UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Amendment No. 1 to quarterly report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
[_] 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 31, 2001, was
13,641,580.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
This amendment on Form 10-QSB of Pro-Pharmaceuticals, Inc. incorporates certain
revisions to historical financial data and related descriptions but is not
intended to update other information presented in this report as originally
filed, except where specifically noted. The amendment reflects the restatement
of the Registrant's condensed consolidated financial statements for the three
and six months ended June 30, 2001 included in its Form 10-QSB filed on
September 9, 2001. See note 9 to our financial statements for detailed
discussion of the matter.
TABLE OF CONTENTS
Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements...............................................1
Review Report of Independent Accountants........................1
Balance Sheets (As Restated)....................................2
Statements of Operations (As Restated)..........................4
Statement of Changes in Stockholders' Equity (Deficit)
(As Restated)..................................................5
Statements of Cash Flows (As Restated)..........................6
Notes to Financial Statements (As Restated).....................7
Item 2. Plan of Operation.................................................16
Part II -- OTHER INFORMATION
Item 1. Legal Proceedings.................................................21
Item 2. Changes in Securities.............................................21
Item 3. Defaults Upon Senior Securities...................................21
Item 4. Submission of Matters to a Vote of Security Holders...............21
Item 5 Other Information.................................................21
Item 6. Exhibits and Reports on Form 8-K..................................22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
And Shareholders of
Pro-Pharmaceuticals, Inc.
Newton, Massachusetts
We have reviewed the accompanying balance sheets of Pro-Pharmaceuticals, Inc. as
of June 30, 2001 and the related statements of operations, changes in deficiency
in assets, and cash flows for the three-month and six-month periods then ended
and for the period from inception (July 10, 2000) through June 30, 2001. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such financial statements for them to be in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, certain conditions raise
substantial doubt about the Corporation's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
that note.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Pro-Pharmaceuticals, Inc. and subsidiaries as of
December 31, 2000, and the related statements of operations, changes in
deficiency in assets and cash flows for the year then ended (not presented
herein); and in our report dated December 4, 2001, except as to Note 7, as to
which the date is April 10, 2002, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying balance sheet as of December 31, 2000 is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
/s/ Scillia Dowling & Natarelli LLC
Scillia Dowling & Natarelli LLC
Hartford, Connecticut
August 31, 2001, except for Note 10, as to which the date is April 10, 2002
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
BALANCE SHEETS (AS RESTATED)
June 30, December 31,
2001 2000
----------- -----------
(unaudited) (As Restated)
(As Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 746,351 $ 204,745
Other current assets 2,409 --
----------- -----------
748,760 204,745
----------- -----------
PROPERTY AND EQUIPMENT, at cost 15,812 --
Less accumulated depreciation (1,119) --
----------- -----------
14,693 --
----------- -----------
OTHER ASSETS
Patent 8,695 8,695
Contractual Rights 107,000 --
Debt issuance costs, net of accumulated
amortization of $8,583 and $0 at June 30, 2001
and December 31, 2000, respectively 27,417 14,500
Deposit 26,950 --
----------- -----------
170,062 23,195
----------- -----------
$ 933,515 $ 227,940
=========== ===========
2
June 30, December 31,
2001 2000
----------- -----------
(unaudited) (As Restated)
(As Restated)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 222,414 $ 79,129
Accrued expenses 78,451 23,238
Other current liabilities 12,629 --
----------- -----------
Total current liabilities 313,494 102,367
CONVERTIBLE NOTES PAYABLE (net of discount of $766,997) 1,310,602 79,245
----------- -----------
Total liabilities 1,624,096 181,612
----------- -----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common voting shares, $0.001 par value,
100,000,000 shares authorized,
