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 March 31, 2001
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 April 27, 2001, there were issued and outstanding 15,555,017 shares of
common stock, par value $.01 per share.
ProCyte Corporation
INDEX
Part I - Financial Information...................................................... 3
Item 1. Condensed Financial Statements (unaudited)................................. 3
Balance Sheets - as of March 31, 2001 and December 31, 2000...................... 3
Statements of Operations - three months ended March 31, 2001 and 2000)........... 4
Statements of Cash Flows - three months ended March 31, 2001 and 2000)........... 5
Statements of Stockholders' Equity - three months ended March 31, 2001
and 2000)....................................................................... 6
Notes to Financial Statements.................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 16
Part II - Other Information......................................................... 17
Item 1. Legal Proceedings......................................................... 17
Item 2. Changes in Securities and Use of Proceeds................................. 17
Item 3. Defaults Upon Senior Securities........................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
Item 5. Other Information......................................................... 17
Item 6. Exhibits and Reports on Form 8-K.......................................... 17
Signatures.......................................................................... 18
EXHIBIT INDEX....................................................................... 19
2
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of March 31, 2001 (unaudited) and December 31, 2000
-------------------------------------------------
March 31, 2001 December 31, 2000
-------------------------------------------------
ASSETS
Cash and cash equivalents...................................... $ 2,026,319 $ 2,773,474
Accounts receivable, net of allowance for doubtful accounts.... 1,441,720 1,263,810
Inventory, net of reserve...................................... 2,087,268 2,242,027
Other current assets........................................... 141,807 171,510
-------------------------------------------------
Total current assets......................................... 5,697,114 6,450,821
Property and equipment, net.................................... 2,259,693 2,341,991
Intangible assets, net......................................... 3,114,785 3,180,046
Other assets................................................... 168,752 212,568
-------------------------------------------------
Total Assets $ 11,240,344 $ 12,185,426
=================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other accrued liabilities................. $ 713,341 $ 579,227
Customer deposit............................................... - 600,000
-------------------------------------------------
Total current liabilities.................................... 713,341 1,179,227
Deferred lease payments 146,248 145,178
Common stock and additional paid in capital.................... 85,126,564 85,105,165
Accumulated deficit............................................ (74,745,809) (74,244,144)
-------------------------------------------------
Stockholders' equity......................................... 10,380,755 10,861,021
-------------------------------------------------
Total Liabilities and Stockholders' Equity $ 11,240,344 $ 12,185,426
=================================================
See notes to financial statements
3
Statements of Operations - three months ended March 31, 2001 and 2000
(unaudited)
-----------------------------------------
Three months ended March 31,
2001 2000
-----------------------------------------
Revenues
Product sales........................... $ 2,316,561 $ 1,092,399
Contract services....................... 90,835 302,443
Licenses, royalties and other........... 134,165 68,216
-----------------------------------------
Total revenue........................... 2,541,561 1,463,058
Cost of product sales................... 1,179,372 276,623
-----------------------------------------
1,362,189 1,186,435
Operating Expenses
Selling, general and administrative..... 1,614,694 1,514,611
Research and development................ 287,075 375,241
-----------------------------------------
Total expenses.......................... 1,901,769 1,889,852
-----------------------------------------
Operating Loss.......................... (539,580) (703,417)
Interest Income......................... 37,915 54,708
-----------------------------------------
Net loss................................ $ (501,665) $ (648,709)
=========================================
Net loss per common share, basic and $(0.03) $(0.04)
diluted.................................
Average number of common shares used in
computing net loss per common share.....
