements expressed or implied. We have attempted to identify the major
factors under the heading "Risk Factors" that could cause differences between
actual and planned or expected results, but we cannot assure you that we have
identified all of those factors. Accordingly, readers should not place undue
reliance on forward-looking statements. Also, we have no obligation to publicly
update forward-looking statements we make in this Form 10-SB.
Business Development
Summary
Pro-Pharmaceuticals, Inc. (referred to as "we" or "us") is a corporation
governed by the corporation law of Nevada. Under our former name, DTR-Med Pharma
Corp., we were incorporated under Nevada law on January 26, 2001, for the
purpose of effecting an acquisition of all the issued and outstanding stock of a
Massachusetts corporation which was also named Pro-Pharmaceuticals, Inc. Prior
to the acquisition, we changed our name to Pro-Pharmaceuticals, Inc. We then
merged with the Massachusetts corporation. We are the surviving corporation in
the merger.
Initial Corporate Organization, Acquisition and Merger
From our incorporation until just before the acquisition, we had been a
wholly owned subsidiary of Developed Technology Resource, Inc., a Minnesota
corporation. Developed Technology's common stock is publicly traded on the
Over-the-Counter Bulletin Board under the symbol DEVT.OB. In exchange for
1,221,890 shares of our common stock, Developed Technology transferred to us
certain contractual rights to receive royalties from a yet undeveloped or
approved cancer detection method that is described below under " -- Cancer
Detection Technology." As part of that process, Developed Technology distributed
its holdings of our common stock to its shareholders of record as of May 7,
2001. While our common stock then became publicly held, there has been no
trading of our common stock. Our articles of organization provide that our
common stock may not be sold without our approval until the earlier of May 1,
2003 or the 90th day after the date our common stock is registered under the
Securities Exchange Act of 1934. We are filing this Form 10-SB with the
Securities and Exchange Commission in order to register our common stock under
the Securities Exchange Act.
On May 15, 2001, we acquired all of the outstanding common stock of
Pro-Pharmaceuticals, Inc., a Massachusetts corporation organized on July 11,
2000 (referred to as Pro-Pharmaceuticals (Massachusetts)). We acquired these
shares in exchange for 12,354,670 shares of our common stock. As a result,
Pro-Pharmaceuticals (Massachusetts) became our wholly owned subsidiary, and the
shareholders of Pro-Pharmaceuticals (Massachusetts) owned approximately 91% of
the outstanding shares of our common stock. See "Item 4. Security Ownership of
Certain
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Beneficial Owners and Management" for information about the ownership of our
common stock. After the acquisition, we merged with our wholly owned subsidiary,
Pro-Pharmaceuticals (Massachusetts) and are the surviving corporation in the
merger. The merger was treated as a capital transaction and was accounted for as
a reverse merger in which Pro-Pharmaceuticals (Massachusetts) was the
accounting acquirer.
We are continuing the business of Pro-Pharmaceuticals (Massachusetts),
which has been attempting to develop a technology that will reduce the toxicity
and improve the efficacy of current drug therapies, including cancer
chemotherapies, by combining the drugs with a number of specific carbohydrate
compounds. This is now the principal focus of our business, and is the basis for
the business discussion included in this Form 10-SB.
Our address is 189 Wells Avenue, Suite 200, Newton, Massachusetts 02459.
Our telephone number is (617) 559-0033, fax number is (617) 928-3450, e-mail
address is Plattpharma@aol.com, and our website address is
www.pro-pharmaceuticals.com
Business of Pro-Pharmaceuticals
Overview
We are an early-stage research and development pharmaceutical company that
intends initially to identify, develop and seek regulatory approval of
technology that will reduce toxicity and improve the efficacy of currently
existing chemotherapy drugs by combining the drugs with a number of specific
carbohydrate compounds. Our fundamental objective is to increase the body's
tolerance to the drugs by enabling delivery of the drugs while protecting
healthy tissue. This would also permit use of larger doses of the drugs, since
current dosages are generally limited due to concerns relating to their toxic
effects on healthy cells. Our carbohydrate-based drug delivery system may also
have applications for drugs now used to treat other diseases and chronic health
conditions.
In technical terms, we seek to "reformulate" existing cancer chemotherapy
drugs with non-toxic carbohydrate-based compounds that recognize and adhere to
specific binding sites on the surface of cancer cells. Reformulation of
chemotherapy drugs already approved by the U.S. federal Food and Drug
Administration has the following benefits for our business:
o Our carbohydrate-based drug delivery system requires less time for
development and FDA approval, and thus reaches the market sooner,
because the active chemotherapy drugs are already approved and in
widespread use for cancer treatment.
o We expect fewer risks in drug development because our
carbohydrate-based compounds would be combined with drugs already in
widespread use. Use of carbohydrate compounds with increased capacity
to bind to receptors only on cancer cells and combining the drug with
a harmless carbohydrate polymer will reduce the toxic effect on
healthy cells and permit better calibration (including possible
increase) of dosages to diseased tissue.
o We foresee a ready demand for chemotherapy that is less toxic and has
greater efficacy. We believe the pharmaceutical industry would respond
favorably to drug delivery systems to upgrade chemotherapies which
patients would tolerate more easily. The industry would likely also be
receptive to patent-protected drug delivery systems that "attach" to
chemotherapies whose patent protection has expired.
o We believe that the development of drug delivery systems to upgrade
these widely used drugs can be accomplished with much less investment
compared to the typical expenditures made by large pharmaceutical
companies for a new drug launch.
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Cancer and Therapy Issues
Cancer is a disease characterized by uncontrolled growth and spread of
abnormal cells. The disease may be caused by patient-specific factors such as
genetic predisposition, immune deficiency, hormones, diet and smoking, or
external factors such as exposure to a toxic environment. It is the second
leading cause of death in the United States, resulting in over 550,000 deaths
annually. The National Cancer Advisory Board reports that more than 8 million
persons in the U.S. have cancer. Estimates claim that approximately one in three
Americans will be diagnosed with the disease their lifetime. About 1.2 million
new cases are diagnosed in the U.S. each year. As populations age in the U.S.,
Canada and other industrialized nations, the incidence of the disease is
expected to increase. About 6 million persons worldwide die annually from
cancer.
The most widely used methods to treat cancer are surgery, radiation and
chemotherapy. Cancer patients often receive a combination of these treatments,
and about half of all patients receive chemotherapy. Both radiation and
chemotherapy have significant limitations that often result in treatment
failure. In the case of chemotherapy, these limitations include:
o Toxicity. Most chemotherapy agents kill cancer cells by disrupting the
cell division process. Cells are killed once they begin to undergo
division and replication. Although these agents are effective on
cancer cells, which generally grow rapidly through cell division, they
also kill healthy non-cancerous cells as these cells undergo ordinary
division. This is particularly apparent in fast-growing normal cells,
such as blood cells forming bone marrow, in the digestive tract, hair
follicles, and reproductive cells. As the chemotherapy harms healthy
tissue, the effectiveness of the drug is limited because dosage levels
and treatment frequency cannot exceed tolerance levels for
noncancerous cells. Moreover, the chemotherapy regimen often
dramatically diminishes the quality of a patient's life through its
physical and emotional side effects.
o Inability to Selectively Target Diseased Cells. The administration of
chemotherapy occurs in such a way that the drug reaches both healthy
and diseased tissue. Normal cells are generally as receptive as tumors
to the toxic effects of chemotherapy. Without the ability to target
the drug exclusively to cancerous tissue, chemotherapy dosages must be
kept within a range that healthy tissue can tolerate, thus reducing
the optimal effectiveness of chemotherapy on diseased tissue.
Our Business Strategy and Initial Objectives
We seek to increase the effectiveness of current cancer treatment and other
drugs. The initial objectives of our business strategy are as follows:
o Verify and extend the carbohydrate-based drug enhancement concept
encompassing our approach for developing novel cancer chemotherapy
products.
o Expand and enhance clinical applications of at least five widely used
chemotherapy drugs (5-Fluorouracil, Adriamycin, Taxol, Cytoxan and
Cisplatin) by combining them with our carbohydrate-based drug delivery
system.
o Demonstrate the safety and efficacy of such product candidates by
means of preclinical evaluation and submitting investigational new
drug ("IND") applications to the FDA.
o Accelerate commercialization by identifying products that qualify for
fast-track designation by the FDA (further described below). We plan
to develop products to be used in treatment of types and stages of
cancer for which treatments are now inadequate. The FDA has adopted
fast-track and priority procedures for accelerating the approval of
oncology agents addressing such needs, potentially reducing the time
required to bring
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new drugs to market. Once approved, we would seek to expand the market
potential of our products by seeking approval for indications in
larger cancer patient populations.
o Leverage our carbohydrate-based drug enhancement technology by
applying it to other FDA-approved drugs, including drugs for
conditions or ailments other than cancer, that would benefit from
reduced toxicity and/or greater efficacy. This strategy would enable
us to increase the portfolio of drugs to which our technology may be
applied without corresponding development risk and expense of creating
new drugs.
o Apply our drug enhancement system with the aim of extending the patent
life of current drugs, or in some cases drugs with expired patents,
creating new patent protection. For example, the patent protections of
the five cancer drugs with which we propose to work have all expired
or long been in the public domain. Non-cancer drugs whose patents have
expired, and that we might apply our carbohydrate-based drug
enhancement technology to include: Prozac (anti-depressant
manufactured by Eli Lilly and Company); Prilosec (anti-ulcerative
manufactured by AstraZenaca PLC); and Zoloft (anti-depressant
manufactured by Pfizer Inc.).
Drug Delivery Technologies
General
The ultimate objective of enhanced drug delivery is to control and optimize
the localized release of a drug at the target site and rapidly eliminate from
the body the portion of the drug that was not delivered to the diseased tissue.
Conventional drug delivery systems such as controlled release, sustained
release, transdermal systems, and others are based on a physical erosion process
for delivering active product into the systemic circulation over time with the
objective of improving compliance by patients with a therapy regimen. These
systems do not address the biologically important issues such as site targeting,
localized release and elimination of undelivered drug from the body. The major
factors that impact the achievement of this ultimate goal are:
o Physical characteristics of a drug. These characteristics affect,
among other things, the drug's interactions with the intended
pharmacological target sites and undesired areas of toxicity; and
o Biological characteristics of the diseased area. These characteristics
impact the ability of a drug to selectively interact with the intended
target site to allow the drug to express the desired pharmacological
activity.
Both of these factors are important in increasing efficacy and reducing toxicity
of cancer drugs. Biotechnology affords a new opportunity in drug delivery
techniques by taking advantage of biological mechanisms such as drug-cell
recognition and interactions, and particular physical characteristics of
cancerous tissue.
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Our Focus: Carbohydrate-Based Drug Enhancement Technology
We are attempting to develop a carbohydrate-based drug delivery technology
to direct cancer drugs more selectively to tumor tissue so as to reduce the
toxic side effects and improve the tumor reduction capacity of chemotherapy
drugs now in use. Carbohydrates are found in the structural elements of cell
walls and, among other functions, serve as recognition elements in biomolecules,
enabling molecule-cell recognition, and hence, molecular targeting. The dense
concentration of chemical functional groups within carbohydrates compared to
other chemicals suits them for use in cell recognition applications in
biological systems.
Our drug enhancement technology is intended to take advantage of the
following biological mechanisms to improve drug delivery:
o Disease-specific carbohydrate recognition; and
o Enhanced permeability and retention in tumors.
Our technology does not change the chemistry of the drugs themselves, but
rather "attaches" cancer drugs to proprietary carbohydrate compounds, which
interact with sugar-specific proteins on the surface of the tumor cell. Because
of these cell surface interactions, we believe that these compounds will
increase cell permeability, resulting in increased targeted absorption of drugs
by cancer cells. These cell surface interactions may also reduce the cells'
ability to adhere to each other as well as to normal tissue, resulting in
diminished ability of cancer cells to metastasize, or spread to other tissue
systems.
Our preliminary studies have led to the identification of certain mannans,
a group of polysaccharides, as a potential drug delivery system. Polysaccharides
are molecules consisting of one or more types of sugars. In the case of mannans,
the principal component is the sugar mannose, which is similar in many respects
to glucose. While mannans can be isolated from plant or microbial sources, we
use mannans isolated from plants. We believe that a mannan with suitable
chemical structure and composition, when attached to or combined with the active
agent of a chemotherapy drug, increases cellular membrane fluidity and
permeability, thereby assisting delivery of the drug. Also, our studies have
shown that mannans of a certain structure may be able to protect healthy tissue
from the toxic effects of chemotherapy drugs, and also may be able to increase
therapeutic efficacy of such drugs.
Initial Chemotherapy Applications
We believe that our carbohydrate-based drug enhancement technology applies
to essentially any oncology drug whose delivery to the target can be improved by
utilizing sugar-specific recognition at the cancer cell surface. Initially, we
are studying the effect of our carbohydrate-based system on the toxicity and
efficacy of selected cancer drugs. We have conducted preliminary studies that
indicate that certain of our mannans, when combined with some of these drugs,
may significantly reduce the toxic effects of the drugs and may also increase
therapeutic efficacy of such drugs.
Our initial program is designed to be "risk-contained" in that it will
focus on proven drugs for which there are already a great deal of data on their
therapeutic efficacy and toxicity, along with an accumulated knowledge of their
limitations. We intend to apply our drug delivery technology initially to five
widely used chemotherapy agents: 5-Fluorouracil, Adriamycin, Taxol, Cytoxan and
Cisplatin. Each of these drugs is among the most popular drugs used in cancer
chemotherapy treatment in the United States, and for each of these drugs there
is a strong need for improving their therapeutic efficacy and decreasing their
toxicity.
o 5-Fluorouracil (5-FU) is a fluorinated pyrimidine (a nucleic acid
component). It interferes with the synthesis of DNA and inhibits the
formation of RNA. Since DNA and RNA are essential for cell division
and growth, the effect of 5-FU provokes
5
unbalanced growth and death of the cell. The effect of DNA and RNA
deprivation is most marked on those cells which grow more rapidly and
which take up the 5-FU at a more rapid rate, such as cancer cells.
5-FU is effective against cancers of the colon, rectum, breast,
stomach and pancreas. This drug is also toxic, resulting in side
effects such as nausea, vomiting, mouth sores, gastrointestinal
ulceration and bleeding, loss of hair, skin darkening and fatigue.
5-FU is manufactured by Roche Laboratories for intravenous
administration. Originally patented in the late 1950s, its patent
protection has expired.
o Adriamycin (generic name -- doxorubicin hydrochloride) is a cytotoxic
agent that selectively kills malignant cells and causes tumor
regression. It binds to the DNA, and presumably inhibits nucleic acid
synthesis. It is used to treat, among others, leukemia, cancers of the
breast, ovaries, bladder, stomach and thyroid, as well as Hodgkin's
and non-Hodgkin's lymphoma. Adriamycin is toxic, resulting in side
effects such as nausea, vomiting, loss of hair, mouth sores, colon
ulceration and heart damage. It is manufactured by Pharmacia Upjohn
for intravenous administration. Originally patented in 1971, its
patent protection has expired.
o Taxol (generic name -- paclitaxel) is a relatively new anti-leukemic
and anti-tumor agent, possessing a cytotoxic activity. It suppresses
cell division by binding to so-called microtubules that form in a
cell's nucleus to help move the chromosomes around during the division
process. Taxol is most effective against ovarian and advanced breast
cancers, particularly after failure of standard chemotherapy. Studies
indicate that it might be effective against leukemia, lung carcinoma,
colon carcinoma, renal carcinoma, melanoma, and CNS carcinoma. Taxol
is toxic, and patients receiving it often develop problems ranging
from rashes, drop in blood pressure and anemia to major breathing
problems, hives and/or fluid buildup around the heart and bone marrow
suppression. Almost all patients experience hair loss from Taxol, and
some patients experience severe hypersensitivity reactions to Taxol.
It is manufactured by Bristol-Myers-Squibb Company for intravenous
administration. We believe that there are no patents covering the
composition of Taxol (paclitaxel).
o Cytoxan (generic name -- cyclophosphamide) has action leading to
cross-linking of RNA of tumor cells, and thereby interferes with the
growth of susceptible rapidly proliferating malignant cells. It is
effective against a range of cancers, such as malignant lymphomas,
Hodgkin's disease, various leukemias, and cancer of the breast and
ovaries. This drug is toxic, with side effects including nausea,
vomiting, anorexia, diarrhea, skin rash and darkening and, in extreme
cases, heart damage or failure, and secondary malignancies. It is
manufactured by Bristol-Myers-Squibb Company for intravenous and oral
administration. We believe that there are no patents covering the
composition of Cytoxan (cyclophosphamide).
o Cisplatin appears to act by inhibiting DNA synthesis. It is effective
against metastatic testicular and ovarian tumors (typically in
combination with other chemotherapeutic agents, such as Cytoxan,
above), and advanced bladder cancer. This drug is toxic, with side
effects including renal toxicity, nausea, vomiting, anorexia, diarrhea
and anemia. It is manufactured as PLATINOL(R) by Bristol-Myers-Squibb
Company for intravenous injection. We believe that there are no
patents covering the composition of Cisplatin.
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Preclinical Animal Studies
As discussed below, we have conducted preclinical animal experiments with
an independent laboratory to study the reduction of toxicity of 5-Fluorouracil
in combination with each of four of our mannan compounds, selected for the
study. We have also conducted a study of the efficacy of 5-FU combined with one
of our mannan compounds.
Toxicity Studies
Results of one of our toxicity studies (00-5953-N1 of 02/15/01) indicate
that one of the mannan compounds may significantly decrease the toxicity of
5-FU. Ten groups of five animals each were used. In five groups, treated
respectively with a placebo and one of four different mannans provided by us,
the animals showed no signs of toxicity. That was expected because the animals
were not receiving the toxic drug, and the mannans were not expected to be toxic
at all. In four groups, treated respectively with 5-FU alone and 5-FU in
combination with either of three of the mannans, the animals showed signs of
severe toxicity. In one group, treated with 5-FU in combination with the fourth
mannan, no clinical signs of toxicity were observed. This provides a preliminary
indication of potential reduction in cancer drug toxicity by a
carbohydrate-based addition to the cancer drug.
A second, similar study (01-0557-N1 of 03/01/01) was performed to test a
potential reduction of toxicity of another anticancer drug, Adriamycin, in
combination with each of two mannan compounds selected for the study. Results
indicate that one of the mannan compounds may decrease the toxicity of
Adriamycin. In two groups, treated with Adriamycin alone and Adriamycin in
combination with one mannan, the animals showed signs of severe toxicity. In one
group, treated with the same amount of Adriamycin in combination with the second
mannan, four out of the five animals in the group did not show any clinical
signs of toxicity. Again, this provides a preliminary indication of potential
reduction in cancer drug toxicity by a carbohydrate-based addition to the cancer
drug. The fact that two different cancer drugs with chemically unrelated
structures showed a marked reduction of their toxicity in combination with
particular mannans indicates that there might be some fundamental underlying
biological reasons, related to the mannans rather than to the drugs, for the
reduction in toxicity.
