UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2002
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _____ to _____
Commission file number 000-32877
PRO-PHARMACEUTICALS, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 04-3562325
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
189 Wells Avenue, Suite 200, Newton, Massachusetts 02459
(Address of principal executive offices)
(617) 559-0033
(Issuer's telephone number)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes |_| No |_|
NOT APPLICABLE
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The total number of shares of Common
Stock, par value $0.001 per share, outstanding as of August 1, 2002 was
15,778,322.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets ...................................... 3
Condensed Statements of Operations ............................ 4
Condensed Statements of Cash Flows ............................ 5
Notes to Condensed Financial Statements ....................... 6
Item 2. Plan of Operation ................................................. 10
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 15
Item 2. Changes in Securities ............................................. 15
Item 3. Defaults Upon Senior Securities ................................... 15
Item 4. Submission of Matters to a Vote of Security Holders ............... 15
Item 5. Other Information ................................................. 15
Item 6. Exhibits and Reports on Form 8-K .................................. 16
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PRO-PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED BALANCE SHEETS (Unaudited)
June 30, December 31,
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 789,008 $ 1,491,172
Prepaid expenses and other current assets 21,721 80,769
Deferred convertible notes payable extension costs 66,800 --
----------- -----------
Total current assets 877,529 1,571,941
----------- -----------
PROPERTY AND EQUIPMENT, Net 176,020 111,540
PATENTS 75,548 56,115
DEPOSITS AND OTHER ASSETS 26,951 26,951
----------- -----------
Total assets $ 1,156,048 $ 1,766,547
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 554,478 $ 236,223
Accrued expenses 30,127 96,676
Convertible notes payable 115,000 195,000
Accrued interest related to convertible notes payable 15,916 22,803
----------- -----------
Total current liabilities 715,521 550,702
Accrued convertible notes payable extension costs 100,625 --
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value; 100,000,000 shares authorized,
15,775,537 and 15,524,410 issued and outstanding at June 30,
2002 and December 31, 2001 15,775 15,524
Deferred compensation (68,013) (91,575)
Additional paid-in capital 6,445,053 5,450,106
Deficit accumulated during the development stage (6,052,913) (4,158,210)
----------- -----------
Total stockholders' equity 339,902 1,215,845
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,156,048 $ 1,766,547
=========== ===========
See notes to condensed financial statements.
3
PRO-PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
Period From
Inception
(July 10, 2000)
Three Months Ended June 30, Six Months Ended June 30, To June 30,
2002 2001 2002 2001 2002
OPERATING EXPENSES:
Research and development $ 451,630 $ 122,392 $ 760,712 $ 155,541 $ 1,754,419
General and administrative 389,871 464,930 797,957 602,652 2,153,291
------------ ------------ ------------ ------------ -----------
Total operating expenses (841,501) (587,322) (1,558,669) (758,193) (3,907,710)
INTEREST INCOME 6,287 5,087 11,957 12,666 37,135
INTEREST EXPENSE (107,196) (1,060,962) (347,991) (1,258,484) (2,178,983)
------------ ------------ ------------ ------------ -----------
Net loss $ (942,410) $ (1,643,197) $ (1,894,703) $ (2,004,011) $(6,049,558)
============ ============ ============ ============ ===========
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.06) $ (0.13) $ (0.12) $ (0.16)
============ ============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
Basic and diluted 15,665,749 12,979,192 15,595,079 12,666,931
============ ============ ============ ============
See notes to condensed finanical statements.
4
PRO-PHARMACEUTICALS, INC.
