Table of Contents

FORM 10-QSB

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            August 31, 2004

[  ]        TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from    N/A    to    N/A

Commission file number       000-28385

Protalex, Inc.

(Exact name of small business issuer as specified in its charter)
     
New Mexico
(State or other jurisdiction of
Incorporation or organization)
  91-2003490
(I.R.S. Employer Identification No.)
     
145 Union Square Drive
(Address of principal executive offices)
  New Hope, PA 18938
(Zip Code)
     
Issuer’s telephone number   (215) 862-9720

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    X    No

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 16,784,433 as of October 12, 2004.

Transitional Small Business Disclosure Format (check one):

Yes        No        X

 


TABLE OF CONTENTS

PART I
ITEM I — FINANCIAL STATEMENTS
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENTS OF CASH FLOWS
ITEM 2 — MANAGEMENT’S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION
ITEM 3 — CONTROLS AND PROCEDURES
ITEM 5 — OTHER INFORMATION
PART II
ITEM 6- EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CERETIFICATION OF CEO PURSUANT TO SECTION 906
CERTIFICATION OF CFO PURSUANT TO SECTION 906


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PART I

ITEM I — FINANCIAL STATEMENTS

Protalex, Inc.
(A Company in the Development Stage)

BALANCE SHEETS

                 
    August 31, 2004
  May 31, 2004
    (Unaudited)   (Audited)
ASSETS
               
CURRENT ASSETS:
               
Cash and cash equivalents
  $ 8,254,011     $ 9,292,783  
Prepaid expenses and employee advances
    44,471       22,041  
 
   
 
     
 
 
Total current assets
    8,298,482       9,314,824  
 
   
 
     
 
 
EQUIPMENT:
               
Lab equipment
    260,425       260,425  
Office and computer equipment
    157,787       153,266  
Furniture & fixtures
    25,556       25,556  
Leasehold improvements
    5,540       5,540  
 
   
 
     
 
 
 
    449,308       444,787  
Less accumulated depreciation
    (354,803 )     (342,723 )
 
   
 
     
 
 
 
    94,505       102,064  
 
   
 
     
 
 
OTHER ASSETS:
               
Deposits
    7,590       7,590  
Intellectual technology property, net of accumulated amortization of $4,908 and $4,653 as of August 31, 2004 and May 31, 2004, respectively
    15,392       15,647  
 
   
 
     
 
 
Total other assets
    22,982       23,237  
 
   
 
     
 
 
TOTAL
  $ 8,415,969     $ 9,440,125  
 
   
 
     
 
 
LIABILITIES AND STOKCHOLDERS’ EQUITY
               
CURRENT LIABILITIES:
               
Current maturities of capital lease obligation
  $ 20,839     $ 20,487  
Accounts payable
    290,842       377,100  
Payroll and related liabilities
    31,783       24,560  
Accrued expenses
    4,105        
 
   
 
     
 
 
Total current liabilities
    347,569       422,147  
Capital lease obligation, less current portion
    14,702       20,046  
Other
    2,702       1,544  
 
   
 
     
 
 
Total liabilities
    364,973       443,737  
 
   
 
     
 
 
STOCKHOLDERS’ EQUITY
               
Common stock, no par value, authorized 40,000,000 shares, 16,784,433 shares issued and outstanding as of August 31, 2004 and May 31 2004, respectively
    14,683,854       14,683,854  
Additional paid in capital
    1,110,603       1,052,008  
Deficit accumulated during the development stage
    (7,743,461 )     (6,739,474 )
 
   
 
     
 
 
Total stockholders’ equity (deficit)
    8,050,996       (8,996,388 )
 
   
 
     
 
 
 
  $ 8,415,969     $ 9,440,125  
 
   
 
     
 
 

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

 


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Protalex, Inc.
(A Company in the Development Stage)

STATEMENTS OF OPERATIONS

For the three months ended August 31, 2004 and 2003, and From
Inception (September 17, 1999) through August 31, 2004
(Unaudited)

                         
    Three   Three   From Inception
    Months Ended   Months Ended   Through
    August 31,   August 31,   August 31,
    2004
  2003
  2004
Revenues
  $     $     $  
Operating Expenses
                       
Research and development
    (719,546 )     (257,234 )     (4,402,452 )
Administrative
    (219,775 )     (317,663 )     (2,576,521 )
Professional fees
    (88,201 )     (37,759 )     (653,494 )
Depreciation and amortization
    (1,396 )     (1,876 )     (142,391 )
 
   
 
     
 
     
 
 
Operating Loss
    (1,028,918 )     (614,532 )     (7,774,858 )
Other income (expense)
                       
Interest income
    25,595       155       109,880  
Interest expense
    (664 )     (2,112 )     (67,903 )
Loss on disposal
                (10,580 )
 
