UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 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 October 17, 2001, there were issued and outstanding 15,653,542 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 September 30, 2001 and December 31, 2000 .......................... 3
Statements of Operations - three and nine months ended September 30, 2001 and 2000 ....... 4
Statements of Cash Flows - nine months ended September 30, 2001 and 2000 ................. 5
Statements of Stockholders' Equity - nine months ended September 30, 2001 and 2000 ....... 6
Notes to Condensed Financial Statements .................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................... 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 ................................................... 18
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 .................................................. 18
Signatures ................................................................................... 19
EXHIBIT INDEX ................................................................................ 20
2
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of September 30, 2001 and
December 31, 2000 (unaudited)
-------------------------------------------
September 30, 2001 December 31, 2000
-------------------------------------------
Assets
Cash and cash equivalents ............................................... $ 2,760,166 $ 2,773,474
Accounts receivable, net of allowance for doubtful accounts ............. 1,104,544 1,263,810
Inventory, net of reserve ............................................... 2,109,913 2,242,027
Other current assets .................................................... 255,198 171,510
-------------------------------------------
Total current assets ................................................ 6,229,821 6,450,821
Property and equipment, net ............................................. 1,642,954 2,341,991
Intangible assets, net .................................................. 2,984,264 3,180,046
Other assets ............................................................ 1,985,302 212,568
-------------------------------------------
Total Assets ........................................................ $ 12,842,341 $ 12,185,426
===========================================
Liabilities and Stockholders' Equity
Accounts payable and other accrued liabilities .......................... $ 553,642 $ 579,227
Customer deposit ........................................................ 478,951 600,000
-------------------------------------------
Total current liabilities ........................................... 1,032,593 1,179,227
Other liabilities ....................................................... 164,249 145,178
Deferred proceeds ....................................................... 1,561,006 --
-------------------------------------------
Total liabilities ................................................... 2,757,848 1,324,405
Common stock and additional paid in capital ............................. 85,207,012 85,105,165
Accumulated deficit ..................................................... (75,122,519) (74,244,144)
-------------------------------------------
Stockholders' equity ................................................ 10,084,493 10,861,021
-------------------------------------------
Total Liabilities and Stockholders' Equity .......................... $ 12,842,341 $ 12,185,426
===========================================
See notes to condensed financial statements
3
Statements of Operations - three and nine months ended
September 30, 2001 and 2000 (unaudited)
----------------------------------------------------------------------
Three months ended September 30, Nine months ended September 30,
2001 2000 2001 2000
----------------------------------------------------------------------
Revenues
Product sales ............................ $ 1,756,609 $ 1,310,753 $ 6,170,913 $ 3,650,299
Licenses and royalties ................... 577,852 126,327 924,363 406,790
Contract manufacturing ................... -- 225,826 195,620 756,545
----------------------------------------------------------------------
Total revenue ............................ 2,334,461 1,662,906 7,290,896 4,813,634
Cost of product sales .................... 703,061 443,835 2,649,887 1,073,403
----------------------------------------------------------------------
Gross profit .......................... 1,631,400 1,219,071 4,641,009 3,740,231
Operating Expenses
Selling, general and administrative ...... 1,591,320 1,522,832 4,895,213 4,457,920
Research and development ................. 87,190 265,597 617,570 1,014,897
Provision for loss on sale of
manufacturing assets .................. 9,955 -- 109,594 --
----------------------------------------------------------------------
Total operating expenses ................. 1,688,465 1,788,429 5,622,377 5,472,817
----------------------------------------------------------------------
Operating Loss ........................... (57,065) (569,358) (981,368) (1,732,586)
Interest and other income ................ 44,996 45,014 102,993 147,409
----------------------------------------------------------------------
Net loss ................................. ($ 12,069) ($524,344) ($878,375) ($1,585,177)
======================================================================
Net loss per common share, basic and diluted ($0.00) ($0.03) ($0.06) ($0.10)
Weighted average number of common shares
used in computing net loss per common
share ................................... 15,595,502 15,503,161 15,563,318 15,469,817
See notes to condensed financial statements
4
Statements of Cash Flows - nine months ended September 30,
2001 and 2000 (unaudited)
---------------------------------------------
Nine months ended September 30,
2001 2000
