<PAGE>
================================================================================
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, 1999
[_] 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)
(619) 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 August 6, 1999, 13,429,882
shares of common stock were outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
===============================================================================
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
FORM 10-QSB
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -
June 30, 1999 and December 31, 1998............................ 3
Condensed Statements of Operations -
For the Three and Six Months ended June 30, 1999 and 1998
and the period July 6, 1988 (inception) to June 30, 1999....... 4
Condensed Statements of Cash Flows -
For the Six Months ended June 30, 1999 and 1998
and the period July 6, 1988 (inception) to June 30, 1999....... 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............................. 15
Signature.................................................... 16
2
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 141,272 $ 1,383,148
Short-term investments -- --
Other current assets 62,598 66,459
------------ ------------
Total current assets 203,870 1,449,607
Deposits 36,977 36,177
Notes receivable from officers 140,000 141,000
Equipment and leasehold improvements, net 464,705 598,447
------------ ------------
$ 845,552 $ 2,225,231
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 537,410 $ 515,413
Accrued employee benefits 84,180 167,849
Other accrued expenses 36,085 21,574
Current portion capital lease obligations 82,869 84,518
Deferred rent 60,668 60,668
------------ ------------
Total current liabilities 801,212 850,022
Long-term portion capital lease obligations 94,345 105,548
Stockholders' equity:
Convertible Preferred Stock, $.01 par value, 153,917 shares
authorized, 74,802 and 79,202 shares issued and outstanding
at June 30, 1999 and December 31, 1998, respectively;
liquidation preference - $7,480,200 7,160,227 7,600,226
Common stock, $.01 par value, 25,000,000 shares
authorized,13,064,510 and 10,827,240 shares issued and
outstanding at June 30, 1999 and December 31, 1998, 130,657 108,274
respectively
Additional paid-in capital 27,924,497 26,549,125
Deficit accumulated during development stage (35,265,386) (32,987,964)
------------ ------------
Total stockholders' equity (50,005) 1,269,661
------------ ------------
$ 845,552 $ 2,225,231
============ ============
</TABLE>
See accompanying notes.
3
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
For the Period
July 6, 1988
Three Months Ended Six Months Ended (inception) to
June 30, June 30, June 30,
1999 1998 1999 1998 1999
--------------- --------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract revenue $ -- $ -- $ -- $ 50,000 $ 4,354,965
Interest income 6,556 39,909 19,559 48,565 1,100,488
Product and other income 13,868 5,506 36,516 34,295 666,530
--------------- --------------- ---------------- ----------- ------------
Total revenues 20,424 45,415 56,075 132,860 6,121,983
Expenses:
Cost of sales (128) 1,213 (323) 4,373 279,356
Research and development 740,004 1,064,159 1,448,080 1,917,383 22,833,334
Selling, general and
administrative 445,620 424,010 873,239 926,058 14,029,541
Royalties 6,250 6,250 12,500 12,500 302,671
--------------- --------------- ---------------- ----------- ------------
Total expenses 1,191,746 1,495,632 2,333,496 2,860,314 37,444,902
--------------- --------------- ---------------- ----------- ------------
Net loss (1,171,322) (1,450,217) (2,277,421) (2,727,454) (31,322,919)
Undeclared, imputed and/or
paid dividends on
preferred stock 69,220 3,335,936 137,678 3,405,503 5,099,693
--------------- --------------- ---------------- ----------- ------------
Net loss applicable to
common shareholders $ (1,240,542) $ (4,786,153) $ (2,415,099) $(6,132,957) $(36,422,612)
=============== =============== ================ =========== ============
Basic and diluted net loss
per common share $ (0.10) $ (0.46) $ (0.21) $ (0.59)
=============== =============== ================ ===========
Shares used in computing
basic and diluted net
loss per common share 12,505,778 10,471,922 11,727,586 10,450,267
=============== =============== ================ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Period
July 6, 1988
Six Months Ended (inception) to
June 30, June 30,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(2,277,421) $(2,727,454) $(31,322,919)
Adjustments to reconcile net loss to net cash
used for operating activities:
Stock issued for compensation and interest 18,000 122,895
Depreciation and amortization 156,023 179,002 1,784,319
Write-off of purchased technology -- -- 503,500
Changes in assets and liabilities:
Deposits (800) (360) (36,977)
Notes receivable from officers 1,000 6,000 (140,000)
Other current assets 3,862 50,172 (62,597)
Accounts payable 21,997 (63,081) 537,410
Accrued employee benefits (83,669) 4,758 84,180
Other accrued expenses 14,511 (7,278) 36,085
Deferred rent -- -- 60,668
----------- ----------- ------------
Net cash used for operating activities (2,146,497) (2,558,241) (28,433,436)
INVESTING ACTIVITIES
Purchase of technology -- -- (570,000)
Purchase of equipment and improvements (22,282) (99,250) (1,806,996)
Purchases of short-term investments -- (893,180) (16,161,667)
Sales of short-term investments -- 974,817 16,161,667
----------- ----------- ------------
Net cash provided by (used for) investing
activities $ (22,282) $ (17,613) $ (2,376,996)
</TABLE>
See accompanying notes.
