Form 10-QSB for PROTEIN POLYMER TECHNOLOGIES, INC., filed
on August 17, 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
[_] 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 _____
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of August 6, 2003, 34,139,537
shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes ____ No X
---
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PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -
June 30, 2003 and December 31, 2002 ................................................ 3
Condensed Statements of Operations -
For the three months and six months ended June 30, 2003 and 2002
and the period July 6, 1988 (inception) to June 30, 2003 ........................... 4
Condensed Statements of Cash Flows -
For the six months ended June 30, 2003 and 2002
and the period July 6, 1988 (inception) to June 30, 2003 ........................... 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 2. Changes in Securities and Use of Proceeds ............................................. 14
Item 4. Submission of Matters to a Vote of Security Holders ................................... 15
Item 6. Exhibits and Reports on Form 8-K ...................................................... 16
Signatures ............................................................................ 17
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Balance Sheets
June 30, December 31,
2003 2002
----------------------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 2,443,524 $ 733,978
Contract receivable 605,196 -
Other current assets 117,616 30,773
----------------------------
Total current assets 3,166,336 764,751
Deposits 30,479 29,679
Equipment and leasehold improvements, net 101,016 80,928
----------------------------
$ 3,297,831 $ 875,358
============================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 239,215 $ 389,109
Accrued employee benefits 135,816 112,714
Other accrued expenses 31,003 49,530
Deferred rent 24,111 24,111
----------------------------
Total current liabilities 430,145 575,464
Long-term portion deferred rent 12,056 24,111
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, 5,000,000 shares authorized,
87,096 and 76,120 shares issued and outstanding at June 30, 2003 and
December 31, 2002, respectively; liquidation preference of $8,709,600
and $7,612,000 at June 30, 2003 and December 31, 2002, respectively 8,164,917 7,266,780
Common stock, $.01 par value, 120,000,000 shares authorized, 36,638,628
and 29,731,535 shares issued and outstanding at June 30, 2003 and
December 31, 2002, respectively 366,398 297,327
Additional paid-in capital 40,273,374 36,618,235
Deficit accumulated during development stage (45,949,059) (43,906,559)
----------------------------
Total stockholders' equity 2,855,630 275,783
----------------------------
$ 3,297,831 $ 875,358
============================
See accompanying notes.
3
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Operations
(unaudited)
For the period
July 6, 1988
(inception) to
Three months ended Six months ended June 30,
June 30, June 30,
2003 2002 2003 2002 2003
-------------------------------------------------------------------------------
Revenues:
Contract revenue $ 742,696 $ 943,764 $ 1,193,679 $ 1,413,342 $ 10,452,265
Interest income 9,263 2,016 10,847 3,636 1,257,794
Product and other income - - - 1,500 694,779
---------------------------- ------------------------------ -------------
Total revenues 751,959 945,780 1,204,526 1,418,478 12,404,838
Expenses:
Research and development 636,086 872,719 1,177,952 1,523,757 33,564,057
Selling, general and
administrative 415,405 377,898 695,827 666,745 19,468,208
---------------------------- ------------------------------ -------------
Total expenses 1,051,491 1,250,617 1,873,779 2,190,502 53,032,265
---------------------------- ------------------------------ -------------
Net loss (299,532) (304,837) (669,253) (772,024) (40,627,427)
Undeclared, imputed and/or paid
dividends on preferred stock 137,082 69,220 1,510,925 137,678 7,583,496
---------------------------- ------------------------------ -------------
Net loss applicable to common
shareholders $ (436,614) $ (374,057) $ (2,180,178) $ (909,702) $ (48,210,923)
===============================================================================
Basic and diluted net loss per
common share $ (0.01) $ (0.01) $ (0.07) $ (0.04)
==============================================================
Shares used in computing basic
and diluted net loss per
common share 34,037,634 27,000,455 31,926,744 25,566,557
==============================================================
See accompanying notes.