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
Period From
Inception
(July 10, 2000)
Six Months Ended June 30, To June 30,
2002 2001 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,894,703) $(2,004,011) $(6,049,558)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 16,215 9,972 28,371
Stock based compensation expense 40,726 -- 188,043
Non cash interest expense 8,179 1,231,357 1,266,191
Expense related to issuance of warrants
to purchase common stock 235,987 -- 235,987
Writeoff of intangible assets -- -- 107,000
Debt conversion expense -- -- 503,019
Accrued convertible notes payable extension
costs 100,625 -- 100,625
Changes in current assets and
liabilities:
Prepaid and other expenses 59,048 -- (21,721)
Deferred convertible notes payable
extension costs (66,800) -- (66,800)
Deposits -- -- (26,951)
Debt issuance costs -- (2,409) --
Accounts payable 318,255 185,756 545,450
Accrued expenses (63,679) 2,601 37,805
Accrued interest related to convertible
notes payable (6,887) -- 11,108
----------- ----------- -----------
Net cash used in operating activities (1,253,034) (576,734) (3,141,431)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (80,695) (15,812) (204,391)
Increase in patents costs and other assets (19,433) (26,950) (75,548)
----------- ----------- -----------
Net cash used in investing activities (100,128) (42,762) (279,939)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and warrants 650,998 134,000 2,880,748
Net proceeds from convertible notes payable -- 1,026,102 1,320,602
Proceeds from shareholder advances -- 1,000 9,028
----------- ----------- -----------
Net cash provided by financing activities 650,998 1,161,102 4,210,378
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (702,164) 541,606 789,008
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,491,172 204,745 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 789,008 $ 746,351 $ 789,008
=========== =========== ===========
NONCASH FINANCING ACTIVITIES
Conversion of convertible notes and accrued
interest to common stock $ 90,257 -- $ 1,215,859
See notes to condensed financial statements.
5
PRO-PHARMACEUTICALS, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2002
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF OPERATIONS
Pro-Pharmaceuticals, Inc. (the Company) was established in July 2000. The
Company is in the development stage and is engaged in developing technology that
will reduce toxicity and improve the efficacy of currently existing chemotherapy
drugs by combining the drugs with a number of specific carbohydrate compounds.
The carbohydrate-based drug delivery system may also have applications for drugs
now used to treat other diseases and chronic health conditions.
The Company is 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.
As of June 30, 2002, the Company had $789,008 in cash and working capital
of $162,008. In August 2002, the Company began a private placement of securities
in order to raise up to $6,588,400, although no funds had been raised as of
August 14, 2002 (see Note 5). The Company has cut back significantly on its
expenditures, especially costs associated with research and development
activities. The Company is also considering other cost containment alternatives,
including extending trade payables and deferring certain compensation payments.
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 $6,052,913 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.
BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant
6
to such rules and regulations. These condensed financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the Company's latest annual report on Form 10-KSB.
The condensed financial statements, in the opinion of management, include
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the Company's financial position and the results of operations.
These results are not necessarily indicative of the results to be expected for
the entire year.
SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company in preparing
its financial statements are set forth in Note 1 to the financial statements
included in its Form 10-KSB for the year ended December 31, 2001. The Company
has made no changes to these policies during this quarter.
2. NET LOSS PER SHARE
Basic and diluted net loss per share is presented in conformity with
Statement of Financial Accounting Standards (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 1,932,193 and
2,078,091 shares issuable pursuant to the exercise of stock options and warrants
and conversion of convertible debt as of June 30, 2002 and December 31, 2001,
respectively, would have been antidilutive.
7
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, December 31,
2002 2001
Property and equipment:
Computer and office equipment $ 62,583 $ 56,681
Furniture and fixtures 41,317 39,746
Leasehold improvements 100,491 27,269
--------- ---------
Total 204,391 123,696
Less accumulated depreciation (28,371) (12,156)
--------- ---------
Property and equipment - net $ 176,020 $ 111,540
========= =========
4. CONVERTIBLE NOTES PAYABLE
On May 9, 2002, the Company extended for one year the holders' right to
convert the $195,000 of notes payable to common stock. The notes will now reach
maturity during the first quarter of 2003.
In consideration for the extension, the holders shall receive one-quarter
of one share of the Company's common stock for each whole dollar amount of
principal, or 48,750 shares of common stock. During the second quarter, the
Company deferred $170,625 in costs associated with the extension, based on the
fair value of the Company's common stock of $3.50 per share. These deferred
convertible notes payable costs will either be amortized ratably over the twelve
month extended term of the notes, if the notes are held to maturity, or expensed
immediately upon conversion, if converted prior to maturity.