13,576,560 and 12,354,670 shares
issued and outstanding at June 30, 2001
and December 31, 2000, respectively 13,577 12,355
Private placement units of common
stock and warrants 133,000 --
Additional paid-in capital 1,351,435 221,910
Deficit accumulated during development stage (2,188,593) (187,937)
----------- -----------
(690,581) 46,328
----------- -----------
$ 933,515 $ 227,940
=========== ===========
See notes to financial statements. 3
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS (AS RESTATED)
Period from
Inception
For the Three For the Six (July 10, 2000)
Months Ended Months Ended through
June 30, 2001 June 30, 2001 June 30, 2001
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
(As Restated) (As Restated) (As Restated)
REVENUE $ -- $ -- $ --
------------ ------------ ------------
RESEARCH AND DEVELOPMENT
Consulting fees and salaries 73,802 90,851 182,101
Laboratory fees 48,590 64,690 73,690
------------ ------------ ------------
122,392 155,541 255,791
------------ ------------ ------------
GENERAL AND ADMINISTRATIVE
Legal 149,506 219,370 226,019
Salaries 45,834 45,834 45,834
Payroll taxes and benefits 7,416 7,416 7,416
Consulting 62,792 74,004 112,754
Rent 13,160 13,160 13,160
Office expenses 74,017 105,038 110,809
Contributions 100 5,100 5,100
Accounting 71,841 84,841 92,341
Marketing 24,149 24,149 24,149
Miscellaneous 1,274 1,274 1,274
Repairs and maintenance 1,097 1,097 1,097
Depreciation and amortization 5,619 9,972 9,972
Telephone and utilities 2,117 4,723 9,023
Travel and entertainment 6,008 6,674 10,404
------------ ------------ ------------
464,930 602,652 669,352
------------ ------------ ------------
NET LOSS FROM
OPERATIONS (587,322) (758,193) (925,143)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest income 5,087 12,666 12,927
Interest expense (1,060,962) (1,247,265) (1,265,158)
------------ ------------ ------------
(1,055,875) (1,245,818) (1,263,450)
------------ ------------ ------------
NET LOSS $ (1,643,197) $ (2,004,011) $ (2,188,593)
============ ============ ============
LOSS PER SHARE
Basic and diluted $ (0.13) $ (0.16)
============ ============
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic and diluted 12,979,192 12,666,931
============ ============
See notes to financial statements. 4
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (AS RESTATED)
Private
Placement
Units of
Common Voting Shares Common Additional
------------------------- Stock and Paid-in
Shares Amount Warrants Capital
----------- ----------- ----------- -----------
Issuance of Common Stock of
Pro-Pharmaceuticals, Inc. 12,354,670 $ 12,355 $ -- $ --
Beneficial conversion feature
& Common Share Grants
embedded in convertible notes 221,910
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31, 2000 12,354,670 12,355 -- 221,910
Beneficial conversion feature
& Common Share Grants
embedded in convertible notes 1,026,102
Issuance of Stock to Acquire
Contractual Rights, and
Payment of Stock 1,221,890 1,222 -- 103,423
Sale of Private Placement
Units, beginning June 2001 -- -- 133,000 --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at June 30, 2001
(unaudited) 13,576,560 $ 13,577 $ 133,000 $ 1,351,435
=========== =========== =========== ===========
Deficit
Accumulated
During the Stockholders'
Development Equity
Stage (Deficit)
----------- ------------
Issuance of Common Stock of
Pro-Pharmaceuticals, Inc. $ (3,355) $ 9,000
Beneficial conversion feature
& Common Share Grants
embedded in convertible notes 221,910
Net loss (184,582) (184,582)
----------- -----------
Balance at December 31, 2000 (187,937) 46,328
Beneficial conversion feature
& Common Share Grants
embedded in convertible notes 1,026,102
Issuance of Stock to Acquire
Contractual Rights, and
Payment of Stock 3,355 108,000
Sale of Private Placement
Units, beginning June 2001 -- 133,000
Net loss (2,004,011) (2,004,011)
----------- -----------
Balance at June 30, 2001
(unaudited) $(2,188,593) $ (690,581)
=========== ===========
See notes to financial statements. 5
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS (AS RESTATED)
Period from
Inception
For the Three For the Six (July 10, 2000)
Months Ended Months Ended through
June 30, 2001 June 30, 2001 June 30, 2001
------------- ------------- -------------
(unaudited) (unaudited) (unaudited)
(As Restated) (As Restated) (As Restated)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss $(1,643,197) $(2,004,011) $(2,188,593)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 5,619 9,972 9,972
Non cash interest expense 1,045,054 1,231,357 1,248,012
Changes in assets and liabilities:
Debt issuance cost (2,409) (2,409) (2,409)
Accounts payable 196,007 185,756 264,595
Accrued expenses 2,601 2,601 2,601
----------- ----------- -----------
