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, 2000
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.)
8511 154th Avenue N.E., Redmond, WA 98052
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including
area code: (425) 869-1239
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 such filing
requirements for the past 90 days.
Yes {X} No { }
As of July 20, 2000, there were issued and outstanding 15,455,078 shares of
common stock, par value $.01 per share.
ProCyte Corporation
INDEX
Part I - Financial Information............................................................... 3
Item 1. Condensed Financial Statements...................................................... 3
Balance Sheets - as of June 30, 2000 and December 31, 1999 (unaudited).................... 3
Statements of Operations - three and six months ended June 30, 2000 and 1999 (unaudited).. 4
Statements of Cash Flows - six months ended June 30, 2000 and 1999 (unaudited)............ 5
Statements of Stockholders' Equity - six months ended June 30, 2000 and 1999
(unaudited)............................................................................... 6
Notes to Financial Statements (unaudited)................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 18
Part II - Other Information.................................................................. 19
Item 1. Legal Proceedings.................................................................. 19
Item 2. Changes in Securities and Use of Proceeds.......................................... 19
Item 3. Defaults Upon Senior Securities.................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................ 19
Item 5. Other Information.................................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................................... 20
Signatures................................................................................... 21
EXHIBIT INDEX................................................................................ 22
2
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of June 30, 2000 and December 31, 1999 (unaudited)
-------------------------------------------------
June 30, 2000 December 31, 1999
-------------------------------------------------
Assets
Cash and cash equivalents..................................... $ 3,078,635 $ 3,883,187
Accounts receivable, net...................................... 841,079 757,343
Other current assets.......................................... 1,017,628 813,756
-------------------------------------------------
Total current assets........................................ 4,937,342 5,454,286
Raw materials and work in process, net........................ 1,420,895 1,572,655
Property and equipment, net................................... 2,550,000 2,746,373
Intangible assets, net........................................ 3,310,567 3,441,088
Other assets.................................................. 183,290 232,226
-------------------------------------------------
Total Assets................................................ $ 12,402,094 $ 13,446,628
=================================================
Liabilities and Stockholders' Equity
Total current liabilities..................................... $ 330,053 $ 416,056
Other liabilities............................................. 150,099 142,035
-------------------------------------------------
Total liabilities........................................... 480,152 558,091
Common stock and additional paid in capital................... 85,084,167 84,989,929
Accumulated deficit........................................... (73,162,225) (72,101,392)
-------------------------------------------------
Stockholders' equity........................................ 11,921,942 12,888,537
-------------------------------------------------
Total Liabilities and Stockholders' Equity.................. $ 12,402,094 $ 13,446,628
=================================================
See notes to financial statements
3
Statements of Operations - three and six months ended June 30, 2000 and 1999
(unaudited)
--------------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
2000 1999 2000 1999
--------------------------------------------------------------------------------
Revenues
Product sales............................ $ 1,247,147 $ 969,981 $ 2,339,546 $ 1,919,562
Contract manufacturing................... 228,276 197,430 530,719 301,750
Licenses, royalties and other............ 212,247 14,703 280,463 98,100
--------------------------------------------------------------------------------
Total revenue............................ 1,687,670 1,182,114 3,150,728 2,319,412
Cost of product sales.................... 352,945 344,826 629,568 742,947
--------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative...... 1,420,477 1,510,662 2,935,088 2,811,272
Research and development................. 374,059 463,386 749,300 943,070
--------------------------------------------------------------------------------
Total expenses........................... 1,794,536 1,974,048 3,684,388 3,754,342
---------------------------------------------------------------------------------
Operating Loss........................... (459,811) (1,136,760) (1,163,228) (2,177,877)
Interest Income.......................... 47,687 66,946 102,395 149,924
---------------------------------------------------------------------------------
Net loss................................. ($ 412,124) ($1,069,814) ($1,060,833) ($2,027,953)
================================================================================
Net loss per common share.................. ($0.03) ($0.07) ($0.07) ($0.14)
Weighted average number of common shares
used in computing net loss per common
share..................................... 15,470,165 14,642,507 15,453,006 14,582,685
See notes to financial statements
4
Statements of Cash Flows - six months ended June 30, 2000 and 1999 (unaudited)
----------------------------------------------
Six months ended June 30,
2000 1999
----------------------------------------------
Operating Activities
Net loss..................................................... ($1,060,833) ($2,027,953)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 334,229 419,111