15,538,405 15,435,833
See notes to financial statements
4
Statements of Cash Flows - three months ended March 31, 2001 and 2000
(unaudited)
-------------------------------------------------
Three months ended March 31,
2001 2000
-------------------------------------------------
Operating Activities
Net loss..................................................... $ (501,665) $ (648,709)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 168,139 221,998
Stock issued in payment of expenses......................... 12,000 12,000
Changes provided (used) by:
(Increase) decrease in accounts receivable.................. (177,911) 39,966
Decrease in inventory....................................... 154,759 17,212
Decrease in other current assets............................ 29,703 66,797
Increase in other non-current assets........................ (1,184) (1,184)
Decrease in current liabilities............................. (465,886) (70,218)
Increase in other liabilities............................... 1,071 4,032
-------------------------------------------------
Net cash used in operating activities..................... (780,974) (358,106)
Financing Activities
Proceeds from issuance of stock.............................. 9,399 8,504
-------------------------------------------------
Net cash provided by financing activities................. 9,399 8,504
Investing Activities
Purchase of property and equipment........................... (20,580) -
Decrease in security deposit................................. 45,000 51,303
-------------------------------------------------
Net cash provided by investing activities................. 24,420 51,303
-------------------------------------------------
Net decrease in cash and cash equivalents................. (747,155) (298,299)
Cash and Cash Equivalents:
At beginning of period.................................... 2,773,474 3,883,187
-------------------------------------------------
At end of period.......................................... $2,026,319 $3,584,888
=================================================
See notes to financial statements
5
Statements of Stockholders' Equity - three months ended March 31, 2001 and 2000
(unaudited)
-------------------------------------------------------------------------------------------
Common Stock Additional
------------ paid-in Accumulated
Shares Par Value Capital Deficit Total
-------------------------------------------------------------------------------------------
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............. 16,632 166 11,834 12,000
Shares issued upon exercise of
options......................... 11,600 116 8,388 8,504
Net loss for three months ended
March 31, 2000.................. (648,709) (648,709)
-------------------------------------------------------------------------------------------
Balance - March 31, 2000......... 15,446,954 $154,470 $84,855,963 $(72,750,101) $12,260,332
===========================================================================================
Balance - January 1, 2001........ 15,514,700 $155,147 $84,950,018 $(74,244,144) $10,861,021
Shares issued under non-employee
director stock plan............. 17,568 176 11,824 12,000
Shares issued upon exercise of
options......................... 10,501 105 9,294 9,399
Net loss for three months ended
March 31, 2001.................. (501,665) (501,665)
-------------------------------------------------------------------------------------------
Balance - March 31, 2001......... 15,542,769 $155,427 $84,971,137 $(74,745,809) $10,380,755
===========================================================================================
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 month period ended March
31, 2001 and 2000, have been prepared by the Company in accordance with
accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of
America 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, 2000. In the opinion
of management, all material adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial
statements have been included. Interim results are not necessarily indicative
of the results that may be expected for the year.
2. Accounts receivable
The Company has provided a reserve for uncollectable accounts receivable in
the amount of $92,332 at March 31, 2001 and December 31, 2000.
3. Inventory
Inventory consisted of the following:
March 31, 2001 December 31, 2000
---------------------------------------
Finished Goods $1,121,929 $1,022,739
Work in process 817,034 1,417,580
Raw materials 538,305 181,708
Reserve for excess
and obsolete items (390,000) (380,000)
---------------------------------------
Total $2,087,268 $2,242,027
=======================================
4. Property and equipment
Property and equipment consisted of the following:
March 31, 2001 December 31, 2000
---------------------------------------------
Equipment..................................... $ 2,142,580 $ 2,122,000
Leasehold improvements........................ 4,028,807 4,028,807
Less accumulated depreciation and
amortization................................. (3,911,694) (3,808,816)
---------------------------------------------
Property and equipment, net................... $ 2,259,693 $ 2,341,991
=============================================
7
5. Intangible assets
At March 31, 2001 and December 31, 2000, intangible assets are shown net of
$851,657 and $786,396 of accumulated amortization.