5
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Condensed Statements of Cash Flows, continued
(unaudited)
<TABLE>
<CAPTION>
For the Period
July 6, 1988
Six Months Ended (inception) to
June 30, June 30,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Net proceeds from exercise of options and
warrants, and sale of common stock $ 939,755 $ 108,244 $17,537,667
Net proceeds from issuance and conversion
of preferred stock -- 5,277,813 12,215,565
Net proceeds from convertible notes and
detachable warrants -- -- 1,068,457
Payment on capital lease obligations (12,852) (36,450) (111,558)
Payment on note payable -- -- (92,750)
Proceeds from note payable -- -- 334,323
----------- ----------- ------------
Net cash provided by (used for) financing
activities 926,903 5,349,607 30,951,704
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents (1,241,876) 2,773,753 141,272
Cash and cash equivalents at beginning of
period 1,383,148 325,021 --
----------- ----------- ------------
Cash and cash equivalents at end of period $ 141,272 $ 3,098,774 $ 141,272
----------- ----------- ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Equipment purchased by capital leases $ -- $ -- $ 288,772
Interest paid 9,925 14,453 107,853
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 444,400 -- 744,400
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
</TABLE>
See accompanying notes.
6
<PAGE>
PROTEIN POLYMER TECHNOLOGIES, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
(unaudited)
June 30, 1999
1. BASIS OF PRESENTATION
The condensed financial statements of Protein Polymer Technologies, Inc. (the
"Company") for the three and six months ended June 30, 1999 and 1998 are
unaudited. These financial statements reflect all adjustments, consisting of
only normal recurring adjustments which, in the opinion of management, are
necessary to state fairly the financial position at June 30, 1999 and the
results of operations for the three and six months ended June 30, 1999 and 1998.
The results of operations for the three and six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the year ended
December 31, 1999. For more complete financial information, these financial
statements and the notes thereto should be read in conjunction with the audited
financial statements included in the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1998, 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 net 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
As required, the Company adopted Financial Accounting Standards Board Statement
No. 128, "Earnings Per Share," ("FAS No. 128") during 1998. FAS No. 128 changes
the method used to calculate earnings per share and requires the restatement of
all prior periods reported. Under FAS No. 128, the Company is 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 includes
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 and six months ended
June 30, 1999 and 1998 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 affect is antidilutive, there is no difference
between the basic and diluted loss per share calculations.
4. NOTE RECEIVABLE WITH OFFICER
A loan for $140,000, secured by a pledge of stock, was made to an officer of the
Company on April 16, 1997, solely to meet tax obligations arising from the
exercise of a stock option. Interest accrues at the annual rate of 8% on the
principal balance. In July 1999, the loan term was extended for five unpaid
years. All remaining principal and accrued interest thereon is to be paid to the
Company in full by April 2005.