Net cash used in operating activities (396,325) (576,734) (665,822)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Patent costs (8,695)
Deposit (26,950) (26,950) (26,950)
Purchase of property, plant
and equipment (15,812) (15,812) (15,812)
----------- ----------- -----------
Net cash used in investing activities (42,762) (42,762) (51,457)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from the sale
of private placement units 133,000 133,000 133,000
Proceeds from the issuance
of common stock -- -- 9,000
Proceeds from convertible notes payable 211,500 1,026,102 1,310,602
Increase in due to Stockholder 1,000 10,028
Cash received from stock
subscription receivable -- 1,000 1,000
----------- ----------- -----------
Net cash provided by
financing activities 344,500 1,161,102 1,463,630
----------- ----------- -----------
NET (DECREASE)
INCREASE IN CASH (94,587) 541,606 746,351
CASH AND CASH EQUIVALENTS, Beginning 840,938 204,745 --
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, Ending $ 746,351 $ 746,351 $ 746,351
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
During the period from inception (July 10, 2000) through June 30, 2001, the Company
capitalized debt issuance costs totaling $35,000, a long-term asset, by incurring an accrued
liability of the same amount.
See notes to financial statements. 6
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 -- OPERATIONS
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.
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 $2,188,593 and expects to incur
additional losses in the near future. 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.
7
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
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.
NOTE 2 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and disclosures required
by accounting principles generally accepted in the United States of America.
However, in the opinion of management, the accompanying unaudited financial
statements contain all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position of
Pro-Pharmaceuticals, Inc. (the Company) at June 30, 2001 and December 31, 2000,
and the results of operations, changes in stockholders' deficit and cash flows
for the three months and six months ended June 30, 2001, and for the period from
inception (July 10, 2000) through June 30, 2001. For further information, refer
to the financial statements and disclosures that were filed by the Company with
the Securities and Exchange Commission in a registration statement on Form 10-SB
(General Form for Registration of Securities of Small Business Issuers) (File
No. 000-32877). That registration became effective as of August 13, 2001.
8
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 -- PRIVATE PLACEMENT
The Company began on May 25, 2001, a private placement of securities exempt from
registration pursuant to Rule 506 of Regulation D of the Securities Act of 1933
in order to raise $5,145,000. The securities consist of 1,470,000 units offered
at $3.50 each of one share of its common stock and one four-year warrant
exercisable at $6.50 to purchase one share of common stock. The warrant is
subject, following written notice, to acceleration if either (i) the Company
files a "New Drug Application" with the Food and Drug Administration; or (ii)
the Company's stock is listed on an exchange and its closing price exceeds
$11.00 on any 10 trading days within a period of 20 consecutive trading days, or
if the Company's stock is quoted on the NASDAQ National Market System or Small
Cap Market, or over-the-counter, and the average of the closing bid and asked
prices thereon exceeds $11.00 on any 10 trading days within a period of 20
consecutive trading days.
As of June 30, 2001, the Company had received proceeds of $133,000 from the sale
of the securities offered in the private placement representing 38,000 units.
Such purchases will result in the Company issuing 250,400 shares of common stock
and warrants to purchase 38,000 shares of its common stock.
NOTE 4 -- PER SHARE DATA
The shares of common stock issuable upon (i) exercise of the warrants issued
pursuant to the May 2001 private placement of the Company; (ii) conversion of
the convertible notes issued by Pro-Pharmaceuticals (Massachusetts) and assumed
by the Company; and (iii) exercise of the warrants issued to such noteholders
who elect an early conversion of their convertible notes (see Note 8) have not
been included in the calculation of loss per share of common stock as the effect
of such an inclusion would be anti-dilutive reducing the loss per share.
The outstanding shares have been restated to reflect the shares outstanding as
of each period based upon the reverse acquisition transactions (see Note 1).