6. 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, 2000......................... 1,861,727 $1.71
Granted.......................................... 43,000 $1.68
Exercised........................................ (11,667) $0.65
Canceled......................................... (31,997) $0.86
-------------------------------------------------
Balance - March 31, 2000.......................... 1,861,063 $1.73
=================================================
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ --------------
Balance - January 1, 2001......................... 2,081,861 $1.63
Granted.......................................... 8,500 $0.98
Exercised........................................ (10,501) $0.90
Canceled......................................... (30,832) $0.93
-------------------------------------------------
Balance - March 31, 2001.......................... 2,049,028 $1.64
=================================================
Currently exercisable............................. 1,236,541 $2.15
=================================================
At March 31, 2001, the Company's 1996 Stock Option Plan had 344,831 shares of
the Company's common stock available.
The Company issued 12,248 shares on April 1, 2001 in payment of the Board of
Director retainers for the first quarter. As of April 27, 2001, the Company's
1998 Non-employee Director Stock Plan had 199,291 shares of the Company's common
stock available.
As of March 31, 2001, there were 100,000 shares of the Company's common stock
reserved for issuance under three common stock warrants issued on May 26, 1999
in exchange for services. The three 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 is fully vested. The fair value of these warrants was determined
to be $90,117 using the Black-Scholes option pricing model and was expensed in
1999. The assumptions used in the model were a risk-free interest rate of
4.08%, an expected life of five years, 98% stock price volatility, and no
dividends over the expected life.
8
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. 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 the
direct selling efforts of its own sales organization on the specialty skin
sector, and marketing its products primarily to dermatologists, plastic surgeons
and cosmetic surgeons. ProCyte primarily emphasizes products containing its
patented copper peptide technologies 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. The Company is currently in discussions to obtain market
presence in the 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 copper peptide containing Complex
Cu3(R) line of products for treatment following chemical peels,
microdermabrasion and laser procedures. The Company's line of advanced sun
protection products, including the Ti-Silc(TM) line, and therapeutic skin care,
allow for a complimentary approach to medically directed skin health. The
Complex Cu3(R) and Neova(R) Therapy products allow the Company to differentiate
its comprehensive line of skin care products on the basis of its proprietary
copper peptide technologies. 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, most of which contain
Triamino Copper Complex(TM), are marketed to physicians using the Company's own
sales force and directly to consumers through
9
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 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 2000, Merck
KGaA launched the copper peptide wound care gel in Brazil. During 2001, Merck
has initiated sales to Mexico and will be selling in Peru by the second half of
the year.
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 sales and other revenues. Over the past three years, the operating
losses have been significantly reduced by the Company's growing product sales in
the U.S. and foreign markets, and by it's strategic licensing agreements. The
Company has also been successful in maintaining or in many cases reducing its
operating costs. At March 31, 2001, the Company's accumulated deficit was
approximately $74.7 million. The Company is expecting to report its first
quarterly profit later this year.
Revenues
During the three-month period ending March 31, 2001, ProCyte increased its
total quarterly operating revenues by $1,078,503 to $2,541,561, a 73.7% increase
over the same quarter in 2000. The Company's total product sales were
$2,316,561, a record 212% increase from the same quarter in 2000. Product sales
included a 36% increase in products sold directly to the physician market as
well as initial shipments of copper peptide to Neutrogena for their recent
launch of Visibly Firm Active Copper products in the mass retail market.
The Company recognized the first royalties from its licensing agreement with
Neutrogena during the first quarter of 2001. The Company also earned royalties
from Osmotics. In all, the Company reported a 196% increase in its royalties
and license revenues over the first quarter of 2000.
Contract services revenues decreased in the first quarter from $302,443 in
2000 to $90,835 in 2001. The decrease of $211,608, or 70%, reflects the timing
and volume of projects undertaken for customers. There are projects of longer-
term nature currently underway, or in discussion, which will provide increased
stability to this operation.
Interest income earned in the first quarter decreased $16,793 from the same
quarter in 2000, due to the reduced funds available for investment.