Loss on sale of securities.................................. - 6,980
Stock issued in payment of expenses......................... 80,000 160,332
Changes in assets and liabilities:
(Increase) decrease in accounts receivable.................. (83,736) 57,442
Increase in other current assets............................ (203,872) (343,719)
Decrease in raw materials and work in process............... 151,760 1,525
Increase in other non-current assets........................ (2,367) (2,564)
(Decrease) increase in current liabilities.................. (86,003) 86,411
Increase in other liabilities............................... 8,064 8,764
----------------------------------------------
Net cash used in operating activities..................... (862,758) (1,633,671)
Financing Activities
Proceeds from issuance of stock.............................. 14,238 -
----------------------------------------------
Net cash provided by financing activities................. 14,238 -
Investing Activities
Purchase of property and equipment........................... (7,335) (46,594)
Proceeds from sale or maturity of securities................. - 3,415,605
Purchase of NextDerm, Inc.................................... - (285,000)
Decrease in security deposit................................. 51,303 52,314
----------------------------------------------
Net cash provided by investing activities................. 43,968 3,136,325
----------------------------------------------
Net (decrease) increase in cash and cash equivalents...... (804,552) 1,502,654
Cash and Cash Equivalents:
At beginning of period.................................... 3,883,187 2,003,896
----------------------------------------------
At end of period.......................................... $3,078,635 $3,506,550
==============================================
See notes to financial statements
5
Statements of Stockholders' Equity - six months ended June 30, 2000 and 1999
(unaudited)
Common Stock Additional
------------ paid-in Accumulated
Shares Par Value Capital Deficit Total
----------------------------------------------------------------------------------------
Balance - January 1, 1999........ 14,489,803 $144,898 $84,320,582 ($66,785,930) $17,679,550
Shares issued under non-employee
director stock plan............ 57,655 577 29,423 30,000
Shares issued under employment
and non-compete agreements 236,748 2,367 127,965 130,332
Shares issued to purchase
NextDerm, Inc. 600,000 6,000 244,000 250,000
Net loss for six months ended
June 30, 1999.................. (2,027,953) (2,027,953)
----------------------------------------------------------------------------------------
Balance - June 30, 1999.......... 15,384,206 $153,842 $84,721,970 ($68,813,883) $16,061,929
========================================================================================
Balance - January 1, 2000........ 15,418,722 $154,187 $84,835,742 ($72,101,392) $12,888,537
Shares issued under non-employee
director stock plan............ 22,648 227 23,773 24,000
Shares issued under non-compete
agreement 37,333 373 55,627 56,000
Shares issued upon exercise of
options........................ 16,334 163 14,075 14,238
Net loss for six months ended
June 30, 2000.................. (1,060,833) (1,060,833)
----------------------------------------------------------------------------------------
Balance - June 30, 2000.......... 15,495,037 $154,950 $84,929,217 ($73,162,225) $11,921,942
========================================================================================
See notes to financial statements
6
ProCyte Corporation
Notes to Financial Statements (unaudited)
1. Basis of presentation
The accompanying unaudited condensed financial statements of ProCyte
Corporation ("ProCyte" or the "Company") for the three and six-month periods
ended June 30, 2000 and 1999 have been prepared by the Company in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Pursuant to
such rules and regulations, the condensed financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for audited financial statements. Accordingly, this financial
information should be read in conjunction with the complete audited financial
statements, including the notes thereto, which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999. 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, 2000.
2. Sale of manufacturing operation
During 1999 the Company retained a financial advisor to assist it with the
sale or spin-off of its manufacturing operation in order to tighten the
Company's focus on its core business. On March 29, 2000 ProCyte agreed to sell
the assets and liabilities related to the manufacturing operation for $2.5
million to a group including a member of ProCyte management. The transaction is
currently expected to close later this year and is subject to negotiation of a
definitive agreement and contingent upon availability of financing and
ratification by the ProCyte Board of Directors. A provision of $1.9 million was
recorded at December 31, 1999 as an estimate of the loss to be realized upon
consummation of this transaction. The manufacturing operation includes the
substantial majority of the fixed assets of the Company and the lease obligation
for the Company's facility. The manufacturing operation generated contract
revenues of $762,320, $436,167 and $705,706 in 1999, 1998 and 1997,
respectively. Expenses related to the manufacturing operation were approximately
$1,800,000 in 1999, $2,050,000 in 1998, and $2,850,000, in 1997. During the six
months ended June 30, 2000 such revenues and expenses amounted to $530,719 and
approximately $780,000, respectively.
3. Accounts receivable
At June 30, 2000, accounts receivable are shown net of a reserve for
uncollectable accounts of $65,421.
4. Inventory
At June 30, 2000, other current assets included finished goods inventory
valued at $781,464, net of a reserve for obsolete and excess finished goods of
$80,000. The value of raw materials was $376,443 and the value of work in
process was $1,344,452 at June 30, 2000. The reserve for obsolete and excess
raw materials and work in process amounted to $300,000 at that date.