The above toxicity studies were conducted by Toxikon Corporation, a
comprehensive compliance FDA-registered service testing laboratory in Bedford,
Massachusetts, that is not affiliated with Pro-Pharmaceuticals. Please see " --
Research" below, for further information about Toxikon Corporation.
Efficacy Study
A preliminary study was performed to test a potential change in therapeutic
efficacy of 5-FU in a combination with that same mannan that decreased toxicity
of the drug in healthy animals (see the first study described in " -- Toxicity
Studies," above). The study was motivated by the desire to test the possibility
that the mannan might diminish both toxicity and efficacy in parallel, if the
mannan were merely competing with 5-FU for binding with cells, healthy or
cancerous. Results of the study demonstrated, however, that the same mannan that
may decrease toxicity of 5-FU may also increase efficacy of the drug when the
drug combined with mannan is administered into cancer-carrying animals. In this
study, we ascertained a decrease in tumor size following administration of 5-FU
alone as well as administration of the 5-FU/mannan combination. When the
5-FU/mannan combination was administered, tumor size decreased by 35%-55% more
than when 5-FU was administered alone. Furthermore, compared to control (i.e.,
when no drug was introduced to the animals), in a week following drug
administration (at high 5-FU concentration) tumor size decreased almost four
times more with 5-FU alone and almost five times more with the 5-FU/mannan
combination. In the two-week period after drug administration of low 5-FU
concentration, tumor size decreased (compared to control) over two times more
with 5-FU alone, and over three times more with the 5-FU/mannan combination.
7
The above efficacy study was conducted by Southern Research Institute in
Birmingham, Alabama. Southern Research Institute is an independent,
not-for-profit contract research organization that is not affiliated with our
company. Please see " -- Research" below, for further information about Southern
Research Institute.
Although the foregoing studies are encouraging, the results achieved in
preclinical studies with animals are often not duplicated in human patients.
Please see "Risk Factors -- Our product candidates will be based on novel
technologies..." below.
Cancer Detection Technology
We have an indirect royalty interest in a cancer detection technology that
may be applied to the detection of soft tissue nodules in human organs, and may
thus assist in the detection of cancerous tissue. A diagnostic system has been
developed which is based on this detection technology. This system uses pressure
to measure the elasticity or hardness of soft tissue, and, through digitization,
provides a clinician with an image of the size and location of nodules in the
tissue. While the detection technology is currently being focused on the
development of a prostate imaging system, the technology is also believed to be
applicable to the detection of nodules or hardness in the breast.
The detection technology is substantially covered by three United States
patents: Patent No. 5,265,612 entitled "Intercavity Ultrasonic Device for
Elasticity Imaging"; Patent No. 5,524,636, dated June 11, 1996 entitled "Method
and Apparatus for Elasticity Imaging"; and Patent No. 5,785,663 dated July 28,
1998, entitled "Method and Device for Mechanical Imaging of Prostate."
The detection technology is owned, and primary development efforts are
being conducted, by ArMed, Inc., a Delaware corporation (formerly ArMed LLC, a
Delaware limited liability company). Artann Corporation, a New Jersey
corporation, and an earlier owner and developer of the detection technology,
transferred the detection technology to ArMed, Inc. in 1996, and in return
received a license to use, develop, manufacture and market a home use breast
cancer system utilizing the detection technology.
Artann Corporation entered into an "Agreement for Transfer of Patent and
Proprietary Rights" dated September 5, 1995, as amended on August 29, 1996, with
our former parent company, Developed Technology. We refer to that agreement as
the "royalty agreement" in this section. We received our rights under the
royalty agreement by assignment from Developed Technology on April 23, 2001.
Armen P. Sarvazyan is the original inventor of the detection technology, is the
principal shareholder of Artann Corporation, and is also a party to the royalty
agreement. Sarvazyan and Artann Corporation, combined, have approximately a 9.5%
equity and voting interest in ArMed, Inc., on a fully diluted basis.
The royalties which we have a right to receive under the royalty agreement
are based on the gross revenues of Artann Corporation and Sarvazyan. Those gross
revenues, if generated, will be obtained by Artann Corporation from (i) the sale
of home use breast cancer detection systems, utilizing the detection technology,
(ii) the licensing or assignment to third parties of the rights to manufacture
and sell breast cancer detection systems utilizing the detection technology, and
(iii) distributions made by ArMed, Inc. to Artann Corporation. The royalty
computation is complex and not readily subject to description, and varies
significantly depending upon the specific application of the detection
technology.
We do not anticipate receiving any revenue under the royalty agreement for
at least two years, and we do not expect any revenue we do receive to be
substantial. An independent appraisal of our royalty interest under the royalty
agreement was obtained in March 2001. That appraisal established a fair market
value of our royalty interest at $107,000.
We are currently negotiating to exchange our royalty interest for a direct
equity interest in ArMed, Inc. We cannot predict whether our royalty interest
will ever result in any revenues to us.
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Patents and Proprietary Rights
We dedicate significant resources to protecting our intellectual property.
We have one pending patent application, entitled "Delivery of Therapeutic Agent
in a Formulation for Reduced Toxicity," filed with the U.S. Patent and Trademark
Office on March 27, 2001, by Dr. David Platt, our President and Chief Executive
Officer and a director, and Dr. Anatole Klyosov, our Senior Vice President and
Chief Scientific Officer. Dr. Platt and Dr. Klyosov assigned this patent
application to us in April 2001.
In addition, we are the owners of rights to two provisional patent
applications. One application, filed on August 30, 2000, concerns a method of
improving drug efficacy based on reformulation of drugs with polysaccharides.
The other application, filed on September 25, 2000, concerns the synthesis of
Galactomycin (i.e., Adriamycin combined with galactose). Both are filed with the
U.S. Patent and Trademark Office. We have not undertaken filings elsewhere. Dr.
Platt, the inventor with respect to each of these provisional patent
applications, assigned the applications to us.
A provisional patent application is not actually reviewed by the U.S.
Patent and Trademark Office. Rather, it is used to establish a filing, or
priority, date for either a U.S. utility patent application, which is subject to
review, or a Patent Cooperation Treaty application, which is subject to an
initial search and a further review upon request. In order to retain the
benefits of the initial filing or priority date, the inventor must file a
utility application with the U.S. Patent and Trademark Office, or an application
under the Patent Cooperation Treaty, within one year of the original filing date
of the provisional application. Otherwise, the filing, or priority, date will be
lost.
We intend to file additional patent applications when appropriate, with
respect to improvements in our core technology and to specific products and
processes that we develop. There can be no assurance that any patents will issue
from any present or future applications or, if patents do issue, that such
patents will be issued on a timely basis or that claims allowed on issued
patents will be sufficient to protect our technology. Our intellectual property
is subject to other risks, including potential patent challenges and possible
lack of protection. Please see " -- Risk Factors -- If we fail adequately to
protect our intellectual property ...," below, for additional discussion of
risks related to intellectual property.
On June 8, 2001 we filed with the U.S. Patent and Trademark Office
applications to register the following trademarks/service marks, each on an
"intent to use" basis in connection with licensing of our intellectual property:
ADVANCING DRUGS THROUGH GLYCOSCIENCE and GLYCO-UPGRADE. The U.S. Patent and
Trademark Office has not reviewed such applications. It generally issues an
office action several months after an application is filed which reports on its
initial determination of whether a mark is registrable under the federal
trademark statute.
Research
We anticipate that our focus will be on design and analysis of
carbohydrate-based drug enhancement systems. We do not anticipate building
in-house research or development facilities, or hiring staff to conduct those
activities. As we have done to date, we will have our pre-clinical testing
conducted by outside laboratories.
Our early stage research was conducted by Toxikon Corporation, a
comprehensive compliance FDA-registered service testing laboratory in Bedford,
Massachusetts, that is not affiliated with Pro-Pharmaceuticals. Toxikon's
laboratory is ISO-9001 certified and EN-45001 approved, meaning that it complies
with quality management standards as established by the International
Organization for Standardization and other international organizations.
Our current research on toxicity and efficacy of several chemotherapy drugs
both alone and in combinations with our mannans on cancer-carrying animals are
being conducted by Southern Research Institute in Birmingham, Alabama. Southern
Research Institute is an independent, not-for-profit contract research
organization that is not affiliated with our company.
If we develop products eligible for clinical trials, we will contract with
an independent clinical research organization to design the trial protocols and
arrange for and monitor the clinical trials. We also intend to rely on academic
institutions or clinical research organizations to conduct,
9
supervise or monitor some or all aspects of clinical trials involving our
products. In addition, certain clinical trials for our products may be conducted
by government-sponsored agencies and consequently will be dependent on
governmental participation and funding. Our dependence on third-party
researchers will involve risks including lessened control over the timing and
other aspects of any clinical trials, since we will not be conducting them on
our own. Please see "Risk Factors -- We have no experience in clinical trials
and will be dependent on others ...", below, for additional discussion of risks
related to our research.
We do not intend to manufacture our products. We anticipate that any
products we develop will be manufactured by subcontractors. Please see "Risk
Factors -- We intend to rely on third parties to manufacture and market ...",
below, for additional discussion of risks related to contract manufacturing.
Manufacturing and Marketing
We are a development company and do not have, or intend to obtain, internal
facilities for the manufacture of any of our products for clinical or commercial
production. In order to have our products manufactured, we will initially need
to develop relationships with third-party manufacturing resources, enter into
collaborative arrangements with other parties that have established
manufacturing capabilities or elect to have other third parties manufacture our
products on a contract basis. Later we would propose to have our products
manufactured and marketed pursuant to licensing agreements as discussed below.
We also have no marketing infrastructure, and we do not intend to develop a
sales and marketing staff to commercialize pharmaceutical products. If we
develop products eligible for commercial sale, we will need to rely on third
parties such as licensees, collaborators, joint venture partners or independent
distributors to market and sell those products. Our dependence on third-party
manufacturers and marketers will involve risks relating to our lessened control,
and other risks including those discussed in " -- Risk Factors -- We intend to
rely on third parties to manufacture and market our products ...," below.
We currently envision having our manufacturing and marketing operations
conducted pursuant to license agreements that we would negotiate with
pharmaceutical companies with respect to manufacturing and marketing of their
"upgraded" drugs. While we presently contemplate offering the rights to
manufacture and market an "upgraded" drug to the original pharmaceutical company
that developed the drug, we will evaluate other manufacturing and marketing
arrangements as well.
Competition
We expect to encounter significant competition for the principal drug
delivery systems we plan to develop. Companies that complete clinical trials,
obtain required regulatory approvals and commence commercial sales of their
products before their competitors may achieve a significant competitive
advantage. Accordingly, the relative speed with which we and any future
collaborators can develop products, complete preclinical testing and clinical
trials and approval processes, and supply commercial quantities of the products
to the market are expected to be important competitive factors. A number of
biotechnology and pharmaceutical companies are developing new drug delivery
systems for the treatment of the same diseases being targeted by us. In some
instances, such products have already entered late-stage clinical trials or
received FDA approval. Significant levels of research in biotechnology,
medicinal chemistry and pharmacology occur in academic institutions,
governmental agencies and other public and private research institutions. These
entities have become increasingly active in seeking patent protection and
licensing revenues for their research results. They also compete with us in
recruiting and retaining skilled scientific talent.
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Please see "Risk Factors -- We are faced with direct and intense competition
...", below, for additional discussion related to our current and potential
competition.
Our potential competition includes other companies developing drug delivery
systems based on carbohydrates, as well as companies developing drug delivery
systems based on other polymers. The principal competitors in the polymer area
are Cell Therapeutics, Access Pharmaceuticals, Daiichi, Enzon and Pharmacia
which are developing alternate drugs in combination with polymers. We believe we
are the only company conducting research on mannan-based drug delivery systems.
In addition, we face competition with technologies other than polymer-based
delivery technologies. We believe that the principal current competitors to
polymer-based targeting technology fall into two categories: monoclonal
antibodies and liposomes. A number of companies are developing or may in the
future engage in the development of products competitive with our drug delivery
system. Several companies are working on targeted monoclonal antibody therapy
including Bristol-Myers Squibb, Centocor, GlaxoSmithKline, Imclone and Xoma.
Currently, liposomal formulations being developed by Nexstar (acquired by Gilead
Sciences), The Liposome Company (acquired by Elan Corporation) and Sequus
Pharmaceuticals (acquired by Alza Corporation), are the major competing
intravenous drug delivery formulations which deliver similar drug substances. A
number of companies are developing or evaluating enhanced drug delivery systems.
We expect that technological developments will occur at a rapid rate and that
competition is likely to intensify as various alternative delivery system
technologies achieve similar if not identical advantages.
We believe that our ability to compete successfully will be based on our
ability to create and maintain scientifically advanced technology, develop
proprietary products, attract and retain scientific personnel, obtain patent or
other protection for our products, obtain required regulatory approvals and
manufacture and successfully market our products either alone or through outside
parties.
Government Regulation
The research, development, testing, manufacture, labeling, promotion,
advertising, distribution, and marketing, among other things, of our products
are extensively regulated by governmental authorities in the United States and
other countries. In the United States, the Food and Drug Administration (FDA)
regulates drugs under the Federal Food, Drug, and Cosmetic Act and its
implementing regulations. Failure to comply with the applicable U.S.
requirements may subject us to administrative or judicial sanctions, such as FDA
refusal to approve pending new drug applications, warning letters, product
recalls, product seizures, total or partial suspension of production or
distribution, injunctions, and/or criminal prosecution. Please see "Risk Factors
- -- If we fail to obtain regulatory approvals ...", below, for additional
discussion of risks related to regulatory compliance.
Drug Approval Process
No drug may be marketed in the U.S. until the drug has received FDA
approval. We have not yet submitted an application for approval for any of our
product candidates. The steps required before a drug may be marketed in the U.S.
include:
o preclinical laboratory tests, animal studies, and formulation studies
o submission to the FDA of an investigational new drug application, or
IND, for human clinical testing, which must become effective before
human clinical trials may begin
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o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the drug for each indication
o submission to the FDA of a New Drug Application, or NDA
o satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess
compliance with current Good Manufacturing Procedures established by
the FDA ("cGMP") and
o FDA review and approval of the NDA.
Preclinical tests include laboratory evaluation of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
preclinical tests, together with manufacturing information and analytical data,
are submitted to the FDA as part of an IND, which must become effective before
human clinical trials may begin. An IND will automatically become effective 30
days after receipt by the FDA, unless before that time the FDA raises concerns
or questions about issues such as the conduct of the trials as outlined in the
IND. In such a case, the IND sponsor and the FDA must resolve any outstanding
FDA concerns or questions before clinical trials can proceed. We cannot be sure
that submission of an IND will result in FDA allowing clinical trials to begin.
Clinical trials involve the administration of the investigational drug to
human subjects under the supervision of qualified investigators. Clinical trials
are conducted under protocols detailing the objectives of the study, the
parameters to be used in monitoring safety, and the effectiveness criteria to be
evaluated. Each protocol must be submitted to the FDA as part of the IND.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap or be combined. Each trial must be reviewed and approved by
an independent Institutional Review Board before it can begin. Study subjects
must sign an informed consent form before participating in a clinical trial.
Phase I usually involves the initial introduction of the investigational drug
into people to evaluate its safety, dosage tolerance, pharmacodynamics, and, if
possible, to gain an early indication of its effectiveness. Phase II usually
involves trials in a limited patient population to (i) evaluate dosage tolerance
and appropriate dosage; (ii) identify possible adverse effects and safety risks;
and (iii) evaluate preliminarily the efficacy of the drug for specific
indications. Phase III trials usually further evaluate clinical efficacy and
test further for safety by using the drug in its final form in an expanded
patient population. There is no assurance that these trials will be completed
within a specified period of time, if at all.
Assuming successful completion of the required clinical testing, the
results of the preclinical studies and of the clinical studies, together with
other detailed information, including information on the manufacture and
composition of the drug, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more indications. Before
approving an NDA, the FDA usually will inspect the facility or the facilities at
which the drug is manufactured, and will not approve the product unless cGMP
compliance is satisfactory. If the FDA evaluates the NDA and the manufacturing
facilities as acceptable, the FDA will issue an approval letter. If the FDA
evaluates the NDA submission or manufacturing facilities as not acceptable, the
FDA will outline the deficiencies in the submission and often will request
additional testing or information. Even if we submit the requested additional
information, the FDA ultimately may decide that the NDA does not satisfy the
regulatory criteria for approval. The testing and approval process requires
substantial time, effort, and financial resources, and we cannot be sure that
any approval will be granted on a timely basis, if at all. After approval,
certain changes to the approved product, such as adding new indications,
manufacturing changes, or additional labeling claims are subject to further FDA
review and approval.
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FDA "Fast Track" Program; Priority Review
The FDA's "fast track" program is intended to facilitate the development
and expedite the review of drugs intended for the treatment of serious or
life-threatening diseases and that demonstrate the potential to address unmet
medical needs for such conditions. Under this program, the FDA can, for example,
review portions of an NDA for a fast track product before the entire application
is complete, thus potentially beginning the review process at an earlier time.
We intend to seek to have some of our products designated as fast track
products, with the goal of reducing review time. There can be no guarantee that
the FDA will grant any of our requests for fast track designation, that any fast
track designation would affect the time of review, or that the FDA will approve
the NDA submitted for any of our product candidates, whether or not fast track
designation is granted. Additionally, FDA approval of a fast track product can
include restrictions on the product's use or distribution (such as permitting
use only for specified medical procedures or limiting distribution to physicians
or facilities with special training or experience), and can be conditioned on
the performance of additional clinical studies after approval.
FDA procedures also provide priority review of NDAs submitted for drugs
that, compared to currently marketed products, offer a significant improvement
in the treatment, diagnosis, or prevention of a disease. NDAs that are granted
priority review are intended to be acted upon more quickly than NDAs given
standard review. The FDA's current goal is to act on 90% of priority NDAs within
six months of receipt. We anticipate seeking priority review with regard to some
of our product candidates. There can be no guarantee that the FDA will grant
priority review status in any instance, that priority review status will affect
the time of review, or that the FDA will approve the NDA submitted for any of
our product candidates, whether or not priority review status is granted.
Post-Approval Requirements
If FDA approval of one or more of our products is obtained, we will be
required to comply with a number of post-approval requirements. For example,
holders of an approved NDA are required to report certain adverse reactions to
the FDA, and to comply with certain requirements concerning advertising and
promotional labeling for their products. Also, quality control and manufacturing
procedures must continue to conform to cGMP after approval, and the FDA
periodically inspects manufacturing facilities to assess compliance with cGMP.
Accordingly, manufacturers must continue to expend time, money, and effort in
the area of production and quality control to maintain cGMP compliance. In
addition, discovery of problems with a product after approval may result in
restrictions on a product, manufacturer, or holder of an approved NDA, including
withdrawal of the product from the market. Also, new government requirements may
be established that could delay or prevent regulatory approval of our products
under development.
