PROTEIN POLYMER TECHNOLOGIES INC - FORM 10-Q

Attached files

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EX-31.2 - PROTEIN POLYMER TECHNOLOGIES INC	v167335_ex31-2.htm
EX-32.1 - PROTEIN POLYMER TECHNOLOGIES INC	v167335_ex32-1.htm
EX-32.2 - PROTEIN POLYMER TECHNOLOGIES INC	v167335_ex32-2.htm
EX-31.1 - PROTEIN POLYMER TECHNOLOGIES INC	v167335_ex31-1.htm
EX-10.6 - PROTEIN POLYMER TECHNOLOGIES INC	v167335_ex10-6x5.htm
EX-10.6 - PROTEIN POLYMER TECHNOLOGIES INC	v167335_ex10-6x6.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨	TRANSITION REPORT PURSUANT TO 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 registrant as specified in its charter)

Delaware	33-0311631
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11494 Sorrento Valley Road, San Diego, CA 92121

(Address of principal executive offices) (Zip Code)

(858) 558-6064

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated

filer ¨

Accelerated
filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting

company)

Smaller reporting

company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

The number of shares of the registrant’s common stock issued and outstanding as of November 20, 2009 was 112,959,272.

PROTEIN POLYMER TECHNOLOGIES, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE PERIOD ENDED SEPTEMBER 30, 2009

TABLE OF CONTENTS

			Page

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	3
		Condensed Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)	4
		Condensed Statements of Cash Flows for the Three and Nine Months Ended September 30, 2009 and 2008 (unaudited)	5
		Notes to Condensed Financial Statements (unaudited)	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
	Item 4T.	Controls and Procedures	18

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings	20
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3.	Defaults Upon Senior Securities	20
	Item 4.	Submission of Matters to a Vote of Security Holders	20
	Item 5.	Other Information	20
	Item 6.	Exhibits	21

SIGNATURES			22

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Protein Polymer Technologies, Inc.

Condensed Balance Sheets

	September 30, 2009			December 31,
	(unaudited)			2008
Assets
Current assets:
Cash	$	17,398		$	1,291
Prepaid expenses and other current assets		77,525			35,011
Total current assets		94,923			36,302

Deposits		29,979			29,679
Equipment and leasehold improvements, net		13,381			24,429
Investment		520,000			520,000
Total assets	$	658,283		$	610,410

Liabilities and stockholders’ deficit
Current liabilities:
Accounts payable	$	1,101,345		$	969,435
Accrued liabilities		1,278,816			844,073
Secured notes payable – related party		6,414,837			6,414,837
Note payable – Surgica - other		-			519,071
Secured notes payables, net of unamortized debt discount		50,688			-
Notes payable – other, net of unamortized debt discount		278,015			158,589
Deferred revenue		50,000			-
Fair value of warrant and embedded derivative liability obligations		1,553,306			-
Total current liabilities		10,727,007			8,906,005

Commitments and contingencies

Stockholders’ deficit:
Convertible preferred stock, $0.01 par value; 5,000,000 shares authorized; 20,237 shares issued and outstanding at September 30, 2009 and December 31, 2008 – liquidation preference of $2,086,273 and $2,082,930 at September 30, 2009 and December 31, 2008, respectively.		1,834,299			1,834,299
Common stock, $0.01 par value; 1,000,000,000 shares authorized; 112,959,272 and 109,387,843 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively.		1,129,593			1,093,878
Additional paid-in capital		59,606,301			61,982,390
Accumulated deficit		(72,638,917	)		(73,206,162	)
Total stockholders’ deficit		(10,068,724	)		(8,295,595	)
Total liabilities and stockholders’ deficit	$	658,283		$	610,410

The accompanying notes are an integral part of these condensed financial statements.

Protein Polymer Technologies, Inc.

Condensed Statements of Operations

(unaudited)

	Three months ended						Nine months ended
	September 30,						September 30,
	2009			2008			2009			2008
Revenues	$	100		$	17,213		$	2,745		$	23,968

Operating expenses:
Research and development		30,139			127,721			88,295			1,253,211
Selling, general and administrative		292,412			236,570			893,285			748,062
Total expenses		322,551			364,291			981,580			2,001,273

Net loss from operations		(322,451	)		(347,078	)		(978,835	)		(1,977,305	)

Other income (expenses):
Interest and other income		-			194			-			194
Interest and other expense		(212,387	)		(183,029	)		(565,544	)		(561,271	)
Gain on sale of equipment		-			-			-			40,646
Gain on settlement of note payable – Surgica		-			-			638,380			-
Gain from change in fair value of warrant and embedded derivative obligations		64,325			-			26,121			-
Total other income (expense)		(148,062	)		(182,835	)		98,957			(520,431	)

Net loss		(470,513	)		(529,913	)		(879,878	)		(2,497,736	)

Dividends on preferred stock		1,127			69,789			3,343			207,850

Net loss applicable to common shareholders	$	(471,640	)	$	(599,702	)	$	(883,221	)	$	(2,705,586	)

Basic and diluted net loss per common share	$	(0.004	)	$	(0.006	)	$	(0.008	)	$	(0.029	)

Weighted average number of common shares outstanding – basic and diluted		112,959,272			105,944,857			112,802,286			93,614,046

The accompanying notes are an integral part of these condensed financial statements.