9
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 -- CONVERTIBLE NOTES PAYABLE
During the six-months ended June 30, 2001 and the year ended December 31, 2000
the Company issued $1,026,102 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. However, subsequent to the end of the year, these notes
were extended. The Company may prepay the amounts outstanding under the
convertible notes at any time prior to maturity.
At any time prior to maturity, the holder has the right to convert the note into
shares of common stock. The number of shares the holder has a right to receive
upon early conversion is computed by dividing the unpaid balance of the
principal and accrued and unpaid interest by 75% of the offering price of the
Company's most recent equity offering. This conversion price, however, may not
exceed $2.00. At maturity, the notes are converted based on dividing the
principal and accrued interest by $0.50, assuming a minimum of 10,000,000 shares
outstanding.
In connection with the issuance of these convertible notes, each holder was
entitled to receive one-half share of the Company's common stock for each whole
dollar amount of principal. The Company has issued a total of 660,321 shares of
common stock to the holders of convertible notes.
The Company has allocated $1,248,012 of the $1,310,602 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.
As additional consideration in the event of an acquisition or merger of the
Company by or with a non-operating public company, the note holders receive one
half of a share of the acquiring company's common stock for each dollar of
principal amount loaned. If the acquisition has not occurred by the maturity
date of the notes, the holders receive one-half of a share of the company for
each dollar of principal amount loaned. If the Company does not have at least
10,000,000 shares outstanding as of the maturity date of the notes, the holders
will receive such percentage of the Company's common stock as they would have
received had 10,000,000 shares been outstanding. The shares for additional
consideration are to be issued upon the earliest of completion of such
acquisition or merger; filing of a registration statement for the common stock
of the Company (or the acquiring company, as the case may be) with the
Securities and Exchange Commission; or the maturity date of the notes.
10
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 -- RELATED PARTY TRANSACTIONS
The Company has incurred consulting expenses as follows, to a corporation
controlled by a person who is also a stockholder, director and officer of the
Company for financing and business development services classified as a general
and administrative expense in the financial statements, to a stockholder for
strategic advisory services also classified as general and administrative
expense, and to a corporation controlled by a stockholder formerly an officer of
the Company for research and development services and so classified.
Period from
From Inception
For the Three For the Six (July 10, 2000)
Months Ended Months Ended through
June 30, 2001 June 30, 2001 June 30, 2001
------------- ------------- -------------
General and administrative fees $ 12,500 $ 76,352 $ 88,852
Research and development 25,000 50,895 75,895
-------- -------- --------
$ 37,500 $127,247 $164,747
======== ======== ========
NOTE 7 -- LEASE OBLIGATION
In June 2001, the Company entered into a sublease for certain office space at
189 Wells Avenue, Newton, Massachusetts. The sublease required the Company to
provide a security deposit of $48,883, of which up to $24,442 could be in the
form of a letter of credit. The Company paid $26,950 in cash and provided the
remainder of the security deposit in the form of a letter of credit.
Additionally, the Company has to assume its proportional share of expenses of
the building. The following is a schedule of the minimum lease payments for that
agreement:
Years ended
June 30,
-----------
2002 $ 89,147
2003 105,174
2004 106,420
2005 107,656
2006 100,234
---------
$ 508,631
=========
11
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 -- COMMITMENTS AND CONTINGENCY
Litigation
SafeScience, Inc. (SafeScience), a prior employer of David Platt, Ph.D., founder
of the Company, issued a demand letter dated February 15, 2001 alleging that Dr.
Platt directly and indirectly, through his activity in the Company, is engaged
in a business competitive with SafeScience in violation of a non-competition
covenant binding on Dr. Platt. Dr. Platt, by his counsel, responded in a letter
dated February 19, 2001 denying such violation and inviting a substantive
meeting to discuss the allegations. No determination has been made of the
likelihood of a favorable or unfavorable outcome, nor has any estimate been made
as to the amount or range, if any, of potential loss. The Company intends to
contest the allegations vigorously.