FDA "Orphan Drug" Designation
The FDA may grant orphan drug designation to drugs intended to treat a
"rare disease or condition," which generally is a disease or condition that
affects fewer than 200,000 individuals in the United States. Orphan drug
designation must be requested before submitting an NDA. After the FDA grants
orphan drug designation, the identity of the therapeutic agent and its potential
orphan use are publicly disclosed by the FDA. Orphan drug designation does not
convey an advantage in, or shorten the duration of, the regulatory review and
approval process. If a product which has an orphan drug designation subsequently
receives the first FDA approval for the indication for which it has such
designation, the product is entitled to orphan exclusivity, meaning that the FDA
may not approve any other applications to market the same drug for the same
indication, except in certain very limited circumstances, for a period of seven
years. As well, orphan drugs usually receive ten years of marketing exclusivity
in the E.U.
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Non-United States Regulation
Before our products can be marketed outside of the United States, they are
subject to regulatory approval similar to that required in the United States,
although the requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country. No
action can be taken to market any product in a country until an appropriate
application has been approved by the regulatory authorities in that country. The
current approval process varies from country to country, and the time spent in
gaining approval varies from that required for FDA approval. In certain
countries, the sales price of a product must also be approved. The pricing
review period often begins after market approval is granted. No assurance can be
given that even if a product is approved by a regulatory authority, satisfactory
prices will be approved for such product.
Environmental Regulation
Pharmaceutical research and development involves the controlled use of
hazardous materials including but not limited to certain hazardous chemicals and
radioactive materials. In connection with research, development and
manufacturing activities, biotechnology and biopharmaceutical companies are
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials, biological specimens and
wastes. Since we do not anticipate building in-house research, development or
manufacturing facilities, but plan to have these activities conducted by
contractors and other third parties, we do not anticipate that we will be
directly affected by environmental regulations. However, our contractors and
others conducting research, development or manufacturing activities for us may
be required to incur significant costs to comply with environmental and health
and safety regulations in the future, and this could in turn affect our costs of
doing business and might ultimately interfere with timely completion of research
or manufacturing programs if those third parties are unable to comply with
environmental regulatory requirements.
Employees
We currently have three employees: David Platt, our President and Chief
Executive Officer; Anatole A. Klyosov, our Senior Vice President and Chief
Scientific Officer; and Maureen Foley, our Manager of Operations. Two of those
employees, namely Dr. Platt and Ms. Foley, are full-time employees.
Scientific and Clinical Advisory Boards
We have started, and will continue to recruit members for, a Scientific
Advisory Board that will include recognized scientists with expertise in the
fields of carbohydrate chemistry and biochemistry, immunology, cell and
molecular biology, and synthetic and medical chemistry. The Scientific Advisory
Board will meet with our management on a regular basis and in smaller groups or
individually from time to time on an informal basis. The members will assist us
in identifying scientific and product development opportunities, reviewing with
management the progress of our specific projects and recruiting and evaluating
our scientific staff. We may also have a Clinical Advisory Board that will
assist us from time to time on clinical matters.
The initial members of our Scientific Advisory Board are: Dr. David Platt,
our President and Chief Executive Officer and a director; Dr. Anatole A.
Klyosov, our Senior Vice President and Chief Scientific Officer; Dr. Dale H.
Conaway, a director; Burton Firtel, a director; and Dr. Henry Esber. See "Item
5. Directors and Executive Officers, Promoters and Control Persons" for
additional information about the business and educational backgrounds of these
persons, other than Dr. Esber whose background is as follows:
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Dr. Esber is Executive Director of Business Development for Primedica
Corporation, a contract research organization. Dr. Esber has served in this
capacity for more than five years. Dr. Esber is a co-founder and a director of
BioQuant Corporation (formerly BioSignature Diagnostics, Inc.), a developer of
immunochemistry kits for diagnosis and assessment of immunological diseases. He
is also a co-founder of Advanced Drug Delivery, Inc., a biotechnology company
that focuses on development of drug delivery systems using co-polymers or other
modifications for use in the area of cancer and other diseases. Dr. Esber serves
on the Scientific Advisory Boards of several U.S. and non-U.S. biotechnology
companies, including Celltek Biotechnologies, Inc., BioQuant Corporation and
Delmont Laboratories. Dr. Esber received a B.S. degree in Biology from the
College of William and Mary in 1961, an M.S. degree in Public Health and
Parasitology from the University of North Carolina in 1963, and a Ph.D. degree
in Immunology/Microbiology from West Virginia University Medical Center in 1967.
Risk Factors
We are at an early stage of development without operating history. Our future
revenues and profits are uncertain.
We are a development-stage venture without operating history. We were
incorporated in January 2001. Our predecessor, Pro-Pharmaceuticals
(Massachusetts) was incorporated in July 2000. We have not generated any
revenues to date. Though we have prepared and tested several carbohydrate-based
formulations in preclinical studies, we have not prepared formulations of any
therapeutic product for testing, and we have not commenced any clinical trials.
We have no therapeutic products available for sale, and none are expected to be
commercially available for several years, if at all. Our research activities may
not lead to the development of any commercially viable products. We may never
generate revenue or become profitable, even if we are able to commercialize any
products. If we are unable to generate revenues or profits, you might not be
able to realize returns on your investment in our company. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a
quarterly or annual basis.
We have incurred net losses to date, and expect to be dependent on outside
sources of capital for the foreseeable future. If we fail to raise substantial
additional capital, we will have to curtail or cease operations.
Our predecessor, Pro-Pharmaceuticals (Massachusetts) had incurred net
operating losses since its incorporation in July 2000, and as of December 31,
2000, had an accumulated deficit of approximately $188,000 and, as of March 31,
2001, $549,000. We will need to conduct significant research, development,
testing and regulatory compliance activities that, together with projected
general and administrative expenses, we expect will result in substantial
increasing operating losses for at least the next several years. Accordingly, we
will not be generating our own capital and will remain dependent on outside
sources of financing during that time.
As of March 31, 2001, we had approximately $841,000 in cash and cash
equivalents. We have budgeted expenditures in 2001 of $5,000,000 and have begun
a private placement exempt from registration under the Securities Act of 1933 in
order to raise $5,145,000 to cover those planned expenditures. Please see "Item
2 -- Plan of Operation -- Liquidity and Capital Resources" for further
discussion of our present financing plans. We may not be able to raise the
entire amount at this time. In any case, we will have to raise additional funds
to continue the development of our technologies and complete the
commercialization of products, if any, resulting from our technologies. We will
require substantial funds to: (1) continue our research and development
programs, (2) acquire technologies by license or purchase, and (3) conduct
preclinical studies and clinical trials. We may need to raise additional capital
to fund our operations repeatedly. We may raise such capital through public or
private equity financings, partnerships,
15
debt financings, bank borrowings, or other sources. Our capital requirements
will depend upon numerous factors, including the following:
o the establishment of collaborations
o the development of competing technologies or products
o changing market conditions
o the cost of protecting our intellectual property rights
o the progress of our research and development programs, the progress of
our collaborations and receipt of any option/license, milestone and
royalty payments resulting from those collaborations
o technology acquisition opportunities
Additional funding may not be available on favorable terms or at all. If
adequate funds are not otherwise available, we may curtail operations
significantly. To obtain additional funding, we may need to enter into
arrangements that require us to relinquish rights to certain technologies,
products and/or potential markets. To the extent that additional capital is
raised through the sale of equity, or securities convertible into equity, you
may experience dilution of your proportionate ownership of the company.
Our product candidates will be based on novel technologies that have not yet
been proven.
Our product candidates will be based upon novel technologies that we plan
to use to apply to drugs currently used in the treatment of cancer and other
diseases. These technologies have not been proven. Carbohydrates are difficult
to synthesize, and we may not be able to synthesize carbohydrates that would be
usable as delivery vehicles for the anti-cancer drugs we plan to work with.
Furthermore, as is often the case, preclinical results in animal studies may not
predict outcomes in human clinical trials. Our product candidates may not be
proven safe or effective. If this technology does not work, our product
candidates may not develop into commercial products.
If we do not successfully develop products, we may be unable to generate any
revenue.
Our product candidates are still in research and preclinical development,
which means that they have not yet been tested on humans. We will need to commit
significant time and resources to develop these and additional product
candidates. We are dependent on the successful completion of clinical trials and
obtaining regulatory approval in order to generate revenues. The failure to
generate such revenues may preclude us from continuing our research and
development of these and other product candidates.
We have no product candidates in clinical trials, and we do not know when,
if ever, we will have a candidate and commence clinical trials. Clinical trials
are expensive, time-consuming and may not be successful. They involve the
testing of potential therapeutic agents, or effective treatments, in humans in
three phases (phases I, II, and III) to determine the safety and efficacy of the
product candidates necessary for an approved drug. Many products in human
clinical trials fail to demonstrate the desired safety and efficacy
characteristics. Even if our products progress successfully through initial
human testing, they may fail in later stages of development. A number of
companies in the pharmaceutical industry have suffered significant setbacks in
advanced clinical trials, even after reporting promising results in earlier
trials. In addition, data obtained from clinical trials are susceptible to
varying interpretations. Government regulators and our collaborators may
16
not agree with our interpretation of our future clinical trial results. The
clinical trials of any of our future product candidates may not be successful.
If we fail to obtain regulatory approvals, we will be unable to commercialize
our products.
We do not have any product approved for sale in the U.S. or any foreign
market. We must obtain approval from the FDA in order to sell our products in
the U.S. and from foreign regulatory authorities in order to sell our drug
products in other countries. We have not yet submitted any application for
approval to the FDA. Once an application is submitted, the FDA could reject the
application or require us to conduct additional clinical or other studies as
part of the regulatory review process. Delays in obtaining or failure to obtain
FDA approvals would prevent or delay the commercialization of our products,
which would prevent, defer or decrease our receipt of revenues.
The regulatory review and approval process is lengthy, expensive and
uncertain. Extensive preclinical and clinical data and supporting information
must be submitted to the FDA for each indication for each product candidate in
order to secure FDA approval. We have no experience in obtaining such approvals,
and cannot be certain when we will receive these regulatory approvals, if ever.
In addition to initial regulatory approval, our product candidates will be
subject to extensive and rigorous ongoing domestic and foreign government
regulation, as we discuss in more detail in "Business of Pro-Pharmaceuticals --
Government Regulation," above. Any approvals, once obtained, may be withdrawn if
compliance with regulatory requirements is not maintained or safety problems are
identified. Failure to comply with these requirements may subject us to
stringent penalties.
Even if our product candidates are successful in clinical trials, they may not
be successfully commercialized.
All of our compounds currently are in research or development, and none has
been submitted for marketing approval. There can be no assurance that any of our
compounds will enter human clinical trials on a timely basis, if at all, or that
we will develop any product candidates suitable for commercialization. Prior to
commercialization, each product candidate will require significant additional
research, development and preclinical testing and extensive clinical
investigation before submission of any regulatory application for marketing
approval. Potential products that appear to be promising at early stages of
development may not reach the market for a number of reasons. Potential products
may:
o be found ineffective or cause harmful side effects during preclinical
testing or clinical trials
o fail to receive necessary regulatory approvals
o be difficult to manufacture on a large scale
o be uneconomical to produce
o fail to achieve market acceptance
o be precluded from commercialization by proprietary rights of third
parties
We cannot assure you that we will undertake any product development
efforts, either alone or with collaborative partners. If we do undertake product
development efforts, we cannot assure
17
you that any of those efforts will be successfully completed, that required
regulatory approvals will be obtained or that any products, if introduced, will
be successfully marketed or achieve customer acceptance.
We have no experience in clinical trials and will be dependent on others to
conduct our clinical trials.
We have no experience in conducting clinical trials. We intend to rely on
academic institutions or clinical research organizations to conduct, supervise
or monitor some or all aspects of clinical trials involving our products. In
addition, certain clinical trials for our products may be conducted by
government-sponsored agencies and consequently will be dependent on governmental
participation and funding. We will have less control over the timing and other
aspects of these clinical trials than if we conducted them entirely on our own.
We cannot assure you that these trials will commence or be completed as we
expect or that they will be conducted successfully. Failure to commence or
complete, or delays in, any of our planned clinical trials could delay or
prevent the commercialization of our products and harm our business. The actual
timing of clinical trials can vary dramatically due to factors such as delays,
scheduling conflicts with participating clinicians and clinical institutions and
the rate of patient accruals. We cannot assure you that clinical trials
involving our product candidates will commence or be completed as forecasted.
If we fail adequately to protect our intellectual property, our competitive
position could be harmed.
Development and protection of our intellectual property are critical to our
business. If we do not adequately protect our intellectual property, competitors
may be able to practice our technologies. Our success depends in part on our
ability to:
o obtain patent protection for our products or processes both in the
United States and other countries
o protect trade secrets
o prevent others from infringing on our proprietary rights
While we believe that linking our carbohydrate polymers to existing drugs
will yield patentable subject matter, to date we have only made two provisional
patent applications, as well as a patent application as discussed above under "
- -- Patents and Proprietary Rights." We do not believe that our carbohydrate-drug
conjugates will infringe any third-party patents covering the underlying drug.
However, there can be no assurance that we will receive a patent for our
carbohydrate-drug conjugates. In addition, we must meet further filing deadlines
in the case of our provisional patent applications if we are to retain the
filing, or priority, dates for those applications, as discussed above under " --
Patents and Proprietary Rights."
Since patent applications in the United States are maintained in secrecy
until patents are issued, and since publication of discoveries in the scientific
or patent literature often lag behind actual discoveries, we cannot be certain
that we are the first to make the inventions to be covered by the patent
applications we intend to file. The patent position of biopharmaceutical firms
generally is highly uncertain and involves complex legal and factual questions.
The U.S. Patent and Trademark Office has not established a consistent policy
regarding the breadth of claims that it will allow in biotechnology patents. If
it allows broad claims, the number and cost of patent interference proceedings
in the U.S. and the risk of infringement litigation may increase. If it allows
narrow claims, the risk of infringement may decrease, but the value of our
rights under our patents, licenses and patent applications may also decrease.
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We cannot assure you that patent applications in which we have rights will
ever issue as patents or that the claims of any issued patents will afford
meaningful protection for our technologies or products. In addition, patents
issued to us or our licensors may be challenged and subsequently narrowed,
invalidated or circumvented. Litigation, interference proceedings or other
governmental proceedings that we may become involved in with respect to our
proprietary technologies or the proprietary technology of others could result in
substantial cost to us. Patent litigation is widespread in the biotechnology
industry, and any patent litigation could harm our business. Costly litigation
might be necessary to protect our patent position or to determine the scope and
validity of third-party proprietary rights, and we may not have the required
resources to pursue such litigation or to protect our patent rights. An adverse
outcome in litigation with respect to the validity of any of our patents could
subject us to significant liabilities to third parties, require disputed rights
to be licensed from third parties or require us to cease using a product or
technology.
Although we require our scientific and technical employees and consultants
to enter into broad assignment of inventions agreements, we have not required
Dr. Platt to do so. He has, however, assigned all his patents and patent
applications of inventions related to our company's business. We also rely upon
trade secrets, proprietary know-how and continuing technological innovation to
remain competitive. Third parties may independently develop such know-how or
otherwise obtain access to our technology. While our employees, consultants and
corporate partners with access to proprietary information generally will be
required to enter into confidentiality agreements, these agreements may not be
honored.
If any of our license agreements for intellectual property underlying any of our
products are terminated, we may lose our rights to develop or market that
product.
Patents issued to third parties may cover our products as ultimately
developed. We may need to acquire licenses to these patents or challenge the
validity of these patents. We may not be able to license any patent rights on
acceptable terms or successfully challenge such patents. The need to do so will
depend on the scope and validity of these patents and ultimately on the final
design or formulation of the products and services that we develop. We may not
be able to meet our obligations under those licenses that we do enter into. If
we enter into a license agreement for intellectual property underlying any of
our products, and that license were to be terminated, we may lose our right to
market and sell any products based on the licensed technology.
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Our products could infringe on the intellectual property rights of others, which
may cause us to engage in costly litigation and, if we are not successful, could
cause us to pay substantial damages and prohibit us from selling our products.
Although we attempt to monitor the patent filings of our competitors in an
effort to guide the design and development of our products to avoid
infringement, third parties may challenge the patents that have been issued or
licensed to us. We may have to pay substantial damages, possibly including
treble damages, for past infringement if it is ultimately determined that our
products infringe a third party's patents. Further, we may be prohibited from
selling our products before we obtain a license, which, if available at all, may
require us to pay substantial royalties. Even if infringement claims against us
are without merit, defending a lawsuit takes significant time, may be expensive
and may divert management attention from other business concerns.
Our lack of operating experience may cause us difficulty in managing our growth.
We have no experience in manufacturing or procuring products in commercial
quantities and conducting other later-stage phases of the regulatory approval
process, or in selling pharmaceutical products, and we have only limited
experience in negotiating, establishing and maintaining strategic relationships.
We have no experience with respect to the launch of a commercial product. Our
ability to manage our growth, if any, will require us to improve and expand our
management and our operational and financial systems and controls. If our
management is unable to manage growth effectively, our business and financial
condition would be materially harmed. In addition, if rapid growth occurs, it
may strain our operational, managerial and financial resources.
If we fail to keep pace with rapid technological change in the biotechnology and
pharmaceutical industries, our products could become obsolete.
Biotechnology and related pharmaceutical technology have undergone and are
subject to rapid and significant change. We expect that the technologies
associated with biotechnology research and development will continue to develop
rapidly. Our future will depend in large part on our ability to maintain a
competitive position with respect to these technologies. Any compounds, products
or processes that we develop may become obsolete before we recover any expenses
incurred in connection with developing these products.
We are faced with direct and intense competition from our rivals in the
biotechnology and pharmaceutical industries.
The biotechnology and pharmaceutical industries are intensely competitive.
We have numerous competitors in the United States and elsewhere. Our competitors
include major, multinational pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other research institutions. Many of
these competitors have greater financial and other resources, larger research
and development staffs and more effective marketing and manufacturing
organizations, than we do. In addition, academic and government institutions
have become increasingly aware of the commercial value of their research
findings. These institutions are now more likely to enter into exclusive
licensing agreements with commercial enterprises, including our competitors, to
market commercial products. Smaller companies may also prove to be significant
competitors, particularly through collaborative arrangements with large
pharmaceutical and established biotechnology companies. Many of these
competitors have significant products that have been approved or are in
development and operate large, well-funded research and development programs.
20
Our competitors may succeed in developing or licensing technologies and
products that are more effective or less costly than any we are developing. Our
competitors may succeed in obtaining FDA or other regulatory approvals for
product candidates before we do. In particular, we face direct competition from
many companies focusing on delivery technologies. Products resulting from our
research and development efforts, if approved for sale, may not compete
successfully with our competitors' existing products or products under
development.
We intend to rely on third parties to manufacture and market our products. Our
dependence on third-party manufacturers and marketers means that we may not have
sufficient control over the manufacture or marketing of our products.