Protein Polymer Technologies, Inc.

Condensed Statements of Cash Flows

(unaudited)

	Nine months ended
	September 30,
	2009			2008
Operating activities
Net loss	$	(879,878	)	$	(2,497,736	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation		11,048			39,435
Stock-based compensation expense		2,422			7,164
Debt discount amortization		133,868			135,449
Gain from change in fair value of warrant and embedded derivative obligations		(26,121	)		-
Gain on sale of fixed assets		-			(40,646	)
Gain on settlement of note payable – Surgica		(638,380	)		-
Changes in operating assets and liabilities:
Deposits		(300	)		-
Prepaid expenses and other current assets		(42,514	)		(25,592	)
Accounts payable		131,910			114,711
Accrued liabilities		554,052			490,839
Deferred revenue		50,000			-
Net cash used for operating activities		(703,893	)		(1,776,376	)

Investing activities:
Proceeds from sale of equipment		-			101,000
Net cash provided by investing activities		-			101,000

Financing activities:
Proceeds from sale of common stock		75,000			1,655,000
Proceeds from issuance of note payable		645,000			-
Net cash provided by financing activities		720,000			1,655,000

Net increase (decrease) in cash		16,107			(20,376	)
Cash at beginning of the period		1,291			21,936
Cash at end of the period	$	17,398		$	1,560

Supplemental disclosures of cash flow information
Interest paid	$	1,358		$	2,129
Non cash investing and financing activity
Debt discount recorded in connection with issuance/amendment of warrants	$	-		$	135,449
Warrants issued with common stock and debt	$	551,539		$	-
Secured note payable-related party issued for payment of accrued interest	$	-		$	538,837

The accompanying notes are an integral part of these condensed financial statements.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Note 1. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q under the modified rules and regulations for “Smaller Reporting Companies”. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. However, the Company believes that the condensed financial statements, including the disclosures herein, include all adjustments necessary in order to make the financial statements presented not misleading. The balance sheet as of December 31, 2008 was derived from the Company’s audited financial statements. The financial statements herein should be read in conjunction with our financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the U.S. Securities and Exchange Commission. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results expected for the fiscal year ending December 31, 2009.

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 nine months ended September 30, 2009, the Company incurred net losses and negative cash flows from operating activities of approximately $880,000 and $704,000, respectively, and at September 30, 2009, the Company had a working capital deficit of approximately $10,632,000 and an accumulated deficit of approximately $72,639,000. The Company’s cash balance as of September 30, 2009 was approximately $17,000 and, in combination with anticipated additional contract and license payments, is insufficient to meet ongoing capital requirements.

From January 1, 2009 through September 30, 2009, required operating capital has been obtained through proceeds totaling $75,000 from equity issuances and proceeds totaling $645,000 from issuance of debt.

Management is currently in discussion with other potential financing sources and collaborative partners and is investigating other funding in the form of equity investments and license fees. If adequate funds are not available, the Company will be required to significantly curtail operations, sell or license out significant portions of its technology, or possibly cease operations. The financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Revenue Recognition

Revenues are recognized when earned in accordance with the terms and performance requirements of the contracts, If the research and development activities are not successful, the Company is not obligated to refund payments previously received.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock-Based Compensation

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-Merton option-pricing model.

Investment

The investment balance at September 30, 2009 and December 31, 2008 represents shares of common stock owned by the Company in a privately held company which were acquired pursuant to a license agreement. Based on the Company’s limited ownership percentage, the investment is reported using the cost method. Under the cost method, the Company does not record its proportional share of earnings and losses of the investee, and income on the investment is only recorded to the extent of dividends distributed from earnings of the investee received subsequent to the date of acquisition.

The Company reviews the carrying value of its cost-method investment for impairment when indicators of impairment are present. When an impairment test demonstrates that the fair value of an investment is less than its cost, Company management will determine whether the impairment is either temporary or other-than-temporary. Examples of factors which may be indicative of an other-than-temporary impairment include i) the length of time and extent to which market value has been less than cost, ii) the financial condition and near-term prospects of the issuer, iii) and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. If the decline in fair value is determined by management to be other-than-temporary, the cost basis of the investment is written down to its estimated fair value as of the balance sheet date of the reporting period which the assessment is made. This fair value becomes the investment’s new cost basis, which is not changed for subsequent recoveries in fair value. Any recorded impairment write-down will be included in earnings as a realized loss in the period such write-down occurs.

