Registration No. 333-74604
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRO-PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its Charter)
Nevada 8731 04-3562325
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification No.)
or organization) Code Number)
189 Wells Avenue, Suite 200
Newton, Massachusetts 02459
(617) 559-0033
(Address and Telephone Number of
Principal Executive Offices)
David Platt, Ph.D.
President and Chief Executive Officer
Pro-Pharmaceuticals, Inc.
189 Wells Avenue, Suite 200
Newton, Massachusetts 02459
(617) 559-0033
(Name, Address and Telephone Number
of Agent for Service)
with copies to:
Jonathan C. Guest, Esq.
Perkins, Smith & Cohen, LLP
One Beacon Street
Boston, Massachusetts 02108
(617) 854-4000
Approximate date of re-commencement of proposed sale to the public: As soon
as possible after this Post-Effective No. 1 to the Form SB-2 Registration
Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box [_]
CALCULATION OF REGISTRATION FEE
Title of Each Class of Number of Proposed Maximum Proposed Maximum
Securities to be Units/Shares to be Offering Price per Aggregate Offering Amount of
Registered Registered (1) Unit (2) Price (3) Registration Fee (3)
Common Stock,
$.001 par value 2,650,462 $3.50 $9,276,617 $2,811
(1) Total represents 1,428,572 shares of Common Stock to be offered by the
Registrant and up to 1,221,890 already issued shares of the Common Stock of
the Registrant to be offered by selling security holders of the Registrant.
In the event of a stock split, stock dividend or similar transaction
involving the Common Stock of the Registrant, in order to prevent dilution,
the number of shares registered shall be automatically increased to cover
additional shares in accordance with Rule 416(a) under the Securities Act.
(2) Represents proposed maximum price per share of Common Stock to be offered
by the Registrant.
(3) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act, based on proposed
maximum offering price per share of Common Stock to be offered by the
Registrant.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
PRO-PHARMACEUTICALS, INC.
2,650,462 Shares of Common Stock
$.001 par value
Of the 2,650,462 shares of Pro-Pharmaceuticals common stock offered by this
prospectus, 1,428,572 shares are being sold by Pro-Pharmaceuticals on a "best
efforts" basis. The other 1,221,890 shares may be offered and sold, from time to
time, by the selling security holders identified in this prospectus. We will not
receive any of the proceeds from the sale of shares by the selling security
holders.
There is currently no market for our common stock. We anticipate that we
will retain a market maker to apply for trading of our common stock on the
Over-the-Counter Bulletin Board following effectiveness of this registration
statement.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 2 TO READ ABOUT CERTAIN RISKS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Proceeds to
Price to Public Placement Fees (1) Company (2)
Per Share $3.50 $0.2975 $3.2025
Total (3) $5,000,000 $425,000 $4,575,000
(1) The 1,428,572 shares offered by Pro-Pharmaceuticals are being offered
principally to selected institutional and accredited investors. We have
retained Atlas Capital Services, LLC, to act, on a best efforts basis, as
our placement agent in connection with the arrangement of this transaction.
We have agreed, among other things, to pay Atlas Capital a fee, including
issuance of warrants, in connection with the arrangement of this financing
and to indemnify Atlas Capital against certain liabilities, including
liabilities under the Securities Act of 1933. See "Plan of Distribution."
(2) Before deducting expenses payable by Pro-Pharmaceuticals estimated at
$120,000. We will not receive any proceeds from the sale of shares by the
selling security holders.
(3) We cannot assure you that any of the shares of common stock offered by this
prospectus will be sold. Since the offering is made on a best efforts
basis, there is no firm commitment by Atlas Capital to purchase or sell any
of the shares of common stock. There is no minimum number of shares of
common stock required to be sold by us, and no arrangements have been made
to escrow any proceeds of the offering. Therefore, we may sell less than
all of the shares of common stock offered hereby, which may significantly
reduce the amount of proceeds that we receive. We anticipate concluding our
offering of common stock on June 11, 2002.
The date of this Prospectus is April ____, 2002.
Legend for Residents of all States:
The securities offered hereby have not been registered under the securities
laws of any state and are being offered and sold in reliance on exemptions from
the registration requirements of such laws. The securities may be subject to
restrictions on transferability and resale under state securities laws and may
not be transferred or resold except as permitted under such laws pursuant to
registration or exemption therefrom. This prospectus, as accessible
electronically as an EDGAR filing on the Securities and Exchange Commission
website or other commercial websites, does not constitute an offer or
solicitation in any state (including California and Michigan) or jurisdiction in
which such offer or solicitation is not authorized.
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................................................1
THE OFFERING..................................................................................................2
RISK FACTORS..................................................................................................2
We are at an early stage of development without operating history........................................3
We have incurred net losses to date and depend on outside capital........................................3
We may not be able to sell all of the shares we are currently offering...................................4
Our product candidates will be based on novel technologies...............................................4
We must successfully develop products in order to generate revenue.......................................4
We will need regulatory approvals to commercialize our products..........................................5
Our product candidates may not be successfully commercialized............................................5
We have no experience in clinical trials.................................................................6
Our competitive position depends on protection of our intellectual property..............................6
Our products could infringe on the intellectual property rights of others................................7
Our lack of operating experience may cause us difficulty in managing our growth..........................8
Our business is subject to technological obsolescence....................................................8
We face intense competition in the biotechnology and pharmaceutical industries...........................8
We will depend on third parties to manufacture and market our products...................................9
We depend on key personnel to develop our products and pursue collaborations.............................9
A former employer of our President alleged in early 2001 a violation of a non-competition
covenant expiring on June 29, 2002.......................................................................9
We face potential difficulties in obtaining product liability and related insurance.....................10
Health care cost containment initiatives may limit our returns..........................................10
Environmental regulations may affect our manufacturers and other contractors............................11
Our ability to conduct animal testing could be limited in the future....................................11
Stock prices for biopharmaceutical and biotechnology companies are volatile.............................11
Our stock is not listed on any exchange or quoted on Nasdaq.............................................12
If our stock is a "penny stock," your ability to trade our shares could be
adversely affected....................................................................................12
Purchasers of stock may be subject to substantial dilution..............................................12
Four principal stockholders own enough shares to control the company....................................12
FORWARD-LOOKING STATEMENTS...................................................................................14
USE OF PROCEEDS..............................................................................................14
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS..................................................15
PLAN OF OPERATION............................................................................................17
CAPITALIZATION...............................................................................................20
SELECTED FINANCIAL DATA......................................................................................20
BUSINESS.....................................................................................................21
MANAGEMENT...................................................................................................38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............................................41
DILUTION.....................................................................................................43
SELLING SECURITY HOLDERS.....................................................................................43
PLAN OF DISTRIBUTION.........................................................................................47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................................................50
DESCRIPTION OF CAPITAL STOCK.................................................................................51
LEGAL MATTERS................................................................................................51
EXPERTS......................................................................................................52
FINANCIAL STATEMENTS........................................................................................F-1
NOTE: The Registration Statement on Form SB-2 of the Registrant, as filed with
the Commission on December 5, 2001, is being amended by this Amendment No. 1
primarily for the following reasons: (1) to reflect restatement of the audited
financial statements of Pro-Pharmaceuticals, Inc., a Massachusetts corporation
and predecessor to the Registrant, for the period from inception (July 10, 2000)
through December 31, 2000; (2) to include the Registrant's audited financial
statements for the year ended December 31, 2001; and (3) to update disclosure
since the Registration Statement as originally filed was declared effective on
December 12, 2001.
PROSPECTUS SUMMARY
About This Prospectus
This prospectus is part of a registration statement we filed with the U.S.
Securities and Exchange Commission. You should rely only on the information
provided in this prospectus. Neither we, Atlas Capital nor the selling security
holders listed in this prospectus have authorized anyone to provide you with
information different from that contained in this prospectus.
Pro-Pharmaceuticals and the selling security holders are offering to sell, and
seeking offers to buy, shares of common stock only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of common stock. Applicable SEC rules
may require us to update this prospectus in the future. This preliminary
prospectus is subject to completion prior to this offering.
About Pro-Pharmaceuticals, Inc.
We are currently in the development stage and have not yet generated any
operating revenues. Since the formation in July 2000 of our predecessor,
Pro-Pharmaceuticals, Inc., a Massachusetts corporation, we have been engaged in
research and development activities in connection with identifying and
developing a technology that will reduce toxicity and improve the efficacy of
currently-used drug therapies, including cancer chemotherapies, by combining the
drugs with a number of carbohydrate compounds. Our preliminary studies have
identified certain mannans, a group of polysaccharides, that could be utilized
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 to glucose. We believe that a mannan having
a suitable chemical structure and composition, when attached to or combined with
the active agent of a chemotherapy drug, would increase cellular membrane
fluidity and permeability, thereby assisting delivery of the drug. We are
currently conducting preclinical animal experiments.
Corporate Information
We were incorporated as "DTR-Med Pharma Corp." under Nevada law in January
2001 for the purpose of acquiring all the outstanding stock of our predecessor,
Pro-Pharmaceuticals, Inc., which was a Massachusetts corporation engaged in a
business we desired to acquire. From our incorporation until just before the
acquisition, we were 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 contractual rights that are
described below under "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
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record as of May 7, 2001. In anticipation of the acquisition of the
Massachusetts company, we changed our name to "Pro-Pharmaceuticals, Inc."
On May 15, 2001, we acquired all of the outstanding common stock of the
Massachusetts corporation. We acquired these shares in exchange for 12,354,670
shares of our common stock. As a result, that corporation became our wholly
owned subsidiary, and its shareholders through an exchange owned approximately
91% of the outstanding shares of our common stock, with the Developed Technology
shareholders owning the remaining 9%. See "Security Ownership of Certain
Beneficial Owners and Management" for information about the ownership of our
common stock. After the acquisition, we merged with the Massachusetts
corporation and are the surviving corporation in the merger.
As required by the stock exchange agreement that effected the acquisition,
we registered our common stock under the Securities Exchange Act of 1934 by
filing a Registration Statement on Form 10-SB with the Securities and Exchange
Commission that became effective on August 13, 2001. Our articles of
organization provide that our common stock may not be sold without our approval
until the 90th day after the date our common stock is registered. Accordingly,
our common stock became eligible for transfer, subject to applicable federal and
state securities law requirements, as of November 11, 2001. We anticipate that
we will retain a market maker to apply for trading of our common stock on the
Over-the-Counter Bulletin Board following effectiveness of this registration
statement.
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 foley@pro-pharmaceuticals.com, and our website address is
www.pro-pharmaceuticals.com.
THE OFFERING
Common stock offered by us: 1,428,572 shares
Common stock offered by the selling security holders: 1,221,890 shares
Common stock currently outstanding (as of April 8, 2002): 15,524,410 shares
Common stock to be outstanding after the
offering assuming sale of all common stock
offered by us: 16,952,982 shares
Use of Proceeds: We intend to use the net proceeds of this offering to fund
research and development activities, conduct pre-clinical
experiments, and for other general corporate purposes.
We will not receive proceeds from the sale of shares by
the selling security holders.
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information
contained in this prospectus before deciding to invest in our common stock. The
risks described below are not the only ones facing our company. Additional risks
not presently known to us or which we currently consider immaterial may also
adversely affect our business. 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. If any of the following risks actually happen, our
business, financial condition and operating results could be materially
adversely affected. In this case, no market may develop for our common stock or,
if there is a market, the trading price of our common stock could decline, and
you could lose part or all of your investment.
We are at an early stage of development without operating history.
We are a development-stage venture without operating history. Our future
revenues and profits are uncertain. 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 depend on outside capital.
Our predecessor, Pro-Pharmaceuticals (Massachusetts) had incurred net
operating losses since its incorporation in July 2000. Our accumulated deficit
as of December 31, 2001 was approximately $4,158,000 which includes
approximately $1,960,000 of various non-cash charges related to certain equity
transactions. 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 December 31, 2001, we had approximately $1,491,000 in cash and cash
equivalents. We have budgeted expenditures for the twelve-month period ending
December 31, 2002 of approximately $5,600,000. We attempted to fund these
expenditures through proceeds of a private placement that we began in May 2001.
We abandoned the private placement as of December 3, 2001, and terminated all
offering activity on or before that date. We raised $2,237,500 prior to
termination.
On December 13, 2001, we commenced a public offering of 1,428,572 shares of
our common stock, at a price to the public of $3.50 per share, pursuant to this
registration statement on Form SB-2 as originally filed and declared effective
by the SEC on December 12, 2001. We anticipated concluding the offering on
February 11, 2002 but extended the offering until June 11, 2002. As of April 8,
2002, we had sold but not issued approximately 50,570 shares pursuant to our
public offering.
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, debt financings, bank
borrowings, or other sources. Our capital requirements will depend upon numerous
factors, including the following:
o the establishment of collaborations
3
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.
We may not be able to sell all of the shares we are currently offering.
Upon this registration becoming effective, we plan to offer and sell to
institutional and accredited investors identified by Atlas Capital Services,
LLC, as our placement agent, shares of our common stock for proceeds of up to
$5,000,000 before expenses. Please see "Plan of Operation -- Liquidity and
Capital Resources" for further discussion of our present financing plans. If we
sell all of the 1,428,572 shares through Atlas Capital that we are offering by
this prospectus, our estimated proceeds would be $4,455,000 after deducting the
estimated placement fee of $425,000 and offering expenses including $20,000 as a
placement agent due diligence fee and estimated $100,000 for accounting, legal
and printing expenses. We cannot assure you that we will succeed in selling any
or all of the shares of common stock we are currently offering. We have not
fixed a minimum number of shares of common stock to be sold by us in this
offering. Therefore, we may sell less than all of the shares of common stock
offered by this prospectus, which may significantly reduce the amount of
proceeds we receive. 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.
Our product candidates will be based on novel technologies.
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.
We must successfully develop products in order to generate 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
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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 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.
We will need regulatory approvals 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 -- Business of
Pro-Pharmaceuticals -- Government Regulation," below. 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.
Our product candidates may not be successfully commercialized.
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:
5
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 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.
We have no experience in conducting clinical trials and will be dependent
on others to conduct our 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.
Our competitive position depends on protection of our intellectual property.
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 two pending patent
applications, as well as a provisional patent application as discussed below
under "Business -- Business of Pro-Pharmaceuticals -- 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
6
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 below under "Business -- Business of
Pro-Pharmaceuticals -- 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.