The Company issued 20,000 of these shares during the period ended June 30,
2002, and they issued the remaining 28,750 shares subsequent to quarter-end.
Accrued convertible notes payable extension costs pertaining to shares issued
subsequent to year-end in the amount of $100,625 have been classified as a
long-term liability.
In June 2002, $80,000 in principal of convertible notes payable and $5,128
in related interest was converted into 45,128 shares of common stock. In
addition, $70,000 in deferred convertible notes payable extension costs was
expensed immediately upon conversion.
5. EQUITY OFFERINGS
On December 13, 2001, the Company commenced a public offering of 1,428,572
shares of common stock, at a price to the public of $3.50 per share The Company
anticipated concluding the offering on February 11, 2002 but extended the
offering until June 11, 2002. As of June 30, 2002, the Company had sold 185,999
shares of $0.001 par value common stock for gross proceeds of $650,998.
In August 2002, the Company 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 up to $6,588,400 to cover its expenditures. Purchasers
under the private placement must qualify as "accredited investors" as such term
is defined in Regulation D. The offered securities comprise up to 910,000 units,
offered at $7.24 each, of one share of the Company's Series A preferred stock,
and one 6-year
8
warrant exercisable at $5.50 to purchase one share of the Company's common
stock. The Series A preferred stock is to pay dividends at 8% per annum payable
in shares of common stock at a price per share of $3.62. The obligation to pay
dividends terminates upon appropriate authorization to commence Phase III
clinical trials of any one of the Company's compounds. The warrant is subject,
following written notice, to acceleration if the Company's stock is listed on an
exchange and its closing price exceeds $10.00 on any 10 trading days within a
period of 20 consecutive trading days or, if the Company's stock is quoted on
the NASDAQ National Market System or Small Cap Market, or over-the-counter, and
the average of the closing bid and asked prices thereon exceeds $10.00 on any 10
trading days within a period of 20 consecutive trading days. The Company has not
yet sold any securities under this offering.
6. OPTIONS AND WARRANTS
Under an agreement with a shareholder for consulting services, the Company
will compensate the shareholder for services rendered by providing options to
purchase 2,000 shares of common stock per month beginning on March 1, 2002. The
options are granted on the first day of the month following the month of
service, vest immediately and expire in 10 years. In accordance with this
agreement, 2,000 and 6,000 options were granted during the three month periods
ended March 31, 2002 and June 30, 2002, respectively. These options were valued
by the Company at $4,291 and $12,873, respectively, or $2.145 per share. The
fair value of these instruments was estimated at the date of grant using a
Black-Scholes option pricing model, based on the following assumptions: a risk
free rate of 3.9%, a volatility factor of 95%, a dividend rate of 0.0%, and a
weighted-average expected life of three years. The options were recognized as a
general and administrative expense in the statement of operations.
The Company had previously incurred a liability of approximately $50,000
to finders in connection with its 2001 debt offering. In the first quarter of
2002, in response to certain liquidity issues, the Company settled this
liability through the issuance of 110,000 warrants. The warrants are exercisable
immediately, have an exercise price of $3.50 per share and a 10 year life. These
warrants were valued by the Company at $235,987, and the excess value of the
warrants over the liability was recorded as interest expense in the statement of
operations for the period ended March 31, 2002.
7. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (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 144 supersedes SFAS 121 and the accounting and reporting
provisions of APB 30 related to the disposal of a segment of a business. The
adoption of this statement did not have a significant effect on the Company's
financial position or results of operations.
8. 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. The non-competition covenant expired 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 GlycoGenesys, Inc. makes demands against the Company
with respect to the allegations, the Company intends to vigorously contest all
such allegations.