7
<PAGE>
5. EXERCISE OF WARRANTS
Between April 1 and April 15, 1999, the Company received approximately $508,000
from the exercise of redeemable, publicly traded, warrants originally issued as
part of PPTI's Initial Public Offering. Following the close of business on April
15, the remaining unexercised redeemable, publicly traded, warrants expired. On
May 12, 1999, the Company received approximately $416,000 from the exercise of
warrants issued in conjunction with the private placement of the Company's
Series E Convertible Preferred Stock.
6. SUBSEQUENT EVENTS
Series G Preferred Stock Offering
- ---------------------------------
On August 6, 1999, the Company notified its stockholders of its intention to
offer up to 35,000 shares of Series G Preferred Stock to institutional and
accredited individual investors following the 10 day stockholder notification
period required by the NASD prior to the sale. Each share of Series G
Convertible Preferred Stock is priced at $100 per share, and the total offering
of up to 35,000 shares provides for additional closings between now and the
middle of September. Each share can be converted at any time by the holder into
common stock at a price of $0.50 per share, subject to certain antidilution
adjustments. Each share of Preferred Stock also receives a common stock warrant,
exercisable for 12 months, that allows the holder to acquire 200 shares of PPTI
common stock at a price of $0.50 per share. The Preferred Stock, warrants and
underlying common stock have not been registered under the Securities Act of
1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. There is
no assurance that any closing will occur, and if none does occur the Company
will have virtually depleted its cash reserves.
Cost Reduction Measures Taken
- -----------------------------
On June 30, 1999, the Company laid off eighteen employees, approximately 60% of
its work force, as part of a broad cost cutting measure to preserve cash. In
late July, several employees were brought back on the payroll in order to
prevent delays in beginning the clinical testing of the Company's lead product,
scheduled to begin in the Fall. In addition, a number of remaining employees
agreed to take 50% of their salary in the form of a promissory note until the
current cash balance was improved, and reductions in non-employee expenditures
across the board have been taken. If the Company is successful in closing the
sale of the Series G Preferred stock offering, it is expected that several more
of the laid off employees will be invited to return to work. However there can
be no assurance that these employees will return to the Company.
7. LIQUIDITY
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company believes its existing
available cash and cash equivalents as of June 30, 1999 are sufficient to meet
its anticipated capital requirements until August 1999. If a closing of the
Series G Preferred stock offering occurs before the end of August, the Company
believes that its available cash and cash equivalents will be sufficient to meet
its anticipated capital requirements until March 2000, including the external
expenses associated with the conduct of pilot human clinical trials of the
Company's product for the treatment of female stress urinary incontinence. There
is no assurance that such a closing will
8
<PAGE>
occur. In addition, substantial additional capital resources will be required to
fund continuing expenditures related to the Company's research, development and
product marketing activities. If adequate funds are not available in the future,
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.
9
<PAGE>
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, compliance with NASDAQ listing requirements, scientific and
technical uncertainties, competitive products and approaches, reliance upon
collaborative partnership agreements and funding, regulatory testing and
approvals, patent protection uncertainties and manufacturing scale-up. 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. The reader is encouraged to refer to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998, as well as other recent filings
with the Securities and Exchange Commission, to ascertain the risks associated
with these statements.
GENERAL OVERVIEW
Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or "the
Company"), is a development-stage biotechnology company incorporated on July 6,
1988 and is engaged in the research, development and production of medical
products based on its proprietary protein-based biomaterials technology. The
Company has been unprofitable to date, and has an accumulated deficit of
$35,265,000. Since 1992, the Company has primarily focused on developing
materials technology and products to be used in the surgical repair of tissue:
soft tissue augmentation; surgical adhesives and sealants; wound healing and
tissue engineering matrices; drug delivery devices; and surgical adhesion
barriers. The Company has also developed coating technology that can efficiently
modify and improve the surface properties of more traditional biomedical
devices. A common goal is to develop materials that beneficially interact with
human cells, enabling cell growth and the regeneration of tissues with improved
outcomes as compared to current products and practices.