As of September 30, 2009, the Company was not aware of any indicators of impairment and believes that the carrying amount of its investment was not impaired at September 30, 2009.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Fair Value Measurements

The carrying value of the Company’s cash, accounts payable and accrued expenses approximate their respective fair values because of the short maturities of these instruments. The carrying value of the Company’s notes payable obligations approximates their fair value as the stated interest rates of these instruments reflect rates currently available to the Company.

The Company measures the fair value of applicable financial and non-financial assets based on the following levels of inputs:

Level 1: Quoted prices in an active market for identical assets or liabilities.

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

At September 30, 2009, the Company re-measured the fair value of warrants and embedded derivatives to purchase shares of common stock that were classified as liabilities (see Note 4). These instruments were valued using Level 3 inputs because there are certain unobservable inputs associated with them. The following table reconciles the liability for these instruments measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2009:

Balance at December 31, 2008	$	-
Cumulative effect of accounting change (Note 7)		933,000
Issuance of new warrants and embedded derivatives		646,000
Gain on change in fair value included in net loss		(26,000	)
Balance at September 30, 2009	$	1,553,000

Fair Value of Warrant and Embedded Derivative Obligations

Effective January 1, 2009, 50,687,119 of the Company’s warrants and embedded derivatives to purchase common stock previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment due to exercise price reset and anti-liquidation features.

On January 1, 2009, the Company reduced additional paid-in capital by $2,380,000 and decreased the beginning accumulated deficit by $1,447,000 as a cumulative effect to establish a long-term warrant and embedded derivative liability of $933,000 to recognize the fair value of such instruments.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

These instruments were initially issued in connection with placement of the Company’s common stock. The instruments were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The instruments do not qualify for hedge accounting, and as such, all future changes in the fair value of these instruments will be recognized currently in earnings until such time as the instruments are exercised or expire. These instruments do not trade in an active securities market, and as such, we estimate the fair value of these instruments using the Black-Scholes-Merton option pricing model using the following assumptions at September 30, 2009:

Annual dividend yield	0	%
Expected life (years)	0.4 – 4.3
Risk-free interest rate	0.2% - 2.4	%
Expected volatility	246% - 476	%

Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected life of the instruments. The Company believes this method produces an estimate that is representative of our expectations of future volatility over the expected term of these instruments. The Company currently has no reason to believe future volatility over the expected remaining life of these instruments is likely to differ materially from historical volatility. The expected life is estimated by management based on the remaining term of the instruments. The risk-free interest rate is based on the rate for U.S. Treasury securities over the expected life.

Income Taxes

The Company records income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their future respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recorded or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established to reduce the deferred tax asset if it is more likely that the related tax benefits will not be realized in the future.

Net Loss per Common Share

Basic loss per share is calculated using the weighted-average number of outstanding common shares during the period. Diluted loss per share is calculated using the weighted-average number of outstanding common shares and dilutive common equivalent shares outstanding during the period, using either the as-converted method for convertible notes and convertible preferred stock or the treasury stock method for options and warrants.

Excluded from diluted loss per common share as of September 30, 2009 and 2008 were 86,492,424 and 143,710,780 shares, respectively, issuable upon conversion of convertible preferred stock, and common stock options and warrants, because the effect of the inclusion of these shares would be anti-dilutive.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2009 presentation.

Recent Accounting Pronouncements

Effective September 2009, the Company revised references to authoritative accounting literature in accordance with FASB Accounting Standards Codification (the “Codification”). The Codification became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative.

Note 2.

Investment

The investment included on our balance sheets at September 30, 2009 and December 31, 2008 represents the Company’s cost basis in shares of common stock of Spine Wave, Inc. (“Spine Wave”), a privately held company focused on the development and commercialization of innovative products and technologies for the treatment of spinal disorders.

As of September 30, 2009 the Company was not aware of any indicators of impairment with respect to its investment in Spine Wave, and it was not practicable for the Company to estimate the fair value of this investment because of the lack of quoted market prices and the inability to otherwise estimate fair value without incurring excessive costs. Management believed that the carrying amount of its investment in Spine Wave was not impaired at September 30, 2009.

As discussed in Note 4, all of the Spine Wave shares owned by the Company serve as collateral for a currently outstanding note payable.

Note 3.

Accrued Liabilities

Accrued liabilities consist approximately of the following:

	September 30,		December 31,
	2009		2008
Payroll and employee benefits	$	91,000		67,000
Professional fees		14,000		-
Accrued interest		920,000		610,000
Insurance premium financing		69,000		27,000
Directors fees		130,000		100,000
Other		55,000		40,000
	$	1,279,000		844,000

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Note 4.