9
Item 2. Plan of Operation
This quarterly report on Form 10-QSB contains, in addition to historical
information, forward-looking statements. These forward-looking statements are
based on management's current expectations and are subject to a number of
factors and uncertainties which could cause actual results to differ materially
from those described in such statements. We caution investors that actual
results or business conditions may differ materially from those projected or
suggested in forward-looking statements as a result of various factors
including, but not limited to, the following: uncertainties as to the utility
and market for our potential products; uncertainties associated with preclinical
and clinical trials of our drug delivery candidates; our lack of experience in
product development and expected dependence on potential licensees and
collaborators for commercial manufacturing, sales, distribution and marketing of
our potential products; possible development by competitors of competing
products and technologies; lack of assurance regarding patent and other
protection of our proprietary technology; compliance with and change of
government regulation of our activities, facilities and personnel; uncertainties
as to the extent of reimbursement for our potential products by government and
private health insurers; our dependence on key personnel; our history of
operating losses and accumulated deficit; and economic conditions related to the
biotechnology and biopharmaceutical industry, each as discussed in our Annual
Report on Form 10-KSB for the year ended December 31, 2001, filed with the
Securities and Exchange Commission. We cannot assure you that we have identified
all the factors that create uncertainties. Readers should not place undue
reliance on forward-looking statements.
Overview
We are currently in the development stage and have not yet generated any
operating revenues. Since our formation in July 2000, 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.
Preclinical Animal Studies; Investigational New Drug Application; Expected Phase
I Human Trials
As discussed below, we have conducted preclinical animal experiments to
study the toxicity and efficacy of 5-Fluorouracil (5-FU) in combination with our
mannan compounds. We are also conducting similar preclinical animal experiments
to study Adriamycin both in combination with our mannan compounds and as
chemically modified with sugar residues via "linkers" of a certain chemical
structure that are our proprietary technology. We named the most promising of
our synthesized Adriamycin sugar derivatives "Galactomycin" (further discussed
below). All of our animal experiments are conducted at independent laboratories.
We have also submitted an investigational new drug application to the FDA which
has been approved and thus authorizes us to begin clinical trials with humans.
Toxicity Studies
Our initial toxicity studies, conducted in early 2001, were performed to
test potential reduction of toxicity of anticancer drugs in combination with
certain of our mannan compounds. Results of one study indicated that one of our
mannan compounds, named DAVANAT, may
10
significantly decrease the toxicity of 5-FU. A second, similar study was
performed to test a potential reduction of toxicity of Adriamycin in combination
with each of two selected mannan compounds. Results indicated that one of the
mannan compounds may decrease the toxicity of Adriamycin. 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. For further
information about these studies, please refer to our Quarterly Report on Form
10-QSB for the quarter ended March 31, 2002, filed with the Securities and
Exchange Commission.
In subsequent preclinical experiments conducted in 2001 and 2002, we
studied on larger animals the toxicity reduction of DAVANAT-1, a DAVANAT
combination with 5-FU, 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 DAVANAT/5-FU
combination on blood structure and survival of these animals. Preliminary
results indicate that the DAVANAT/5-FU combination decreased toxicity, resulting
in lower animal mortality and decreased loss of blood structure components in
comparison to the results in animals which were administered 5-FU alone.
We are presently conducting additional toxicity studies on larger animals
using particularly high DAVANAT doses.
Efficacy Studies
We undertook three independent studies to test a potential change in
therapeutic efficacy of DAVANAT in a combination with 5-FU, which had decreased
toxicity of the drug in healthy animals. Results of the studies demonstrated
that DAVANAT, which may decrease toxicity of 5-FU, may also increase efficacy of
5-FU when administered into cancer-carrying animals. All three studies,
conducted with two different human colon tumors implanted into the test animals,
demonstrated a decrease in tumor size following administration of 5-FU alone as
well as administration of the DAVANAT/5-FU combination. When the combination was
administered, the time for the tumor to quadruple in size in the animals
increased between 154% and 236% compared to the time required for such tumor
increase for 5-FU alone, and 177% to 448% in comparison to control animals (no
drug administered).
At the request of the FDA for a better understanding of the DAVANAT mode
of therapeutic action, we conducted two additional efficacy studies using
DAVANAT-1 and DAVANAT-1 in combination with leucovorin, which is a typical
cancer treatment regimen. The studies showed that DAVANAT and leucovorin do not
interfere with each other when administered following standard procedure, and
that DAVANAT-1 (DAVANAT/5-FU combination) is superior compared to
5-FU/leucovorin when both are administered in tumor-bearing animals. Leucovorin
is a folinic acid derivative, which may enhance both the therapeutic and toxic
effect of 5-FU in cancer therapy.
