UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission File Number 0-18044
PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)
Washington 91-1307460
---------- ----------
(State of incorporation) (I.R.S. Employer
Identification No.)
12040 115th Avenue N.E., Suite 210, Kirkland, WA 98034-6900
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206)820-4548
-------------
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 Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for 90 days.
Yes /X/ No/ /
As of August 2, 1996, there were issued and outstanding 13,348,788 shares of
common stock, par value $.01 per share.
PROCYTE CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (unaudited)
Balance Sheet-
As of June 30, 1996 and
December 31, 1995 3
Statements of Operations -
Three and six months ended
June 30, 1996 and 1995 4
Statements of Cash Flows
For six months ended
June 30, 1996 and 1995 5
Statements of Stockholders' Equity 6
Notes to Financial Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
BALANCE SHEETS
June 30, December 31,
1996 1995
------------------- -------------------
(unaudited)
------------------- -------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 7,599,357 $ 6,019,740
Cash in escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 0
Securities available for sale. . . . . . . . . . . . . . . . . . . . 23,847,548 30,057,780
Insurance claim receivable . . . . . . . . . . . . . . . . . . . . . 1,000,000 3,000,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198,425 0
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 867,461 477,116
------------------- -------------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 36,012,791 39,554,636
PROPERTY AND EQUIPMENT, at cost
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,522,529 3,328,829
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . 5,097,833 5,097,833
Less accumulated depreciation and amortization . . . . . . . . . . . (3,558,428) (3,244,799)
------------------- -------------------
Property and equipment, net . . . . . . . . . . . . . . . . . . . . 5,061,934 5,181,863
PATENTS, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . 290,930 290,930
Less accumulated amortization. . . . . . . . . . . . . . . . . . . . (101,270) (93,270)
------------------- -------------------
Patents, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,660 197,660
OTHER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193,061 159,399
------------------- -------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,457,446 $ 45,093,558
------------------- -------------------
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 343,119 $ 678,698
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 643,620 687,452
Payable to stockholders for settlement of litigation . . . . . . . . 7,750,000 7,750,000
------------------- -------------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 8,736,739 9,116,150
DEFERRED LEASE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . 59,294 69,172
DEFERRED STATE SALES TAXES . . . . . . . . . . . . . . . . . . . . . 23,682 23,682
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value: 2,000,000 shares
authorized; no shares issued or outstanding . . . . . . . . . . .
Common stock $.01 par value: 30,000,000 shares
authorized; shares issued and outstanding 13,348,621
- June 30, 1996 and 13,318,495 - December 31,1995. . . . . . . . . 132,112 131,311
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 82,551,772 82,350,862
Deficit accumulated during the development stage . . . . . . . . . . (49,983,259) (46,513,220)
Unearned compensation. . . . . . . . . . . . . . . . . . . . . . . . (62,894) (84,399)
------------------- -------------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . 32,637,731 35,884,554
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . $ 41,457,446 $ 45,093,558
------------------- -------------------
------------------- -------------------
SEE NOTES TO FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(unaudited)
January 1,
1985
Three months ended June 30, Six months ended June 30, (predecessor
------------------------------ ---------------------------- inception) to
June 30,
1996 1995 1996 1995 1996
-------------- ------------ ------------ ------------ --------------
REVENUES
Research and development
revenues under collaborative
agreements. . . . . . . . . . . . . . . $ 230,313 $ 709,660 $ 475,216 $ 1,286,315 $ 8,381,763
License fees . . . . . . . . . . . . . . 0 0 900,000 1,500,000
