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 September 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 November 6, 2000, there were issued and outstanding 15,514,701 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 September 30, 2000 and December 31, 1999 (unaudited)........... 3
Statements of Operations - three and nine months ended September 30, 2000
and 1999 (unaudited)................................................................. 4
Statements of Cash Flows - nine months ended September 30, 2000 and 1999 (unaudited).. 5
Statements of Stockholders' Equity - nine months ended September 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..................... 19
Part II - Other Information.............................................................. 20
Item 1. Legal Proceedings.............................................................. 20
Item 2. Changes in Securities and Use of Proceeds...................................... 20
Item 3. Defaults Upon Senior Securities................................................ 20
Item 4. Submission of Matters to a Vote of Security Holders............................ 20
Item 5. Other Information.............................................................. 20
Item 6. Exhibits 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 September 30, 2000 (unaudited) and December 31, 1999
-------------------------------------------------
September 30, 2000 December 31, 1999
-------------------------------------------------
Assets
Cash and cash equivalents.................................. $ 3,144,132 $ 3,883,187
Accounts receivable, net................................... 1,086,678 757,343
Inventory.................................................. 2,033,862 666,203
Other current assets....................................... 228,283 147,553
-------------------------------------------------
Total current assets................................... 6,492,955 5,454,286
Raw materials and work in process, net..................... 131,318 1,572,655
Property and equipment, net................................ 2,423,457 2,746,373
Intangible assets, net..................................... 3,245,307 3,441,088
Other assets............................................... 184,474 232,226
-------------------------------------------------
Total Assets $ 12,477,511 $ 13,446,628
=================================================
Liabilities and Stockholders' Equity
Total current liabilities.................................. $ 920,726 $ 416,056
Other liabilities.......................................... 150,190 142,035
-------------------------------------------------
Total liabilities...................................... 1,070,916 558,091
Common stock and additional paid in capital................ 85,093,164 84,989,929
Accumulated deficit........................................ (73,686,569) (72,101,392)
-------------------------------------------------
Stockholders' equity................................... 11,406,595 12,888,537
-------------------------------------------------
Total Liabilities and Stockholders' Equity $ 12,477,511 $ 13,446,628
=================================================
See notes to financial statements
3
Statements of Operations - three and nine months ended September 30, 2000 and
1999 (unaudited)
---------------------------------------------------------------------------
Three months ended September 30 Nine months ended September 30
2000 1999 2000 1999
---------------------------------------------------------------------------
Revenues
Product sales................................. $ 1,310,753 $ 826,622 $ 3,650,299 $ 2,746,184
Contract manufacturing........................ 225,826 105,980 756,545 407,730
Licenses, royalties and other................. 126,327 16,313 406,790 114,413
---------------------------------------------------------------------------
Total revenue................................. 1,662,906 948,915 4,813,634 3,268,327
Cost of product sales......................... 443,835 321,565 1,073,403 1,064,512
---------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative........... 1,522,832 1,085,180 4,457,920 3,896,452
Research and development...................... 265,597 410,125 1,014,897 1,353,195
---------------------------------------------------------------------------
Total operating expenses...................... 1,788,429 1,495,305 5,472,817 5,249,647
---------------------------------------------------------------------------
Operating Loss................................ (569,358) (867,955) (1,732,586) (3,045,832)
Interest Income............................... 45,014 45,798 147,409 195,722
---------------------------------------------------------------------------
Net loss...................................... ($ 524,344) ($822,157) ($1,585,177) ($2,850,110)
===========================================================================
Net loss per common share...................... ($0.03) ($0.05) ($0.10) ($0.19)
Weighted average number of common shares used
in computing net loss per common share........ 15,503,161 15,400,850 15,469,817 14,858,285
See notes to financial statements
4
