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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 Identification No.)
incorporation or organization)
10655 Sorrento Valley Road, San Diego, CA 92121
(Address of principal executive offices)
(858) 558-6064
(Issuer's telephone number)
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
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 30, 2004, 37,106,515
shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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1
PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -
March 31, 2004 and December 31, 2003.......................................3
Condensed Statements of Operations -
For the three months ended March 31, 2004 and 2003
and the period July 6, 1988 (inception) to March 31, 2004..................4
Condensed Statements of Cash Flows -
For the three months ended March 31, 2004 and 2003
and the period July 6, 1988 (inception) to March 31, 2004..................5
Notes to Condensed Financial Statements...........................................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................9
Item 3. Controls and Procedures..........................................................13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................................14
Signatures.......................................................................15
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Balance Sheets
March 31, December 31,
2004 2003
(Unaudited) (Audited)
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 754,770 $ 1,085,314
Contracts receivable - 252,026
Rent receivable 184,527 184,527
Prepaid expenses 29,946 25,799
Other current assets - -
-------------------------------
Total current assets 969,243 1,547,666
Equipment and leasehold improvements, net 107,675 114,411
Deposits 30,479 29,679
-------------------------------
$ 1,107,397 $ 1,691,756
===============================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 94,828 $ 168,659
Accrued expenses 184,087 162,609
Deferred revenue 77,139 -
Deferred rent 18,083 24,111
-------------------------------
Total current liabilities 374,137 355,379
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, 5,000,000 shares
authorized, 84,745 and 86,095 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively - liquidation
preference of $8,474,500 and $8,609,500 at March 31, 2004
and December 31, 2003, respectively 7,929,917 8,064,917
Common stock, $.01 par value, 120,000,000 shares authorized,
38,091,515 and 36,830,857 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively 380,926 368,319
Additional paid-in capital 40,746,848 40,376,185
Deficit accumulated during development stage (48,324,431) (47,473,044)
-------------------------------
Total stockholders' equity 733,260 1,336,377
-------------------------------
$ 1,107,397 $ 1,691,756
===============================
See accompanying notes.
3
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Operations
(unaudited)
For the period
July 6, 1988
Three months ended (inception) to
March 31, March 31,
2004 2003 2004
----------------------------------------------------
Revenues:
Contract revenue $ 189,050 $ 450,983 $ 11,045,051
Interest income 1,958 1,583 1,268,808
Product and other income 6 - 694,785
-----------------------------------------------------
Total revenues 191,014 452,566 13,008,644
Expenses:
Research and development 638,748 541,866 35,384,496
Selling, general and administrative 403,653 280,421 20,626,948
-----------------------------------------------------
Total expenses 1,042,401 822,287 56,011,444
-----------------------------------------------------
Net loss (851,387) (369,721) (43,002,800)
Undeclared, imputed and/or paid dividends on
preferred stock 69,220 1,373,831 7,792,677
-----------------------------------------------------
Net loss applicable to common shareholders $ (920,607) $ (1,743,552) $(50,795,477)
=====================================================
Basic and diluted net loss per common share $ (0.02) $ (0.06)
=================================
Shares used in computing basic and diluted
net loss per common share 37,313,282 29,792,399
=================================
See accompanying notes.
4
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
For the period
July 6, 1988
Three months ended (inception) to
March 31, March 31,
2004 2003 2004
-----------------------------------------------------
Cash flows from operating activities
Net loss $ (851,387) $ (369,721) $(43,002,800)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock issued for compensation and interest - - 472,676
Depreciation and amortization 8,254 20,572 2,423,214
Write-off of purchased technology - - 503,500
Changes in assets and liabilities:
Deposits (800) (800) (30,479)
Other current assets 247,879 (67,771) (214,473)
Accounts payable (73,831) (216,292) 94,828
Accrued employee benefits 12,567 8,947 144,958
Other accrued expenses 8,911 (20,862) 39,129
Deferred revenue 77,139 - 77,139
Deferred rent (6,028) (6,028) 18,083
-----------------------------------------------------
Net cash used in operating activities (577,296) (651,955) (39,474,225)
Cash flows from investing activities
Purchase of technology - - (570,000)
Purchase of equipment and improvements (1,518) (3,609) (2,088,862)
Purchases of short-term investments - - (16,161,667)
Sales of short-term investments - - 16,161,667
-----------------------------------------------------
Net cash used in investing activities
$ (1,518) $ (3,609) $ (2,658,862)
See accompanying notes.