We do not have, and do not intend to develop, internal facilities for the
manufacture of any of our products for clinical or commercial production. We
will need to develop relationships with third-party manufacturing resources,
enter into collaborative arrangements with licensees or other parties which have
established manufacturing capabilities or elect to have other third parties
manufacture our products on a contract basis. We expect to be dependent on such
collaborators or third parties to supply us in a timely way with products
manufactured in compliance with standards imposed by the FDA and foreign
regulators. The manufacturing facilities of contract manufacturers may not
comply with applicable manufacturing regulations of the FDA nor meet our
requirements for quality, quantity or timeliness.
In addition, we have no direct experience in marketing, sales or
distribution, and we do not intend to develop a sales and marketing
infrastructure to commercialize pharmaceutical products. If we develop products
eligible for commercial sale, we will need to rely on third parties such as
licensees, collaborators, joint venture partners or independent distributors to
market and sell those products. We may not be able to obtain access to a
marketing and sales force with sufficient technical expertise and distribution
capability. Also, we will not be able to control the resources and effort that a
third party will devote to marketing our products. If we are unable to develop
and maintain relationships for the necessary marketing and sales capabilities,
we may fail to gain market acceptance for our products, and our revenues could
be impaired.
If we lose our key personnel or are unable to attract and retain additional
personnel, we may be unable to pursue collaborations or develop our own
products.
We are highly dependent on Dr. David Platt, President and Chief Executive
Officer, and Dr. Anatole Klyosov, Senior Vice President and Chief Scientific
Officer. The loss of either of these persons, or failure to attract or retain
other key personnel, could prevent us from pursuing collaborations or developing
our products and core technologies. We are considering but at this point have
not entered into employment agreements with either Dr. Platt or Dr. Klyosov, nor
has either entered into an assignment of inventions or confidentiality agreement
with us.
Recruiting and retaining qualified scientific personnel to perform research
and development work are critical to our success. There is intense competition
for qualified scientists and managerial personnel from numerous pharmaceutical
and biotechnology companies, as well as from academic and government
organizations, research institutions and other entities. In addition, we may
face particular difficulties because there is a limited number of scientists
specializing in on carbohydrate chemistry, a principal focus of our company. We
expect to rely on consultants and advisors, including our scientific and
clinical advisors, to assist us in formulating our research and development
strategy. Any of those consultants or advisors could be employed by other
employers, or be self-employed, and might have commitments to, or consulting or
advisory contracts with, other entities that may limit their availability to us.
Such other employment, consulting or advisory relationships could place our
trade secrets at risk, even if we require non-disclosure agreements.
21
Our President and Chief Executive Officer, Dr. David Platt, may be the subject
of litigation involving a noncompetition agreement with a former employer.
Dr. David Platt, our President and Chief Executive Officer, received a
demand letter dated February 15, 2001, from SafeScience, Inc., his former
employer, claiming that his engagement with our business is a violation of a
noncompetition covenant he has with SafeScience and demanding that he cease such
conduct. Our counsel in a letter dated February 19, 2001 responded on behalf of
Dr. Platt stating that we do not believe our business is competitive because,
among other things, we are developing methods to reduce toxicity of currently
existing chemotherapy drugs by combining the drugs with different carbohydrate
molecules (particularly, mannans or other sugars), whereas SafeScience is
engaged in new drug development based on a different compound, pectin, which we
believe they are developing as a stand-alone drug rather than in combination
with other known drugs, such as in our case. Mannans and pectins differ
significantly. Mannans consist of the sugars mannose and galactose, and have an
ordered, crystalline structure with a polymannan backbone. In contrast, pectin
is amorphous, and it is made of several sugar components and polygalacturonic
acid. Counsel for SafeScience indicated a willingness to resolve these matters
which resulted in attempts to set up meeting with a scientist from each company
to discuss the competition issues. Dr. Platt believes that SafeScience
subsequently imposed obstacles to the desired meeting such that he on April 26,
2001 terminated negotiations. We cannot assure you that Safe Science will not
proceed to file a lawsuit against us or, if it does, that we will prevail in
such action. In addition, litigation could impose a substantial, if not
unacceptable, financial burden on us, and be disruptive of our operations.
Because there is a risk of product liability associated with our products, we
face potential difficulties in obtaining insurance.
We do not have product liability or other professional liability insurance.
In the future, we may, in the ordinary course of business, be subject to
substantial claims by, and liability to, persons alleging injury as a result of
taking products we have under development. If we are successful in having
products approved by the FDA, the sale of such products would expose us to
additional potential product liability and other claims resulting from their
use. This liability may result from claims made directly by consumers or by
pharmaceutical companies or others selling such products. We do not currently
have any product liability or professional liability insurance, and it is
possible that we will not be able to obtain or maintain such insurance on
acceptable terms or that any insurance obtained will provide adequate coverage
against potential liabilities. Our inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product
liability claims could prevent or limit the commercialization of any products we
develop. A successful product liability claim in excess of our insurance
coverage could exceed our net worth. While we desire to reduce our risk by
obtaining indemnity undertakings with respect to such claims from licensees and
distributors of our products, we may not be able to obtain such undertakings
and, even if we do, they may not be sufficient to limit our exposure to claims.
Uncertainty regarding third-party reimbursement and health care cost containment
initiatives may limit our returns.
Our ability to commercialize our products successfully will be affected by
the ongoing efforts of governmental and third-party payors to contain or reduce
the cost of health care. Governmental and other third-party payors increasingly
are attempting to contain health care costs by:
o challenging the prices charged for health care products and services
o limiting both coverage and the amount of reimbursement for new
therapeutic products
22
o denying or limiting coverage for products that are approved by the FDA
but are considered experimental or investigational by third-party
payors
o refusing in some cases to provide coverage when an approved product is
used for disease indications in a way that has not received FDA
marketing approval
In addition, the trend toward managed health care in the United States, the
growth of organizations such as health maintenance organizations, and
legislative proposals to reform healthcare and government insurance programs
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products.
Even if we succeed in bringing any products to the market, they may not be
considered cost-effective and third-party reimbursement might not be available
or sufficient. If adequate third-party coverage is not available, we may not be
able to maintain price levels sufficient to realize an appropriate return on our
investment in research and product development. In addition, legislation and
regulations affecting the pricing of pharmaceuticals may change in ways adverse
to us before or after any of our proposed products are approved for marketing.
While we cannot predict whether any such legislative or regulatory proposals
will be adopted, the adoption of such proposals could make it difficult or
impossible to sell our products.
To the extent that our third-party research contractors, developers or
manufacturers are required to comply with potentially costly and time-consuming
environmental regulations, our costs could increase and our research,
development and manufacturing programs could be adversely affected.
Pharmaceutical research and development involves the controlled use of
hazardous materials including but not limited to certain hazardous chemicals and
radioactive materials. In connection with research, development and
manufacturing activities, biotechnology and biopharmaceutical companies are
subject to federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, effluent
discharge, handling and disposal of certain materials, biological specimens and
wastes. Since we do not anticipate building in-house research, development or
manufacturing facilities, but plan to have these activities conducted by
contractors and other third parties, we do not anticipate that we will be
directly affected by environmental regulations. However, our contractors and
others conducting research, development or manufacturing activities for us may
be required to incur significant costs to comply with environmental and health
and safety regulations in the future, and this could in turn affect our costs of
doing business and might ultimately interfere with timely completion of research
or manufacturing programs if those third parties are unable to comply with
environmental regulatory requirements.
Our ability to conduct animal testing could be limited in the future.
Our research and development activities have involved, and will continue to
involve, animal testing. Such activities have been the subject of controversy
and adverse publicity. Animal rights groups and other organizations and
individuals have attempted to stop animal testing activities by pressing for
legislation and regulation in these areas. To the extent the activities of these
groups are successful, our business could be materially harmed.
Stock prices for biopharmaceutical and biotechnology companies are extremely
volatile, which may affect our ability to raise capital in the future.
The market price for securities of biopharmaceutical and biotechnology
companies historically has been highly volatile, and the market from time to
time has experienced significant price and volume fluctuations that are
unrelated to the operating performance of such companies.
23
Fluctuations in the trading price or liquidity of our common stock may adversely
affect our ability to raise capital through future equity financings.
Factors that may have a significant impact on the market price and
marketability of our common stock include:
o announcements of technological innovations or new commercial
therapeutic products by us, our collaborative partners or our present
or potential competitors
o announcements by us or others of results of preclinical testing and
clinical trials
o developments or disputes concerning patent or other proprietary rights
o adverse legislation, including changes in governmental regulation and
the status of our regulatory approvals or applications
o changes in health care policies and practices
o economic and other external factors, including general market
conditions
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
Our stock is not listed on any exchange, and there is little near-term
likelihood that we could meet listing standards on an exchange or for either
Nasdaq market. This limits the ability of our shareholders to sell their shares
and liquidate their investment.
We have not listed our capital stock on any exchange and do not foresee
that in the near-term we would be able to meet the listing standards for any
exchange or for the Nasdaq National Market or the Nasdaq Small Cap Market. We
are contemplating taking, but have not yet taken any, steps to permit our shares
to be traded over the counter including on the over-the-counter bulletin board
(OTCBB) sponsored by the National Association of Securities Dealers. There may
be, but we cannot assure, a market for our shares on the OTCBB. Accordingly, our
stockholders may not find a market for their shares and be unable to sell their
shares when they want or at a favorable price.
Four of our principal stockholders own a sufficient number of shares to control
the company.
Four of our principal stockholders, David Platt, James Czirr, Offer Binder
and Anatole Klyosov, own or control approximately 91% of our outstanding shares
of our common stock, and Messrs. Platt and Czirr together own approximately 73%.
Even if we sell all of the 1,470,000 shares that we are currently offering in a
private placement, the four stockholders named above would still control
approximately 82% of our common stock, with Messrs. Platt and Czirr together
controlling about 66%. Some or all of these stockholders, acting in concert,
will be able to continue to elect the Board of Directors and take other
corporate actions requiring stockholder approval, such as recapitalization or
other fundamental corporate action, as well as dictate the direction and
policies of our company. Such concentration of ownership also could have the
effect of delaying, deterring or preventing a change in control of the company
that might otherwise be beneficial to stockholders.
24
Item 2. Plan of Operation
Overview
We are currently in the development stage and have not yet generated any
operating revenues. Since the inception of our predecessor, Pro-Pharmaceuticals
(Massachusetts) in July 2000, we have been engaged in research and development
activities in connection with developing carbohydrate-based enhancement systems
for proven anti-cancer drugs. During 2001, we have so far conducted two sets of
preclinical animal experiments with an independent laboratory to study the
reduction of toxicity of two widely-used anti-cancer drugs, 5-Fluorouracil and
Adriamycin, in combination a number of our mannan compounds, selected for the
studies, and have also conducted one study of the efficacy of 5-FU when used
with one of the mannans. Preliminary results of the studies indicate that one of
the mannan compounds may significantly decrease the toxicity of 5-FU and
increase its therapeutic efficacy, and another mannan may significantly decrease
the toxicity of Adriamycin. We believe that the results of those studies show
promise for carbohydrate-based anti-cancer drug delivery systems. We are
currently developing formulations of carbohydrates linked to anti-cancer drugs.
We have no products and have not yet conducted any clinical trials.
Business Combination; Ownership and Management Structure
Under our former name, DTR-Med Pharma Corp., we were incorporated under
Nevada law in January 2001, for the purpose of effecting an acquisition of all
the issued and outstanding stock of our predecessor, Pro-Pharmaceuticals
(Massachusetts). Prior to the acquisition, we changed our name to
Pro-Pharmaceuticals, Inc. We then merged with the Massachusetts corporation. We
are the surviving corporation in the merger.
From our incorporation until just before the acquisition, we had been a
wholly owned subsidiary of Developed Technology Resource, Inc., a Minnesota
corporation whose common stock is publicly traded on the Over-the-Counter
Bulletin Board. In exchange for 1,221,890 shares of our common stock, Developed
Technology transferred to us certain contractual rights as described under "Item
1. Description of Business -- Business of Pro-Pharmaceuticals -- Cancer
Detection Technology." As part of that process, Developed Technology distributed
its holdings of our common stock to its shareholders of record as of May 7,
2001.
On May 15, 2001, we acquired all of the outstanding common stock of
Pro-Pharmaceuticals (Massachusetts). We acquired these shares in exchange for
12,354,670 shares of our common stock. As a result, Pro-Pharmaceuticals
(Massachusetts) became our wholly owned subsidiary, and the shareholders of
Pro-Pharmaceuticals (Massachusetts) owned approximately 91% of the outstanding
shares of our common stock, with the Developed Technology shareholders owning
the remaining 9%. After the acquisition, we merged with our wholly owned
subsidiary, Pro-Pharmaceuticals (Massachusetts) and are the surviving
corporation in the merger. The merger was treated as a capital transaction and
was accounted for as a reverse merger in which Pro-Pharmaceuticals
(Massachusetts) was the accounting acquirer.
Concurrent with the change of control, all of our original officers and
directors resigned and were replaced by then-current officers and directors of
Pro-Pharmaceuticals (Massachusetts).
We are continuing the business of Pro-Pharmaceuticals (Massachusetts),
which has been attempting to develop a technology that will reduce the toxicity
and improve the efficacy of current drug therapies, including cancer
chemotherapies, by combining the drugs with a number of specific carbohydrate
compounds.
Plan of Operation
During 2001, our plan of operation is as follows:
o Make drug delivery formulations to upgrade the anti-cancer drugs
5-Fluorouracil, Adriamycin, Taxol, Cytoxan and Cisplatin linked to
carbohydrates, in quantities necessary for preclinical evaluation of
the upgraded formulations
o Based on results of preclinical evaluations, and depending on the
availability of funds, select one or more of the drug enhancement
systems to conduct clinical trials
o File an Investigational New Drug (IND) application with the FDA to
conduct clinical trials, aiming for a fast-track designation to
shorten the FDA approval process
o Begin clinical trials
In subsequent years, we would plan to complete clinical trials, file at
least one New Drug Application (NDA) with the FDA and obtain FDA approval to
market the product. We would then arrange for manufacture and marketing of the
product(s).
We do not plan to purchase or sell any plant or significant equipment
during 2001. We expect to maintain our employee headcount at three to four.
25
Liquidity and Capital Resources
Our capital raised to date was primarily through a private placement of
convertible notes, issued by Pro-Pharmaceuticals (Massachusetts). These notes
are now our corporate obligations, as a result of the merger. See "Part II. Item
4. Recent Sales of Unregistered Securities" for a discussion of the convertible
note issuance. As of March 31, 2001, the proceeds from convertible note
issuances totaled approximately $1,100,000. As of March 31, 2001, we had
approximately $841,000 in cash and cash equivalents. We have budgeted
expenditures in 2001 of $5,000,000, comprised of anticipated expenditures for
research and development ($3,200,000), general and administrative ($1,300,000),
equipment and leaseholds ($200,000) and contingency allowance ($300,000). We
have begun a private placement exempt from registration pursuant to Rule 506 of
Regulation D under the Securities Act of 1933 in order to raise $5,145,000 to
cover our expenditures. Purchasers under the private placement must qualify as
"accredited investors" as such term is defined in Regulation D. The securities
consist of 1,470,000 units, offered at $3.50 each, of one share of our common
stock and one 4-year warrant exercisable at $6.50 to purchase one share of our
common stock. The warrant is subject, following written notice, to acceleration
if either (i) we file a New Drug Application with the FDA, or (ii) our stock is
listed on an exchange and its closing price exceeds $11.00 on any 10 trading
days within a period of 20 consecutive trading days or, if our stock is quoted
on the NASDAQ National Market System or Small Cap Market, or over-the-counter,
and the average of the closing bid and asked prices thereon exceeds $11.00 on
any 10 trading days within a period of 20 consecutive trading days.
Additional funds may be raised through additional equity financings, as
well as borrowings and other resources. We are currently holding discussions
with potential investors. With the capital we have raised to date, and the
additional $5,145,000 we are attempting to raise, we believe that we will be
able to proceed with our current plan of operations and meet our obligations for
approximately the next twelve months. If we do not raise the additional funds,
we will have to cut our research and development expenditures to a minimum level
for the remainder of the year, since available cash at March 31 would be
insufficient to cover more than equipment and leasehold costs and some
administrative costs. In that case, overall administrative expenses for the year
would have to be cut by approximately $800,000. If we have only minimal funds to
spend on research and development, that would substantially slow progress that
we might expect to make during 2001 and early 2002 in development of our
business including commencement of clinical trials.
We expect to generate losses from operations for several years due to
substantial additional research and development costs, including costs related
to clinical trials. Our future capital requirements will depend on many factors,
in particular our progress in and scope of our research and development
activities, and the extent to which we are able to enter into collaborative
efforts for research and development and, later, manufacturing and marketing
products. We may need additional capital to the extent we acquire or invest in
businesses, products and technologies. If we should require additional financing
due to unanticipated developments, additional financing may not be available
when needed or, if available, we may not be able to obtain this financing on
terms favorable to us or to our stockholders. Insufficient funds may require us
to delay, scale back or eliminate some or all of our research and development
programs, or may adversely affect our ability to operate as a going concern. If
additional funds are raised by issuing equity securities, substantial dilution
to existing stockholders may result.
Item 3. Description of Property
We entered into a 5-year sublease commencing June 1, 2001 for approximately
2,830 square feet for our executive offices located at 189 Wells Avenue, Suite
200, Newton, Massachusetts 02459. The rent for the first year is $87,730 ($7,311
per month) and is subject to increase in subsequent years. The sublease is a
so-called "triple net" lease, meaning that we must pay our proportionate share
of items such as property taxes, insurance and operating costs. Under the
sublease, we paid a security deposit of $48,883.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of our common stock, as of May 15, 2001, by (1) each shareholder known
to us to be the beneficial owner
26
of more than 5% of our outstanding shares of common stock, (2) each of our
executive officers and directors and (3) our executive officers and directors,
as a group, as of May 15, 2001.
Shares of Common Stock Percentage
Name and Address Beneficially Owned (1) of Class
---------------- ------------------ ---------
David Platt, Ph.D 4,941,868 36.4%
12 Appleton Circle
Newton, MA 02459
James Czirr 4,941,868 36.4%
425 Janish Drive
Sandpoint, ID 83864
Anatole Klyosov, Ph.D 1,235,467 9.1%
36 Walsh Road
Newton, MA 02459
Offer Binder 1,235,467 9.1%
c/o Pasquale
via Settembrini 14/A
San Mariano
06073 Corciano (PG)
Italy
Peter L. Hauser 40,000 *
Equity Security Investments, Inc.
701 Xenia Avenue South, Suite 100
Golden Valley, MN 55416
Burton C. Firtel 0 --
555 Sherman Avenue
Hamden, CT 06518
Dale H. Conaway, D.V.M 0 --
1731 Circle Pines Fort
Okemos, MI 48864
All executive officers and directors as a 11,159,203 82.2%
group (7 persons)
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares owned by a
person and the percentage ownership of that person, shares of common stock
subject to options and warrants held by that person that are currently
exercisable or exercisable within 60 days of May 15, 2001, are deemed
outstanding. Such shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. As of May 15, 2001 we
had no options or warrants outstanding, and none of the above persons owned any
security of our company otherwise exercisable for, or convertible into, shares
of our common stock.
