UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 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 July 17, 2001, there were issued and outstanding 15,565,927 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 June 30, 2001 and December 31, 2000....................................... 3
Statements of Operations - three and six months ended June 30, 2001 and 2000..................... 4
Statements of Cash Flows - six months ended June 30, 2001 and 2000............................... 5
Statements of Stockholders' Equity -six months ended June 30, 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................................ 17
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....................................... 18
Item 5. Other Information......................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.......................................................... 19
Signatures.......................................................................................... 20
EXHIBIT INDEX....................................................................................... 21
2
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of June 30, 2001 and December 31, 2000 (unaudited)
------------------------------------------------------
June 30, 2001 December 31, 2000
------------------------------------------------------
Assets
Cash and cash equivalents........................................ $ 2,256,091 $ 2,773,474
Accounts receivable, net of allowance for doubtful accounts...... 1,627,255 1,263,810
Inventory, net of reserve........................................ 2,058,217 2,242,027
Other current assets............................................. 249,188 171,510
------------------------------------------------------
Total current assets......................................... 6,190,751 6,450,821
Property and equipment, net...................................... 2,060,897 2,341,991
Intangible assets, net........................................... 3,049,525 3,180,046
Other assets..................................................... 169,936 212,568
------------------------------------------------------
Total Assets $ 11,471,109 $ 12,185,426
======================================================
Liabilities and Stockholders' Equity
Accounts payable and other accrued liabilities................. $ 572,107 $ 579,227
Customer deposit............................................... 724,000 600,000
------------------------------------------------------
Total current liabilities.................................... 1,296,107 1,179,227
Deferred lease payments.......................................... 146,249 145,178
Common stock and additional paid in capital...................... 85,139,203 85,105,165
Accumulated deficit.............................................. (75,110,450) (74,244,144)
Stockholders' equity......................................... 10,028,753 10,861,021
------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 11,471,109 $ 12,185,426
======================================================
See notes to financial statements
3
Statements of Operations - three and six months ended June 30, 2001 and 2000
(unaudited)
--------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
--------------------------------------------------------------------------------
Revenues
Product sales........................... $2,097,743 $ 1,247,147 $ 4,414,304 $ 2,339,546
Contract manufacturing.................. 104,785 228,276 195,620 530,719
Licenses, royalties and other........... 212,346 212,247 346,511 280,463
--------------------------------------------------------------------------------
Total revenue........................... 2,414,874 1,687,670 4,956,435 3,150,728
Cost of product sales................... 767,454 352,945 1,946,826 629,568
--------------------------------------------------------------------------------
Operating Expenses
Selling, general and administrative..... 1,689,199 1,420,477 3,303,893 2,935,088
Research and development................ 243,305 374,059 530,380 749,300
Provision for loss on disposition of
manufacturing assets................... 99,639 - 99,639 -
--------------------------------------------------------------------------------
Total operating expenses................ 2,032,143 1,794,536 3,933,912 3,684,388
--------------------------------------------------------------------------------
Operating Loss.......................... (384,723) (459,811) (924,303) (1,163,228)
Interest Income......................... 20,082 47,687 57,997 102,395
--------------------------------------------------------------------------------
Net loss................................ ($ 364,641) ($412,124) ($866,306) ($1,060,833)
================================================================================
Net loss per common share, basic and
diluted................................. ($0.02) ($0.03) ($0.06) ($0.07)
Weighted average number of common
shares used in computing net loss per
common share............................ 15,555,420 15,470,165 15,546,959 15,453,006
See notes to financial statements
4
Statements of Cash Flows - six months ended June 30, 2001 and 2000 (unaudited)
--------------------------------------
Six months ended June 30,
2001 2000
--------------------------------------
Operating Activities
Net loss....................................................... ($866,306) ($1,060,833)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................. 336,759 334,229
Provision for disposition of manufacturing assets............. 99,639 -
Stock issued in payment of expenses........................... 24,000 80,000
Changes provided (used) by:
Increase in accounts receivable............................... (363,445) (83,736)
Decrease in inventory......................................... 183,810 116,499
Increase in other current assets.............................. (77,678) (168,611)
Increase in other non-current assets.......................... (2,368) (2,367)
Increase (decrease) in current liabilities.................... 116,880 (86,003)
Increase in other liabilities................................. 1,071 8,064
-----------------------------------
Net cash used in operating activities......................... (547,638) (862,758)
Financing Activities
Proceeds from issuance of common stock......................... 10,038 14,238
-----------------------------------
Net cash provided by financing activities.................. 10,038 14,238
Investing Activities
Purchase of property and equipment............................. (20,580) (7,335)
Disposition of assets.......................................... (4,203) -
Decrease in security deposit................................... 45,000 51,303
-----------------------------------
Net cash provided by investing activities.................. 20,217 43,968
-----------------------------------
Net decrease in cash and cash equivalents.................. (517,383) (804,552)
Cash and Cash Equivalents:
At beginning of period..................................... 2,773,474 3,883,187
-----------------------------------
At end of period........................................... $2,256,091 $ 3,078,635
===================================
See notes to financial statements
5
Statements of Stockholders' Equity - six months ended June 30, 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................ 22,648 227 23,773 - 24,000
Shares issued at $1.50 per share
to settle contingent obligation
to sellers of HumaTech
Corporation........................ 37,333 373 55,627 - 56,000
Shares issued upon exercise of
options............................ 16,334 163 14,075 - 14,238
Net loss for six months ended
June 30, 2000...................... - - - (1,060,833) (1,060,833)
-------------------------------------------------------------------------------------
Balance - June 30, 2000............. 15,495,037 $154,950 $84,929,217 ($73,162,225) $11,921,942
=====================================================================================
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................ 29,816 298 23,702 - 24,000
Shares issued upon exercise of
options............................ 11,335 113 9,925 - 10,038
Net loss for six months ended
June 30, 2001...................... - - - (866,306) (866,306)
-------------------------------------------------------------------------------------
Balance - June 30, 2001............. 15,555,851 $155,558 $84,983,645 ($75,110,450) $10,028,753
=====================================================================================
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 and six month
periods ended June 30, 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 $102,332 at June 30, 2001 and $92,332 at December 31, 2000.