10
Expenses
The cost of product sales was $1,179,372 (50.9% of product sales) for the
three month period ended March 31, 2001, and $276,623 (25.3% of product sales)
during the comparable period in 2000. The change in cost of sales reflects the
Company's increased shipments of raw copper peptide, which is sold for a smaller
profit margin than the Company's other finished goods products. The Company has
successfully maintained its profit margins on its other product lines.
Selling, general and administrative expenses were $1,614,694 during the first
quarter of this year, only a 6.6%, or $100,083, increase over the same quarter
in 2000, when expenses of $1,514,611 were reported. The Company has been
successful in keeping its expense growth low, while rapidly growing revenues.
Research and development expenses were $287,075 for the three-month period
ending March 31, 2001, as compared to $375,241 reported for the same period in
2000. The decrease of $88,166, or 23.5%, reflects the Company's continuing
efforts to shift from research activities towards more conventional product
development programs.
Liquidity and Capital Resources
The Company has relied primarily on equity financing, product sales, royalties
and license fees, contract services, interest income and corporate partnerships
to fund its operations and capital expenditures. At March 31, 2001, the Company
had approximately $2.02 million in cash and cash equivalents, compared to $2.77
million at December 31, 2000. The change in cash and cash equivalents reflects
the application of a $600,000 deposit by one of its customers for the purchase
of GHK copper, and a $181,000 net cash outflow in other operating activities.
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 will depend on product revenues, royalties and license fees, contract
services, asset redeployment, interest income, equity financing, and funding
from corporate partnerships to meet its future capital needs. See "Important
Factors Regarding Forward-Looking Statements - Need for Additional Capital".
11
Important Factors Regarding Forward-Looking Statements
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
The Company has been launching products based on its proprietary copper
peptide technology since mid-1996. It expects to continue to launch new copper
peptide based products in 2001. To date the Company has generated 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 or revenues from its contract services to achieve a
profitable level of operations. As of March 31, 2001, the Company's accumulated
deficit was approximately $74.7 million. The Company expects to incur
additional operating losses through the third quarter of 2001. 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 services and interest income.
There can be no assurance that the Company can achieve a consistent and
profitable level of operations, which is dependent on the Company's ability to
successfully manufacture and market its products, enter into agreements with
corporate partners for commercialization of the Company's products, and license
the Company's products and technology. In addition, payments under corporate
partnerships and licensing arrangements, if any, may be subject to fluctuations
in both timing and amounts. The time required to reach sustained profitability
is uncertain, and there can be no assurance that the Company will be able to
achieve profitability on a sustained basis. Moreover, if the Company does
achieve profitability, the level of profitability cannot be predicted and may
vary significantly from quarter to quarter.
Need for Additional Capital
The Company expects negative cash flow from operations to continue at least
through the second quarter of 2001. The Company may require additional funds to
expand or enhance its sales and marketing activities and to continue product
development. 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; the continued progress in the Company's research
and development programs; the relationships with existing and future corporate
collaborators, if any; the 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. As of March 31, 2001,
the Company had cash and cash equivalents of $2.02 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 for at least 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. 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 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 its rights to certain technologies or
potential products that it would otherwise seek to develop or commercialize on
its own. 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; sell assets; or license to third
12
parties the rights to commercialize products or technologies that the Company
would otherwise seek to develop on its own. 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 increasing revenue from the 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 continue to be
successfully commercialized and accepted for use by physicians, healthcare
providers and consumers.
Dependence on and Management of Existing and Future Corporate Alliances
The successful commercialization of the Company's existing and future products
in the consumer markets and wound care markets will depend upon ProCyte's
ability to enter into and effectively manage corporate partnerships. 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 these factors 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 significantly on its ability to
obtain 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 March 31, 2001, the Company had 21 issued US patents expiring between 2005
and 2017 and numerous issued foreign patents and
13
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, 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 on non-patented proprietary technology. There can be
no assurance that the Company can meaningfully protect its rights to such non-
patented 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 non-patented 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 manufacturing and marketing of ProCyte's products are subject to extensive
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
14
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.