Interest income. . . . . . . . . . . . . 240,997 752,760 785,578 1,464,147 7,821,379
Other. . . . . . . . . . . . . . . . . . 697,764
-------------- ------------ ------------ ------------ --------------
Total revenues . . . . . . . . . . . . . 471,310 1,462,420 2,160,794 2,750,462 18,400,906
-------------- ------------ ------------ ------------ --------------
COSTS AND EXPENSES
Research and
development . . . . . . . . . . . . . . 1,459,647 1,831,813 3,206,987 3,723,369 46,347,345
Litigation settlement. . . . . . . . . . 4,750,000
General & administrative . . . . . . . . 1,059,760 934,243 2,423,846 1,900,908 17,289,608
-------------- ------------ ------------ ------------ --------------
Total costs and expenses. . . . . . . . 2,519,407 2,766,056 5,630,833 5,624,277 68,386,953
-------------- ------------ ------------ ------------ --------------
NET LOSS . . . . . . . . . . . . . . . . $ (2,048,097) $ (1,303,636) $ (3,470,039) $ (2,873,815) $ (49,986,047)
-------------- ------------ ------------ ------------ --------------
-------------- ------------ ------------ ------------ --------------
NET LOSS PER
COMMON SHARE. . . . . . . . . . . . . . $ (0.16) $ (0.10) $ (0.26) $ (0.22) $ (6.77)
-------------- ------------ ------------ ------------ --------------
-------------- ------------ ------------ ------------ --------------
Weighted average number of
common shares used in computing
net loss per common share . . . . . . . 13,196,124 13,118,495 13,174,838 13,081,247 7,387,244
-------------- ------------ ------------ ------------ --------------
-------------- ------------ ------------ ------------ --------------
SEE NOTES TO FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
January 1,
1985
(predecessor
Six months ended June 30, inception) to
--------------------------------- June 30,
OPERATING ACTIVITIES 1996 1995 1996
-------------- -------------- --------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($3,470,039) ($2,873,815) $(49,986,047)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 313,629 390,723 3,809,098
Patent expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 30,000 778,929
Amortization of discount on marketable securities . . . . . . . . . (15,625)
(Gain) loss on sale of securities available for sale. . . . . . . . 160,980 (262,430) (26,644)
Stock grants and Restricted Stock grants. . . . . . . . . . . . . . 129,500 203,221
Compensation expense on stock options . . . . . . . . . . . . . . . 21,505 40,857 677,244
Changes in assets and liabilities:
(Increase) decrease in other current assets . . . . . . . . . . . . (588,770) (278,295) (1,065,889)
(Increase) decrease in insurance receivable . . . . . . . . . . . . 2,000,000 (1,000,000)
(Increase) decrease in escrowed cash. . . . . . . . . . . . . . . . (2,500,000) (2,500,000)
(Increase) decrease in deferred offering. . . . . . . . . . . . . . 0
(Increase) decrease in other assets . . . . . . . . . . . . . . . . (33,662) (43,061)
Increase (decrease) in accounts payable . . . . . . . . . . . . . . (335,579) (23,108) 258,000
Increase (decrease) in accrued liabilities. . . . . . . . . . . . . (43,832) (5,264) 588,712
Increase (decrease) in litigation payable . . . . . . . . . . . . . 0 7,750,000
Increase (decrease) in deferred income. . . . . . . . . . . . . . . 0 (90,344) 0
Increase (decrease) in deferred lease payments. . . . . . . . . . . (9,878) (3,953) 59,294
Decrease in deferred use tax. . . . . . . . . . . . . . . . . . . . 0 0 (71,031)
-------------- -------------- --------------
Net cash used in operating activities. . . . . . . . . . . . . . . . . (4,348,146) (3,075,629) (40,583,799)
-------------- -------------- --------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net . . . . . . . . . . . . . . . . 72,211 27,423 81,367,107
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . . . 500,000
-------------- -------------- --------------
Net cash provided by financing activities. . . . . . . . . . . . . . . 72,211 27,423 81,867,107
-------------- -------------- --------------
INVESTING ACTIVITIES
Purchase of property and equipment. . . . . . . . . . . . . . . . . . (193,700) 45,742 (8,775,101)
Refund (payment) Interest-bearing lease deposit . . . . . . . . . . . (150,000)
Purchase of securities available-for-sale . . . . . . . . . . . . . . (98,772,868) (69,721,202) (307,266,663)
Proceeds from sale or maturity of securities available for sale . . . 104,822,120 58,444,370 283,461,384
Patents:
Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (4,389) (1,018,117)
Reimbursements . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 64,546
-------------- -------------- --------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . 5,855,552 (11,235,479) (33,683,951)
-------------- -------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . 1,579,617 (14,283,685) 7,599,357
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . 6,019,740 26,243,922
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . $7,599,357 $11,960,237 $7,599,357
-------------- -------------- --------------
-------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Conversion of debt to common stock . . . . . . . . . . . . . . . . . $ 500,000
--------------
--------------
Issuance of stock for patents. . . . . . . . . . . . . . . . . . . . $ 27,790
--------------
--------------
SEE NOTES TO FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Deficit
Accumulated
Common Stock Additional During the
---------- ---------- Paid-in Development Unearned
Shares Par Value Capital Stage Compensation Total
---------- ---------- ------------- --------------- ------------ -------------
Balance, December 31, 1995 . . . . . . . . . . . . 13,131,095 $ 131,311 $ 82,350,862 $(46,513,220) $ (84,399) $ 35,884,554
---------- ---------- ------------- --------------- ------------ -------------
Exercise of stock options:
($2.64 per share) January 5 to April 12 . . . . . 14,635 146 35,705 35,851
($2.53 per share) January 5 to April 12 . . . . . 7,835 78 19,744 19,822
($2.16 per share) April 1 to May 7. . . . . . . . 7,656 77 16,461 16,538
Hymedix Restricted Stock: 0
($2.59 per share) March 31. . . . . . . . . . . . 25,000 250 64,500 64,750
($2.59 per share) June 30 . . . . . . . . . . . . 25,000 250 64,500 64,750
Amortization of unearned compensation. . . . . . . 21,505 21,505
Net loss . . . . . . . . . . . . . . . . . . . . . (3,470,039) (3,470,039)
---------- ---------- ------------- --------------- ------------ -------------
Balance, June 30, 1996 . . . . . . . . . . . . . . 13,211,221 132,112 82,551,772 (49,983,259) (62,894) 32,637,731
---------- ---------- ------------- --------------- ------------ -------------
---------- ---------- ------------- --------------- ------------ -------------
SEE NOTES TO FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited Financial Statements of ProCyte Corporation (the
"Company") as of June 30, 1996 and December 31, 1995, and for the three and six-
month periods ended June 30, 1996 and 1995, have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Pursuant to such rules and regulations, the Financial Statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Accordingly, this
financial information should be read in conjunction with the complete Financial
Statements, including the notes thereto and the auditors' opinion, which are
included in the Company's Annual Report, incorporated by reference on Form 10-K,
for the year ended December 31, 1995. In the opinion of management, all
material adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Interim results are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
2. INVESTMENTS
At June 30, 1996, the Company's investments consist entirely of U.S.
Treasury bills and notes which are classified as "available for sale." The
amortized cost and estimated market value for investments maturing in one year
or less is $11,234,423, and those maturing in one through five years is
$12,613,124. There were no gross unrealized gains or losses at June 30, 1996,
and realized losses from sales of investments in the three and six-month periods
ended June 30, 1996 were $203,292 and $160,979, respectively.
3. EXISTING CORPORATE LICENSE AGREEMENTS
HYMEDIX INTERNATIONAL, INC.
In November 1995, ProCyte entered into a license agreement with Hymedix
International Inc. ("Hymedix") in which the Company acquired the exclusive
worldwide rights, outside of Asia, to five FDA-cleared wound care products
developed by Hymedix, as well as exclusive rights to the use of the underlying
technology in the territory for future wound care products. Additionally, the
Company acquired, on a non-exclusive basis, the rights to a sixth FDA-cleared
wound care product in the same territory. The Company shares marketing rights
to the sixth product with B. Braun Medical, Inc. The Company also acquired
exclusive worldwide rights to the drug delivery application of Hymedix's
polymer-based technology for wound healing applications.