Notes Payable

Secured Notes Payable – Related Party

As of September 30, 2009, the amount due on the secured notes payable – related party note includes the $6,415,000 outstanding balance plus $885,000 of accrued interest. On September 21, 2009, the Company extended the maturity date to September 30, 2010.

The note is secured by a senior security interest in and general lien upon (i) 2,400,000 shares of Spine Wave, Inc. common stock owned by the Company; and (ii) all U.S. patents owned by the Company.

Secured Notes Payable – Other

On September 3, 2009, the Company received proceeds of $150,000 as a secured loan. This note is due on March 2, 2010 and bears an annual interest rate of 10%. The interest is payable on the maturity date, either in cash or common stock at a rate of $0.04 per share at the discretion of the Company. The note is convertible into the Company’s common stock at the rate of $0.04 per share subject to applicable anti-dilution provisions and future pricing provisions. As of September 30, 2009 the total amount of accrued interest owed was $1,000. The note is secured by a junior interest in and general lien upon (i) 2,400,000 shares of Spine Wave, Inc. common stock owned by the Company; and (ii) all U.S. patents owned by the Company.

A portion of the proceeds totaling $99,000 were allocated to the future pricing provisions as debt discount. The fair value of this embedded derivative was estimated on the issuance date using the Black-Scholes-Merton option valuation model with the following assumptions:

Expected annual dividends	0	%
Risk-free interest rate	0.21	%
Expected term (in years)	0.5
Expected Volatility	466	%

The carrying value of the secured notes payable - other at September 30, 2009, is comprised of the following:

Principal value of notes	$	150,000
Less: Unamortized debt discount		(99,000	)
	$	51,000

The total debt discount recorded is being amortized as interest expense over the expected term of the notes using the effective interest method. During the nine months ended September 30, 2009, the Company did not record non-cash interest expense based on the debt discount amortization of the embedded derivative.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Notes Payable - Other

On July 7, 2009 and August 14, 2009, the Company received proceeds of $50,000 and $30,000, respectively, as unsecured loans. These notes are due on July 6, 2010 and August 13, 2010, respectively, and bear an annual interest rate of 8%. The interest and principal are payable on the maturity dates, either in cash or common stock at a rate of $0.034, and $0.025 per share, respectively, at the discretion of the Company. In connection with the loans, the Company granted warrants to the noteholders to purchase an aggregate of 1,492,537, and 1,200,000, shares, respectively, of the Company’s common stock at an exercise price of $0.034 and $0.025 per share, respectively. As of September 30, 2009 the total amount of accrued interest owed was $1,000.

A portion of the proceeds totaling $79,000 were allocated to the warrant liabilities and as debt discount. The fair value of these warrants was estimated on the date of grant using the Black-Scholes-Merton option valuation model with the following assumptions:

	7/7/09 Warrant			8/14/09 Warrant
Expected annual dividends		0	%		0	%
Risk-free interest rate		1.55	%		1.48	%
Expected term (in years)		3.0			3.0
Expected Volatility		287	%		299	%

The carrying value of the notes payable - other at September 30, 2009, is comprised of the following:

Principal value of notes	$	725,000
Less: Unamortized debt discount		(447,000	)
	$	278,000

The total debt discount recorded is being amortized as interest expense over the expected term of the notes using the effective interest method. During the nine months ended September 30, 2009, the Company recorded non-cash interest expense of approximately $134,000 based on the debt discount amortization of the warrants.

Surgica Notes

In December 2005, in connection with a license agreement with Surgica Corporation for the rights to certain intellectual property, the Company assumed several notes payable agreements with an aggregate principal balance of $519,000.

In March 2007, the license agreement with Surgica was terminated. On October 15, 2008, the noteholders instituted suit against the Company in Superior Court of California, County of Sacramento seeking payment of these notes. Until a final determination was made with respect to the disposition of the notes, the Company continued to carry them on its balance sheet.

On May 19, 2009, the plaintiffs filed a request for dismissal with prejudice of the action against the Company, and the Company paid nothing to plaintiffs in exchange for the dismissal. The dismissal was granted, and the Company reversed the principal liability balance of $519,000 and the accrued interest of $119,000 relating to this license agreement and recorded a gain on extinguishment of $638,000 for the three-month period ended June 30, 2009. As such, neither the liability nor the related accrued interest appears on the Company’s balance sheet as of September 30, 2009.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Note 5.

