Form 10KSB for PROTEIN POLYMER TECHNOLOGIES, INC., filed on March 5, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 0-19724
PROTEIN POLYMER TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0311631
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of Principal Executive Offices)
Issuer's Telephone Number: (619) 558-6064
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Redeemable Warrants
(Title of Class)
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
--- ---
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
The issuer's revenues for the most recent fiscal year were $255,824.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on February 26, 1999 was $5,063,391.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of February 26, 1999, 10,915,493
shares of common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Definitive Proxy Statement to be filed no later than April 30, 1998 pursuant to
Regulation 14A with respect to the Registrant's 1998 Annual Meeting of
Stockholders (incorporated by reference in Part III).
Transitional Small Business Disclosure Format: Yes No X
--- ---
PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page No.
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PART I........................................................................... 2
Item 1. Business............................................................. 2
Item 2. Properties........................................................... 15
Item 3. Legal Proceedings.................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.................. 15
PART II.......................................................................... 16
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 16
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 18
Item 7. Financial Statements................................................. F-1
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 23
PART III......................................................................... 23
Items 9, 10, 11 and 12 - Incorporated by Reference
Item 13. Financial Statements, Exhibits and Reports on Form 8-K............... 23
Signatures..................................................................... 27
PART I
ITEM 1. BUSINESS
Company Background
Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or "the
Company"), is a development-stage biotechnology company incorporated on July 6,
1988, and engaged in the research, development and production of medical
products based on its proprietary protein-based biomaterials technology. Since
1992, the Company has primarily focused on developing materials technology and
products to be used in the surgical repair of tissue: surgical adhesives and
sealants; soft tissue augmentation products; wound healing matrices; drug
delivery devices; and surgical adhesion barriers. The Company has also developed
coating technology that can efficiently modify and improve the surface
properties of more traditional biomedical devices. A common goal is to develop
materials that beneficially interact with human cells, enabling cell growth and
the regeneration of tissues with improved outcomes as compared to current
products and practices.
In December 1998, the Company filed its first Investigational Device
Exemption ("IDE") with the U.S. Food and Drug Administration ("FDA") to obtain
approval to begin human clinical testing of its urethral bulking agent for the
treatment of female stress urinary incontinence. The FDA has requested
additional information about the product and the Company is preparing a response
to the request. The Company intends to submit an additional IDE to the FDA in
1999 to obtain approval to begin human clinical testing of its dermal bulking
agent for use in cosmetic and reconstructive surgery applications. PPTI began
studies to identify its most promising biomaterial formulations for use in these
soft tissue augmentation products in 1996 and has devoted increasing resources
to this program area through 1997 and 1998 in preparation for beginning human
clinical testing.
Between 1994 and 1997, the Company's efforts were focused predominantly on
the development of its surgical adhesive and sealant technology. As part of
this effort, the Company targeted the establishment of a strategic alliance with
a market leader in the field of surgical wound closure products which led to
the execution of comprehensive license, supply and development agreements in
September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). Ethicon elected to terminate these agreements in
December 1997.
The Company has demonstrated both the adhesive performance and the
biocompatibility of its product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. PPTI is committed to the commercial development of its adhesive and
sealant technology and during 1998 the Company worked to determine the specific
markets and products providing the most significant opportunities for its use.
PPTI is seeking to establish new strategic alliances with leaders in those
markets.
To the extent sufficient resources are available, the Company continues to
research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.
Specialty use products currently being marketed by the Company include
SmartPlastic(R) and ProNectin(R) F Cell Attachment Factor. ProNectin F was
launched commercially in 1991. SmartPlastic is ProNectin F Activated Cultureware
where ProNectin F is presented in ready to use form on the surfaces of
disposable plastic labware for culturing human and animal cells. SmartPlastic
was launched commercially in 1995. In 1998 the Company discontinued direct sales
of its cell culture products.
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Prior to 1992, the Company's scientists had successfully demonstrated the
ability to create and produce novel protein polymer materials having important
physical, biological and chemical properties. During this period, most of the
Company's efforts were dedicated to supplying E. I. DuPont de Nemours & Co.
("DuPont") with materials under contract for its proprietary research and
testing purposes.
In 1992, the Company raised approximately $8.9 million through its initial
public offering of common stock and redeemable warrants. The Company used a
major portion of these proceeds to generate substantive in vitro laboratory
evidence and in vivo animal test data demonstrating the biocompatibility and
performance of its protein polymers and derived biomaterials, and to establish a
materials science group which has developed important materials modification and
fabrication technology.
In July 1994, the Company raised approximately $2.1 million from the sale
of its unregistered Series C Preferred Stock to private investors. In September
1995, the Company raised approximately $2.4 million from the sale of its
unregistered Series D Preferred Stock to the same private investors. Also at
this time these investors exchanged all of their holdings of Series C Preferred
Stock and accumulated dividends into Series D Preferred Stock. In January 1997,
the Company raised approximately $4.6 million from a private placement of the
Company's common stock with a number of institutional and accredited investors.
In April and May of 1998, the Company raised approximately $5.4 million
from the sale of 54,437.5 shares of the Company's unregistered Series E
Convertible Preferred Stock ("Series E Stock") priced at $100 per share with
warrants to purchase an aggregate of 3,266,250 shares of common stock to a small
group of institutional and accredited investors. In connection with this
transaction, the Company issued 26,240 shares of Series F Convertible Preferred
Stock in exchange for the same number of shares of outstanding Series D
Convertible Preferred Stock.
We believe that our current capital resources will be sufficient to fund
our operating losses through April of 1999. In their report for the year ended
December 31, 1998, our independent auditors stated that without additional
financing, there is substantial doubt about our ability to continue as a going
concern. We believe there are a number of alternatives available to meet our
continuing capital requirements. See the Liquidity and Capital Resources section
of Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion.
THE COMPANY'S TECHNOLOGY
PPTI is focused on developing products to improve medical and surgical
outcomes, based on an extensive portfolio of proprietary biomaterials.
Biomaterials are materials that are used to direct, supplement, or replace the
functions of living systems. The interaction between materials and living
systems is dynamic. It involves the response of the living system to the
materials (e.g., biocompatibility) and the response of the materials to the
living system (e.g., degradation). The requirements for performance within this
demanding biological environment have been a critical factor in limiting the
myriad of possible metal, polymer, and ceramic compositions to a relatively
small number that to date have been proven useful in medical devices.
The goal of biomaterials development historically has been to produce inert
materials -- materials that elicit little or no response from the living system.
However, the Company believes that such conventional biomaterials are
constrained by their inability to convey appropriate messages to the cells which
surround them -- the same messages that are conveyed by proteins in normal human
tissues.
The products targeted for development by PPTI are based on a new generation
of biomaterials which have been designed to be recognized and accepted by human
cells, to aid in the natural process of bodily repair (including the healing of
tissue and the restoration or augmentation of its form and function), and,
ultimately, to promote the regeneration of tissues. The Company
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believes that the successful realization of these properties will substantially
expand the role that artificial devices can play in the prevention and treatment
of human disability and disease, and enable the culture of native tissues for
successful reimplantation.
Through its proprietary core technology, PPTI produces high molecular
weight polymers that can be processed into a variety of material forms such as
gels, sponges, films, and fibers, with their physical strength and rate of
resorption tailored to each potential product application. These polymers are
constructed of the same amino acids as natural proteins found in the body. The
Company has demonstrated that its polymers can mimic the biological and chemical
functions of natural proteins and peptides, such as the attachment of cells
through specific membrane receptors and the ability to participate in enzymatic
reactions, thus overcoming a critical limitation of conventional biomaterials.
In addition, materials made from PPTI's polymers have demonstrated excellent
biocompatibility in a variety of feasibility studies.
PPTI's patented core technology enables messages that direct activities of
cells to be precisely formulated and presented in a structured environment
similar to what nature has demonstrated to be essential in creating, maintaining
and restoring the body's functions. The Company's protein polymers are made by
combining the techniques of modern biotechnology and traditional polymer
science. The techniques of biotechnology are used to create synthetic genes
which direct the biological synthesis of protein polymers in recombinant
microorganisms. The methods of traditional polymer science are used to design
novel materials for specific product applications by combining the properties of
individual "building block" components in polymer form.
In contrast to natural proteins, either isolated from natural sources or
produced using traditional genetic engineering techniques, PPTI's technology
results in the creation of new proteins with unique properties. PPTI has
demonstrated its capability to create materials that:
. combine properties of different proteins found in nature,
. reproduce and amplify selected activities of natural proteins,
. eliminate undesired properties of natural proteins, and
. incorporate synthetic properties via chemical modifications.
This capability is fundamental to PPTI's current primary product research
and development focus -- tissue repair and regeneration. Tissues are highly
organized structures made up of specific cells arranged in relation to an
extracellular matrix ("ECM"), which is principally composed of proteins. The
behavior of cells is determined largely by their interactions with the ECM.
Thus, the ability to structure the cells' ECM environment allows the protein
messages they receive -- and their activity -- to be controlled. Similar to
what nature has demonstrated to be essential in creating, maintaining and
restoring the body's functions, PPTI's patented core technology enables messages
that direct activities of cells to be precisely formulated and presented in a
structured environment.
FUNDAMENTAL PROTEIN POLYMERS
PPTI's primary products under development are based on protein polymers
combining selected properties from two of the most extraordinary structural
proteins found in nature: silk and elastin. Silk, based upon its crystalline
structure, has long been known as an incredibly strong material, and has a long
history of medical use in humans as a material for sutures. Elastin fibers are
one of the most remarkable rubber-like materials ever studied. Found in human
tissues such as lungs and arteries, elastin fibers must expand and contract over
a life time, and can be extended nearly three times their resting length without
damaging their flexibility.
Despite the incredible individual properties of silk and elastin, neither
of these natural protein materials is capable of being processed into forms
other than what nature has provided without destroying their valuable materials
properties. However, PPTI's proprietary technology
4
has enabled the creation of polymers that combine the repeating blocks of amino
acids responsible for the strength of silk and the elasticity of elastin. By
precisely varying the number and sequence of the different blocks in the
assembled protein polymer, new combinations of properties suitable for various
medical applications have been created.
The Company has also created protein polymers based on repeating blocks of
amino acids found in two other classes of structural proteins found in nature:
collagen and keratin. Collagen is the principal structural component of the
body, found in some shape or form in virtually every tissue, ranging from shock
absorbing cartilage to light transmitting corneas. Keratin is a major component
in hair, nails and skin. The development of materials based on these polymers is
at an early stage of research.