Under the terms of the agreement with Hymedix, the Company is obligated to
pay
7
certain upfront, milestone and royalty payments. The Company's November 1995
upfront payment included 200,000 shares of the Company's common stock,
releasable over a two-year period in four equal segments of 50,000 shares each,
unless Hymedix has materially breached the agreement or the Company has
terminated the agreement. The stock is subject to SEC Rule 144 restrictions and
has piggyback registration rights for a limited period of time. The Company may
terminate the agreement at any time upon sixty days' written notice.
During the three-month period ended March 31, 1996, and pursuant to the
agreement, the Company paid $150,000 to Hymedix for the 1996 research and
development program related to the licensed technology. During second quarter
1996, the Company released 50,000 shares of the Company's common stock to
Hymedix, and on July 3, 1996 paid Hymedix a milestone payment of $500,000 due
under the terms of the agreement.
KISSEI PHARMACEUTICAL CO., LTD.
In November 1993, the Company entered into a license agreement with Kissei
Pharmaceutical Co., Ltd. ("Kissei"). Under the terms of the agreement, the
Company granted to Kissei an exclusive license to make, have made, use and sell
the Company's Iamin-Registered Trademark- compound in Japan, China, Taiwan, and
Korea for topical wound healing applications, including chronic human dermal
wounds such as diabetic ulcers, venous stasis ulcers, pressure sores, surgical
wounds and burns.
Pursuant to the terms of the agreement with Kissei, the Company will
manufacture Kissei's requirements for the Iamin-Registered Trademark- compound
for Kissei's product development and for Kissei's clinical trials for the first
approved use of the Iamin-Registered Trademark- compound in Japan. In addition,
Kissei is responsible for making certain research and development, milestone and
royalty payments to the Company subject to the terms of the agreement. In
January 1996, Kissei paid the Company a $900,000 milestone payment due under the
agreement. Kissei may terminate the agreement at any time upon sixty days'
written notice.
KAKEN PHARMACEUTICAL CO., LTD.
On January 31, 1996, the Company's license agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), for development of the Company's peptide-
copper hair growth technology in Asia, was terminated. As a result, ProCyte
regained worldwide rights to the use of its technology for hair growth and hair
loss prevention applications. Kaken satisfied all of its research and
development funding obligation to ProCyte during the term of the agreement.
4. INVENTORIES
Inventories consist entirely of raw materials and are accounted for at the
lower of cost or market.
8
5. STOCKHOLDERS' EQUITY
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
Shares subject Option price
To option Range
--------- -----
Balance, January 1, 1995 1,412,710 $.09 - $11.88
Granted 428,500 $2.94
Exercised 203,880 $.09 - $2.16
Canceled 98,812 $.86 - $11.25
---------
Balance, June 30, 1995 1,538,518 $2.16 - $11.88
---------
---------
Balance, January 1, 1996 1,536,957 $2.15 - $11.88
Granted 95,500 $3.02 - $4.20
Exercised 30,126 $2.16 - $2.64
Canceled 292,500 $2.53 - $11.88
---------
Balance, June 30, 1996 1,309,831 $2.15 - $11.88
---------
---------
Currently exercisable 668,696
During the three-month period ended June 30, 1996, the Compensation
Committee of the Board of Directors approved grants of incentive stock options
to purchase 6,000 shares of the Company's common stock to employees of the
Company. All options are subject to vesting schedules. In January 1996, an
officer of the Company voluntarily and without recompense relinquished and
returned to the Company under its 1989 Restated Stock Option Plan, a non-
qualified stock option grant for up to 200,000 shares of ProCyte common stock,
which option had been granted to him in 1992. The officer took this action to
provide that more shares of common stock would be available for the Company's
use in granting options to future employees of the Company.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on equity financings and corporate
partnerships to fund its operations and capital expenditures. At June 30, 1996,
the Company had cash, cash equivalents and short-term investments of
approximately $31.4 million.
The Company believes that its present capital resources and expected
revenues from its existing license agreement should be sufficient to fund the
Company's currently planned operations and capital needs for approximately two
years. The Company's future cash requirements, however, may vary materially
from those now expected because of a number of factors, including the cost to
staff a dedicated sales force and cash requirements for expansion of the
Company's manufacturing facility for commercialization of polymer-based wound
care products.