In December 1998, the Company filed its first Investigational Device Exemption
("IDE") with the U.S. Food and Drug Administration ("FDA") to request approval
to begin human clinical testing of its urethral bulking agent for the treatment
of female stress urinary incontinence. In May 1999, the FDA approved the IDE.
The Company expects to start enrolling patients for these clinical trials in the
fall. The Company intends to submit an additional IDE to the FDA in the fourth
quarter of 1999 to request approval to begin human clinical testing of its
dermal bulking agent for use in cosmetic and reconstructive surgery
applications. PPTI began studies to identify its most promising biomaterial
formulations for use in these soft tissue augmentation products in
10
<PAGE>
1996 and has devoted increasing resources to this program area through 1997 and
1998 in preparation for beginning human clinical testing.
Between 1994 and 1997, the Company's efforts were focused predominantly on the
development of its surgical adhesive and sealant technology. As part of this
effort, the Company targeted the establishment of a strategic alliance with a
market leader in the field of surgical wound closure products which lead to the
execution of comprehensive license, supply and development agreements in
September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson &
Johnson Company ("J&J"). Ethicon elected to terminate these agreements in
December 1997.
The Company has demonstrated both the adhesive performance and the
biocompatibility of its product formulations in animal models, including the
resorption of the adhesive matrix in conjunction with the progression of wound
healing. PPTI is committed to the commercial development of its adhesive and
sealant technology and during 1998, the Company worked to determine the specific
markets and products providing the most significant opportunities for its use.
As a result, the Company has focused project activities on the development of
products to repair spinal discs for the treatment of chronic lower back pain.
PPTI is seeking to establish a strategic alliance with a leader in the market
for such products.
To the extent sufficient resources are available, the Company will continue to
research the use of its protein polymers for other tissue repair and medical
device applications, principally for use in tissue engineering matrices and drug
delivery devices.
PPTI is aggressively pursuing domestic and international patent protection for
its technology, making claim to an extensive range of recombinantly prepared
structural and functional proteins, methods for preparing synthetic repetitive
DNA, methods for the production and purification of protein polymers, end-use
products incorporating such materials and methods for their use. To date, the
United States Patent and Trademark Office ("USPTO") has issued fourteen patents
to the Company, eight of which were issued in 1998. In addition, PPTI has filed
corresponding patent applications in most other relevant commercial
jurisdictions.
In 1992, the Company raised approximately $8.9 million through its initial
public offering of common stock and redeemable warrants. The Company used a
major portion of these proceeds to generate substantive in vitro laboratory
evidence and in vivo animal test data demonstrating the biocompatibility and
performance of its protein polymers and derived biomaterials, and to establish a
materials science group which has developed important materials modification and
fabrication technology.
In July 1994, the Company raised approximately $2.1 million from the sale of its
unregistered Series C Preferred Stock to private investors. In September 1995,
the Company raised approximately $2.4 million from the sale of its unregistered
Series D Preferred Stock to the same private investors. Also at this time these
investors exchanged all of their holdings of Series C Preferred Stock and
accumulated dividends into Series D Preferred Stock. In January 1997, the
Company raised approximately $4.6 million from a private placement of the
Company's common stock with a number of institutional and accredited investors.
11
<PAGE>
In April and May of 1998, the Company raised approximately $5.4 million from the
sale of 54,437.5 shares of the Company's unregistered Series E Convertible
Preferred Stock ("Series E Stock") priced at $100 per share with warrants to
purchase an aggregate of 3,266,250 shares of common stock to a small group of
institutional and accredited investors. In connection with this transaction, the
Company issued 26,240 shares of Series F Convertible Preferred Stock in exchange
for the same number of shares of outstanding Series D Convertible Preferred
Stock.
In April 1999 the Company received approximately $508,000 from the exercise of
redeemable, publicly traded, warrants issued as part of the initial public
offering. In May 1999 the Company received $416,000 from the exercise of
warrants issued in conjunction with the sale of its Series E Convertible
Preferred Stock.