5
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
For the period
July 6, 1988
Three months ended (inception) to
March 31, March 31,
------------------------------------------------
2004 2003 2004
------------------------------------------------
Cash flows from financing activities
Net proceeds from exercise of options and
warrants, and sale of common stock $ 248,270 $ 3,227 $ 23,468,529
Net proceeds from issuance and conversion of
preferred stock - 2,639,650 18,398,068
Net proceeds from convertible notes and
detachable warrants - - 1,068,457
Payment on capital lease obligations - - (288,770)
Payment on note payable - - (242,750)
Proceeds from note payable - - 484,323
------------------------------------------------
Net cash provided by financing activities 248,270 2,642,877 42,887,857
------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (330,544) 1,987,313 754,770
Cash and cash equivalents at beginning of
period 1,085,314 733,978 -
------------------------------------------------
Cash and cash equivalents at end of period $ 754,770 $ 2,721,291 $ 754,770
================================================
Supplemental disclosures of cash flow
information
Equipment purchased by capital leases $ - $ - $ 288,772
Interest paid 899 - 148,432
Imputed dividend on Series E stock - - 3,266,250
Imputed dividend on Series I stock - 1,305,372 1,373,247
Conversion of Series D preferred stock to
common stock - - 2,142,332
Conversion of Series E preferred stock to
common stock - 1,921,513 5,277,813
Conversion of Series G preferred stock to
common stock 135,000 15,000 720,000
Conversion of Series I preferred stock to
common stock - - 105,000
Series D stock issued for Series C stock - - 2,073,925
Series C dividends paid with Series D stock - - 253,875
Series D dividends paid with common stock - - 422,341
See accompanying notes.
6
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(unaudited)
March 31, 2004
Note 1. Basis of Presentation
The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three months ended March 31, 2004 and 2003 are unaudited.
These financial statements reflect all adjustments, consisting of only normal
recurring adjustments which, in the opinion of management, are necessary to
state fairly the financial position at March 31, 2004 and the results of
operations for the three months ended March 31, 2004 and 2003. The results of
operations for the three months ended March 31, 2004 are not necessarily
indicative of the results to be expected for the year ended December 31, 2004.
For more complete financial information, these financial statements and the
notes thereto should be read in conjunction with the audited financial
statements included in our Annual Report on Form 10-KSB for the year ended
December 31, 2003, filed with the Securities and Exchange Commission.
Accounting for Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. Had compensation cost for the Company's stock option
awards been determined based upon the fair value at the grant date and
recognized on a straight-line basis over the related vesting period, in
accordance with the provisions of SFAS No. 123, the Company's net loss and
earnings per share would have been reduced to the proforma amount indicated
below:
For the three months
ended March 31,
2004 2003
---- ----
Net loss applicable to common shareholders, as reported $(920,607) $(1,743,552)
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all options, net of
related tax effects
(1,342,216) (22,794)
Pro forma net loss (2,262,823) (1,766,346)
Earnings per share:
Basic - as reported 0.003 0.059
Basic - pro forma 0.061 $ 0.059
Note 2. Revenue and Expense Recognition
Research and development contract revenues are recorded as earned in accordance
with the terms and performance requirements of the contracts. If the research
and development activities are not successful, we are not obligated to refund
payments previously received. Fees from the sale or license of technology are
recognized on a straight-line basis over the term required to complete the
transfer of technology or the substantial satisfaction of any performance
related responsibilities. License fee payments received in advance of amounts
earned are recorded as deferred revenue. Milestone payments are recorded as
revenue based upon the completion of certain contract specified events that
measure progress toward completion
7
under certain long-term contracts. Royalty revenue related to licensed
technology is recorded when earned and in accordance with the terms of the
license agreement. Research and development costs are expensed as incurred.