4
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
For the period
July 6, 1988
Six months ended (inception) to
June 30, June 30,
2003 2002 2003
-------------------------------------------------
Operating activities
Net loss $ (669,253) $ (772,024) $(40,627,427)
Adjustments to reconcile net loss to net cash used for
operating activities:
Stock issued for compensation and interest - - 472,676
Depreciation and amortization 34,088 87,534 2,392,472
Write-off of purchased technology - - 503,500
Changes in assets and liabilities:
Contract receivable (605,196) - (605,196)
Deposits (800) (800) (30,479)
Other current assets (86,843) 23,533 (117,616)
Accounts payable (149,894) 209,672 239,215
Accrued employee benefits 23,102 (7,963) 135,816
Other accrued expenses (18,526) (4,787) 31,005
Deferred revenue - (166,667) -
Deferred rent (12,056) (12,056) 36,166
-------------------------------------------------
Net cash used for operating activities (1,485,378) (643,558) (37,569,868)
Investing activities
Purchase of technology - - (570,000)
Purchase of equipment and improvements (54,175) (25,280) (2,051,461)
Purchases of short-term investments - - (16,161,667)
Sales of short-term investments - - 16,161,667
-------------------------------------------------
Net cash provided by (used for) investing activities $ (54,175) $ (25,280) $ (2,621,461)
See accompanying notes.
5
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
For the period
July 6, 1988
Six months ended (inception) to
June 30, June 30,
2003 2002 2003
-------------------------------------------
Financing activities
Net proceeds from exercise of options and warrants,
and sale of common stock $ 359,449 $ 1,001,834 $ 23,215,525
Net proceeds from issuance and conversion of preferred
stock 2,889,650 - 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 3,249,099 1,001,834 42,634,853
-------------------------------------------
Net increase in cash and cash equivalents 1,709,546 332,996 2,443,524
Cash and cash equivalents at beginning of period 733,978 234,271 -
-------------------------------------------
Cash and cash equivalents at end of period $ 2,443,524 $ 567,267 $ 2,443,524
===========================================
Supplemental disclosures of cash flow information
Equipment purchased by capital leases - - $ 288,772
Interest paid - 723 146,775
Imputed dividend on Series E stock - - 3,266,250
Imputed dividend on Series I stock 1,373,247 - 1,373,247
Conversion of Series D preferred stock to common stock - - 2,142,332
Conversion of Series E preferred stock to common stock 1,921,513 643,750 5,277,813
Conversion of Series G preferred stock to common stock 15,000 570,000 585,000
Conversion of Series I preferred stock to common stock 55,000 - 55,000
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)
June 30, 2003
1. Basis of Presentation
The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three months and the six months ended June 30, 2003 and 2002
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 June 30, 2003 and the
results of operations for the three months and the six months ended June 30,
2003 and 2002. The results of operations for the six months ended June 30, 2003
are not necessarily indicative of the results to be expected for the year ended
December 31, 2003. 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, 2002, filed with the Securities and Exchange Commission.
2. New Accounting Pronouncements
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amends SFAS 123, "Accounting
for Stock-Based Compensation." SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirement of SFAS 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation, regardless of which accounting method is used to account for
stock-based compensation. The transition guidance and annual disclosure
provisions of SFAS 148 are effective for fiscal years ending after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. The Company has adopted the disclosure requirements of SFAS 148 as
described in Footnote 6.
3. 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 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.
4. Issuance of Preferred Stock
On March 25 and May 12, 2003, we raised approximately $3.25 million from the
sale of 32,550 shares of our Series I Convertible Preferred Stock ("Series I
Stock") priced at $100 per share, with warrants to purchase an aggregate of
2,582,669 shares of common stock to a small group of institutional and
accredited investors. Each share of Series I Stock is convertible at any time at
the election of the holder into approximately 181 shares of common stock at a
conversion price of $0.55 per share, subject to certain anti-dilution
adjustments. In connection with this transaction, we recorded a non-cash
"imputed dividend" expense of $1,373,247 in order to account for the difference
between the fair market value of the common stock and the conversion price of
the preferred stock into common stock.