27
We are not aware of any arrangements that may result in "changes in
control" as that term is defined by the provisions of Item 403(c) of Regulation
S-B.
Item 5. Directors and Executive Officers, Promoters and Control Persons
The following table sets forth information about our executive officers and
directors:
Name Age as of 5/24/01 Position
---- ----------------- --------
David Platt, Ph.D. 47 President, Chief Executive Officer,
Treasurer, Secretary and Director
Anatole Klyosov, Ph.D. 54 Senior Vice President and Chief
Scientific Officer
James Czirr 47 Executive Vice President of
Business Development and Director
Peter Hauser 60 Director
Burton C. Firtel 61 Director
Dale H. Conaway, D.V.M. 46 Director
Dr. Platt has served as our President, Chief Executive Officer, Treasurer,
Secretary and a director since May 15, 2001. Previously, he had been President,
Chief Executive Officer, Treasurer, Clerk and a director of Pro-Pharmaceuticals
(Massachusetts), the Company's predecessor, since its founding in July 2000. He
was Chairman of the Board, Chief Executive Officer and Secretary of SafeScience
Inc. (NASDAQ SmallCap: SAFS) (formerly IGG International, Inc.), a biotechnology
company involved in research and development of products for treating cancer and
immune system diseases, from December 1992 through May 2000. Dr. Platt had been
Chairman of the Board, Chief Executive Officer and Secretary of Agricultural
Glycosystems, Inc., a wholly owned subsidiary of SafeScience, from its inception
in June 1995 through May 2000. Agricultural Glycosystems manufactures and
markets complex carbohydrate compounds for use in agriculture. He is currently a
director of Integrated Pharmaceuticals, Inc. (OTCBB: INTP), a company
specializing in molecular-level means of increasing speed of production of
enzymes for use in fermentation. Dr. Platt received a Ph.D. in Chemistry from
Hebrew University in Jerusalem, Israel, in 1988, and also earned an M.S. degree
in 1983 and a B.S. degree in 1978 from Hebrew University. He earned a Bachelor
of Engineering degree in 1980 from Technicon in Haifa, Israel.
Dr. Klyosov has served as our Senior Vice President, Chief Scientific
Officer since May 15, 2001. Previously, he had been Senior Vice President, Chief
Scientific Officer of Pro-Pharmaceuticals (Massachusetts), the Company's
predecessor, since its founding in July 2000. From 1996 to the present, Dr.
Klyosov has served as Manager, Research and Development, for Thermo Fibergen,
Inc. (AMEX: TFG), a biotechnology company that develops and manufactures
products including biotechnological materials and fiber-based composites. From
1990 to June 1998, Dr. Klyosov served as Professor of Biochemistry at Harvard
Medical School, Center for Biochemical and Biophysical Sciences and Medicine,
where he studied an enzyme involved in angiogenesis of cancer cells,
glucocorticoid receptors, and biochemistry of alcohol abuse. Dr.
28
Klyosov received a Ph.D. degree in Physical Chemistry from Moscow State
University in 1972, and a D.Sc. degree in Physical Chemistry and Biochemistry
from Moscow State University in 1977.
Mr. Czirr has served as Executive Vice President of Business Development
and a director since May 15, 2001. He had been a director of Pro-Pharmaceuticals
(Massachusetts), the Company's predecessor, since its founding in July 2000. He
has been an independent corporate and public relations consultant for over ten
years, working with various companies concerning business strategies, including
issues such as organization of production, finance and capital programs,
marketing strategies and incentive programs. He is a director of the following
companies which are subject to the reporting requirements of the Securities
Exchange Act of 1934: Metalline Mining Co. (OTCBB: MMGG), which is developing a
zinc mine in Mexico; and NACO Industries Inc., which manufactures polyvinyl
chloride fittings for use in agriculture, municipal and industrial applications.
Mr. Czirr received a B.B.A. degree from the University of Michigan in 1976, and
has completed post-graduate courses at the University of Toledo School of
Business Administration, and at the College for Financial Planning.
Mr. Hauser has served as a director since May 15, 2001. He has been a
director of Developed Technology Resource, Inc. (DEVT.OB), a company subject to
the reporting requirements of the Securities Exchange Act of 1934, since October
1993. Since 1977, he has been employed by Equity Securities Trading Co., Inc., a
Minneapolis-based brokerage firm, and is currently a vice president and
principal. Mr. Hauser received a B.A. from the University of Minnesota in 1967.
Mr. Firtel has served as a director since May 15, 2001. He is President of
Adco Medical Supplies Incorporated, a company he founded in 1970. Adco Medical
Supplies distributes disposable medical supplies to U.S. customers, mostly for
hospital use. Mr. Firtel also serves as President of Plastic Fabricators
Incorporated, a manufacturer of plastic burial supplies sold through
distributors to customers in the funeral industry, which was acquired by Adco
Medical Supplies in 1992. Mr. Firtel received a B.S. degree in Business
Administration from Boston University in 1961.
Dr. Conaway has served as a director since May 15, 2001. He is currently
the Deputy Regional Director and the Chief Veterinary Medical Officer for the
Office of Research Compliance and Assurance, a division of the U.S. Department
of Health and Human Services. From March 1998 to March 2001, he served as
Manager of the Equine Drug Testing and Animal Disease Surveillance Laboratories,
for the Michigan Department of Agriculture. From July 1994 to March 1998, he was
the Regulatory Affairs Manager for the Michigan Department of Public Health
Vaccine Production Division. Dr. Conaway received a D.V.M. degree from Tuskegee
Institute, Tuskegee, Alabama, in 1979, and a M.S. degree in Pathology from the
College of Veterinary Medicine, Michigan State University, in 1984.
None of the persons specified above share any familial relationship. Other
than the persons specified above, there are currently no significant employees
that we expect to make a significant contribution to our business. All of our
directors serve until the next annual meeting of stockholders.
Item 6. Executive Compensation
We were incorporated in January 2001 and have been inactive from that time
until April 23, 2001 when we acquired certain rights to potential royalties
relating to a cancer detection technology from our former parent, Developed
Technology Resources, Inc. Please see "Item 1. Description of Business --
Business of Pro-Pharmaceuticals -- Cancer Detection Technology". We acquired
Pro-Pharmaceuticals (Massachusetts) on May 15, 2001 by means of an exchange of
stock. Pro-Pharmaceuticals
29
(Massachusetts) was incorporated as of July 11, 2000. During the year ended
December 31, 2000, none of our executive officers or directors earned any
salary, bonus or other cash or non-cash compensation from Pro-Pharmaceuticals
(Massachusetts) for services provided in their official capacities. We have no
stock option plan or other equity incentive plan, and we have not made any
grants of stock options or other equity-based compensation to date.
We do not currently have an employment contract with Dr. David Platt or
with any other employees. None of our employees is currently receiving any
salary, bonus or other cash or non-cash compensation from us for services
provided in their official capacities. We anticipate entering into an agreement
to compensate Dr. Platt at a salary of $150,000 per year and Dr. Anatole Klyosov
at a salary of $150,000 per year. Dr. Klyosov intends to resign from Thermo
Fibergen, Inc. upon entering into an employment contract with us.
We have no standard arrangement to compensate directors for their services
in their capacity as directors and have no immediate plans to compensate them or
the members of our Scientific Advisory Board.
Item 7. Certain Relationships and Related Transactions
Related Party Transactions
Dr. David Platt and MIR International, Inc., were each paid $25,000 as fees
for managing the operations, compiling chemistry data and planning experiments,
and conducting strategic planning for our company's predecessor during the
partial year ended December 31, 2000. Dr. Platt is a founding stockholder of
Pro-Pharmaceuticals (Massachusetts). Dr. Anatole Klyosov, also a founding
stockholder of Pro-Pharmaceuticals (Massachusetts), owns 50% of MIR
International, Inc., with the remaining 50% owned by a party unrelated to Dr.
Klyosov or to us. Pro-Pharmaceuticals (Massachusetts) also issued a convertible
$7,000 note to Naomi Platt, the wife of Dr. David Platt. See "Part II -- Item 1
- -- Market Price of and Dividends on...and Related Stockholder Matters" for
detail as to such convertible notes. The accounts payable of Pro-Pharmaceuticals
(Massachusetts) include $22,417 as amounts due to our stockholders during the
period ended December 31, 2000 for operating expenses incurred.
Pro-Pharmaceuticals (Massachusetts) paid Dr. Platt, MIR International,
Inc., and Offer Binder $25,000, $50,000 and $25,000, respectively, for services
as described in the preceding paragraph that they provided to the company's
predecessor during the three months ended March 31, 2001. Mr. Binder is a
founding stockholder of Pro-Pharmaceuticals (Massachusetts). Also during that
period, Pro-Pharmaceuticals (Massachusetts) reimbursed James Czirr $5,039 for
expenses made by Mr. Czirr on that company's behalf. Mr. Czirr is also a
founding stockholder of Pro-Pharmaceuticals (Massachusetts). In addition, as of
March 31, 2001, Pro-Pharmaceuticals (Massachusetts) owed $9,028 to Mr. Binder
under an unsecured loan without repayment terms, but expected to be paid by
December 31, 2001.
Transactions with Promoters
Because we were incorporated less than five years ago, we are required to
disclose any transactions we have had with "promoters" of our company. Promoters
include founders of our company, as well as any persons who have received 10
percent or more of our common stock in connection with the organization of our
company. Our promoters are: Developed Technology Resource, Inc.; Dr. David
Platt, our President and Chief Executive Officer and a director; and James
Czirr, Executive Vice President of Business Development and a director.
In connection with our formation in January 2001, Developed Technology
acquired 1,221,890 shares of our common stock, representing all of our common
stock outstanding, for a contract right valued at $107,000. On May 15, 2001,
Developed Technology distributed its holdings of our common stock to its
shareholders of record at the close of business on May 7, 2001. See "Item 1.
Description of Business -- Business Development -- Initial Corporate
Organization, Acquisition and Merger" for a discussion of the distribution and
related transactions.
Each of Dr. Platt and Mr. Czirr became the owner of 10 percent or more of
our common stock in connection with our acquisition of Pro-Pharmaceuticals
(Massachusetts) on May 15, 2001, whereby all of the holders of
Pro-Pharmaceuticals (Massachusetts) common stock, including Dr. Platt and Mr.
Czirr, exchanged their Pro-Pharmaceuticals (Massachusetts) common stock for the
common stock of our company. In September 2000, Pro-Pharmaceuticals
(Massachusetts) had issued and sold 40,000 shares to Dr. Platt for $4,000 in
cash, and also issued and sold 40,000 shares to James Czirr for $4,000 in cash.
In addition, Dr. Platt has loaned $6,000 to Pro-Pharmaceuticals (Massachusetts),
of which $1,000, loaned in July 2000, was evidenced by a promissory note with an
interest rate of 10% per year and a maturity date of July 2002. The remaining
$5,000, loaned in two installments in September 2000, will be evidenced by a
form of note if Dr. Platt so requests. The $5,000 loan has an interest rate of
8% per year and matures in September 2001.
30
Item 8. Description of Securities
We have authorized 100,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of $0.01 par value (blank check) undesignated
shares. Our common stockholders are entitled to one vote per share on all
matters on which holders of common stock are entitled to vote and do not have
any cumulative voting rights. This means that the holders of more than 50% of
the shares of common stock voting for the election of directors can elect all of
the directors if they choose to do so; and, in that event, the holders of the
remaining shares of common stock would not be able to elect any person to our
board of directors. Subject to the rights of holders of shares of any series of
preferred stock, our common stockholders are entitled to receive such dividends
as our board of directors may declare, out of legally available funds. Holders
of common stock have no pre-emptive, conversion, redemption, subscription or
similar rights. If Pro-Pharmaceuticals were to be liquidated, dissolved or wound
up, common stockholders would be entitled to share equally in any of our assets
legally available for distribution after we satisfy any outstanding debts and
other liabilities as well as any amounts that might be due to holders of
preferred stock, if any.
Our shares of authorized preferred stock are undesignated. Our board or
directors has authority, without seeking stockholder approval, to determine the
designation, preferences, rights and other privileges for any series of
preferred stock that the board of directors may designate, which could include
preferences on liquidation or as to dividends, voting rights including the right
to vote as a separate class on certain corporate events or to elect directors
designated by the holders of such series, and rights to conversion, or
redemption of their shares and other matters.
We have no charter or by-law provisions that would delay, defer or prevent
a change in control of Pro-Pharmaceuticals.
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
There is currently no market for our common stock. We anticipate that, upon
completion of the Form 10-SB registration process, application will be made for
our common stock to be traded on the Over-the-Counter Bulletin Board.
We have outstanding $1,199,602 principal amount of convertible notes, which
are convertible into shares of our common stock at a conversion price to be
based on the per share offering price in the most recent equity offering we make
prior to conversion of the notes, subject to a maximum conversion price of $2.00
per share. At the maximum conversion price, the notes would be convertible into
599,801 shares of common stock, but could be convertible into more shares of
stock depending on the actual offering price. In addition to issuing shares on
conversion of the notes, we will also issue additional shares of common stock to
the note holders at the rate of one-half share of common stock for each dollar
of principal amount of the notes, for another 599,801 shares of common stock to
be issued to the note holders. The terms of the notes are discussed below under
"Item 4. Recent Sales of Unregistered Securities." None of our common stock is
subject to outstanding warrants or options to purchase the common stock.
As of May 15, 2001, 13,576,560 shares of our common stock are outstanding,
consisting of 1,221,890 shares which were issued as a dividend to the
stockholders of Developed Technology Resource, Inc., and 12,354,670 shares which
were issued to the former shareholders of Pro-Pharmaceuticals (Massachusetts).
All of our outstanding shares, except for the 1,221,890 shares issued as a
dividend to the Developed Technology stockholders, are restricted securities
within the meaning of Rule 144 under the Securities Act of 1933 and may not be
sold in the absence of
31
registration under the Securities Act unless an exemption from registration is
available, including an exemption contained in Rule 144 under the Securities
Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, as that term is defined in
Rule 144 under the Securities Act, who has beneficially owned shares for at
least one year is entitled to sell, within any three-month period, a number of
such shares that does not exceed the greater of (1) one percent of the then
outstanding shares of common stock (approximately 135,766 shares as of May 15,
2001) or (2) the average weekly trading volume in the common stock in the
Over-the-Counter market during the four calendar weeks preceding the date on
which notice of such sale is filed, provided certain requirements concerning
availability of public information, manner of sale and notice of sale are
satisfied. In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of common stock which are not restricted securities.
Under Rule 144(k), a person who is not an affiliate and has not been an
affiliate for at least three months prior to the sale and who has beneficially
owned shares for at least two years may resell such shares without compliance
with the foregoing requirements. In meeting the one-and two-year holding periods
described above, a holder of shares can include the holding periods of a prior
owner who was not an affiliate. The one-and two-year holding periods described
above do not begin to run until the full purchase price or other consideration
is paid by the person acquiring the shares from the issuer or an affiliate.
The 12,354,670 shares of our common stock issued to the shareholders of
Pro-Pharmaceuticals (Massachusetts) in exchange for their Pro-Pharmaceuticals
(Massachusetts) common stock will become eligible for sale pursuant to Rule 144
under the Securities Act on May 15, 2002, which is one year from the date of the
exchange. We have no agreements with any holder of our common stock that would
require us to register any common stock under the Securities Act for sale by
security holders.
We do not have any current plans for a public offering of our shares, but
we do plan to issue common stock in private placement transactions during the
second quarter of 2001, with the issuance amounts to be based on market
conditions at the time.
There are 88 holders of record of our common stock.
There have been no cash dividends declared on our common stock since our
company was formed. Dividends are declared at the sole discretion of our Board
of Directors.
Item 2. Legal Proceedings
None.
Item 3. Changes in and Disagreements with Accountants
None.
Item 4. Recent Sales of Unregistered Securities
Commencing in December 2000 and continuing through April 2001,
Pro-Pharmaceuticals (Massachusetts) issued convertible notes with an aggregate
principal amount of $1,199,602 to
32
"accredited investors" as such term is defined in Regulation D promulgated under
the Securities Act of 1933. These notes are now our corporate obligations as a
result of the merger with Pro-Pharmaceuticals (Massachusetts). The notes have an
interest rate of 10% per year and mature one year from their issuance dates. The
notes are convertible into shares of our common stock, with the conversion price
to be based on the per share offering price in the most recent equity offering
we make prior to conversion of the notes, subject to a maximum conversion price
of $2.00 per share. In general, if the notes are converted prior to their
maturity date, the conversion price will be 75% of the price of our most recent
equity offering preceding the conversion date, and if the notes are converted at
their maturity date, the conversion price will be $0.50 per share. In addition
to issuing shares on conversion of the notes, we will also issue additional
shares of common stock to the note holders at the rate of one-half share of
common stock for each dollar of principal amount of the notes, or an aggregate
of 599,801 shares.
In issuing the notes, Pro-Pharmaceuticals (Massachusetts) relied upon the
exemption provided by Rule 506 under Section 4(2) of the Securities Act of 1933.
Item 5. Indemnification of Directors and Officers
Article V of our Articles of Incorporation provides that no director or
officer of our company will be liable to us or to any of our stockholders for
breach of his or her fiduciary duty as a director or officer, except for:
o Acts or omissions by the director or officer which involve intentional
misconduct, fraud or a knowing violation of law, or
o The payment of any distribution to any of our stockholders in
violation of, and as provided under, Section 78.300 of the Nevada
Revised Statutes.
Subsection (1) of Section 78.7502 of the Nevada Revised Statutes empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation) by reason of the fact that
the person is or was a director, officer, employee, or agent of the corporation
or is or was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by him or
her in connection with the action, suit, or proceeding if the person acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
Subsection (2) of Section 78.7502 of the Nevada Revised Statutes empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending, or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that such person acted in any of the capacities set forth in subsection (1)
enumerated above, against expenses (including amounts paid in settlement and
attorneys' fees) actually and reasonably incurred by him or her in connection
with the defense or settlement of such action or suit if the person acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the corporation except that no indemnification may be
made in respect of any claim, issue, or matter as to which such person shall
have been adjudged to be liable to the corporation, unless and only to the
extent that the court in which such action or suit was brought determines that
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
33
Subsection (3) of Section 78.7502 of the Nevada Revised Statutes provides
that to the extent a director, officer, employee, or agent of a corporation has
been successful in the defense of any action, suit, or proceeding referred to in
subsections (1) and (2) or in the defense of any claim, issue, or matter
therein, that person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection therewith.