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.
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.
Our products could infringe on the intellectual property rights of others.
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
7
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.
Our business is subject to technological obsolescence.
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 face intense competition 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.
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.
8
We will depend on third parties to manufacture and market 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.
We depend on key personnel to develop our products and pursue collaborations.
We are highly dependent on Dr. David Platt, President and Chief Executive
Officer, and Dr. Anatole Klyosov. Dr. Klyosov is a member of our Scientific
Advisory Board and he owns 50% of MIR International, Inc., which provides
consulting services regarding our research and development. 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 have not entered into an employment agreement with Dr. Platt.
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 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.
A former employer of our President alleged in early 2001 a violation of a
non-competition covenant expiring on June 29, 2002.
SafeScience, Inc. (now known as GlycoGenesys, Inc.), former employer of Dr.
David Platt, our President and Chief Executive Officer, alleged in a letter
dated February 15, 2001 that he violated his employment severance agreement
dated June 1, 2000, and included an allegation that his engagement with our
company violates his non-competition covenant with SafeScience. Dr. Platt
responded in a letter dated February 19, 2001 that our business is not
competitive because, among other things, we are developing methods to reduce
toxicity of currently existing chemotherapy drugs, whereas SafeScience is
engaged in new drug development. SafeScience indicated a
9
willingness a resolve these matters but attempts to set up a meeting were
unsuccessful. SafeScience has not pursued the matter with Dr. Platt or our
company. Dr. Platt's non-competition covenant with SafeScience expires on June
29, 2002. An evaluation cannot be made at this time of the likelihood of a
favorable or unfavorable outcome, nor can any estimate be made as to the amount
or range, if any, of potential loss. If SafeScience makes demands against us
with respect to the allegations, we intend to vigorously contest all such
allegations.
We face potential difficulties in obtaining product liability and related
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.
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
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
10
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.
Environmental regulations may affect our manufacturers and other contractors.
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 volatile.
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. 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
11
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 or quoted on Nasdaq.
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 SmallCap Market. We are
taking 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.
If our stock is a "penny stock," your ability to trade our shares could be
adversely affected.
The SEC has adopted regulations imposing limitations upon the manner in
which certain low priced equity securities, referred to as "penny stocks," are
publicly traded. Under these regulations, a penny stock is defined as any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. These exceptions include any equity security listed on a
national exchange, the Nasdaq National Market System or SmallCap Market and any
equity security issued by a company meeting specified requirements for net
tangible assets or revenues. Unless an exception is available, the regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the associated risks.
The regulations also require certain broker-dealers who recommend penny stocks
to persons other than established customers and certain accredited investors to
make a special written suitability determination for the purchaser and receive
the purchaser's written agreement to a transaction prior to sale. These
requirements make it more difficult to effect transactions in penny stocks as
compared to other securities.
Our common stock is not yet publicly traded. Since we do not meet any of
the requirements that would exempt us from the $5.00 per share market price
requirement, our stock must trade above that level in order for it not to be
classified as a "penny stock." We are uncertain that trading prices at this
level can be established or sustained. Should trading prices fall below $5.00
per share, our shares could be considered a "penny stock" and your ability to
trade our shares could accordingly be adversely affected.
Purchasers of stock may be subject to substantial dilution.
We are offering our common stock to the public at a price that is
substantially higher than the net tangible book value per share of our common
stock, as discussed in "Dilution," below. If you purchase common stock that
Pro-Pharmaceuticals is offering with this prospectus, you will therefore incur
immediate and substantial dilution.
Four principal stockholders own enough shares to control the company.
Four of our principal stockholders, David Platt, James Czirr, Offer Binder
and Anatole Klyosov, own or control approximately 80% of our outstanding shares
of our common stock, and Dr. Platt and Mr. Czirr together own approximately 64%.
Even if we sell all of the 1,428,572
12
shares that we are currently offering in this prospectus, the four stockholders
named above would still control approximately 73% of our common stock, with Dr.
Platt and Mr. Czirr together controlling about 58%. 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.
13
FORWARD-LOOKING STATEMENTS
This prospectus 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. Accordingly, readers should not place undue
reliance on forward-looking statements. We undertake no obligation to publicly
release the result of any revision of these forward-looking statements to
reflect events or circumstances after the date they are made or to reflect the
occurrence of unanticipated events.
USE OF PROCEEDS
If we sell all of the 1,428,572 shares we are offering by this prospectus
through Atlas Capital, our estimated proceeds would be $4,455,000 after
deducting the estimated placement fee and offering expenses. We cannot assure
you that we will succeed in selling any or all of the shares of common stock we
are currently offering. See "Risk Factors -- We may not be able to sell all of
the shares we are currently offering" for further discussion about risks
connected with this offering.
We will not receive any proceeds from the sale of common stock by the
selling security holders.
We expect to use approximately $3,500,000 of the aggregate net proceeds of
this offering to fund our research and development efforts, including ongoing
development of our technologies, pre-clinical and clinical testing and other
costs associated with our pharmaceutical discovery and development programs. The
remainder of the aggregate net proceeds will be used for working capital and
general corporate purposes including general and administrative ($800,000),
equipment and leaseholds ($80,000) and contingency allowance ($75,000).
The amounts actually expended for each purpose may vary significantly
depending upon a number of factors, including:
o the progress of our drug delivery research and development efforts
o our ability to establish collaborative arrangements
o progress with pre-clinical studies and clinical trials
o the time and costs involved in obtaining regulatory approvals
o the costs involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims
o competing technological and market developments
o changes in our collaborative relationships, if any
14
o costs associated with the acquisition of technology, if any
o evaluation of the commercial viability of potential products
Based on current projections, we estimate that our existing capital
resources, together with the net proceeds from this offering, will be sufficient
to fund our requirements for approximately twelve months. Pending such uses, we
intend to invest the aggregate net proceeds from this offering in short-term,
investment-grade, interest-bearing securities. We may also use a portion of the
net proceeds to acquire or invest in businesses, products and technologies that
are complementary to ours, although no agreements have been entered into as of
the date of this prospectus with respect to any such acquisition or investment.
See "Plan of Operation," below, for further discussion of our operating plans.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market for Our Common Stock
There is currently no market for our common stock. We anticipate that we
will retain a market maker to apply for trading of our common stock on the
Over-the-Counter Bulletin Board following effectiveness of this registration
statement. Our articles of organization provide that our common stock may not be
sold without our approval until the 90th day after the date our common stock is
registered under the Securities Exchange Act of 1934. We registered our common
stock under the Exchange Act by filing a Registration Statement on Form 10-SB,
which became effective as of August 13, 2001. Accordingly, our common stock
became eligible for transfer, subject to applicable federal and state securities
law requirements, as of November 11, 2001.
Shares Subject to Future Issuance
Convertible Notes
As of December 31, 2001, we had outstanding $195,000 principal amount of
notes. 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 our most recent
equity offering. This conversion price, however, may not exceed $2.00. At
maturity, the notes are automatically converted based on dividing the principal
and accrued interest by $0.50, assuming a minimum of 10,000,000 shares
outstanding. The $195,000 principal amount represents the notes that are
outstanding following an early conversion offer we made to noteholders as
described below under "Plan of Operation -- Liquidity and Capital Resources."
In April 2002, we extended the maturity date for the $195,000 of
outstanding notes for one year. In consideration for the extension, 48,750
shares of common stock will be issued to the holders of the outstanding notes.
Common Stock Warrants
Private Placement (terminated)
We began in May 2001 a private placement of securities consisting of
1,470,000 units, offered at $3.50 each, of one share of our common stock and one
warrant to purchase one share of our common stock. Such purchases resulted in
our issuing 689,300 shares of our common stock and warrants to purchase 689,300
shares of our common stock. We granted one purchaser of a
15
large block of units an option to purchase an additional 200,000 units on the
same terms as that investor's current purchase. For detail about this private
placement, see "Plan of Operation -- Liquidity and Capital Resources" below. We
abandoned the private placement as of December 3, 2001, and terminated all
offering activity on or before that date.
Warrants Issued to Former Holders of Convertible Notes
In response to our offer for early conversion of our convertible notes,
holders of an aggregate of $1,125,602 of principal amount of the convertible
notes have requested conversion of their notes. This resulted in issuance of an
additional 598,229 common stock purchase warrants identical to the warrants
being offered in our terminated private placement.
Stock Incentive Plan
On October 18, 2001, our 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 nonemployees such as directors and consultants.
The Board reserved 2,000,000 of our shares of common stock for awards pursuant
to the plan, all of which reserved shares could be awarded as incentive stock
options. The Board agreed to recommend the plan to our stockholders for approval
at the next annual or special meeting of stockholders. As of April 8, 2002, we
have granted Burton Firtel, a director of our company, a non-qualified stock
option under the plan to purchase 200,000 shares of common stock. The option is
immediately exercisable as to 120,000 shares. See "Management -- Compensation of
Directors and Advisors" for further information about this option grant.
Shares Eligible for Sale Pursuant to Rule 144 under the Securities Act
As of April 8, 2002, 15,524,410 shares of our common stock are outstanding,
including 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 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 155,244 shares as of April 8,
2002) 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
16
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 or warrants
that would require us to register any common stock under the Securities Act for
sale by security holders.
Holders
As of April 8, 2002, there were 212 holders of record of our common stock,
although we believe that there are additional beneficial owners of our common
stock who own their shares in "street name."
Dividends
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.
PLAN OF OPERATION
This Plan of Operation and other parts of this prospectus contain
forward-looking statements that involve risks and uncertainties. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of a number of
factors, including those set forth in "Risk Factors" and elsewhere in this
prospectus.
We were incorporated in January 2001 for the purpose of effecting a
business combination with Pro-Pharmaceuticals, Inc., a Massachusetts
corporation. The transaction included a merger in which we are the surviving
corporation. The business combination has been accounted for using purchase
accounting, with the assets and liabilities of the acquired company being
recorded at fair value. The merger and related transactions are discussed below
under "Business -- Initial Corporate Organization, Acquisition and Merger."
Our capital resources to date consist of (i) the proceeds of a private
placement of convertible notes issued and sold by the predecessor Massachusetts
company in anticipation of its being acquired by us, (ii) the proceeds of a
private placement begun in May 2001 of our common stock and stock purchase
warrants and (iii) the proceeds of our public offering of common stock begun in
December 2001 pursuant to this registration statement on Form SB-2 as originally
filed and declared effective by the SEC. Each is further described below.
Commencing in December 2000 and continuing through May 2001,
Pro-Pharmaceuticals (Massachusetts) issued convertible notes with an aggregate
principal amount of $1,320,602 to "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 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 our
most recent equity offering. This conversion price,
17
however, may not exceed $2.00. At maturity, the notes are automatically
converted based on dividing the principal and accrued interest by $0.50,
assuming a minimum of 10,000,000 shares outstanding. Pursuant to our early
conversion offer, described below, holders of an aggregate of $1,125,602 of
principal and accrued interest of the convertible notes have requested
conversion of their notes.
We began as of May 25, 2001 a private placement of securities 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. We abandoned this
private placement as of December 3, 2001, and terminated all offering activity
on or before that date. Purchasers under the private placement had to qualify as
"accredited investors" as such term is defined in Regulation D. The offered
securities comprised up to 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. We sold 689,300 units as of the date we abandoned the
offering. 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.
In connection with agreements with three investors in this offering who
were each willing to invest a substantial amount of funds, we 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. We
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. We
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 we notify the investor of our
receipt of notice that an investigational new drug application filed by us with
the FDA has become effective for any one of our compounds.
As of the termination of this private placement in December 2001, we had
received proceeds of $2,237,500 from the sale of the securities offered in this
private placement. Such purchases will result in our issuing 689,300 shares of
our common stock and warrants to purchase 889,300 shares of our common stock.
We have requested that the holders of the convertible notes described above
convert them, in accordance with their terms, to shares of our common stock
prior to the notes' maturity dates. In order to encourage early conversion by
September 7, 2001, we offered to issue each noteholder who converts a common
stock purchase warrant identical to the warrant offered in our terminated
private placement. In the case of a noteholder who accepted our offer, the
warrant we issued is exercisable to purchase such number of shares as is equal
to the number of shares of our common stock that the holder receives as of the
conversion of the note. In response to our offer, holders of an aggregate of
$1,125,602 of principal amount of the convertible notes have requested
conversion of their notes.
Regardless of whether a noteholder accepted our early conversion offer or
later decides to convert each of our noteholders is entitled to receive, as
"additional consideration" for originally purchasing the note, one-half (1/2)
share of our common stock for each dollar of principal. We have completed our
issuance an aggregate of 660,321 of such "additional compensation" shares. All
shares of common stock issued upon conversion of the notes are "restricted
securities" as defined in Rule 144 under the Securities Act.
18
In April 2002, we extended the maturity date for the $195,000 of
outstanding notes for one year. In consideration for the extension, 48,750
shares of common stock will be issued to the holders of the outstanding notes.
On December 13, 2001, we commenced a public offering of 1,428,572 shares of
our common stock, at a price to the public of $3.50 per share, pursuant to this
registration statement on Form SB-2 as originally filed and declared effective
by the SEC on December 12, 2001. We anticipated concluding the offering on
February 11, 2002 but extended the offering until June 11, 2002. As of April 8,
2002, we had sold but not issued approximately 50,570 shares pursuant to our
public offering.
As of December 31, 2001, we had approximately $1,491,000, and as of April
8, 2002 approximately $970,000, in cash and cash equivalents. We have budgeted
expenditures for the twelve-month period ending December 31, 2002, of
$5,600,000, comprised of anticipated expenditures for research and development
($4,400,000), general and administrative ($1,000,000), equipment and leaseholds
($100,000) and contingency allowance ($100,000).
Our financial statements have been presented on a going-concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. Pro-Pharmaceuticals is in the development stage,
has incurred a net loss since inception of approximately $4,155,000 and expects
to incur additional losses in the near future. Successful completion of our
development program and, ultimately, the attainment of profitable operations is
dependent upon future events, including maintaining adequate financing to
fulfill our development activities and achieving a level of sales adequate to
support our cost structure. We are actively seeking additional financing to fund
future operations and future significant investments in the business. However,
there can be no assurance that we will be able to obtain financing on acceptable
terms, or at all.