Common Stock

The Company’s Board of Directors agreed to the terms of a Stock Purchase Agreement (“SPA”) and a Registration Rights Agreement (“RRA”), each dated as of September 27, 2007 and amended on November 28, 2007, with TAG Virgin Islands, Inc.(“TAG”), as agent for certain purchasers of the Company’s common stock. TAG is a registered investment advisor and advises a number of the Company’s stockholders, including certain members of the Company’s Board of Directors, in investment decisions, including decisions about whether to invest in the Company’s stock. The SPA essentially provides for the Company selling, from time to time, shares of its common stock, par value $0.01, to the purchasers at a purchase price determined as the closing price of the stock on sale date. As a component of the purchase of the common stock, the purchaser also will receive a warrant to purchase the same number of shares of common stock in the future. Each warrant expires in five years from the date of purchase and is exercisable at a per share price, subject to certain anti-dilution provisions, equal to 100% of the purchase price paid by the purchase. The SPA can be terminated at any time by TAG. The purchasers have certain registration rights, as provided by the RRA, to require the Company, at its cost, to file an effective registration statement with the Securities and Exchange Commission.

For the nine months ended September 30, 2009, the Company received an aggregate of $75,000 in subscriptions for the purchase of 3,571,429 shares of common stock and 3,571,429 warrants, subject to the terms of the SPA and RRA. Between September 27, 2007 and September 30, 2009, the Company received proceeds of $2,357,000 for the purchase of 46,070,548 shares of common stock and 46,070,548 warrants pursuant to this Stock Purchase Agreement.

Note 6.

Stock Options

The Company did not grant options during the nine months ended September 30, 2009. Stock option activity for the nine months ended September 30, 2009 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)
Outstanding at December 31, 2008		3,507,500		$	0.68		4.40
Issued		-			-
Exercised		-			-
Cancelled		(77,500	)	$	0.46
Outstanding at September 30, 2009		3,430,000		$	0.69		3.74
Exercisable at September 30, 2009		3,430,000		$	0.69		3.74

During the three and nine month periods ended September 30, 2009, the Company recognized $0 and $2,400 in stock-based compensation expense. The charges in the comparable periods ended September 30, 2008 were $2,900 and $7,200, respectively. As of September 30, 2009, all unrecognized compensation expense related to unvested share-based compensation arrangements was fully recognized. There was no intrinsic value related to the stock options outstanding as of September 30, 2009.

Protein Polymer Technologies, Inc.

Notes to Condensed Financial Statements

(unaudited)

Note 7.

Warrants to Purchase Common Stock

The Company has reserved for issuance, out of currently authorized and unissued shares of common stock, shares underlying outstanding warrants to purchase common stock. The fair values of the warrant obligations were recorded as liabilities on the dates of issuance. Upon exercise of the warrants, shares of common stock will be issued out of currently authorized and unissued shares. A summary of warrant activity for the nine months ended September 30, 2009 is as follows:

	Number of Warrants Outstanding and Exercisable			Weighted- Average Exercise Price
Outstanding, December 31, 2008		63,246,315		$	0.14
Granted		26,437,043		$	0.02
Exercised		-		$	-
Expired		(12,468,589	)	$	0.50
Outstanding, September 30, 2009		77,214,769		$	0.04

At September 30, 2009, the weighted-average remaining contractual life of the warrants was approximately 3.10 years.

Note 8.

Sanyo Contract

On June 29, 2009, the Company received from Sanyo Chemical Industries, Ltd. (“Sanyo”) a fully executed copy of a License Agreement between Sanyo and the Company. The effective date of the Agreement is June 18, 2009. Pursuant to the Agreement, the Company has granted a non-exclusive, world-wide license to Sanyo of its technology, know-how, and intellectual property relating to recombinant, repetitive unit proteins and peptides, for the purposes of developing and commercializing products related to Sanyo’s specific fields of business. The Agreement remains in effect until the expiration of the last to expire of the Company’s patents licensed by Sanyo under this Agreement. The Agreement further provides the Company with initial and ongoing license fees, technical service and training fees, and a percentage royalty on the quarterly net sales of any new products developed by Sanyo under this Agreement.

Note 9.

Subsequent Events

On October 21, 2009 and November 12, 2009, the Company received proceeds of $100,000 and $100,000, respectively, pursuant to note payable agreements entered into with clients of TAG. These loans are represented by secured notes issued by the Company. These notes are due on April 20, 2010 and May 11, 2010, respectively, and bear an annual interest rate of 10%. The interest is payable on the maturity dates, either in cash or common stock at a rate of $0.04 per share at the discretion of the Company. These notes are convertible into the Company’s common stock at the rate of $0.04 per share subject to applicable anti-dilution provisions. The Company did not grant warrants to the noteholders in connection with these loans. These notes are secured by a junior interest in and general lien upon (i) 2,400,000 shares of Spine Wave, Inc. common stock owned by the Company; and (ii) all U.S. patents owned by the Company.

The Company evaluated subsequent events through November 20, 2009, which is the date the financial statements were issued.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2008, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2008. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. When used herein, the words “believe,” “anticipate,” “expect,” “estimate” and similar expressions are intended to identify such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under the caption “Risk Factors” in the Form 10-K for the year ended December 31,2008. We undertake no obligation to update any of the forward-looking statements contained herein to reflect any future events or developments.