Statements of Cash Flows - nine months ended September 30, 2000 and 1999
(unaudited)
----------------------------------
Nine months ended September 30,
2000 1999
----------------------------------
Operating Activities
Net loss..................................................... ($1,585,177) ($2,850,110)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 535,443 639,007
Loss on sale of securities................................... - 6,980
Stock issued in payment of expenses.......................... 89,000 172,332
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (329,335) 168,192
Increase in other current assets............................. (202,181) (324,288)
Decrease in raw materials and work in process................ 195,129 27,547
Increase in other non-current assets......................... (3,551) (3,748)
(Decrease) increase in current liabilities................... 504,670 (105,751)
Increase in other liabilities................................ 8,155 12,786
----------------------------------
Net cash used in operating activities...................... (787,847) (2,257,053)
Financing Activities
Proceeds from issuance of stock.............................. 14,235 -
----------------------------------
Net cash provided by financing activities.................. 14,235 -
Investing Activities
Purchase of property and equipment........................... (16,745) (64,325)
Proceeds from sale or maturity of securities................. - 3,915,605
Purchase of NextDerm, Inc.................................... - (285,000)
Decrease in security deposit................................. 51,302 52,314
----------------------------------
Net cash provided by investing activities.................. 34,557 3,618,594
----------------------------------
Net (decrease) increase in cash and cash equivalents....... (739,055) 1,361,541
Cash and Cash Equivalents:
At beginning of period.................................... 3,883,187 2,003,896
---------------------------------
At end of period.......................................... $ 3,144,132 $ 3,365,437
=================================
See notes to financial statements
5
Statements of Stockholders' Equity - nine months ended September 30, 2000 and
1999
(unaudited)
-----------------------------------------------------------------------------------------
Common Stock Additional Accumulated
------------ paid-in
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............. 74,299 743 41,257 42,000
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 nine months ended
September 30, 1999............... (2,850,110) (2,850,110)
-----------------------------------------------------------------------------------------
Balance - September 30, 1999...... 15,400,850 $154,008 $84,733,804 ($69,636,040) $15,251,772
=========================================================================================
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............. 30,772 308 32,692 33,000
Shares issued under non-compete
agreement........................ 37,333 373 55,627 56,000
Shares issued upon exercise of
options.......................... 16,334 163 14,072 14,235
Net loss for nine months ended
September 30, 2000............... (1,585,177) (1,585,177)
-----------------------------------------------------------------------------------------
Balance - September 30, 2000...... 15,503,161 $155,031 $84,938,133 ($73,686,569) $11,406,595
=========================================================================================
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 nine-month periods
ended September 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
On March 29, 2000 the Company signed a definitive agreement to sell its
manufacturing facility, which consists of leasehold improvements and equipment,
to an investor group for $2.5 million. As a result, an impairment loss of $1.9
million was recorded at December 31, 1999 as an estimate of the loss to be
realized upon consummation of the sale. However, the investor group was unable
to meet certain requirements necessary to consummate the transaction.
The Company currently plans to continue to use the facility in its contract
manufacturing operations, and will evaluate opportunities to sell the facility
as they arise. Based on management's evaluation of the net realizable value of
the facility, management believes that no further impairment loss on the
facility is necessary, and an estimated remaining useful life of 7-10 years is
appropriate.
3. Accounts receivable
The Company has provided a reserve for uncollectable accounts receivable in
the amount of $65,421 and $65,421 at September 30, 2000 and December 31, 1999.
4. Inventory
Finished goods inventory valued at $867,654 and $746,203 at September 30,
2000 and December 31, 1999. Both inventories are shown net of an $80,000 reserve
for obsolete and excess finished goods. The value of raw material was $396,886
and $578,215, and the value of work in process was $1,280,640 and $1,294,440 at
September 30, 2000 and December 31, 1999, respectively. The reserve for obsolete
and excess raw materials and work in process amounted to $300,000 for both
periods.