Additional funds may be raised through additional equity financings, as
well as borrowings and other resources. With the capital we have raised to date,
and the additional $5,000,000 under the offering described in this prospectus
that 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, which would substantially slow
progress that we might expect to make during the next twelve months 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.
19
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2001,
and also our capitalization as adjusted to reflect the sale of 1,428,572 shares
of our common stock that we are offering with this prospectus, at an assumed
maximum public offering price of $3.50 per share, and receipt of net proceeds
from this sale of $4,455,000 reflecting gross proceeds less placement agent
commissions of $425,000 (assuming all shares in offering were sold through
placement agent) and estimated offering costs of $120,000. See "Use of Proceeds"
for further information about our anticipated proceeds to us from this offering.
December 31, 2001
-----------------
Actual As Adjusted
------ -----------
Common voting shares, $0.001 par value,
100,000,000 shares authorized and
15,524,410 shares outstanding actual and
16,952,982 shares outstanding pro forma as adjusted (1) $ 15,524 $ 16,953
Undesignated shares, $0.01 par value, 5,000,000 shares
authorized, none issued -- --
Additional paid-in capital 5,450,106 9,903,677
Deferred compensation (91,575) (91,575)
Deficit accumulated during development stage (4,158,210) (4,158,210)
----------- -----------
$ 1,215,845 $ 5,670,845
=========== ===========
(1) The number of shares outstanding at December 31, 2001, excludes
approximately 50,570 shares of common stock sold, but not yet issued, after
December 31, 2001 through March 31, 2002. Also excluded are 2,078,091
shares issuable pursuant to the exercise of stock options and warrants and
conversion of convertible debt.
SELECTED FINANCIAL DATA
The income statement data for the period from July 10, 2000 (inception)
through December 31, 2000, and balance sheet data at December 31, 2000, are
derived from financial statements that have been audited by Scillia Dowling &
Natarelli LLC, which are included elsewhere in this prospectus. The income
statement data for the twelve months ended December 31, 2001, and balance sheet
data at December 31, 2001, are derived from financial statements that have been
audited by Deloitte & Touche, LLP, which are included elsewhere in this
prospectus. You should read the data set forth below in conjunction with "Plan
of Operation," above, and the financial statements and notes included in this
prospectus.
20
Period from
Inception
(July 10, 2000) Cumulative
to Year Ended since
December 31, 2000 December 31, 2001 Inception
----------------- ----------------- ----------
Income Statement Data
Revenue $ -- $ -- $ --
Net loss $ (184,582) $ (3,970,273) $(4,154,855)
Net loss per share
Basic and diluted $ (0.01) $ (0.29)
Weighted average outstanding
shares
Basic and diluted 12,354,670 13,601,795
December 31, 2000 December 31, 2001
----------------- -----------------
Balance Sheet Data
Total assets $ 227,940 $ 1,766,547
Working capital $ 23,133 $ 1,021,239
Stockholders' equity $ 46,328 $ 1,215,845
BUSINESS
Initial Corporate Organization, Acquisition and Merger
We were incorporated as "DTR-Med Pharma Corp." under Nevada law in January
2001 for the purpose of acquiring all the outstanding stock of our predecessor,
Pro-Pharmaceuticals, Inc., which was a Massachusetts corporation engaged in a
business we desired to acquire. From our incorporation until just before the
acquisition, we were 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 contractual rights that are
described below under "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. In
anticipation of the acquisition of the Massachusetts company, we changed our
name to "Pro-Pharmaceuticals, Inc."
On May 15, 2001, we acquired all of the outstanding common stock of the
Massachusetts corporation. We acquired these shares in exchange for 12,354,670
shares of our common stock. As a result, that corporation became our wholly
owned subsidiary, and its shareholders through an exchange owned approximately
91% of the outstanding shares of our common stock, with the
21
Developed Technology shareholders owning the remaining 9%. See "Security
Ownership of Certain Beneficial Owners and Management" for information about the
ownership of our common stock. After the acquisition, we merged with the
Massachusetts corporation 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 acquisition, all of our original officers and directors
resigned and were succeeded by the officers and directors of the predecessor
Massachusetts corporation, except for Peter Hauser, who has served a director
from our incorporation in January 2001. He had also served as Vice President
from that time until the acquisition.
As required by the stock exchange agreement that effected the acquisition,
we filed a registration statement in June 2001 on Form 10-SB with the Securities
and Exchange Commission in order to register our common stock under the
Securities Exchange Act of 1934. The registration of our common stock under the
Exchange Act became effective on August 13, 2001. 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. Accordingly, our common
stock became eligible for transfer, subject to applicable federal and state
securities law requirements, as of November 11, 2001. We anticipate that we will
retain a market maker to apply for trading of our common stock on the
Over-the-Counter Bulletin Board following effectiveness of this registration
statement.
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 registration statement.
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 foley@pro-pharmaceuticals.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:
22
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.
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
23
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 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:
24
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.
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.
25
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 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 o 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).
26
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.
Preclinical Animal Studies; Investigational New Drug Application
As discussed below, using independent laboratories we have conducted
preclinical animal experiments to study the toxicity and efficacy of
5-Fluorouracil (5-FU), and are also conducting preclinical animal experiments to
study the toxicity and efficacy of Adriamycin in combination with our mannan
compounds. The preclinical data we obtained from the studies with 5-FU will be
included in an Investigational New Drug, or IND, submission that we plan to make
to the FDA in the first half of 2002. We have already submitted some study
results to the FDA on a preliminary basis.
Toxicity Studies
Results of one toxicity study conducted in early 2001 indicate that one of
our mannan compounds, named Davanat-1, 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, Davanat-1, 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, also conducted in early 2001, 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.
27
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.
In four subsequent preclinical experiments conducted in June and September
2001, we studied on larger animals the toxicity reduction of 5-FU in combination
with Davanat-1, which had demonstrated toxicity reduction in the prior 5-FU
study. These experiments were performed in accordance with FDA guidelines and
recommendations on rats (acute and long-term toxicity study) and dogs (acute and
long-term toxicity study) measuring the effect of the 5-FU/Davanat-1 combination
on blood structure and survival of these animals. Preliminary results indicate
that the 5-FU/Davanat-1 combination decreased toxicity using this measure
because it resulted in lower animal mortality and decreased loss of blood
structure components in comparison to the results of tests which administered
5-FU alone.
These four experiments were conducted by Redfield Laboratories, Inc., based
in Redfield, Arkansas and licensed by the U.S. Department of Agriculture to
conduct research in laboratory animals. Testing conditions at Redfield
Laboratories are in compliance with the federal Animal Welfare Act. Redfield
Laboratories is not affiliated with Pro-Pharmaceuticals.
Efficacy Study
A preliminary study was performed to test a potential change in therapeutic
efficacy of 5-FU in a combination with Davanat-1, which had 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 Davanat-1 might diminish both toxicity and efficacy in parallel, if the
Davanat-1 were merely competing with 5-FU for binding with cells, healthy or
cancerous. Results of the study demonstrated, however, that Davanat-1, which may
decrease toxicity of 5-FU, may also increase efficacy of the drug when the drug
combined with Davanat-1 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/Davanat-1 combination. When the
5-FU/Davanat-1 combination was administered, the time for the tumor to quadruple
in size in the animals increased from 24 days (5-FU alone administered) to 56
days (5-FU/Davanat-1 combination administered) relative to 12 days for control
animals (no drug administered).
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.
Carbohydrate-Cancer Drug Formulations
We are currently developing formulations of carbohydrates linked to
anti-cancer drugs. We have chemically synthesized four novel products that are
carbohydrate derivatives of Adriamycin, and have conducted preclinical animal
experiments, studying both toxicity (on healthy animals) and efficacy (on
cancer-carrying animals). Preliminary results of these experiments indicate that
all four of the synthesized carbohydrate-Adriamycin compounds, and particularly
one, named Galactomycin, are significantly less toxic compared with the original
Adriamycin, and demonstrate therapeutic efficacy as well. In the case of
Galactomycin, the preliminary results indicated a therapeutic efficacy higher
than that for the parent Adriamycin. These studies were conducted at the Academy
of Medical Sciences, Moscow, Russia.
28
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 That May Affect Results -- Our product candidates will
be based on novel technologies" below.
IND Application; Anticipated Phase I Study
We have engaged Averion, Inc., of Framingham, Massachusetts, for the
purpose of assisting us in matters including statistical analysis, pre-IND
support services and design and implementation of our future Phase I study. To
date, Averion has prepared a statistical analysis report and has conducted
pre-IND support services, all in accordance with work assignments as they and we
establish from time to time. Work assignments dated February 20, 2002 and
February 26, 2002, in connection with statistical analysis support, provide that
those services are to be charged on an hourly basis. As of April 8, 2002,
charges have aggregated approximately $89,000 for those services. A work
assignment dated March 1, 2002 concerns services in connection with our
anticipated Phase I study, not yet started, with a budget cost estimate of
$570,000.
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
29
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. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of, we determined that
the carrying amount of this asset may not be recoverable and we wrote down the
value of the asset to the amount of future cash flows expected to be generated
by the asset. As a result of this we wrote off the $107,000 contractual rights
in 2001.
We may 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.
Patents and Proprietary Rights
We have six pending utility patent applications in the United States. The
patent applications cover methods and compositions for reducing side effects in
chemotherapeutic formulations, and improving efficacy and reducing toxicity of
chemotherapeutic agents. Two of our utility patents are filed worldwide under
the Patent Cooperation Treaty. (In order to retain the benefit of a PCT
application, national applications must be filed before the appropriate
deadlines.)
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 That May Affect Results -- Our
competitive position depends on protection of our intellectual property" below,
for additional discussion of risks related to intellectual property.
We filed with the U.S. Patent and Trademark Office (PTO) applications to
register the following trademarks/service marks: ADVANCING DRUGS THROUGH
GLYCOSCIENCE; GLYCO-UPGRADE; PRO-PHARMACEUTICALS, INC.; DAVANAT; UCLT and
UNIVERSAL CARBOHYDRATE LINKER TECHNOLOGY. The PTO 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. In February 2002, the PTO issued Notices of Allowance for two of these
marks, ADVANCING DRUGS THROUGH GLYCOSCIENCE, and GLYCO-UPGRADE. In order to
obtain registrations, we must file evidence of use by August 2002, or we must
file an for an extension of time to provide evidence of use. In January 2002,
the PTO informed us that the mark PRO-PHARMACEUTICALS, INC. has been approved
for publication. Unless an opposition to registration is timely filed, the PTO
will issue a Notice of Allowance for this mark.
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
30
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. Redfield
Laboratories, Inc., based in Redfield, Arkansas, is licensed by the U.S.
Department of Agriculture to conduct research in laboratory animals. Testing
conditions at Redfield Laboratories are in compliance with the federal Animal
Welfare Act. Redfield Laboratories is not affiliated with Pro-Pharmaceuticals.
Our current research on toxicity and efficacy of several chemotherapy drugs
both alone and in combinations with our mannans on cancer-carrying animals is
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, 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," above, 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 will depend on third parties to manufacture and market our
products," above, 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.
31
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 will depend on
third parties to manufacture and market our products," above.
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. Please see "Risk Factors --
We face intense competition in the biotechnology and pharmaceutical industries,"
above, 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.
32
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
- -- We will need regulatory approvals to commercialize our products," above, 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
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
33
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.
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.
34
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.
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
35
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
As of April 8, 2002, we have three employees, including David Platt, our
President and Chief Executive Officer; Maureen Foley, our Chief Operating
Officer; and an administrative assistant. All are full-time employees.
Scientific and Clinical Advisory Boards
We 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; Dr. Dale H. Conaway, a director; Dr. Edgar Ben-Josef, a director; Dr.
Henry Esber; and Dr. Mildred Christian. See "Management" for additional
information about the business and educational backgrounds of these persons,
other than Drs. Klyosov, Esber and Christian, whose backgrounds are as follows:
Dr. Klyosov was the Senior Vice President, Chief Scientific Officer of
Pro-Pharmaceuticals (Massachusetts), our predecessor, as of its founding in July
2000. Dr. Klyosov owns 50% of MIR International, Inc., which provides consulting
services regarding our research and development. See "Certain Relationships and
Related Transactions -- Related Party Transactions," below. 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.
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.
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.
36
Dr. Christian is President and Chief Executive Officer of Argus
International, Inc., a provider of consulting services in regulatory affairs.
She is also Executive Director of Research of Argus and Redfield Laboratories,
both divisions of Charles River Laboratories, Inc. Since founding Argus Research
Laboratories in 1979 and Argus International in 1980, she has participated at
all levels in the performance, evaluation and submission of developmental
("teratology"), reproductive and general toxicology evaluations in over 1,800
studies from protocol to final report. Dr. Christian is a member of 20
professional organizations, and has served as president of each of the
Teratology Society, the American College of Toxicology, and the Academy of
Toxicological Sciences. She is an honorary member of the Society of Quality
Assurance and founding editor of the Journal of Toxicological Sciences. She has
edited or contributed to several major textbooks and is the author of over 120
papers and abstracts published in U.S. and international journals. Dr. Christian
obtained her Ph.D. from Thomas Jefferson University in developmental anatomy and
pharmacology.
Consulting Arrangements
We have entered into consulting arrangements directly and indirectly with
an officer and certain advisors, in order to utilize their expertise at this
stage of our corporate development. Each of the following agreements is
terminable on thirty days' notice.
Extol International Ltd., a company controlled by James Czirr, our
Executive Vice President of Business Development and a director, has agreed to
provide financing and business development services. This agreement provides for
a monthly payment of $12,500 and reimbursement of expenses. Mr. Czirr owns more
than 5% of our outstanding common stock.
MIR International, Inc., a company controlled by Anatole A. Klyosov, Ph.D.,
a member of our Scientific Advisory Board and formerly our Senior Vice President
and Chief Scientific Officer, has agreed to provide consulting services
regarding our research and development including design of preclinical
experimental protocols, arranging preclinical experiments, performing chemical
synthetic work, and preparing reports on biochemical study and clinical
applications of carbohydrates. This agreement provides for a monthly payment of
$5,000 and reimbursement of expenses. Dr. Klyosov owns more than 5% of our
outstanding common stock.
Eliezer Zomer, Ph.D., has agreed to provide consulting services with
respect to the development of standard operations procedures for the manufacture
of our medical products. This agreement provides for a monthly payment of $2,000
and reimbursement of expenses.