7
5. Property and equipment
At June 30, 2000 property and equipment consisted of the following:
Equipment..................................... $ 2,525,486
Leasehold improvements........................ 5,513,850
Less reserve for loss on disposition of
manufacturing operation...................... (1,900,000)
Less accumulated depreciation and
amortization................................. (3,589,336)
-----------
Property and equipment, net................... $ 2,550,000
===========
6. Intangible assets
At June 30, 2000 intangible assets are shown net of $655,875 of accumulated
amortization.
7. Stockholders' equity
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ --------------
Balance - January 1, 1999......................... 1,618,061 $2.18
Granted.......................................... 378,500 $0.86
Exercised........................................ - -
Canceled......................................... (187,666) $1.19
-----------------------------------------
Balance - June 30, 1999........................... 1,808,895 $2.00
=========================================
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ ---------------
Balance - January 1, 2000..................... 1,861,727 $1.71
Granted...................................... 134,500 $1.34
Exercised.................................... (16,334) $0.87
Canceled..................................... (47,533) $0.86
-----------------------------------------
Balance - June 30, 2000....................... 1,932,360 $1.72
=========================================
Currently exercisable......................... 1,006,378 $2.43
=========================================
8
At June 30, 2000 the Company's 1996 Stock Option Plan had 633,000 shares of
the Company's common stock available, including the 450,000 shares approved for
the plan at the Company's annual shareholders meeting on May 23, 2000.
After issuing 8,124 shares on July 1, 2000 in payment of the retainers for
the second quarter, and including the 200,000 shares approved for the plan at
the Company's annual shareholders meeting on May 23, 2000, the Company's 1998
Non-employee Director Stock Plan had 240,647 shares of the Company's common
stock available.
At June 30, 2000 there were 100,000 shares of the Company's common stock
reserved for issuance under the common stock warrants issued on May 26, 1999.
The warrants oblige the Company to issue 33,334 shares at $0.6875 per share, the
market price on the grant date, 33,333 shares at $1.6875 and 33,333 shares at
$2.6875. Each of the three warrants has a five year life and vests one-third on
the grant date, one-third six months after the grant date, and one-third twelve
months after the grant date.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The entire discussion in this report, as well as other management discussion of
the Company's goals and expectations, contains Forward-Looking statements that
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. The words "believe", "expect",
"intend", "anticipate", variations of such words and similar expressions
identify Forward-Looking statements, but their absence does not mean that the
statement is not Forward-Looking. These statements are not guaranties of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Factors that could affect the Company's actual
results include, among other things, the availability of adequate funding, the
sale of the manufacturing operation, relationships with corporate collaborators,
the rate of market acceptance of the Company's products, the status of competing
products, and the Company's ability to obtain and defend patent and intellectual
property rights and to successfully develop and market the Company's existing
and future products. See "Important Factors Regarding Forward-Looking
Statements." Readers are cautioned not to place undue reliance on these Forward-
Looking statements, which speak only as of the date of this report. ProCyte
undertakes no obligation to update publicly any Forward-Looking statement to
reflect new information, events or circumstances after the date of this report
or to reflect the occurrence of unanticipated events. The entire discussion in
this report should be read in conjunction with the Company's annual report on
Form 10-K.
Corporate Overview
ProCyte develops and markets skin health and hair care products, focusing its
direct efforts on specialty skin health sector and marketing its products
primarily to dermatologists, plastic surgeons and cosmetic surgeons. On April
19, 2000 ProCyte announced a long-term license agreement with Neutrogena
Corporation, a Johnson & Johnson company, for worldwide use of its patented
copper peptide complexes in consumer products for skin health. The agreement
provides ProCyte with milestone and royalty payments and specifies minimum
payment levels.
The Company markets its Neova(TM) Therapy line of copper peptide based anti-
aging products directly to physicians. The Company also markets its Complex
Cu3(TM) Intensive Repair Creme, Cleanser and Hydrating Gel products used to
treat patients following chemical peels, microdermabrasion and laser treatments,
as a complement to its line of over-the-counter topical drugs, sun protection
and other skin care products. The Complex Cu3(TM) and Neova(TM) Therapy
products allow the Company to differentiate its comprehensive line of skin care
products on the basis of its proprietary copper peptide technology. These
products are distributed using the Company's own sales force.
The Company positions its Tricomin(R) line of triamino copper complex containing
hair care products as a therapeutic approach to the maintenance of thinning hair
in both men and women. These products are marketed to physicians using the
Company's own sales force and directly to consumers through specialty
distributors and through the Company's web site at www.tricomin.com.
Additionally, ProCyte believes that it is the only company providing a line of
specific products that address the importance of wound care in the hair
transplant procedure. The Company's GraftCyte(TM) line of copper peptide
containing wound care products for use following hair restoration surgery are
promoted through its own sales force and specialty distributors.