3. Inventory
Inventory consisted of the following:
June 30, 2001 December 31, 2000
---------------------------------------------
Finished Goods $ 980,961 $1,022,739
Work in process 1,009,587 1,417,580
Raw materials 457,669 181,708
Reserve for excess and obsolete items (390,000) (380,000)
-------------------------------------
Total $ 2,058,217 $2,242,027
=====================================
4. Property and equipment
Property and equipment consisted of the following:
June 30, 2001 December 31, 2000
---------------------------------------
Equipment....................................... $ 2,142,580 $ 2,122,000
Leasehold improvements.......................... 4,028,807 4,028,807
Less accumulated depreciation and
amortization.................................. (4,015,054) (3,808,816)
Reserve for loss on disposition of assets....... (95,436) -
-------------------------------
Property and equipment, net..................... $ 2,060,897 $ 2,341,991
===============================
7
5. Intangible assets
At June 30, 2001 and December 31, 2000, intangible assets are shown net of
$916,617 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.......................................... 134,500 $1.34
Exercised........................................ (16,334) $0.87
Canceled......................................... (47,533) $0.86
----------------------------------------
Balance - June 30, 2000............................ 1,932,360 $1.72
========================================
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ ----------------
Balance - January 1, 2001.......................... 2,081,861 $1.63
Granted.......................................... 38,000 $1.11
Exercised........................................ (11,335) $0.89
Canceled......................................... (140,116) $1.36
-----------------------------------------
Balance - June 30, 2001............................ 1,968,410 $1.64
=========================================
Currently exercisable.............................. 1,220,425 $2.13
=========================================
At June 30, 2001, the Company's 1996 Stock Option Plan had 345,165 shares
of the Company's common stock available.
The Company issued 10,076 shares on July 1, 2001 in payment of the Board of
Director retainers for the second quarter. As of July 17, 2001, the Company's
1998 Non-employee Director Stock Plan had 189,215 shares of the Company's common
stock available.
As of June 30, 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
7. Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interests method. The Company does not believe that the adoption of SFAS 141
will have a significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations.
8. Subsequent Events
Sale of Contract Manufacturing Business
On July 17, 2001 ProCyte sold the assets, net of related liabilities,
related to the contract manufacturing operation for $2.25 million to Emerald
Pharmaceutical LP. Consideration received consisted of $250,000 in cash, a 10-
year interest-bearing note in the principle amount of $2,000,000. A provision of
approximately $100,000 has been recorded at June 30, 2001 as an estimate of the
loss that will be realized from the transaction. The contract manufacturing
operation includes the substantial majority of the fixed assets of the Company.
As part of the agreement, ProCyte will lease a portion of its current 32,750
square foot leased facility to Emerald. Also, in connection with the sale of the
assets, the Company holds a minority limited partnership interest in Emerald.
During the years 1998, 1999 and 2000 and for the six months ended June 30, 2001,
the contract manufacturing service generated revenues of $436,167, $762,320,
$1,085,750 and $195,620, respectively. Expenses for the same periods were
approximately $2,050,000, $1,800,000, $1,500,000 and $882,000 respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Form 10-Q, contains forward-looking statements. In some cases you can
identify forward- looking statements by terminology such as "believe," "expect,"
"intend," "anticipate," "estimate," "predict," "potential," "propose" or
"continue," the statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors described below in the section entitled "Important
Factors That May Affect Results."
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of
this report. This report should be read in conjunction with the Company's annual
report on Form 10-K.