Offer Binder, Ph.D., has agreed to provide management advisory services.
This agreement provides for a monthly payment of $5,000 and reimbursement of
expenses. Dr. Binder owns more than 5% of our outstanding common stock.
Properties
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. The sublease
required us to provide a security deposit of $48,883, of which up to $24,442
could be in the form of a letter of credit. We paid $26,951 in cash and provided
the remainder of the security deposit in the form of a letter of credit.
37
We are currently undertaking a build-out of our office space. We estimate
that the buildout will cost approximately $80,000 before related expenditures
such as office furnishings.
Subject to completion of the buildout, we believe that our currently
leased facilities are suitable and adequate to meet our requirements for the
near term.
Legal Proceedings
Pro-Pharmaceuticals is not a party to any litigation or legal proceedings.
MANAGEMENT
Officers and Directors
The following table sets forth information about our executive officers and
directors:
Name Age as of 4/8/02 Position
---- ----------------- --------
David Platt, Ph.D. 48 President, Chief Executive Officer,
Treasurer, Secretary and Director
Maureen Foley 60 Chief Operating Officer
James Czirr 48 Executive Vice President of
Business Development and Director
Peter Hauser 61 Director
Burton C. Firtel 62 Director
Dale H. Conaway, D.V.M. 47 Director
David H. Smith 62 Director
Edgar Ben-Josef, M.D. 42 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. (now known as GlycoGenesys, Inc.) (NASDAQ SmallCap: GLGS) (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
38
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.
Ms. Foley has served as our Chief Operating Officer since October 2001 and
prior to that time served as our Manager of Operations since January 2001. She
has been involved in the start-up of several high tech companies, where she has
been responsible for the establishment and administration of business operations
including human resources and benefits, accounting and finance, marketing,
product development, and project management. Her experience at start-up
companies includes the following: From June 2000 to December 2000, she provided
business operations services as described for eHealthDirect, Inc., a developer
of medical records processing software. From October 1999 to May 2000 she
provided business operations services for ArsDigita, Inc., a developer of
business software and programs. From June 1996 to August 1999, Ms. Foley served
with Thermo Fibergen Inc., a subsidiary of Thermo Electron Corporation, a paper
waste processing developer. She is a director and Chairman of Tax/Eze, Inc. a
tax preparation and financial services company, and a director of
Stewart/Precision, Inc., a metal fabricator, and Ergonics, Inc., a project
management firm. Ms. Foley is a graduate of The Wyndham School, Boston,
Massachusetts, with a major in Mechanical Engineering.
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), our 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, where he is a Registered Principal. Mr. Hauser
received a B.A. from the University of Minnesota in 1965.
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
39
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.
Mr. Smith has served as a director since January 10, 2002. Since 1996, he
has been a Founder and Managing Director of venture capital funds, as follows:
Interim Advantage Fund, LLC (founded in 1996), Contra V.C., LLC (founded in
1998) and Tailwind V.C., LLC (founded in 2000). He has had significant business
experience in the clinical laboratory industry. He was a co-founder, Vice
President and Director of Canberra Industries, a large publicly-traded
manufacturer of analytical instruments, and also of Canberra Clinical
Laboratories, which was sold in 1986 to MetPath, Inc., a subsidiary of Corning,
Inc. Mr. Smith received a B.A. degree in Political Science from Hampden-Sydney
College in 1961.
Dr. Ben-Josef has served as a director since January 10, 2002. He is a
physician specializing in radiation oncology, both as a clinician and a
researcher. Since July 1995, he has served as an attending physician at the
Gershenson Radiation Oncology Center, Harper Hospital, in Detroit, Michigan.
Since July 2000, he has been an Associate Professor in the Department of
Radiation Oncology of the Wayne State University School of Medicine. Dr.
Ben-Josef received an M.D. degree from The Hebrew University - Hadassah School
of Medicine in Jerusalem, Israel. He received a B.Med.Sc. degree from that
institution in 1980.
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.
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 "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 (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.
Our Board of Directors on October 18, 2001 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 nonemployees such as directors and consultants.
The Board reserved 2,000,000 of our shares of common stock for awards pursuant
to the plan, all of which reserved shares could be awarded as incentive stock
options. The Board agreed to recommend the plan to our stockholders for approval
at the next annual or special meeting of stockholders. We have granted Burton
Firtel, a director of our company, a non-qualified stock option under the plan
to purchase 200,000 shares of common stock, as described below under " --
Compensation of Directors and Advisors."
We do not currently have an employment contract with Dr. David Platt or
with any other employees. We compensate Dr. Platt at a salary of $150,000 per
year. We compensate Ms. Foley at a salary of $75,000 per year.
40
Compensation of Directors and Advisors
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. As of March 31, 2002, we have
granted Burton Firtel, a director of our company, a non-qualified stock option
under our stock incentive 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of our common stock, as of April 8, 2002, by (1) each shareholder
known to us to be the beneficial owner 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 April 8, 2002.
Percentage of Class
-------------------
Shares of Common Stock Before After
Name and Address Beneficially Owned (1) Offering Offering (2)
- ---------------- ------------------ -------- --------
David Platt, Ph.D 4,952,747(3) 31.9% 29.2%
12 Appleton Circle
Newton, MA 02459
James Czirr 4,939,868(4) 31.8 29.1
425 Janish Drive
Sandpoint, ID 83864
Anatole Klyosov, Ph.D 1,235,467 8.0 7.3
36 Walsh Road
Newton, MA 02459
Offer Binder 1,245,878(5) 8.0 7.4
c/o Pasquale
via Settembrini 14/A
San Mariano
06073 Corciano (PG)
Italy
Peter L. Hauser (6) 46,000 * *
Equity Security Investments, Inc.
701 Xenia Avenue South, Suite 100
Golden Valley, MN 55416
Burton C. Firtel 273,000(7) 1.7 1.6
555 Sherman Avenue
Hamden, CT 06518
41
Percentage of Class
-------------------
Shares of Common Stock Before After
Name and Address Beneficially Owned (1) Offering Offering (2)
- ---------------- ------------------ -------- --------
Dale H. Conaway, D.V.M 19,096(8) * *
1731 Circle Pines Fort
Okemos, MI 48864
Edgar Ben-Josef, M.D -- -- --
12734 Vernon Avenue
David H. Smith 300,000(9) 1.9 1.8
82 Beachside Avenue
Greens Farms, CT 06436
All executive officers and directors as a 10,530,711 66.4% 60.9%
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 April 8, 2002, are deemed
outstanding. Such shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. This table has been
prepared based on 15,524,410 shares of common stock outstanding as of April 8,
2002.
(2) Assumes that Pro-Pharmaceuticals sells all of the 1,428,572 shares currently
being offered with this prospectus.
(3) Includes 7,379 shares, as well as 3,500 shares which may be acquired upon
the exercise of an immediately exercisable share purchase warrant, all owned by
Dr. Platt's wife, and as to which Dr. Platt disclaims beneficial ownership.
(4) Includes 15,000 shares owned by minor children of Mr. Czirr, as to which Mr.
Czirr disclaims beneficial ownership.
(5) Includes 10,411 shares owned by Mr. Binder's wife, as to which Mr. Binder
disclaims beneficial ownership.
(6) Included in selling security holders, as disclosed below in "Selling
Security Holders."
(7) Includes shares which may be acquired upon the exercise of non-qualified
stock option which is currently exercisable as to 120,000 shares. Also includes
50,000 shares which may be acquired upon the exercise of an immediately
exercisable share purchase warrant.
(8) Includes 6,250 shares which may be acquired upon the exercise of an
immediately exercisable share purchase warrant.
(9) Includes 150,000 shares which may be acquired upon the exercise of an
immediately exercisable share purchase warrant. Mr. Smith is a member and the
manager of the LLC that owns the reported securities, and disclaims beneficial
ownership of the reported securities except to the extent of his pecuniary
interest therein.
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.
42
DILUTION
At December 31, 2001, our net tangible book value was $1,215,845 or $0.08
per share. Net tangible book value per share is equal to our total tangible
assets less our total liabilities, divided by the number of shares of common
stock outstanding, which was 15,524,410 shares at December 31, 2001. For
purposes of this analysis, we assume that we will sell all of the 1,428,572
shares we are currently offering, at the proposed maximum offering price per
share of $3.50. Net tangible book value dilution per share represents the
difference between the amount per share paid by the purchasers of shares in our
offering and the pro forma net tangible book value per share of common stock
immediately after completion of this offering. After giving effect to the sale
by Pro-Pharmaceuticals of 1,428,572 shares of common stock offered with this
prospectus at the proposed maximum offering price of $3.50 per share, and after
deducting the estimated placement fee and offering expenses, our pro forma net
tangible book value at December 31, 2001, would have been approximately
$5,670,845, or $0.33 per share, representing an immediate increase in our pro
forma net tangible book value of $0.25 per share to existing stockholders and an
immediate dilution in pro forma net tangible book value of $3.17 per share to
purchasers of common stock that we are offering with this prospectus. The
following table illustrates this per share dilution:
Proposed maximum offering price per share to public $3.50
Net tangible book value per share at December 31, 2001 $0.08
Increase per share attributable to new investors $0.25
-----
Pro forma net tangible book value per share after offering $0.33
-----
Dilution per share to new investors $3.17
=====
The number of shares outstanding at December 31, 2001, excludes
approximately 50,570 shares of common stock sold, but not yet issued, after
December 31, 2001 through March 31, 2002. Also excluded are 2,078,091 shares
issuable pursuant to the exercise of stock options and warrants and conversion
of convertible debt. See Footnote (1) under "Capitalization," above. To the
extent that outstanding options or warrants are exercised, there may be further
dilution to new investors.
SELLING SECURITY HOLDERS
The selling security holders identified in the following table are offering
for sale 1,221,890 shares of common stock. These shares were issued to
shareholders of our former parent company, Developed Technology Resources, as
described above under "Business -- Initial Corporate Organization, Acquisition
and Merger." Forty thousand of these shares are being offered by directors,
officers or principal stockholders of the company.
The selling security holders may offer their shares of common stock for
sale from time to time at market prices prevailing at the time of sale or at
negotiated prices, and without payment of any underwriting discounts or
commissions except for usual and customary selling commissions paid to brokers
or dealers.
The following table sets forth, as of April 8, 2002, the number of shares
being held of record or beneficially by the selling security holders and
provides by footnote reference any material relationship between the company and
the selling security holder, all of which is based upon information currently
available to the company.
43
- -----------------------------------------------------------------------------------------------------------------------
Beneficial Ownership of Beneficial Ownership of
Selling Security Holder Shares
Prior to Offering (1) After Offering (2)
--------------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------
Number of
Shares
offered
Name of Selling Security Holder Number Percent hereby (2) Number Percent
- ------------------------------- ------ ------- ---------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
Kathleen C. Anderson 183 * 183 -- --
- -----------------------------------------------------------------------------------------------------------------------
Gertrude Barbush 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Theresa S. Block 2,167 * 2,167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Kent Bond 34 * 34 -- --
- -----------------------------------------------------------------------------------------------------------------------
Brad M. Bristol 333 * 333 -- --
- -----------------------------------------------------------------------------------------------------------------------
Michael D. Callister 67 * 67 -- --
- -----------------------------------------------------------------------------------------------------------------------
George J. Chlebecek 100 * 100 -- --
- -----------------------------------------------------------------------------------------------------------------------
Ronald G. Dorken and Cynthia J. Dorken 333 * 333 -- --
- -----------------------------------------------------------------------------------------------------------------------
Dina Drits 3,334 * 3,334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Tanya Drits 16,667 * 16,667 -- --
- -----------------------------------------------------------------------------------------------------------------------
Vladimir Drits 30,000 * 30,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Russ Erkkila 167 * 167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Scott O. Fuller 167 * 167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Peter L. Hauser (3) 40,000 * 40,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Edward J Hayward 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
LeAnn Hitchcock (4) 30,000 * 30,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Karen Holitz 1,167 * 1,167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Norman D. Holm 3,000 * 3,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Jennifer L. Holmers 1,167 * 1,167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Richard M. Horwood (Russell Trust) 5,667 * 5,667 -- --
- -----------------------------------------------------------------------------------------------------------------------
William J. Howard 134 * 134 -- --
- -----------------------------------------------------------------------------------------------------------------------
John P. Hupp (5) 247,335 1.6% 247,335 -- --
- -----------------------------------------------------------------------------------------------------------------------
Boris Iliarski 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Steven C. Isakson as Custodian for Evan 67 * 67 -- --
Alden Isakson
- -----------------------------------------------------------------------------------------------------------------------
Julie A. Johnson 1,167 * 1,167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Thomas Denver Kaufman 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Kathryn M. Kubinski 1,167 * 1,167 -- --
- -----------------------------------------------------------------------------------------------------------------------
William C. Marx and Roger W. Marx 1,334 * 1,334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Kevin P. Mc Quillan 67 * 67 -- --
- -----------------------------------------------------------------------------------------------------------------------
Diane Meyer 833 * 833 -- --
- -----------------------------------------------------------------------------------------------------------------------
Greg Meyer 833 * 833 -- --
- -----------------------------------------------------------------------------------------------------------------------
Doug Morgan 34 * 34 -- --
- -----------------------------------------------------------------------------------------------------------------------
John P. Oroark 34 * 34 -- --
- -----------------------------------------------------------------------------------------------------------------------
Mark F. Palma and Shannon L. Palma 1,334 * 1,334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Mark Peterson 167 * 167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Loren A. Pfau and Florence A. Pfau 17 * 17 -- --
- -----------------------------------------------------------------------------------------------------------------------
John Rhodes 5,000 * 5,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
44
- -----------------------------------------------------------------------------------------------------------------------
Beneficial Ownership of Beneficial Ownership of
Selling Security Holder Shares
Prior to Offering (1) After Offering (2)
--------------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------
Number of
Shares
offered
Name of Selling Security Holder Number Percent hereby (2) Number Percent
- ------------------------------- ------ ------- ---------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
Vernon D. Riediger 1,334 * 1,334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Steve D. Roberts as Trustee for Steven D. 5,500 * 5,500 -- --
Robert Trust
- -----------------------------------------------------------------------------------------------------------------------
Erlan Sagadiev 125,000 * 125,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Joseph J. Scancarello and Margaret 35,000 * 35,000 -- --
Scancarello
- -----------------------------------------------------------------------------------------------------------------------
Christopher K. Schneenman 21 * 21 -- --
- -----------------------------------------------------------------------------------------------------------------------
Roger W. Schnobrich (6) 35,700 * 35,700 -- --
- -----------------------------------------------------------------------------------------------------------------------
Aaron J. Scholl as Custodian for Gordon J. 34 * 34 -- --
- -----------------------------------------------------------------------------------------------------------------------
Aaron J. Scholl as Custodian for Nora M.