ProCyte's mission is to become a fully integrated healthcare products and
services company through continued pursuit of its threefold strategy, which the
Company implemented in 1995 in an effort to build long-term shareholder value.
This strategy includes: (1) continued development of certain of the Company's
proprietary family of copper-based compounds for therapeutic or other
applications; (2) utilization of the Company's manufacturing facility to serve
both the Company's own clinical and commercial needs as well as to address the
contract manufacturing needs of selected industry clients; and (3) continued
evaluation and, as appropriate, acquisitions through in-licensing or cross-
licensing of technologies or products which complement the Company's wound care
product focus. In addition, the Company will continue to seek corporate
partners or out-licensing opportunities to develop and/or distribute certain of
its technologies or products.
In second quarter 1996, the Company had three copper-based drug
candidates in clinical development. Enrollment in the Company's Phase II
study of PC1358, tradenamed Tricomin-Registered Trademark- solution, was
completed in first quarter 1996. The study is expected to be
completed at year end 1996, and is evaluating the safety and effectiveness of
the investigational compound, at varying doses versus placebo, in the
treatment of early to mid stage male pattern baldness.
In second quarter 1996, the Company completed enrollment in its Phase
I/II safety and initial effectiveness study in humans of PCA, administered
via retention enema, for the potential treatment of mild to moderate
ulcerative colitis. The Phase I/II study of this compound, tradenamed
Iamin-IB-Registered Trademark-solution, is expected to be completed in 1996.
ProCyte presently is planning IN VITRO and/or human clinical studies or has
such studies in progress in the U.S. and/or the U.K. for the continued
evaluation of Iamin-Registered Trademark- gel as a potential therapeutic agent.
Additionally, Kissei has indicated that it has completed its Phase I safety
10
evaluation of the compound in Japan. Data analysis of that study is reportedly
underway by Kissei.
The Company has substantially diminished its internal efforts and resource
commitment in the area of anti-viral research with certain of its proprietary
compounds due to ProCyte's internal resource commitment to wound care and
contract manufacturing priorities.
ProCyte's second strategic goal in 1996 is to continue to expand the
utilization of the Company's manufacturing plant by providing contract
manufacturing services to select industry clientele and to service ProCyte's own
product needs. The Company currently utilizes the plant for the manufacture of
ProCyte's own bulk compounds for clinical or commercial use, and for the
development of manufacturing processes for the Company's planned polymer-based
wound care products. In the first six months of 1996, the Company also
performed contract manufacturing services on behalf of outside clients. The
Company expects to utilize approximately 85% of the plant's current capacity for
overall manufacturing endeavors in 1996, including manufacture of its own
products and product candidates and contract manufacturing services provided on
behalf of clients of the plant.
The third primary area of business focus being pursued by the Company in
1996 builds upon the Company's pioneering research expertise in the complex
field of wound care and healing. In February 1996, the FDA granted ProCyte
clearance to market Iamin-Registered Trademark- gel as a 510(k)-regulated
medical dressing for the care and management of acute and chronic wounds,
including diabetic ulcers, venous stasis ulcers, pressure sores, first and
second degree burns, postoperative wounds and skin abrasions. In second quarter
1996, the Company continued to hire a dedicated sales force in support of this
initial wound care product, and on July 1, 1996 ProCyte launched Iamin-
Registered Trademark- Hydrating Gel in the U.S.
ProCyte is continuing to evaluate the polymer technology to which it
acquired worldwide rights, exclusive of Asia, for wound care product
applications. In second quarter 1996, the Company continued to conduct
marketing studies with the first of its prototype products which incorporate the
polymer technology, and the Company is working to develop manufacturing methods
for the first of these planned products. The Company announced on July 8, 1996
that it filed its first 510(k) pre-market notification with the FDA for
clearance to market a ProCyte developed polymer-based dressing called
OsmoCyte-TM- Ultra Pillow Wound Dressing.