Financial Consulting Agreement
In August 2001, the Company retained I.W. Miller Group, Inc. of Irvine,
California, for two years to provide the Company with financial public relations
and financial consulting services. Either party may terminate on thirty days'
notice. The Miller Group has agreed to prepare informational materials about the
Company's business for potential investors and business partners, to assist the
Company in seeking business relationships, to introduce the Company to sources
of investment capital, to assist in negotiating financing terms, to introduce
the Company to potential media outlets and to advise the Company about investor
relations. The Company paid a fee of $10,000 to the Miller Group on signing the
agreement, and has agreed to issue shares of its common stock to the Miller
Group over the term of the agreement. The Company will be required to pay
finders' fees and retainer fees and issue additional shares of common stock to
the Miller Group as follows:
a) $12,500 monthly retainer for six months commencing upon and subject to
locating investment capital of $250,000 from Miller Group sources or
introductions. The monthly retainer will resume for a second six month
period provided Miller Group introductions have invested $750,000 in
the Company through the term of the agreement. For amounts raised from
Miller Group introductions in excess of the above thresholds,
additional shares of restricted stock will be issued based upon the
increments in the amount of funds raised.
b) The Miller Group will receive a finder's fee of 10 percent in cash of
all capital raised for the Company.
12
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Private Placement
On August 22, 2001, the Company sold 133,400 units of the offered securities
described in Note 3 for $400,200 to one subscriber willing to make a substantial
investment. The aggregate purchase price for such securities represents a
reduction of the unit price from $3.50 to $3.00. In addition, the holder's
exercise price under the warrant is reduced from $6.50 to $5.00 and the
Company's exercise acceleration rights occur at $10.00 rather than $11.00 (see
Note 3 for detail). The Company also granted this subscriber an option to
purchase an additional 200,000 units of the offered securities upon the same
terms at any time until after 30 days after the Company notifies the investor
that an investigational new drug application of the Company filed with the Food
and Drug Administration has become effective with respect to any one compound.
As a result of agreeing to accept different terms on the offered securities with
such investor, the Company intends to notify each previous purchaser of such
securities of such event. This could result in the Company agreeing to refund
some or all of the previous investments.
Consulting Arrangements
The Company has entered into consulting arrangements, each terminable on thirty
days' notice, with (i) a corporation controlled by a person who is a
stockholder, director and officer of the Company for financing and business
development services in consideration of $10,000 per month and expense
reimbursement, (ii) a corporation controlled by a person who is a stockholder
and former officer of the Company for research and development services in
consideration of $5,000 per month and expense reimbursement, and (iii) an
individual otherwise unaffiliated with the Company with respect to product
development services in consideration of $2,000 per month and expense
reimbursement.
13
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 -- SUBSEQUENT EVENTS
Convertible Notes
In August 2001, the Company requested that the holders of its outstanding
convertible notes convert them, in accordance with their terms, to shares of its
common stock prior to the notes' maturity dates. In order to encourage early
conversion by September 7, 2001, the Company has offered to issue each
noteholder who converts a common stock purchase warrant identical to the warrant
offered in its ongoing private placement. In the case of a noteholder who
accepts the Company's offer, the warrant issued would be exercisable to purchase
such number of shares as is equal to the number of shares of the Company's
common stock that the holder receives as of the conversion of the note. As of
August 29, 2001, holders of notes with an aggregate principal amount of $627,002
have elected to accept the Company's early conversion offer.
NOTE 10 -- RESTATEMENT
Subsequent to the issuance of the Company's condensed financial statements for
the six-months ended June 30, 2001, management has revised its best estimate of
the fair value of the Company's stock. Management believes that the estimated
value of the Company's stock at the time of the issuances of the convertible
debt was understated. Had the higher estimate been used, the proceeds from
convertible debt issued in 2000 and the six-months ended June 30, 2001 would
have been allocated to two equity features--an embedded beneficial conversion
feature and shares received. The valuation of these features results in an
allocation to additional paid in capital and a discount to debt that will be
amortized over the term of the debt. Management believes that the updated
estimates and restated financial statements better reflect the economic
substance of the financing transactions.