- -----------------------------------------------------------------------------------------------------------------------
Joan V. Smith 134 * 134 -- --
- -----------------------------------------------------------------------------------------------------------------------
Dain Rauscher as Custodian for John P Smith
(IRA) 166 * 166 -- --
- -----------------------------------------------------------------------------------------------------------------------
Theresa J. Smith 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Scott L. Solberg and Barb M. Solberg 100 * 100 -- --
- -----------------------------------------------------------------------------------------------------------------------
John Steinbergs 7,500 * 7,500 -- --
- -----------------------------------------------------------------------------------------------------------------------
Stephen B. Swartz as Trustee for Stephen B. 6,667 * 6,667 -- --
Swartz (1991 Profit Sharing Plan)
- -----------------------------------------------------------------------------------------------------------------------
Leo Tutewohl (Trustee) 166 * 166 -- --
- -----------------------------------------------------------------------------------------------------------------------
Debra Van Der Vieren 835 * 835 -- --
- -----------------------------------------------------------------------------------------------------------------------
Kimberly S. Vatter 134 * 134 -- --
- -----------------------------------------------------------------------------------------------------------------------
Avie Wasser as Custodian for David M. Wasser 7 * 7 -- --
- -----------------------------------------------------------------------------------------------------------------------
Dain Rauscher as Custodian for Brenton L 500 * 500 -- --
Wolfe (IRA)
- -----------------------------------------------------------------------------------------------------------------------
Advanced Clearing, Inc. 14,600 * 14,600 -- --
- -----------------------------------------------------------------------------------------------------------------------
Alpine Securities Corp. 47,850 * 47,850 -- --
- -----------------------------------------------------------------------------------------------------------------------
American Enterprise Investment Services 2,500 * 2,500 -- --
- -----------------------------------------------------------------------------------------------------------------------
Robert W. Baird & Co., Incorporated 202 * 202 -- --
- -----------------------------------------------------------------------------------------------------------------------
Bear Stearns Securities Corp. 2,333 * 2,333 -- --
- -----------------------------------------------------------------------------------------------------------------------
Brown & Company Securities Corporation 31,868 * 31,868 -- --
- -----------------------------------------------------------------------------------------------------------------------
Charles Schwab & Co., Inc. 35,873 * 35,873 -- --
- -----------------------------------------------------------------------------------------------------------------------
Dain Rauscher Incorporated 3 * 3 -- --
- -----------------------------------------------------------------------------------------------------------------------
Dobbin & Co. 2,000 * 2,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Donaldson, Lufkin and Jenrette Securities 64,136 * 64,136 -- --
- -----------------------------------------------------------------------------------------------------------------------
E Trade Securities, Inc. 20,834 * 20,834 -- --
- -----------------------------------------------------------------------------------------------------------------------
Edward D. Jones 534 * 534 -- --
- -----------------------------------------------------------------------------------------------------------------------
First Clearing Corporation 4,000 * 4,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
45
- -----------------------------------------------------------------------------------------------------------------------
Beneficial Ownership of Beneficial Ownership of
Selling Security Holder Shares
Prior to Offering (1) After Offering (2)
--------------------- ------------------
- -----------------------------------------------------------------------------------------------------------------------
Number of
Shares
offered
Name of Selling Security Holder Number Percent hereby (2) Number Percent
- ------------------------------- ------ ------- ---------- ------- -------
- -----------------------------------------------------------------------------------------------------------------------
Fiserv Securities, Inc. 2 * 2 -- --
- -----------------------------------------------------------------------------------------------------------------------
Fleet Securities, Inc. 1,468 * 1,468 -- --
- -----------------------------------------------------------------------------------------------------------------------
GVR Co. 1 * 1 -- --
- -----------------------------------------------------------------------------------------------------------------------
Harris Investorline, Inc. 10,143 * 10,143 -- --
- -----------------------------------------------------------------------------------------------------------------------
ICLEARING CORP. 1,787 * 1,787 -- --
- -----------------------------------------------------------------------------------------------------------------------
Janney Montgomery Scott Inc. 350 * 350 -- --
- -----------------------------------------------------------------------------------------------------------------------
Lehman Brothers, Inc. 1,000 * 1,000 -- --
- -----------------------------------------------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith Inc. 26,499 * 26,499 -- --
- -----------------------------------------------------------------------------------------------------------------------
Miller Johnson Steichen Kinnard, Inc. 20,986 * 20,986 -- --
- -----------------------------------------------------------------------------------------------------------------------
Millsec & Co 70,296 * 70,296 -- --
- -----------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Witter Inc 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
National Financial Services Corporation 4,316 * 4,316 -- --
- -----------------------------------------------------------------------------------------------------------------------
National Investor Services Corp. 12,566 * 12,566 -- --
- -----------------------------------------------------------------------------------------------------------------------
PREFERREDTRADE, INC. 333 * 333 -- --
- -----------------------------------------------------------------------------------------------------------------------
Prudential Securities Incorporated 6,350 * 6,350 -- --
- -----------------------------------------------------------------------------------------------------------------------
Ragen MacKenzie Incorporated 1,010 * 1,010 -- --
- -----------------------------------------------------------------------------------------------------------------------
Raymond James & Associates, Inc. 2,300 * 2,300 -- --
- -----------------------------------------------------------------------------------------------------------------------
SCOTTRADE, INC. 4,167 * 4,167 -- --
- -----------------------------------------------------------------------------------------------------------------------
Southwest Securities, Inc. 209,979 1.4% 209,979 -- --
- -----------------------------------------------------------------------------------------------------------------------
Stifel, Nicolaus & Co Inc. 333 * 333 -- --
- -----------------------------------------------------------------------------------------------------------------------
UBS Painewebber Inc. 2,583 * 2,583 -- --
- -----------------------------------------------------------------------------------------------------------------------
US Bancorp Piper Jaffray Inc. 2,692 * 2,692 -- --
- -----------------------------------------------------------------------------------------------------------------------
USAA Investment Management Company 750 * 750 -- --
- -----------------------------------------------------------------------------------------------------------------------
Wells Fargo Bank Minnesota, N.A. 334 * 334 -- --
- -----------------------------------------------------------------------------------------------------------------------
Total 1,221,890
- -----------------------------------------------------------------------------------------------------------------------
* Represents less than 1% of the outstanding shares of common stock.
(1) Applicable percentage of ownership is based on 15,524,210 shares of common
stock outstanding as of April 8, 2002, plus any securities held by such
holder exercisable for or convertible into common stock within sixty (60)
days after the date of this prospectus.
(2) Assumes that all shares are sold pursuant to this offering and that no
other shares of common stock are acquired or disposed of by the selling
security holders prior to the termination of this offering. Because the
selling security holders may sell all, some or none of their shares or may
acquire or dispose of other shares of common stock, we cannot estimate the
aggregate number of shares which will be sold in this offering or the
number or percentage of shares of common stock that each selling security
holder will own upon completion of this offering.
46
(3) Mr. Hauser has served as a director of Pro-Pharmaceuticals since our
incorporation in January 2001. He served as our Vice President from our
incorporation in January 2001 until we acquired the predecessor
Massachusetts corporation in May 2001. He is a director of our former
parent company, Developed Technology Resource, Inc. Above list includes
6,000 shares held in IRA account for Mr. Hauser (reflected in totals for
Southwest Securities, Inc.).
(4) Ms. Hitchcock has served as Chief Executive Officer and President of our
former parent company, Developed Technology Resource, Inc., since January
2001, and has served as Chief Financial Officer and Corporate Secretary of
that company since September 1997.
(5) Mr. Hupp served as President, Treasurer and a director of
Pro-Pharmaceuticals from its incorporation in January 2001 until we
acquired the predecessor Massachusetts corporation in May 2001. He is a
director of our former parent company, Developed Technology Resource, Inc.
(6) Mr. Schnobrich served as Secretary and a director of Pro-Pharmaceuticals
from its incorporation in January 2001 until we acquired the predecessor
Massachusetts corporation in May 2001. He is a director of our former
parent company, Developed Technology Resource, Inc., and served as
President of that company from June 1995 to January 2001.
We will pay all expenses in connection with the distribution of the shares
of common stock being sold by the selling security holders, except for the fees
and expenses of any counsel and other advisors that any selling security holders
may employ to represent them in connection with the offering and any brokerage
or underwriting discounts or commissions paid to broker-dealers in connection
with the sale of the shares.
PLAN OF DISTRIBUTION
Of the 2,650,462 shares of Pro-Pharmaceuticals common stock offered by this
prospectus, 1,428,572 shares are being sold by Pro-Pharmaceuticals on a "best
efforts" basis through Atlas Capital Services, LLC, as described below. The
other 1,221,890 shares may be offered and sold, from time to time, by the
selling security holders identified in this prospectus. We will not receive any
of the proceeds from the sale of shares by the selling security holders. We will
pay the expenses of preparing this prospectus and the related registration
statement.
Shares Offered by Pro-Pharmaceuticals
We are offering 1,428,572 shares of our common stock through Atlas Capital
Services, LLC, on a best efforts basis, which means that Atlas Capital is not
obligated to buy any of the common stock we are offering and is required only to
use its reasonable best efforts to sell common stock on our behalf. Atlas
Capital will offer the common stock principally to selected institutional
investors. We have engaged Atlas Capital to act as our exclusive agent in
connection with the shares being offered by Pro-Pharmaceuticals in this
prospectus. The offering is subject to the terms and conditions set forth in a
placement agent engagement agreement between us and Atlas Capital.
Atlas Capital is not obligated to and does not intend to take (or purchase)
any of the shares of common stock for itself. Confirmation and definitive
prospectuses will be distributed to all investors at the time of pricing,
informing investors of the closing date, which will be scheduled for three
business days after pricing. We will not accept any investor funds before the
Registration Statement becomes effective. We may sell less than all of the
shares of common stock we are offering in this prospectus. There is no required
minimum number of shares that must be sold as a
47
condition to completion of the offering. Upon closing, (i) we will deliver to
each investor the number of shares of common stock purchased by such investor in
accordance with instructions previously delivered by Atlas Capital on behalf of
the investors, (ii) each investor will deliver to us immediately available funds
in an amount equal to the aggregate purchase price of the shares of common stock
being sold to that investor and (iii) we will pay Atlas Capital its fee. The
offering will not continue after the closing.
We have agreed to pay Atlas Capital a placement fee of 8.5% of the proceeds
of the offering (0.5% of the proceeds from sales of shares to investors that we
identify) and also to issue to Atlas Capital a warrant to purchase 10% of the
total number of shares sold by Pro-Pharmaceuticals to investors in this offering
who are identified by Atlas Capital. The warrant will be exercisable for 5 years
and the exercise price per share will be the effective per share price of
investors who purchase in the offering. We have also agreed to pay Atlas Capital
a non-refundable due diligence fee of $20,000 to cover all fees of Atlas Capital
and its counsel associated with this offering. We will indemnify Atlas Capital
against certain liabilities, including liabilities under the Securities Act, if
these liabilities arise from any negligence or misrepresentation by us.
We reserve the right to reject any order to purchase our common stock.
Orders will be effective only upon acceptance by us.
Prior to this offering, there has been no public market for our common
stock. The public offering price of our common stock has been determined by
negotiations between Pro-Pharmaceuticals and prospective purchasers, with advice
also provided by Atlas Capital. Among the factors considered in the negotiations
are:
o Prevailing market conditions;
o Offering price of recent issuances of our common stock;
o Market capitalizations and stages of development of other companies
which we believe are comparable with our company;
o Estimates of our business potential;
o The present stage of our development; and
o Other factors deemed relevant.
Shares Offered by Selling Security Holders
Pro-Pharmaceuticals will not receive any of the proceeds of the sale of the
shares offered by the selling security holders.
The selling security holders have not advised us of any specific plan for
distribution of the shares offered hereby, but it is anticipated that the shares
will be sold from time to time by the selling security holders or by pledgees,
donees, transferees or other successors in interest on a best efforts basis
without an underwriter. Such sales may be made on the National Quotation
Bureau's Pink Sheets, the OTC Bulletin Board, any exchange upon which our shares
may trade in the future, over-the-counter, or otherwise, at prices and at terms
then prevailing or at prices related to the then current market price, or in
negotiated transactions. The shares may be sold by one or more of the following,
without limitation:
48
o a block trade in which the broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
o purchases by a broker or dealer for its account pursuant to this
prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchases;
o through options, swaps or derivatives;
o in privately negotiated transactions;
o in transactions to cover short sales;
o through a combination of any such methods of sale; or
o in accordance with Rule 144 under the Securities Act, rather than
pursuant to this prospectus.
The selling security holders may sell their shares directly to purchasers
or may use brokers, dealers, underwriters or agents to sell their shares.
Brokers or dealers engaged by the selling security holders may arrange for other
brokers or dealers to participate. Brokers or dealers may receive commissions,
discounts or concessions from the selling security holders, or, if any such
broker-dealer acts as agent for the purchaser of shares, from the purchaser in
amounts to be negotiated immediately prior to the sale. The compensation
received by brokers or dealers may, but is not expected to, exceed that which is
customary for the types of transactions involved. Broker-dealers may agree with
a selling security holder to sell a specified number of shares at a stipulated
price per share, and, to the extent the broker-dealer is unable to do so acting
as agent for a selling security holder, to purchase as principal any unsold
shares at the price required to fulfill the broker-dealer commitment to the
selling security holder. Broker-dealers who acquire shares as principal may
thereafter resell the shares from time to time in transactions, which may
involve block transactions and sales to and through other broker-dealers,
including transactions of the nature described above, in the over-the counter
market or otherwise at prices and on terms then prevailing at the time of sale,
at prices then related to the then-current market price or in negotiated
transactions. In connection with resales of the shares, broker-dealers may pay
to or receive from the purchasers of shares commissions as described above.