The Company's other wound care products, including Iamin(R) Hydrating Gel,
Iamin(R) Wound
10
Cleanser and OsmoCyte(R) Pillow and OsmoCyte(R) Island Dressings, are marketed
in the hospital, nursing home and extended care markets in the United States
directly and through an agreement with a distribution partner. Similar
agreements have been concluded, with product registrations in place or in
process, for Latin America, Europe, and the Far East.
Operating Losses
The Company has incurred operating losses since its inception due to the
marketing expense of product launches and the costs of supporting research and
development of its proprietary technology at a time when sales of the Company's
product and other revenues do not yet exceed operating expenses. At June 30,
2000, the Company's accumulated deficit was approximately $73.2 million. The
Company expects to incur additional operating losses until its product lines
have been further expanded and have achieved market acceptance.
Revenue
During the six-month period ended June 30, 2000, ProCyte generated total
operating revenue of $3,150,728 from product sales, contract manufacturing and
licenses. Comparable revenues were $2,319,412 for the six-month period ended
June 30, 1999. The increase in total operating revenue during the six-month
period ended June 30, 2000 as compared to the six-month period ended June 30,
1999 was $831,316 or 35.6%. Total operating revenue for the quarters ended June
30, 2000 and 1999 were $1,687,670 and $1,182,114, respectively, an increase of
$505,556 or 42,8%.
Revenue from product sales was $2,339,546 during the six-month period ended June
30, 2000, up $419,984 or 21.9% from $1,919,562 during the comparable period in
1999. Revenue from product sales was $1,247,147 during the second quarter of
2000, compared to $969,981 during the second quarter of 1999. The increase
during both the quarter and the six-month period was primarily a result of
additional sales of skin and hair care products and the introduction of new
products incorporating the Company's proprietary copper peptide technology
Revenue from contract manufacturing services was $530,719 during the six-month
period ended June 30, 2000, and $301,750 during the comparable period in 1999.
Revenue from contract manufacturing services was $228,276 during the second
quarter of 2000, compared to $197,430 during the second quarter of 1999. The
increases reflect the timing and volume of projects undertaken for customers.
The Company has agreed to sell its contract manufacturing operations and the
facility used for such purposes. See "Important Factors Regarding Forward-
Looking Statements - Uncertainties Related to the Sale of the Manufacturing
Operation."
Revenue from royalties and licenses during the six-month period ended June 30,
2000 includes milestone payments from Neutrogena and E. Merck and royalties from
a license agreement with Osmotics Corporation. The comparable amount in 1999
includes initial fees from Neutrogena and royalties from Osmotics.
Interest income was $102,395 during the six-month period ended June 30, 2000,
and $149,924 during the comparable period in 1999. Interest income was $47,687
during the second quarter of 2000, compared with $66,946 during the second
quarter of 1999. The decreases in interest income were primarily a result of
reduced funds available for investment.
11
Expenses
The cost of product sales was $629,568 (26.9% of product sales) for the six-
month period ended June 30, 2000, a decrease of $113,379 or 15.3% from $742,947
(38.7% of product sales) during the comparable period in 1999. Cost of product
sales was $352,945 during the second quarter of 2000, compared with $344,826
during the second quarter of 1999. Higher margin products, based on proprietary
technology, represent a greater percentage of total product sales during the
periods ended June 30, 2000 than during those ended June 30, 1999.
Selling, general and administrative expenses were $2,935,088 during the six-
month period ended June 30, 2000, an increase of $123,816 or 4.4% from
$2,811,272 during the comparable period in 1999. Selling, general and
administrative expenses were $1,420,477 and $1,510,662 during the second
quarters of 2000 and 1999, respectively. The increase during the six-month
period reflects the higher level of sales support provided for certain products
and the cost of the expanded sales force. The decrease during the second
quarter reflects differences in the timing of marketing expenditures.
Research and development expenses were $749,300 during the six-month period
ended June 30, 2000, down $193,770 or 20.6% from $943,070 during the comparable
period in 1999. Research and development expense was $374,059 and $463,386
during the second quarters of 2000 and 1999, respectively. The decrease during
both the quarter and the six-month period reflect the continuing conversion of
research activities into a more conventional product development program.
Liquidity and Capital Resources
Historically, the Company has relied on equity financing, product sales,
contract manufacturing, interest income and corporate partnerships to fund its
operations and capital expenditures. At June 30, 2000, the Company had
approximately $3.1 million in cash and cash equivalents, compared to $3.9
million at December 31, 1999. The $800,000 decrease in cash principally
represents the cash outflow from operations, offset in part by a decrease in a
security deposit. The Company expects that its operating cash needs will
continue at similar, progressively decreasing, levels in future periods until
revenues exceed operating expenses.