Management has also determined that salaries and consulting expenses that were
originally recorded as an expense in 2001 related to services that were
performed in 2000, and therefore should be recorded as a liability and an
expense in 2000. As a result, the 2000 financial statements have been restated
from the amounts previously reported to reflect these changes.
14
PRO-PHARMACEUTICALS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The significant effects of the restatement are as follows:
As
Previously
Reported As Restated
At June 30, 2001:
Additional paid in capital 103,423 1,351,435
Deficit accumulated during development stage (940,581) (2,188,593)
For the three months ended June 30, 2001:
Interest expense (15,908) (1,060,962)
Net Loss (598,143) (1,643,197)
Loss per share (Basic and diluted) (0.05) (0.13)
For the six months ended June 30, 2001:
Research and Development 196,791 155,541
General and Administrative 616,402 602,652
Interest expense (27,127) (1,258,484)
Net Loss (827,654) (2,004,011)
Loss per share (Basic and diluted) (0.07) (0.16)
Period from Inception (July 10, 2000) through June 30, 2001:
Interest expense (28,365) (1,276,377)
Net Loss (940,581) (2,188,593)
15
Item 2. Plan of Operation
This quarterly report on Form 10-QSB contains, in addition to historical
information, forward-looking statements as such term is defined in the Private
Securities Litigation Reform Act of 1995. The 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
Registration Statement on Form 10-SB 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. We have no obligation to publicly update forward-looking statements
we make in this Form 10-QSB.
Overview
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.
During 2001 we conducted preclinical animal experiments to study the
reduction of toxicity of two widely-used anti-cancer drugs, 5-Fluorouracil
(5-FU) and Adriamycin, in combination with mannan compounds we selected for the
studies. Preliminary results of studies in which toxicity was measured based on
animal survival rates, indicate that one of the mannan compounds may
significantly decrease the toxicity of 5-FU, and another mannan may
significantly decrease the toxicity of Adriamycin. In another preclinical
experiment, we studied toxicity reduction of 5-FU in combination with the same
mannan that demonstrated toxicity reduction in the previous 5-FU study. In this
experiment, toxicity was measured by effect on blood count. Preliminary results
indicate that the mannan decreased toxicity of 5-FU by this measure as well,
since the 5-FU/mannan combination resulted in decreased loss of hemoglobin,
platelets and red blood cells compared to the loss resulting from administration
of 5-FU alone.
This year we also conducted preclinical animal experiments to study the
efficacy of 5-FU in combination with the same mannan that demonstrated toxicity
reduction. Our objective was to
16
determine whether the desirable toxicity reduction of the 5-FU/mannan
combination occurs at the expense of diminished drug efficacy. Preliminary
results of these experiments indicate that such combination results in a
significant increase in efficacy of the drug when administered into
cancer-carrying animals.
We are currently developing formulations of carbohydrates linked to
anti-cancer drugs. We have chemically synthesized two 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
both of the synthesized carbohydrate-Adriamycin compounds are significantly less
toxic compared with the original Adriamycin, and demonstrate therapeutic
efficacy as well. We engaged independent laboratories to conduct all of the
foregoing studies.
We believe that the results of our studies show promise for
carbohydrate-based anti-cancer drug delivery systems. We have no products and
have not yet conducted any clinical trials.
Business Combination; Ownership and Management Structure
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 in our registration statement on Form 10-SB under "Item 1. Description
of Business -- Business of Pro-Pharmaceuticals -- Cancer Detection Technology."
As part of that process, Developed Technology distributed its holdings of our
common stock to its shareholders of record as of May 7, 2001. 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 company. We acquired these shares in exchange for 12,354,670
shares of our common stock. As a result, that company became our wholly owned
subsidiary, and its shareholders through an exchange became owners of
approximately 91% of the outstanding shares of our common stock, with the
Developed Technology shareholders owning the remaining 9%. After the
acquisition, we merged with the Massachusetts company and are the surviving
corporation following 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 company.
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.
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
17
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 $26,950 in cash and provided the remainder of the security deposit in the
form of a letter of credit.
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 $10,000 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, 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.