PRODUCT CANDIDATES AND ANTICIPATED MARKETS
The Company's technology and materials have the potential to create
products and product applications in a variety of medical and specialty use
markets. The Company's current development efforts are principally focused on
preparations to begin human clinical testing of its hydrogel bulking agents for
soft tissue augmentation, subject to the availability of capital. However, PPTI
is also conducting product feasibility testing for certain applications of its
tissue adhesive and sealant technology.
Opportunities for research and development of product candidates for other
medical and specialty uses continue to be evaluated, particularly with respect
to tissue engineering matrices and drug delivery devices. With the exception of
the use of ProNectin F for in vitro cell culture, all of the Company's product
candidates are subject to preclinical and clinical testing requirements for
obtaining U.S. Food and Drug Administration's ("FDA's") marketing approval.
The actual development of other product candidates, if any, will depend on
a number of factors, including the availability of funds required to research,
develop, test and obtain necessary regulatory approvals; the anticipated time to
market; the potential revenues and margins that may be generated if a product
candidate is successfully developed and commercialized; and the Company's
assessment of the potential market acceptance of a product candidate.
Soft Tissue Augmentation
Conditions where there is a need to augment the body's soft tissues include
both cosmetic and medical applications. In the former, for example, current
procedures include the injection of collagen-based materials to smooth out
facial wrinkles, acne scars and to modify lip contours. However, these
treatments only last a matter of months, which puts them economically out of
reach for a large portion of the population of people who would otherwise desire
the procedure.
Medical applications include the treatment of stress urinary incontinence
and gastro-esophageal reflux, the reversible blockage of fallopian tubes for
birth control, the augmentation of vocal chords, and the expansion of gingival
tissues impacted by periodontal disease. PPTI believes there is a lack of
materials with suitable properties for these applications, primarily because
materials having the required durability in vivo either lack the requisite
biocompatibility or the ability to be easily injected.
The Company has developed protein polymers that demonstrate excellent
biocompatibility, are soluble in water at room temperature, and are easily
injected into body tissues, irreversibly forming soft, durable gels at body
temperature. Previously, PPTI has shown gels of similar composition to have
persisted at least 18 months in an animal model.
PPTI's bulking agents are unique in that they are applied as an aqueous
solution, easily injected through a 30-gauge needle, rapidly spreading
throughout the native tissue architecture. With the increase from room to body
temperature, the polymer solution irreversibly transforms
5
within minutes to a soft, pliable hydrogel. Importantly, the volume of material
remains constant in the liquid to gel transition, such that the tissue expansion
observed by the physician upon administration will be subsequently maintained.
This is in direct contrast to the majority of competing technologies, which
are suspensions or slurries of solid particles in an aqueous carrier such as
saline. When injected through a fine gauge needle, with some difficulty due to
their thick constitution, the carrier liquid dissipates through the tissues with
time, usually within 24 hours, such that roughly half of the effective bulking
volume is lost. This requires the physician to either overcompensate for the
expected volume reduction upon initial administration, with increased risks to
the patient, or to "top off" the bulking effect with repeated administrations of
the product over time, with substantially increased costs.
Other hydrogel technologies of which the Company is aware are either
preformed gels, difficult to administer by injection, or polymer solutions mixed
with a chemical cross-linking agent prior to injection. PPTI believes that such
technologies are limited in their overall performance including durability,
biocompatibility and ease of administration.
In October 1997, in response to PPTI's request for a jurisdiction
determination, the FDA determined that the Company's proposed bulking agent for
the treatment of stress urinary incontinence would be reviewed as a device by
the Center for Devices and Radiologic Health ("CDRH"). Subsequently, the Company
submitted a pre-Investigational Device Exemption ("IDE") filing to the FDA
describing the process used to manufacture the product and a proposed
preclinical testing plan, the results of which would be used to support an IDE
under which the safety and efficacy of the device would be demonstrated in human
clinical trials.
In December 1998, the Company filed its first IDE with the FDA to obtain
approval to begin human clinical testing of its urethral bulking agent for the
treatment of female stress urinary incontinence. The FDA has requested
additional information about the product and the Company is preparing a response
to the request. To the extent funds are available, the Company intends to
submit an additional IDE to the FDA in 1999 to obtain approval to begin human
clinical testing of its dermal bulking agent for use in cosmetic and
reconstructive surgery applications.
Surgical Adhesives and Sealants
Surgeons are master craftsmen. However, instead of working with metal, wood
or plastic, they work with living tissues. Like carpenters, they use saws,
chisels (knives) and drills to take things apart and fit pieces together. But
they only have access to string (sutures) and nails (staples, pins, screws) to
hold things in place. Furthermore, a surgeon's work is complicated by the
biological healing response occurring when tissues are injured. This is one of
the reasons why no glue has been approved by the FDA for use inside the human
body.
As in everyday life, there are many surgical uses for glue where string and
nails just don't work well. They may not be quick or easy enough to use; they
may not be capable of staying in place; they may do more damage than desired;
they and/or the tools to use them may not fit within the available work space;
they may result in fluid or air leaks; or the "fit and finish" or healing
response is just not satisfactory.
Certain surgical adhesives and sealants that seek to avoid these
limitations have been developed and marketed outside the United States by other
parties. In 1998, the FDA approved two such products for certain uses in the
U.S. DermaBond(TM), a cyanoacrylate adhesive, was approved for topical
application to close skin incisions and lacerations. Cyanoacrylate adhesives
set fast and have high strength, but are toxic to certain tissues and form
brittle plastics that do not resorb. These limitations restrict their use to
bonding the outer surfaces of skin together. Tisseel(TM), a fibrin sealant, was
approved for use as an adjunct to hemostasis in surgery. Fibrin sealants have
6
excellent hemostatic properties, but are derived from human and/or animal blood
products, set slowly, have low strength, and lose their strength rapidly.
A third category of tissue adhesives combines natural proteins such as
collagen or albumin with aldehyde cross-linking agents. Such products are
marketed in Europe for limited life-threatening indications. The aldehyde cross-
linking agents employed (i.e. glutaraldehyde, formaldehyde) in such products are
known to cause adverse tissue reactions. Additional adhesive and/or sealant
products employing other polymer systems and cross-linking agents are also under
development.
PPTI is seeking to develop surgical adhesives and sealants that combine the
biocompatibility of fibrin glues (without the risks associated with use of
blood-derived products) with the high strength and fast setting times of
cyanoacrylates. Unique features include significant elasticity within the
adhesive matrix (to move as tissues move) and the capability of tailoring the
resorption rate of the adhesive matrix with the rate at which the wound heals.
A non-resorbable adhesive or sealant can only be used where the damaged tissues
will not heal. Otherwise, a barrier to wound healing is unavoidably created.
In September 1995, the Company entered into a series of agreements with
Ethicon regarding this program. Ethicon elected to terminate these agreements in
December 1997. However, the Company has demonstrated both the adhesive
performance and the biocompatibility of its product formulations in animal
models, including the resorption of the adhesive matrix in conjunction with the
progression of wound healing. During 1998, the Company worked to determine the
specific markets and products providing the most significant opportunities for
the use of its adhesive and sealant technology.
As a result of its evaluations of the medical market needs, the properties
achievable with its technology, and the capabilities of competitive
technologies, PPTI has focused its product development activities on certain
orthopedic applications, particularly those related to the repair of the Spinal
disc for the treatment of chronic low back pain. Low back pain is the most
common musculoskeletal disorder in industrialized societies. PPTI is committed
to the commercial development of its adhesive and sealant technology and is
seeking to establish new strategic alliances with market leaders. However,
there can be no assurance that such alliances can be entered into. The product
candidates the Company is seeking to develop are currently in feasibility
testing prior to beginning formal preclinical studies.
Wound Healing/Tissue Engineering Matrices
The current market for wound care products is highly segmented, involving a
variety of different approaches to wound care. Products currently marketed and
being developed by other parties include fabric dressings (such as gauze),
synthetic materials (such as polyurethane films) and biological materials (such
as growth factors and living tissue skin graft substitutes). While the type of
product used varies depending on the type of wound and extent of tissue damage,
the Company believes that a principal treatment goal in all instances is to
stimulate wound healing while regenerating functional (as opposed to scar)
tissue.
The Company has developed protein polymers which it believes may be useful
in the treatment of dermal wounds, particularly chronic wounds such as
decubitous ulcers, where both reconstruction of the ECM and re-establishment of
its function are desired. These polymers, based on key ECM protein sequence
blocks, are biocompatible, fully resorbable and have been processed into gels,
sponges, films and fibrous sheets. The Company believes that such materials, if
successfully developed, could improve the wound-healing process by providing
physical support in situ for cell migration and tissue regeneration and as
delivery systems for growth factors. Additionally, such materials may serve as
scaffolds for the ex vivo production of living tissue substitutes.
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This program is in the early stages of research, which the Company has
principally conducted in collaboration with third parties. Such collaborations
have primarily focused on the treatment of dermal wounds.
Controlled Release Drug Delivery
Oral delivery of drugs is the most preferred route of administration.
However, for many drugs this is not possible and alternative drug delivery
routes are required. Alternative routes include transdermal, mucosal, and by
implantation or injection. For implantation or injection, it is often desirable
to extend the availability of the drug in order to minimize the frequency of
these invasive procedures. A few materials have been commercialized which act
as depots for a drug when implanted or injected, releasing the drug over periods
ranging from one month to several years. Other material and drug combinations
are being developed by third parties. PPTI believes that the properties of
these materials for such applications can be substantially improved upon, making
available the use of depot systems for a wider range of drugs and applications.
PPTI's soft tissue augmentation products, its wound healing matrices, and
its medical device coating technology all provide platforms for drug delivery
applications, serving as controlled release drug depots. The protein polymer
materials the Company has developed exhibit exceptional biocompatibility,
provide for control over rates of resorption, and are fabricated using aqueous
solvent systems at ambient temperatures -- attributes which can be critical in
maintaining the activity of the drug, particularly protein-based drugs emerging
from the biotechnology industry. This program is in the early stages of
research.