   
 
     
 
     
 
 
Net Loss
  $ (1,003,987 )   $ (616,489 )   $ (7,743,461 )
 
   
 
     
 
     
 
 
Weighted average number of common shares outstanding
    16,784,433       12,244,740       12,118,511  
 
   
 
     
 
     
 
 
Loss per common share – basic and diluted
  $ (.06 )   $ (.05 )   $ (.64 )
 
   
 
     
 
     
 
 

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

 


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Protalex, Inc.
(A Company in the Development Stage)

STATEMENTS OF CASH FLOWS

For the Three Months Ended August 31, 2004 and 2003, and From
Inception (September 17, 1999) through August 31, 2004
Unaudited

                         
    Three   Three   From Inception
    Months Ended   Months Ended   Through
    August 31,   August 31,   August 31,
    2004
  2003
  2004
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net loss
  $ (1,003,987 )   $ (616,489 )   $ (7,743,461 )
Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities
                       
Loss on disposal of equipment
                10,580  
Depreciation and amortization
    12,335       13,676       382,232  
Non cash compensation expense
    58,595       182,002       1,267,481  
Non cash expenses
                16,644  
(Increase) decrease in:
                       
Prepaid expense and employee advances
    (22,430 )     1,221       (52,061 )
Increase (decrease) in:
                       
Accounts payable and accrued expenses
    (82,153 )     99,280       294,947  
Payroll and related liabilities
    7,223       52,320       31,783  
Other liabilities
    1,158             2,702  
 
   
 
     
 
     
 
 
Net cash and cash equivalents used in operating activities
    (1,029,259 )     (267,990 )     (5,789,153 )
 
   
 
     
 
     
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Acquisition of intellectual technology license – fee portion
                (20,000 )
Acquisition of equipment
    (4,521 )           (335,,828 )
Excess of amounts paid for public shell over assets acquired to be accounted for as a recapitalization
                (250,000 )
Proceeds from disposal of equipment
                6,000  
 
   
 
     
 
     
 
 
Net cash and cash equivalents used in investing activities
    (4,521 )           (599,828 )
 
   
 
     
 
     
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Proceeds from stock issuance
                14,976,464  
Principal payment on equipment notes payable and capital leases
    (4,992 )     (6,797 )     (259,870 )
Contribution by shareholders
                183,569  
Principal payment on note payable individual
                (225,717 )
Issuance of note payable to individuals
          100,000       368,546  
Acquisition of common stock
          (8,334 )     (400,000 )
 
   
 
     
 
     
 
 
Net cash and cash equivalents (used in) provided by financing activities
    (4,992 )     84,869       14,642,992  
 
   
 
     
 
     
 
 
NET (DECREASE) INCREASEIN CASH AND CASH EQUIVALENTS
    (1,038,772 )     (183,121 )     8,254,011  
Cash and cash equivalents, beginning
    9,292,783       280,052        
 
   
 
     
 
     
 
 
Cash and cash equivalents, end
  $ 8,254,011     $ 96,931     $ 8,254,011  
 
   
 
     
 
     
 
 
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
                       
Interest paid
  $ 664     $ 1,316     $ 64,692  
 
   
 
     
 
     
 
 
Taxes paid
  $     $ 50     $ 50  
 
   
 
     
 
     
 
 

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

 


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NOTE A — NOTES TO INTERIM FINANCIAL STATEMENTS

    The interim financial data is unaudited, however in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim period. The financial statements included herein have been prepared by Protalex, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading.
 
    The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the Company’s financial statements filed as part of the Company’s Form 10-KSB for the year ended May 31, 2004. This quarterly report should be read in conjunction with such annual report.

NOTE B — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1. Estimates

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

2. Loss per Common Share

    The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards No. 128 “Earnings Per Share” (SFAS No. 128) which is effective for periods ending after December 15, 1997. SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing loss to common shareholders by the weighted average number of common shares outstanding for the period. All potentially dilutive securities have been excluded from the computations since they would be antidilutive. However, these dilutive securities could potentially dilute earnings per share in the future. As of August 31, 2004, the Company had a total of 6,762,654 potentially dilutive securities.

3. Stock Based Compensation

    The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 148 (“SFAS No. 148), “Accounting for Stock-Based Compensation – Transition and Disclosure.” The Company does not plan to adopt the fair value method of accounting of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123) for stock options issued to employees. The company accounts for those options granted to employees using the intrinsic value recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. In accordance with APB 25, the Company records compensation cost as the difference between the exercise price of the options and the fair market value of the Company stock on the measurement (grant) date. These costs are amortized to expense over the options’ vesting period. Options to non-employees are accounted for using the “fair value” method, which recognizes the value of the option as an expense over the related service period with a corresponding increase to additional paid-in capital.
 