---------------------------------------------
Operating Activities
Net loss .................................................... ($878,375) ($1,585,177)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 478,216 535,443
Amortization of promissory note discount ................. (5,200) -
Amortization of deferred gain ............................ (66,900) -
Provision for disposition of manufacturing assets ........ 109,594 -
Stock issued in payment of expenses ...................... 36,000 89,000
Changes provided (used) by:
(Increase) decrease in accounts receivable ............... 134,633 (329,335)
Decrease in inventory .................................... 126,998 73,678
Increase in other current assets ......................... (83,688) (80,730)
Increase in other non-current assets ..................... (3,551) (3,551)
Increase (decrease) in current liabilities ............... (146,634) 504,670
Increase in other liabilities ............................ 19,071 8,155
---------------------------------------------
Net cash used in operating activities .................. (279,836) (787,847)
Financing Activities
Proceeds from issuance of common stock ...................... 65,847 14,235
---------------------------------------------
Net cash provided by financing activities .............. 65,847 14,235
Investing Activities
Purchase of property and equipment .......................... (29,179) (16,745)
Net proceeds from sale of assets ............................ 212,243 -
Investment in Emerald Pharmaceutical LP ..................... (1,000) -
Decrease in security deposit ................................ 18,617 51,302
---------------------------------------------
Net cash provided by investing activities .............. 200,681 34,557
---------------------------------------------
Net decrease in cash and cash equivalents .............. (13,308) (739,055)
Cash and Cash Equivalents:
At beginning of period ................................. 2,773,474 3,883,187
---------------------------------------------
At end of period ....................................... $2,760,166 $3,144,132
=============================================
Promissory note received from sale of assets ................ $2,000,000 -
See notes to condensed financial statements
5
Statements of Stockholders' Equity - nine months ended September 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 .......................... 30,772 308 32,692 - 33,000
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 14,072 - 14,235
Net loss for nine months ended
September 30, 2000 ............................ - - - (1,585,177) (1,585,177)
-----------------------------------------------------------------------------
Balance - September 30, 2000 .................... 15,503,161 $ 155,031 $ 84,938,133 ($73,686,569) $ 11,406,595
=============================================================================
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 ........................... 39,892 399 35,601 - 36,000
Shares issued upon exercise of
options ....................................... 88,002 880 64,967 - 65,847
Net loss for nine months ended
September 30, 2001 ............................ - - - (878,375) (878,375)
-----------------------------------------------------------------------------
Balance - September 30, 2001 .................... 15,642,594 $ 156,426 $ 85,050,586 ($75,122,519) $ 10,084,493
=============================================================================
See notes to condensed financial statements
6
ProCyte Corporation
Notes to Condensed 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 nine month
periods ended September 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 receivables in the
amount of $279,902 at September 30, 2001 and $92,332 at December 31, 2000.
3. Inventory
Inventory consisted of the following:
September 30, 2001 December 31, 2000
--------------------------------------
Finished Goods $ 1,114,776 $ 1,022,739
Work in process 938,478 1,417,580
Raw materials 541,659 181,708
Reserve for excess and obsolete items (485,000) (380,000)
------------------------------------
Total $ 2,109,913 $ 2,242,027
====================================
4. Property and equipment
Property and equipment consisted of the following:
September 30, 2001 December 31, 2000
-------------------------------------
Equipment............................................................ $ 310,633 $ 2,122,000
Leasehold improvements .............................................. 4,028,807 4,028,807
Less accumulated depreciation and amortization ...................... (2,696,486) (3,808,816)
------------------------------------
Property and equipment, net ......................................... $ 1,642,954 $ 2,341,991
====================================
7
5. Intangible assets
At September 30, 2001 and December 31, 2000, intangible assets are shown
net of $982,178 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 ........................................ 184,000 $1.28
Exercised ...................................... (16,334) $0.87
Canceled ....................................... (122,697) $0.93
-----------------
Balance - September 30, 2000 ...................... 1,906,696 $1.73
=================
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ --------------
Balance - January 1, 2001 ......................... 2,081,861 $1.63
Granted ........................................ 118,000 $1.21
Exercised ...................................... (88,002) $0.75
Canceled ....................................... (293,781) $1.82
-----------------
Balance - September 30, 2001 ...................... 1,818,078 $1.61
=================
Currently exercisable ............................. 1,229,257 $1.95
=================
At September 30, 2001, the Company's 1996 Stock Option Plan had 317,497
shares of the Company's common stock available.