Note 3. Rent Receivable
The Company subleases 6,183 square feet of its office and research facilities
under a month to month arrangement for $13,108 per month. Since December 2002,
the sublessee has not been able to make monthly rental payments due to a lack of
funding. Obligations under the sublease are secured by certain listed property
and equipment of the sublessee. At December 31, 2003 and March 31, 2004 the
amount due from the sub-lessee is $184,527
Note 4. Exercise and Exchange of Warrants
In March 2004, certain holders of warrants exercised their warrants to purchase
common stock, these warrants were due to expire at the end of March 2004. The
exercise prices of such warrants were $0.40 and $0.55 per share. As an incentive
to exercise the warrant early the Company offered each holder the issuance of a
new warrant, for a similar number of shares, at an exercise price of $0.55 per
share. As a result, the Company raised $246,250. The newly issued warrants will
expire on the last day of January 2005.
Note 5. Liquidity
The Company's continued existence is dependent upon its ability to resolve its
liquidity problems, principally by obtaining additional debt and equity capital.
While pursuing additional debt and equity funding, the Company must continue to
operate on limited capital. The Company has experienced a net loss for the three
months ended March 31, 2004 of $851,387 compared to a net loss for the three
months ended March 31, 2003 of $369,721.
Management believes our existing available cash and cash equivalents as of March
31, 2004, plus contractual amounts receivable, is sufficient to meet our
anticipated capital requirements until July 2004. Substantial additional capital
resources will be required to fund continuing expenditures related to our
research, development, clinical trials, and product marketing activities. If
adequate funds are not available, we will be required to significantly curtail
our operating plans and may have to sell or license out significant portions of
our technology or potential products.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Certain statements contained or incorporated by reference in this Quarterly
Report on Form 10-QSB 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, 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., a Delaware corporation
with corporate offices and laboratories located in San Diego, California, is a
development-stage biotechnology company engaged in the research, development,
production and clinical testing of medical products based on its proprietary
protein-based biomaterials and tissue engineering technology. Since 1992, we
have focused primarily on developing technology and products to be used in the
surgical repair, augmentation, and regeneration of tissue; surgical adhesives
and sealants; soft tissue augmentation products; matrices for wound healing and
tissue engineering; and drug delivery formulations. We have been unprofitable to
date, and as of March 31, 2004 had an accumulated deficit of $(48,324,000).
Protein polymers are synthetic proteins created "from scratch" through chemical
DNA (gene) synthesis, and produced in quantity by traditional large-scale
microbial fermentation methods. As a result, protein polymers contain no human
or animal components that could potentially transmit or cause disease. Due to
their synthetic design, protein polymers are capable of combining the biological
functionality of natural proteins with the chemical functionality and
exceptional physical properties of synthetic polymers. 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.
Our product candidates for surgical repair, augmentation and regeneration of
human tissues are in various stages of research and development. The more
advanced programs are bulking agents for soft tissue augmentation, particularly
for use in dermal tissue for cosmetic and reconstructive procedures and in
urethral tissue for the treatment of female stress incontinence, and tissue
adhesive formulations for the repair of spinal discs damaged due to injury or
aging and as surgical sealants for use in pulmonary, cardiovascular and
abdominal surgical procedures. We currently are devoting the majority of our
resources to the development and registration of these products.
Because of our technology's breadth of commercial opportunity, we are pursuing
multiple routes for commercial development. Currently, we independently are
developing the incontinence and the dermal augmentation products, which share
similar technology and product characteristics. We have established a
comprehensive license and development agreement with Genencor International for
the use of our biomaterials and technology to develop, manufacture and
commercialize products for industrial markets. Genencor International is one of
the world's largest manufacturers of industrial enzymes and other biologically
derived products. Through this arrangement, we will receive milestone payments,
and eventually royalties on the sale of products. For development and
commercialization of our spinal disc repair product, we joined with Windamere
Venture Partners to establish a new company, Spine Wave, Inc., that provides us
with both near term research and development support and eventually royalties on
the sale of licensed products. Except for the industrial products, we have
retained manufacturing rights.