7
5. Property and equipment
Property and equipment consisted of the following:
September 30, 2000 December 31, 1999
Equipment......................................... $ 2,534,896 $ 2,518,151
Leasehold improvements............................ 5,513,850 5,513,850
Less reserve for impairment of manufacturing
operation........................................ (1,900,000) (1,900,000)
Less accumulated depreciation and amortization
(3,725,289) (3,385,628)
---------------------------------------
Property and equipment, net....................... $ 2,423,457 $ 2,746,373
=======================================
6. Intangible assets
At September 30, 2000 and December 31, 1999 intangible assets are shown net
of $721,136 and $525,354 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........................................ 830,000 $0.81
Exercised...................................... - -
Canceled....................................... (596,167) $1.70
-----------------------------------------
Balance - September 30, 1999.................... 1,851,894 $1.72
=========================================
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ --------------
Balance - January 1, 2000....................... 1,861,727 $1.71
Granted........................................ 184,000 $1.28
Exercised...................................... (16,334) $0.87
Canceled....................................... (122,697) $0.93
----------------------------------------
Balance - September 30, 2000.................... 1,906,696 $1.73
========================================
Currently exercisable........................... 1,189,547 $2.17
========================================
8
At September 30, 2000 the Company's 1996 Stock Option Plan had 586,500
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 11,540 shares on October 1, 2000 in payment of the retainers
for the third 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 229,107 shares of the Company's common
stock available.
At September 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, 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 selling efforts on the specialty skin sector, and marketing its products
primarily to dermatologists, plastic surgeons and cosmetic surgeons. Primary
emphasis is placed on the products containing its patented copper peptide
technology for therapeutic and anti-aging uses. 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. ProCyte believes that
its patented copper peptide technology has application in a wide range of skin
care products and markets. The Company has in place licensing and distribution
agreements with partners, under which, they will market products in the mass
retail and prestige segments of the health and beauty market. There are ongoing
discussions regarding the Company's efforts to obtain market presence in spa,
salon, home shopping, infomercial and multi-level segments.
The Company markets its skin health products directly to physicians. The product
portfolio consists of Neova(R) Therapy copper peptide anti-aging products
along with other complimentary skin care products under the same brand name. In
addition, the Company 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
TI-SILC(TM)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 markets its Tricomin(R) hair care products for the maintenance of
thinning hair in both men and women. These products containing triamino copper
complex are marketed to physicians using the Company's own sales force and
directly to consumers through specialty distributors, and
10
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 wound care products
containing copper peptide 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 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, 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. In August Merck KGaA
launched the copper peptide wound care gel in Brazil.
Operating Losses
The Company has incurred operating losses since its inception. The costs
associated with researching and developing its proprietary technology and
selling and marketing its products have not yet been exceeded by the Company's
product and other revenues. Over the past three years, the operating losses have
been reduced as revenues from product sales and other sources have increased and
expenses have decreased or remained flat. At September 30, 2000, the Company's
accumulated deficit was approximately $73.7 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 nine-month period, ended September 30, 2000, ProCyte generated total
operating revenue of $4,813,634 from product sales, contract manufacturing and
licenses. Comparable revenues were $3,268,327 for the nine-month period, ended
September 30, 1999. The increase in total operating revenue during the nine-
month period ended September 30, 2000 as compared to the nine-month period ended
September 30, 1999 was $1,545,307 or 47%. Total operating revenue for the
quarters ended September 30, 2000 and 1999 were $1,662,906 and $948,915,
respectively, an increase of $713,991 or 75%.
Revenue from product sales was $3,650,299 during the nine-month period ended
September 30, 2000, up $904,115 or almost 33% from $2,746,184 during the
comparable period in 1999. Revenue from product sales was $1,310,753 during the
third quarter of 2000, compared to $826,622 during the third quarter of 1999.
The increase during both the quarter and the nine-month period was primarily
from sales of Neova(R) Therapy and GraftCyte products. During the nine-month
period, over twenty new products have been added to the line, including upgrades
to some existing products. In addition poorly performing products have been
eliminated.