We also conducted a study that involved injecting radiolabeled DAVANAT
(with and without 5-FU) into tumor-free and tumor-bearing animals. The study
provided extensive experimental data with respect to DAVANAT distribution in
organs and tissues (liver, kidney, lungs, plasma, and tumor) and the capacity of
such organs and tissue to clear DAVANAT after various time periods. The study
indicated that DAVANAT may protect the liver from a toxic effect of 5-FU yet
increase the amount, and hence the therapeutic effect, of 5-FU in the tumor. In
other words, we have indications that DAVANAT may decrease toxicity and increase
efficacy of 5-FU.
11
Investigational New Drug Application; Expected Phase I Clinical Trials in
Humans.
We submitted an investigational new drug application to the FDA on May 26,
2002 based on the preclinical data obtained from our 5-FU studies. Following
discussions with the FDA, the application was accepted as of June 26, 2002 which
authorized us to begin Phase I of clinical trials with humans. In Phase I we
will evaluate the ability of cancer patients to tolerate increasing doses of
DAVANAT while receiving a stable dose of 5-FU for treatment of colorectal
cancer. The Phase I study has two primary objectives: (1) to determine the
maximum dose of DAVANAT that can be tolerated when administered with a stable
dose of 5-FU, and (2) to define the dose-limiting toxicities of DAVANAT in
combination with 5-FU. We expect that up to 40 male and female patients, 18 to
65 years old, suffering from metastatic colon cancer will participate in the
study. We are currently selecting sites and conducting other planning activities
for Phase I clinical trials. The pharmaceutical company with which we contracted
to produce DAVANAT, a certified GMP facility, has manufactured sufficient
quantities for the doses that will be needed for the forthcoming human clinical
trials.
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, compared to control animals, indicated a
therapeutic efficacy more than twice as high as that for the parent Adriamycin,
particularly at repeated administrations. Unlike repeated injections of
Adriamycin which result in a cumulative toxic effect, Galactomycin at repeated
injections apparently increases its therapeutic effect while retaining low
toxicity.
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" in our 2001 Form 10-KSB.
Intellectual Property Protection
We have three regular utility patent applications pending 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. In addition, international patent
applications corresponding to two of our U.S. applications have been filed under
the Patent Cooperation Treaty.
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. In February 2002, the PTO issued
Notices of Allowance for two of these marks, ADVANCING DRUGS THROUGH
GLYCOSCIENCE and GLYCO-UPGRADE, and in March 2002 the PTO issued a Notice of
Allowance for the mark PRO-PHARMACEUTICALS, INC. We filed for an extension
of time to provide evidence of use for the marks ADVANCING DRUGS THROUGH
GLYCOSCIENCE and GLYCO-UPGRADE, and we are awaiting approval of both extensions.
In order to obtain registrations for these marks, the next deadline for filing
evidence of use or a request for extension
12
of time to file evidence of use is February 5, 2003. In order to obtain a
registration for PRO-PHARMACEUTICALS, INC., we must file evidence of use by
September 2002, or we must file for an extension of time to provide evidence of
use. In July 2002, the PTO informed us that the mark DAVANAT has been approved
for publication. Unless an opposition to registration is timely filed, the PTO
will issue a Notice of Allowance for this mark.
Plan of Operation
As discussed in our 2001 Form 10-KSB, we were incorporated in January 2001
for the purpose of effecting a business combination with Pro-Pharmaceuticals,
Inc., a Massachusetts corporation engaged in a business we desired to acquire.
The transaction included a merger in which we are the surviving corporation. We
are a development-stage company and have not generated any revenues to date. 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 of our common stock and stock purchase warrants; and (iii) the
proceeds of our public offering of common stock, as further described below,
which we began in December 2001 and terminated in June 2002.
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. We issued
185,999 shares of common stock under this offering, for gross proceeds of
approximately $651,000.
In August 2002, 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 up to $6,588,400 to cover our expenditures. Purchasers
under the private placement must qualify as "accredited investors" as such term
is defined in Regulation D. The offered securities comprise up to 910,000 units,
offered at $7.24 each, of one share of our Series A preferred stock, and one
6-year warrant exercisable at $5.50 to purchase one share of our common stock.