Significant Collaborative Agreements
Our collaborative development agreements generally contain provision for
specific payments for defined activities, services, royalties on the sales of
developed products, and/or the accomplishment of performance benchmarks. These
agreements also may provide for equity investments or other financial
incentives. Technology license agreements usually are associated with
collaborative development agreements, but occasionally we will agree to a
license without an accompanying development agreement.
9
Spine Wave
----------
In April 2001, we entered into agreements with Spine Wave, Inc., to develop and
commercialize an injectable protein-based formulation for the repair of spinal
discs damaged either by injury or aging. As consideration for entering into an
exclusive, worldwide license agreement with Spine Wave, we received one million
shares of the founding common stock in Spine Wave, valued initially at $10,000.
The shares of founding common stock were subject to a vesting schedule; however,
Spine Wave's right to repurchase unvested shares terminated in 2002 upon their
merger with VERTx, Inc. Royalties from the sale or sublicensing of licensed
products will be determined in the future based on the gross margin (sales
revenue less the cost of goods) realized by Spine Wave from the sale of the
products.
In connection with the license agreement, we entered into a separate supply and
services agreement to provide Spine Wave with a variety of research and
development services, and to supply materials to Spine Wave for pre-clinical and
clinical testing. Spine Wave, in return, agreed to reimburse us for both our
direct costs and the associated overhead costs for the services provided. During
2001, we recognized contract revenues of $450,000 related to activities
performed under the collaborative agreement.
In March 2002, we executed additional agreements with Spine Wave that expanded
our contractual research and development relationship, and that offered us
additional equity incentives in the form of Spine Wave common stock and
warrants. Under the amended supply and services agreement, we, on behalf of
Spine Wave, are proceeding with pre-clinical safety and performance studies of a
product for spinal disc repair to support Spine Wave's filing of an
investigational device exemption with the FDA to obtain approval to initiate
human clinical testing. During the subsequent period leading to regulatory
marketing approval, our contractual responsibilities include the supply of
product to be used in clinical testing and preparation for commercial
manufacturing operations. Research and development services performed for Spine
Wave are reimbursed including both direct costs and associated overhead costs.
Spine Wave is responsible for clinical testing, regulatory approvals, and
commercialization. For the quarter ended March 31, 2004 and for the period of
project inception to date we received $189,000 and $4,650,000, respectively, in
contract revenue from Spine Wave which represents the reimbursement of direct
costs plus overhead costs allocated to the research and development resources
used in performing the collaborative activities.
Additional equity incentives offered in conjunction with the expanded supply and
services agreement of March 17, 2002 consist of a three year warrant to purchase
1,000,000 shares of Spine Wave common stock at an exercise price of $0.50 per
share (recently issued Spine Wave preferred stock was priced at $0.55 per
share), and 400,000 shares of common stock valued at $0.05 per share subject to
repurchase at cost until each of three performance goals is achieved. The
performance goals consist of: (i) completion of certain studies for filing an
investigational device exemption application (100,000 shares); (ii) completion
of additional studies for filing of the investigational device exemption and
provision of inventory for the pilot clinical study (150,000 shares); and (iii)
completion of certain manufacturing arrangements, and production of certain
quantities of product (150,000 shares). As of March 31, 2004, the first two of
the three performance goals had been met.
In October 2003, we executed a second amendment to the supply and services
agreement with Spine Wave. The amendment, effective for one year, extended Spine
Wave's right to certain research and development services, and further defined
the cost basis for reimbursement of services provided by us to Spine Wave.
License Agreements
Our license agreements usually include provision for up-front compensation and
eventual royalties on the sale of licensed products. Terms of license agreements
typically commence as of the date executed and continue for a period of the
greater of twenty (20) years from execution date or the date upon which the last
of the patented technology under license expires.
Femcare, Ltd.
-------------
In January 2000, we entered into a strategic alliance agreement with Femcare,
Ltd. ("Femcare"), for the commercialization in Europe and Australia of our
product for treatment of stress urinary incontinence. Under the terms of the
license agreement, Femcare paid a $1 million non-refundable license fee in
exchange for the patented technology and a three year commitment from us to
provide support to Femcare in its efforts to clinically test our products in
Great Britain and to achieve European regulatory approval. We have not incurred
any research and development costs associated with our support efforts to date.
