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, 2006
[ ] 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)
(former name, former address and former fiscal year, if changed
since last report)
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
---- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
-------- ----
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 14, 2006, 67,424,919
shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
------ ------
1
Protein Polymer Technologies, Inc.
FORM 10-QSB
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets
As of June 30, 2006 and December 31, 2005 .................................................3
Statements of Operations
For the three months and six months ended June 30, 2006 and 2005...........................4
Statements of Cash Flows
For the six months ended June 30, 2006 and 2005 ...........................................5
Notes to Financial Statements.......................................................................6
Item 2. Management's Discussion and Analysis or Plan of Operation ............................................13
Item 3. Controls and Procedures...............................................................................20
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........................................21
Item 6. Exhibits..............................................................................................21
Signatures............................................................................................22
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Protein Polymer Technologies, Inc.
Balance Sheets
(unaudited)
June 30, December 31,
2006 2005
--------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 68,539 $ 1,211,748
Contract receivable 192,686 113,792
Current portion of rent receivable 46,051 88,477
Prepaid expenses and other assets 31,018 32,440
--------------------------------------
Total current assets 338,294 1,446,457
Deposits 30,479 29,679
Notes receivable 249,942 242,884
Rent receivable, net of current portion and reserve of $128,273 at June 30, 2006
and December 31, 2005 - 26,050
Technology license agreement 1,078,774 1,106,435
Equipment and leasehold improvements, net 275,119 292,778
--------------------------------------
Total assets $ 1,972,608 $ 3,144,283
======================================
Liabilities and stockholders' (deficit) equity Current liabilities:
Accounts payable $ 1,364,715 420,672
Accrued expenses 355,015 381,139
Current maturities of notes payable 1,028,800 195,565
--------------------------------------
Total current liabilities 2,748,530 997,376
Notes payable, net of current maturities 436,970 323,506
Deferred rent 13,245 8,820
--------------------------------------
Total liabilities 3,198,745 1,329,702
--------------------------------------
Stockholders' (deficit) equity:
Convertible preferred stock, $.01 par value; 5,000,000 shares authorized;
65,645 and 66,045 shares issued and outstanding at June 30, 2006 and
December 31, 2005, respectively - liquidation preference of $6,564,500 and
$6,604,500 at June 30, 2006 and December 31, 2005, respectively 6,019,917 6,059,917
Common stock, $.01 par value; 225,000,000 shares authorized, 67,409,204
shares issued and outstanding at June 30, 2006 and 120,000,000 shares
authorized, 67,311,408 shares issued and outstanding at December 31, 2005 674,104 673,125
Additional paid-in capital 55,664,522 54,122,000
Accumulated deficit (63,584,680) (59,040,461)
--------------------------------------
Total stockholders' (deficit) equity (1,226,137) 1,814,581
--------------------------------------
Total liabilities and stockholders' (deficit) equity $ 1,972,608 $ 3,144,283
======================================
See accompanying notes.
3
Protein Polymer Technologies, Inc.
Statements of Operations
(unaudited)
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
----------------------------------------------------------------------------------------------------------------------------
Revenues:
Contract revenue $ 189,613 $ 145,225 $ 410,532 $ 657,996
Product and other income 18,616 430 37,174 1,101
-------------------- ------------------ ------------------- -------------------
Total revenues 208,229 145,655 447,706 659,097
-------------------- ------------------ ------------------- -------------------
Operating Expenses:
Cost of sales 838 - 1,640 -
Research and development 1,148,418 692,408 2,184,858 1,248,376
Selling, general and administrative 729,902 1,886,704 2,617,214 2,279,997
-------------------- ------------------ ------------------- -------------------
Total expenses 1,879,158 2,579,112 4,803,712 3,528,373
-------------------- ------------------ ------------------- -------------------
Loss from operations (1,670,929) (2,433,457) (4,356,006) (2,869,276)
-------------------- ------------------ ------------------- -------------------
Other income (expense):
Interest income 56 16,122 2,580 16,201
Interest expense (90,941) (249) (101,842) (86,874)
-------------------- ------------------ ------------------- -------------------
Total other expense (90,885) 15,873 (99,262) (70,673)
-------------------- ------------------ ------------------- -------------------
Net loss (1,761,814) (2,417,584) (4,455,268) (2,939,949)
Undeclared, imputed and/or paid
dividends on preferred stock 69,220 69,220 226,628 619,261
-------------------- ------------------ ------------------- -------------------
Net loss applicable to common
shareholders $ (1,831,034) (2,486,804) $ (4,681,896) $ (3,559,210)
==================== ================== =================== ===================
Basic and diluted net loss per common
share $ (0.03) (0.04) $ (0.07) $ (0.07)
==================== ================== =================== ===================
Shares used in computing basic and
diluted net loss per common share 67,350,633 59,687,009 67,331,227 50,044,186
==================== ================== =================== ===================
See accompanying notes.
4
Protein Polymer Technologies, Inc.
Statements of Cash Flows
(unaudited)
Six months ended
June 30,
2006 2005
------------------ -----------------
Operating activities
Net loss $ (4,455,268) $ (2,939,949)
Adjustments to reconcile net loss to net cash used for operating activities:
Warrants issued for services - 1,245,295
Depreciation and amortization 80,960 16,173
Share based compensation expense 1,341,765 -
Amortization of discounts on notes payable - 56,493
Amortization of loan fees 69,608 -
Changes in operating assets and liabilities:
Deposits (800) (800)
Prepaid expenses 1,422 (38,467)
Rent receivable 58,428 20,000
Contracts receivable (68,846) (100,225)
Accounts payable 944,042 26,885
Deposits payable - (33,000)
Accrued expenses (26,123) 24,351
Deferred revenue - (102,784)
Deferred rent 4,425 -
------------------ -----------------
Net cash used for operating activities (2,050,387) (1,826,028)
Investing activities
Purchase of equipment and improvements (35,641) (121,242)
Issuance of notes receivable (7,058) -
------------------ -----------------
Net cash used for investing activities (42,699) (121,242)
Financing activities
Net proceeds from exercise of options and warrants
and sale of common stock 3,177 6,422,053
Net proceeds from issuance of secured note 946,700 -
Net proceeds from issuance of debt - related party - 260,000
Payments on notes payable - related party - (150,000)
------------------ -----------------
Net cash provided by financing activities 949,877 6,532,533
------------------ -----------------
Net increase (decrease) in cash and cash equivalents (1,143,209) 4,584,783
Cash and cash equivalents at beginning of the period 1,211,748 82,222
------------------ -----------------
Cash and cash equivalents at end of the period $ 68,539 $ 4,667,005
================== =================
Supplemental disclosures of cash flow information
Interest paid $ 3,282 $ 86,874
Non cash investing and financing activity
Imputed dividend on extension of warrants $ 88,950 $ -
Conversion of Series G preferred stock to common stock $ 40,000 $ 20,000
Conversion of Series I preferred stock to common stock $ - $ 1,650,000
Conversion of notes payable and accrued interest to common stock and warrants $ - $ 1,213,855
Imputed dividend on warrant repricing $ - $ 481,522
Warrants issued for loan fees $ 69,608 $ 608,371
See accompanying notes.