    The following table illustrates the effect on net loss and earnings per share if the Company applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation.

                         
    Three   Three   From Inception
    Months Ended   Months Ended   Through
    August 31,   August 31,   August 31,
    2004
  2003
  2004
Net loss, as reported
  $ (1,003,,987 )   $ (616,489 )   $ (7,743,461 )
Add: stock-based employee compensation expense included in reported net loss
    58,595       182,002       652,907  
Deduct: Stock-based employee compensation expense determined under fair- value method for all awards
    (160,174 )     (323,231 )     (2,065,108 )
 
   
 
     
 
     
 
 
Pro forma net loss
  $ (1,105,566 )   $ (757,718 )   $ (9,145,662 )
 
   
 
     
 
     
 
 
Loss per share, as reported basic and diluted
  $ (.06 )   $ (.05 )   $ (.64 )
Proforma loss per share basic and diluted
  $ (.07 )   $ (.06 )   $ (.75 )

 


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    The fair value of the options are estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

                         
    Three   Three   From Inception
    Months Ended   Months Ended   Through
    August 31,   August 31,   August 31,
    2004
  2003
  2004
Dividends per year
    0       0       0  
Volatility percentage
    103 %     90%-131 %     90%-131 %
Risk free interest rate
    2.57 %     4.16%-5.11 %     2.07%-5.11 %
Expected life (years)
    4       3-5       3-5  

    On July 19, 2004, the Company issued options to purchase up to 15,000 shares of restricted common stock of the Company to an employee, as part of an agreement for employment, at an exercise price of $2.00 a share. The options were issued pursuant to the Company’s 2003 Stock Option Plan and vest over a forty- eight month period. The options will expire July 2008.

NOTE C — RECENT ACCOUNTING PRONOUNCEMENTS

    In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this statement did not have a significant impact on the Company’s financial position, results of operations, or cash flows since the Company currently has no VIEs. In December 2003, the FASB issued FIN 46R with respect to VIEs created before January 31, 2003, which, among other things, revised the implementation date to the first fiscal year or interim period ending after March 15, 2004, with the exception of Special Purpose Entities (SPE). The consolidation requirements apply to all SPEs in the first fiscal year or interim period ending after December 15, 2003. The Company adopted the provision of FIN46R effective February 27, 2004, and such adoption did not have a material impact on the financial statements since the Company currently has no SPEs.
 
    On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments:

  mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets;
 
  instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets, including put options and forward purchase contracts; and
 
  obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares.

    SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material effect on the Company’s financial position, results of operations or cash flows.

NOTE D – RELATED PARTIES

    During the quarter ended August 31, 2004, the Company incurred $3,794 of expenses related to air travel to a partnership principally owned by the Chief Executive Officer of the Company. In addition the Company incurred $1,975 of expenses related to legal services, $789 of which remained unpaid to a law firm, which employs one of the Company’s board members. The Company also has an agreement with its Chairman to pay $12,500 per month for his services. During the quarter ended August 31, 2004 the Company incurred $37,500 related to these services.

 


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NOTE E — RECLASSIFICATIONS

    Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation.

ITEM 2 — MANAGEMENT’S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited financial statements and related notes included elsewhere in this Form 10-QSB. This discussion, as well as the remainder of this Report on Form 10-QSB, contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risks Relating to Our Business,” “Description of Business” and elsewhere in our most recent Annual Report on Form 10-KSB.

PLAN OF OPERATIONS

Favorable Pre-clinical safety and efficacy studies for Protalex’s lead compound, PRTX-100, lay the foundation for the Investigational New Drug (IND) Application for treating Rheumatoid Arthritis (RA) to be submitted to the FDA. The Company has performed additional studies in non-human primates to determine the pharmacokinetics of PRTX-100. The results of those studies have indicated more favorable dosing schedules (longer half lives) than studies obtained from rodents. Since non-human primates are more closely related to humans, Protalex has decided to perform additional toxicology studies in monkeys to establish the toxicity and starting doses in humans. While these studies will delay the IND submission by approximately three months; to first quarter of 2005, the Company believes that this approach will ultimately accelerate the development path and maximize success of PRTX-100 in patients. Other IND-related activities include manufacturing and formulation of Protalex’s drug for Phase I and II clinical trials, arranging for packaging and testing, designing clinical trial protocols, and completing additional toxicology studies utilizing the companies manufactured drug. These IND and Clinical Trial-related activities will occur during the next 12 months. Additionally the company will be conducting research and pre-clinical activities with PRTX-100 and other compounds in Rheumatoid Arthritis, Systemic Lupus Erythematosus (Lupus), and other related indications.