We intend to use the net proceeds for general corporate and working capital
purposes.
Each share of Series I Stock received two common stock warrants. One warrant is
exercisable at any time for 27 shares of common stock at an exercise price of
$0.88 per share, and expires 18 months after the close of the offering; the
other warrant is exercisable at any time for 18 shares of common stock at an
exercise price of $1.65 per share, and expires 48 months after the close of the
offering. In connection with the issuance of the Series I Stock, additional
warrants to purchase 819,543 shares of common stock at an exercise price of
$0.65 per share, expiring 18 months after the close of the offering were issued,
as well as
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warrants to purchase 204,998 shares of common stock at an exercise price of
$0.58 per share, warrants to purchase 27,340 shares of common stock at an
exercise price of $0.68 per share, warrants to purchase 30,748 shares of common
stock at an exercise price of $0.92 per share and warrants to purchase 20,500
shares of common stock at an exercise price of $1.73 per share, each expiring 5
years after the close of the offering.
No underwriters were engaged by us 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.
5. Exercise and Exchange of Warrants
In June 2003, certain holders of warrants exercised their warrants to purchase
common stock, these warrants were due to expire in August 2003. The exercise
prices of such warrants were $0.40 and $0.10 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 $353,500. The newly issued warrants will
expire on the last day of September 2003.
6. Accounting for Stock-Based Compensation
As allowed by Statement No. 123, Accounting for Stock-Based Compensation, we
account for stock compensation arrangements with employees using the intrinsic
value method under the provisions of the Accounting Principles Board's Opinion
No. 25, Accounting for Stock Issued to Employees. Deferred stock-based
compensation is amortized over the vesting period, which is generally three to
five years, utilizing the accelerated method prescribed in FASB Interpretation
No. 28. Pro Forma stock compensation in accordance with Statement No. 123 is
amortized using the straight-line method over the vesting period.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of Statement No. 123:
For the three months For the six months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss:
As reported (436,614) (374,057) (2,180,178) $ (909,702)
Total stock-based employee compensation expense
determined under fair value based methods for
all options, net of related tax effects (53,869) (7,768) (76,663) (18,794)
Pro forma net loss $(490,483) (381,825) (2,256,841) $ (928,496)
Basic and diluted net loss per share:
As reported 0.01 0.01 0.07 0.04
Pro forma 0.01 0.01 0.08 0.04
7. Liquidity
We believe our existing available cash and cash equivalents as of June 30, 2003,
plus contractual amounts receivable, is sufficient to meet our anticipated
capital requirements until April 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.
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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 June 30, 2003 had an accumulated deficit of $(45,949,000).
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 urethral tissue for the treatment of female stress incontinence and
in dermal tissue for cosmetic and reconstructive procedures, and tissue adhesive
formulations for the repair of spinal discs damaged due of injury or aging. 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.
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Spine Wave
In April 2001, we entered into agreements with Spine Wave, Inc. ("Spine Wave"),
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. 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.
The shares of founding common stock are subject to a vesting schedule consisting
of three triggers corresponding to Spine Wave's progress in commercializing
products using the licensed technology. Unvested shares of founding common stock
are subject to repurchase by Spine Wave at the original purchase price.
One-third of the shares of founding common stock vest on or after each trigger.
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 year ended December 31, 2002 and for the period ended
June 30, 2003 we recognized $2,427,000 and $1,194,000, 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 also priced at $0.50 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 June 30, 2003, the first of the
three performance goals had been met.
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.
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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 product for the treatment of female stress urinary incontinence is in pilot
human clinical testing. We project beginning pivotal clinical testing during
2004. 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 2006. 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 can
occur at least one year in advance of U.S. commercialization.
Our tissue augmentation product for use in cosmetic and reconstructive surgery
applications is in pilot human clinical testing. We project beginning pivotal
clinical testing during 2004. 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 late 2005. 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.