The Company believes that its existing cash and cash equivalents and interest
thereon, will be sufficient to meet its working capital requirements for at
least the next twelve months. However, there can be no assurance that the
underlying assumed levels of revenue and expense will prove accurate. Later this
year the Company expects to receive $2.5 million from the sale of its contract
manufacturing operations. See "Important Factors Regarding Forward-Looking
Statements - Uncertainties Related to the Sale of the Manufacturing Operation."
Although the Company believes that its existing and potential products are
promising, it does not know whether any of such products will prove commercially
viable. In any event, substantial additional funds could be needed to
commercialize existing products and to continue development of potential
products. The Company will depend upon product revenues, interest income, equity
financing, and funding from corporate partnerships to meet its future capital
needs. There can be no assurance that additional funds will be available as
needed or on terms that are acceptable to the Company. If the Company is unable
to obtain sufficient funds to satisfy its cash requirements, the Company will be
required to delay, reduce or eliminate some or all of its research and
development activities and administrative programs, or dispose of additional
assets or technology. See "Important Factors Regarding Forward-Looking
Statements - Need for Additional Capital".
12
Important Factors Regarding Forward-Looking Statements
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
The Company launched its first product based on its proprietary copper peptide
technology in July, 1996. To date, however, the Company has generated relatively
minor revenues from sales of products based on its proprietary technology, and
there can be no assurance that the Company will be able to generate sufficient
product sales from those products to achieve a profitable level of operations.
As of June 30, 2000 the Company's accumulated deficit was approximately $73.2
million. The Company expects to incur additional operating losses at least
through the balance of 2000. In addition to sales of products based on its
proprietary copper peptide technology, the Company's revenues have historically
included sales of non-proprietary products, license fees and royalties, revenue
from contract research and manufacturing and interest income. The Company's
ability to achieve a consistent, profitable level of operations is dependent in
large part on successfully marketing its products, entering into agreements with
corporate partners for distribution and commercialization of the Company's
products and out-licensing of the Company's products and technology, of which
there can be no assurance. In addition, payments under corporate partnerships
and licensing arrangements, if any, may be subject to significant fluctuations
in both timing and amounts. The time required to reach sustained profitability
is highly uncertain, and there can be no assurance that the Company will be able
to achieve profitability on a sustained basis, if at all. Moreover, if
profitability is achieved, the level of profitability cannot be predicted and
may vary significantly from quarter to quarter.
Need for Additional Capital
The Company's future capital requirements will depend on numerous factors,
including: its efforts, and the efforts of its collaborative partners, to
commercialize its products; continued progress in the Company's research and
development programs; the results of research and development activities;
relationships with existing and future corporate collaborators, if any;
competing technological and market developments; the costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of commercialization
activities; and other factors. At June 30, 2000, the Company had cash and cash
equivalents of $3.1 million. The Company has agreed to sell its contract
manufacturing operations and the facility used for such purposes for $2.5
million in a transaction expected to close later this year. See "Important
Factors Regarding Forward-Looking Statements - Uncertainties Related to the Sale
of the Manufacturing Operation." The Company estimates that at its planned rate
of spending, its existing cash and cash equivalents and the interest income
thereon will be sufficient to meet its capital requirements at least for the
next twelve months. There can be no assurance that the underlying assumed levels
of revenue and expense will prove accurate. Whether or not these assumptions
prove to be accurate, the Company may need to raise additional capital to expand
or enhance its sales and marketing activities and to continue product
development. The Company may be required to seek additional funding through
public or private financing, including equity financing, or through
collaborative arrangements. Adequate funds for these purposes, whether obtained
through financial markets or from collaborative or other arrangements with
corporate partners or other sources, may not be available when needed or may not
be available on terms favorable to the Company, if at all. If issuing equity
securities raises additional funds, dilution to existing shareholders will
result. In addition, in the event that additional funds are obtained through
arrangements with collaborative partners, such arrangements may require the
Company to relinquish rights to certain of its technologies or potential
products that it would otherwise seek to develop or commercialize itself. If
funding is insufficient at any time in the future, the Company may be required
to delay, scale back or eliminate some or all of its marketing and research and
development
13
programs, to sell additional assets, or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself. Furthermore, the terms of any such license agreements or asset
sales might be less favorable than if the Company were negotiating from a
stronger position. Moreover, if funding is insufficient at any time in the
future, and the Company's existing funds are depleted, the Company may be
required to cease operations.