In the area of intellectual property and derivative drug development, Protalex’s patent was filed in April, 2002, and additional patent filings relating to the manufacturing process of PRTX-100 and new compounds are currently in process.

Staffing plans during this fiscal year include hiring a Chief Financial Officer, Project Manager of Clinical Operations, and additional Research & Development (R&D) Scientists and Laboratory Technicians. Continued growth in staffing is anticipated in the Company’s business plan, and specialized staffing requirements in the areas of management, scientific and FDA regulatory affairs will call for competitive salaries to attract and retain qualified personnel.

The Company anticipates that it will need to expand its current laboratory space to accommodate the additional staffing. This will be accomplished through the redesign and remodeling of its current facility in New Hope, PA. Remodeling should be completed in the fourth quarter of calendar year 2004. Further expansion of laboratory space is anticipated with further growth of the Company.

Research and Development (R&D) costs increased from the previous year from $257,234 to $719,546. This increase was due largely to increased expenses to outside contract labs for pre-clinical trials, product manufacturing, and product qualification related costs. Monthly R&D costs are expected to continue to increase in the coming fiscal year, driven by larger payments to vendors and labs performing drug manufacture, FDA consultation and clinical trial site management.

Administrative expenses decreased to $ 219,775 for the three months ended August 31, 2004 from $ 317,663 for the three months ended August 31, 2003. Stock based compensation which is used to attract and reward qualified employees, consultants and board members included in administrative costs decreased to $ 58,995 for the three months ended August 31, 2004 from 182,002 for the three months ended August 31, 2003. Other administrative costs increased to $160,780 for the three months ended August 31, 2004 from $135,661 for the three months ended August 31, 2003 due to increased staffing and the expansion and upgrade of the clinical consultant team associated with the company, including Dr. Hector Alila as senior Vice President of Drug Development. The Company has also recruited well-respected opinion leaders into its newly created Scientific Advisory Board.

Off Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements.

CRITICAL ACCOUNTING POLICIES

The Company’s significant accounting policies are more fully described in Note B to the financial statements included in this Quarterly Report and in Note B to the financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended May 31, 2004 filed with the Securities and Exchange Commission. Certain accounting policies are particularly important to the portrayal of the Company’s financial position and results of operations and require the application of significant judgment by management. As a result, these policies are subject to an inherent degree of uncertainty. In applying these policies, management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. The Company bases its estimates and judgments on historical experience, terms of existing contracts, observance of trends in the industry, information received from outside sources, and on various other assumptions that management believes to be

 


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reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies, including stock based compensation are each discussed in more detail in our Annual Report on Form 10-KSB for the year ended May 31, 2004. The Company has reviewed and determined that those policies remain the Company’s critical accounting policies as of and for the three months ended August 31, 2004. The Company did not make any changes to those policies during the period.

ITEM 3 — CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

Disclosure controls and procedures are designed and implemented to ensure that all material information relating to a Company is made known to its President and Chief Financial Officer and such other persons who are responsible for preparing and filing periodic reports with the Securities and Exchange Commission. As of August 31, 2004, Steven H. Kane, Chief Executive Officer and Chief Financial Officer, representing all of the officers and directors of Protalex, Inc., evaluated Protalex’s disclosure controls and procedures and concluded that such controls were adequate as of that date.

Changes in Internal Control:

There has been no significant changes in Protalex’s internal controls or any other factors that could significantly affect the Company’s internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 5 — OTHER INFORMATION

None.

PART II

ITEM 6 — EXHIBITS AND REPORTS ON FORM 8-K

             
2.1
  Stock Purchase Agreement among Protalex, Inc., Don Hanosh and Enerdyne Corporation   Incorporated by reference, to the Company’s 10-SB filing December 3, 1999    
 
           
2.2
  Merger Agreement and Plan of Re-organization between Protalex, Inc. and Enerdyne Corporation   Incorporated by reference to the Company’s 10-SB filing December 3, 1999    
 
           
3.1
  Articles of Incorporation, as amended   Incorporated by reference to the Company’s 10-SB filing December 3, 1999    
 
           
3.2
  Bylaws of the Company   Incorporated by reference to the Company’s 10-SB/A filing September 24, 2003    
 
           
31.1
  Certification of Chief Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act   Attached    
 
           
31.2
  Certification of Chief Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act   Attached    
 
           
32.1
  Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act   Attached    
 
           
32.2
  Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act   Attached    
 
           
(b)   No reports on Form 8-K were filed for the quarter ended August 31, 2004

 


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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PROTALEX, INC.

             
Date: October 13, 2004   PROTALEX, INC.
 
  By:   Steven H. Kane    
   
 
           
      Steven H. Kane, President, Chief
Executive Officer and Acting Chief Financial Officer