As a result of the arrangement, we recognized approximately $333,000 in deferred
license fee revenue for 2000 and 2001, and 2002. In accordance with the
agreement, we will receive a royalty on net product sales generated by Femcare,
and we have the right to manufacture commercial product for Femcare. The
agreement terminates on the greater of 20 years or upon which the last of the
licensed patents expire.
10
Genencor International, Inc.
----------------------------
In December 2000, we signed a broad-based, worldwide exclusive license agreement
with Genencor International, Inc. ("Genencor") enabling Genencor to potentially
develop a wide variety of new products for industrial markets. In October 2002,
the license agreement was amended to provide Genencor with an additional
one-year option to initiate development of products in the field of non-medical
personal care. As a result of the agreements, Genencor may use our patented
protein polymer design and production technology, in combination with Genencor's
extensive gene expression, protein design, and large-scale manufacturing
technology, to design and develop new products with improved performance
properties for defined industrial fields and the field of non-medical personal
care products.
In return for the licensed rights, Genencor paid us an up-front license fee of
$750,000, and will pay royalties on the sale of any products commercialized by
Genencor under the agreement. The licensed technology was transferred to
Genencor upon execution of the license agreement without any further product
development obligation on our part. Future royalties on the net sales of
products incorporating the technology under license and developed by Genencor
will be calculated based on a royalty rate to be determined at a later date. In
addition, we are entitled to receive up to $5 million in milestone payments
associated with Genencor's achievement of various industrial product development
milestones incorporating the licensed technology. There is no limitation on the
amount of milestone payments we can receive from Genencor for Genencor's product
development in the field of non-medical personal care products. In December 2002
we received a license milestone payment of $250,000 from Genencor for Genencor's
initiation of a product development project based on technology licensed from
us.
In connection with the license agreement, Genencor was issued two warrants, each
convertible by formula into $500,000 of our common stock. The first warrant
could be converted into 442,478 shares at an exercise price of $1.13 per share.
The second warrant could be converted into 1,250,000 shares at an exercise price
of $0.40 per share. As a result of the collaboration, in 2000 we recognized
$750,000 in license fee revenue (less the issuance of warrants to purchase $1
million of our common stock valued at $319,000). The agreement terminates on the
date of expiration of the last remaining patent.
Research and Development
We currently maintain detailed project costs (direct costs plus allocated
overhead) for contractual research and development services. However, we do not
maintain cost breakdowns for our internal research and development projects due
to the extensive degree of overlap between our tissue augmentation projects such
as common manufacturing, quality control, and developmental product testing.
Our tissue augmentation product for use in cosmetic and reconstructive surgery
applications is in pilot human clinical testing. In February 2004, the Food and
Drug Administration approved a supplement to our Investigational Device
Exemption that simplifies the protocol for the pilot clinical trials and expands
the number of patients that can be included. We are implementing improvements in
the product manufacturing process to complete the pilot study. We now project
beginning pivotal clinical testing during 2005. We expect these trials,
including patient follow-up, will take approximately 15 months, and the
subsequent Food and Drug Administration review of our pre-market approval
submission may take up to an additional 12 months. Assuming this schedule is met
and the product is approved, U.S. sales are projected to begin in 2007. The
pivotal clinical trial is estimated to cost approximately $2.2 million. This
product is based on the same manufacturing technology as our product for the
treatment of female stress urinary incontinence, and thus, the incremental cost
of manufacturing development is estimated to be approximately $0.1 million.
Our product for the treatment of female stress urinary incontinence is in pilot
human clinical testing. We project beginning pivotal clinical testing during
2005. We expect these trials, including patient follow-up, will take
approximately 24 months, and the subsequent Food and Drug Administration review
of our pre-market approval submission may take an additional 12 months. Assuming
this schedule is met and the product is approved, U.S. sales of the product are
projected to begin in 2007. Commercial manufacturing process development and
completion of the clinical trials are estimated to cost approximately $10
million. Femcare, Ltd., our licensee for this product in Europe and Australia,
has advised us that commercialization of the product in Europe potentially could
occur at least one year in advance of U.S. commercialization.