The Company issued 10,948 shares on October 1, 2001 in payment of the Board
of Director retainers for the third quarter. As of October 17, 2001, the
Company's 1998 Non-employee Director Stock Plan had 178,267 shares of the
Company's common stock available.
As of September 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 September 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 nine 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.
In July 2001, the Financial Accounting Standards Board published Statement
of Financial Accounting Standards ("SFAS") No. 143 Part 1, "Accounting for Asset
Retirement Obligations". This pronouncement amends SFAS No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies". This Statement
applies to all entities and financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The provisions of SFAS No. 143 are required to be
applied starting with fiscal years beginning after June 15, 2002. The Company
does not expect SFAS No. 143 to have a material impact on the Company's
financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This pronouncement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" as well as reporting provisions of Accounting
Principles Board Opinion No. 30 and Accounting Research Bulleting No. 51. The
provisions of SFAS No. 144 are required to be applied starting with fiscal years
beginning after December 15, 2001. The Company does not expect SFAS No. 144 to
have a material impact on the Company's financial statements.
8. Sale of Contract Manufacturing Business
On July 17, 2001, ProCyte sold the assets, net of liabilities, related to
the contract manufacturing operation for $2.25 million to Emerald Pharmaceutical
LP. Consideration received consisted of $250,000 in cash, and a 10-year
interest-bearing note in the principle amount of $2,000,000. The Company has
recognized a $109,594 loss from the transaction. Included as part of the
agreement, ProCyte will lease a portion of its current 32,750 square foot leased
facility, including existing leasehold improvements, to Emerald. Also included
in the proceeds is $1,627,906, which will be recognized over the term of the
lease for Emerald's use of the leasehold improvements. In addition to the sale
of the assets, the Company holds a minority limited partnership interest in
Emerald.
9
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.
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 market products in the physician and consumer health
and beauty markets.
On April 19, 2000, ProCyte announced a long-term license and supply
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. Additional
products were launched in August.
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 its 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.
10
Additionally, ProCyte believes that it is the only company providing a line
of specific products that address the importance of wound care in hair
transplant procedures. 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.
On July 17, 2001, ProCyte sold the assets, net of liabilities, related to
the contract manufacturing operation for $2.25 million to Emerald Pharmaceutical
LP. During the years 1998, 1999 and 2000, and for the nine months ended
September 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.
Revenues
Total revenues for the quarter increased 40% to $2,334,461 as compared to
$1,662,906 for the same quarter a year ago. Revenues for the nine months also
increased 51% to $7,290,896 as compared to $4,813,634 for the same period in the
prior year.
For the quarter, product sales increased 34% to $1,756,609, a $445,856
increase over the $1,310,753 reported in the third quarter of 2000. For the nine
months ended, product sales increased 69% to $6,170,913 as compared to
$3,650,299 in 2000. Product sales to the physician market increased 16% for the
quarter and 30% for the nine months ended, over the same periods in 2000. The
increase during both the quarter and the nine-month period was primarily from
new customer growth and increased sales of the Company's popular Neova(R)
Therapy products. Product sale revenue also includes sales of GHK copper peptide
to Neutrogena, which launched their Visibly Firm(TM) Active Copper(TM) products
earlier this year.
For the third quarter, the Company's royalty and licensing revenue increased
357% to $577,852, a $451,525 increase over $126,327 reported in the same quarter
in the prior year. Year-to-date, royalty and licensing revenues increased 127%
to $924,363 as compared to $406,790 for the same nine months last year. Royalty
growth continues to be driven by Neutrogena's first year launch of Visibly
Firm(TM) Active Copper(TM) products.
The Company sold its contract manufacturing business in July 2001, and had
no revenue to report in the third quarter as compared to $225,826 reported in
the same quarter in the prior year. Comparable revenues for the nine-months were
$195,620 in 2001 and $756,545 in 2000.
Interest income of $44,996 earned in the third quarter was similar to the
interest earned in the same quarter in the prior year, $45,014. For the nine
months, interest earnings have declined 30.1% to $102,993 as compared to
$147,409 earned in 2000, due to the reduced funds available for investment and
lower market yields. The Company began receiving interest on its $2,000,000
promissory note from Emerald Pharmaceutical in the third quarter.