The Company's cash balance as of June 30, 1999 was $141,000. The Company hopes
to raise additional funds for continuing operations through private or public
offerings and collaborative agreements. On August 6, 1999, the Company notified
its stockholders of its intention to offer up to 35,000 shares of Series G
Preferred Stock to institutional and accredited individual investors following
the 10 day stockholder notification period required by the NASD prior to the
sale. Each share of Series G Convertible Preferred Stock is priced at $100 per
share, and the total offering of up to 35,000 shares provides for additional
closings between now and the middle of September. Each share can be converted at
any time by the holder into common stock at a price of $0.50 per share, subject
to certain antidilution adjustments. Each share of Preferred Stock also receives
a common stock warrant, exercisable for 12 months, that allows the holder to
acquire 200 shares of PPTI common stock at a price of $0.50 per share. The
Preferred Stock, warrants and underlying common stock have not been registered
under the Securities Act of 1933, as amended, and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements.
If the Company's Series G Preferred Stock offering is completely sold the
Company's cash balance (on a pro forma basis as of June 30, 1999), including the
net amount raised in combination with existing cash, would be approximately
$3,600,000. At planned spending levels this amount would be expected to meet the
Company's anticipated capital requirements until June 2000. There is no
assurance that any closing will occur, and if none does occur the Company will
have virtually depleted its cash reserves.
The Company's strategy with most of its programs is to enter into collaborative
development agreements with major medical product marketing and distribution
companies. Although these relationships, to the extent any are consummated, may
provide significant near-term revenues through up front licensing fees, research
and development reimbursements and milestone payments, the Company expects to
continue incurring operating losses for several more years. In their report for
the year ended December 31, 1998, our independent auditors stated that without
additional financing, there is substantial doubt about our ability to continue
as a going concern. We believe there are a number of alternatives available to
meet our continuing capital requirements. See the Liquidity and Capital
Resources section of Management's Discussion and Analysis of Financial Condition
and Results of Operations for further discussion.
RESULTS OF OPERATIONS
Since the termination of the R&D agreements with Ethicon in December 1997, the
Company has received virtually no contract research revenue. Interest income was
$7,000 for the three months ended June 30, 1999, versus $40,000 for the same
period in 1998. Interest income for the six months ended June 30, 1999 and 1998
were $20,000 and $49,000 respectively. The decreases resulted from less cash
available for investing.
12
<PAGE>
For the three months ended June 30, 1999 and 1998, sales and license fees from
the Company's ProNectin(R) and SmartPlastic(R) products were $14,000 and $6,000,
respectively, and for the six month period ended June 30, 1999 were $37,000 and
$34,000 respectively. Although there has been a slow growth in sales, the
differences were due primarily to fluctuations in reorders by distributors.
The Company incurred no cost of sales for the three months or six months ended
June 30, 1999, compared to $1,000 and $4,000 respectively for the same period in
1998. The decrease in costs related primarily to adjustments in inventory
charges. Royalty expense was $6,000 and $13,000 respectively for the three and
six month periods ended June 30, 1999 and 1998.
Research and development expenses for the three and six months ended June 30,
1999 were $740,000 and $1,448,000 respectively, compared to $1,064,000 and
$1,917,000 respectively for the same period in 1998, decreases of 31% and a 25%
respectively. Throughout 1999 the Company has been systematically increasing the
focus of its efforts and reducing its expenditures across the board, by most
recently downsizing. The decrease is also attributable to completion of external
contracts and consulting services related to the Company's soft tissue
augmentation program, including preclinical testing and preparation of the
Investigational Device Exemption submitted to the Food and Drug Administration
("FDA") in December 1998. However, external expenses are expected to increase as
the Company begins the clinical testing of its urethral bulking product later
this year. In the future, the Company expects, in general, that its research and
development expenses will continue to increase over time if its other products
in development and other contemplated projects successfully progress and
additional capital is obtained.
Selling, general and administrative expenses for the three and six months ended
June 30, 1999 were $446,000 and $873,000 respectively, as compared to $424,000
and $926,000 for the same periods in 1998. Although baseline expenditures have
decreased, the total selling, general and administrative expenditures remained
similar to previous periods due to increases in legal and other professional
services primarily related to Securities and Exchange Commission filings and
other regulatory expenses. In general, the Company expects its selling, general
and administrative expenses to continue to decrease in the near term, but will
increase in the future as support for its research and development efforts may
require and to the extent additional capital is obtained.