Cell Culture Products
The market for products used to culture mammalian cells encompasses the
production of pharmaceuticals and vaccines, ex vivo cell therapy, and basic and
applied research on the cellular mechanisms of human and animal development and
disease. The common element is the need to culture cells outside the body in an
artificial, controlled environment. With the culture of many types of mammalian
cells, fetal bovine serum, animal sera factors or attachment factors must be
added to the culture medium or coated on the culture surface to enable cells to
attach and spread, initiating cell growth.
Unlike standard tissue culture treated labware, these products primarily
present to cells the RGD cell attachment ligand of the serum protein
fibronectin, an amino acid sequence which is an essential requirement for the
growth, proper morphology and fully-differentiated function of many different
cells. However, the Company believes that there are disadvantages to using such
products which, depending on the application, result in variable performance,
lack of storage stability, undesirable contaminants, excessive media protein,
high costs and lost time.
PPTI developed ProNectin F to address these limitations. This product
presents multiple copies of the RGD ligand within a chemically and thermally
stable protein polymer. ProNectin F is free of animal-derived contaminants and
has a long shelf-life. Moreover, tests conducted by third parties and the
Company confirm that, compared with standard tissue culture treated labware,
labware coated with ProNectin F enhances the cell attachment process.
Since March 1991, the Company has commercially marketed ProNectin F as a
cell culture reagent for use by cell biologists and cell culture laboratories.
In 1995, the Company launched SmartPlastic, where ProNectin F is presented on
the surfaces of disposable plastic labware in ready-to-use form for culturing
human and animal cells. To date, the Company has generated over $550,000 in
revenues and license fees from the marketing of these products. In 1998, the
Company discontinued direct sales of its cell culture products. However, PPTI
maintains its network of distributors to supply the products worldwide.
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MANUFACTURING, MARKETING, AND DISTRIBUTION
ProNectin F
PPTI currently produces ProNectin F in its laboratory facilities, and
believes its current production facilities are sufficient for the anticipated
demand of ProNectin F in the foreseeable future. The Company markets and
distributes ProNectin F and SmartPlastic through foreign and domestic
distribution arrangements.
Biomedical Product Candidates
Preclinical and clinical testing of potential medical device products,
where the results will be submitted to the FDA, requires compliance with the
FDA's Good Laboratory Practices ("GLP") and other Quality System Regulations
("QSR"). The Company has implemented, and continues to implement, polymer
production and quality control procedures, and has made certain facilities
renovations to operate in conformance with FDA requirements. The Company
believes its current polymer production capacity is sufficient for supplying its
development programs with the required quality and quantity of materials needed
for feasibility and preclinical testing and initial ("pilot") clinical testing.
To expand beyond initial clinical trials, the Company will require additional
manufacturing capacity.
The Company is considering several methods for increasing production of its
biomedical and other product candidates to meet clinical and commercial
requirements. For example, the Company may expand its existing facility to
produce needed quantities of materials under FDA's GLP and Good Manufacturing
Practice ("GMP") regulations for clinical and commercial use. Alternatively, the
Company may establish external contract manufacturing arrangements for needed
quantities of materials. However, there can be no assurance that such
arrangements, if desired, could be entered into or maintained on acceptable
terms, if at all, or that the existence or maintenance of such arrangements
would not adversely affect the Company's margins or its ability to comply with
applicable governmental regulations. The actual method, or combination of
methods, that the Company may ultimately pursue will depend on a number of
factors, including availability, cost and the Company's assessment of the
ability of such production methods to meet its commercial objectives.
The Company currently expects that its initial biomedical products, if any
are commercialized, would be marketed and distributed by a corporate partner.
While this arrangement would minimize the Company's marketing costs and
facilitate wider distribution of any biomedical products it may develop, these
arrangements would possibly reduce the Company's revenues and profits as
compared to what would be possible if the Company directly sold such products.
RESEARCH AND DEVELOPMENT
Information regarding Company-sponsored research and development activities
and contract research and development revenue is set forth below under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
COLLABORATIVE AGREEMENTS
Because of the highly technical focus of its business, the Company must
conduct extensive research and development prior to any commercial production of
its biomaterials. During this development stage, PPTI's ability to generate
revenues is limited. Because of this limitation, the Company does not have
sufficient resources to devote to extensive testing or marketing of its
products. The Company's primary method of expanding its product development,
testing and marketing capabilities is to seek to form collaborative arrangements
with selected corporate partners with specific resources that the Company
believes complement its business strategies and goals.
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The medical device industry has traditionally licensed from development
stage companies product candidates whose safety and efficacy has been
demonstrated at least in pilot human clinical trials. PPTI currently does not
have any product candidates in human clinical testing. In December 1998, the
Company filed its first IDE with the FDA to obtain approval to begin human
clinical testing of its urethral bulking agent for the treatment of female
stress urinary incontinence. The FDA has requested additional information about
the product and the Company is preparing a response to the request. Pending FDA
approval and the availability of sufficient capital, PPTI intends to initiate
human clinical testing of the product in 1999. The Company also intends to
submit an additional IDE to the FDA in 1999 to obtain approval to begin human
clinical testing of its dermal bulking agent for use in cosmetic and
reconstructive surgery applications.
Agreements
PPTI is discussing potential collaboration agreements with prospective
marketing partners for both its soft tissue augmentation products and its tissue
adhesive and sealant products. There can be no assurance that the Company will
continue such discussions or be able to establish such agreements at all, or do
so in a timely manner and on reasonable terms, or that such agreements will lead
to successful product development and commercialization. From time to time, the
Company is a party to certain materials evaluation agreements regarding
biomedical and specialty use applications of its products, polymers and
technology, including applications in areas other than those identified as
product candidates above. These agreements provide, or are intended to provide,
for the evaluation of product feasibility. There can be no assurance that the
Company will continue to be able to establish such agreements at all, or do so
in a timely manner and on reasonable terms, or that such agreements will lead to
joint product development and commercialization agreements.
INTENSE COMPETITION
The principal anticipated commercial uses of PPTI's biomaterials are as
components of end-use products for biomedical and other specialty applications.
End-use products using or incorporating the Company's biomaterials would compete
with other products which rely on the use of alternative materials. For
example, bulking agents for soft tissue augmentation are currently marketed
based on bovine collagen and, outside the U.S., the synthetic polymer
polytetrafluoroethylene. Similarly, all targeted applications of the Company's
potential products will compete with other products having the same or similar
applications.
The areas of business in which the Company engages and proposes to engage
are characterized by intense competition and rapidly evolving technology.
Competition in the biomedical and surgical repair markets is particularly
significant. The Company's competitors in the biomedical and surgical repair
markets include major pharmaceutical, surgical product, chemical and specialized
biopolymer companies, many of which have financial, technical, research and
development and marketing resources significantly greater than those of the
Company. Academic institutions and other public and private research
organizations are also conducting research and seeking patent protection, and
may commercialize products on their own or through joint ventures. Most of the
Company's competitors depend on synthetic polymer technology rather than protein
engineering for developing products. However, the Company believes that
research into similar protein engineering technology is currently being
conducted by DuPont and several university laboratories.
The primary elements of competition in the biomedical and surgical repair
products market are performance, cost, safety, reliability, convenience and
commercial production capabilities. The Company believes that its ability to
compete in this market will be enhanced by its issued patent claims, the breadth
of its other pending patent applications, its early entry into its field and its
experience in protein engineering.
10
PATENTS AND TRADE SECRETS
PPTI is aggressively pursuing domestic and international patent protection
for its technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA, methods for the production and purification of protein polymers, end-use
products incorporating such materials and methods for their use.
The United States Patent and Trademark Office ("USPTO") has issued fourteen
patents to the Company, eight of which were issued in 1998. U.S. Patent
5,235,041 (1993) relates to the Company's method for purifying structurally
ordered recombinant protein polymers. U.S. Patent 5,243,038 (1993) covers the
Company's synthetic DNA compositions that encode polymers and copolymers
comprising the amino acid "building blocks" of silk and elastin. U.S. Patent
5,496,712 (1996) covers the Company's family of high molecular weight collagen
like polymers and the DNA sequences encoding them. U.S. Patent 5,514,581 (1996)
covers DNA sequences encoding silk-like structural building blocks with an
intervening sequence coding for the key cell attachment ligand from human
fibronectin. One of the claimed sequences encodes ProNectin F.
U.S. Patent 5,606,019 (1997) covers the protein compositions comprising
copolymers of the amino acid "building blocks" of silk and elastin. These are
the primary materials used in the Company's current product development efforts.
U.S. Patent 5,641,648 (1997) covers methods by which synthetic genes encoding
protein polymers are created.
U.S. Patent 5,723,588 (1998) covers molded articles incorporating
biologically active proteins. U.S. Patent 5,760,004 (1998) covers chemical
modification of protein polymers to enhance their water solubility. U.S. Patent
5,770,697 (1998) broadly covers protein polymers incorporating repetitive amino
acid sequences found in naturally occurring proteins. U.S. Patent 5,773,249
(1998) expands the coverage of high molecular weight collagen like polymers.
U.S. Patent 5,773,577 (1998) covers protein polymers which can be cross-linked
by certain enzymes that naturally occur in the body. U.S. Patent 5,808,012
(1998) expands the coverage of molded articles to those incorporating chemically
active proteins. U.S. Patent 5,817,303 (1998) covers the use of protein
polymers with chemical cross-linking agents as adhesives and sealants. U.S.
Patent 5,830,713 (1998) expands the coverage of methods by which synthetic genes
encoding protein polymers are created. Additionally, PPTI has eight U.S.
patent applications pending, one of which has been allowed, covering related
aspects of its core technology.
Although the Company believes its existing issued patent claims may provide
a competitive advantage, there can be no assurance that the scope of the
Company's patent protection is or will be adequate to protect its technology or
that the validity of any patent issued will be upheld in the future.
Additionally, with respect to the Company's allowed and pending applications,
there can be no assurance that any patents will be issued, or that, if issued,
they will provide substantial protection or be of commercial benefit to the
Company. The two patents issued to PPTI in 1993 will expire in 2010, as will
one of the patents issued in 1996. The other patent issued in 1996 will expire
in 2013, and the patents issued in 1997 will expire in 2014. The three patents
issued in 1998 which expand the coverage of previously issued patents will
expire in concert with the original patents. The other five patents issued in
1998 will expire in 2015.