Uncertainties Related to the Sale of the Manufacturing Operation
Since inception, a substantial portion of the Company's revenues has been
derived from contract manufacturing as the Company has sought to more fully
utilize its existing facility's capacity while its own products were under
development. During 1999 the Company retained a financial advisor to assist it
with the sale or spin-off of the manufacturing operation in order to tighten the
Company's focus on its core business. On March 29, 2000 ProCyte agreed to sell
the assets and liabilities related to its manufacturing operation for $2.5
million to a group including a member of ProCyte management. The time required
to conclude the transaction has been longer than initially anticipated, but
subject to negotiation of a definitive agreement and contingent upon
availability of financing and ratification by the ProCyte Board of Directors,
the transaction is expected to close later this year. The manufacturing
operation includes the substantial majority of the fixed assets of the Company
and the lease obligation for the Company's facility. A provision of $1.9 million
was recorded at December 31, 1999 as an estimate of the loss to be realized upon
consummation of this transaction. If the sale is not concluded on a timely basis
the Company may be required to further reduce its estimate of the value of these
assets. The manufacturing operation generated contract revenues of $762,320,
$436,167 and $705,706 in 1999, 1998 and 1997, respectively. Expenses related to
the manufacturing operation were approximately $1,800,000 in 1999, $2,050,000 in
1998, and $2,850,000, in 1997. During the six month period ended June 30, 2000
such revenues and expenses amounted to $530,719 and approximately $780,000,
respectively. Interim results are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000. If a sale of the
manufacturing operation is not concluded, the Company may be subject to the
uncertainties of the contract manufacturing industry, including better
capitalized and established competitors and irregular timing of projects. Such a
transaction may not be feasible on a timely basis or may not be feasible with
terms acceptable to the Company, and there can be no assurance that such a
transaction will ever be successfully completed.
Uncertainties Related to Product Development
From the Company's inception in 1986 until it launched its first commercial
product in 1996, substantially all of its resources were dedicated to the
research and development of wound healing, hair growth and other therapeutic
pharmaceutical applications of its copper peptide compounds. To date, the
Company has generated relatively minor but progressively increasing revenues
from sales of products based on its proprietary copper peptide technology.
There can be no assurance that the Company's current products or potential
products will be successfully commercialized and accepted for use by physicians,
healthcare providers and consumers.
The Company is dependent upon the successful development of its current and
potential products. Development of the Company's potential products is highly
uncertain, and unanticipated developments, clinical and regulatory delays,
adverse or unexpected side effects or inadequate therapeutic efficacy could slow
or prevent the successful completion of the Company's product and technology
development. There can be no assurance that the Company will obtain regulatory
approval, that an approved product can be produced in commercial quantities at
reasonable costs or gain acceptance for use by physicians, healthcare providers
and consumers or that any potential
14
products will be successfully marketed at prices that would permit the Company
to operate profitably. The failure of any of these would have a material adverse
effect on the Company's business, financial condition and results of operations.
Dependence on and Management of Existing and Future Corporate Alliances
The successful commercialization of the Company's existing and future products
will depend upon ProCyte's ability to market through its own sales force and to
enter into and effectively manage corporate partnerships. ProCyte currently
promotes certain of its products through specialty distributors. Other products
and technology are licensed for incorporation into products sold by others.
There can be no assurance that any of the Company's collaborators will perform
their obligations under their agreements with the Company or that the Company's
products or the products of others that incorporate the Company's products or
technology, will be successfully commercialized, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Furthermore, there can be no assurance that the Company will be successful in
establishing corporate alliances in the future, or that it will be successful in
maintaining existing or any future corporate alliances. Moreover, there can be
no assurance that the interests and motivations of any corporate partner,
distributor or licensee would be or remain consistent with those of the Company,
or that such partners, distributors or licensees would successfully perform the
necessary technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Failure of any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Patent Position and Proprietary Rights
The patent positions of biotechnology, medical device and healthcare products
companies are often uncertain and involve complex legal and factual questions,
and the breadth of claims allowed in such patents cannot be predicted. In
addition, there is a substantial backlog of patents at the US Patent and
Trademark Office that may delay the review and the potential issuance of
patents. The Company's success will depend on its ability to maintain its
patents and licenses to patent rights, to maintain trade secrets and to operate
without infringing on the proprietary rights of others, both in the United
States and in other countries. The failure of the Company or its licensors to
obtain and maintain patent protection for the Company's technology could have a
material adverse effect on the Company.
ProCyte's success depends, in part, upon its ability to protect its products and
technology under intellectual property laws in the United States and abroad. As
of June 30, 2000 the Company had 21 issued US patents expiring between 2005 and
2017 and numerous 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 that offer significant market
potential. There can be no assurance that patent applications relating to the
technology used by the Company will result in patents being issued. There can
be no assurance that any patent issued to the Company will not be subjected to
further proceedings limiting the scope of the rights under the patent or that
such patent will provide a competitive advantage, or will afford
15
protection against competitors with similar technology, or will not be
successfully challenged, invalidated or circumvented by competitors.