5
Protein Polymer Technologies, Inc.
Notes to Unaudited Financial Statements
Note 1. Basis of Presentation
Interim Financial Statements
The financial statements of Protein Polymer Technologies, Inc. (the "Company")
for the three and six months ended June 30, 2006 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, results of operations and cash flows for the interim
period presented. The balance sheet as of December 31, 2005 was derived from the
Company's audited financial statements. The results of operations for the three
and six months ended June 30, 2006 are not necessarily indicative of the results
to be expected for the year ending December 31, 2006. These financial statements
and the notes thereto should be read in conjunction with the audited financial
statements included in our Annual Report on Form 10KSB and 10KSB/A for the year
ended December 31, 2005, filed with the Securities and Exchange Commission.
Going Concern and Liquidity
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. For the six months ended June 30,
2006, the Company incurred a net loss of approximately $4,455,000. As of June
30, 2006 we have a working capital deficit of approximately $2.4 million. Our
cash and cash equivalents of approximately $68,000 in combination with (i) the
balance remaining from a secured loan that provides for advances aggregating
$1,500,000 which is due in October, 2006, as amended, and (ii) anticipated
additional contract and license payments, will be sufficient to meet our
anticipated capital requirements only through the end of September 2006.
Prior to the commercialization of its products, substantial additional capital
resources will be required to fund continuing operations related to the
Company's research, development, manufacturing, clinical testing, 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.
Further, the Company is currently in discussions with several potential
financing sources and collaborative partners and funding in the form of equity
investments, debt instruments, license fees, milestone payments or research and
development payments could be generated. There can be no assurance that any of
these potential sources of funds will be realized in the time frames needed for
continuing operations or on terms favorable to the Company. If adequate funds in
the future 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, or obtain a secured
private financing or possibly cease operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Note 2. Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standard ("SFAS") No. 155, Accounting for
Certain Hybrid Financial Instruments, ("SFAS No. 155"). SFAS No. 155 is an
amendment of SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 155 establishes,
among other items, the accounting for certain derivative instruments embedded
within other types of financial instruments; and, eliminates a restriction on
the passive derivative instruments that a qualifying special-purpose entity may
hold. Effective for the Company beginning January 1, 2007, SFAS No. 155 is not
expected to have any impact on the Company's financial position, results of
operations or cash flows.
In March 2006, the FASB released SFAS No. 156, Accounting for Servicing of
Financial Assets, an amendment of SFAS Statement No. 140, ("SFAS No. 156"). SFAS
No. 156 amends SFAS No. 140 to require that all separately recognized servicing
assets and liabilities in accordance with SFAS No. 140 be initially measured at
fair value, if practicable. Furthermore, this standard permits, but does not
require, fair value measurement for separately recognized servicing assets and
liabilities in subsequent reporting periods. SFAS No. 156 is also effective for
the Company beginning January 1, 2007; however, the standard is not expected to
have an impact on the Company's financial position, results of operation or cash
flows.
In the first quarter of 2006, the Company adopted SFAS No. 154, Accounting for
Changes and Error Corrections--a replacement of Accounting Principals Board
(APB) Opinion No. 20 and SFAS Statement No. 3 , ("SFAS No. 154") which changed
the requirements for the accounting for and reporting of a voluntary change in
accounting principle. The Company also adopted Statement No. 151, Inventory
Costs--an amendment of ARB No. 43, Chapter 4 ("SFAS No. 151") which, among other
changes, requires certain abnormal expenditures to be recognized as expenses in
the current period versus capitalized as a component of inventory. The adoption
of SFAS No. 154 did not impact the results presented and the impact on any
future periods will depend on the nature and significance of any future
accounting changes subject to the provisions of the statement. The adoption of
SFAS No. 151 did not have any impact on the Company's financial position,
results of operations or cash flows.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty
in Income Taxes - an interpretation of FASB Statement No. 109, ("FIN 48"). FIN
48 clarifies the accounting for uncertainty in tax positions and requires that a
Company recognize in its financial statements the impact of a tax position, if
that position is more likely than not of being sustained on audit, based on the
technical merits of the position. The provisions of FIN 48 are effective for
fiscal years beginning after December 15, 2006. The adoption of FIN 48 is not
expected to have any impact on the Company's financial position, results of
operations or cashflows.
6
Protein Polymer Technologies, Inc.
Notes to Unaudited Financial Statements
Note 3. Accounting for Stock-Based Compensation
On January 1, 2006, the Company adopted SFAS No.123 (Revised 2004), "Share Based
Payment," ("SFAS 123R"), using the modified prospective method. In accordance
with SFAS No. 123R, the Company measures the cost of employee services received
in exchange for an award of equity instruments based on the grant-date fair
value of the award. That cost is recognized over the period during which an
employee is required to provide service in exchange for the award - the
requisite service period. The Company determines the grant-date fair value of
employee share options using the Black-Scholes option-pricing model.
Under the modified prospective approach, SFAS No. 123R applies to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized for the first quarter of fiscal 2006 includes
compensation cost for all share-based payments granted prior to, but not yet
vested on, January 1, 2006, based on the grant-date fair value estimated in
accordance with the pro forma provisions of SFAS No. 123R, and compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123R. Prior periods were not restated to reflect the impact of adopting the new
standard. During the three and six month periods ended June 30, 2006, the
Company recorded $303,000 and $1,342,000, respectively in non-cash charges for
the implementation of SFAS No. 123R. As of June 30, 2006, there was
approximately $359,000 of total unrecognized compensation costs related to
unvested options.
The Company has granted an option to purchase 330,000 shares of common stock
during 2006. The fair value of stock options granted in 2005 and 2006 were
estimated using the Black-Scholes model with the following assumptions: expected
volatilities ranging from 90% to of 210%, expected term of 3 years, risk-free
interest rates ranging from 3.50% to 5.08%, and expected dividend yield of 0%.
Expected volatility is based on the historical volatilities of the Company's
common stock. The expected life of employee stock options is determined using
historical data of employee exercises and represents the period of time that
stock options are expected to be outstanding. The risk free interest rate is
based on U.S. Treasury constant maturity for the expected life of the stock
option.
7
Protein Polymer Technologies, Inc.
Notes to Unaudited Financial Statements
The following table summarizes the stock option transactions during the six
months ended June 30, 2006:
-----------------------------------------------------------
Weighted
average
Weighted remaining
Average contractual
Exercise life
Shares Price (in years)
----------------- --------------- -----------------
Options outstanding at January 1, 2006 12,638,082 $0.72 7.93
Options granted 330,000 $0.20 -
Options exercised - - -
Options terminated (388,500) $1.56 -
Options outstanding at June 30, 2006 12,579,582 $0.66 6.91
Options exercisable at June 30, 2006 11,170,185 $0.70 6.73
Prior to January 1, 2006, the Company accounted for stock-based compensation
using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Had compensation
cost for the plan been determined based on the fair value of the options at the
grant dates consistent with the method of SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of SFAS No.