The selling security holders and any broker-dealers or agents that
participate with the selling security holders in the sale of the shares may be
deemed to be "underwriters" within the meaning of the Securities Act. In that
event, any commissions received by broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
From time to time the selling security holders may engage in short sales,
short sales against the box, puts and calls and other hedging transactions in
our securities, and may sell and deliver the shares in connection with such
transactions or in settlement of securities loans. These transactions may be
entered into with broker-dealers or other financial institutions. In addition,
from time to time, a selling security holder may pledge its shares pursuant to
the margin provisions of its customer agreements with its broker-dealer. Upon
delivery of the shares or a default by a selling security holder, the
broker-dealer or financial institution may offer and sell the pledged shares
from time to time.
49
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), and is President, Chief Executive Officer,
Treasurer, Secretary and a director of our company. He owns more than 5% of our
outstanding stock. 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. Dr.
Klyosov was Senior Vice President, Chief Scientific Officer of
Pro-Pharmaceuticals (Massachusetts), our predecessor, since its founding in July
2000. Dr. Klyosov owns more than 5% of our outstanding stock.
Pro-Pharmaceuticals (Massachusetts) also issued a convertible $7,000 note
to Naomi Platt, the wife of Dr. David Platt, and issued convertible notes
aggregating $100,000 and $12,500, respectively, to Burton Firtel and Dr. Dale
Conaway, directors of our company. All of these convertible notes have been
converted into shares of our common stock in accordance with their terms,
pursuant to our request for early conversion. See "Plan of Operation --
Liquidity and Capital Resources" for detail as to the convertible notes and our
early conversion request. The accounts payable of Pro-Pharmaceuticals
(Massachusetts) include approximately $40,000 as amounts due to our stockholders
as of December 31, 2000 for operating expenses incurred.
Pro-Pharmaceuticals (Massachusetts) paid Dr. Platt, MIR International,
Inc., and Offer Binder, Ph.D., $25,000, $50,000 and $12,500, 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. Dr. Binder
is a founding stockholder of Pro-Pharmaceuticals (Massachusetts) and currently
owns more than 5% of our outstanding stock. 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), and currently serves as our
Executive Vice President of Business Development and a director. Mr. Czirr owns
more than 5% of our outstanding stock.
Extol International Ltd., a company controlled by Mr. Czirr, has agreed to
provide financing and business development services. This agreement provides for
a monthly payment of $12,500 and reimbursement of expenses.
MIR International, Inc., a company controlled by Dr. Klyosov as described
above, has agreed to provide consulting services regarding our research and
development including design of preclinical experimental protocols, arranging
preclinical experiments, performing chemical synthetic work, and preparing
reports on biochemical study and clinical applications of carbohydrates. This
agreement provides for a monthly payment of $5,000 and reimbursement of
expenses.
Dr. Binder has agreed to provide management advisory services. This
agreement provides for a monthly payment of $5,000 and reimbursement of
expenses.
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
50
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 "Business --
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.
DESCRIPTION OF CAPITAL STOCK
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.
LEGAL MATTERS
The validity of the common stock being offered hereby will be passed upon
for Pro-Pharmaceuticals by Perkins, Smith & Cohen, LLP, of Boston,
Massachusetts.
51
EXPERTS
The financial statements for our Massachusetts predecessor corporation as
of December 31, 2000 and for the period from inception (July 10, 2000) through
December 31, 2000, as well as the financial statements for Pro-Pharmaceuticals,
Inc. as of May 15, 2001 and for the period from inception (January 26, 2001)
through May 15, 2001, included in this prospectus, have been so included in
reliance on the report of Scillia Dowling & Natarelli LLC, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements for Pro-Pharmaceuticals, Inc. as of December 31,
2001 and for the year then ended, and for the period from inception (July 10,
2000) to December 31, 2001, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes an explanatory paragraph relating
to the ability of Pro-Pharmaceuticals, Inc. to continue as a going concern) and
have been so included in reliance upon the report of such firm, given upon their
authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a Post-Effective Amendment No. 1 to a registration statement
on Form SB-2 with the SEC. This prospectus, which forms a part of that amended
registration statement, does not contain all of the information included in the
registration statement and the exhibits and schedules thereto as permitted by
the rules and regulations of the SEC. For further information with respect to
Pro-Pharmaceuticals and the shares of common stock offered hereby, please refer
to the amended registration statement, including its exhibits and schedules.
Statements contained in this prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and, where the
contract or other document is an exhibit to the amended registration statement,
each such statement is qualified in all respects by the provisions of such
exhibit, to which reference is hereby made. You may review a copy of the amended
registration statement at the SEC's public reference room in Washington, D.C.,
and at the SEC's regional office in Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The amended registration statement can also be reviewed by accessing the
SEC's Internet site at http://www.sec.gov. We are subject to the information and
reporting requirements of the Securities Exchange Act and, in accordance
therewith, file periodic reports, proxy statements or information statements,
and other information with the SEC. These reports can also be reviewed by
accessing the SEC's Internet site.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information below has been previously included in our Current Report
on Form 8-K filed with the SEC on February 25, 2002, as amended and filed with
the SEC as Form 8-K/A on March 8, 2002.
On February 15, 2002, we dismissed Scillia Dowling & Natarelli LLC as our
independent auditors. On February 22, 2002, we engaged Deloitte & Touche LLP as
our independent auditors to audit our financial statements for the fiscal year
ended December 31, 2001. The decision to
52
dismiss Scillia Dowling & Natarelli LLC and to retain Deloitte & Touche LLP was
approved by our Board of Directors and Audit Committee.
The report of Scillia Dowling & Natarelli LLC on our financial statements
as of December 31, 2000, and for the period commencing July 10, 2000 (Inception)
to December 31, 2000, and the review reports of Scillia Dowling & Natarelli LLC
on our financial statements as of June 30, 2001 and September 30, 2001 and for
the three-month and year-to-date periods, did not contain an adverse opinion or
a disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles. We have only filed financial statements
since our July 10, 2000 date of inception. On March 31, 2001, we engaged Scillia
Dowling & Natarelli LLC as our independent auditors to audit our financial
statements for the period commencing July 10, 2000 (Inception) to December 31,
2000. From July 10, 2000 (Inception) through February 15, 2002, there were no
disagreements between Scillia Dowling & Natarelli LLC and us on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Scillia Dowling & Natarelli LLC, would have caused it to make reference to the
subject matter of the disagreement in connection with its reports on our
financial statements. Prior to March 31, 2001, another independent auditor had
opined on our financial statements. A discussion of this auditor's resignation
can be seen under "Item 2. Plan of Operation -- Business Combination and
Ownership" in our Quarterly Report on Form 10-QSB for the quarterly period ended
September 30, 2001, as filed with the SEC on November 14, 2001. No disagreements
were reported therein.
From March 31, 2001, we did not consult with Deloitte & Touche LLP on items
which involved (i) the application of accounting principles to a specified
transaction, either completed or proposed, (ii) the type of audit opinion that
might be rendered on our financial statements, or (iii) the subject matter of a
disagreement or "reportable event."
Before we filed the Form 8-K in its original and amended versions in which
the above matters were disclosed, we furnished Scillia Dowling & Natarelli LLC
with a copy of the above disclosure as included in each of the original and
amended forms, respectively, and requested it in each case to furnish a letter
addressed to the SEC stating whether Scillia Dowling & Natarelli LLC agrees with
the above statements. Copies of the letters are attached as Exhibit 16.1 and
Exhibit 16.2 to the Form 8-K/A as filed with the SEC on March 8, 2002. A copy of
the letter with respect to the original Form 8-K disclosure was also attached as
Exhibit 16 to the Form 8-K as filed with the SEC on February 25, 2002.
FINANCIAL STATEMENTS
Index to Financial Statements
Page
----
1. Independent Auditors' Report for the year ended December 31, 2001............ F-1
2. Independent Auditors' Report with respect to the period from
inception (July 10, 2000) through December 31, 2000 ......................... F-2
3. Audited Balance Sheets as of December 31, 2001 and 2000...................... F-3
4. Audited Statements of Operations for the year ended December 31, 2001
and for the period from inception (July 10, 2000) to December 31, 2000,
and cumulative for the period from inception to December 31, 2001............ F-4
5. Audited Statements of Stockholders' Equity for the year ended
December 31, 2001 and for the period from inception (July 10, 2000)
to December 31, 2000......................................................... F-5
6. Audited Statements of Cash Flows for the year ended December 31, 2001
and for the period from inception (July 10, 2000) to December 31, 2000
and cumulative for the period from inception to December 31, 2001............ F-6
7. Notes to Financial Statements for the year ended December 31, 2001
and for the period from inception (July 10, 2000) to December 31, 2000
and cumulative for the period from inception to December 31, 2001............ F-7
53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Pro-Pharmaceuticals, Inc.
Newton, MA
We have audited the accompanying balance sheet of Pro-Pharmaceuticals, Inc. (a
development-stage company) (the "Company") as of December 31, 2001, and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended, and for the period from inception (July 10, 2000) to December
31, 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. The Company's financial statements as of and for
the year ended December 31, 2000, and for the period from inception (July 10,
2000) through December 31, 2000, were audited by other auditors whose report,
dated April 10, 2002, expressed an unqualified opinion on those statements. The
financial statements for the period from inception (July 10, 2000) through
December 31, 2000 reflect a cumulative net loss of $184,582, of the total net
loss of $4,154,855. The other auditors' report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such prior periods,
is based solely on the report of such other auditors.
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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the 2001
financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2001, and the results of its
operations and its cash flows for the year then ended, and for the period from
inception (July 10, 2000) through December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company is a development stage
enterprise engaged in developing technology that will reduce the toxicity and
improve the efficacy of chemotherapy drugs. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and deficit
accumulated during the development stage raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/Deloitte & Touche LLP
Boston, Massachusetts
April 12, 2002
F-1
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-2
PRO-PHARMACEUTICALS, INC.
(A Development-Stage Company)
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
2001 2000
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,491,172 $ 204,745
Prepaid expenses and other current assets 80,769 --
----------- -----------
Total current assets 1,571,941 204,745
PROPERTY AND EQUIPMENT, Net 111,540 --
PATENTS 56,115 8,695
DEPOSITS AND OTHER ASSETS 26,951 14,500
----------- -----------
TOTAL ASSETS $ 1,766,547 $ 227,940
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 236,223 $ 79,129
Accrued expenses 119,479 23,238
Convertible notes payable (net of discount of $0 and $205,255 at
December 31, 2001 and 2000, respectively) 195,000 79,245
----------- -----------
Total current liabilities 550,702 181,612
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 100,000,000 shares authorized, 15,524,410
and 12,354,670 shares issued and outstanding at December 31, 2001 and
2000, respectively 15,524 12,355
Additional paid-in capital 5,450,106 221,910
Deferred compensation (91,575) --
Deficit accumulated during the development stage (4,158,210) (187,937)
----------- -----------
Total stockholders' equity 1,215,845 46,328
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,766,547 $ 227,940
=========== ===========
See notes to financial statements.
F-3
PRO-PHARMACEUTICALS, INC.
(A Development-Stage Company)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001, THE PERIOD FROM INCEPTION (JULY 10, 2000) TO
DECEMBER 31, 2000, AND CUMULATIVE FOR THE PERIOD FROM INCEPTION TO DECEMBER 31,
2001
- --------------------------------------------------------------------------------
Cumulative for the
Period from Period from
Inception Inception
Year Ended (July 10, 2000) (July 10, 2000)
December 31, to December 31, to December 31,
2001 2000 2001
OPERATING EXPENSES:
Research and development $ (893,457) $ (100,250) $ (993,707)
General and administrative (1,288,634) (66,700) (1,355,334)
------------ ------------ ------------
Total operating expenses (2,182,091) (166,950) (2,349,041)
------------ ------------ ------------
INTEREST INCOME 24,917 261 25,178
------------ ------------ ------------
INTEREST AND OTHER EXPENSES:
Amortization of debt discount on convertible notes (1,241,357) (16,655) (1,258,012)
Debt conversion expense (503,019) -- (503,019)
Interest expense on 10% convertible notes (68,723) (1,238) (69,961)
------------ ------------ ------------
Total interest and other expenses (1,813,099) (17,893) (1,830,992)
------------ ------------ ------------
NET LOSS $ (3,970,273) $ (184,582) $ (4,154,855)
============ ============ ============
NET LOSS PER SHARE - Basic and diluted $ (0.29) $ (0.01)
============ ============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING -
Basic and diluted 13,601,795 12,354,670
============ ============
See notes to finanical statements.
F-4
PRO-PHARMACEUTICALS, INC.
(A Development-Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 2001 AND THE PERIOD FROM INCEPTION (JULY 10, 2000) TO
DECEMBER 31, 2000
- --------------------------------------------------------------------------------
Common Stock Additional
Number of $0.001 Par Paid-in Deferred
Shares Value Capital Compensation
Issuance of founders shares 12,354,670 $ 12,355 $ -- $ --
Beneficial conversion feature and rights to common stock embedded
in convertible note -- -- 221,910 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2000 12,354,670 12,355 221,910 --
Issuance of common stock and beneficial conversion feature related to
convertible note 660,321 660 1,035,442 --
Issuance of common stock in connection with reverse merger with
Pro-Pharmaceuticals-NV 1,221,890 1,222 105,778 --
Conversion of notes payable and accrued interest to common stock 598,229 598 1,125,004 --
Issuance of warrants to induce conversion of notes payable -- -- 503,019 --
Issuance of common stock and warrants (net of issuance
costs of $16,750) 689,300 689 2,220,061 --
Deferred compensation relating to issuance of stock options -- -- 238,892 (238,892)
Amortization of deferred compensation -- -- -- 147,317
Net loss -- -- -- --
----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 2001 15,524,410 $ 15,524 $ 5,450,106 $ (91,575)
=========== =========== =========== ===========
Deficit
Accumulated
During the Total
Development Stockholders'
Stage Equity
Issuance of founders shares $ (3,355) $ 9,000
Beneficial conversion feature and rights to common stock embedded
in convertible note -- 221,910
Net loss (184,582) (184,582)
----------- -----------
BALANCE, DECEMBER 31, 2000 (187,937) 46,328
Issuance of common stock and beneficial conversion feature related to
convertible note -- 1,036,102
Issuance of common stock in connection with reverse merger with
Pro-Pharmaceuticals-NV -- 107,000
Conversion of notes payable and accrued interest to common stock -- 1,125,602
Issuance of warrants to induce conversion of notes payable -- 503,019
Issuance of common stock and warrants (net of issuance
costs of $16,750) -- 2,220,750
Deferred compensation relating to issuance of stock options -- --
Amortization of deferred compensation -- 147,317
Net loss (3,970,273) (3,970,273)
----------- -----------
BALANCE, DECEMBER 31, 2001 $(4,158,210) $ 1,215,845
=========== ===========
See notes to financial statements.
