10QSB 1 d10qsb.txt FORM 10-QSB ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission file number 0-19724 PROTEIN POLYMER TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) Delaware 33-0311631 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 10655 Sorrento Valley Road, San Diego, CA 92121 (Address of principal executive offices) (858) 558-6064 (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of March 10, 2002, 27,421,963 shares of common stock were outstanding. Transitional Small Business Disclosure Format (check one): Yes No X ----- ----- ================================================================================ PROTEIN POLYMER TECHNOLOGIES, INC. FORM 10-QSB INDEX
Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Condensed Balance Sheets- March 31, 2002 and December 31, 2001........................... 3 Condensed Statements of Operations- For the Three Months ended March 31, 2002 and 2001 and the period July 6, 1988 (inception) to March 31, 2002...... 4 Condensed Statements of Cash Flows- For the Three Months ended March 31, 2002 and 2001 and the period July 6, 1988 (inception) to March 31, 2002...... 5 Notes to Condensed Financial Statements............................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................... 13 Signature.......................................................... 14
2 PROTEIN POLYMER TECHNOLOGIES, INC. (A Development Stage Company) Condensed Balance Sheets
March 31, December 31, 2002 2001 ------------------------------------- Assets (unaudited) Current assets: Cash and cash equivalents $ 458,549 $ 234,271 Other current assets 214,620 57,520 ------------------------------------- Total current assets 673,169 291,791 Deposits 30,479 29,679 Equipment and leasehold improvements, net 161,537 205,247 ------------------------------------- $ 865,185 $ 526,717 ===================================== Liabilities and stockholders' equity Current liabilities: Accounts payable $ 260,313 $ 356,942 Accrued employee benefits 121,415 118,987 Other accrued expenses 62,870 43,398 Deferred revenue 250,000 333,333 Deferred rent 24,111 24,111 ------------------------------------- Total current liabilities 718,709 876,771 Long-term portion deferred rent 42,194 48,222 Stockholders' equity: Convertible Preferred Stock, $.01 par value, 5,000,000 shares authorized, 84,758 and 88,258 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively; liquidation preference of $8,475,800 and $8,825,800 at March 31, 2002 and December 31, 2001, respectively 8,130,530 8,480,530 Common stock, $.01 par value, 60,000,000 shares authorized, 26,023,463 and 21,740,650 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively 260,246 217,418 Additional paid-in capital 35,071,094 33,794,177 Deficit accumulated during development stage (43,357,588) (42,890,401) ------------------------------------- Total stockholders' equity 104,282 (398,276) ------------------------------------- $ 865,185 $ 526,717 =====================================
See accompanying notes. 3 PROTEIN POLYMER TECHNOLOGIES, INC. (A Development Stage Company) Condensed Statements of Operations (unaudited)
For the period July 6, 1988 Three months ended (inception) to March 31, March 31, 2002 2001 2002 ------------------------------------------------------ Revenues: Contract revenue $ 469,577 $ 83,333 $ 6,717,592 Interest Income 1,620 8,230 1,241,757 Product and other income 1,500 38 694,779 ------------------------------------------------------ Total revenues 472,697 91,601 8,654,128 Expenses: Research and development 651,037 604,902 30,338,409 Selling, general and administrative 288,847 357,813 17,724,922 ------------------------------------------------------ Total expenses 939,884 962,715 48,063,331 ------------------------------------------------------ Net loss (467,187) (871,114) (39,409,203) Undeclared, imputed and/or paid dividends on preferred stock 68,459 68,459 5,863,391 ------------------------------------------------------ Net loss applicable to common shareholders $ (535,646) $ (939,573) $ (45,272,594) ====================================================== Basic and diluted net loss per common share $ (0.02) $ (0.05) ================================= Shares used in computing basic and diluted net loss per common share 24,116,726 18,914,202 =================================
See accompanying notes. 4 PROTEIN POLYMER TECHNOLOGIES, INC. (A Development Stage Company) Condensed Statements of Cash Flows (unaudited)