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
in pre-clinical testing. 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 June 30, 2003 and for the period of
project inception to date are approximately $743,000 and $4,071,000
respectively.
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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 $743,000 in contract and licensing revenue for the three months
ended June 30, 2003 as compared to $944,000 for the three months ended June 30,
2002. For the six month period ended June 30, 2003, we recognized $1,194,000 in
contract and licensing income as compared to $1,413,000 for the same period in
2002. The contract and licensing revenue for the three months ended June 30,
2003 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 whereas contract and licensing revenue for the same period in
2002 also included $83,000 and $167,000 respectively in amortized revenue from a
$1 million up-front license payment (being recognized ratably over a period of
three years) from Femcare for the commercial rights to our incontinence product
in Europe and Australia. The amortization of the $1 million dollar payment
terminated on December 31, 2002. The decrease in contract revenue in 2003 is due
to the reduction in preclinical testing of the injectable spinal disc nucleus
product in preparation for Spine Wave filing an Investigational Device exemption
with the Food and Drug Administration requesting permission to initiate human
clinical trials.
Interest income was $9,000 and $11,000 respectively for the three months and six
months ended June 30, 2003 versus $2,000 and $4,000 respectively for the same
periods in 2002.
Research and development expenses for the three and six-month periods ended June
30, 2003 were $636,000 and $1,178,000 respectively, as compared to $873,000 and
$1,524,000 for the same periods in 2002. The decrease in research and
development expenditures for the three and six month periods in 2003 primarily
reflects reduced pre-clinical costs associated with the development of the
spinal disc nucleus replacement product. 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 and six month periods
ended June 30, 2003 were $415,000 and $696,000 respectively as compared to
$378,000 and $667,000 respectively for the same periods in 2002. 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 June 30, 2003, we recorded a net loss applicable to
common shareholders of $437,000 or $0.01 per share, as compared to a loss of
$374,000, or $0.01 per share for the same period in 2002. For the six months
ended June 30, 2003, we recorded a net loss applicable to common shareholders of
$2,180,000 or $0.07 per share, as compared to a loss of $910,000, or $0.04 per
share for the same period in 2002. Included in the net loss per share for the
six months ended June 30, 2003 is a one-time, non-cash "imputed dividend" of
$1,373,000 from the sale and issuance of our Series I Preferred Stock which
raised approximately $3.25 million less expenses (see Note 4 to the Financial
Statements). The net loss and the net loss per share also included in each of
the three month and the six-month periods of 2003 and 2002 $68,000 and $137,000
for undeclared dividends related to our preferred stock. Excluding the effect of
the imputed dividends, the net loss applicable to common shareholders would have
been $807,000 ($.03 per share) for the six months ended June 30, 2003.
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.
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.
12
Liquidity and Capital Resources
As of June 30, 2003, we had cash, cash equivalents and short-term investments
totaling $2,444,000 as compared to $734,000 at December 31, 2002. As of June 30,
2003, we had working capital of $2,736,000, compared to a working capital of
$189,000 at December 31, 2002.
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
June 30, 2003 or December 31, 2002. For the three month period ended June 30,
2003, our cash expenditures for capital equipment and leasehold improvements
totaled $(54,175), compared with $(25,280) for the same period in the prior
year. To the extent capital is available, we anticipate that these expenditures
will be increased in 2003 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 June 30, 2003, in combination with continuing contractual
commitments will be sufficient to meet our anticipated capital requirements
until April of 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) Evaluation of 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) Changes in 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 2. Changes in Securities and Use of Proceeds
On March 25 and May 12, 2003, we raised approximately $3.25 million
from the sale of 32,550 shares of our Series I Convertible Preferred
Stock ("Series I Stock") priced at $100 per share, with warrants to
purchase an aggregate of 2,582,669 shares of common stock to a small
group of institutional and accredited investors. Each share of Series
I Stock is convertible at any time at the election of the holder into
approximately 181 shares of common stock at a conversion price of
$0.55 per share, subject to certain anti-dilution adjustments. In
connection with this transaction, we recorded a non-cash "imputed
dividend" expense of $1,373,000 in order to account for the
difference between the fair market value of the common stock and the
conversion price of the preferred stock into common stock.