Plan of Operation
For the twelve-month period ending June 30, 2002, our plan of operation is
to:
o Make drug delivery formulations to upgrade the anti-cancer drugs
5-Fluorouracil, Adriamycin, Taxol, Cytoxan and Cisplatin linked to
carbohydrates, in quantities necessary for preclinical evaluation of
the upgraded formulations
o Based on results of preclinical evaluations, and depending on the
availability of funds, select one or more of the drug enhancement
systems to conduct clinical trials
o File an Investigational New Drug (IND) application with the Food and
Drug Administration to conduct clinical trials, aiming for a
fast-track designation to shorten the FDA approval process
o Begin clinical trials
We plan in subsequent years to complete clinical trials, file at least one
New Drug Application (NDA) with the FDA and obtain FDA approval to market the
product. We would then arrange for manufacture and marketing of our product(s).
We do not plan to purchase or sell any plant or significant equipment
during 2001. We expect to maintain our employee headcount at three to four.
Liquidity and Capital Resources
Our capital resources to date consist primarily of the proceeds of a
private placement of convertible notes issued and sold by the predecessor
Massachusetts company in anticipation of its
18
being acquired by us. These notes are now our corporate obligations as a result
of the merger. See "Part II. Item 4. Recent Sales of Unregistered Securities" in
our Form 10-SB for a discussion of the convertible notes. Sale of the notes as
of June 30, 2001 resulted in aggregate proceeds of $1,310,602.
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. Purchasers under
the private placement must qualify as "accredited investors" as such term is
defined in Regulation D. The securities consist of 1,470,000 units, offered at
$3.50 each, of one share of our common stock and one 4-year warrant exercisable
at $6.50 to purchase one share of our common stock. The warrant is subject,
following written notice, to acceleration if either (i) we file a New Drug
Application with the FDA, or (ii) our stock is listed on an exchange and its
closing price exceeds $11.00 on any 10 trading days within a period of 20
consecutive trading days or, if our stock is quoted on the NASDAQ National
Market System or Small Cap Market, or over-the-counter, and the average of the
closing bid and asked prices thereon exceeds $11.00 on any 10 trading days
within a period of 20 consecutive trading days.
In connection with an agreement with an early investor in this offering who
was willing to invest a substantial amount of funds, we sold 133,400 of the
units to that investor at $3.00 each, for a total of $400,200. We reduced the
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
that investor an option to purchase an additional 200,000 units on the same
terms as the 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 a result of agreeing to accept
different terms on the offered securities with that investor, we intend to
notify each previous purchaser of the sale to that investor. This could result
in our agreeing to refund some or all of the previous investments.
As of June 30, 2001 we had received proceeds of $133,000 from the sale of
the securities offered in our private placement, and through August 27, 2001 we
have received proceeds of $772,950. Such purchases will result in our issuing
239,900 shares of our common stock and warrants to purchase 239,900 shares.
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 have offered to issue each noteholder who converts a
common stock purchase warrant identical to the warrant offered in our ongoing
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. As of August 29, 2001 holders of notes with an
aggregate principal amount of $627,002 have elected to accept our early
conversion offer.
Regardless of whether a noteholder accepts our early conversion offer or
ever 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 presently issuing
an aggregate of 656,601 of such "additional compensation" shares. Based upon the
offering price of the securities in our private placement, the conversion price
under the convertible note is now fixed at one share of our common stock for
each two dollars ($2.00) of unpaid principal and interest. All shares of common
stock issued upon conversion of the notes are "restricted securities" as defined
in Rule 144 under the Securities Act.
19
As of June 30, 2001, we had approximately $746,000, and as of August 31,
2001 approximately $1,113,000, in cash and cash equivalents. We have budgeted
expenditures for the twelve-month period ending June 30, 2002, of $5,000,000,
comprised of anticipated expenditures for research and development ($3,200,000),
general and administrative ($1,300,000), equipment and leaseholds ($200,000) and
contingency allowance ($300,000).