Company and Technology Background

Protein Polymer Technologies, Inc. (hereafter the “Company”, “our” or “we”), a Delaware corporation, is a biotechnology company incorporated on July 6, 1988. We are engaged in the research, development and production of bio-active devices to improve medical and surgical outcomes. Through our patented technology to produce proteins of unique design, biological and physical product components are integrated to provide for optimized clinical performance.

We are focused on developing products to improve medical and surgical outcomes, based on an extensive portfolio of proprietary biomaterials. Biomaterials are materials that are used to direct, supplement, or replace the functions of living systems. The interaction between materials and living systems is dynamic. It involves the response of the living system to the materials (e.g., biocompatibility) and the response of the materials to the living system (e.g., remodeling). The requirements for performance within this demanding biological environment have been a critical factor in limiting the possible metal, polymer, and ceramic compositions to a relatively small number that to date have been proven useful in medical devices implanted within the body.

The goal of biomaterials development historically has been to produce inert materials, i.e., materials that elicit little or no response from the living system. However, we believe that such conventional biomaterials are constrained by their inability to convey appropriate messages to the cells that surround them, the same messages that are conveyed by proteins in normal human tissues.

The products we have targeted for development are based on a new generation of biomaterials which have been designed to be recognized and accepted by human cells to aid in the natural process of bodily repair, (including the healing of tissue and the restoration or augmentation of its form and function) and, ultimately, to promote the regeneration of tissues. We believe that the successful realization of these properties will substantially expand the role that artificial devices can play in the prevention and treatment of human disability and disease, and enable the culture of native tissues for successful reimplantation.

Through our proprietary core technology, we produce high molecular weight polymers that can be processed into a variety of material forms such as gels, sponges, films, and fibers, with their physical strength and rate of resorption tailored to each potential product application. These polymers are constructed of the same amino acids as natural proteins found in the body. We have demonstrated that our polymers can mimic the biological and chemical functions of natural proteins and peptides, such as the attachment of cells through specific membrane receptors and the ability to participate in enzymatic reactions, thus overcoming a critical limitation of conventional biomaterials. In addition, materials made from our polymers have demonstrated excellent biocompatibility in a variety of preclinical safety studies.

Our patented core technology enables messages that direct activities of cells to be precisely formulated and presented in a structured environment similar to what nature has demonstrated to be essential in creating, maintaining and restoring the body’s functions. Our protein polymers are made by combining the techniques of modern biotechnology and traditional polymer science. The techniques of biotechnology are used to create synthetic genes that direct the biological synthesis of protein polymers in recombinant microorganisms. The methods of traditional polymer science are used to design novel materials for specific product applications by combining the properties of individual “building block” components in polymer form.

In contrast to natural proteins, either isolated from natural sources or produced using traditional genetic engineering techniques, our technology results in the creation of new proteins with unique properties. We have demonstrated an ability to create materials that:

· combine properties of different proteins found in nature;

· reproduce and amplify selected activities of natural proteins;

· eliminate undesired properties of natural proteins; and

· incorporate synthetic properties via chemical modifications

This ability is fundamental to our current primary product research and development focus — tissue repair and regeneration. Tissues are highly organized structures made up of specific cells arranged in relation to an extracellular matrix (“ECM”), which is principally composed of proteins. The behavior of cells is determined largely by their interactions with the ECM. Thus, the ability to structure the cells’ ECM environment allows the protein messages they receive — and their activity — to be controlled.

Results of Operations

Revenue. Product and licensing revenues for the three and nine months ended September 30, 2009 were approximately $0 and $3,000, respectively, compared to $17,000 and $24,000, respectively, for revenue from product sales for the comparable periods in 2008.

Research and Development Expenses. Research and development expenses for the three and nine months ended September 30, 2009 were $30,000 and $88,000, respectively, compared to $128,000 and $1,253,000, respectively, for the comparable periods in 2008. The decline resulted from our inability to raise additional capital, and the closing of our laboratory and administrative facility, and the subsequent sub-contracting of the laboratory function in 2008. We expect our research and development expenses will increase in the future only to the extent that additional capital is obtained or future collaborative development and licensing agreements are secured.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and nine months ended September 30, 2009 were $292,000 and $893,000, respectively, as compared to $237,000 and $748,000, respectively, for the comparable periods in 2008. To the extent possible, we continue to concentrate on controlling costs in this area. We expect our selling, general and administrative expenses will increase in the future only to the extent that additional capital is obtained or future collaborative development and licensing agreements are secured.

Change in Fair Value of Warrant and Embedded Derivative Obligations

We recognized a non-cash gain from the change in fair value of the warrant and embedded derivative obligations for the three and nine months ended September 30, 2009 of $64,000 and $26,000, respectively.