9
Corporate Overview
ProCyte develops and markets skin health and hair care products, focusing
the direct selling efforts of its own sales organization on the therapeutic and
cosmeceutical skin sector. The Company markets its products primarily to
dermatologists, plastic surgeons and cosmetic surgeons, and emphasizes product
lines containing its patented copper peptide technologies. ProCyte believes that
its patented copper peptide technologies have application in a wide range of
skin and hair care products in both the physician and consumer markets. The
Company has in place licensing and distribution agreements with strategic
partners, under which, they will market products in the mass retail and prestige
segments of the health and beauty market.
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 technology in consumer products for skin health. The
agreement provides ProCyte with milestone and royalty payments and specifies
minimum payment levels. In April 2001, Neutrogena launched the first series of
products under the Visibly Firm(TM) brand name.
In June 2001, ProCyte announced a long-term licensing and supply agreement
with American Crew, a division of Colomar USA, for use of its patented AHK
Copper Peptide for hair care products for sale in the hair and beauty salon and
day spa marketplaces. The agreement covers the United States and certain
international markets and provides ProCyte with milestone and royalty payments
that include minimum payment levels.
The Company markets its own 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
Cu\\3\\(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 Cu\\3\\(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 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.
10
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 June 30, 2001, the Company's accumulated deficit was
approximately $75.1 million. The Company still expects to report its first
quarterly profit later this year.
Revenues
Total revenues for the quarter increased by 43% to $2,414,874 as compared to
$1,687,670 for the same period a year ago. Revenues for the first six months
also increased 57% to $4,956,435 as compared to $3,150,728 for the same period a
year ago.
For the quarter, product sales increased 68% to $2,097,743, an $850,596
increase over the $1,247,147 reported in the second quarter of 2000. For the
six months ended, product sales increased 89% to $4,414,304 as compared to
$2,339,546 in 2000. Product sales to the physician market have increased 38%
for the quarter and 37% for the six months ended over the same periods in 2000.
Product sale revenue also includes sales of copper peptide to Neutrogena for
their recent launch of Visibly Firm(TM) Active Copper(TM) products.
During the first six months, the Company began recognizing royalties from its
licensing agreement with Neutrogena, as compared to milestone payments reported
in the same period in 2000. For the quarter, the Company reported $212,346, a
small increase over $212,247 reported in the same quarter in 2000. Year-to-
date, royalty and licensing revenues have increased 24% to $346,511 as compared
to $280,463 for the same six months last year.
Contract service revenues decreased 54% in the second quarter to $104,785 from
$228,276 in 2000. Revenues for the six-months also decreased 63% to $195,620
compared to the same prior year period. On July 17, 2001, the Company sold its
manufacturing operation, and does not expect to recognize any additional
contract service revenue in 2001.
Interest income earned declined 58% in the second quarter to $20,082 as
compared to $47,687, and a 43% decrease in the first six-months to $57,997 as
compared to $102,395 reported in the same period in the prior year. The decrease
is due to the reduced funds available for investment.
Expenses
The cost of product sales was $767,454 (36.6% of product sales) for the three-
month period ended June 30, 2001, as compared to $352,945 (28.3% of product
sales) during the comparable period in 2000. For the first six months cost of
product sales was $1,946,826 (44.1% of product sales) as compared to $629,567
(26.9% of product sales) for the same 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 other finished good products. The
Company has maintained its profit margins on the other product lines.
Selling, general and administrative expenses increased 19% to $1,689,199 in
the second quarter as
11
compared to $1,420,477 reported for the same quarter last year. Year-to-date,
expenses increased 13% to $3,303,893 from $2,935,088 reported in the same period
last year. The Company has been successful in keeping its expense growth well
below the rate of its revenue growth. The Company expects to report lower
expenses in the remaining quarters of this year, due to the divesting of its
contract manufacturing service operations.
Research and development expenses decreased 35% to $243,305 in the three-month
period ending June 30, 2001, as compared to $374,059 reported for the same
period in 2000. In the first six months of 2001, expenses decreased 29% to
$530,380 as compared to $749,300 in 2000. The decrease 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 June 30, 2001, the Company
had approximately $2.3 million in cash and cash equivalents, compared to $2.77
million at December 31, 2000. A large part of the decrease in cash and cash
equivalents reflects the negative cash flow from the Company's contract
manufacturing service operations. Subsequent to June 30, 2001, the Company
transferred a $724,000 deposit from a contract-manufacturing customer to Emerald
Pharmaceutical LP as part of the sale transaction. The Company also received
$250,000 from Emerald as initial payment towards the purchase.
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, 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".