Generally, for patent applications filed in the U.S. prior to June 8, 1995,
the term of the patent will be 17 years from the issue date. Subsequently filed
U.S. patent applications will have a term of 20 years from the date of filing,
consistent with the patent laws in international jurisdictions.
Although the Company does not currently have any operations outside the
U.S., it anticipates that its potential products will be marketed on a worldwide
basis, with possible manufacturing operations outside the U.S. Accordingly,
international patent applications corresponding to the major U.S. patents and
patent applications described above have been filed.
11
Due to translation costs and patent office fees, international patents are
significantly more expensive to obtain than U.S. patents. Additionally, there
are differences in the requirements concerning novelty and the types of claims
that can be obtained compared to U.S. patent laws, as well as the nature of the
rights conferred by a patent grant. PPTI carefully considers these factors in
consultation with its patent counsel, as well as the size of the potential
markets represented, in determining the foreign countries in which to file
patents.
In almost all cases, the Company files for patents in Australia, Canada,
Europe and Japan. Currently, PPTI has nine issued foreign patents, 32 pending
foreign applications, and is maintaining its rights to begin prosecution of two
additional applications filed through the Patent Cooperation Treaty/World Patent
Office in all countries of potential economic importance. One of the issued
foreign patents is in Europe and the scope of its claims broadly covers protein
polymers having biological or chemical activity.
Because of the uncertainty concerning patent protection and the
unavailability of patent protection for certain processes and techniques, PPTI
also relies upon trade secret protection and continuing technological innovation
to maintain its competitive position. Although all of the Company's employees
have signed confidentiality agreements, there can be no assurance that the
Company's proprietary technology will not be independently developed by other
parties, or that secrecy will not be breached. Additionally, the Company is
aware that substantial research efforts in protein engineering technology are
taking place at universities, government laboratories and other corporations and
that numerous patent applications have been filed. The Company cannot predict
whether it may have to obtain licenses to use any technology developed by third
parties or whether such licenses can be obtained on commercially reasonable
terms, if at all.
In the course of its business, PPTI employs various trademarks and trade
names in packaging and advertising its products. The Company has obtained
federal registration of its ProNectin(R) trademark and its SmartPlastic(R)
trademark for ProNectin F Activated Cultureware. The Company intends to protect
and promote all of its trademarks and, where appropriate, will seek federal
registration of its trademarks.
REGULATORY MATTERS
Regulation by governmental authorities in the United States and other
countries is a significant factor affecting the success of products resulting
from biotechnological research. The Company's current operations and products
are, and anticipated products and operations will be, subject to substantial
regulation by a variety of agencies, particularly those products and operations
related to biomedical applications. Currently, the Company's activities are
subject principally to regulation under the Occupational Safety and Health Act
and the Food, Drug and Cosmetic Act.
Extensive preclinical and clinical testing and pre-market approval from the
FDA is required for new medical devices, drugs or vaccines, which is generally a
costly and time-consuming process. PPTI is required to be in compliance with
many of the FDA's regulations to conduct testing in support of product
approvals; in particular, compliance with the FDA's Good Laboratory Practices
("GLP") regulations and portions of the FDA's Quality Systems Regulations. Where
PPTI has conducted such testing, the Company may choose to file product approval
submissions itself or maintain with the FDA a "Master File" containing, among
other items, such test results. A Master File can then be accessed by the FDA in
reviewing particular product approval submissions from companies commercializing
products based on PPTI's materials.
There can be no assurance that the Company or its customers will be able to
obtain or maintain the necessary approvals from the FDA or that the Company will
be able to maintain a Master File in accordance with FDA regulations. In either
case, the Company's anticipated business could be adversely affected. To the
extent PPTI manufactures medical devices, as opposed to a component material
supplied to a medical device manufacturer, it will be required to conform
commercial manufacturing operations to the FDA's Good Manufacturing Practices
12
("GMP") Quality Systems Regulations. The Company would also be required to
register its facility with the FDA as an establishment involved in the
manufacture of medical devices. GMP regulatory requirements are rigorous, and
there can be no assurance that GMP status could be obtained in a timely manner
and without the expenditure of substantial resources, if at all.
In October 1997, in response to PPTI's request for a jurisdiction
determination, the FDA determined that the Company's proposed bulking agent for
the treatment of stress urinary incontinence would be reviewed as a device by
the CDRH. The FDA's decision to review and regulate PPTI's product as a medical
device is important, since it supports the Company's position that products
based on its polymer technology should be classified for FDA regulation
according to their function in the body rather than the method used to make
their component materials.
In December 1998, the Company filed its first IDE with the FDA to obtain
approval to begin human clinical testing of its urethral bulking agent for the
treatment of female stress urinary incontinence. The FDA has requested
additional information about the product and the Company is preparing a response
to the request. The Company intends to submit an additional IDE tothe FDA in
1999 to obtain approval to begin human clinical testing of its dermal bulking
agent for use in cosmetic and reconstructive surgery applications. The Company
has implemented, and continues to implement, polymer production and quality
control procedures, and has made certain facilities renovations to operate in
conformance with FDA requirements.
The Company's research, development and production activities are, or may
be, subject to various federal and state laws and regulations relating to
environmental quality and the use, discharge, storage, transportation and
disposal of toxic and hazardous substances. The Company's future activities may
be subject to regulation under the Toxic Substances Control Act, which requires
the Company to obtain pre-manufacturing approval for any new "chemical material"
the Company produces for commercial use that does not fall within the FDA's
regulatory jurisdiction. The Company believes it is currently in substantial
compliance with all such laws and regulations. Although the Company intends to
use its best efforts to comply with all environmental laws and regulations in
the future, there can be no assurance that the Company will be able to fully
comply with such laws, or that full compliance will not require substantial
capital expenditures.
PRODUCT LIABILITY AND ABSENCE OF INSURANCE
PPTI's business may expose it to potential product liability risks whenever
human clinical testing is performed or medical device product sales occur. The
Company believes that its current preclinical testing and production activities
and its sales of ProNectin F and SmartPlastic products do not pose a potential
product liability risk. The Company therefore currently has no product
liability insurance. The Company expects to procure such insurance at the time
its product candidates progress to clinical testing and development. There can
be no assurance however that PPTI will be able to obtain such insurance on
acceptable terms or that such insurance will provide adequate coverage against
potential liabilities. A successful product liability claim or series of claims
could result in a material adverse effect on the Company.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position with the Company
------------------------------ --- -----------------------------------------
J. Thomas Parmeter 59 Chairman of the Board of Directors,
President and Chief Executive Officer
Joseph Cappello, Ph.D. 42 Vice President, Research and Development,
Chief Technical Officer and Director,
Polymer Research
Philip J. Davis 68 Corporate Secretary
Franco A. Ferrari, Ph.D. 47 Vice President, Laboratory Operations and
Polymer Production and Director,
Molecular Genetics
John E. Flowers 42 Vice President, Planning and Operations
Janis Y. Neves 47 Director of Finance, Controller, and
Assistant Secretary
Erwin R. Stedronsky, Ph.D. 54 Vice President, Product Formulation and
Engineering and Director, Materials
Science
Mr. Parmeter has been the Company's President, Chief Executive Officer and
Chairman of the Board of Directors since its inception in July 1988 (and, from
July 1988 to July 1992, its Chief Financial Officer). From 1982 to November
1987, Mr. Parmeter was President, Chief Executive Officer and, from June 1987 to
June 1988, Chairman of the Board of Syntro Corporation.
Dr. Cappello has been the Company's Vice President, Research and
Development since February 1997 and Director, Polymer Research and Chief
Technical Officer since February 1993. From September 1988 to February 1993, he
was the Company's Senior Research Director, Protein Engineering.
Mr. Davis has been the Company's Secretary since January 1989. Mr. Davis
has been a director of the Company since April 1995; he previously served as a
director of the Company from January 1989 until October 1991. Mr. Davis has
been a Senior Vice President with Donaldson, Lufkin & Jenrette since March 1995.
He was Director, Institutional Sales at Merrill Lynch, Inc. (formerly Merrill
Lynch Capital Markets) from February 1991 to March 1995, and was a Vice
President at Merrill Lynch, Inc. from 1986 to 1995.
Mr. Flowers has been the Company's Vice President, Planning and Operations,
since February 1993. From September 1988 to February 1993, he was the Company's
Vice President, Commercial Development.
Dr. Ferrari has been the Company's Vice President, Laboratory Operations
and Director, Molecular Genetics since February 1993. From September 1988 to
February 1993, he was the Company's Senior Research Director, Genetic
Engineering.
Ms. Neves has been the Company's Director of Finance since November 1998
and Controller and Assistant Secretary since January 1990. From July 1988 until
January 1990, Ms. Neves was the Company's Business Office Manager.
Dr. Stedronsky has been the Company's Vice President, Product Formulation
and Engineering since February 1997 and Director of Materials Science since
September 1992. For
14
approximately 20 years prior to joining PPTI, Dr. Stedronsky held increasingly
responsible R&D positions in Corporate Research at Monsanto Company.
All executive officers of the Company were elected by the Board of
Directors and serve at its discretion. No family relationships exist between
any of the officers or directors of the Company.
EMPLOYEES
As of February 26, 1999, PPTI had 29 full-time and four part-time
employees, of whom five hold employment contracts with the Company and seven
hold Ph.D. degrees in the chemical or biological sciences. The Company is
highly dependent on the services of its executive officers and scientists. The
loss of the services of any one of these individuals would have a material
adverse effect on the achievement of the Company's development objectives, its
business opportunities and prospects. The recruitment and retention of
additional qualified management and scientific personnel is also critical to the
Company's success. There can be no assurance that the Company will be able to
attract and retain required personnel on acceptable terms, due to the
competition for such experienced personnel from other biotechnology,
pharmaceutical, medical device and chemical companies, universities and non-
profit research institutions.
ITEM 2. PROPERTIES
PPTI does not own any real property. The Company leases approximately
21,000 square feet in San Diego, California from Sycamore/San DiegoInvestors.
The leased property includes the Company's administrative offices,which
encompass approximately 4,000 square feet, and its laboratory facilities,which
encompass approximately 17,000 square feet. The current annual rent is
approximately $425,000. The lease expires in May 2005.
The Company believes that its current facilities are adequate to meet its
needs until the end of 1999. The Company retains an option to lease an
additional 7,000 square feet of office and laboratory space in its present
facility and to extend its lease for an additional five years.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1998.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "PPTI". The trade prices set forth below represent inter-dealer prices
without retail markups, markdowns or commissions.