Our surgical sealant product for use in lung, bowel, and cardiovascular surgery
is currently in pre-clinical testing. Assuming the pre-clinical testing results
continue to be favorable, we project filing in 2005 an Investigational Device
Exemption application with the Food and Drug Administration requesting
permission to begin human clinical testing. Until the Investigational Device
Exemption is approved by the Food and Drug Administration, we cannot predict the
timing of the completion of human clinical studies, but typically such trials
would take approximately two years to complete.
11
We currently do not have sufficient cash to complete the development of these
products. We anticipate obtaining the necessary cash either by additional equity
financings, or by sharing the cost of development with potential marketing
partners, or a combination of both methods. If we are unable to obtain the
necessary cash, it will have a material adverse effect on us.
Our spinal disc repair product being developed for our licensee, Spine Wave, is
awaiting approval to begin human clinical testing in both the United States and
overseas. The timing of this project is under the control of Spine Wave. Under
our contract with Spine Wave, we are responsible for development of the
formulated product, its manufacturing process, and product production for both
clinical trials and commercialization. Spine Wave is responsible for funding all
expenses associated with these activities. Contract revenue received from Spine
Wave is approximately equal to our cost (direct project costs plus allocated
laboratory and corporate overhead expenses) of the work performed. Total
research and development costs plus certain administrative costs, for the three
month period ended March 31, 2004 and for the period of project inception to
date are approximately $189,000 and $4,650,000 respectively.
To the extent sufficient capital resources are available, we continue to
research the use of our patented technology to produce proteins of unique design
for other tissue repair and medical device applications, principally for use in
supporting the wound healing process, including devices based on tissue
engineering, and in drug delivery devices. Our strategy for most of our programs
is to enter into collaborative development agreements with 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 payments and milestone payments, we
expect to continue incurring operating losses for the next several years.
Results of Operations
We recognized $189,000 in contract and licensing revenue for the three months
ended March 31, 2004 as compared to $451,000 for the three months ended March
31, 2003. The contract and licensing revenue for the three months ended March
31, 2004 was for research and development services for Spine Wave associated
with the development of an injectable spinal disc nucleus product for the
treatment of lower back pain. The decrease in contract revenue in the three
months ended March 31, 2004, as compared to the same period in 2003, is due to
the completion in 2003of preclinical testing of the injectable spinal disc
nucleus product in preparation for Spine Wave's filing of an Investigational
Device exemption with the Food and Drug Administration requesting permission to
initiate human clinical trials.
Interest income was $2,000 for the three months ended March 31, 2004 versus
$1,600 for the same period in 2003.
Research and development expenses for the three-month period ended March 31,
2004 were $639,000, as compared to $542,000 for the same period in 2003. The
increase in research and development expenditures primarily reflects increased
pre-clinical costs associated with the development of the spinal disc nucleus
replacement product, largely offset by some increased expenditures in
manufacturing development. We expect, in general, that our research and
development, human clinical testing and manufacturing expenses will increase
over time if our incontinence and dermal products, and other products in
development, successfully progress and additional capital is obtained.
Selling, general and administrative expenses for the three period ended March
31, 2004 were $404,000 as compared to $280,000 for the same periods in 2003. The
increased expenditures in the three months ended March 31, 2004 as compared to
the same period in 2003 were primarily increased costs for our Board of
Directors, increases in patent filing and patent maintenance fees, and business
travel. We expect that our selling, general and administrative expenses will
remain largely unchanged in the near term, but may increase in the future as
support for our research and development and manufacturing efforts require
additional resources and to the extent additional capital is obtained.
For the three months ended March 31, 2004, we recorded a net loss applicable to
common shareholders of $921,000 or $0.02 per share, as compared to a loss of
$1,744,000 or $0.06 per share for the same period in 2003 This net loss and the
net loss per share includes undeclared dividends on our preferred stock of
$69,000 and ,$1,374,000 for in the three month s ended March 31, 2004 and 2003,
respectively.