For the period July 6, 1988 Three months ended (inception) to March 31, March 31, 2002 2001 2002 ----------------------------------------------------- Operating activities Net loss $ (467,187) $ (871,114) $(39,409,203) Adjustments to reconcile net loss to net cash used for operating activities: Stock issued for compensation and interest - - 472,676 Depreciation and amortization 45,003 34,467 2,247,502 Write-off of purchased technology - - 503,500 Changes in assets and liabilities: Deposits (800) (2,800) (30,479) Other current assets (157,100) 1,158 (214,620) Accounts payable (96,629) 37,899 260,313 Accrued employee benefits 2,428 17,190 121,415 Other accrued expenses 19,472 (9,685) 62,870 Deferred revenue (83,333) (83,334) 250,000 Deferred rent (6,028) 2,249 66,305 ----------------------------------------------------- Net cash used for operating activities (744,174) (873,970) (35,669,721) Investing activities Purchase of technology - - (570,000) Purchase of equipment and improvements (1,293) - (1,967,013) Purchases of short-term investments - - (16,161,667) Sales of short-term investments - - 16,161,667 ----------------------------------------------------- Net cash provided by (used for) investing activities $ (1,293) $ - $ (2,537,013)
See accompanying notes. 5 PROTEIN POLYMER TECHNOLOGIES, INC. (A Development Stage Company) Condensed Statements of Cash Flows, continued (unaudited)
For the period July 6, 1988 Three months ended (inception) to March 31, March 31, 2002 2001 2002 ----------------------------------------------------- Financing activities Net proceeds from exercise of options and warrants, and sale of common stock $ 969,745 $ 1,250,620 $ 22,135,605 Net proceeds from issuance and conversion of preferred stock - - 15,508,418 Net proceeds from convertible notes and detachable warrants - - 1,068,457 Payment on capital lease obligations - (20,971) (288,770) Payment on note payable - - (242,750) Proceeds from note payable - 800,000 484,323 ----------------------------------------------------- Net cash provided by financing activities 969,745 2,029,649 38,665,283 ----------------------------------------------------- Net increase (decrease) in cash and cash equivalents 224,278 1,155,679 458,549 Cash and cash equivalents at beginning of period 234,271 866,220 - ----------------------------------------------------- Cash and cash equivalents at end of period $ 458,549 $ 2,021,899 $ 459,549 ===================================================== Supplemental disclosures of cash flow information Equipment purchased by capital leases $ - $ - $ 288,772 Interest paid 3,924 449 148,529 Imputed dividend on Series E stock - - 3,266,250 Conversion of Series D preferred stock to common stock - - 2,142,332 Conversion of Series E preferred stock to common stock 400,000 - 3,112,550 Series D stock issued for Series C stock 2,073,925 Series C dividends paid with Series D stock - - 253,875 Series D dividends paid with common stock $ - $ - $ 422,341
See accompanying notes. 6 PROTEIN POLYMER TECHNOLOGIES, INC. (A Development Stage Company) Notes to Condensed Financial Statements (unaudited) March 31, 2002 1. Basis of Presentation The condensed financial statements of Protein Polymer Technologies, Inc. (the "Company") for the three months ended March 31, 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 March 31, 2002 and the results of operations for the three months ended March 31, 2002 and 2001. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the year ended December 31, 2002. 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, 2001, filed with the Securities and Exchange Commission. 2. Net Loss Per Share Net loss per share is computed using the weighted average number of common shares outstanding during the period. The loss figures used for this calculation recognize accumulated dividends on the Company's Series D and Series F Preferred Stock. Such dividends are payable when declared by the Board of Directors in cash or common stock. 3. Basic and Diluted Loss Per Share In accordance with FAS No. 128, we are required to present basic and diluted earnings per share if applicable. Basic and diluted earnings per share are determined based on the weighted average number of shares outstanding during the period. Diluted earnings per share also include potentially dilutive securities such as options and warrants outstanding and securities convertible into common stock. Both the basic and diluted loss per share for the three months ended March 31, 2002 and 2001 are based on the weighted average number of shares of common stock outstanding during the periods. Since potentially dilutive securities have not been included in the calculation of the diluted loss per share for both periods as their effect is anti-dilutive, there is no difference between the basic and diluted loss per share calculations. 4. Revenue and Expense Recognition License fees and research and development contract revenues are recorded as earned based on the performance requirements of the contracts. If the research and development activities are not successful, we are not obligated to refund payments previously received. Milestone payments are recorded as revenue when received as they are not refundable and we have no future performance obligations. Payments received in advance of amounts earned are recorded as deferred revenue. Research and development costs are expensed as incurred. 