Trade Prices
---------------------
1998 High Low
---- -------- -------
First Quarter $1.531 $1.063
Second Quarter 2.250 0.875
Third Quarter 1.719 0.750
Fourth Quarter 1.250 0.688
1997
----
First Quarter $4.625 $1.813
Second Quarter 3.063 1.938
Third Quarter 3.125 1.563
Fourth Quarter 3.250 0.750
As of February 25, 1998, the Company had approximately 110 shareholders of
record; it estimates it has approximately 1,500 beneficial holders. The Company
has never paid cash dividends on its Common Stock. The Company currently
intends to retain earnings, if any, for use in the operation and expansion of
its business and therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
UNREGISTERED OFFERINGS
In April and May of 1998, the Company raised approximately $5.4 million
from the sale of 54,437.5 shares of the Company's Series E Convertible Preferred
Stock ("Series E Stock") priced at $100 per share, with warrants to purchase an
aggregate of 3,266,250 shares of common stock to a small group of institutional
and accredited investors.
Each share of Series E Stock is convertible at any time at the election of
the holder into 80 shares of common stock at a conversion price of $1.25 per
share, subject to certain antidilution adjustments. No underwriters were engaged
by the Company in connection with such issuance and, accordingly, no
underwriting discounts were paid. The offering is exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"),
and met the requirements of Rule 506 of Regulation D promulgated under the
Securities Act. The Company has registered the shares of common stock
underlying the Series E Stock and the warrants with the Securities and Exchange
Commission. The Company has agreed to use its best efforts to nominate for
election a person selected by the holders of the Series E Stock to its Board of
Directors.
Each share of Series E Stock received two common stock warrants. One
warrant (first warrant) is exercisable at any time for 40 shares of common stock
at an exercise price of $2.50 per share, and expires approximately 18 months
after the close of the offering; the other warrant (second warrant) is
exercisable at any time for 20 shares of common stock at an exercise price of
$5.00 per share, and expires approximately 36 months after the close of the
offering. In addition, an 18 month warrant to acquire 200,000 common shares
exercisable at $2.50 per share and a 36 month warrant to acquire 100,000 common
shares exercisable at $5.00 per share were issued as a finder and document
review fee paid to a lead investor. An 18 month warrant to acquire 32,000 common
shares exercisable at $2.50 per share, a 24 month warrant to acquire 6,000
common shares exercisable at $5.00 per share, and 5 year warrants to acquire an
aggregate of 25,200
16
common shares exercisable at $2.50 per share were issued to certain persons for
service as finders in relation to the private placement.
In connection with the above private placement, the Company issued 26,420
shares of its Series F Convertible Preferred Stock in exchange for the same
number of shares of outstanding Series D Convertible Preferred Stock. The
Company's Series F Convertible Preferred Stock is equivalent to the Company's
Series E Stock with regard to liquidation preferences. All other terms of the
Company's Series F Convertible Preferred Stock remained the same as the
Company's Series D Convertible Preferred Stock.
On January 7, 1997, the Company received $4,760,000, less expenses of
approximately $140,000, from a private placement of 1,904,000 shares of the
Company's common stock, at $2.50 per share, with a number of accredited
investors. No underwriters were engaged by the Company in connection with such
issuance and, accordingly, no underwriting discounts or commissions were paid.
The issuance was exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"), and met the requirements of Rule
506 of Regulation D promulgated under the Securities Act. The Company agreed to
register the shares with the Securities and Exchange Commission promptly after
the closing. The registration was declared effective on January 24, 1997.
On September 14, 1995, the Company issued 49,187 shares of its Series D
Convertible Preferred Stock and warrants to purchase 500,960 shares of common
stock at $1.25 per share in a private placement to certain accredited investors.
Of this amount, 20,000 shares of Series D Convertible Preferred Stock and
warrants to purchase 400,000 shares of common stock were issued for cash at
$100.00 per share; 21,600 shares of Series D Convertible Preferred Stock were
issued in exchange for all outstanding shares of the Company's Series C
Convertible Preferred Stock and 2,539 shares for accrued and unpaid dividends
thereon; and an additional 5,048 shares of Series D Convertible Preferred Stock
and warrants to purchase 100,960 shares of common stock were issued in exchange
for cancellation of a $500,000 bridge loan and accrued interest thereon. No
underwriters were engaged by the Company in connection with such issuance and,
accordingly, no underwriting discounts or commissions were paid. The issuance
was exempt from registration under Section 4(2) of the Securities Act and met
the requirements of Rule 506 of Regulation D promulgated under the Securities
Act.
Each share of Series D and Series F Convertible Preferred Stock earns a
cumulative dividend at the annual rate of $10 per share, payable as and when
declared by the Company's Board of Directors in the form of cash, common stock
or any combination thereof. The Series D and F Convertible Preferred Stock is
convertible into common stock after two years from the date of issuance at the
holder's option. The conversion price at the time of conversion is the lesser of
$3.75 or the market price. The Series D and F Convertible Preferred Stock is
redeemable at the Company's option after four years from the date of issuance.
Automatic conversion of all of the Series D and F Convertible Preferred Stock
will occur if: (a) the Company completes a public offering of common stock at a
price of $2.50 or higher; or (b) the holders of a majority thereof elect to
convert. The Company has the option to demand conversion of the Series D and F
Convertible Preferred Stock if the average market price of its common stock
equals or exceeds $5.00 per share over a period of twenty business days. The
Series D Convertible Preferred Stock has a liquidation preference of $100 per
share plus accumulated dividends.
At the time of purchase, the Series D Convertible Preferred stockholders
received warrants to purchase, at an exercise price of $1.25 per share, twenty
shares of the Company's common stock for each share of Series D Convertible
Preferred Stock acquired for cash, or upon conversion of the outstanding bridge
loan and accrued interest thereon, described above. Warrants to acquire a total
of 500,960 shares of common stock were issued. All of these warrants were
exercised during 1996, from which the Company received aggregate gross proceeds
of $626,200. The Series D Convertible Preferred stockholders were granted
certain registration rights relating to their shares
17
of common stock issuable upon conversion of the Series D Convertible Preferred
Stock and upon the exercise of their warrants.
In July 1994, the Company received $2,160,000 from a private placement of
the Company's Series C Convertible Preferred Stock with certain accredited
investors, consisting of 21,600 shares at $100.00 per share. No underwriters
were engaged by the Company in connection with such issuance and, accordingly,
no underwriter discounts or commissions were paid. The issuance was exempt from
registration under Section 4(2) of the Securities Act and met the requirements
under Rule 506 of Regulation D promulgated under the Securities Act. As
described above, the investors exchanged 21,600 shares of Series C Convertible
Preferred Stock, plus accrued and unpaid dividends thereon, for 24,139 shares of
Series D Convertible Preferred Stock. There are currently no shares of Series C
Convertible Preferred Stock outstanding.
In connection with the issuance of the Series C Convertible Preferred
Stock, warrants were also issued to acquire a total of 432,000 shares of the
Company's common stock at a price of $1.25 per share. All of these warrants were
exercised during 1996, from which the Company received aggregate gross proceeds
of $540,000.
In July 1996, holders of warrants to acquire 322,663 shares of common stock
(all of whom were accredited investors) exercised such warrants at $2.50 per
share, resulting in approximately $807,000 in gross proceeds to the Company.
These warrants were originally issued in 1991 in connection with the issuance of
the Company's Series B Convertible Preferred Stock. The issuance upon exercise
of these warrants was exempt from registration under Section 4(2) of the
Securities Act and met the requirements under Rule 506 of Regulation D
promulgated under the Securities Act. The Company agreed to register the resale
of the common stock received upon exercise of these warrants, and the applicable
registration was declared effective on July 19, 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements contained or incorporated by reference in this Annual
Report on Form 10-KSB constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause actual results, performance or achievements of the company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by forward-looking statements.
Such risks and uncertainties include, among others, history of operating losses,
raising adequate capital for continuing operations, early stage of product
development, compliance with NASDAQ listing requirements, scientific and
technical uncertainties, competitive products and approaches, reliance upon
collaborative partnership agreements and funding, regulatory testing and
approvals, patent protection uncertainties and manufacturing scale-up and
required qualifications. While these statements represent management's current
judgment and expectations for the company, such risks and uncertainties could
cause actual results to differ materially from any future results suggested
herein. The company undertakes no obligation to release publicly the results of
any revisions to these forward-looking statements to reflect events or
circumstances arising after the date hereof.
GENERAL OVERVIEW
Incorporated in 1988, Protein Polymer Technologies, Inc. has concentrated
its research and development efforts on establishing a scientific and technical
leadership position in the production of unique protein-based materials. The
Company has identified biomedical market and product opportunities for further
research and development that management believes will exploit the
18
unique properties of the Company's technology to competitive advantage. The
Company has been unprofitable to date, and as of December 31, 1998 has an
accumulated deficit of $32,987,964.
The Company's product candidates for surgical repair, augmentation and
regeneration of human tissues are in various stages of research and development.
Its more advanced programs are in the areas of bulking agents for soft tissue
augmentation, particularly for use in urethral tissue for the treatment of
female stress incontinence and in dermal tissue for cosmetic and reconstructive
procedures. The Company currently is devoting the majority of its resources to
the development and registration of these products which are projected, pending
approval by the U.S. Food and Drug Administration, to begin human clinical
trials later this year, subject to the availability of sufficient capital. The
Company's other advanced product technology is in the area of tissue adhesives
and sealants. Currently the Company's research and development in this area is
focused on the repair of Spinal discs for the treatment of lower back pain. The
Company's first commercial products, ProNectin F and SmartPlastic, are used by
biologists and cell culture laboratories, principally to grow mammalian cells
for biomedical research purposes.
In 1995, the Company entered into a collaborative relationship with Ethicon
regarding its surgical adhesives and sealants program. Ethicon terminated the
relationship in December 1997 which materially adversely affected the Company.
The Company's strategy with most of its programs is to enter into collaborative
development agreements with major medical product marketing and distribution
companies. Although these relationships, to the extent any are consummated, may
provide significant near-term revenues through up-front licensing fees, research
and development reimbursements and milestone payments, the Company expects to
continue incurring operating losses for the next several years.
The Company's cash balance as of December 31, 1998 was $1,380,000, which
the Company believes is sufficient to fund its operations through April 1999.