Additional funds may be raised through additional equity financings, as
well as borrowings and other resources. We are currently holding discussions
with potential investors. With the capital we have raised to date, and the
additional $5,145,000 we are attempting to raise, we believe that we will be
able to proceed with our current plan of operations and meet our obligations for
approximately the next twelve months. If we do not raise the additional funds,
we will have to cut our research and development expenditures to a minimum level
for the next twelve months, since available cash at August 27, 2001 would be
insufficient to cover more than equipment and leasehold costs and some
administrative costs. In that case, overall administrative expenses for the next
twelve months would have to be cut by approximately $500,000. If we have only
minimal funds to spend on research and development, that would substantially
slow progress that we might expect to make during the next twelve months in
development of our business including commencement of clinical trials.
In August 2001 we retained I.W. Miller Group, Inc., of Irvine, California,
for two years to provide us with financial public relations and financial
consulting services. Either party may terminate on thirty days' notice. The
Miller Group has agreed to prepare informational materials about our business
for potential investors and business partners, assist us in seeking business
relationships, introduce us to sources of investment capital and assist in
negotiating financing terms, introduce us to potential media outlets, and advise
us about investor relations. We paid a fee of $10,000 to the Miller Group on
signing the agreement, and have agreed to issue shares of our common stock to
the Miller Group over the term of the agreement. We will be required to pay
finders' fees and retainer fees and issue additional shares of common stock to
the Miller Group if we receive threshold amounts of equity financing from Miller
Group sources or introductions during the 2-year term. As of August 27, 2001, we
have no current or pending financing transactions with any Miller Group sources
or introductions.
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.
20
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
During the quarter ended June 30, 2001, we began a private placement exempt
from registration pursuant to Rule 506 of Regulation D under the Securities Act
of 1933 in order to raise up to $5,145,000 to cover our budgeted expenditures as
set forth in "Part I -- Financial Information -- Item 2. Plan of Operation --
Liquidity and Capital Resources," above. Purchasers under the private placement
must qualify as "accredited investors" as that term is defined in Regulation D.
The securities consist of 1,470,000 units, offered at $3.50 each, of one share
of our common stock and one 4-year warrant exercisable at $6.50 to purchase one
share of our common stock. The warrant is subject, following written notice, to
acceleration if either (i) we file a New Drug Application with the FDA, or (ii)
our stock is listed on an exchange and its closing price exceeds $11.00 on any
10 trading days within a period of 20 consecutive trading days or, if our stock
is quoted on the NASDAQ National Market System or Small Cap Market, or
over-the-counter, and the average of the closing bid and asked prices thereon
exceeds $11.00 on any 10 trading days within a period of 20 consecutive trading
days. For further information about this offering, please see "Part I --
Financial Information -- Item 2. Plan of Operation -- Liquidity and Capital
Resources."
As of June 30, 2001 we had received proceeds of $133,000 from the sale of
the securities offered in our private placement, and through August 27, 2001 we
have received proceeds of $772,950. Such purchases will result in our issuing
239,900 shares of our common stock and warrants to purchase 239,900 shares.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1 Articles of Incorporation of the Registrant, dated January 26,
2001*
3.2 By-laws of the Registrant*
10.1 Assignment and Assumption Agreement, dated April 23, 2001, by and
between Developed Technology Resource, Inc. and DTR-Med Pharma
Corp.*
10.2 Stock Exchange Agreement, dated April 25, 2001, by and among
Developed Technology Resource, Inc., DTR-Med Pharma Corp.,
Pro-Pharmaceuticals, Inc. (Massachusetts) and the Shareholders
(as defined therein)*
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB, as filed with the Commission on June 13, 2001.
(b) Reports on Form 8-K
None
22
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 April 12, 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)
23
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
3.1 Articles of Incorporation of the Registrant, dated January 26,
2001*
3.2 By-laws of the Registrant*
10.1 Assignment and Assumption Agreement, dated April 23, 2001, by and
between Developed Technology Resource, Inc. and DTR-Med Pharma
Corp.*
10.2 Stock Exchange Agreement, dated April 25, 2001, by and among
Developed Technology Resource, Inc., DTR-Med Pharma Corp.,
Pro-Pharmaceuticals, Inc. (Massachusetts) and the Shareholders
(as defined therein)*
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB, as filed with the Commission on June 13, 2001.
24