5. Exercise and Exchange of Series G Warrants During January 2002, certain holders of warrants issued in connection with the sale of Series G Preferred Stock exercised their warrants to purchase common stock, which were due to expire in February 2002. The original exercise price was $0.50 per share. As an inducement to exercise the warrant early, we offered to reduce the exercise price to $0.25 and offer each holder a new eighteen month warrant for a similar number of shares at an exercise 7 price of $0.40 per share. As a result we raised $990,000 (less expenses). The newly issued warrants will expire on the last day of August 2003. 6. Expanded Spine Wave, Inc. Relationship On March 17, 2002, we executed additional agreements with Spine Wave, Inc. that expanded our contractual research and development relationship, and that provided us with additional equity incentives in the form of Spine Wave common stock and warrants. In a related transaction, Spine Wave announced that it had raised approximately $15 million through the sale of Series A Preferred Stock. Under the amended Supply and Services Agreement between the Company and Spine Wave, PPTI, on behalf of Spine Wave, is proceeding with preclinical safety and performance studies of the device to support Spine Wave's filing of an Investigational Device Exemption with the FDA to obtain approval to initiate human clinical testing. We estimate we will receive from Spine Wave approximately $1.5 million in R&D payments over the next year, exclusive of the preclinical study costs. During the subsequent period leading to regulatory marketing approvals, our contractual responsibilities include the supply of product to be used in clinical testing and preparation for commercial manufacturing operations. Spine Wave is responsible for clinical testing, regulatory approvals, and commercialization. 7. Liquidity We believe our existing available cash and cash equivalents as of March 31, 2002, plus contractual amounts receivable, is sufficient to meet our anticipated capital requirements until July 2002. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, clinical trials, and product marketing activities. If adequate funds are not available, we will be required to significantly curtail our operating plans and may have to sell or license out significant portions of our technology or potential products. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking Statements Certain statements contained or incorporated by reference in this Quarterly Report on Form 10-QSB constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements of the company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Such risks and uncertainties include, among others, history of operating losses, raising adequate capital for continuing operations, early stage of product development, scientific and technical uncertainties, competitive products and approaches, reliance upon collaborative partnership agreements and funding, regulatory testing and approvals, patent protection uncertainties and manufacturing scale-up and required qualifications. While these statements represent management's current judgment and expectations for the company, such risks and uncertainties could cause actual results to differ materially from any future results suggested herein. The company undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances arising after the date hereof. General Overview Incorporated in 1988, Protein Polymer Technologies, Inc., a Delaware corporation with corporate offices and laboratories located in San Diego, California, is a development-stage biotechnology company engaged in the research, development, production and clinical testing of medical products based on its proprietary protein-based biomaterials technology. Since 1992, we have focused primarily on developing materials 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; drug delivery formulations; and surgical adhesion barriers. We have been unprofitable to date, and as of March 31, 2002 had an accumulated deficit of $ 43,357,588. 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. 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 development 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 will provide us with both near term research and development support and 9 eventually potential royalties on the sale of licensed products. Except for the industrial products, we have retained manufacturing rights. To the extent sufficient resources are available, we continue to research the use of our protein polymers for other tissue repair and medical device applications, principally for use in tissue engineering matrices and drug delivery devices. Our strategy with 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 reimbursements and milestone payments, the Company expects to continue incurring operating losses for the next several years. We are aggressively pursuing domestic and international patent protection for our technology, making claim to an extensive range of recombinantly prepared structural and functional proteins, methods for preparing synthetic repetitive DNA, methods for the production and purification of protein polymers, end-use products incorporating such materials and methods for