The Company is attempting to raise additional funds for continuing operations
through private or public offerings and collaborative agreements (see "Liquidity
and Capital Resources" below, and Note 1 of the Audited Financial Statements for
additional information and a description of the associated risks).
RESULTS OF OPERATIONS
Contract research revenue for the year ended December 31, 1998 was $50,000,
compared to $460,000 and $610,000 for 1997 and 1996, respectively. During 1997
and 1996 the Company received research and development reimbursements totaling
$300,000 and $600,000, respectively, from Ethicon related to the Company's
surgical adhesives and sealants program. In September 1995, the Company
received a payment of $800,000 from Ethicon upon the signing of the various
agreements related to the Company's tissue adhesives and sealants program.
Other revenues for these periods were derived from materials evaluation
agreements entered into with various divisions of J&J. In December 1997,
Ethicon elected to terminate its collaboration with the Company; therefore, no
additional revenue has been generated from these agreements.
Interest income was $135,000 for the year ended December 31, 1998, as
compared to $187,000 for 1997 and $87,000 for 1996. The year-to-year
variability resulted from the amount and timing of the receipt of equity capital
and the amounts of excess cash available for investment.
Product sales for the years ended December 31, 1998 were $67,000, compared
to $77,000 and $58,000 in 1997 and 1996 respectively. Product sales consist of
ProNectin F related product revenues and licensing fees. Sales during 1996
reflected disappointing market interest in the line of ProNectin products; as a
result the Company discontinued related promotional expenditures to conserve
cash. Sales in 1997 and 1998 primarily reflect distributor stocking orders.
Cost of sales was $4,000 for the year ended December 31, 1998, versus
$26,000 and $47,000 for 1997 and 1996, respectively. Because the products sold
through distributors are manufactured to order, the Company no longer books
inventory reserves. Royalty expenses of
19
$25,000 were paid to Telios Pharmaceuticals, Inc. for each of the three years
ended December 31, 1998, 1997 and 1996. Additionally, prior to 1997, royalty
expenses of $10,000 per year were paid to Stanford University.
Research and development expenses for the year ended December 31, 1998 were
$4,138,000, compared to $3,127,000 in 1997, an increase of 32%. This increase is
due primarily to expanded activities regarding the Company's soft tissue
augmentation program, in particular the outside testing and regulatory
consulting expenses associated with the filing of an Investigational Device
Exemption with the U.S. Food and Drug Administration to begin human trials for
the treatment of female stress urinary incontinence. Other related expenses
include expanded manufacturing capacity and manufacturing process validation,
quality assurance efforts, and outside testing services. The Company expects its
research and development expenses will increase in the future, to the extent
additional capital is obtained, due to the expansion of product-directed
development efforts including human clinical testing, increased manufacturing
requirements, and increased use of outside testing services.
Selling, general and administrative expenses for the year ended December
31, 1998 were $1,727,000, as compared to $1,988,000 for 1997, a decrease of 13%.
This decrease was due to reduced patent filing expenses. To the extent possible,
the Company concentrated on controlling costs reflected in reduced travel,
office supplies, and non-regulatory consulting costs. The Company expects its
selling, general and administrative expenses will increase in the future, to the
extent additional capital is obtained, consistent with supporting its research
and development efforts and as business development, patent, legal and investor
relations activities require.
For the year ended December 31, 1998, the Company recorded a net loss
applicable to common shareholders of $9,183,000, or $.88 per share, as compared
to $4,887,000, or $.52 per share for 1997, and $3,356,000, or $.51 per share for
1996. The difference between 1998 and previous year end results is due primarily
to a non-cash "imputed dividend" expense of $3,266,000 that resulted from the
sale and issuance of the Company's Series E Convertible Preferred Stock during
1998. The 1998, 1997 and 1996 losses and per share calculations also include
$278,000, $433,000 and $492,000, respectively, of undeclared and/or paid
dividends from the Company's Preferred Stock.
The Company expects to incur increasing operating losses for the next
several years, to the extent additional capital is obtained, based upon the
successful continuation of the tissue augmentation program and product
registration, and the tissue adhesives program, as well as expected increases in
the Company's other research and development, manufacturing and business
development activities. The Company's results depend in part on its ability to
establish strategic alliances and generate contract revenues, increased
research, development and manufacturing efforts, preclinical and clinical
product testing and commercialization expenditures, expenses incurred for
regulatory compliance and patent prosecution, and other factors. The Company's
results will also fluctuate from period to period due to timing differences.
To date, the Company believes that inflation and changing prices have not
had a material impact on its continuing operations. Based upon Company earnings
history, a valuation allowance of $11,749,000 is required to reduce the
Company's net deferred tax assets to the amount realizable.
20
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash, cash equivalents and short-
term investments totaling $1,380,000, as compared to $1,300,000 at December 31,
1997. As of December 31, 1998, the Company had working capital of $600,000,
compared to $697,000 at December 31, 1997. In April and May of 1998, the
Company realized approximately $5,400,000 net of expenses from the private
placement of the Company's Series E Convertible Preferred Stock.
The Company had long-term capital lease obligations of $106,000 as of
December 31, 1998, compared to an obligation of $190,000 as of December 31,
1997. For the year ended December 31, 1998, the Company's cash expenditures for
capital equipment and leasehold improvements totaled $197,000, compared with
$296,000 for the same period last year. The Company anticipates that these
expenditures will be less in 1999 as laboratory renovations and additional
equipment required to meet current GLP regulations and production requirements
have been mostly completed. However, the Company anticipates a significant
increase in manufacturing-related equipment and leasehold improvement
expenditures in 2000 due to an increase in need for products for clinical
testing, and anticipated need for additional product manufacturing for
preclinical animal studies. The Company may enter into additional capital
equipment lease arrangements in the future if available at appropriate rates and
terms.
The Company believes its existing available cash, cash equivalents and
short-term investments would be sufficient to meet its anticipated capital
requirements through April 1999. Substantial additional capital resources will
be required to fund continuing expenditures related to the Company's research,
development, manufacturing and business development activities. The Company
believes there may be a number of alternatives available to meet the continuing
capital requirements of its operations, such as collaborative agreements and
public or private financings. During 1999, the Company expects that the possible
exercise of existing warrants could result in additional funds for continuing
operations. Further, the Company is currently in preliminary discussions with a
number of potential collaborative partners and, based on the results of various
materials evaluations, revenues in the form of license fees, milestone payments
or research and development reimbursements could be generated. There can be no
assurance that any of these fundings will be consummated in the necessary
timeframes needed for continuing operations or on terms favorable to the
Company. If adequate funds are not available, the Company will be required to
significantly curtail its operating plans and may have to sell or license out
significant portions of the Company's technology or potential products.
YEAR 2000 COMPLIANCE
The Company has developed a plan to modify its information technology in
recognition of the year 2000 issue. The "Year 2000" issue concerns potential
exposure related to the interruption of business practice and financial
misinformation resulting from the application of computer programs which have
been written using two digits, rather than four, to define the applicable year
of business transactions. The Company has undertaken initiatives to ensure that
its computer systems are Year 2000 compliant. To date, the Company has not
incurred any material costs in connection with its Year 2000 plan. Based on its
assessments to date, the Company does not expect to incur any further
significant costs, or anticipate any significant problems or uncertainties
associated with becoming Year 2000 compliant.
21
The following is a breakdown by phase of the progress the Company has made
to date on its Year 2000 plan:
Phase Timeframe % Complete
-------------------------------------- --------- -----------
Initial identification and assessment Q-4 1998 95%
Remediation Q-4 1998 95%
Testing Q-2 1999 70%
Contingency planning Q-2 1999 50%
The Company is reliant on its vendors and suppliers and may be reliant on
strategic partners to provide Year 2000 compliant systems prior to December 31,
1999. The Company is in the process of surveying all of its major vendors and
suppliers to determine whether their systems are Year 2000 compliant. At this
time, the impact on the Company of significant vendors and suppliers not being
in full compliance cannot be reasonably estimated. However, the Company believes
that any of its vendors and suppliers can be replaced with minimal cost impact.
The Company is developing a plan to mitigate the impact of vendors and suppliers
who are not in compliance with issues related to the Year 2000.
22
ITEM 7. FINANCIAL STATEMENTS
Filed herewith are the following Audited Financial Statements for Protein
Polymer Technologies, Inc. (a Development Stage Company):
Description Page
----------- ------
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets at December 31, 1998 and 1997................................ F-3
Statements of Operations for the years ended December 31, 1998, 1997
and 1996 and the period July 6, 1988 (inception) to December 31, 1998....... F-4
Statements of Stockholders Equity for the period July 6, 1988 (inception)
to December 31, 1998........................................................ F-5
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996 and the period July 6, 1988 (inception) to December 31, 1998....... F-7
Notes to Financial Statements............................................... F-9
F-1
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Protein Polymer Technologies, Inc.
We have audited the accompanying balance sheets of Protein Polymer
Technologies, Inc. (a Development Stage Company) as of December 31, 1998 and
1997, and the related statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998 and for
the period July 6, 1988 (inception) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Protein Polymer
Technologies, Inc. (a Development Stage Company) at December 31, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1998 and for the period July 6, 1988
(inception) to December 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, Protein Polymer
Technologies, Inc. (a Development Stage Company) has reported accumulated losses
during the development stage aggregating $(32,987,964) and without additional
financing, lacks sufficient working capital to fund operations beyond April
1999, which raises substantial doubt about its ability to continue as a going
concern. Management's plans as to these matters are described in Note 1. The
1998 financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
ERNST & YOUNG LLP
San Diego, California
February 5, 1999
F-2
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31,
1998 1997
---------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,383,148 $ 325,021
Short-term investments - 974,817
Other current assets 66,459 88,868
---------------------------------
Total current assets 1,449,607 1,388,706
Deposits 36,177 36,617
Notes receivable from officers 141,000 153,000
Equipment and leasehold improvements, net 598,447 769,564
---------------------------------
$ 2,225,231 $ 2,347,887
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 515,413 $ 423,594
Accrued employee benefits 167,849 151,831
Other accrued expenses 21,574 41,151
Deferred revenue - -
Current portion capital lease obligations 84,518 75,110
Deferred rent 60,668 -
---------------------------------
Total current liabilities 850,022 691,686
Long-term portion capital lease obligations 105,548 190,068
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, 153,917 shares
authorized, 79,202 and 28,214 shares issued and outstanding at
December 31, 1998 and 1997, respectively - liquidation
preference of $7,920,200 7,600,226 2,667,403
Common stock, $.01 par value, 25,000,000 shares authorized,
10,827,240 and 10,420,722 shares issued and outstanding at
December 31, 1998 and 1997, respectively 108,274 104,208
Additional paid-in capital 26,549,125 22,778,033
Deficit accumulated during development stage (32,987,964) (24,083,511)
---------------------------------
Total stockholders' equity 1,269,661 1,466,133
---------------------------------
$ 2,225,231 $ 2,347,887
=================================
See accompanying notes.