123," the Company's net earnings and earnings per share would have been:
For the Three For the Six
Month Ended Month Ended
June 30, 2005 June 30, 2005
Net loss available to common shareholders $ (2,486,804) $ (3,559,210)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (149,112) (272,764)
--------------- -----------------
Pro forma net loss $ (2,635,916) $ (3,831,974)
=============== =================
Basic and diluted loss per share $(0.04) $(0.07)
=============== =================
Pro forma basic and diluted loss per share $(0.04) $(0.08)
=============== =================
The pro forma compensation costs presented above were determined using the
weighted average fair values of options granted under the Company's stock option
plans. The fair value of the grants was estimated using the Black-Scholes option
pricing model with the following weighted-average assumptions. The assumptions
utilized for 2005 were:
Expected life 3
Risk-free interest rate 3.50%
Dividend yield -
Volatility 210%
8
Protein Polymer Technologies, Inc.
Notes to Unaudited Financial Statements
Note 4. Revenue 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. Revenue from product sales is
recognized at the time product is shipped.
Note 5. Promissory Notes Receivable
On July 12, 2005, the Company entered into a non-binding letter of intent to
acquire Surgica Corporation, a medical device company that develops,
manufactures and markets embolization products. The letter of intent was
extended by mutual agreement until December 12, 2005. On December 19, 2005, the
Company entered into a technology license agreement with Surgica (see Note 10)
As specified in the Letter of Intent, the Company agreed to advance Surgica
certain funds for on-going operations in return for Promissory Notes. As of June
30, 2006, the Company had loaned Surgica a total of $238,000. The Promissory
Notes are due and payable on January 5, 2008. Interest on the unpaid balance of
each Promissory Note accrues at the rate of 6.00% per annum, payable annually on
the 5th day of January, from the date of issuance through the date that the
principal of the Promissory Note is paid in full. As of June 30, 2006, Surgica
accrued $12,100 in interest receivable.
Note 6. Rent Receivable
The Company subleases 6,183 square feet of its office and research facilities
under a month to month arrangement for $13,000 per month plus utilities. From
December 2002 until July 2004, the sub-lessee was unable to make monthly rental
payments as the result of funding deficiencies. In August 2004 the sub-lessee
resumed making rental payments and as of September 2004 an additional $5,000 per
month is being paid as credit against previous rental obligations. Obligations
under the sublease are secured by certain listed property and equipment of the
sub-lessee. At June 30, 2006 the current portion due from the sub-lessee was
$46,100 and the long-term portion was $128,000 and an allowance for
collectibility of $128,000.
Note 7. Equipment and Leasehold Improvements
Equipment and leasehold improvements at June 30, 2006 are comprised of the
following:
June 30, December 31,
2006 2005
--------------- -----------------
Laboratory equipment $ 1,376,000 $ 1,375,000
Office equipment 220,000 218,000
Leasehold improvements 361,000 329,000
--------------- -----------------
1,957,000 1,922,000
Less accumulated depreciation and amortization (1,682,000) (1,629,000)
--------------- -----------------
$ 275,000 $ 293,000
=============== =================
Depreciation expense was $26,000 and $53,000 for the three and six months ended
June 30, 2006, respectively.
Note 8. Warrants
In January 2004, certain holders of warrants issued in conjunction with the sale
of the Company's Series G convertible preferred stock exercised their warrants
to purchase 855,303 shares of the Company's common stock. These warrants were
due to expire on January 31, 2005. The exercise price of such warrants was $0.55
per share. In order to induce the warrant
9
Protein Polymer Technologies, Inc.
Notes to Unaudited Financial Statements
holders to exercise their warrants prior to the expiration date, the Company
offered to reduce the exercise price of the warrants from $0.55 to $0.33 per
share and offered each warrant holder a new warrant, for the same number of
shares of the Company's common stock, at an exercise price of $0.50 per share.
As a result, the Company raised $282,000. The newly issued warrants were set to
expire January 31, 2006. In connection with the repricing and issuance of
additional warrants to the investors, the Company recorded an imputed dividend
of $482,000 during the first quarter of 2005 to reflect the additional benefit
created for such investors. The newly issued warrants' expiration date was
extended from January 31, 2006 to January 31, 2007. The Company recorded an
imputed dividend of $89,000 in the quarter ending March 31, 2006 to reflect the
additional benefit created for the investors.
In connection with the issuance of the secured promissory note in April 2006 the
Company granted the note holder a warrant, which expires on April 30, 2009, to
purchase an aggregate of 500,000 shares of the Company's common stock at an
exercise price of $0.30 per share. The Company recognized the warrant's imputed
fair market of approximately $70,000 as additional interest expense during the
quarter ended June 30, 2006.
Note 9. Notes Payable
On December 19, 2005, in connection with the Surgica License Agreement, the
Company assumed several notes payable agreements. The notes bear interest at
rates ranging from 6% to 10%, and mature at various dates through January 2009.
On April 21, 2006, the Company entered into a Security Agreement and a secured
promissory note, each dated as of April 13, 2006, with an accredited investor
pursuant to which the investor loaned the Company a total of $1,000,000
($500,000 in cash and an additional $500,000 deposited with an escrow agent as a
line of credit) in exchange for (i) a warrant to purchase 500,000 shares of the
Company's commons stock (see Note 8) and (ii) a continuing security interest in
and a general lien upon (A) 1,000,000 shares of Spine Wave, Inc. ("SWI") common
stock owned by the Company; (B) a warrant, expiring April 30, 2009, to purchase
1,000,000 shares of Spine Wave, Inc. common stock owned by the Company currently
set to expire September 21, 2006; and (C) all U.S. patents owned. The secured
promissory note is due on July 7, 2006. At June 30, 2006 the outstanding
advances to date were $946,700.
Pursuant to the terms of the Security Agreement, the Company entered into a
patent security agreement, an escrow agreement, patent assignment, and a
registration rights agreement, each dated as of April 13, 2006. According to the
terms of the Security Agreement, the Company entered into the Escrow Agreement
with an escrow agent for the investor. The Escrow Agreement provides for the
disbursement of the funds held in escrow for application to Company expenses at
the sole discretion of the investor's designee. The Escrow Agreement terminates
upon the event that the amount borrowed is paid in full and no event of default
has occurred.
During July and August, 2006 the Promissory Note was amended to provide for the
extension of the note's maturity to October 10, 2006 and increase the maximum
borrowings under the Security Agreement to $1,500,000. In connection with these
amendments the Company agreed to pay an additional $30,000 of interest.
As of June 30, 2006 the current and long term note balances were $1,029,000 and
$437,000, respectively.