their use. To date, the United States Patent and Trademark Office ("USPTO") has issued 21 patents to us. In addition, we have filed corresponding patent applications in other relevant commercial jurisdictions. During January 2002, certain holders of warrants, issued in connection with the sale of Series G Preferred Stock, exercised their warrants to purchase common stock which were due to expire in February, 2002 The original exercise price was $0.50 per share. As an inducement to exercise the warrant early, we offered to reduce the exercise price to $0.25 and offered each holder a new eighteen month warrant for a similar number of shares at an exercise price of $0.40 per share. As a result we raised $990,000 (less expenses). The newly issued warrants will expire on the last day of August 2003. In April 2001, we joined with Windamere Venture Partners and affiliates to form a new orthopedic company, Spine Wave, Inc., to develop and commercialize an injectable protein-based formulation for the repair of spinal discs damaged either by injury or aging. Based on Protein Polymer's proprietary tissue adhesive technology, the product under development has potential to be an effective outpatient surgical treatment for chronic low back pain. Back pain is the leading cause for healthcare expenditures in the United States. According to a 2000 Viscogliosi Bros., LLC, Spine Industry report, back pain results in more than $50 billion in direct and indirect medical expense. Despite the invasive surgery associated with many spinal procedures, such as spinal fusion, the worldwide spinal market represents more than $2 billion in revenues, growing at a rate of over 25% annually. It is the fastest growing major segment of the orthopedic industry. In many instances, spinal fusion is a procedure of last resort, since it destroys the natural function and mobility of the spine by replacing the shock absorbing intervertebral disc with metal and/or bone. Currently, there are no approved products to replace or restore the function of the invertebral disc that has degenerated, or to intervene in the degenerative process. Using our patented technology, we are developing a product (the Injectable Disc Nucleus) designed to restore natural disc function by replacing or augmenting the natural disc nucleus that has degenerated or that has been surgically removed in a discectomy procedure. The product has the potential to be used independently in minimally invasive outpatient procedures as well as in combination with traditional open procedures. As a result of the agreements we executed, Spine Wave has acquired a license to our technology for use in spinal and other defined orthopedic applications. We received approximately 33% of the founding stock in Spine Wave and will receive royalties on the sale or sublicensing of licensed products. In addition to the License Agreement, we agreed in 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, and ultimately for commercial sale. If we are unable to meet the requirements for product delivery, we agreed to make the manufacturing methods and materials available to Spine Wave as specified in a separate Escrow Agreement. Spine Wave is responsible for clinical testing, regulatory approvals, and commercialization. 10 On March 17, 2002, we executed additional agreements with Spine Wave that expanded our contractual research and development relationship, and that provided us with additional equity incentives in the form of Spine Wave common stock and warrants. In a related transaction, Spine Wave announced that it had raised approximately $15 million through the sale of Series A Preferred Stock. Spine Wave also recently completed the acquisition of VERTx, Inc. Formed in 2001, VERTx is an orthopedic company developing products to improve the repair of vertebral fractures due to injury and aging. This acquisition significantly broadens Spine Wave's technology base and gives it a platform in two of the fastest growing segments of the spine industry - disc repair and vertebral compression fracture treatment. Under the amended Supply and Services Agreement, the Company on behalf of Spine Wave is proceeding with preclinical safety and performance studies of the device to support Spine Wave's filing of an Investigational Device Exemption with the FDA to obtain approval to initiate human clinical testing. We estimate we will receive from Spine Wave approximately $1.5 million in R&D payments over the next year, exclusive of the preclinical study costs. During the subsequent period leading to regulatory marketing approvals, our contractual responsibilities include the supply of product to be used in clinical testing and preparation for commercial manufacturing operations. Spine Wave is responsible for clinical testing, regulatory approvals, and commercialization. As of March 31, 2002, we had cash and cash equivalents totaling $459,000. We believe our available cash and cash equivalents, accounts receivable, and future contractual research and development payments will be sufficient