F-3
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998
---------------------------------------------------------------------
Revenues:
Contract revenue $ 50,000 $ 459,510 $ 610,000 $ 4,354,965
Interest income, net 134,978 186,531 87,317 1,080,929
Product and other income 70,846 76,917 58,434 630,014
---------------------------------------------------------------------
Total revenues 255,824 722,958 755,751 6,065,908
Expenses:
Cost of sales 4,158 26,141 47,364 279,679
Research and development 4,137,986 3,127,257 2,021,413 21,385,254
Selling, general and administrative 1,726,883 1,988,493 1,516,406 13,156,302
Royalties 25,000 35,000 35,000 290,171
---------------------------------------------------------------------
Total expenses 5,894,027 5,176,891 3,620,183 35,111,406
---------------------------------------------------------------------
Net loss (5,638,203) (4,453,933) (2,864,432) (29,045,498)
Undeclared and/or paid dividends on
preferred stock 3,544,323 432,682 491,867 4,962,015
---------------------------------------------------------------------
Net loss applicable to common
shareholders $ (9,182,526) $(4,886,615) $(3,356,299) $(34,007,513)
=====================================================================
Net loss per common share - basic
and diluted $ (.88) $ (.52) $ (.51)
==================================================
Shares used in computing net loss
per common share - basic and
diluted 10,484,277 9,487,165 6,638,814
==================================================
See accompanying notes.
F-4
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 6, 1988 (INCEPTION) TO DECEMBER 31,1998
COMMON STOCK PREFERRED STOCK
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
Issuance of common stock at
$.01 per share for cash 400,000 $ 4,000 - $ -
Issuance of common stock at
$.62 per share for cash and receivables 1,116,245 11,162 - -
Receivables from sale of common stock - - - -
Net loss - - - -
Balance at December 31, 1988 1,516,245 15,162 - -
Repayment of receivables from sale of common stock - - - -
Issuance of common stock at $.62 per share 359,136 3,594 - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1989 1,875,381 18,756 - -
Exercise of common stock options at
$.01 per share for cash 60,000 600 - -
Issuance of common stock at
$.68 per share for cash and compensation 5,000 50 - -
Common stock repurchased at
$.01 per share for cash (25,000) (250) - -
Common stock issued at
$.68 per share for cash and compensation 25,000 250 - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1990 1,940,381 19,406 - -
Exercise of common stock options at
$.68 per share for cash 5,000 50 - -
Conversion of notes payable to common stock 339,230 3,391 - -
Conversion of notes payable to preferred stock - - 278,326 2,783
Issuance of preferred stock at
$2.00 per share for cash, net of
issuance costs - - 400,000 400,000
Issuance of warrants for cash - - - -
Issuance of warrants in connection with
convertible notes payable - - - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1991 2,768,366 27,684 678,326 6,783
Initial public offering at
$6.50 per unit, net of
issuance costs 1,667,500 16,676 - -
Conversion of Series B preferred stock
into common stock in connection with
initial public offering 678,326 6,783 (678,326) (6,783)
Conversion of Series A preferred stock into common stock
at 1.13342 per share 713,733 7,137 - -
--------------------------------------------------------
Balance at December 31, 1992 5,827,925 58,280 - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1993 5,830,925 58,310 - -
Issuance of preferred stock
at $100 per share for cash, net
of issuance costs - - 21,600 2,073,925
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1994 5,830,925 58,310 21,600 2,073,925
Issuance of preferred stock
at $100 per share for cash and
cancellation of bridge loan,
net of issuance costs - - 25,000 2,432,150
Series C dividends paid in Series D preferred stock - - 2,539 253,875
Interest paid in Series D preferred stock - - 48 4,795
Exercise of common stock options at $.53 per share 2,000 20 - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1995 5,832,925 58,330 49,187 4,764,745
Deficit
accumulated
during
Additional development Receivables from Total stockholders'
paid-in capital stage stock equity
---------------------------------------------------------------------
Issuance of common stock at
$.01 per share for cash $ - $ - $ - $ 4,000
Issuance of common stock at
$.62 per share for cash and
receivables 681,838 - - 693,000
Receivables from sale of common stock - - (86,000) (86,000)
Net loss - (322,702) - (322,702)
---------------------------------------------------------------------
Balance at December 31, 1988 681,838 (322,702) (86,000) 288,298
Repayment of receivables from sale
of common stock - - 86,000 86,000
Issuance of common stock at
$.62 per share 219,358 - - 222,952
Net loss - (925,080) - (925,080)
---------------------------------------------------------------------
Balance at December 31, 1989 901,196 (1,247,782) - (327,830)
Exercise of common stock options at
$.01 per share for cash - - - 600
Issuance of common stock at
$.68 per share for cash and compensation 3,350 - - 3,400
Common stock repurchased at
$.01 per share for cash - - - (250)
Common stock issued at
$.68 per share for cash and compensation 16,750 - - 17,000
Net loss - (1,501,171) - (1,501,171)
---------------------------------------------------------------------
Balance at December 31, 1990 921,296 (2,748,953) - (1,808,251)
Exercise of common stock options at
$.68 per share for cash 3,350 - - 3,400
Exercise of warrants for common stock 295,493 - - 300,330
Conversion of notes payable to common stock 508,414 - - 511,805
Conversion of notes payable to preferred stock 553,869 - - 556,652
Issuance of preferred stock at
$2.00 per share for cash, net of
issuance costs 703,475 - - 707,475
Issuance of warrants for cash 3,000 - - 3,000
Issuance of warrants in connection with
convertible notes payable 28,000 - - 28,000
Net loss - (1,143,119) - (1,143,119)
---------------------------------------------------------------------
Balance at December 31, 1991 3,016,897 (3,892,072) - (840,708)
Initial public offering at
$6.50 per unit, net of
issuance costs 8,911,024 - - 8,927,700
Conversion of Series B preferred stock
into common stock in connection with
initial public offering - - - -
Conversion of Series A preferred stock
into common stock at 1.13342
per share 1,717,065 - - 1,724,202
Net loss - (3,481,659) - (3,481,659)
---------------------------------------------------------------------
Balance at December 31, 1992 13,644,986 (7,373,731) - 6,329,535
Exercise of common stock options
at $.68 per share 2,010 - - 2,040
Net loss - (3,245,436) - (3,245,436)
---------------------------------------------------------------------
Balance at December 31, 1993 13,646,996 (10,619,167) - 3,086,139
Issuance of preferred stock at
$100 per share for cash, net of
issuance costs - - - 2,073,925
Net loss - (3,245,359) - (3,245,359)
---------------------------------------------------------------------
Balance at December 31, 1994 13,646,996 (13,864,526) - 1,914,705
Issuance of preferred stock at
$100 per share for cash and
cancellation of bridge loan,
net of issuance costs - - - 2,432,150
Series C dividends paid in Series D
preferred stock - (253,875) - -
Interest paid in Series D preferred stock - - - 4,795
Exercise of common stock options at
$.53 per share 1,040 - - 1,060
Net loss - (2,224,404) - (2,224,404)
---------------------------------------------------------------------
Balance at December 31, 1995 13,648,036 (16,342,805) - 2,128,306
See accompanying notes.
F-5
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD JULY 6, 1988 (INCEPTION) TO DECEMBER 31,1998
COMMON STOCK PREFERRED STOCK
--------------------------------------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------
Exercise of common stock warrants at $1.25 per share 932,960 $ 9,330 - $ -
Exercise of common stock warrants at $2.50 per share,
net of issuance costs 322,663 3,226 - -
Exercise of common stock warrants at $1.00 per share 25,000 250 - -
Exercise of common stock options 136,000 1,360 - -
Stock repurchases (16,320) (163) - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1996 7,233,228 72,333 49,187 4,764,745
Issuance of common stock at $2.50 per share,
net of issuance costs 1,904,000 19,040 - -
Exercise of common stock options 28,000 280 - -
Issuance of common stock under stock purchase plan 15,036 151 - -
Conversion of Series D preferred stock into common stock 1,032,537 10,325 (20,973) (2,097,342)
Series D dividends paid in common stock 207,921 2,079 - -
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1997 10,420,722 $ 104,208 28,214 $ 2,667,403
Issuance of common stock under stock purchase plan 36,715 368 - -
Exercise of common stock options 12,000 120 - -
Issuance of common stock at $1.60 per share,
net of issuance costs 23,439 234 - -
Issuance of Series E preferred stock,
net of issuance costs - - 54,438 5,277,813
Grant of stock to finder 64,000 640 - -
Conversion of Series D and E preferred stock
into common stock 270,364 2,704 (3,450) (344,990)
Net loss - - - -
--------------------------------------------------------
Balance at December 31, 1998 10,827,240 $ 108,274 79,202 $ 7,600,226
Deficit
accumulated
during
Additional development Receivables from Total stockholders'
paid-in capital stage stock equity
---------------------------------------------------------------------
Exercise of common stock warrants at
$1.25 per share $ 1,156,870 $ - $ - $ 1,166,200
Exercise of common stock warrants at
$2.50 per share, net of
issuance costs 779,413 - - 782,639
Exercise of common stock warrants at
$1.00 per share 24,750 - - 25,000
Exercise of common stock options 91,650 - - 93,010
Stock repurchases (81,437) - - (81,600)
Net loss - (2,864,432) - (2,864,432)
---------------------------------------------------------------------
Balance at December 31, 1996 15,619,282 (19,207,237) - 1,249,123
Issuance of common stock at $2.50 per share,
net of issuance costs 4,601,322 - - 4,620,362
Exercise of common stock options 20,200 - - 20,480
Issuance of common stock under
stock purchase plan 29,950 - - 30,101
Conversion of Series D preferred stock
into common stock 2,087,017 - - -
Series D dividends paid in common stock 420,262 (422,341) - -
Net loss - (4,453,933) - (4,453,933)
---------------------------------------------------------------------
Balance at December 31, 1997 $ 22,778,033 $ (24,083,511) $ - $ 1,466,133
Issuance of common stock under
stock purchase plan 38,010 - - 38,378
Exercise of common stock options 7,920 - - 8,040
Issuance of common stock at $1.60 per share,
net of issuance costs 37,266 - - 37,500
Issuance of Series E preferred stock,
net of issuance costs 3,266,250 (3,266,250) - 5,277,813
Grant of stock to finder 79,360 - - 80,000
Conversion of Series D and E preferred
stock into common stock 342,286 - - -
Net Loss - (5,638,203) - (5,638,203)
---------------------------------------------------------------------
Balance at December 31, 1998 $ 26,549,125 $ (32,987,964) $ - $ 1,269,661
=====================================================================
See accompanying notes.