Additional Factors that May Affect Results
In addition to the other information contained in this report, the following
factors could affect the Company's actual results and could cause our actual
results to differ materially from those achieved in the past or expressed in our
forwarding-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 June 30, 2001, the Company's accumulated
deficit was approximately $75.1 million. The Company is expecting to be
profitable in the final two quarters 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
12
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 positive cash flow from operations in the last half 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 June 30, 2001, the
Company had cash and cash equivalents of $2.3 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 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.
13
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 June 30, 2001, 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, 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
14
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 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
15
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 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
16
requirements on broker-dealers, or to the "penny stock" rules, either of which
would likely reduce the level of trading activity in the secondary market for
the Company's securities and make selling the securities more difficult for an
investor.
Announcements concerning the Company or its competitors, including
fluctuations in operating results, research and development program direction,
results of clinical trials, addition or termination of corporate alliances,
technology licenses, clearance or approval to market products, announcements of
technological innovations or new products by the Company or its competitors,
changes in government regulations, healthcare reform, developments in patent or
other proprietary rights of the Company or its competitors, litigation
concerning business operations or intellectual property, or public concern as to
safety of products, as well as changes in general market conditions and mergers
and acquisitions, may have a significant effect on the market price of ProCyte's
common stock.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
ProCyte did not own any derivative financial instruments as of June 30, 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 June 30, 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.
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.
17
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 23,
2001. The election of directors was the only matter submitted to the
shareholders for vote. As of April 10, 2001, the record date, there were
15,555,017 shares eligible to vote at the meeting, of which 85.99% or 13,376,184
were represented at the meeting, constituting a quorum.
The five nominees for election as directors were elected to serve until the
2002 annual meeting of the shareholders, and until the election and
qualification of their respective successors. The vote for each director
follows:
--------------------------------------------------------------
DIRECTOR FOR WITHHELD
--------------------------------------------------------------
John F. Clifford 13,239,889 136,295
John Hammer 13,242,489 133,695
Matt L. Leavitt 13,243,489 132,695
Glenn A. Oclassen 13,240,989 135,195
Robert E. Patterson 13,242,489 133,695
Item 5. Other Information
Sale of Contract Manufacturing Business
On July 17, 2001, the Company completed the sale of its contract
manufacturing business to Emerald Pharmaceuticals, L.P., a Delaware limited
partnership. The Company received a purchase price of $250,000 cash paid at
closing and a promissory note for an additional $2,000,000 payable over ten
years. Payments of interest under the promissory note will be monthly. Payments
of principle under the promissory note will not commence until the fourth
anniversary of closing and will be annual. Assets sold in the transaction
included certain manufacturing equipment; rights under certain contracts;
certain inventory and certain intellectual property related to the Business;
certain computer hardware and software and other tangible assets. Emerald
assumed certain liabilities of the contract manufacturing business, including
obligations under the assumed contracts. The terms of this disposition of assets
are more fully described in the Asset Purchase Agreement, dated July 13, 2001,
by and among the Company and Emerald, filed as an exhibit to this Form 10-Q. As
part of the agreement, ProCyte will lease a portion of its current 32,750 square
foot leased facility to Emerald. In connection with the sale of the assets, the
Company holds a minority limited partnership interest in Emerald, which entitles
it to receive cash distributions from time to time. The nature and amount of
consideration in this transaction was determined by arms' length negotiation of
the parties.
The Company is reporting a one-time charge of approximately $100,000 for the
estimated loss associated with the disposition of the Business in the second
quarter. During the years 1998, 1999 and 2000 and for the six months ended June
30, 2001, the Business generated revenues of $436,167, $762,320, $1,085,750 and
$195,620, respectively. Expenses for the same periods were approximately
$2,050,000, $1,800,000, $1,500,000 and $882,000, respectively.
Licensing Agreement with American Crew
ProCyte Corporation announced on June 28, 2001, that it had entered into long
term license and supply agreements with American Crew, a division of The Colomer
Group, for use of its patented AHK
18
Copper Peptide Complex(TM) for hair care products for the sale in the hair and
beauty salon and day spa marketplaces. The agreements cover the United States
and certain international markets, and provide ProCyte with milestone and
royalty payments that include minimum payment levels. American Crew is a leader
in meeting the needs of professional salons. Their products are specifically
formulated for men, and are sold in 35,000 salons in the U.S. and over 40 other
countries around the world.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page 21.
(b) Reports on Form 8-K
None.
19
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
Date: July 27, 2001 By: /s/ John F. Clifford
------------------------------------
John F. Clifford, Chairman and CEO
Date: July 27, 2001 By: /s/ Mark E. Landis
------------------------------------
Mark E. Landis, Controller
20
EXHIBIT INDEX
Exhibit Description Note
2.1 Asset Purchase and Sale Agreement dated April 27, 1998, between the
Registrant and HumaTech Corporation E
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
10.19+ Asset Purchase Agreement dated July 13, 2001 between ProCyte Corporation and J
Emerald Pharmaceuticals, L.P.
* 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