In 1996, ProCyte intends to explore corporate alliance relationships with
companies that are capable of pursuing alternative registrations of the
Company's hair technology in Asia and elsewhere, and to distribute and/or
develop certain other Company compounds and/or products.
RISK FACTORS
The entire foregoing discussion, as well as other management discussion of
the Company's 1996 goals and expectations as reported in the Company's Annual
Report on Form 10-K and its Annual Report to Shareholders for the year ended
December 31, 1995, contain
11
forward-looking statements. Any and all statements of goals, beliefs, intent,
plans, anticipation or expectations set forth in its S.E.C. reports and other
communications are forward-looking statements.
The following factors, among others, could affect the Company's actual
results with regard to such forward-looking statements, and could cause such
results to differ materially from those expressed in the Company's forward-
looking statements.
GENERAL FINANCIAL POSITION OF THE COMPANY
The Company may be required to raise additional capital through equity
offerings, strategic alliances or other sources. There can be no assurance that
such funds will be available to the Company on acceptable terms, if at all.
There can be no assurance that the Company will be successful in attracting
or retaining corporate alliances on terms favorable to the Company, whether for
the Company's hair technology or otherwise, or that the interests and
motivations of any corporate partner or licensee would be or remain consistent
with those of the Company, or that such partners or licensees would successfully
perform the technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Suspension or termination of
agreements with the Company's current or future partners or licensees could have
a material adverse effect on the development of the Company's proposed products
and could adversely effect the Company's financial position.
CLINICAL AND COMMERCIAL DEVELOPMENT OF NOVEL COMPOUNDS
There can be no assurance that the Company will commence or successfully
complete preclinical or clinical testing or commercial development, including
commercial-scale manufacturing and market launch of any of the product
candidates identified above, or that, if successfully developed, such product
candidates will be approved or cleared for sale by the FDA for sale in the
United States or by comparable regulatory authorities for sale in other
countries. Approval of a product for marketing in one country does not ensure
approval for marketing in other countries. Launch of a product does not ensure
market acceptance. The results of Phase I, Phase II or Phase III studies are
not necessarily indicative of efficacy or safety of a commercial product for
human use.
CONTRACT MANUFACTURING
Given the risks and uncertain timelines associated with pharmaceutical and
biotechnology products being developed, tested, reviewed or sold by clients of
the manufacturing facility, the Company will be required to strive to maintain
sufficient clientele to counter the effect that regulatory delays, product
failures, product recalls, and other such circumstances may have on its contract
manufacturing capabilities and revenues. Also, such factors as unexpected or
unsuccessful plant audits or regulatory inspections, the potential impact of
adverse weather conditions on plant operations, the decision of a client to
12
manufacture its own products or have them manufactured elsewhere, market
acceptance of clients' products, and competition, mean there can be no assurance
that the Company will be successful in its contract manufacturing endeavors.
WOUND CARE PRODUCT DEVELOPMENT AND DISTRIBUTION
Factors beyond the Company's control such as delays in obtaining FDA
clearance to market new products, delays in product launch, the promotion and
introduction of competitive products by others with larger and more established
sales and marketing organizations, lack of product acceptance by the
marketplace, changes in Medicare reimbursement and the impact this would have on
product pricing, unexpected difficulties in scaling-up the full scale commercial
manufacturing processes, obtaining suitable raw materials, and staffing the
production operation, mean that there can be no assurance that the Company will
be able to commercialize any of its planned wound care products in a cost-
effective, timely manner, if at all.
COMPETITION
Competition in the Company's planned area of initial product launch, wound
care, is particularly intense, involving a number of well-established, major
pharmaceutical and healthcare companies, such as Bristol Myers Squibb, Kendall
Healthcare Company, and Johnson & Johnson, and others. A significant number of
smaller companies as well are developing or marketing competitive wound care
products, some of which may have an entirely different approach than products
being developed by the Company.