F-6
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998
---------------------------------------------------------------------
OPERATING ACTIVITIES
Net Loss $ (5,638,203) $(4,453,933) $(2,864,432) $(29,045,498)
Adjustments to reconcile net loss to net cash
cash used for operating activities:
Stock issued for compensation 80,000 - - 100,100
Stock issued for interest - - - 4,795
Depreciation and amortization 368,577 184,300 117,203 1,628,296
Write-off of purchased technology - - - 503,500
Changes in assets and liabilities:
Deposits 440 (14,360) - (36,177)
Notes receivable from officers 12,000 (153,000) - (141,000)
Other current assets 22,409 (11,613) 25,556 (66,459)
Accounts payable 91,819 172,273 93,350 515,413
Accrued employee benefits 16,018 34,219 16,328 167,849
Other accrued expenses (19,577) (12,374) 1,927 21,574
Deferred revenue - (75,000) 75,000 -
Deferred rent 60,668 - - 60,668
---------------------------------------------------------------------
Net cash used for operating activities (5,005,849) (4,329,488) (2,535,068) (26,286,939)
INVESTING ACTIVITIES
Purchase of technology - - - (570,000)
Purchase of equipment and improvements (197,460) (295,778) (183,722) (1,784,714)
Purchases of short-term investments - (4,226,729) (1,943,042) (16,161,667)
Sales of short-term investments 974,817 4,244,954 2,490,000 16,161,667
---------------------------------------------------------------------
Net cash provided by (used for) investing
activities 777,357 (277,553) 363,236 (2,354,714)
FINANCING ACTIVITIES
Net proceeds from issuance of warrants and
sale of common stock 83,918 4,670,943 1,985,249 16,597,912
Net proceeds from issuance of preferred
stock 5,277,813 - - 12,215,565
Net proceeds from convertible notes and
detachable warrants - - - 1,068,457
Payments on capital lease obligations (75,112) (23,594) - (98,706)
Payment on note payable - - - (92,750)
Proceeds from note payable - - - 334,323
Deferred offering costs - 17,356 (17,356) -
---------------------------------------------------------------------
Net cash provided by financing activities 5,286,619 4,664,705 1,967,893 30,024,801
Net increase (decrease) in cash and cash
equivalents 1,058,127 57,664 (203,939) 1,383,148
Cash and cash equivalents at beginning of
the period 325,021 267,357 471,296 -
---------------------------------------------------------------------
Cash and cash equivalents at end of the
period $ 1,383,148 $ 325,021 $ 267,357 $ 1,383,148
=====================================================================
F-7
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE PERIOD
JULY 6, 1988
(INCEPTION) TO
YEARS ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998
---------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Equipment purchased by capital leases $ - $ 288,722 $ - $ 288,722
Interest paid 26,692 7,763 - 97,928
Imputed dividend on Series E Stock 3,266,250 - - 3,266,250
Conversion of Series D preferred stock to
common stock 44,990 2,097,342 - 2,142,332
Conversion of Series E preferred stock to
common stock 300,000 - - 300,000
Series D stock issued for Series C Stock - - 2,073,925 2,073,925
Series C dividends paid with Series D stock - - 253,875 253,875
Series D dividends paid with common stock $ - $ 422,341 $ - $ 422,341
=====================================================================
See accompanying notes.
F-8
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITIES
Protein Polymer Technologies, Inc. (the "Company") was established to design,
produce and market genetically engineered protein polymers for a variety of
biomedical and specialty materials applications. The Company was incorporated
in Delaware on July 6, 1988. For the period from its inception to date,the
Company has been a development stage enterprise, and accordingly, the Company's
operations have been directed primarily toward developing business strategies,
raising capital, research and development activities, exploring marketing
channels and recruiting personnel.
LIQUIDITY
As of December 31, 1998, the Company had cash, cash equivalents and short-term
investments totaling $1,380,000 as compared to $1,300,000 at December 31, 1997.
As of December 31, 1998, the Company had working capital of $600,000, compared
to $697,000 at December 31, 1997. In April and May of 1998, the Company raised
approximately $5,400,000, net of expenses, from the private placement of the
Company's Series E Convertible Preferred Stock.
The Company believes its available cash, cash equivalents and short-term
investments would be sufficient to meet its anticipated capital requirements
through April 1999, which raises substantial doubt about its ability to continue
as a going concern. Substantial additional capital resources will be required to
fund continuing operations related to the Company's research, development,
manufacturing and business development activities. The Company believes there
may be a number of alternatives available to meet the continuing capital
requirements of its operations, such as collaborative agreements and public or
private financings. During 1999, the Company expects that the possible exercise
of existing warrants could result in additional funds for continuing operations.
Further, the Company is currently in preliminary discussions with a number of
potential collaborative partners and, based on the results of various materials
evaluations, revenues in the form of license fees, milestone payments or
research and development reimbursements could be generated. There can be no
assurance that any of these fundings will be consummated in the necessary time
frames needed for continuing operations or on terms favorable to the Company. If
adequate funds are not available, the Company will be required to significantly
curtail its operating plans and may have to sell or license out significant
portions of the Company's technology or potential products.
F-9
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Short-term investments consist primarily of commercial paper, notes and short-
term U.S. Government securities with original maturities beyond three months and
are stated at estimated fair value. Similar items with original maturities of
three months or less are considered cash equivalents. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. The Company has not experienced any losses on its short-
term investments.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Equipment is depreciated over the estimated
useful life of the asset, typically one to seven years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease term
or life of the asset. Equipment and leasehold improvements consist of the
following:
DECEMBER 31,
1998 1997
-----------------------------
Laboratory equipment $ 1,600,723 $ 1,459,476
Office equipment 175,128 171,490
Leasehold improvements 297,635 245,060
-----------------------------
2,073,486 1,876,026
Less accumulated depreciation and amortization (1,475,039) (1,106,4632)
-----------------------------
$ 598,447 $ 769,564
=============================
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Research and development contract revenues are recorded as earned based on the
performance requirements of the contracts. If the research and development
activities are not successful, the Company is not obligated to refund payments
previously received. Milestone and license payments are recorded as revenue when
received as they have not been refundable and the Company has no future
performance obligations. Payments received in advance of amounts earned are
recorded as deferred revenue. Research and development costs are expensed as
incurred.
PRODUCT REVENUE RECOGNITION
Sales are recognized upon shipment of products to customers.
F-10
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING STANDARD ON IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of, the Company regularly evaluates its long-lived assets for
indicators of possible impairment. To date, no such indicators have been
identified.
STOCK OPTIONS
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25") and related Interpretations
in accounting for its employee stock options. Under APB 25, if the exercise
price of the Company's employee stock options equals or exceeds the deemed fair
value of the underlying stock on the date of grant, no compensation expense is
recognized. Options issued to non-employees are recorded at their fair value and
recognized over the related service period. The effects of using the fair value
accounting method, as described in SFAS Statement No. 123 are described below in
Note 2.
NET LOSS PER COMMON SHARE
The Company reports its earnings per share in accordance with SFAS No. 128,
Earnings per Share, which requires the presentation of both basic and diluted
earnings per share on the statements of operations. Basic earnings per share is
calculated based upon weighted-average number of outstanding common shares for
the period. Diluted earnings per share is calculated based upon weighted-average
number of outstanding common shares, plus the effect of dilutive stock options.
The net loss per common share for the years ended December 31, 1998, 1997 and
1996 is based on the weighted average number of shares of common stock
outstanding during the periods. Potentially dilutive securities include
options, warrants and convertible preferred stock; however, such securities have
not been included in the calculation of the net loss per common share as their
effect is antidilutive. Since this is the case, there is no difference between
the basic and dilutive net loss per common share for any of the periods
presented and none of the prior periods were required to be restated. For
purposes of this calculation, net loss in 1998, 1997 and 1996 has beenadjusted
for accumulated and/or paid dividends on the Preferred Stock.
F-11
PROTEIN POLYMER TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
SFAS No. 130, Reporting Comprehensive Income, was issued in June 1997. This
standard requires that the Company disclose, either in the income statement or
in a separate financial statement, net income as currently reported and other
components of comprehensive income. Comprehensive income is defined as the
change in shareholders' equity during a period resulting from transactions and
other events and circumstances from non-owner sources. The Company adopted this
standard during 1998. For the years ended December 31, 1998, 1997 and 1996 the
Company did not have any components of comprehensive income as defined in SFAS
No. 130.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, was issued in June 1997. This standard defines segments of an
enterprise as the components of the company whose operations are reviewed
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. It requires disclosures about products
and services, geographic areas and major customers. The Company adopted this
standard during 1998. Implementation of this standard did not affect the
Company's financial position or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the amount of revenue and expense reported during the period. Actual results
could differ from those estimates. The financial statements contained herein do
not include any reserves or adjustments that may result from the Company's going
concern risk.
2. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
In April and May of 1998, the Company raised approximately $5.4 million from the
sale of 54,437.5 shares of the Company's Series E Convertible Preferred Stock
("Series E Stock") priced at $100 per share, with warrants to purchase an
aggregate of 3,266,250 shares of common stock to a small group of institutional
and accredited investors. In connection with this transaction, the Company
recorded a non-cash "imputed dividend" expense of $3,266,250 in order to account
for the difference between the fair market value of the stock and the beneficial
conversion feature.
F-12
PROTEIN POLYMER TECHNOLOGIES, INC.