The Series A preferred stock is to pay dividends at 8% per annum payable in
shares of common stock at a price per share of $3.62. The obligation to pay
dividends terminates upon appropriate authorization to commence Phase III
clinical trials of any one of our compounds. The warrant is subject, following
written notice, to acceleration if our stock is listed on an exchange and its
closing price exceeds $10.00 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 $10.00 on any 10 trading days
within a period of 20 consecutive trading days. We have not yet sold any
securities under this offering.
As of June 30, 2002, we had $789,008 in cash and working capital of
$162,008. We have budgeted expenditures for the twelve-month period ending June
30, 2003, of $6,200,000, comprised of anticipated expenditures for research and
development ($5,000,000), general and administrative ($1,100,000). We have cut
back significantly on expenditures, especially costs associated with research
and development activities and are considering other cost containment
alternatives, including extending trade payables and deferring certain
compensation payments. Because we outsource primarily all of our research and
development activities our business structure is flexible and we have the
ability to slow or halt our activities and still remain a company until adequate
funding becomes available.
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. We are in the development stage, have incurred a
net loss since inception of $6,052,913 and expect to incur additional losses in
the near future. These factors raise substantial doubt about our ability to
continue as a going concern. Successful completion of our development program
and, ultimately, the attainment of profitable operations is dependent upon
future events, including maintaining
13
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 $6,588,400 that we are attempting to raise under our private
placement of preferred stock and warrants to purchase common stock that
commenced in August 2002, 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.
During the next twelve months, we anticipate that our research and
development activities will include commencement of a Phase I first-in-man
clinical trial as discussed above under " -- Preclinical Animal Studies;
Investigational New Drug Application; Expected Phase I Human Trials," as well as
continuing preclinical animal experiments to study toxicity and efficacy of 5-FU
and other cancer chemotherapies both in combination with our mannan compounds
and, in the case of Adriamycin, as chemically modified with sugar residues via
"linkers" of a certain chemical structure that are our proprietary technology.
As we have done to date, we will have our pre-clinical testing done by outside
laboratories. We do not anticipate building in-house research or development
facilities, or hiring staff to conduct those activities. Consequently, we do not
expect to make any purchases or sales of plant or significant equipment during
the next twelve months. We currently have six employees, all full-time. We
expect to maintain our employee headcount at under 10.
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.
14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of stockholders at our
Annual Meeting of Stockholders, held on May 31, 2002, with the vote tabulations
as indicated below:
Voters elected seven incumbent directors for one-year terms. The vote
tabulation for individual directors was:
Director Shares For Shares Withheld
-------- ---------- ---------------
David Platt, Ph.D. 12,451,549 0
James Czirr 12,451,549 0
Peter Hauser 12,451,549 0
Burton C. Firtel 12,451,549 0
Dale H. Conaway, D.V.M. 12,451,549 0
David H. Smith 12,451,549 0
Edgar Ben-Josef, M.D. 12,451,549 0
Voters approved the ratification of the appointment of Deloitte & Touche
LLP, as Pro-Pharmaceuticals' independent public accountants for the fiscal year
ending December 31, 2002, by a vote of 12,451,549 for and 0 against. There were
no abstentions or broker non-votes.
Voters approved the adoption of the Pro-Pharmaceuticals 2001 Stock
Incentive Plan by a vote of 12,451,549 for and 0 against. There were no
abstentions or broker non-votes.
Item 5. Other Information
None
15
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits filed as part of this Form 10-QSB are listed on the Exhibit
Index immediately preceding such Exhibits, which Exhibit Index is incorporated
herein by reference.
(b) Reports on Form 8-K
None
16
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on August 14, 2002.
PRO-PHARMACEUTICALS, INC.
Registrant
By: / S / DAVID PLATT
--------------------------------------
Name: David Platt
Title: President, Chief Executive Officer,
Treasurer and Secretary
(Principal Executive Officer and
Principal Financial and Accounting
Officer)
17
EXHIBIT INDEX
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 **
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
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
* 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.
18