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. Regulatory requirements ultimately imposed could also
adversely affect the ability of the Company to clinically test, manufacture or
market products.
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 certain ointments and gels, must show safety and substantial
equivalency with predicate products already cleared by the FDA to be marketed.
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, Johnson and
Johnson, OMP, Biomedic, Allergan and Nioxin. 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. The Company's competitors may develop and commercialize
products or obtain patent protection or other regulatory approvals for products
more rapidly than the Company. In addition, competitive products may be
manufactured and marketed
15
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.
The contract services business is also highly competitive. Competitors
include major chemical and pharmaceutical companies, as well as specialized
biotechnology firms, smaller contract chemical manufacturers and some
universities. Many of these companies or institutions have greater financial,
technical and marketing resources than the Company.
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 easily
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 March 31, 2001.
The Company is debt-free and is exposed to interest rate risk only to the extent
that it has invested idle cash balances. At March 31, 2001, 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.
16
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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 19.
(b) Reports on Form 8-K
None.
17
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: May 5, 2001 By: /s/ John F. Clifford
--------------------------------------
John F. Clifford, Chairman and CEO
Date: May 5, 2001 By: /s/ Mark E. Landis
--------------------------------------
Mark E. Landis, Controller
18
EXHIBIT INDEX
Exhibit Description Note
2.1 Asset Purchase and Sale Agreement dated April 27, 1998, between the Registrant E
and HumaTech Corporation
3.1 Restated Articles of Incorporation of the Registrant A
3.2 Restated Bylaws of the Registrant A
4.1 Rights Agreement between the Registrant and American Securities Transfer and G
Trust as of December 7, 1994
10.1* 1987 Stock Benefit Plan of ProCyte Corporation A
10.2* ProCyte Corporation 1989 Restated Stock Option Plan B
10.3* ProCyte Corporation 1991 Restated Stock Option Plan for Non-employee Directors D
and amendments thereto
10.4+ Teachers Insurance & Annuity Association Lease dated as of October 1, 1993 and D
second amendment thereto dated February 28, 1997
10.5* 1996 Stock Option Plan D
10.6* ProCyte Corporation 1998 Non-employee Director Stock Plan F
10.7* Change of Control Agreement for Ms. Robin Carmichael F
10.8* Change of Control Agreement for Mr. John Clifford D
10.13* Form of Indemnity Agreement dated February 23, 1995 between the Registrant and C
each of Dr. Blake, Mr. Patterson and Mr. Clifford.
10.14* Form of Indemnity Agreement between ProCyte Corporation and each of various of F
its Officers and Directors
10.15* Form of Severance Agreement for Mr. John Clifford D
10.16* Form of Promissory Note between ProCyte Corporation and Mr. John Clifford H
10.17+ Distribution & License Agreement dated December 12, 1997 between the G
Registrant and Bard Medical Division
10.18+ License Agreement dated April 19, 2000 between ProCyte Corporation and I
Neutrogena Corporation
____________________________________________________________________________________________________________________
* Management contract or compensatory plan or arrangement.
+ Confidential treatment has been granted or requested with respect to portions of this exhibit.
A. Incorporated by reference to the Registrant's Registration Statement of Form S-1 (No. 33-31353).
B. Incorporated by reference to the Registrant's Registration Statement of Form S-1 (No. 33-46364).
C. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
D. Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
E. Incorporated by reference to the Registrant's current Report on Form 8-K dated April 27, 1998
F. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1998.
G. Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A dated December 31, 1997.
H. Incorporated by reference to the Registrant's Amended Annual Report on Form 10-K/A dated December 31, 1998.
I. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000.
J. Filed herewith.
19