Section 78.751 of the Nevada Revised Statutes provides that a corporation's
charter or by-laws, or an agreement made by the corporation, may provide that
the expenses of officers and directors incurred in defending a civil or criminal
action, suit or proceeding must be paid by the corporation as they are incurred
and in advance of the final disposition of the action, suit or proceeding, upon
receipt of an undertaking of the director or officer to repay the amount if it
is ultimately determined by a court of competent jurisdiction that he or she is
not entitled to be indemnified by the corporation. Section 78.751 also provides
that indemnification and advancement of expenses authorized in or ordered by a
court does not exclude any other rights to which the indemnified party may be
entitled.
Section 78.752 of the Nevada Revised Statutes empowers the corporation to
purchase and maintain insurance on behalf of any person acting in any of the
capacities set forth in Subsection (1) of Section 78.7502 against any liability
asserted against that person and liability and expenses incurred by that person
in any such capacity or arising out of the person's status as such whether or
not the corporation would have the power to indemnify that person against such
liability and expenses.
Our By-laws have no specific provision for indemnification or limitation of
liability for persons serving as our officers or directors.
34
PART F/S
Items 1 - 12 below relate to Pro-Pharmaceuticals, Inc., a Massachusetts corporation Page
1. Independent Auditors' Report dated April 10, 2002................................................ F-1
2. Audited Balance Sheet as of December 31, 2000.................................................... F-2
3. Audited Statement of Operations for the period commencing July 10, 2000
(inception) to December 31, 2000 ................................................................ F-3
4. Audited Statement of Stockholders' Equity During the Development Stage
for the period commencing July 10, 2000 (inception) to December 31, 2000......................... F-4
5. Audited Statement of Cash Flows for the period commencing July 10, 2000
(inception) to December 31, 2000................................................................. F-5
6. Notes Accompanying Financial Statements for the period commencing
July 10, 2000 (inception) to December 31, 2000 .................................................. F-6
7. Report of Independent Accountants dated May 3, 2001, except for Note 7,
which is dated April 10, 2002................................................................... F-13
8. Unaudited Balance Sheet as of March 31, 2001 (as restated)...................................... F-14
9. Unaudited Statements of Operations for three months ended March 31, 2001
and the period from inception (July 10, 2000) through March 31, 2001 (as restated) ............. F-15
10. Unaudited Statement of Changes in Stockholders' Equity for period from inception
(July 10, 2000) through March 31, 2001 (as restated)............................................ F-16
11. Unaudited Statements of Cash Flows for three months ended March 31, 2001
and the period from inception (July 10, 2000) through March 31, 2001 (as restated).............. F-17
12. Notes to (unaudited) Financial Statements for the periods ended
March 31, 2001 (as restated).................................................................... F-18
35
Items 13 - 23 below relate to the registrant, Pro-Pharmaceuticals, Inc., a Nevada corporation formerly known as
DTR Med-Pharma Corp.
13. Unaudited Balance Sheet as of March 31, 2001.................................................... F-25
14. Unaudited Statement of Operations for period from inception (January 26, 2001)
through March 31, 2001 ......................................................................... F-26
15. Unaudited Statement of Changes in Stockholders' Equity for period from
inception (January 26, 2001) through March 31, 2001............................................. F-27
16. Unaudited Statement of Cash Flows for period from inception (January 26, 2001)
through March 31, 2001 ......................................................................... F-28
17. Notes to (unaudited) Financial Statements for period from inception
(January 26, 2001) through March 31, 2001....................................................... F-29
18. Report of Independent Auditors dated June 6, 2001............................................... F-32
19. Audited Balance Sheet as of May 15, 2001........................................................ F-33
20. Audited Statement of Operations for period from inception (January 26, 2001)
through May 15, 2001 ........................................................................... F-34
21. Audited Statement of Changes in Stockholders' Equity for period from inception
(January 26, 2001) through May 15, 2001 ........................................................ F-35
22. Audited Statement of Cash Flows for period from inception (January 26, 2001)
through May 15, 2001 ........................................................................... F-36
23. Notes to Financial Statements for period from inception (January 26, 2001)
through May 15, 2001 ........................................................................... F-37
Other items:
24. Pro Forma Financial Data (unaudited balance sheet) combining data for the
registrant as of March 31, 2001, and Pro-Pharmaceuticals (Massachusetts) as
of March 31, 2001 .............................................................................. F-40
25. Pro Forma Financial Data (unaudited statement of operations) combining
data for the registrant for period from inception (January 26, 2001)
through March 31, 2001, and Pro-Pharmaceuticals (Massachusetts) for the
three months ended March 31, 2001............................................................... F-42
36
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Pro-Pharmaceuticals, Inc.
(A development stage company)
Newton, Massachusetts
We have audited the accompanying balance sheet of Pro-Pharmaceuticals, Inc. as
of December 31, 2000 and the related statements of operations, changes in
stockholders' deficiency and cash flows for the period from inception (July 10,
2000) through December 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pro-Pharmaceuticals, Inc. at
December 31, 2000 and the results of its operations and cash flows for the
period from inception (July 10, 2000) through December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Scillia Dowling & Natarelli LLC
Scillia Dowling & Natarelli LLC
Hartford, Connecticut
April 10, 2002
F-1
PRO-PHARMACEUTICALS, INC.
(A development stage company)
BALANCE SHEET
December 31, 2000
ASSETS
CURRENT ASSETS
Cash $ 204,745
---------
Total current assets 204,745
---------
OTHER ASSETS
Patent 8,695
Debt issuance costs 14,500
---------
Total other assets 23,195
---------
$ 227,940
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 79,129
Accrued expenses 23,238
---------
Total current liabilities 102,367
---------
CONVERTIBLE NOTES PAYABLE,
net of discount of $205,255 79,245
---------
Total liabilities 181,612
---------
STOCKHOLDERS' EQUITY
Common voting shares 12,355
Additional paid in capital 221,910
Deficit accumulated during development stage (187,937)
---------
46,328
---------
$ 227,940
=========
See notes to financial statements.
F-2
PRO-PHARMACEUTICALS, INC.
(A development stage company)
STATEMENT OF OPERATIONS
Period from inception (July 10, 2000)
through December 31, 2000
REVENUE $ --
------------
RESEARCH AND DEVELOPMENT EXPENSES
Laboratory fees 9,000
Consulting fees 91,250
------------
100,250
------------
GENERAL AND ADMINISTRATIVE EXPENSES
Legal fees 6,649
Consulting fees 38,750
Accounting fees 7,500
Office expenses 5,771
Telephone 4,300
Travel and entertainment 3,730
------------
66,700
------------
OPERATING LOSS (166,950)
------------
NON OPERATING INCOME (EXPENSE)
Interest income 261
Amortization of discount on convertible notes (16,655)
Non-cash interest expense on 10% convertible notes (1,238)
------------
(17,632)
------------
NET LOSS $ (184,582)
============
LOSS PER SHARE
Basic and diluted $ (0.01)
============
SHARES OUTSTANDING
Basic and diluted 12,354,670
============
See notes to financial statements.
F-3
PRO-PHARMACEUTICALS, INC.
(A development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Period from inception (July 10, 2000)
through December 31, 2000
Common Voting Shares Deficit
----------------------- Accumulated
Issued During
----------------------- Additional Development Stockholders'
Shares Amount Paid in Capital Stage Equity
---------- ---------- --------------- ----------- -------------
Issuance of common stock 12,354,670 $ 12,355 $ -- $ (3,355) $ 9,000
Beneficial conversion feature and common
share grants embedded in convertible notes -- -- 221,910 -- 221,910
Net loss -- -- (184,582) (184,582)
---------- ---------- --------------- ----------- -------------
Balance, December 31, 2000 12,354,670 $ 12,355 $ 221,910 $ (187,937) $ 46,328
========== ========== =============== =========== =============
Common voting shares, $0.001 par value, 100,000,000 shares authorized,
12,354,670 shares issued and outstanding after restatement for reverse
acquisition.
See notes to financial statements.
F-4
PRO-PHARMACEUTICALS, INC.
(A development stage company)
STATEMENT OF CASH FLOWS
Period from inception (July 10, 2000)
through December 31, 2000
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(184,582)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non cash interest expense 16,655
Changes in assets and liabilities:
Deferred issuance cost (14,500)
Accrued expenses 70,101
Accounts payable 23,238
---------
Net cash used in operating activities (89,088)
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent costs (8,695)
---------
Net cash used in investing activities (8,695)
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 9,000
Proceeds from convertible notes payable 284,500
Proceeds from shareholder advances 9,028
---------
Net cash provided by financing activities 302,528
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 204,745
CASH AND CASH EQUIVALENTS, Beginning --
---------
CASH AND CASH EQUIVALENTS, End $ 204,745
=========
NON CASH INVESTING ACTIVITIES:
$14,500 of debt issuance costs incurred
through accrued expense
$17,893 non cash interest expense
See notes to financial statements.
F-5
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pro-Pharmaceuticals, Inc. (the "Company") was established in July 2000. The
Company is in the development stage and is engaged in developing technology that
will reduce toxicity and improve the efficacy of currently existing chemotherapy
drugs by combining the drugs with a number of specific carbohydrate compounds.
The carbohydrate-based drug delivery system may also have applications for drugs
now used to treat other diseases and chronic health conditions.
The Company is in the development stage while it is focusing on research and
raising capital (see Note 6) and has not generated any revenues. Its product
candidates are still in research and development, with none yet in clinical
trials. Principal risks to the Company include uncertainty of product
development and generation of revenues; dependence on outside sources of
capital; risks associated with clinical trials of products; dependence on
third-party collaborators for research operations; need for regulatory approval
of products; risks associated with protection of intellectual property; and
competition with larger, better-capitalized companies.
Significant Accounting Policies
Cash and Cash Equivalents -- For the purposes of reporting cash flows, the
Company includes all cash accounts that are not subject to withdrawal
restrictions or penalties, as cash and cash equivalents in the accompanying
balance sheet.
The Company has cash accounts that exceed $100,000 at a single financial
institution. Accounts are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000 per depositor. The portion of the deposit in excess of
$100,000 is not subject to such insurance and represents a credit risk to the
Company. At December 31, 2000, $104,745 was uninsured.
Research and Development Costs -- The Company charges research and development
costs to operations as incurred.
Debt Issuance Costs -- The Company's issuance costs with respect to its
outstanding convertible notes payable are capitalized and amortized over the
terms of the related notes, using the straight-line method. These costs comprise
a financing fee of 10 percent of the principal amount of such notes, payable
upon issuance of the notes.
Income Taxes -- The Company accounts for income taxes under the asset and
liability method. Deferred income taxes and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse.
F-6
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
Use of Estimates in Financial Statements -- Management uses estimates and
assumptions in preparing these financial statements in accordance with generally
accepted accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could
vary from those estimates that were used.
NOTE 2 -- CONVERTIBLE NOTES PAYABLE
Convertible notes issued by the Company as of December 31, 2000 range in
original principal amount from $2,500 to $50,000 and accrue interest at 10
percent per annum. The notes are due two years after issue. The notes provide
that in the event the Company is acquired by or merged with a non-operating
public company, the note holders will receive additional consideration as
described below.
At any time up to maturity a note holder may convert the principal and interest
into common stock of the Company. If the conversion is made prior to maturity,
the holder will receive that number of shares of the common stock of the Company
as calculated by dividing the converted amount by 75 percent of the offering
price per share of the Company's most recent equity offering, subject to a
maximum conversion price of $2.00. If the notes are converted at the maturity
date, the conversion price is $.50 per share. If at the time of conversion the
Company does not have at least 10,000,000 shares outstanding, the conversion
price will be adjusted such that the holder receives such number of shares as
would result if 10,000,000 shares were outstanding.
As additional consideration, if the maturity date is extended, the note holders
receive one-quarter of a share of the Company's common stock for each dollar of
principal amount loaned and, if the Company does not then have at least
10,000,000 shares outstanding, or an acquisition by or merger with a public
company has not then occurred, the number of shares issued as additional
consideration will be adjusted such that the holder receives such number of
shares as would result if 10,000,000 shares were outstanding.
As additional consideration in the event of an acquisition or merger of the
Company by or with a non-operating public company, the note holders receive one
half of a share of the acquiring company's common stock for each dollar of
principal amount loaned. If the acquisition has not occurred by the maturity
date of the notes, the holders receive one-half of a share of the company for
each dollar of principal amount loaned. If the Company does not have at least
10,000,000 shares outstanding as of the maturity date of the notes, the holders
will receive such percentage of the Company's common stock as they would have
received had 10,000,000 shares been outstanding. The shares for additional
consideration are to be issued upon the earliest of completion of such
acquisition or merger, filing of a registration statement for the common stock
of the Company (or the acquiring company, as the case may be) with the
Securities and Exchange Commission, or the maturity date of the notes.
F-7
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company has allocated $221,910 of the $284,500 proceeds from the issuance of
the convertible debt to the common shares and the embedded beneficial conversion
feature. The beneficial conversion feature was calculated at the convertible
debt issuance dates based on the difference between the conversion price most
beneficial to the holders and the estimated fair value of the common stock at
that date.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Consulting Fees
For the period from inception (July 10, 2000) through December 31, 2000, the
Company paid two of its stockholders $25,000 and $12,500, respectively, for fees
associated with the management of the day-by-day operations of the Company as
well as research and development of chemistry data, planning experiments and
strategic planning.
Convertible Notes Payable
Included in convertible notes payable is $7,000 due to a stockholder's spouse.
Due to Stockholder
As of December 31, 2000, the Company owes $22,417 to a stockholder of the
Company. The amount is included in accounts payable and represents advances
received and various operating expenses incurred.
NOTE 4 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax asset and liability as of December 31, 2000
are as follows:
Deferred tax assets $ 67,000
Valuation allowance (67,000)
--------
Asset (liability) $ --
========
The valuation allowance at December 31, 2000 relates primarily to tax assets
associated with net operating losses. Management's assessment is that the nature
of future taxable income may not allow the Company to realize certain tax
benefits of net operating losses within the prescribed carryforward period.
Accordingly, an appropriate valuation allowance has been made. The Company has a
federal net operating loss carryover of $185,000 that can be carried forward to
the following 20 years.
F-8
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 5 -- CONTINGENCY
SafeScience, Inc. (now known as GlycoGenesys, Inc.), former employer of Dr.
David Platt, President and Chief Executive Officer of the Company, alleged in a
letter dated February 15, 2001, that Dr. Platt's activity with the Company is a
violation of a noncompetition covenant he has with SafeScience. Dr. Platt
responded by letter dated February 19, 2001 denying the allegations and inviting
a meeting to discuss them. Counsel for SafeScience indicated a willingness to
resolve these matters but attempts to set up a meeting were unsuccessful. No
determination has been made as to the likelihood of a favorable or unfavorable
outcome, nor has any estimate been made as to the amount or range, if any, of
potential loss. The Company intends to contest the allegations vigorously.
NOTE 6 -- SUBSEQUENT EVENTS
Reverse Acquisition
DTR-Med Pharma Corp. (DTR Med-Pharma) was incorporated under Nevada law as of
January 26, 2001 for the purpose of acquiring all of the issued and outstanding
stock of the Company (referred to in this note as Pro-Pharmaceuticals-MA). Prior
to the acquisition, DTR Med-Pharma changed its name to "Pro-Pharmaceuticals,
Inc." (Pro-Pharmaceuticals-NV).
From its incorporation until the acquisition of Pro-Pharmaceuticals-MA, DTR
Med-Pharma had been a wholly owned subsidiary of Developed Technology Resource,
Inc., a Minnesota corporation (Developed Technology) whose stock is publicly
traded on the Over-the-Counter Bulletin Board under the symbol DEVT.OB. In
exchange for 1,221,890 shares of the common stock of DTR-Med Pharma, Developed
Technology transferred its contractual rights to receive royalties from a yet
undeveloped or approved cancer detection method. As part of that process,
Developed Technology distributed its 1,221,890 shares of the common stock of
DTR-Med Pharma to the stockholders of record of Developed Technology as of May
7, 2001.
On May 15, 2001, Pro-Pharmaceuticals-NV (formerly known as DTR-Med Pharma) in
exchange for 12,354,670 shares of its common stock acquired all of the issued
and outstanding shares of the common stock of Pro-Pharmaceuticals-MA. As a
result, Pro-Pharmaceuticals-MA became a subsidiary of Pro-Pharmaceuticals-NV,
following which the subsidiary was merged into its parent which is the surviving
corporation. The merger was treated as a capital transaction and was accounted
for as a reverse merger in which Pro-Pharmaceuticals-MA was the accounting
acquirer. Pro-Pharmaceuticals-NV continues the business of
Pro-Pharmaceuticals-MA (note 1).
F-9
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
Per Share Data
The shares of common stock issuable upon exercise of the warrants issued
pursuant to the May 2001 private placement of the Company have not been included
in the calculation of loss per share of common stock as the effect of such an
inclusion would be anti-dilutive reducing the loss per share.
The outstanding shares have been restated to reflect the shares outstanding as
of each period based upon the reverse acquisition transactions.
Private Placement
The Company began on May 25, 2001, a private placement of securities exempt from
registration pursuant to Rule 506 of Regulation D of the Securities Act of 1933
to raise $5,145,000. The Company abandoned this private placement as of December
3, 2001, and terminated all offering activity on or before that date. The
securities consist of 1,470,000 units offered at $3.50 each of one share of its
common stock and one four-year warrant exercisable at $6.50 to purchase one
share of common stock. The warrant is subject, following written notice, to
acceleration if either (i) the Company files a "New Drug Application" with the
Food and Drug Administration; or (ii) the Company's stock is listed on an
exchange and its closing price exceeds $11.00 on any 10 trading days within a
period of 20 consecutive trading days, or if the Company's stock is quoted on
the NASDAQ National Market System or Small Cap Market, or over-the-counter, and
the average of the closing bid and asked prices thereon exceeds $11.00 on any 10
trading days within a period of 20 consecutive trading days.
As of December 3, 2001, the Company had received proceeds of $2,237,500 from the
sale of securities offered in the private placement representing 689,300 units.
Such purchases will result in the Company issuing 689,300 shares of common stock
and warrants to purchase 689,300 shares of its common stock.
In connection with agreements with three investors in this offering who were
each willing to invest a substantial amount of funds, the Company sold units at
$3.00 each, as follows: 133,400 of the units for a total of $400,200; 66,700
units for a total of $200,100; and 150,000 units for a total of $450,000. The
Company reduced each investor's warrant exercise price to $5.00, and changed the
warrant acceleration provision to lower the 10-day closing price threshold to
$10.00. The Company also granted the earliest of these investors an option to
purchase an additional 200,000 units on the same terms as that investor's
current purchase. The option is exercisable at any time until 30 days after the
Company notifies the investor of its receipt of notice that an investigational
new drug application filed by the Company with the FDA has become effective for
any one of the Company's compounds.
As a result of agreeing to accept different terms on the offered securities with
these investors, the Company is notifying each previous purchaser of the sale to
those investors. This could result in the Company's agreeing to refund some or
all of the previous investments.