Quarter ending Notes payable
June 30, Maturities
--------------------- ---------------
2007 $ 1,029,000
2008 88,000
2009 349,000
---------------
Total maturities $ 1,466,000
===============
10
Protein Polymer Technologies, Inc.
Notes to Unaudited Financial Statements
Note 10. Technology License Agreement
On December 19, 2005, the Company entered into a License Agreement with Surgica
Corporation ("Surgica"), a medical device company that develops, manufactures
and markets embolization products. Embolization is a minimally invasive
procedure, generally performed by interventional radiologists, used to treat
uterine fibroids, liver cancer and neurovascular malformations. Pursuant to the
License Agreement, the Company acquired exclusive marketing and distribution
rights to Surgica's three embolization products, one issued patent, and
technical and market know-how. Concurrent with the signing of the License
Agreement, the Company closed a previously entered into Asset Purchase Option
Agreement ("Option Agreement") and entered into a Supply and Services Agreement
("Supply Agreement") with Surgica (See Note 12).
The Company capitalized a total of approximately $1,106,000 in connection with
this agreement based on cash consideration paid in the amount of $385,000, the
assumption of certain liabilities of Surgica totaling $521,000 and
indemnification of contingent liabilities up to a maximum of $200,000. Under the
terms of the License Agreement, the agreement will continue, unless terminated
earlier in accordance with its terms, for twenty (20) years.
Furthermore, the agreement provides that the License Agreement shall
automatically terminate and be effectively assigned to the Company if the
Company exercises its option to purchase the assets of the Licensor under the
Option Agreement, and that in the event the Company does not exercise this
option, the parties shall negotiate in good faith for the re-conveyance of the
license to the Licensor. The total capitalized amount is being amortized on a
straight line basis over the initial twenty (20) year term of the License
Agreement, with amortization commencing on January 1, 2006.
In addition to the cash payments and assumption of certain liabilities, the
License Agreement provides for Surgica to receive a royalty of twenty-five
percent (25%) of net profits, if any, on revenues generated by the sale by the
Company of Surgica products.
Technology license agreement consists of the following at June 30, 2006 :
Technology license agreement $ 1,106,000
Less accumulated amortization (27,000)
----------
$ 1,079,000
==========
Amortization expense was $14,000 and $27,000 for the three and six ended June
30, 2006, respectively.
Note 11. Contracts Receivable
Under an existing Supply and Services agreement with Spine Wave Corporation, the
Company provides various research and development services for Spine Wave
including the production of product used in Spine Wave's clinical trials. These
services are billed upon the completion of various agreed upon work products. On
June 30, 2006, the Company had outstanding Spine Wave invoices in the amount of
approximately $193,000.
Note 12. Commitments
Indemnification Against Claims related to License Agreement
In connection with the License Agreement (See Note 10), the Company agreed to
indemnify Surgica for up to $200,000 in connection with claims by the Sapphire
Group LLC for fees owed pursuant to an Engagement Letter entered into between
Surgica and the Sapphire Group LLC, as a result of agreements entered into
between Surgica and the Company. A former Director of the Company is a principal
of the Sapphire Group LLC.
Asset Purchase Option Agreement
On December 19, 2005 the Company closed the Option Agreement that had been
entered into with Surgica on November 23, 2005. Under the terms of the Option
Agreement, the Company has the right to acquire substantially all of the assets
of Surgica for 2,000,000 shares of the Company's common stock and a potential
future incentive issuance of additional shares of the Company's common stock ("
Earn-out Shares"), based on the future sales performance of Surgica's products
during
11
the first quarter of 2007. The additional shares of Earn-out common stock will
be issued, if at all, only if the average sales per quarter from the operations
to be transferred from Surgica to us for the first (1st) and second (2nd)
quarters of 2007 are equal to or greater than a predetermined set amount. The
Option Agreement is exercisable, at our sole discretion, for a term of up to two
(2) years from December 19, 2005. Once Surgica is given notice of the Company's
intent to exercise the option, if at all, the exercise of the option itself will
be subject to approval by Surgica's stockholders.
Supply and Services Agreement
On December 19, 2005 the Company entered into a Supply Agreement with Surgica.
Under the terms of the Supply Agreement, Surgica is obligated to provide product
development and manufacturing services to the Company and the Company is
obligated to fund monthly operating costs of Surgica up to amounts specified in
Supply Agreement, and purchase products for sale and for clinical use at prices
specified in the Supply Agreement. Pursuant to the terms of the Supply
Agreement, the Company is obligated to fund annual operating costs of Surgica of
up to approximately $800,000 during 2006. Thereafter, the Company's obligation
to fund Surgica's operating costs is subject to a future determination to be
made based on mutually agreed upon operating budgets.
12
Item 2. Management's Discussion and Analysis or Plan of Operation
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 that
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. We undertake 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
Protein Polymer Technologies, Inc, is a biotechnology company engaged in the
research, development, production and clinical testing of medical products based
on materials created from our patented technology to produce proteins of unique
design. Additionally, we are committed to the acquisition of faster-to-market
medical products in certain complementary growth markets. Since 1992, we have
focused primarily on developing technology and products to be used for soft
tissue augmentation, tissue adhesives and sealants; wound healing support; and
drug delivery devices. We recently acquired an exclusive license to three
FDA-cleared arterial embolization products and related technology from Surgica
Corporation. The transaction also included an option to acquire all of Surgica's
assets (See "Significant Collaborative Agreements: Surgica Corporation" below).
We have been unprofitable to date, and as of June 30, 2006 had an accumulated
deficit of approximately $64 million.
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. Our primary goal is to
develop medical products for use inside the body with significantly 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,
tissue adhesive formulations for the repair of spinal discs damaged due to
injury or aging, and preclinical development of a new surgical sealant designed
to prevent air and fluid leaks following lung, gastrointestinal, and
cardiovascular surgery. We currently are devoting the majority of our resources
to the development and FDA approval of these products, and to the commercial
launch of the three Surgica embolization 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 urethral bulking product and the surgical sealant.
We have established a comprehensive license and development agreement with
Genencor International for the use of our materials 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 could
receive milestone payments, and eventually royalties on the sale of products, if
any. For development and commercialization of our spinal disc repair product, we
entered into agreements with Spine Wave, Inc., which we expect will provide us
with both near term research and development support and eventually royalties on
the sale of licensed products, if any.
13
Recent Events: Thuris Corporation
On November 21, 2005, we entered into a non-binding, letter of intent with
Thuris Corporation. Thuris is a privately held biopharmaceutical company focused
on medical device solutions to aid in drug development and diagnosis of Central
Nervous System (CNS) disorders including Mild Cognitive Impairment and
Alzheimer's disease. Thuris is also developing pharmaceuticals for select CNS
orphan and niche indications including ischemia-related conditions, brain
inflammation and Huntington's disease. Under the terms of the letter of intent,
a wholly-owned subsidiary formed by us would merge into Thuris which would
thereafter be our wholly-owned subsidiary. The stockholders, option holders and
warrant holders of Thuris would receive from us, in exchange for their holdings,
a number of shares of our common stock, or common stock equivalents, equal to
between 30% and 50% of our outstanding capital stock, calculated on a fully
diluted basis.