In general, there can be significant fluctuation in revenue from quarter to
quarter due to variability in outside contract and licensing payments. In
general, we expect to incur increasing operating losses in the future (to the
extent additional capital is obtained), due primarily to increases in our soft
tissue augmentation program's development, manufacturing and business
development activities, and the initiation of new tissue adhesive product
development activities. Our financial results depend on our ability to establish
strategic alliances and generate contract revenues, increased research,
development and manufacturing efforts, pre-clinical and clinical product testing
and commercialization expenditures, expenses incurred for regulatory compliance
and patent prosecution, and other factors.
12
To date we believe that inflation and changing prices have had only a modest
effect on our continuing operations. However, increases in utility costs,
insurance, and employee benefits may have a greater impact in the future.
Liquidity and Capital Resources
As of March 31, 2004, we had cash, cash equivalents and short-term investments
totaling $755,000 as compared to $1,085,000 at December 31, 2003. As of March
31, 2004, we had working capital of $595,000, compared to a working capital of
$1,192,000 at December 31, 2003.
We do not have any off balance sheet financing activities and do not have any
special purpose entities. We had no long-term capital lease obligations as of
March 31, 2004 or December 31, 2003. For the three month period ended March 31,
2004, our cash expenditures for capital equipment and leasehold improvements
totaled $1,518, compared with $3,600 for the same period in the prior year. To
the extent capital is available, we anticipate that these expenditures will be
increased in 2004 for laboratory renovations and additional equipment required
to meet the FDA's applicable Quality System regulation as we scale up our
manufacturing operations to meet product requirements for expanded clinical
testing. We may enter into capital equipment lease arrangements in the future if
available at appropriate rates and terms.
We believe our existing available cash, cash equivalents and short-term
investments as of March 31, 2004, in combination with continuing contractual
commitments will be sufficient to meet our anticipated capital requirements
until July 2004. Substantial additional capital resources will be required to
fund continuing expenditures related to our research, development, manufacturing
and business development activities. In addition we are pursuing a number of
alternatives available to meet the continuing capital requirements of our
operations, such as collaborative agreements and public or private financings.
Further, we are continuing our reimbursed services to Spine Wave. We are
currently in preliminary discussions with potential financing sources and
collaborative partners, and funding in the form of equity investments, license
fees, milestone payments or research and development payments could be
generated. There can be no assurance that any of these fundings will be
consummated in the timeframes needed for continuing operations or on terms
favorable to us. If adequate funds are not available, we will be required to
significantly curtail our operating plans and would likely have to sell or
license out significant portions of our technology, and possibly cease
operations.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures. Based on their evaluation, as of
the end of the period covered by this quarterly report, our
principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of
1934 ("Exchange Act")) are effective based on their evaluation of
these controls and procedures required by paragraph (b) of Rules
13a-15 or 15d-15 under the Exchange Act.
(b) Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Rules
13a-15 or 15d-15 under the Exchange Act that occurred during our
last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
13
PART II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a.Exhibits
31.1 Certification of Chief Executive Officer pursuant to
Securities Exchange Act Rules 13a- 14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Director of Finance (Principal Financial
Officer) pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Director of
Finance (Principal Financial Officer) pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b.Reports on Form 8-K
On March 16, 2004, the Company filed a Current Report on Form 8-K
announcing the Company's financial results for the fourth quarter and the
year ended December 31, 2003.
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PROTEIN POLYMER TECHNOLOGIES, INC.
Date: May 14, 2004 By /s/ J. Thomas Parmeter
-----------------------
J. Thomas Parmeter
Chairman of the Board, Chief
Executive Officer, President
Date: May 14, 2004 By /s/ Janis Y. Neves
-------------------
Janis Y. Neves
Director of Finance, Controller
and Assistant Secretary
15
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Securities
Exchange Act Rules 13a- 14(a)/15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Director of Finance (Principal Financial
Officer) pursuant to Securities Exchange Act Rules
13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Director of Finance
(Principal Financial Officer) pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.