F-5
PRO-PHARMACEUTICALS, INC.
(A Development-Stage Company)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001, THE PERIOD FROM INCEPTION (JULY 10, 2000) TO
DECEMBER 31, 2000, AND CUMULATIVE FOR THE PERIOD FROM INCEPTION TO DECEMBER 31,
2001
- --------------------------------------------------------------------------------
Cumulative for the
Period from Period from
Inception Inception
Year Ended (July 10, 2000) (July 10, 2000)
December 31, to December 31, to December 31,
2001 2000 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,970,273) $ (184,582) $(4,154,855)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 12,156 -- 12,156
Amortization of deferred compensation 147,317 -- 147,317
Amortization of debt discount on convertible notes 1,241,357 16,655 1,258,012
Writeoff of intangible assets 107,000 -- 107,000
Debt conversion expense 503,019 -- 503,019
Changes in assets and liabilities:
Prepaid and other expenses (80,769) -- (80,769)
Deposits and other assets (12,451) (14,500) (26,951)
Accounts payable 157,094 70,101 227,195
Accrued expenses 96,241 23,238 119,479
----------- ----------- -----------
Net cash used in operating activities (1,799,309) (89,088) (1,888,397)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (123,696) -- (123,696)
Increase in patent costs (47,420) (8,695) (56,115)
----------- ----------- -----------
Net cash used in investing activities (171,116) (8,695) (179,811)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and warrants 2,220,750 9,000 2,229,750
Proceeds from convertible notes payable 1,036,102 284,500 1,320,602
Proceeds from shareholder advances -- 9,028 9,028
----------- ----------- -----------
Net cash provided by financing activities 3,256,852 302,528 3,559,380
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,286,427 204,745 1,491,172
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 204,745 -- --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,491,172 $ 204,745 $ 1,491,172
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid for interest $ -- $ 1,238 $ 1,238
=========== =========== ===========
NONCASH FINANCING ACTIVITIES:
Issuance of warrants to induce conversion of notes payable $ 503,019 -- $ 503,019
Issuance of common stock and warrants 866,328 -- 866,328
Conversion of convertible notes and accrued interest
to common stock 1,125,602 -- 1,125,602
Issuance of stock to acquire Pro-Pharmaceuticals -NV 107,000 -- 107,000
See notes to financial statements.
F-6
PRO-PHARMACEUTICALS, INC.
(A DEVELOPMENT-STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2001 AND THE PERIOD FROM INCEPTION (JULY 10, 2000) TO
DECEMBER 31, 2000
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Business - 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 devoting substantially all of its efforts toward product
research and development and raising capital. Its product candidates are
still in the research and development stage, with none yet in clinical
trials. The Company is subject to a number of risks similar to those of
other development-stage companies, including dependence on key individuals,
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. To date, the Company
has raised capital principally through the issuance of convertible notes
and the sale of common stock through a private placement.
The Company's financial statements have been presented on a going-concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The Company is in the
development stage, has incurred a net loss since inception of $4,154,855
and expects to incur additional losses in the near future. These factors
raise substantial doubt about the Company's ability to continue as going
concern. Successful completion of the Company's development program and,
ultimately, the attainment of profitable operations is dependent upon
future events, including maintaining adequate financing to fulfill its
development activities and achieving a level of sales adequate to support
the Company's cost structure. The Company is actively seeking additional
financing to fund future operations and future significant investments in
the business. However, there can be no assurance that the Company will be
able to obtain financing on acceptable terms, or at all.
Reverse Merger Transaction - On May 15, 2001, Pro-Pharmaceuticals, Inc., a
Nevada corporation organized in January 2001 and formerly known as DTR-Med
Pharma Corp. ("Pro-Pharmaceuticals-NV"), issued 12,354,670 shares of its
common stock to the stockholders of Pro-Pharmaceuticals, Inc., a
Massachusetts corporation organized in July 2000
("Pro-Pharmaceuticals-MA"), in exchange for all of the outstanding shares
of the common stock of Pro-Pharmaceuticals-MA. Such exchange diluted the
ownership percentage of the prior Pro-Pharmaceuticals-NV stockholders to
approximately 9% and resulted in the prior stockholders of
Pro-Pharmaceuticals-MA owning approximately 91% of Pro-Pharmaceuticals-NV's
outstanding shares. Following the exchange of stock,
Pro-Pharmaceuticals-MA, as a wholly owned subsidiary, merged with
Pro-Pharmaceuticals-NV, which is the surviving corporation in the merger.
F-7
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Reverse Merger Transaction (Continued) - At the time of the merger, the
common shares issued to the stockholders of Pro-Pharmaceuticals-NV
represented a majority of the Company's common stock, enabling them to
retain voting and operating control of the Company. 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. The historical results
presented are those of Pro-Pharmaceuticals-MA, the accounting acquirer.
Information concerning common stock in 2000 has been restated on an
equivalent-share basis.
Summary of Significant Accounting Policies
The accompanying financial statements reflect the application of certain
accounting policies, as described in this note and elsewhere in the
accompanying notes to financial statements.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with original maturities of 90 days or less at the time of
acquisition to be cash equivalents. Cash equivalents consist primarily of
cash on hand and money market funds at December 31, 2001 and 2000.
Prepaid Expenses and Other Current Assets - Prepaid expenses and other
current assets include deferred offering costs and amounts prepaid for
rent. Deferred offering costs of $69,208 at December 31, 2001 consist of
legal and other direct costs pertaining to a private placement sale of the
Company's common stock, which began on December 15, 2001. These costs have
been capitalized as incurred and will be offset against proceeds from the
offering when the private placement is completed.
Property and Equipment - Property and equipment, including leasehold
improvements, are stated at cost, net of accumulated depreciation, and are
depreciated using the straight-line method over the lesser of the estimated
useful lives of the assets or the related lease term. The Company
periodically evaluates the recoverability of its long-lived assets based on
the expected undiscounted cash flows and recognizes impairments, if any,
based on expected discounted future cash flows. The estimated useful lives
are as follows:
Asset Classification Estimated Useful Life
Computers and office equipment Three years
Furniture and fixtures Five years
Leasehold improvements Life of lease
Patent Costs and Other Assets - Patent costs, which consist primarily of
related legal fees, are capitalized as incurred and are amortized over the
estimated useful life of the patents. As of December 31, 2001 and 2000, all
patents were pending and none of the costs had been amortized. Other assets
consist principally of deposits.
F-8
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Impairment of Long-Lived Assets - The Company evaluates its long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to the future undiscounted net cash flows
expected to be generated by the asset. As a result of this, the Company
wrote off $107,000 of contractual rights in 2001.
Research and Development Expenses - Costs associated with research and
development are expensed as incurred.
Stock-Based Compensation - Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," addresses the
financial accounting and reporting standards for stock or other
equity-based compensation arrangements. The Company has elected to use the
intrinsic-value method to account for employee stock option awards under
the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and provides disclosures based
on the fair value method in the notes to the financial statements as
permitted by SFAS No. 123 and interpretations.
Stock or other equity-based compensation for nonemployees must be accounted
for under the fair-value method as required by SFAS No.123 and Emerging
Issues Task Force No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." Under this method, the equity-based instrument
is valued at either the fair value of the consideration received or the
equity instrument issued on the date of vesting. The resulting expense is
recognized and charged to operations over the service period. The
measurement date is generally the vesting date for nonemployees. The
resulting noncash expense is recorded in the statements of operations over
the vesting period of the stock.
Income Taxes - Deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of
assets and liabilities and are measured using the expected tax rates
estimated to be in effect when such basis differences reverse. A valuation
allowance is provided for the amount of deferred tax assets that, based on
currently available evidence, are not expected to be realized.
Net Loss Per Share - Basic and diluted net loss per share is presented in
conformity with SFAS No. 128, "Earnings Per Share," for all periods
presented. In accordance with SFAS No. 128, basic and diluted net loss per
common share was determined by dividing net loss applicable to common
stockholders by the weighted-average common shares outstanding during the
period, less shares subject to repurchase. Diluted weighted-average shares
are the same as basic weighted-average shares since the inclusion of
2,078,091 shares issuable pursuant to the exercise of stock options and
warrants and conversion of convertible debt would have been antidilutive.
Comprehensive Income - Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. The Company does not have
any items of comprehensive income (loss) other than net losses as reported.
Fair Value of Financial Instruments - Financial instruments consist of cash
equivalents, accounts payable, and convertible notes payable. The estimated
fair value of these financial instruments approximates their carrying value
due to the short-term nature of these instruments.
F-9
1. NATURE OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk - The Company has no significant
concentrations of credit risk, such as foreign exchange contracts or other
hedging arrangements. Financial instruments that subject the Company to
credit risk consist of cash and cash equivalents. The Company maintains its
cash equivalents with well-capitalized financial institutions.
Reclassifications - Certain reclassifications have been made to the 2000
financial statements in order to conform to the 2001 presentation.
Segment Information - SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires companies to report selected
information about operating segments, as well as enterprise-wide
disclosures about products, services, geographic areas and major customers.
Operating segments are determined based on the way management organizes its
business for making operating decisions and assessing performance. The
Company has concluded that it operates in one operating segment.
Recently Issued Accounting Pronouncements - In October 2001, the FASB
issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial reporting for the impairment
or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 and
the accounting and reporting provisions of APB Opinion No. 30 related to
the disposal of a segment of a business. SFAS No. 144 will become effective
in the Company's fiscal year beginning July 1, 2002. Management does not
believe the adoption of SFAS No. 144 will have a significant effect on the
Company's financial position or results of operations.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2001:
Computer and office equipment $ 56,681
Furniture and fixtures 39,746
Leasehold improvements 27,269
---------
Total 123,696
Less accumulated depreciation (12,156)
---------
Property and equipment, net $ 111,540
=========
3. RELATED-PARTY TRANSACTIONS
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 research and development and the day-to-day
operations of the Company.
F-10
3. RELATED-PARTY TRANSACTIONS (CONTINUED)
During 2001, the Company entered into various consulting agreements, each
terminable on thirty days notice, with certain related parties as follows:
(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 for $12,500 per month and expense reimbursement, (ii) a
corporation controlled by a person who is a stockholder and officer of the
Company for research and development services in consideration of $5,000
per month and expense reimbursement, and (iii) an individual who is a
stockholder of the Company for management and consultant services in
consideration of $5,000 per month and expense reimbursement. The Company
had related-party consulting expenses of $203,000 and $77,000 for 2001 and
2000, respectively.
A stockholder and spouse of a Company officer were paid approximately
$8,000 for services during the year ended December 31, 2001. Included in
convertible notes payable for the year ended December 31, 2000 was $7,000
due to this same individual. At December 31, 2000, the Company had a
payable to related parties of approximately $40,000.
4. CONVERTIBLE NOTES
During 2001 and 2000 the Company issued $1,036,102 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. At any time prior to maturity, the Company may prepay, upon
thirty days' notice, the amounts outstanding under the convertible notes.
Within the thirty day time period, the holder may convert at the
then-applicable conversion price.
At any time prior to maturity, the holder also 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
automatically 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 660,321
shares of common stock to the holders of convertible notes.
The Company has allocated $1,248,012 of the $1,320,602 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. The debt discount was initially being amortized over the
one-year term of the notes, and was fully amortized upon the Company's
first equity offering in June 2001, at which time the convertible debt
became immediately convertible.
F-11
4. CONVERTIBLE NOTES (CONTINUED)
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.
In April 2002, the Company extended the maturity date for the $195,000 of
outstanding notes for one year. In consideration for the extension, 48,750
shares of common stock will be issued to the holders of the outstanding
notes.
5. STOCKHOLDERS' EQUITY
Private Placement Shares - From May 25, 2001 through December 3, 2001, the
Company sold a total of 689,300 shares of common stock for gross proceeds
of $2,237,500 through a private placement (the Private Placement) of
securities. Each share sold in the Private Placement included a warrant to
purchase common stock of the Company. These warrants are described below.
Warrants - As part of the Private Placement the Company issued 339,200 and
550,100 warrants to purchase common stock at $6.50 and $5.00 per share,
respectively. All of the warrants are exercisable immediately and expire
through December 2005. The Company, upon giving written notice, may
accelerate the exercise of the warrants and effect an early termination
thereof in the event of either of the following: (i) the Company files an
NDA with the Food and Drug Administration or (ii) the market price exceeds
$11.00 and $10.00 for warrants with exercise prices of $6.50 and $5.00,
respectively, 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 $886,328 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%.
6. 2001 STOCK INCENTIVE PLAN
In October 2001, the Company's Board of Directors adopted the
Pro-Pharmaceuticals, Inc. 2001 Stock Incentive Plan (the "Plan"), which
permits awards of incentive and nonqualified stock options and other forms
of incentive compensation to employees and nonemployees such as directors
and consultants. The Board reserved 2,000,000 shares of common stock for
issuance under the Plan.
Options granted under the Plan generally have a vesting period ranging from
immediately to over a period of two years and expire 10 years from the
grant date. At December 31, 2001, 1,800,000 shares were available for
future grant under the Plan.
F-12
6. 2001 STOCK INCENTIVE PLAN (CONTINUED)
During 2001, the Company granted options to a nonemployee for the purchase
of 200,000 shares at $3.50 per share, thereby resulting in deferred
compensation expense of $238,892 at the time of issuance. A portion of such
options vested during fiscal 2001 and the remainder will completely vest
during fiscal 2002. Consulting expense is estimated based on fair value
pursuant to SFAS No. 123 and EITF No. 96-18 until the final measurement
date, which is the earlier of performance completion or vesting.
Accordingly, the total amount of consulting expense to be recognized for
stock options granted to consultants will increase or decrease over the
vesting/performance period based on changes in the fair value of such stock
options. Total expense for the year ended December 31, 2001 related to
options was $147,317.