On July 28, 2006 we announced that we had discontinued discussions of a merger
with Thuris.
Significant Collaborative Agreements
Our collaborative development agreements generally contain provisions 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 are usually associated with
collaborative development agreements, but occasionally we will agree to a
license without an accompanying development agreement.
Surgica Corporation
-------------------
On November 23, 2005, we entered into an Asset Purchase Option Agreement
("Option Agreement"), with Surgica Corporation ("Surgica"), a medical device
company that develops, manufactures and markets embolization products.
Embolization is a minimally invasive procedure, generally performed by
interventional radiologists, used to treat uterine fibroids, liver cancer and
neurovascular malformations. Pursuant to the Option Agreement we were granted a
one-year option (which may be extended by one year at our discretion) to acquire
substantially all of Surgica's assets in exchange for two million shares of our
common stock and a potential future incentive issuance of additional common
stock based on the future sales performance of Surgica's products during the
first quarter of 2007.
On December 19, 2005, we entered into a License Agreement and Supply and
Services agreement with Surgica, pursuant to which we acquired exclusive rights
to Surgica's technology and products. Upon execution and delivery of the License
Agreement, Surgica transfered to us its PVA Plus(TM), MaxiStat(TM), and
MicroStat(TM) 510(k) clearances from the FDA by delivering a duly executed bill
of sale and assignment. Other agreements executed concurrently included: (i) the
consent of AngioDynamics, Inc. for the assignment by Surgica to us of their
distributor agreement, dated as of June 28, 2002; (ii) a voting agreement (and
proxy) between us and Louis R. Matson; Surgica's President and Chief Executive
Officer and majority shareholder; (iii) an employment agreement between Surgica
and Louis R. Matson to expire no later than December 31, 2007; and (iv) a side
letter agreement between us and Louis R. Matson representing that, to his actual
knowledge, each of the representations and warranties of Surgica set forth in
the Option Agreement was true and correct at the date the Option Agreement was
executed. The following is a brief summary of the transaction.
Asset Purchase Option Agreement. Under the terms of the Option Agreement, we
have the option to acquire substantially all of the assets of Surgica for (i) 2
million shares of our common stock and (ii) a potential earn out payment of
additional shares of our common stock based on the future sales performance of
Surgica's products during the first quarter of 2007. The earnout payment of
additional shares of our common stock, if any, will be determined in part on the
price per share of our common stock based on the 90 day prior average price of
our common stock as of April 1, 2007. The option is exercisable, at our sole
discretion, for a term of up to two (2) years from December 19, 2005. Once
Surgica is given notice of our intent to exercise the option, if at all, the
exercise of the option itself will be subject to approval by Surgica's
stockholders. There would be no affect whatsoever if we decided not to exercise
the asset purchase option.
License Agreement and Supply and Services Agreement. Under the terms of the
License Agreement, we acquired exclusive rights to Surgica's three embolization
products, one issued patent, and technical and market know-how in return for (i)
the assumption of approximately $522,000 of certain Surgica liabilities, (ii) a
cash payment to Surgica of approximately $385,000, and (iii) in connection with
the license agreement, the company agreed to indemnify Surgica for up to
$200,000 in connection with claims by a third party for fees owed pursuant to an
engagement letter entered into between Surgica and the third party as a result
of agreements entered into between Surgica and the Company. Under the terms of
the Supply and Services agreement and License Agreement, Surgica is obligated to
provide its goods and services, including further product development, in
exchange for (i) operating payments to Surgica and (ii) a royalty of twenty-five
percent (25%) of net profits, if any, on revenues generated by the sale of
Surgica products.
14
Employment Agreement. Under the terms of the Option Agreement, Louis R. Matson
and Surgica entered into an employment agreement that provides, among other
things, that Louis R. Matson (i) retain the title of President of Surgica; (ii)
be paid a specified base salary; and (iii) be employed until December 31, 2007,
unless terminated prior to such date. It is currently contemplated that this
employment agreement will be assumed by us or a wholly-owned subsidiary of the
Company if and when we exercise the option.
Voting Agreement and Proxy. As a condition of the Option Agreement, we entered
into a voting agreement pursuant to which Louis R. Matson agreed to vote all
shares of Surgica that he may own (i) in favor of the adoption of the Option
Agreement; (ii) in favor of adoption of the Asset Purchase Agreement and
approval of the acquisition contemplated thereby but only to the extent the
option is exercised by the Company; (iii) against any proposal for any
acquisition transaction, other than the acquisition, between Surgica and any
person other than us and/or a wholly-owned subsidiary; and (iv) against any
other action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of Surgica under
the Option Agreement or Asset Purchase Agreement or which would result in any of
the conditions to the consummation of the effectiveness of the option under the
Option Agreement or the acquisition under the Asset Purchase Agreement not being
fulfilled. Concurrently with the execution of the voting agreement, and pursuant
to the voting agreement's terms, Louis R. Matson delivered to us an irrevocable
proxy appointing the Company as the sole and exclusive attorney and proxy of
Louis R. Matson, with full power of substitution and resubstitution, to vote and
exercise all voting and related rights with respect to all shares of Surgica
that he may own in accordance with (ii), (iii), and (iv) above.
Asset Purchase Agreement. Pursuant to the terms of the Option Agreement, we will
have up to two years from December 19, 2005 to exercise an option to purchase
substantially all of the assets of Surgica in exchange for 2 million shares of
our common stock and a potential future incentive issuance of additional shares
of the Company's common stock based on the future sales performance of Surgica's
products during the first quarter of 2007 which will be subject to a number of
conditions precedent, including approval by Surgica's stockholders. Pursuant to
the terms of the Asset Purchase Agreement, the shares will constitute
"restricted securities" as that term is defined in Section 144(a)(3) of the
Securities Act of 1933, as amended, and will be restricted as to their resale
for a period of at least one hundred eighty (180) days from the date the Asset
Purchase Agreement is executed.
The additional shares of our common stock will be issued, if at all, only if the
average sales per quarter from the operations to be transferred from Surgica to
us for the first (1st) and second (2nd) quarters of 2007 are equal to or greater
than a predetermined set amount.
Each of the Option Agreement, license agreement, supply and services agreement
and Asset Purchase Agreement contain representations and warranties by us and
Surgica customary for transactions of this type.
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, if any.
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.