For the three months ended June 30, 1999, the Company recorded a net loss
applicable to common shareholders of $1,241,000, or $0.10 per share compared to
a loss of $4,786,000, or $0.46 per share for the same period in 1998. For the
six months ended June 30, 1999, the Company recorded a net loss applicable to
common shareholders of $2,415,000, or $0.21 per share compared to a loss of
$6,133,000 or $0.59 per share for the same period in 1998. Included in the net
loss figures for the three and six month periods of 1998 were imputed non-cash
dividends of $3,266,000 to record the difference between the conversion price of
the newly issued Series E preferred stock and the fair market value of the
common stock on the preferred stock issuance date. Also included in each of the
three and six month periods of 1999 and 1998 was $69,000 and $138,000
respectively, for undeclared dividends related to the Company's preferred stock.
The Company expects to incur similar or increasing operating losses in the
future (to the extent additional capital is obtained), due primarily to
increases in the Company's soft tissue augmentation program's development,
manufacturing and business development activities. The Company's results depend
on its ability to establish strategic alliances and generate contract revenues,
increased research, development and manufacturing efforts, preclinical and
clinical product testing and commercialization expenditures, expenses incurred
for regulatory compliance
13
<PAGE>
and patent prosecution, and other factors. The Company's results will also
fluctuate from period to period due to timing differences.
To date the Company believes that inflation and changing prices have not had a
material effect on its continiuing operations.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company had cash, cash equivalents and short-term
investments of $141,000 as compared to $1,383,000 at December 31, 1998. As of
June 30, 1999, the Company had working capital of ($597,000) as compared to
$600,000 at December 31, 1998. In April and May 1999, the Company received
$924,000 from the exercise of redeemable, publicly traded, warrants issued in
conjunction with PPTI's Initial Public Offering and from the exercise of certain
warrants issued in conjunction with the private placement of the Company's
Series E Convertible Preferred Stock.
The Company had long-term debt obligations as of June 30, 1999 of $94,000 in the
form of capital lease obligations, versus $106,000 as of December 31, 1998. For
the six months ending June 30, 1999, the Company's expenditures for capital
equipment and leasehold improvements totaled $22,000, compared with $99,000 for
the same period last year. The Company is expecting to increase its capital
expenditures in the next few quarters (to the extent additional capital is
obtained), as the Company improves existing space to expand capacity to meet
materials manufacturing requirements for clinical testing. The Company may enter
into additional capital lease arrangements if available at appropriate rates and
terms.
The Company hopes to raise additional funds for continuing operations through
private or public offerings and collaborative agreements. On August 6, 1999, the
Company notified its stockholders of its intention to offer up to 35,000 shares
of Series G Preferred Stock to institutional and accredited individual investors
following the 10 day stockholder notification period required by the NASD prior
to the sale. Each share of Series G Convertible Preferred Stock is priced at
$100 per share, and the total offering of up to 35,000 shares provides for
additional closings between now and the middle of September. Each share can be
converted at any time by the holder into common stock at a price of $0.50 per
share, subject to certain antidilution adjustments. Each share of Preferred
Stock also receives a common stock warrant, exercisable for 12 months, that
allows the holder to acquire 200 shares of PPTI common stock at a price of $0.50
per share. The Preferred Stock,warrants and underlying common stock have not
been registered under the Securities Act of 1933, as amended, and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
If the Company's Series G Preferred Stock offering is completely sold the
Company's cash balance (on a pro forma basis as of June 30, 1999) including the
net amount raised in combination with existing cash would be approximately
$3,600,000. At planned spending levels this amount would be expected to meet the
Company's anticipated capital requirements until June 2000. There is no
assurance that any closing will occur, and if none does occur the Company will
have virtually depleted its cash reserves.