F-10
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
Consulting Arrangements
The Company has entered into consulting arrangements, each terminable on thirty
days' notice, with (i) a corporation controlled by a person who is a
stockholder, director and officer of the Company for financing and business
development services in consideration of $12,500 per month and expense
reimbursement, (ii) a corporation controlled by a person who is a stockholder
and former officer of the Company for research and development services in
consideration of $5,000 per month and expense reimbursement, (iii) an individual
otherwise unaffiliated with the Company with respect to product development
services in consideration of $2,000 per month and expense reimbursement, and
(iv) an individual who is a stockholder of the Company for management consultant
services in consideration of $5,000 per month and expense reimbursement.
Convertible Notes Payable
In August 2001, the Company offered warrants to holders of its outstanding
convertible notes as an inducement to convert prior to the maturity of the
notes. Holders representing $1,125,602 of the outstanding principal and accrued
interest chose to convert at a conversion price of $2.00 per share and received
598,229 common shares and 598,229 warrants. The warrants have an exercise price
of $6.50 per share and are immediately exercisable. The warrants expire on
October 1, 2005, however, the Company may, upon giving written notice,
accelerate the exercise of the warrant and effect an early termination thereof
in the event of either of the following: (i) the Company files a new drug
application ("NDA") with the Food and Drug Administration, or (ii) the market
price exceeds $11.00 on any 10 trading days within a period of 20 consecutive
trading days, as defined. In the event of acceleration, the unexercised warrants
automatically terminate without payment by the Company upon the thirtieth day
following the written notice. The Company valued the warrants at $503,019 using
the Black-Scholes option-pricing model, based on a deemed fair market value of
the Company's common stock of $2.28 per share, an assumed volatility of 95%, a
risk-free interest rate of 3.9%, a weighted-average expected life of three
years, and a dividend rate of 0.0%. The value of the warrants has been recorded
as a debt conversion expense.
F-11
PRO-PHARMACEUTICALS, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock Incentive Plan
On October 18, 2001, the Company's Board of Directors adopted the
"Pro-Pharmaceuticals, Inc. 2001 Stock Incentive Plan" which permits awards of
incentive and non-qualified stock options and other forms of incentive
compensation to employees and non-employees such as directors and consultants.
The Board reserved 2,000,000 of the Company's shares of common stock for awards
pursuant to such plan, all of which reserved shares could be awarded as
incentive stock options. The Board agreed to recommend such plan to the
Company's stockholders for approval at the next annual or special meeting of
stockholders. As of November 26, 2001, the Company had granted Burton Firtel, a
director of the Company, a non-qualified stock option under the plan to purchase
200,000 shares of common stock at an exercise price of $3.50 per share. The
option is immediately exercisable as to 120,000 shares, and will vest as to an
additional 40,000 shares on the first anniversary of the grant date, and as to
the remaining 40,000 shares on the second anniversary of the grant date,
provided Mr. Firtel remains a director at the applicable anniversary date.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141). This
statement addresses financial accounting and reporting for business combinations
and supersedes APB Opinion No. 16 Business Combinations, and FASB Statement No.
28, Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations within the scope of this statement are to be accounted for
using the purchase method.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
(SFAS 142). Upon adoption of SFAS 142, intangible assets with finite lives will
be amortized over those lives and assets with indefinite lives will be tested
for impairment at least annually.
The Company does not expect the issuance of these pronouncements to have a
material effect.
F-12
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
And Shareholders of
Pro-Pharmaceuticals, Inc.
Newton, Massachusetts
We have reviewed the accompanying balance sheets of Pro-Pharmaceuticals, Inc. as
of March 31, 2001 and the related statements of operations, changes in
deficiency in assets, and cash flows for the three-month period then ended and
for the period from inception (July 10, 2000) through March 31, 2001. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Pro-Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2000, and the related statements of operations, changes in
deficiency in assets and cash flows for the year then ended (not presented
herein); and in our report dated December 4, 2001, except as to Note 7, as to
which the date is April 10, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying balance sheet as of December 31, 2001 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
/s/ Scillia Dowling & Natarelli LLC
Scillia Dowling & Natarelli LLC
Hartford, Connecticut
May 3, 2001, except for Note 7,as to which the date is April 10, 2002
F-13
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
BALANCE SHEET
March 31, 2001
(Unaudited) (As Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 839,938
-----------
OTHER ASSETS
Patent 8,695
Debt issuance costs, net of amortization of $4,083 31,917
-----------
Total other assets 40,612
-----------
$ 880,550
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses $ 104,858
Due to stockholder 10,028
-----------
Total current liabilities 114,886
CONVERTIBLE NOTES PAYABLE 265,547
-----------
Total liabilities 380,433
-----------
STOCKHOLDERS' EQUITY
Common stock, no par value, 200,000 shares authorized,
100,000 shares issued and outstanding 12,355
Additional paid-in capital 1,036,512
Deficit accumulated during development stage (548,750)
-----------
500,117
-----------
$ 880,550
-----------
See notes to financial statements.
F-14
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
(Unaudited)
Period from
Inception
Three months (July 10, 2000)
ended through
March 31, March 31,
2001 2001
----------------------------
REVENUE $ -- $ --
------------ ------------
RESEARCH AND DEVELOPMENT
Consulting fees 17,049 108,299
Laboratory fees 16,100 25,100
------------ ------------
33,149 133,399
------------ ------------
GENERAL AND ADMINISTRATIVE
Legal fees 39,864 46,513
Consulting fees 51,212 89,962
Office expenses 26,291 32,062
Contributions 5,000 5,000
Accounting fees 8,000 15,500
Amortization 4,083 4,083
Telephone and utilities 2,606 6,906
Travel and entertainment 666 4,396
------------ ------------
137,722 204,422
------------ ------------
Loss from operations (170,871) (337,821)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 7,579 7,840
Interest expense (197,521) (215,414)
------------ ------------
(189,942) (207,574)
------------ ------------
NET LOSS $ (360,813) $ (545,395)
============ ============
LOSS PER SHARE
Basic and diluted $ (0.03) $ (0.04)
============ ============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic and diluted 12,354,670 12,354,670
============ ============
See notes to financial statements.
F-15
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Period from Inception (July 10, 2000) through March 31, 2001
(Unaudited)
Common Shares
-----------------------
Issued Deficit Accumulated
----------------------- Additional During the Stockholders'
Shares Amount Paid in Capital Development Stage Equity
---------- ---------- --------------- ------------------- -------------
Issuance of Common Stock 12,354,670 $ 12,355 $ -- $ (3,355) $ 9,000
Benefical conversion feature and common
share grants embedded in convertible notes 221,910 221,910
Net loss -- -- -- (184,582) (184,582)
---------- ---------- --------------- ------------------- -------------
Balance at December 31, 2000 12,354,670 12,355 221,910 (187,937) 46,328
Beneficial conversion feature and common
share grants embedded in convertible notes 814,602 814,602
Net loss -- -- -- (360,813) (360,813)
---------- ---------- --------------- ------------------- -------------
Balance at March 31, 2001 12,354,670 $ 12,355 $ 1,036,512 $ (548,750) $ 500,117
========== ========== =============== =================== =============
See notes to financial statements.
F-16
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Inception
Three months (July 10, 2000)
ended through
March 31, March 31,
2001 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (360,814) $ (545,395)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,083 4,083
Non cash interest expense 185,303 201,957
Changes in assets and liabilities:
Debt issuance cost (21,500)
Accounts payable (70,101) 21,500
Accrued expenses 81,620 90,358
----------- -----------
Net cash used in operating activities (181,409) (227,497)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent costs -- (8,695)
----------- -----------
Net cash used in investing activities -- (8,695)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,000 10,000
Proceeds from convertible notes payable 814,602 1,099,102
Increase in due to stockholder 1,000 10,028
----------- -----------
Net cash provided by financing activities 816,602 1,119,130
----------- -----------
NET INCREASE IN CASH 635,193 840,938
CASH AND CASH EQUIVALENTS, Beginning 204,745 --
----------- -----------
CASH AND CASH EQUIVALENTS, End $ 839,938 $ 840,938
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
During the period from inception (July 10, 2000) through March 31, 2001
the Company capitalized debt issuance costs totaling $35,000, a
long-term asset, by incurring an accrued liability of the same amount.
See notes to financial statements.
F-17
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pro-Pharmaceuticals, Inc. (the "Company"), was established on July 10, 2000 to
identify, develop and seek regulatory approval of technology that will reduce
toxicity and improve the efficacy of currently existing chemotherapy drugs by
combining the drugs with a number of specific carbohydrate compounds. The
carbohydrate-based drug delivery system may also have applications for drugs now
used to treat other diseases and chronic health conditions.
The Company is in the development stage while it is focusing on research and
raising capital. Its product candidates are still in research and development,
with none yet in clinical trials. Principal risks to the Company include
uncertainty of product development and generation of revenues; dependence on
outside sources of capital; risks associated with clinical trials of products;
dependence on third-party collaborators for research operations; lack of
experience in clinical trials; need for regulatory approval of products; risks
associated with protection of intellectual property; and competition with
larger, better-capitalized companies.
Significant Accounting Policies
Cash and Cash Equivalents -- For the purposes of reporting cash flows, the
Company includes all cash accounts that are not subject to withdrawal
restrictions or penalties, as cash and cash equivalents in the accompanying
balance sheet.
The Company has cash accounts that exceed $100,000 at a single financial
institution. Accounts are insured by the Federal Deposit Insurance Corporation
(FDIC) up to $100,000 per depositor. The portion of the deposit in excess of
$100,000 is not subject to such insurance and represents a credit risk to the
Company. At March 31, 2001, $749,278 was uninsured.
Research and Development Costs -- The Company charges research and development
costs to operations as incurred.
Debt Issuance Costs -- The Company's issuance costs with respect to its
outstanding convertible notes payable are capitalized and amortized over the
terms of the related notes, using the straight-line method. These costs comprise
a financing fee of 10 percent of the principal amount of such notes, payable
upon issuance of the notes.
Income Taxes -- The Company accounts for income taxes under the asset and
liability method. Deferred income taxes and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse.
F-18
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Patent -- The Company incurred costs totaling $8,695 for the period from
inception (July 10, 2000) through March 31, 2001 related to the patent
application. Upon the patent's approval the Company will amortize the cost over
the estimated useful life of the patent using the straight-line method. Any
future costs associated with the patent will also be capitalized and subject to
the same amortization policy. If the patent is not accepted the costs will be
expensed in the respective period.
Use of Estimates in Financial Statements -- Management uses estimates and
assumptions in preparing these financial statements in accordance with generally
accepted accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could
vary from those estimates that were used.
NOTE 2 -- CONVERTIBLE NOTES PAYABLE
During the three months ended March 31, 2001 and the year ended December 31,
2000 the Company issued $814,602 and $284,500 of convertible notes,
respectively. The notes accrue interest at a rate of 10% per year and mature one
year from their issuance dates. At the Company's discretion, the notes may be
extended for a one-year period and, in consideration for the extension, holders
shall receive one-quarter of one share of the Company's common stock for each
whole dollar amount of principal. However, subsequent to the end of the year,
these notes were extended. The Company may prepay the amounts outstanding under
the convertible notes at any time prior to maturity.
At any time prior to maturity, the holder has the right to convert the note into
shares of common stock. The number of shares the holder has a right to receive
upon early conversion is computed by dividing the unpaid balance of the
principal and accrued and unpaid interest by 75% of the offering price of the
Company's most recent equity offering. This conversion price, however, may not
exceed $2.00. At maturity, the notes are converted based on dividing the
principal and accrued interest by $0.50, assuming a minimum of 10,000,000 shares
outstanding.
In connection with the issuance of these convertible notes, each holder was
entitled to receive one-half share of the Company's common stock for each whole
dollar amount of principal. The Company has issued a total of 660,310 shares of
common stock to the holders of convertible notes.
The Company has allocated $1,036,512 of the $1,099,102 proceeds from the
issuance of the convertible debt to the common shares and the embedded
beneficial conversion feature. The beneficial conversion feature was calculated
at the convertible debt issuance dates based on the difference between the
conversion price most beneficial to the holders and the estimated fair value of
the common stock at that date. This amount, however, was limited to the proceeds
received from the issuance of the convertible debt.
F-19
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
As additional consideration in the event of an acquisition or merger of the
Company by or with a non-operating public company, the note holders receive one
half of a share of the acquiring company's common stock for each dollar of
principal amount loaned. If the acquisition has not occurred by the maturity
date of the notes, the holders receive one-half of a share of the company for
each dollar of principal amount loaned. If the Company does not have at least
10,000,000 shares outstanding as of the maturity date of the notes, the holders
will receive such percentage of the Company's common stock as they would have
received had 10,000,000 shares been outstanding. The shares for additional
consideration are to be issued upon the earliest of completion of such
acquisition or merger; filing of a registration statement for the common stock
of the Company (or the acquiring company, as the case may be) with the
Securities and Exchange Commission; or the maturity date of the notes.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Consulting Fees
For the three months ended March 31, 2001 and the period from inception (July
10, 2000) through March 31, 2001, the Company paid its stockholders $67,550 and
$105,050, respectively, for fees associated with the management of the day by
day operations of the Company as well as research and development of chemistry
data, planning experiments and strategic planning.
Convertible Notes Payable
Included in convertible notes payable is $7,000 due to a stockholder's spouse.
Due to Stockholder
As of March 31, 2001, the Company owes $9,028 to a stockholder of the Company.
The loan is unsecured and without repayment terms, but is expected to be paid by
December 31, 2001.
F-20
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax asset and liability as of March 31, 2001 are
as follows:
Current Long-Term
Asset Liability
--------- ---------
Net operating loss carryforward $ 137,000 $ --
Valuation allowance (137,000) --
--------- ---------
Asset (liability) $ -- $ --
========= =========
The valuation allowance at March 31, 2001 relates primarily to tax assets
associated with net operating losses. Management's assessment is that the nature
of future taxable income may not allow the Company to realize certain tax
benefits of net operating losses within the prescribed carryforward period.
Accordingly, an appropriate valuation allowance has been made
The provision for income taxes consisted of the following components:
Period from
Inception
Three months (July 10, 2000)
ended through
March 31, March 31,
2001 2001
--------------- ---------------
Currently payable $ -- $ --
Deferred income tax benefit 91,898 137,000
Change in valuation allowance (91,898) (137,000)
--------------- ---------------
$ -- $ --
=============== ===============
At March 31, 2001, the Company has approximately $345,000 of available net
operating loss carryforwards for income tax purposes, which will expire through
2020 for federal and state income tax purposes.
F-21
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 -- CONTINGENCY
SafeScience, Inc. (SafeScience), a prior employer of David Platt, Ph.D., founder
of the Company, issued a demand letter dated February 15, 2001 alleging that Dr.
Platt directly and indirectly, through his activity in the Company, is engaged
in the business competitive with SafeScience and is in violation of a
non-competition covenant binding on Dr. Platt. Dr. Platt, by his counsel,
responded in a letter dated February 19, 2001 denying such violation and
inviting a meeting to discuss the allegations. No determination has been made of
the likelihood of a favorable or unfavorable outcome, nor has any estimate been
made as to the amount or range, if any, of potential loss. The Company intends
to contest the allegations vigorously.
NOTE 6 -- SUBSEQUENT EVENT
During May 2001, Pro-Pharmaceuticals, Inc. (formerly DTR Med Pharma)
("Pro-Pharmaceuticals NV"), a Nevada corporation, issued 12,354,670 shares to
the stockholders of the Company in exchange for all of the outstanding shares of
common stock of the Company, diluting Pro-Pharmaceuticals NV's prior
stockholders' percentage to approximately 9 percent. Following the exchange, the
Company will be merged into Pro-Pharmaceuticals NV. After this merger,
Pro-Pharmaceuticals NV will be the surviving corporation and assume all assets
and liabilities of both corporations.
The Company has raised approximately $1,200,000 in a private placement of
convertible debt. Currently, the Company is undertaking a private placement of
common stock and common stock purchase warrants and filing a registration
statement on Form 10-SB to make the Company a reporting entity under the
Securities Exchange Act of 1934.
The merger was treated as a capital transaction and was accounted for as a
reverse merger in which Pro-Pharmaceuticals (Massachusetts) was the accounting
acquirer.
F-22
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 -- RESTATEMENT
Subsequent to the issuance of the Company's condensed financial statements for
the three months ended March 31, 2001, management has revised its best estimate
of the fair value of the Company's stock. Management believes that the estimated
value of the Company's stock at the time of the issuances of the convertible
debt was understated. Had the higher estimate been used, the proceeds from
convertible debt issued in 2000 and the three-months ended June 30, 2001 would
have been allocated to two equity features--an embedded beneficial conversion
feature and shares received. The valuation of these features results in an
allocation to additional paid in capital and a discount to debt that will be
amortized over the term of the debt. Management believes that the updated
estimates and restated financial statements better reflect the economic
substance of the financing transactions.
Management has also determined that salaries and consulting expenses that were
originally recorded as an expense in 2001 related to services that were
performed in 2000, and therefore should be recorded as a liability and an
expense in 2000. As a result, the 2000 financial statements have been restated
from the amounts previously reported to reflect these changes.
F-23
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The significant effects of the restatement are as follows:
As
Previously
Reported As Restated
At March 31, 2001:
Additional paid in capital -- 1,036,512
Deficit accumulated during development stage (342,438) (545,395)
For the three months ended March 31, 2001:
Research and Development 74,399 33,149
General and Administrative 151,472 137,722
Interest expense (11,219) (197,521)
Net Loss (229,511) (360,813)
Loss per share (Basic and diluted) (0.02) 3.00
Period from Inception (July 10, 2000) through March 31, 2001:
Interest expense (12,457) (215,414)
Net Loss (342,438) (545,395)
F-24
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
BALANCE SHEET
March 31, 2001
(Unaudited)
ASSETS
OTHER ASSETS
Contractual rights $ --
--------
$ --
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses $ 50,000
--------
Total current liabilities 50,000
--------
STOCKHOLDERS' EQUITY
Common stock
Voting shares, $0.001 par value,
100,000,000 shares authorized,
1,221,890 shares issued and outstanding 1,222
Undesignated shares, $0.01 par value,
5,000,000 shares authorized --
Stock Subscription Receivable (1,222)
Deficit accumulated (50,000)
--------
(50,000)
$ --
========
See notes to financial statements.
F-25
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
STATEMENT OF OPERATIONS
Period from inception (January 26, 2001)
through March 31, 2001
(Unaudited)
REVENUE $ --
-----------
GENERAL AND ADMINISTRATIVE
Legal fees 30,000
Consulting fees 10,000
Accounting fees 5,000
Other expenses 5,000
-----------
50,000
NET LOSS $ (50,000)
===========
EARNINGS PER SHARE
Basic $ (0.04)
===========
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 1,221,890
===========
See notes to financial statements.