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, conducted pre-clinical safety and performance studies of a product
for spinal disc repair to support Spine Wave's regulatory filings both in the
U.S. and abroad to obtain approval to initiate human clinical testing. Our
continuing contractual responsibilities include the supply of product to be used
in clinical testing. 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, 2006 we received $221,000 in
contract revenue from Spine Wave which
15
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 four year warrant (the
expiration was recently extended until June 21, 2006, and upon meeting certain
conditions would be further extended to September 21, 2006) to purchase
1,000,000 shares of Spine Wave common stock at an exercise price of $0.50 per
share (Spine Wave preferred stock issued during this time 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, or
until the repurchase option expired. The performance goals consisted 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).
Spine Wave's repurchase option expired on December 31, 2005.
In October 2003, we executed a second amendment to the supply and services
agreement with Spine Wave that further defined the cost basis for reimbursement
of services provided by us to Spine Wave.
Significant 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.
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. In March 2005, the license was amended to fully incorporate the
field of personal care products into the license. 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 product development milestones
incorporating the licensed technology. In March 2005 we received a second
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. Both warrants have
subsequently expired. 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 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. Due to the rate of patient enrollment, we now project
beginning pivotal clinical testing during 2006. We expect these trials,
including patient follow-up, will take approximately 24 months, and the
subsequent FDA 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
16
projected to begin in 2009. Commercial manufacturing process development and
completion of the clinical trials are estimated to cost approximately $10
million. In 2004, we completed feasibility assessments of a surgical sealant
formulation for cardiovascular, pulmonary (lung) and gastrointestinal
procedures. Preclinical studies are currently being completed to support
regulatory approval to begin human clinical testing. The external cost of
completing preclinical testing is estimated to be approximately $750,000. We
expect to begin a clinical study for one of these indications before the end of
2006, to the extent resources are available. We are seeking to establish
additional partnerships to pursue the commercial development of such products.
In these types of applications, the use of sutures and staples for closing the
wound may permit leaks of air, in the case of pulmonary surgery, and fluids,
particularly blood in any surgery, and also gastrointestinal (GI) fluids in the
case of surgery on the colon (GI tract). In such surgeries, the use of an
effective sealant -- as an adjunct to sutures or staples -- to prevent leaks
could reduce hospitalization stays, reduce post-operative pain and
complications, and lower associated mortality rates. We estimate that about
500,000 gastrointestinal, 300,000 lung, and over 1.5 million cardiovascular
surgical procedures are performed each year worldwide where the use of a sealant
has the opportunity to significantly reduce complications and costs.
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,
Inc., is in 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 pilot manufacturing process, and
product production for clinical trials. 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 for the three and six months ended June 30,
2006 were approximately $1,148,000 and $2,185,000, 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
Contract and Licensing Revenue. We received $411,000 and $190,000 in contract
and licensing revenue for the six and three month periods ended June 30, 2006,
respectively, as compared to approximately $658,000 and $145,000 for comparable
periods in 2005. Contract revenues from Spine Wave for the three and six months
ended June 30, 2006 represent approximately $190,000 and 411,000, respectively
for materials and services provided in the development of an adhesive product
for the repair of spinal discs as compared to approximately $263,000 in the same
period a year ago. Product revenue for the six months ended June 30, 2006 was
$30,000, which was a payment from Angio Dynamics, Inc. for Surgica embolization
products. We received no licensing income for the period ended June 30, 2006 as
compared to $250,000 in licensing revenue in the six months ended June 30, 2005
for a milestone payment from Genencor International for Genencor's initiation of
a product development project based on technology licensed from us.
Research and Development Expenses. Research and development expenses for the six
and three months ended June 30, 2006 were approximately $2,185,000 and
$1,148,000, respectively, as compared to approximately $1,249,000 and $692,000
incurred for the same periods in 2005. The increase in research and development
expenses are primarily due to costs associated with preclinical animal testing
of our sealant product necessary to achieve regulatory approval to begin human
clinical trials later this year, as well as for on-going clinical testing,
regulatory consulting costs, and costs associated with manufacturing product for
Spine Wave. Other related expenses include those for expanded manufacturing
capacity and manufacturing process development, quality assurance efforts, and
outside testing services. We expect our 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 further preclinical
development of our surgical sealants, increased human clinical
17
testing, increased manufacturing requirements, increased use of outside testing
services, and increased research and development services for Spine Wave.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six and three months ended June 30, 2006 were
approximately $2,617,000 and $730,000, respectively, as compared to
approximately $2,280,000 and $1,887,000 for the comparable periods in 2005.
The increase in selling, general and administrative expenses for the six months
ended June 30, 2006 was primarily the result of the recognition of a non-cash
expense associated with the reporting of compensation expense for stock options
issued by the Company under SFAS No. 123R. There were also increases in legal,
consulting and other professional services related to due diligence and other
expenses pertaining to the potential Thuris acquisition and remaining costs of
the completion of the agreements with Surgica. Other expenses have been fairly
consistent over the past three years. We do anticipate some increases during
2006 in the areas of insurance coverage and legal services, although we
anticipate that these increases will be offset by reductions in personnel
expense. To the extent possible, we continue to concentrate on controlling costs
reflected in reduced travel, office supplies, and non-regulatory consulting
costs.
The decline in selling, general and administrative expenses for the three months
ended June 30, 2006 was primarily the result of reduction of certain management
positions and the reduction of consulting and professional services incurred in
2005 related to due diligence and other expenses pertaining to the potential
Thuris acquisition and remaining costs of the completion of the agreements with
Surgica. Other expenses have been fairly consistent over the past three years.
We do anticipate some increases during 2006 in the areas of insurance coverage
and legal services, although we anticipate that these increases will be offset
by reductions in personnel expense. To the extent possible, we continue to
concentrate on controlling costs reflected in reduced travel, office supplies,
and non-regulatory consulting costs.
Selling, general and administrative expenses may increase in the future, to the
extent additional capital is obtained, consistent with supporting our research
and development efforts and as business development, patent, legal and investor
relations activities require.
Interest Income. Interest income was $16,000 for the quarter and six months
ended June 30, 2005, as compared to essentially nil for the same period in 2006.
The company had no excess funds available for short term investments in 2006.
Interest Expense. Interest expense incurred during the second quarter of 2006
resulted from the issuance of a secured promissory note in April 2006. As a
result of the issuance of the warrants associated with a note issued, the
Company recorded additional interest expense of approximately $70,000.
Loss from Operations. For the quarter ended June 30, 2006, our net loss was
$1,762,000 versus the net loss incurred in the comparable quarter of 2005 of
$2,418.000. Included in 2006 results is a non-cash charge of $303,000 associated
with the reporting of compensation expense for stock options issued by the
Company under SFAS No. 123R. Additionally the pre-clinical development of our
surgical sealant product and related research have increased research and
development expenses. Legal and acquisition costs related to Surgica and Thuris
were incurred during the 2005 period. Interest expense increased during 2006 as
the result of the Company's issuance of a promissory note in April, 2006. Net
loss applicable to common shareholders during the quarter ended June 30, 2006
was approximately $1,831,000 ($0.03 per share) as compared to approximately
$2,487,000 ($0.04 per share) for the same period in 2005.