Substantial additional capital resources will be required to fund continuing
expenditures related to the Company's research, development, manufacturing and
business development activities. The Company believes there may be a number of
alternatives to meeting the continuing capital requirements of its operations,
including collaborative agreements and additional public or private financings.
The Company is currently in discussions at various stages with several potential
collaborative partners that, based on the results of various in vitro and in
-------- --
vivo product performance evaluations, could result in generating revenues in the
- ----
form of license fees, milestone payments or research and development
reimbursements. For example, the Company is
14
<PAGE>
in discussions with potential strategic partners regarding the provision of cash
and services in return for product marketing rights following FDA approvals. The
extent to which these partnership arrangements are realized will decrease the
amount of cash the Company will have to spend each quarter, thus potentially
extending the length of these operating priods. 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 the Company. If
adequate funds are not available, the Company will be required to significantly
curtail its operating plans and may have to sell or license out significant
portions of the Company's technology or potential products.
YEAR 2000 COMPLIANCE
The Company continues to modify its information technology in recognition of the
year 2000 issue. The "Year 2000" issue concerns potential exposure related to
the interruption of business practice and financial misinformation resulting
from the application of computer programs which have been written using two
digits, rather than four, to define the applicable year of business
transactions.
The Company has undertaken initiatives to ensure that its computer systems are
Year 2000 compliant. To date, the Company has not incurred any material costs in
connection with its Year 2000 plan. Based on its assessments to date, the
Company does not expect to incur any further significant costs, or anticipate
any significant problems or uncertainties associated with becoming Year 2000
compliant.
The following is a breakdown by phase of the progress the Company has made to
date on its Year 2000 plan:
Phase Timeframe % Complete
----- --------- -----------
Initial identification and assessment Q-4 1998 95%
Remediation Q-4 1998 95%
Testing Q-3 1999 85%
Contingency planning Q-3 1999 70%
The Company is reliant on its vendors and suppliers and may be reliant on
strategic partners to provide Year 2000 compliant systems prior to December 31,
1999. The Company is in the process of surveying all of its major vendors and
suppliers to determine whether their systems are Year 2000 compliant. At this
time, the impact on the Company of significant vendors and suppliers not being
in full compliance cannot be reasonably estimated. However, the Company believes
that any of its vendors and suppliers can be replaced with minimal cost impact.
The Company is developing a plan to mitigate the impact of vendors and suppliers
who are not in compliance with issues related to the Year 2000.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits:
Exhibit
Number Description
------ -----------
27 Financial Data Schedule.
b. Reports on Form 8-K
None.
16
<PAGE>
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 August 13, 1999 By /s/ J. Thomas Parmeter
--------------- -------------------------------
J. Thomas Parmeter
Chairman of the Board, Chief
Executive Officer, President
Date August 13, 1999 By /s/ Janis Y. Neves
--------------- -------------------
Janis Y. Neves
Director of Finance, Controller
and Assistant Secretary
17
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
27 Financial Data Schedule.
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 DEC-31-1998
<CASH> 141,272 1,348,148
<SECURITIES> 0 0
<RECEIVABLES> 19,333 9,965
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 203,869 1,449,607
<PP&E> 2,095,768 2,073,486
<DEPRECIATION> (1,631,063) (1,475,039)
<TOTAL-ASSETS> 845,552 2,225,231
<CURRENT-LIABILITIES> 801,212 850,022
<BONDS> 0 0
0 0
7,160,227 7,600,226
<COMMON> 130,657 26,657,399
<OTHER-SE> (35,265,386) (32,987,964)
<TOTAL-LIABILITY-AND-EQUITY> 845,552 2,225,231
<SALES> 36,516 67,096
<TOTAL-REVENUES> 56,075 255,824
<CGS> (323) 4,158
<TOTAL-COSTS> 12,177 29,158
<OTHER-EXPENSES> 2,321,319 5,864,819
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9,925 29,692
<INCOME-PRETAX> (2,277,421) (5,638,203)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,277,421) (5,638,203)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,277,421) (5,638,203)
<EPS-BASIC> (.21) (.88)
<EPS-DILUTED> (.21) (.88)
</TABLE>