to meet our anticipated capital requirements until July 2002. We will continue to attempt to raise additional funds for continuing operations through private or public offerings and collaborative agreements. See "Liquidity and Capital Resources" below for additional information and a description of the associated risks. Results of Operations The Company received $470,000 in contract and licensing revenue for the three months ended March 31, 2002 as compared to $83,000 in contract and licensing revenue for the three months ended March 31, 2001. The contract and licensing revenue primarily represents the amortized portion of an up-front license payment of $1 million (being recognized ratably over a period of three years) from Femcare Ltd. for the commercial rights to our potential incontinence product in Europe and Australia, and payments from Spine Wave, Inc. for research and development associated with the development of a product for the repair of spinal disks for the treatment of lower back pain. The increase in contract and licensing revenue over the three month period primarily reflects contractual research and development revenue from Spine Wave which did not begin until the second quarter of 2001. Interest income was $2,000, for the three months ended March 31, 2002 versus $8,000 for the same period in 2001. Research and development expenses for the three months ended March 31, 2002 were $651,000 compared to $605,000 for the same period in 2001. 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 months ended March 31, 2002 were $289,000 as compared to $358,000 for the same period in 2001. 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, regulatory and manufacturing efforts require additional resources and to the extent additional capital is obtained. For the three months ended March 31, 2002, we recorded a net loss applicable to common shareholders of $(535,646), or $0.02 per share as compared to a loss of $(939,573), or $0.05 per share for the same period in 2000. Also included in each of the three month periods of 2002 and 2001 were $68,000, for undeclared dividends related to our preferred stock. 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 11 development, manufacturing and business development activities. Our 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 not had a material effect on our continuing operations. However, the sharp rise in utility costs may have an impact in the future. In addition, following the tragic events of September 11, we are being notified by our various insurance carriers to expect both changes in coverage and/or increased rates. Liquidity and Capital Resources As of March 31, 2002, we had cash and cash equivalents of $459,000 as compared to $234,000 at December 31, 2001. As of March 31, 2002, we had working capital of $(46,000) as compared to $(585,000) at December 31, 2001. We had no long-term debt obligations as of March 31, 2002 or as of December 31, 2001. We had $(1,293) in expenditures for capital equipment and leasehold improvements for the three months ending March 31, 2002, compared to zero for the same period last year. We are expecting to increase our capital expenditures in the next few quarters (to the extent additional capital is obtained), as we improve existing space to expand capacity to meet materials manufacturing requirements for clinical testing. We may also enter into capital lease arrangements if available at appropriate rates and terms. We believe our existing available cash, cash equivalents and accounts receivable, in combination with anticipated contract research payments and revenues received from the transfer of clinical testing materials, will be sufficient to meet our anticipated capital requirements until July 2002. Substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. We believe there may be a number of alternatives to meeting the continuing capital requirements of our operations, including additional collaborative agreements and public or private financings. However, there can be no assurance that any of these fundings will be consummated in the necessary time frames needed for continuing operations or on terms favorable to us. If adequate funds are not available, we will be required to significantly curtail or cease our operations, and may have to sell or license out significant portions of our technology or potential products. 12 PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: None b. Reports on Form 8-K The Current Report on Form 8-K filed with the Securities and Exchange Commission on May 1, 2002. 13 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROTEIN POLYMER TECHNOLOGIES, INC. Date: May 15, 2002 By /s/ J. Thomas Parmeter ----------------------- J. Thomas Parmeter Chairman of the Board, Chief Executive Officer, President Date: May 15, 2002 By /s/ Janis Y. Neves ------------------- Janis Y. Neves Director of Finance, Controller and Assistant Secretary 14 EXHIBIT INDEX Exhibit Sequentially Number Description Numbered Page ------- ----------- ------------- None 15