Wound care is an evolving field as far as technology, regulations, and
products are concerned. The Company believes that its most substantial
competition with respect to its planned wound care product line will come from
established pharmaceutical and healthcare companies, which are significantly
larger than the Company and have substantially greater financial resources,
marketing and sales staffs, and experience in obtaining regulatory approvals, as
well as in manufacturing and marketing wound care products, and have
considerable experience, and established reputations, promoting to healthcare
providers.
Competition in the Company's other areas of interest, as well as wound
care, is based on scientific and technological advances, the availability of
patent protection, access to adequate capital, the requirement for and ability
to obtain government approval for new products or testing, timing and scope of
regulatory approvals, product pricing, manufacturing and marketing capability.
There can be no assurance that the Company's competitors will not succeed in
bringing to market technologies and/or products that may make the proposed
products being developed by the Company obsolete or noncompetitive. Some of the
Company's competitors may achieve product commercialization earlier than the
Company, which may adversely affect market introductions and sales of the
Company's proposed products. Competition for highly qualified scientific,
technical, and managerial personnel, consultants and advisors on whose services
the Company depends is also intense.
The contract manufacturing service business also is highly competitive.
Competitors
13
include major chemical and pharmaceutical companies, as well as specialized
biotechnology firms, smaller contract chemical manufacturers and some
universities. Many of these companies or institutions have greater financial,
technical and marketing resources than the Company.
The chemical, commodity-products and pharmaceutical industries have
undergone and are expected to continue to undergo significant technological and
strategic change, and the Company expects the competition to intensify as
technical advances or business alliances are made by others in fields of
interest to the Company. The Company believes that its success in competing
with others will depend on such things as its ability to retain scientific
expertise and capable, experienced management, and identifying and pursuing
scientifically feasible, medically relevant, and commercially viable
opportunities.
PATENTS AND PROPRIETARY RIGHTS
ProCyte's success depends in part upon its ability to protect its products
and technology under intellectual property laws in the Unites States and abroad.
As of June 30, 1996, the Company had 16 issued United States patents expiring
between 2005 and 2010, and 123 issued foreign patents and patent registrations.
The patents relate to use of the Company's copper-based technology for a variety
of healthcare applications, and to the composition of certain biologically
active, synthesized compounds. The Company's strategy has been to apply for
patent protection for certain compounds and their discovered uses that are
believed to have potential commercial value in countries which offer significant
market potential. The Company currently holds several registered trademarks for
its product candidates.
There can be no assurance as to the breadth or degree of protection that
the Company's existing trademarks or patents, or any additional trademarks or
patents that may be granted in the future, will afford the Company, or that any
additional trademarks or patents will be issued to the Company. In addition,
there can be no assurance that others will not independently develop
substantially equivalent proprietary technology that is not covered by the
Company's patents or that others will not be issued patents that may prevent the
Company's manufacture, sale or use of the Company's proposed products or require
licensing and the payment of significant fees or royalties by the Company for
the pursuit of its business. Litigation, which could result in substantial cost
to the Company, may be necessary to enforce the Company's patents or to
determine the scope and validity of other parties' proprietary rights. If the
outcome of any such litigation were adverse, the Company's business could be
materially affected. The Company is unable to predict how courts would resolve
any future issues relating to the validity and scope of the Company's patents or
trademarks should they be challenged.
The Company also intends to rely on its unpatented proprietary know-how,
and there can be no assurance that others will not develop or acquire equivalent
proprietary information. To the extent that corporate partners or consultants
apply Company technological information independently developed by them or by
others to Company projects or apply Company technology or know-how to other
projects, disputes may arise as to the ownership of proprietary rights to such
information.
14
OPERATING LOSSES
The Company is engaged in the research and development of human health care
products, including potential pharmaceutical agents, utilizing copper-based
compounds. Such research and development has been funded from the Company's
equity-derived working capital and through corporate partnerships. The Company
has incurred operating losses since its inception due to financial and
regulatory requirements required to support research, development and clinical
studies of its proprietary technology. In particular, the Company has supported
and continues to finance development of Iamin-Registered Trademark- gel for
potential treatment of chronic dermal wounds, investigational PCA for potential
treatment of inflammatory bowel disease, investigational PC1358 for potential
treatment of hair loss conditions, and polymer-based wound care products.