For the six months ended June 30, 2006, our net loss was $4,455,000 versus the
net loss incurred in the comparable period of 2005 of $2,940.000. Included in
2006 results is a non-cash charge of $1,342,000 associated with the reporting of
compensation expense for stock options issued by the Company under SFAS No.
123R. Additionally the pre-clinical development of our surgical sealant product
and related research have increased research and development expenses. Legal and
acquisition costs related to Surgica and Thuris were incurred during the 2005
period. Interest expense increased as the result of the Company's issuance of a
promissory note in April, 2006. Net loss applicable to common shareholders
during the six months ended June 30, 2006 was approximately $4,682,000 ($0.07
per share) as compared to approximately $3,559,000 ($0.07 per share) for the
same period in 2005.
We expect to incur increasing operating losses for the next several years, to
the extent additional capital is obtained, based upon the continuation of the
development and testing of our surgical sealant product, and our product for the
treatment of female stress urinary incontinence, the associated FDA approval
process, and further development of the tissue adhesives program, as well as
expected increases in our other research and development, manufacturing and
business development activities. Our results depend in part on our ability to
establish strategic alliances and generate contract revenues, and upon
18
increased research, development and manufacturing efforts, pre-clinical and
clinical product testing and commercialization expenditures, and expenses
incurred for regulatory compliance and patent prosecution. Our results will also
fluctuate from period to period due to timing differences.
Inflation
To date, we believe that inflation and changing prices have not had a material
impact on our continuing operations. However, we have experienced increased
general and product liability insurance costs over the past two years, and these
increases are expected to continue for the foreseeable future as our products
incur increased exposure in expanded clinical trials.
Liquidity and Capital Resources
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, 2006 or December 31, 2005. For the three and six month periods ended
June 30, 2006, our cash expenditures for capital equipment and leasehold
improvements totaled approximately $36,000. For the three and six month periods
ended June 30, 2005 our cash expenditures for capital equipment and leasehold
improvements totaled approximately $121,000.
We believe our existing available cash, cash equivalents and loan proceeds, as
of August 14, 2006, in combination with continuing contractual commitments, will
be sufficient to meet our anticipated capital requirements through the end of
September 2006. 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 discussions with potential financing sources and collaborative
partners, and additional funding in the form of equity investments, license
fees, loans, milestone payments or research and development payments could be
generated. There can be no assurance that any of these potential sources of
funds will be realized 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.
19
ITEM 3. Controls and Procedures
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management,
including its Chief Executive Officer (the principal executive officer) and
Director of Finance and Controller (the principal financial officer), evaluated
the effectiveness of the design and operation of its disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, and taking into consideration the material weaknesses identified in
the letter from the Company's auditor as discussed below, the Chief Executive
Officer and Director of Finance and Controller concluded that, as of the end of
the period covered by this report, the Company's disclosure controls and
procedures were not effective for the purposes of recording, processing,
summarizing and timely reporting of material information relating to the Company
required to be included in its periodic reports. The Company's management
received a letter dated March 24, 2006 (the "Letter") from Peterson & Co., LLP,
our independent auditors, addressed to the Chairman of the Audit Committee of
the Company's Board of Directors in connection with the audit of our financial
statements as of December 31, 2005, which identified certain matters involving
internal control and its operation that they consider to be significant
deficiencies or material weaknesses under the standards of the Public Company
Accounting Oversight Board. These material weaknesses were: (1) inadequate
segregation of duties in the areas of approving invoices and initiating wire
transfers; (2) insufficient personnel resources and technical accounting
expertise within the accounting function to resolve non-routine or complex
accounting matters; (3) ineffective controls over period end financial close and
reporting processes; and (4) inadequate procedures for appropriately
identifying, assessing and applying accounting principles.
We will continue to monitor and evaluate the effectiveness of our disclosure
controls and procedures and our internal controls over financial reporting on an
ongoing basis and are committed to taking further action and implementing
additional enhancements or improvements, as necessary and as funds allow.
Internal Control Over Financial Reporting
Other than noted above, there have been 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.
20
PART II.
OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On April 21, 2006, the Company entered into a Security Agreement and
a secured promissory note, each dated as of April 13, 2006, in favor
of Matthew J. Szulik pursuant to which Mr. Szulik loaned the Company
One Million ($1,000,000.00) Dollars in exchange for (i) a warrant to
purchase an aggregate of 500,000 shares of the Company's common stock
at an exercise price of $0.30 per share (the "Warrant") and (ii) a
continuing security interest in and a general lien upon (A) 1,000,000
shares of Spine Wave, Inc. common stock owned by the Company; (B) a
warrant to purchase 1,000,000 shares of Spine Wave, Inc. common stock
owned by the Company currently set to expire June 30, 2006; and (C)
all U.S. patents owned by the Company.
Pursuant to the terms of the Security Agreement, the Company issued
the Warrant to Mr. Szulik, entitling him to purchase 500,000 shares
of the Company's common stock at a purchase price per share equal to
Thirty Cents ($0.30), as may be adjusted pursuant to certain
anti-dilution provisions set forth therein. The warrant provides for
a "cashless exercise" whereby Mr. Szulik has the right to elect, upon
exercise the Warrant, to receive the "net number" of shares of
Company common stock according to a predetermined formula in lieu of
making a cash payment otherwise contemplated to be made to the
Company. In addition, the Warrant provides for anti-dilution rights
with respect to future subscriptions of the Company's securities at a
price per share (or having a conversion price per share) less than
the lower of the then exercise price of the Warrant or the
then-current market price per share based on a twenty- (20) day
trailing average of the market price of the Company's common stock.
The Warrant expires on April 30, 2009.
The sale of the Warrant to Mr. Szulik by the Company was exempt from
registration under the Securities Act in reliance on Section 4(2) of
the Securities Act and Rule 506 of Regulation D promulgated
thereunder, as transactions by an issuer not involving a public
offering. The Company relied upon the representations made by Mr.
Szulik in determining that such exemptions were available. No
underwriting discounts or commissions were paid by the Company in
connection with these transactions.
Item 6. Exhibits
10.1 Amendment No. 1 to Secured Promissory Note issued to Matthew J.
Szulik dated July 12, 2006.
10.2 Amendment No. 2 to Secured Promissory Note issued to Matthew J.
Szulik dated August 18, 2006.
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.
21
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 21, 2006 By /s/ William N. Plamondon, III
------------------------------
William N. Plamondon, III
Chief Executive Officer
Date: August 21, 2006 By /s/ Janis Y. Neves
-------------------
Janis Y. Neves
Director of Finance, Controller
and Corporate Secretary
22
EXHIBIT INDEX
Exhibit
Number Description
----- -----------
10.1 Amendment No. 1 to Secured Promissory Note issued to Matthew J. Szulik
dated, July 12, 2006.
10.2 Amendment No. 2 to Secured Promissory Note issued to Matthew J. Szulik
dated August 18, 2006.