Operating Losses. For the three months ended September 30, 2009, we recorded a net loss applicable to common shareholders of $472,000 or $0.004 per share, as compared to a loss of $600,000 or $0.006 per share for the comparable period in 2008. For the nine months ended September 30, 2009, we recorded a net loss applicable to common shareholders of $883,000 or $0.008 per share, as compared to a loss of $2,706,000 or $0.029 per share for the comparable period in 2008.

Liquidity and Capital Resources

As of September 30, 2009, we had cash totaling approximately $17,000, as compared to $1,000 at December 31, 2008. As of September 30, 2009, we had a working capital deficit of $10,632,000 compared to a working capital deficit of $8,870,000 at December 31, 2008.

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 September 30, 2009. During the nine months ended September 30, 2009, we did not purchase or sell any capital equipment or leasehold improvements. We do not anticipate significant expenditures for capital equipment or leasehold improvements for the remainder of 2009.

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 not be sufficient to meet our anticipated capital requirements during 2009. Substantial additional capital resources are required to fund continuing expenditures related to our operating, research, development, manufacturing and business development activities.

As discussed in Note 5 to the financial statements, the Company entered into a common stock purchase agreement (hereafter “SPA”) in September 2007 and has raised $2,357,000 as of September 30, 2009, as a result of that SPA. The SPA has been our main source of external financing since September 2007.

Prior to the SPA, required funding was provided to us through a note payable agreement (known as the Szulik Loan) by Matthew Szulik, one of our stockholders. On January 9, 2008, we replaced the Szulik Loan by issuing to Mr. Szulik a new note in the principal amount of $6,415,000. On September 21, 2009, the scheduled maturity date was extended to September 30, 2010.

Between October 2, 2008 and November 20, 2009, the Company received proceeds of $1,075,000 as loans from clients of TAG. These loans are represented by notes issued by the Company. The term of these notes range from six months to one year after issuance, and bear an annual interest rate ranging from 8% to 10%. The interest and principal on the notes representing $725,000 of these loans are payable on the maturity dates, either in cash or common stock, at the discretion of the Company, at rates ranging from $0.02 to $0.05 per share. The interest and principal on the notes representing $350,000 of these loans are also payable on the maturity dates, but the interest is payable, either in cash or common stock, at the discretion of the Company, at a rate of $0.04 per share and these notes are convertible at the rate of $0.04 per share, subject to applicable anti-dilution clauses.

As noted above, we believe our existing available cash as of September 30, 2009 will not be sufficient to meet our anticipated capital requirements during 2009. We are unable to pay certain vendors in a timely manner and remain over 90 days past due with certain critical vendors, such as outside laboratories and law firms. Additionally, we are currently outsourcing administrative and accounting functions as a result of cutbacks necessitated by insufficient monetary resources. We are attempting to remedy this problem. Our ability to continue operating is dependent on the receipt of additional funding and substantial additional capital resources will be required to fund continuing expenditures related to our research, development, manufacturing and business development activities. If adequate funds are not available, we will be required to significantly curtail our operating plans and most likely cease operations. We are still in discussions with other potential financing sources and collaborative partners, and are seeking additional funding in the form of equity investments, license fees, loans, milestone payments or research and development payments. We cannot assure that any of these other sources of funding will be consummated in the timeframes needed for continuing operations or on terms favorable to us, if at all.

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.

Caution on Forward-Looking Statements

Any statements in this report about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. You can identify these forward-looking statements by the use of words or phrases such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should” or “would.” Among the factors that could cause actual results to differ materially from those indicated in the forward-looking statements are risks and uncertainties inherent in our business including, without limitation: the potential for the FDA to impose non-clinical, clinical or other requirements to be completed before or after use of any of our intellectual property or methodology; our ability to demonstrate to the satisfaction of potential collaborative development partners of the feasibility of utilizing our intellectual property or methodology; the failure to generate the potential to enter into and the terms of any strategic transaction relating to our intellectual property or methodology; the scope, validity and duration of patent protection and other intellectual property rights for our intellectual property or methodology ; estimates of the potential markets for our intellectual property or methodology and our ability to compete in these markets; our products, our expected future revenues, operations and expenditures and projected cash needs; our ability to raise sufficient capital and other risks detailed in this report. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, events, levels of activity, performance or achievement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. This caution is made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations, and therefore are not required to provide the information requested by this Item.

Item 4T. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Interim Principal Financial Officer, who is the same person, to allow timely decisions regarding required disclosure. As reported in our Annual Report on Form 10-K for the year ended December 31, 2008 (filed on July 24, 2009), Company management identified material weaknesses in our internal accounting control over financial reporting as of December 31, 2008, including:

Pervasive, entity-level control deficiencies across key COSO components in the Company’s control environment, including:

Controls over the period-end financial closing and reporting processes;

Controls over managerial override;

Controls to prevent or reduce the risk of fraudulent activity;

Controls to monitor other controls, including the role of the Board of Directors; and

Controls related to risk assessment.