11
Expenses
The cost of product sales was $703,061 (40.0% of product sales) for the
quarter ended September 30, 2001, as compared to $443,835 (33.9% of product
sales) reported for the same quarter in 2000. For the first nine months cost of
product sales was $2,649,887 (42.9% of product sales) as compared to $1,073,403
(29.4% of product sales) for the same period in 2000. The change in cost of
sales reflects the Company's increased shipments of GHK 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 4.5% to $1,591,320 in
the third quarter as compared to $1,522,832 reported for the same quarter last
year. Year-to-date, expenses increased 9.8% to $4,895,213 from $4,457,920
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 final quarter of this year, due
to the divesting of its contract manufacturing business.
Research and development expenses decreased 67.2% to $87,190 in the
three-month period ending September 30, 2001, as compared to $265,597 reported
for the same period in 2000. In the first nine months of 2001, expenses
decreased 39.1% to $617,570 as compared to $1,014,897 in 2000. The decrease
reflects the Company's continuing efforts to shift from research activities
towards more conventional product development programs.
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. The net loss for the quarter decreased 98% to
$12,069 as compared to a loss of $524,344 reported for the same quarter in 2000.
Year-to-date, the net loss has fallen 45% to $878,375 as compared to $1,585,177
for the same period in 2000. 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. In July
2001, the Company sold its contract manufacturing operation, which has never
generated enough revenue to cover its operating expenses. During the years 1998,
1999 and 2000, and for the nine months ended September 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. At September 30, 2001, the
Company's accumulated deficit was approximately $75.1 million.
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 September 30,
2001, the Company had approximately $2.76 million in cash and cash equivalents,
compared to $2.77 million at December 31, 2000. Reducing negative cash flows
from operations, along with net proceeds from the sale of the manufacturing
business has helped the Company improve its nine-month cash position to the
level equal to year-end 2000.
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
12
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 2002. To date the Company has generated increasing
revenues from sales of products based on its proprietary technology and
licensing agreements, but there can be no assurance that the Company will be
able to generate sufficient revenues to achieve a profitable level of
operations. As of September 30, 2001, the Company's accumulated deficit was
approximately $75.1 million. 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, 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's cash flow was positive in the third quarter, which includes
proceeds from the sale of the contract manufacturing assets. 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 September 30, 2001, the Company had cash and cash equivalents of
$2.76 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
13
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.
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
14
States and in other countries. The failure of the Company or its licensors to
obtain and maintain patent protection for the Company's technology could have a
material adverse effect on the Company.
ProCyte's success depends, in part, upon its ability to protect its products
and technology under intellectual property laws in the United States and abroad.
As of September 30, 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
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.
15
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 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
contract manufactures maybe subject to the regulations of and inspections by
other foreign, federal, state or local agencies. There can be no assurance that
the Company's contract manufactures facilities or operations will meet or
continue to meet all appropriate guidelines or to pass inspections by any
government agency.
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 Obagi, Biomedic, Allergan and Nioxin.
These competitors may have 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
16
successfully than the Company's potential products. Such developments could
render the Company's existing or potential products less competitive or obsolete
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
Potential Volatility of Stock Price; Bulletin Board Listing
The market prices for securities of healthcare, medical dressings,
pharmaceutical and biotechnology companies are subject to volatility, and the
market has from time to time experienced significant fluctuations that are
unrelated to the operations of the Company. ProCyte's market price has
fluctuated over a wide range since the Company's initial public offering in
1989, and since March 25, 1999, the Company's common stock has traded on the
NASD OTC bulletin board. Because real-time price information may not be 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 September 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 September 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.
17
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 20.
(b) Reports on Form 8-K
None.
18
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
Date: November 9, 2001 By: /s/ John F. Clifford
------------------------------------------
John F. Clifford, Chairman and CEO
Date: November 9, 2001 By: /s/ Mark E. Landis
------------------------------------------
Mark E. Landis, Controller
19
EXHIBIT INDEX
Exhibit Description Note
2.1 Asset Purchase and Sale Agreement dated April 27, 1998, between the Registrant and E
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 Trust as G
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 and D
amendments thereto
10.4+ Teachers Insurance & Annuity Association Lease dated as of October 1, 1993 and second D
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 each C
of Dr. Blake, Mr. Patterson and Mr. Clifford.
10.14* Form of Indemnity Agreement between ProCyte Corporation and each of various of its F
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 Registrant and G
Bard Medical Division
10.18+ License Agreement dated April 19, 2000 between ProCyte Corporation and Neutrogena I
Corporation
10.19+ Asset Purchase Agreement dated July 13, 2001 between ProCyte Corporation and Emerald J
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. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 2001.
20