Revenue from contract manufacturing services was $756,545 during the nine-month
period ended September 30, 2000, versus $407,730 during the comparable period in
1999. Revenue from contract manufacturing services was $225,826 during the third
quarter of 2000, compared to $105,980 during the third quarter of 1999. The
increases reflect the timing and volume of projects undertaken for customers.
There are several projects of longer-term nature currently underway, or in
discussion, which will provide increased stability to this operation.
Revenue from royalties and licenses during the nine-month period ended September
30, 2000
11
includes milestone payments from Neutrogena and Merck KGaA 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 $147,409 during the nine-month period ended September 30,
2000, and $195,722 during the comparable period in 1999. Interest income was
$45,014 during the third quarter of 2000, compared with $45,798 during the third
quarter of 1999. The decreases in interest income were primarily a result of
reduced funds available for investment.
Expenses
The cost of product sales was $1,073,403 (29.4% of product sales) for the nine-
month period ended September 30, 2000, and $1,064,512 (38.8% of product sales)
during the comparable period in 1999. Cost of product sales was $443,835 during
the third quarter of 2000, compared with $321,565 during the third quarter of
1999. Higher margin products, based on proprietary technology, represent a
greater percentage of total product sales during the periods ended September 30,
2000 than during those ended September 30, 1999.
Selling, general and administrative expenses were $4,457,920 during the nine-
month period ended September 30, 2000, an increase of $561,468 or 14.4% from
$3,896,452 during the comparable period in 1999. Selling, general and
administrative expenses were $1,522,832 and $1,085,180 during the third quarters
of 2000 and 1999, respectively. The increase during the nine-month period
reflects the sales support provided for the introduction of new products, and
the cost of expanding the sales force. The Company also incurred non-recurring
expenses related to the proposed sale of its contract manufacturing facility.
Research and development expenses were $1,014,897 during the nine-month period
ended September 30, 2000, down $338,298 or 25.0% from $1,353,195 during the
comparable period in 1999. Research and development expense was $265,597 and
$410,125 during the third quarters of 2000 and 1999, respectively. The decrease
during both the quarter and the nine-month period reflect the continuing
conversion of research activities into a more conventional product development
programs.
12
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 September 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, net of reductions in deposits and
other payments. The Company expects that it's operating cash needs will continue
to progressively decrease until revenues exceed operating expenses in future
periods.
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. The
Company believes that it's existing and potential product sales and licensing
and distribution agreements are promising. However, it does not know whether any
of such products will prove to be 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".
13
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, the Company has generated progressively
increasing revenues from sales of products based on its proprietary technology,
but 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 September 30, 2000 the Company's accumulated deficit was
approximately $73.7 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: the efforts of the Company, and 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 September 30, 2000, the Company had cash and
cash equivalents of $3.1 million. 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 additional funds
are raised by issuing equity securities, 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 programs, to sell additional assets, or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop itself.
14
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 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 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 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.
15
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 September 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 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
16
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 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, may occur, and such 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
17
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
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
18
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 September 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 September 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.
19
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
None.
Item 5. Other Information
On October 6, 2000 the Company announced that the discussions for the sale of
its manufacturing facility had terminated. Previously the Company had announced
that it was in discussions to sell its manufacturing facility to an investor
group that included a member of ProCyte's management, who has since resigned.
The Company expected the transaction, based upon the original letter of intent,
to close in July 2000. However, the investor group was unable to meet certain
requirements necessary to complete the purchase. Under the original term sheet
ProCyte would have received a significant cash payment upon closing. The
investor group was unable to obtain funding, and asked ProCyte to consider an
alternative structure that would have required the Company to assume a sizable
ongoing financial risk. The Directors believed it was in the best interests of
the shareholders not to conclude a sale under the newly proposed terms.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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: November 7, 2000 By: /s/ John F. Clifford
-----------------------------------------------------
John F. Clifford, Chairman and CEO
Date: November 7 , 2000 By: /s/ Mark E. Landis
-----------------------------------------------------
Mark E. Landis, Controller
21
EXHIBIT INDEX
Exhibit Number Title
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27 Financial Data Schedule
22