The Company expects to incur additional operating losses for a number of
years until its proposed products may be approved and successfully distributed.
At June 30, 1996, the Company's accumulated deficit was approximately $50.0
million.
REVENUES
For the three and six-month periods ended June 30, 1996, ProCyte earned
revenues from collaborative agreements of $230,313 and $1,375,216, and interest
income of $240,997 and $785,578, respectively. This compares to collaborative
agreement revenues of $709,660 and $1,286,315, and interest income of $752,760
and $1,464,147 earned in the first three and six- month periods, respectively,
in 1995.
EXPENSES
Research and development expenses for the three and six-month periods ended
June 30, 1996 were $1,459,647 and $3,206,987, respectively, compared to
$1,831,813 and $3,723,369 for the same periods in 1995. Expenditures during the
period conform with the Company's planned expenses, relating primarily to the
Company's clinical and wound care product development programs.
General and administrative expenses for the three and six-month periods
ended June 30, 1996 were $1,059,760 and $2,423,846, respectively, compared to
$934,243 and $1,900,908 for the same periods in 1995. The increase was
primarily related to legal and other fees incurred as a result of the Company's
defense of the class action lawsuit.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 1996, the Company announced that a tentative settlement had
been reached in the shareholder lawsuit filed in October 1994 against the
Company and certain of its officers and directors. The Company continues to
believe that there was no wrongdoing on the part of the Company and/or any of
its officers and directors, but reached the tentative settlement agreement in an
effort to focus management's attention and corporate financial resources on the
important business of building long-term shareholder value in the Company.
The tentative settlement, which is subject to court approval, is for $7.75
million, of which at least $2.5 million will be paid in cash, and which the
Company has currently paid into an escrow account. The remainder of the
settlement is payable, at the Company's discretion, in cash or shares of ProCyte
common stock following the court's approval hearing, which is scheduled to occur
on September 12, 1996. The amount, if any, of the stock portion would be
dependent upon the market price of ProCyte common stock during the six-month
period following final court approval of the settlement. One of the Company's
insurance carriers has declined coverage with respect to $1.0 million. The
Company is currently pursuing arbitration against the carrier.
To the extent that the Company elects to issue shares of its common stock
as settlement, sales of significant amounts of the shares of said stock by
plaintiffs' counsel could have an adverse effect on the price on the Company's
common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held the annual meeting of its shareholdetrs on May 14, 1996.
Two items were submitted to the shareholders for a vote. The first proposal was
the election of directors from which Gordon Duncan's nomination was withdrawn.
The five nominated directors were re-elected to serve until the next annual
meeting of the shareholders or until their successors are elected and qualified.
The vote for each such director was as follows:
DIRECTOR FOR WITHHOLD
Joseph Ashley 11,345,546 690,936
Jules Blake, Ph.D. 11,346,468 690,014
Robert E. Patterson 11,353,382 683,100
William M. Sullivan 11,352,818 683,664
Thomas E. Tierney 11,352,568 683,914
The second proposal, to amend the Company's Restated Articles of
Incorporation to provide for a classified Board of Directors, did not receive
the required approval of a majority of the then outstanding shares entitled to
vote. 5,109,350 shares voted for the proposal, 1,197,008 shares voted against,
and 72,538 shares abstained. The remaining 5,657,586 shares
16
which were present at the meeting were broker non-votes which could not be cast
with respect to the proposal.
ITEM 5. OTHER INFORMATION
On July 23, 1996, the Board of Directors accepted the voluntary resignation
of David Fulle as Vice President, Manufacturing Operations and elected John
Young to the position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
Date: August 2, 1996 By /s/Joseph Ashley
-------------------------------
Joseph Ashley
Chairman, President and C.E.O.
Date: August 2, 1996 By: /s/Robert MacDonald
-------------------------------
Robert MacDonald
Principal Accounting Officer
18