The Company's processes and potential products may conflict with patents that
have been or may be granted to competitors and others. As the biotechnology,
medical device and healthcare industries expand and more patents are issued, the
risk increases that the Company's processes and potential products may give rise
to claims that they infringe the patents of others. Such other persons could
bring legal actions against the Company claiming damages and seeking to enjoin
clinical testing, manufacturing and marketing of the affected product or use of
the affected process. Litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of proprietary rights of
others. If the Company becomes involved in such litigation, it could result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. In addition to any potential
liability for significant damages, the Company could be required to obtain a
license to continue to manufacture or market the affected product or use the
affected process. Costs associated with any licensing arrangement may be
substantial and could include ongoing royalties. There can be no assurance that
any license required under any such patent would be made available to the
Company on acceptable terms, if at all. If such licenses could not be obtained
on acceptable terms, the Company could be prevented from manufacturing and
marketing existing or potential products. Accordingly, an adverse determination
in such litigation could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon unpatented proprietary technology. There can be no
assurance that the Company can meaningfully protect its rights in such
unpatented technology, that any obligation to maintain the confidentiality of
such proprietary technology will not be breached by employees, consultants,
collaborators or others or that others will not independently develop or acquire
substantially equivalent technology. 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. Any failure to protect unpatented proprietary technology or
any breach of obligations designed to protect such technology or development of
equivalent technology may have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainty of Government Regulatory Requirements
The manufacture and marketing of ProCyte's products and its research and
development activities in general are subject to regulation in the United States
by the federal government, principally by the FDA, and in other countries by
similar health and regulatory authorities. The Federal Food, Drug and Cosmetic
Act, and the regulations promulgated thereunder, and other federal and state
statutes govern, among other things, the testing, manufacture, safety, labeling,
storage, record-keeping, advertising and promotion of cosmetic products and
medical devices. Product development and approval or clearance within the
regulatory framework requires a number of years and involves the expenditure of
substantial resources.
In order to obtain FDA clearance to market a new device in the United States for
use in humans, it is necessary to proceed through several stages of product
testing, including research and development, clinical trials, and the filing of
a product 510(k) medical device application with the FDA to obtain authorization
to market a product. The Company's products and product candidates may be
regulated by any of a number of divisions of the FDA. The process of obtaining
and maintaining regulatory
16
approvals for the manufacturing or marketing of the Company's existing and
potential products is costly and time-consuming and is subject to unanticipated
delays. Accordingly delays, rejections or unexpected costs based on changes in
the policy or regulations of the FDA or foreign governmental authorities during
the period of product development and regulatory review, which changes may
result in limitations or restrictions on the Company's ability to utilize its
technology or develop product candidates. Regulatory requirements ultimately
imposed could also adversely affect the ability of the Company to clinically
test, manufacture or market products. Even if regulatory approval of a potential
product is obtained, such approval may entail limitations on the indicated uses
for which such product may be marketed, which may restrict the patient
population for which any product may be prescribed. In addition, a marketed
product is subject to continual FDA review. Later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on marketing a product or withdrawal of
the product from the market, as well as possible criminal or civil sanctions.
In the United States, products that do not seek to make effectiveness claims
based on human clinical evaluation may be subject to review and regulation under
the FDA's cosmetic or 510(k) medical device guidelines. Similar guidelines
exist for such products in other countries. Such products, which include wound
care dressings and gels, must show safety and substantial equivalency with
predicate products already cleared to be marketed by the FDA. There can be no
assurance that such product applications submitted to the FDA or similar
agencies in other countries will receive clearance to be marketed, or that the
labeling claims sought will be approved, or that, if cleared, such products will
be commercially successful.
In addition to obtaining approval or clearance from the FDA or foreign
regulatory bodies to market a product, the prospective manufacturer's quality
control and manufacturing procedures must conform to current good manufacturing
practices ("cGMP") guidelines, or ISO 9000 standards, when appropriate. In
complying with these regulations, which are subject to change at any time
without notice to the Company, ProCyte must continue to expend time, effort and
financial resources in production and quality control. In addition, ProCyte's
manufacturing plant is subject to the regulations of and inspections by other
foreign, federal, state or local agencies, such as local and regional water and
waste treatment agencies, and state and federal safety and health agencies.
There can be no assurance that the Company's manufacturing facility or its
manufacturing operations will meet or continue to meet all appropriate
guidelines or to pass inspections by any government agency.
The Company also is or may become subject to various other federal, state, local
and foreign laws, regulations and policies relating to, among other things, safe
working conditions, good laboratory practices, and the use and disposal of
hazardous or potentially hazardous substances used in connection with research,
development and manufacturing.
Failure to obtain regulatory approvals for its product candidates or to attain
or maintain compliance with cGMP or other manufacturing requirements would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Intense Competition
Competition in the wound care, skin health and hair care markets is intense.