F-26
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Period from inception (January 26, 2001)
through March 31, 2001
(Unaudited)
Common Stock
------------------------------------------
Voting Shares Undesignated Shares Stock
-------------------- ------------------- Subscription Retained
Shares Amount Shares Amount Receivable Earnings Total
--------- ------ ------- ------- ---------- -------- --------
Issuance of Common Stock of
DTR-Med Pharma Corp. 1,221,890 $1,222 -- $ -- $(1,222) $ -- $ --
Net loss -- -- -- -- -- (50,000) (50,000)
--------- ------ ----- ----- ------- -------- --------
Balance at March 31, 2001 1,221,890 $1,222 -- $ -- $(1,222) $(50,000) $(50,000)
========= ====== ===== ===== ======= ======== ========
See notes to financial statements.
F-27
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
STATEMENT OF CASH FLOWS
Period from inception (January 26, 2001)
through March 31, 2001
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(50,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization --
Changes in assets and liabilities:
Accrued expenses 50,000
--------
Net cash used in operating activities --
--------
NET INCREASE IN CASH --
CASH AND CASH EQUIVALENTS, Beginning --
--------
CASH AND CASH EQUIVALENTS, End $ --
========
SUPPLEMENTAL DISCLOSURES OF CASH PAYMENTS
Interest $ --
========
Taxes $ --
========
See notes to financial statements.
F-28
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Formation
On January 26, 2001, Developed Technology Resource, Inc. (DTR) formed DTR-Med
Pharma Corp. (the Company), a Nevada corporation, for the sole purpose of
entering into a business combination with Pro-Pharmaceuticals, Inc, a
Massachusetts corporation, a development stage biotechnology company. Subsequent
to March 31, 2001 the Company's name was changed to Pro-Pharmaceuticals, Inc.
Significant Accounting Policies
Income Taxes -- The Company accounts for income taxes under the asset and
liability method. Deferred income taxes and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates for the period in which the differences are
expected to reverse.
Use of Estimates in Financial Statements -- Management uses estimates and
assumptions in preparing these financial statements in accordance with generally
accepted accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could
vary from the estimates that were used.
NOTE 2 -- SUBSEQUENT EVENTS
Stock Exchange and Merger
On May 15, 2001, 1,221,890 shares of the Company's stock were distributed by DTR
to its stockholders. Subsequent to the distribution, the Company issued an
additional 12,354,670 shares to the stockholders of Pro-Pharmaceuticals, Inc. (a
Massachusetts corporation) in exchange for all of the outstanding shares of
common stock of that corporation, diluting the Company's prior stockholders'
percentage to approximately 9 percent. Following the exchange,
Pro-Pharmaceuticals, Inc. (a Massachusetts corporation) will be merged into the
Company. After this merger, the Company will be the surviving corporation and
assume all assets and liabilities of both corporations.
Pro-Pharmaceuticals, Inc. (a Massachusetts corporation) has raised approximately
$1,200,000 in a private placement of convertible debt. Currently,
Pro-Pharmaceuticals, Inc. is undertaking a private placement of common stock and
common stock purchase warrants and filing a registration statement on Form 10-SB
to make the Company a reporting entity under the Securities Exchange Act of
1934.
F-29
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
For accounting purposes, the previous Pro-Pharmaceuticals, Inc. (Massachusetts)
will be treated as the continuing reporting entity in the form of a reverse
acquisition.
Contractual Rights
On April 23, 2001, DTR contributed certain contractual rights (see below) for
equity. DTR owned a fifty percent interest in Medical Biophysics International,
a partnership, (MBI) which owned certain rights regarding technologies and
patents. MBI assigned these rights to Artann Corporation d/b/a Artann
Laboratories. That corporation then assigned those rights to ArMed LLC. In
consideration for the assignment of these rights DTR was to receive certain
payments relating to royalties or production of the MBI technology. DTR assigned
these rights to the Company on April 23, 2001. The Company recorded the
contractual rights received from DTR at DTR's carrying cost, which was $1,222 at
the time of the assignment; this is due to the fact that the entities were under
common control.
NOTE 3 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities as of March 31, 2001
are as follows:
Current Long-Term
Asset Liability
-------- ---------
Net operating loss carryforward $ 20,000 $ --
Valuation allowance (20,000) --
-------- --------
Asset (liability) $ -- $ --
-------- --------
The valuation allowance at March 31, 2001 relates primarily to tax assets
associated with net operating losses. Management's assessment is that the nature
of future taxable income may not allow the Company to realize the tax benefits
of net operating losses within the prescribed carry forward period. Accordingly,
an appropriate valuation allowance has been made.
F-30
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The provision for income taxes consisted of the following components for the
period from inception (January 26, 2001) through March 31, 2001:
Currently payable $ --
Deferred income tax benefit 20,000
Change in valuation allowance (20,000)
--------
$ --
--------
At March 31, 2001, the Company has approximately $50,000 of available net
operating loss carryforwards for income tax purposes, which will expire through
2020 for federal and state income tax purposes.
F-31
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
Pro-Pharmaceuticals, Inc.
(formerly DTR-Med Pharma Corp.)
Reno, Nevada
We have audited the accompanying balance sheet of Pro-Pharmaceuticals, Inc.
(formerly DTR-Med Pharma Corp.) as of May 15, 2001 and the related statements of
operations, changes in stockholders' equity and cash flows for the period from
inception (January 26, 2001) through May 15, 2001. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pro-Pharmaceuticals, Inc.
(formerly DTR-Med Pharma Corp.) at May 15, 2001, and the results of its
operations and cash flows for the period from inception (January 26, 2001)
through May 15, 2001, in conformity with accounting principles generally
accepted in the United States of America.
SIMIONE SCILLIA LARROW & DOWLING LLC
Hartford, Connecticut
June 6, 2001
F-32
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
BALANCE SHEET
May 15, 2001
ASSETS
OTHER ASSETS
Contractual rights $ 1,222
--------
$ 1,222
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accrued expenses $ 75,000
--------
Total current liabilities 75,000
--------
STOCKHOLDERS' EQUITY
Common stock
Voting shares, $0.001 par value,
100,000,000 shares authorized,
1,221,890 shares issued and outstanding 1,222
Undesignated shares, $0.01 par value,
5,000,000 shares authorized --
Deficit accumulated (75,000)
--------
(73,778)
--------
$ 1,222
========
See notes to financial statements.
F-33
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
STATEMENT OF OPERATIONS
Period from inception (January 26, 2001)
through May 15, 2001
REVENUE $ --
-----------
GENERAL AND ADMINISTRATIVE
Legal fees 40,000
Consulting fees 15,000
Accounting fees 10,000
Other expenses 10,000
-----------
75,000
NET LOSS $ (75,000)
===========
EARNINGS PER SHARE
Basic $ (0.06)
===========
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 1,221,890
===========
See notes to financial statements.
F-34
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Period from inception (January 26, 2001)
through May 15, 2001
Common Stock
---------------------------------------------
Voting Shares Undesignated Shares
--------------------- -------------------- Retained
Shares Amount Shares Amount Earnings Total
--------- -------- ------- -------- -------- --------
Issuance of Common Stock of
DTR-Med Pharma Corp. 1,221,890 $1,222 -- $ -- $ -- $ 1,222
Net loss -- -- -- -- (75,000) (75,000)
--------- ------ ------- -------- -------- --------
Balance at May 15, 2001 1,221,890 $1,222 -- $ -- $(75,000) $(73,778)
========= ====== ======= ======== ======== ========
See notes to financial statements.
F-35
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
STATEMENT OF CASH FLOWS
Period from inception (January 26, 2001)
through May 15, 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(75,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization --
Changes in assets and liabilities:
Accrued expenses 75,000
--------
Net cash used in operating activities --
--------
NET INCREASE IN CASH --
CASH AND CASH EQUIVALENTS, Beginning --
--------
CASH AND CASH EQUIVALENTS, End $ --
========
SUPPLEMENTAL DISCLOSURES OF CASH PAYMENTS
Interest $ --
========
Taxes $ --
========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
During the year, the Company received certain contractual rights of
Developed Technology Resource, Inc., valued at $1,222, in exchange for
shares of the common stock of the Company.
See notes to financial statements.
F-36
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Formation
On January 26, 2001, Developed Technology Resource, Inc. (DTR) formed DTR-Med
Pharma Corp. (the Company), a Nevada corporation, for the sole purpose of
entering into a business combination with Pro-Pharmaceuticals, Inc, a
Massachusetts corporation, a development stage biotechnology company. On April
23, 2001, DTR, the Company's parent, contributed certain contractual rights (see
below) for equity. On May 10, 2001 the Company's name was changed to
Pro-Pharmaceuticals, Inc.
Significant Accounting Policies
Contractual Rights -- DTR owned a fifty percent interest in Medical Biophysics
International, a partnership, (MBI) which owned certain rights regarding
technologies and patents. MBI assigned these rights to Artann Corporation d/b/a
Artann Laboratories. That corporation then assigned those rights to ArMed LLC.
In consideration for the assignment of these rights DTR was to receive certain
payments relating to royalties or production of the MBI technology. DTR assigned
these rights to the Company on April 23, 2001. The Company recorded the
contractual rights received from DTR at DTR's carrying cost, which was $1,222 at
the time of the assignment; this is due to the fact that the entities were under
common control.
Income Taxes -- The Company accounts for income taxes under the asset and
liability method. Deferred income taxes and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates for the period in which the differences are
expected to reverse.
Use of Estimates in Financial Statements -- Management uses estimates and
assumptions in preparing these financial statements in accordance with generally
accepted accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Actual results could
vary from the estimates that were used.
F-37
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
NOTES TO FINANCIAL STATEMENTS
NOTE 2 -- SUBSEQUENT EVENTS
Stock Exchange and Merger
On May 15, 2001, 1,221,890 shares of the Company's stock were distributed by DTR
to its stockholders. Subsequent to the distribution, the Company issued an
additional 12,354,670 shares to the stockholders of Pro-Pharmaceuticals, Inc. (a
Massachusetts corporation) in exchange for all of the outstanding shares of
common stock of that corporation, diluting the Company's prior stockholders'
percentage to approximately 9 percent. Following the exchange,
Pro-Pharmaceuticals, Inc. (a Massachusetts corporation) will be merged into the
Company. After this merger, the Company will be the surviving corporation and
assume all assets and liabilities of both corporations.
Pro-Pharmaceuticals, Inc. (a Massachusetts corporation) has raised approximately
$1,200,000 in a private placement of convertible debt. Currently,
Pro-Pharmaceuticals, Inc. is undertaking a private placement of common stock and
common stock purchase warrants and filing a registration statement on Form 10-SB
to make the Company a reporting entity under the Securities Exchange Act of
1934.
For accounting purposes, the previous Pro-Pharmaceuticals, Inc. (Massachusetts)
will be treated as the continuing reporting entity in the form of a reverse
acquisition.
NOTE 3 -- INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred income tax assets and liabilities as of May 15, 2001 are
as follows:
Current Long-Term
Asset Liability
-------- ---------
Net operating loss carryforward $ 30,000 $ --
Valuation allowance (30,000) --
-------- -------
Asset (liability) $ -- $ --
======== =======
The valuation allowance at May 15, 2001 relates primarily to tax assets
associated with net operating losses. Management's assessment is that the nature
of future taxable income may not allow the Company to realize the tax benefits
of net operating losses within the prescribed carry forward period. Accordingly,
an appropriate valuation allowance has been made.
F-38
PRO-PHARMACEUTICALS, INC.
(formerly DTR-Med Pharma Corp.)
NOTES TO FINANCIAL STATEMENTS
The provision for income taxes consisted of the following components for the
period from inception (January 26, 2001) through May 15, 2001:
Currently payable $ --
Deferred income tax benefit 30,000
Change in valuation allowance (30,000)
--------
$ --
========
At May 15, 2001, the Company has approximately $75,000 of available net
operating loss carryforwards for income tax purposes, which will expire through
2020 for federal and state income tax purposes.
F-39
PRO FORMA FINANCIAL DATA
The following unaudited pro forma balance sheet has been derived from the
unaudited balance sheet of Pro-Pharmaceuticals, Inc. (formerly DTR-Med Pharma
Corp.) (the "Company") at March 31, 2001 and the unaudited balance sheet of
Pro-Pharmaceuticals, Inc. (a Massachusetts corporation) (Pro-Pharmaceuticals MA)
at March 31, 2001, and gives the effect of the exchange of newly issued stock by
the Company for all outstanding shares of Pro-Pharmaceuticals MA as if the
transaction occurred on March 31, 2001. The transaction has been accounted for
as a reverse aquisition where Pro-Pharmaceuticals MA is the acquirer with
purchase accounting being applied for the business combination. The original
stockholders of Pro-Pharmaceuticals MA received 91 percent of the stock of the
Company. The pro forma balance sheet is presented for informational purposes
only and does not purport to be indicative of the financial condition that
actually would have resulted if the transaction had been consummated at March
31, 2001. The pro forma balance sheet should be read in conjunction with the
notes thereto and the Company's financial statements and related notes thereto
contained elsewhere in this registration statement.
Pro-
Pharmaceuticals,
Pro- Inc. (formerly
Pharmaceuticals DTR-Med
MA Pharma Corp.) Pro Forma
March 31, 2001 March 31, 2001 Adjustments Pro Forma
--------------- -------------- ----------- ---------
CURRENT ASSETS $ 840,938 $ -- $ -- $ 840,938
INVESTMENT IN SUBSIDIARY -- -- 107,000(b)
(107,000)(d)
OTHER ASSETS 40,612 -- 1,222(a)
105,778(c) 147,612
----------- --------- --------- -----------
TOTAL ASSETS $ 881,550 $ -- $ 107,000 $ 988,550
=========== ========= ========= ===========
CURRENT LIABILITIES $ 114,886 $ 50,000 $ -- $ 164,886
LONG-TERM LIABILITIES 1,099,102 -- -- 1,099,102
----------- --------- --------- -----------
TOTAL LIABILITIES 1,213,988 50,000 -- 1,263,988
----------- --------- --------- -----------
STOCKHOLDERS' EQUITY
Common stock 10,000 1,222 (10,000)(d)
12,355(b) 13,577
Additional paid-in capital -- -- (97,000)(d)
105,778(c)
94,645(b) 103,423
Stock subscription receivable (1,222) 1,222(a) --
Retained earnings (342,438) (50,000) -- (392,438)
----------- --------- --------- -----------
Total Stockholders' Equity (332,438) (50,000) 107,000 (275,438)
----------- --------- --------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 881,550 $ -- $ 107,000 $ 988,550
=========== ========= ========= ===========
F-40
Footnotes
(a) To record the receipt of Contractual Rights from Developed Technology
Resources.
(b) To record the issuance of the additional shares issued by the Company to
the stockholders of Pro-Pharmaceuticals MA as a result of the reverse
acquisition reported under purchase accounting.
(c) To record the appropriate step-up basis to the contractual property due to
purchase accounting.
(d) To eliminate the investment in subsidiary.
F-41
PRO FORMA FINANCIAL DATA
The following unaudited pro forma statement of operations has been derived from
the unaudited statement of operations of Pro-Pharmaceuticals, Inc. (formerly
DTR-Med Pharma Corp.) (the "Company") for the period from inception (January 26,
2001) through March 31, 2001 and the unaudited statement of operations for
Pro-Pharmaceutiacals, Inc. (a Massachusetts corporation) ("Pro-Pharmaceuticals
MA") for the three months ended March 31, 2001, and gives the effect of the
exchange of newly issued stock by the Company for all outstanding shares of
Pro-Pharmaceuticals MA as if the transaction occurred as of the beginning of the
period. The original stockholders of Pro-Pharmaceuticals MA received 91 percent
of the stock of the Company. The pro forma statement of operations is presented
for informational purposes only and does not purport to be indicative of the
results of operations that actually would have resulted if the transaction had
been consummated at January 1, 2001. The pro forma statement of operations
should be read in conjunction with the Company's financial statements and
related notes thereto contained elsewhere in this registration statement. The
transaction has been accounted for as a reverse acquisition where
Pro-Pharmaceuticals MA is the acquirer with purchase accounting being applied
for the business combination.
Pro-
Pharmaceuticals,
Inc. (formerly
Pro- DTR-Med
Pharmaceuticals Pharma Corp.)
MA from inception
For the Three (January 26, 2001)
Months Ended through Pro Forma
March 31, 2001 March 31, 2001 Adjustments Pro Forma
-------------- -------------- ----------- ---------
REVENUES $ -- $ -- $ -- $ --
RESEARCH AND DEVELOPMENT
EXPENSES 74,399 -- -- 74,399
GENERAL AND
ADMINISTRATIVE EXPENSES 151,472 50,000 -- 201,472
--------- ----------- ---------- ------------
OPERATING LOSS (225,871) (50,000) -- (275,871)
OTHER EXPENSES (3,640) -- -- (3,640)
--------- ----------- ---------- ------------
LOSS BEFORE PROVISION
FOR INCOME TAXES (229,511) (50,000) -- (279,511)
INCOME TAX EXPENSE -- -- -- --
--------- ----------- ---------- ------------
NET LOSS $(229,511) $ (50,000) $ -- $ (279,511)
========= =========== ========== ============
LOSS PER SHARE
Basic and fully diluted $ (2.30) $ (0.04) $ -- $ (0.02)
========= =========== ========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic and fully diluted 100,000 1,221,890 12,354,670* 13,576,560
========= =========== ========== ============
* As a result of the stock exchange transaction between the Company and
Pro-Pharmaceuticals MA, where the stockholders of Pro-Pharmaceuticals MA
received approximately 91 percent of the Company's common stock, in
exchange for all of the outstanding stock of Pro-Pharmaceuticals MA, the
ending common stock totaled 13,576,560 shares issued and outstanding as of
the date of the merger.
F-42
PART III
Item 1. Index to Exhibits
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Articles of Incorporation of the Registrant, dated January 26, 2001*
3.2 By-laws of the Registrant*
10.1 Assignment and Assumption Agreement, dated April 23, 2001, by and
between Developed Technology Resource, Inc. and DTR-Med Pharma Corp.*
10.2 Stock Exchange Agreement, dated April 25, 2001, by and among Developed
Technology Resource, Inc., DTR-Med Pharma Corp., Pro-Pharmaceuticals,
Inc. (Massachusetts) and the Shareholders (as defined therein)*
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB, as filed with the Commission on June 13, 2001
37
Item 2. Description of Exhibits
Text of Exhibits included in filing.
38
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRO-PHARMACEUTICALS, INC.
Registrant
By: /s/ David Platt
--------------------------------------
Name: David Platt
Title: President
Dated: April 12, 2002
39
Exhibit
Number Description of Document
- ------- -----------------------
3.1 Articles of Incorporation of the Registrant, dated January 26, 2001*
3.2 By-laws of the Registrant*
10.1 Assignment and Assumption Agreement, dated April 23, 2001, by and
between Developed Technology Resource, Inc. and DTR-Med Pharma Corp.*
10.2 Stock Exchange Agreement, dated April 25, 2001, by and among Developed
Technology Resource, Inc., DTR-Med Pharma Corp., Pro-Pharmaceuticals,
Inc. (Massachusetts) and the Shareholders (as defined therein)*
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB, as filed with the Commission on June 13, 2001
40