We intend to use the net proceeds for general corporate and working
capital purposes.
Each share of Series I Stock received two common stock warrants. One
warrant is exercisable at any time for 27 shares of common stock at
an exercise price of $0.88 per share, and expires 18 months after the
close of the offering; the other warrant is exercisable at any time
for 18 shares of common stock at an exercise price of $1.65 per
share, and expires 48 months after the close of the offering. In
connection with the issuance of the Series I Stock, additional
warrants to purchase 819,543 shares of common stock at an exercise
price of $0.65 per share, expiring 18 months after the close of the
offering were issued, as well as warrants to purchase 204,998 shares
of common stock at an exercise price of $0.58 per share, warrants to
purchase 27,340 shares of common stock at an exercise price of $0.68
per share, warrants to purchase 30,748 shares of common stock at an
exercise price of $0.92 per share and warrants to purchase 20,500
shares of common stock at an exercise price of $1.73 per share, each
expiring 5 years after the close of the offering.
No underwriters were engaged by us 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
registration statement covering resales of the shares of common stock
underlying the Series I Stock and the warrants became effective on
June 6, 2003.
14
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on April 25, 2003.
Proposals I, II, III, IV and V were approved. The results are as
follows:
Proposal I
The following directors were elected at the meeting to serve a one-year
term as directors:
Authority
For Withheld
J. Thomas Parmeter 24,189,520 0
George R. Walker 24,189,520 0
Philip J. Davis 24,189,520 0
Edward J. Hartnett 24,189,520 0
Phillip M. Berman 24,189,520 0
Kerry L. Kuhn 24,189,520 0
Edward G. Cape 24,189,520 0
Proposal II
Approval of the Amendment to the Certificate of Incorporation to
increase the number of authorized shares of Common Stock:
Broker
For Against Abstained Non-Vote
------------------------------ --------- ----------- ----------
24,188,320 1,200 0 0
Proposal III
Approval of the Amendment to the 2002 Stock Option Plan to increase the
number of shares of Common Stock reserved for issuance under the Plan
from 1,500,000 to 9,000,000:
Broker
For Against Abstained Non-Vote
------------------------------ --------- ----------- ----------
18,257,103 235,668 7,400 5,689,349
Proposal IV
Approval of the Amendment to the 1996 Non-employee Directors Stock
Option Plan to increase the number of shares of common stock reserved
for issuance under the Plan from 250,000 to 1,750,000:
Broker
For Against Abstained Non-Vote
------------------------------ --------- ----------- ----------
18,242,803 226,868 30,500 5,689,349
Proposal V
Ratification of appointment of Peterson & Co. as the Company's
independent auditors for fiscal year 2003:
Broker
For Against Abstained Non-Vote
------------------------------ --------- ----------- ----------
24,189,520 0 0 0
15
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Amended and Restated Securities Purchase Agreement related
to the sale of Series I Preferred Stock dated as of May 12,
2003.
10.2 Form of $0.55 warrant issued in connection with the exchange
of warrants.
31.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, 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 18 U.S.C. Section 1350, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of 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
None.
16
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: August 14, 2003 By /s/ J. Thomas Parmeter
----------------------
J. Thomas Parmeter
Chairman of the Board, Chief
Executive Officer, President
Date: August 14, 2003 By /s/ Janis Y. Neves
------------------
Janis Y. Neves
Director of Finance, Controller
and Assistant Secretary
17
EXHIBIT INDEX
Exhibit
Number Description
10.1 Amended and Restated Securities Purchase Agreement related to the
sale of Series I Preferred Stock dated as of May 12, 2003.
10.2 Form of $0.55 warrant issued in connection with the exchange of
warrants.
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, 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 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of 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.