The Company's competitors include well-established pharmaceutical, cosmetic and
healthcare companies such as Bristol Myers Squibb's ConvaTec division, Johnson
and Johnson, Obagi and Allergan. These competitors have substantially more
financial and other resources, larger research and development staffs, and more
experience and capabilities in researching, developing and testing products in
17
clinical trials, in obtaining FDA and other regulatory approvals and in
manufacturing, marketing and distribution than the Company. In addition, a
number of smaller companies are developing or marketing competitive products,
some of which may have an entirely different approach than products being
marketed or developed by the Company. The Company's competitors may succeed in
developing and commercializing products or obtaining patent protection or other
regulatory approvals for products more rapidly than the Company. If the Company
is successful in commercializing its products, it will be required to be
competitive with respect to manufacturing efficiency and marketing capabilities,
areas in which it has very limited experience. The Company's competitors may
develop new technologies and products that are available for sale prior to the
Company's potential products or that are more effective than the Company's
existing or potential products. In addition, competitive products may be
manufactured and marketed more successfully than the Company's potential
products. Such developments could render the Company's existing or potential
products less competitive or obsolete and could have a material adverse effect
on the Company's business, financial condition and results of operations.
Potential Volatility of Stock Price; Bulletin Board Listing
The market prices for securities of healthcare, medical dressings,
pharmaceutical and biotechnology companies are subject to volatility, and the
market has from time to time experienced significant fluctuations that are
unrelated to the operations of the Company. ProCyte's market price has
fluctuated over a wide range since the Company's initial public offering in
1989, and since March 25, 1999 the Company's common stock has traded on the NASD
OTC bulletin board. Because real-time price information may not be available
for bulletin board securities, an investor is likely to find it more difficult
to dispose of, or to obtain accurate quotations on the market value of, the
Company's securities than if they were listed on a national exchange. In
addition, purchases and sales of the Company's securities may become subject to
Rule 15g-9 of the Exchange Act which imposes various sales practice requirements
on broker-dealers, or to the "penny stock" rules, either of which would likely
reduce the level of trading activity in the secondary market for the Company's
securities and make selling the securities more difficult for an investor.
Announcements concerning the Company or its competitors, including fluctuations
in operating results, research and development program direction, results of
clinical trials, addition or termination of corporate alliances, technology
licenses, clearance or approval to market products, announcements of
technological innovations or new products by the Company or its competitors,
changes in government regulations, healthcare reform, developments in patent or
other proprietary rights of the Company or its competitors, litigation
concerning business operations or intellectual property, or public concern as to
safety of products, as well as changes in general market conditions and mergers
and acquisitions, may have a significant effect on the market price of ProCyte's
common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
ProCyte did not own any derivative financial instruments as of June 30, 2000.
The Company is debt-free and is exposed to interest rate risk only to the extent
that it has invested idle cash balances. At June 30, 2000 such balances were
invested in a United States Treasury money market fund. ProCyte employs
established policies and procedures to manage its exposure to changes in the
market risk of its investments. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
18
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 23, 2000.
Three matters were submitted to the shareholders for a vote: the election of
directors, a proposal to increase the number of shares reserved for issuance
under the Company's 1996 employee stock option plan, and a proposal to increase
the number of shares reserved for issuance under the Company's 1998 non-employee
director stock plan. As of April 10, 2000, the record date, there were
15,453,037 shares eligible to vote at the meeting, of which 76.75% or 11,860,465
were represented at the meeting, constituting a quorum.
The four nominees for election as directors were elected to serve until the 2001
annual meeting of the shareholders, and until the election and qualification of
their respective successors. The vote for each director follows:
-----------------------------------------------------------------------
DIRECTOR FOR WITHHELD
-----------------------------------------------------------------------
John F. Clifford 11,727,148 133,317
Matt L. Leavitt 11,629,489 230,976
Glenn A. Oclassen 11,727,448 133,017
Robert E. Patterson 11,727,448 133,017
19
The other two proposals were approved by the shareholders. The vote for each
proposal was as follows:
-----------------------------------------------------------------------
PROPOSAL FOR WITHHELD
-----------------------------------------------------------------------
Increase the number of
shares authorized for the
1996 stock option plan
from 550,000 to 1,000,000
shares...................... 10,886,487 973,978
Increase the number of
shares authorized for the
1998 non-employee
director stock plan from
200,000 to 400,000
shares...................... 10,897,479 962,986
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
20
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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: July 28, 2000 By: /s/ John F. Clifford
-------------------------------------------------
John F. Clifford, Chairman and CEO
Date: July 28, 2000 By: /s/ Jerry Scott
-------------------------------------------------
Jerry P. Scott, Vice President - Finance and CFO
21
EXHIBIT INDEX
Exhibit Number Title
- -------------- -----
27 Financial Data Schedule
22