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.
Exhibit 10.1
PROTEIN POLYMER TECHNOLOGIES, INC.
8% SECURED PROMISSORY NOTE
DUE JULY 12, 2006
AMENDMENT NO. 1
DATED JULY 12, 2006
On April 13, 2006, Protein Polymer Technologies, Inc., ("Maker"),
issued to Matthew J. Szulik ("Payee") a note (the "Note") in the principal
amount of One Million ($1,000,000.00) Dollars pursuant to which, among other
things, Maker agreed to pay the Obligations, as defined therein, to Payee on
July 12, 2006, or sooner as otherwise provided therein. In accordance with the
terms of Section 10 (f) thereof, the Note is hereby amended as follows:
1. In the first paragraph "July 12, 2006" is changed to "October 10,
2006."
Maker shall pay additional Interest to Payee in the amount of Twenty
Thousand ($20,000) Dollars (the "Additional Interest") for the extended period
of the Note as provided herein upon the execution of this Amendment No. 1 by
requesting Designee, as defined in the Escrow Agreement, dated as of April 13,
2006, among Maker, Taurus Advisory Group, LLC, as agent for Payee, Designee and
Barry Feiner, Esq., as Escrow Agent, to direct the Escrow Agent, as defined in
the Escrow Agreement, to pay the Additional Interest to Payee as an expense of
Maker from the funds that the Escrow Agent is currently holding in the Escrow
Account, as defined in the Escrow Agreement, as provided in Section 3.1 of the
Escrow Agreement.
Counterparts. This Amendment No.1 may be executed in one or more
counterparts, including by facsimile, each of which shall be deemed an original,
but all such counterparts together shall constitute but one and the same
Amendment No. 1.
Governing Law. This Amendment No. 1 shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the State
of Connecticut.
Except as set forth above, the Note is not modified, changed or
otherwise amended and remains in full force and effect in accordance with its
terms as amended herein.
Amendment No. 1, dated July 12, 2006
to $1,000,000.00 Secured Promissory Note
of Protein Polymer Technologies, Inc.
payable to Mathew J. Szulik
dated April 13, 2006
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1
to the Note as of the day and year first above written.
Protein Polymer Technologies, Inc., Maker,
a Delaware corporation
By: /s/ William N. Plamondon III
-----------------------------------------
William N. Plamondon III,
Chief Executive Officer
Taurus Advisory Group, LLC, as agent for
Matthew J. Szulik, Payee
/s/ James Tagliaferri
-----------------------------------------
James Tagliaferri,
Managing Director
- 2-
Exhibit 10.2
PROTEIN POLYMER TECHNOLOGIES, INC.
8% SECURED PROMISSORY NOTE
DUE JULY 12, 2006
NOW DUE OCTOBER 10, 2006
AMENDMENT NO. 2
DATED AS OF JULY 14, 2006
AND
EXECUTED ON August 18, 2006
On April 13, 2006, Protein Polymer Technologies, Inc., ("Maker"),
issued to Matthew J. Szulik ("Payee") a note (the "Note") in the principal
amount of One Million ($1,000,000.00) Dollars pursuant to which, among other
things, Maker agreed to pay the Obligations, as defined therein, to Payee on
July 12, 2006, or sooner as otherwise provided therein. On July 12, 2006, Maker
and Taurus Advisory Group, LLC, as agent for Payee, ("Agent") executed Amendment
No. 1 to the Note pursuant to which, among other things, "July 12, 2006" In the
first paragraph of the Note was changed to "October 10, 2006." In accordance
with the terms of Section 10 (f) thereof, the Note is hereby amended as follows:
1. In the first paragraph "One Million ($1,000,000.00) Dollars" is changed
to "One Million Five Hundred Thousand ($1,500,000.00) Dollars."
Maker shall pay additional Interest to Payee in the amount of Nine
Thousand Eight Hundred and Eighty Nine ($9,889.00) Dollars (the "Additional
Interest") for the increased Principal of the Note as provided herein upon the
execution of this Amendment No. 2 by requesting Designee, as defined in the
Escrow Agreement, dated as of April 13, 2006, among Maker, Agent, Designee and
Barry Feiner, Esq., as Escrow Agent, to direct the Escrow Agent, as defined in
the Escrow Agreement, to pay the Additional Interest to Payee as an expense of
Maker from the funds that the Escrow Agent is currently holding in the Escrow
Account, as defined in the Escrow Agreement, as provided in Section 3.1 of the
Escrow Agreement.
Counterparts. This Amendment No. 2 may be executed in one or more
counterparts, including by facsimile, each of which shall be deemed an original,
but all such counterparts together shall constitute but one and the same
Amendment No. 2.
Governing Law. This Amendment No. 2 shall be governed by and construed
in accordance with the internal laws (and not the law of conflicts) of the State
of Connecticut.
Except as set forth above, the Note, as amended pursuant to Amendment
No. 1, is not modified, changed or otherwise amended and remains in full force
and effect in accordance with its terms as amended herein.
Amendment No. 2, dated as of July 14, 2006
and executed on August 18, 2006
to $1,000,000.00 Secured Promissory Note
of Protein Polymer Technologies, Inc.
payable to Mathew J. Szulik
dated April 13, 2006 and Amended
on July 12, 2006
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 2
to the Note on August 18, 2006, as of July 14, 2006.
Protein Polymer Technologies, Inc., Maker,
a Delaware corporation
By: /s/ William N. Plamondon III
-----------------------------------------
William N. Plamondon III,
Chief Executive Officer
Taurus Advisory Group, LLC, as agent for
Matthew J. Szulik, Payee
/s/ James Tagliaferri
-----------------------------------------
James Tagliaferri,
Managing Director `
- 2-
Exhibit 31.1
SECTION 302 CERTIFICATION
of the Chief Executive Officer
I, William N. Plamondon, III, the Chief Executive Officer of Protein Polymer
Technologies, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Protein Polymer
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the small
business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: August 21, 2006
/s/William N. Plamondon, III
----------------------------
William N. Plamondon, III
Chief Executive Officer
Exhibit 31.2
SECTION 302 CERTIFICATION
of the Director of Finance (Principal Financial Officer)
I, Janis Y. Neves, the Director of Finance of Protein Polymer Technologies,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Protein Polymer
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the small
business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business
issuer's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: August 21, 2006
/s/Janis Y. Neves
-----------------
Janis Y. Neves
Director of Finance
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Protein Polymer Technologies, Inc.
(the "Company") on Form 10-QSB for the period ended June 30, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant
to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ William N. Plamondon, III
-----------------------------
William N. Plamondon, III
Chief Executive Officer
August 21, 2006
In connection with the Quarterly Report of Protein Polymer Technologies, Inc.
(the "Company") on Form 10-QSB for the period ended June 30, 2006 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant
to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Janis Y. Neves
------------------
Janis Y. Neves
Director of Finance and Corporate Secretary
August 21, 2006