7. COMMITMENTS AND CONTINGENCIES
Lease Commitments - The Company leases its facility under a noncancelable
operating lease that expires in May 2006. Future minimum rental payments
under this operating lease as of December 31, 2001 are approximately as
follows:
Year Ending December 31
2002 $ 98,000
2003 106,000
2004 107,000
2005 109,000
2006 46,000
--------
Total lease payments $466,000
========
Rent expense was $0 for fiscal 2000 and approximately $50,000 for fiscal
2001 and cumulative for the period from inception (July 10, 2000) to
December 31, 2001.
In connection with the operating lease, the Company has issued a letter of
credit in the amount of $21,933 as part of the security deposit.
Contingency - GlycoGenesys, Inc. (formerly known as SafeScience, Inc.),
former employer of Dr. David Platt, Chairman 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 GlycoGenesys, Inc. Dr. Platt responded by letter dated February
19, 2001 denying the allegations and inviting a meeting to discuss them.
Counsel for GlycoGenesys, Inc. indicated a willingness to resolve these
matters but attempts to set up a meeting were unsuccessful. An evaluation
cannot be made at this time of the likelihood of a favorable or unfavorable
outcome, nor can any estimate be made as to the amount or range, if any, of
potential loss. If GlycoGenesys, Inc. makes demands against the Company
with respect to the allegations, the Company intends to vigorously contest
all such allegations.
F-13
8. INCOME TAXES
The components of the net deferred tax asset are as follows at December 31:
2001 2000
Operating loss carryforwards $ 909,000 $ 67,000
Tax credit carryforwards 86,000 --
Depreciation temporary difference (2,000) --
--------- ---------
993,000 67,000
Less valuation allowance (993,000) (67,000)
--------- ---------
Net deferred tax asset $ -- $ --
========= =========
As of December 31, 2001, the Company has federal net operating loss
carryforwards totaling approximately $2,153,000 and research and
development and investment tax credits of $86,000, which expire between
2022 and 2023. Because of the Company's limited operating history and its
recorded losses, management has provided, in each of the last two years, a
100% allowance against the Company's net deferred tax assets.
* * * * * *
F-14
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. 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.
Our By-laws provide that we will indemnify our officers and directors to
the fullest extent permitted by Section 78.7502 of the Nevada Revised Statutes,
provided the officer or director acts in good faith and in a manner which he or
she reasonably believes to be in or not opposed to the company's best interests,
and with respect to any criminal matter, had no reasonable cause to believe that
his or her conduct was unlawful. Our By-laws also provide that, to the fullest
extent permitted by Section 78.751 of the Nevada Revised Statutes, we will pay
the expenses of our officers and directors incurred in defending a civil or
criminal action, suit or proceeding, as they are incurred and in advance of the
final disposition of the matter, upon receipt of an undertaking acceptable to
the Board of Directors for the repayment of such advances if it is ultimately
determined by a court of competent jurisdiction that the officer or director is
not entitled to be indemnified.
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
55
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.
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.
Reference is made to Item 28 for Pro-Pharmaceuticals' undertakings in this
registration statement with respect to indemnification of liabilities arising
under the Securities Act of 1933, as amended.
Item 25. Other Expenses of Issuance and Distribution.
The following is a list of the expenses, other than the placement fees, to
be incurred by the Registrant in connection with the preparation and filing of
this Registration Statement. All amounts shown are estimates except for the SEC
registration fee. The Registrant will pay all expenses in connection with the
distribution of the shares of common stock being sold by the selling security
holders, except for the fees and expenses of any counsel and other advisors that
any selling security holders may employ to represent them in connection with the
offering and any brokerage or underwriting discounts or commissions paid to
broker-dealers in connection with the sale of the shares.
SEC Registration Fee................................ $ 2,811
Printing and Engraving.............................. $ 4,500
Accountants' Fees and Expenses...................... $ 35,000
Legal Fees and Expenses............................. $ 50,000
Placement Agent Due Diligence Fee................... $ 20,000
Transfer Agent Fees and Expenses.................... $ 2,500
Other Offering Expenses............................. $ 5,189
----------
Total.......................................... $ 120,000
==========
56
Item 26..Recent Sales of Unregistered Securities.
1. Commencing in December 2000 and continuing through May 2001,
Pro-Pharmaceuticals (Massachusetts) issued convertible notes with an aggregate
principal amount of $1,310,602 to "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 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 our
most recent equity offering. This conversion price, however, may not exceed
$2.00. At maturity, the notes are automatically converted based on dividing the
principal and accrued interest by $0.50, assuming a minimum of 10,000,000 shares
outstanding.
We have requested that the holders of the convertible notes described above
convert them, in accordance with their terms, to shares of our common stock
prior to the notes' maturity dates. In order to encourage early conversion by
September 7, 2001, we offered to issue each noteholder who converts a common
stock purchase warrant identical to the warrant offered in our terminated
private placement. In the case of a noteholder who accepts our offer, the
warrant we issue would be exercisable to purchase such number of shares as is
equal to the number of shares of our common stock that the holder receives as of
the conversion of the note. In response to our offer, holders of an aggregate of
$1,125,602 of principal and accrued interest of the convertible notes have
requested conversion of their notes.
Regardless of whether a noteholder accepted our early conversion offer or
later decides to convert each of our noteholders is entitled to receive, as
"additional consideration" for originally purchasing the note, one-half (1/2)
share of our common stock for each dollar of principal. We are completing our
issuance an aggregate of 660,321 of such "additional compensation" shares. All
shares of common stock issued upon conversion of the notes are "restricted
securities" as defined in Rule 144 under the Securities Act.
In April 2002, we extended the maturity date for the $195,000 of
outstanding notes for one year. In consideration for the extension, 48,750
shares of common stock will be issued to the holders of the outstanding notes.
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.
2. In May 2001, we began a private placement of securities 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. We abandoned this
private placement as of December 3, 2001, and terminated all offering activity
on or before that date. Purchasers under the private placement had to qualify as
"accredited investors" as such term is defined in Regulation D. The offered
securities comprised up to 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. We sold 689,300 units as of the date we abandoned the
offering. 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.
57
In connection with agreements with three investors in this offering who
were each willing to invest a substantial amount of funds, we 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. We
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. We
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 we notify the investor of our
receipt of notice that an investigational new drug application filed by us with
the FDA has become effective for any one of our compounds.
As of the termination of this offering in December 2001, we had received
proceeds of $2,237,500 from the sale of the securities offered in this private
placement. Such purchases will result in our issuing 689,300 shares of our
common stock and warrants to purchase 889,300 shares of our common stock.
Item 27. Exhibits.
Exhibit
Number Description of Document
- ------ -----------------------
3.1 Articles of Incorporation of the Registrant, dated January 26, 2001 *
3.2 Amended and Restated By-laws of the Registrant **
5 Opinion of Perkins, Smith & Cohen, LLP (including the consent of such firm)
regarding the legality of the securities being offered
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)
10.3 Pro-Pharmaceuticals, Inc. 2001 Stock Incentive Plan **
16 Letter from Scillia Dowling & Natarelli LLC to the Commission, dated ***
February 25, 2002, concerning change in certifying accountant
21 Subsidiaries of the Registrant None
23.1 Consent of Perkins, Smith & Cohen, LLP (included as part of Exhibit 5 hereto)
23.2 Consent of Scillia Dowling & Natarelli LLC, independent auditors
23.3 Consent of Deloitte & Touche LLP, independent auditors
24.1 Power of Attorney of Edgar Ben-Josef, M.D.
58
Exhibit
Number Description of Document
- ------ -----------------------
24.2 Power of Attorney of David H. Smith
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB, as filed with the Commission on June 13, 2001.
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the period ended September 30, 2001, as filed with the
Commission on November 14, 2001.
*** Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on February 25, 2002.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended (the "Securities Act"); (ii) reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement; and (iii) include any material information with respect
to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
2. For the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
4. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
5. (a) For the purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed under Rule 424(b)(1), or (4) or 497(h) under the Securities Act
shall be deemed to be part of this registration statement as of the time the
Commission declared it effective.
59
(b) For the purpose of determining any liability under the Securities Act,
each such post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
60
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Post-Effective Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in Newton, Massachusetts on April 12, 2002.
PRO-PHARMACEUTICALS, INC.
Registrant
By: /s/ David Platt
------------------------------------
Name: David Platt, Ph.D.
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David Platt President, Chief Executive Officer, April 12, 2002
- ----------------------------- Treasurer, Secretary and Director
David Platt, Ph.D. (Principal Executive, Financial and
Accounting Officer)
* Executive Vice President of Business April 12, 2002
- ----------------------------- Development and Director
James C. Czirr
* Director April 12, 2002
- -----------------------------
Peter L. Hauser
* Director April 12, 2002
- -----------------------------
Burton C. Firtel
* Director April 12, 2002
- -----------------------------
Dale H. Conaway, D.V.M.
* Director April 22, 2002
- -----------------------------
David H. Smith
* Director April 19, 2002
- -----------------------------
Edgar Ben-Josef, M.D.
* By David Platt,
attorney-in-fact
Exhibit
Number Description of Document
- ------ -----------------------
3.1 Articles of Incorporation of the Registrant, dated January 26, 2001 *
3.2 Amended and Restated By-laws of the Registrant **
5 Opinion of Perkins, Smith & Cohen, LLP (including the consent of such firm)
regarding the legality of the securities being offered
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)
10.3 Pro-Pharmaceuticals, Inc. 2001 Stock Incentive Plan **
16 Letter from Scillia Dowling & Natarelli LLC to the Commission, dated ***
February 25, 2002, concerning change in certifying accountant
21 Subsidiaries of the Registrant None
23.1 Consent of Perkins, Smith & Cohen, LLP (included as part of Exhibit 5 hereto)
23.2 Consent of Scillia Dowling & Natarelli LLC, independent auditors
23.3 Consent of Deloitte & Touche LLP, independent auditors
24.1 Power of Attorney of Edgar Ben-Josef, M.D.
24.2 Power of Attorney of David H. Smith
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB, as filed with the Commission on June 13, 2001.
** Incorporated by reference to the Registrant's Quarterly Report on Form
10-QSB for the period ended September 30, 2001, as filed with the
Commission on November 14, 2001.
*** Incorporated by reference to the Registrant's Current Report on Form 8-K as
filed with the Commission on February 25, 2002.
Exhibit 5
PERKINS, SMITH & COHEN, LLP
- --------------------------------------------------------------------------------
Attorneys At Law
ONE BEACON STREET
BOSTON, MA 02108-3106
TEL 617.854.4000 fax 617.854.4040
www.pscboston.com
April 22, 2002
Pro-Pharmaceuticals, Inc.
189 Wells Avenue, Suite 200
Newton, Massachusetts 02458
Ladies and Gentlemen:
We have acted as special counsel for Pro-Pharmaceuticals, Inc., a Nevada
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), of Post-Effective Amendment No.
1 to a Registration Statement on Form SB-2 (the "Amended Registration
Statement"), including a prospectus to be filed with the Commission pursuant to
Rule 424(b) of Regulation C promulgated under the Securities Act (the
"Prospectus") relating to shares of the Company's common stock, par value $.001
per share (the "Common Stock"), as follows: (i) a "best efforts" placement of up
to 1,428,572 shares of Common Stock to be issued and sold by the Company (the
"Company Shares"), and (ii) the offering of up to 1,221,890 shares of Common
Stock by certain stockholders of the Company (the "Stockholders' Shares").
As special counsel to the Company, in connection with this opinion, we have
examined and relied upon such records, documents, certificates and other
instruments as in our judgment are necessary or appropriate to form the basis
for the opinions set forth herein. In our examinations, we have assumed the
genuineness of all signatures, the legal capacity of natural persons signing or
delivering any instrument, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies and the authenticity of the originals of such
latter documents.
Based upon the foregoing, we are of the opinion that:
1. The Company Shares, when issued and sold in accordance with the Amended
Registration Statement and related Prospectus, will be validly issued, fully
paid and non-assessable.
2. The Stockholders' Shares have been duly authorized and validly issued
and are fully paid and non-assessable.
- --------------------------------------------------------------------------------
TEN WEYBOSSET STREET 1001 PENNSYLVANIA AVENUE, NW, STE 450N
PROVIDENCE, RI 02903-2818 WASHINGTON, DC 20004
TEL 401.456.1200 FAX 401.456.1210 TEL 202.789.8787 FAX 202.789.4242
PERKINS, SMITH & COHEN, LLP
Pro-Pharmaceuticals, Inc.
April 22, 2002
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Amended Registration Statement and to the reference to this firm appearing under
the heading "Legal Matters" in the Prospectus. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the General Rules and Regulations of
the Commission thereunder.
Very truly yours,
/s/ Perkins, Smith & Cohen, LLP
Perkins, Smith & Cohen, LLP
Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Post-Effective Amendment No. 1 to Registration Statement No. 333-74604 of Pro-Pharmaceuticals, Inc. (the "Company") on Form SB-2 of our report dated April 10, 2002 (which report expresses an unqualified opinion), appearing in the Prospectus, which is a part of such Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in the Prospectus. /s/ Scillia Dowling & Natarelli LLC Hartford, Connecticut April 22, 2002
Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Post-Effective Amendment No. 1 to Registration Statement No. 333-74604 of Pro-Pharmaceuticals, Inc. (the "Company") on Form SB-2 of our report dated April 12, 2002 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's ability to continue as a going concern), appearing in the Prospectus, which is a part of such Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in the Prospectus. /s/ Deloitte & Touche LLP Boston, MA April 22, 2002
Exhibit 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints DAVID PLATT, PH.D., his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including, without limitation, post-effective amendments) to
this Registration Statement, any related Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933 and any or all pre- or
post-effective amendments thereto, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes, may all
that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 19th
day of April, 2002.
/s/ Edgar Ben-Josef, M.D.
---------------------------
Edgar Ben-Josef, M.D.
Exhibit 24.2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the individual whose signature appears
below constitutes and appoints DAVID PLATT, PH.D., his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
or all amendments (including, without limitation, post-effective amendments) to
this Registration Statement, any related Registration Statement filed pursuant
to Rule 462(b) under the Securities Act of 1933 and any or all pre- or
post-effective amendments thereto, and to file the same, with all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes, may all
that said attorney-in-fact and agent or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand on the 22nd
day of April, 2002.
/s/ David H. Smith
---------------------------
David H. Smith