An absence of independence and financial expertise on the Board of Directors, limiting its ability to provide effective oversight.

An absence of a formalized process to manage the Company’s internal controls over financial reporting and become compliant with Section 404 of the Sarbanes-Oxley Act.

Inadequate controls over the period-end financial close and reporting processes;

Insufficient personnel resources and technical accounting expertise within the accounting function to provide for adequate segregation of duties and to properly account for non-routine or complex accounting matters; and

Inadequate documentation of policies, procedures, and controls related to finance and accounting, including inadequate procedures for appropriately identifying, assessing, and applying accounting principles.

As a result of these material weaknesses, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2008.

As of September 30, 2009, our management, including our Interim Chief Executive Officer and Interim Principal Financial Officer, who is the same person, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). As part of its evaluation, management evaluated whether the previously reported material weaknesses in internal control over financial reporting continue to exist. Company management has determined that it cannot assert that the reported material weaknesses have been effectively remediated as of September 30, 2009. Accordingly, Company management, including our Interim Chief Executive Officer and Interim Principal Financial Officer, who is the same person, has concluded that Company’s disclosure controls and procedures were not effective as of September 30, 2009.

Notwithstanding the identified material weaknesses, Company management has concluded that the financial statements included in this Quarterly Report present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.

There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in litigation and proceedings in the ordinary course of our business. We are not currently involved in any legal proceeding that we believe would have a material adverse effect on our business or financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the nine months ended September 30, 2009, we received an aggregate of $75,000 for the purchase of 3,571,429 common shares and 3,571,429 warrants to purchase our common stock. Between January 1, 2009 and November 20, 2009, we sold notes in the aggregate principal amount of $845,000 and issued warrants in connection therewith to purchase 22,865,614 shares of our common stock. Reference is made to Liquidity and Capital resources under Management’s Discussion and Analysis of Financial Condition and Results of Operations or information relating to these sales. The sales were made pursuant to the exemption from the registration provisions of the Securities Act of 1933 provided by Section 4 (2) thereof.

As of November 20, 2009, we had used substantially all of the net proceeds which were generated from the sale of our securities described in the preceding paragraph to fund ongoing operations. We have no remaining proceeds from these sales and will require further sales or other financing transactions or collaborative development agreements to maintain ongoing operations.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

The following documents are included or incorporated by reference:

Exhibit Number		Description
10.6.1*		Secured Promissory Note issued to Matthew J. Szulik, dated as of January 9, 2008.
10.6.2**		Form of Promissory Note issued to noteholders, dated as of October 2, 2008, November 3, 2008, December 11, 2008, February 6, 2009, March 18, 2009, April 20, 2009, May 7, 2009, June 5, 2009, July 7, 2009, and August 14, 2009.
10.6.3**		Form of Warrant to Purchase Shares of Common Stock of the Company in connection with the Promissory Note issued to noteholders, dated as of October 2, 2008, November 3, 2008, December 11, 2008, February 6, 2009, March 18, 2009, April 20, 2009, and May 7, 2009, June 5, 2009, July 7, 2009, and August 14, 2009.
10.6.4***		License Agreement, effective June 18, 2009 and dated June 29, 2009, between the Company and Sanyo Chemical Industries, Ltd.
10.6.5		Secured Promissory Note Replacement Agreement, dated as of September 21, 2009, between the Company and Matthew J. Szulik.
10.6.6		Form of Promissory Note issued to noteholders, dated as of September 3, 2009, October 21, 2009, and November 12, 2009.
31.1		Certification of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Interim Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Interim Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 960 of the Sarbanes-Oxley Act of 2002.

Incorporated by reference to Registrant’s Report on Form 10-KSB for the fiscal year ended December 31, 2007, SEC File No. 000-19724, as filed with the Commission on May 12, 2008.

Incorporated by reference to Registrant’s Report on Form 10-Q for the quarter ended September 30, 2008, SEC File No. 000-19724, as filed with the Commission on November 19, 2008.

***

Incorporated by reference to Registrant’s Report on Form 10-K for the fiscal year ended December 31, 2008, SEC File No. 000-19724, as filed with the Commission on July 24, 2009.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PROTEIN POLYMER TECHNOLOGIES, INC.

Date: November 20, 2009	By:	/s/ James B. McCarthy
		James B. McCarthy
		Interim Chief Executive Officer

Date: November 20, 2009	By:	/s/ James B. McCarthy
		James B. McCarthy
		Interim Principal Financial Officer

PROTEIN POLYMER TECHNOLOGIES INC - FORM 10-Q - November 23, 2009

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