<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
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.)
12040 115th Avenue N.E., Suite 210, Kirkland, WA 98034-6900
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206)820-4548
-------------
Securities registered pursuant to Section 12(b) of the Act: None
----
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
the filing requirements for 90 days.
Yes {X} No { }
As of May 13, 1996, there were issued and outstanding 13,344,765 shares of
common stock, par value $.01 per share.
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ProCyte Corporation
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (unaudited)
Balance Sheet -
at March 31, 1996 and December 31, 1995 3
Statements of Operations -
Three months ended March 31, 1996 and 1995 4
Statements of Cash Flows
Three months ended March 31, 1996 and 1995 5
Statements of Stockholders' Equity 6
Notes to Financial Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1996 December 31,
(unaudited) 1995
--------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents............................................... $ 12,414,695 $ 6,019,740
Securities available for sale .......................................... 22,331,351 30,057,780
Insurance claim receivable.............................................. 3,000,000 3,000,000
Other................................................................... 541,793 477,116
--------------- --------------
Total current assets.................................................. 38,287,839 39,554,636
PROPERTY AND EQUIPMENT, at cost
Equipment............................................................... 3,357,040 3,328,829
Leasehold improvements.................................................. 5,097,833 5,097,833
Less accumulated depreciation and amortization.......................... (3,401,569) (3,244,799)
--------------- --------------
Property and equipment, net........................................... 5,053,304 5,181,863
PATENTS, at cost........................................................ 290,930 290,930
Less accumulated amortization........................................... (97,270) (93,270)
--------------- --------------
Patents, net.......................................................... 193,660 197,660
OTHER................................................................... 159,399 159,399
--------------- --------------
TOTAL ASSETS............................................................ $ 43,694,202 $ 45,093,558
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................................ $ 457,505 $678,698
Accrued liabilities..................................................... 806,535 687,452
Payable to stockholders for settlement of litigation.................... 7,750,000 7,750,000
--------------- --------------
Deferred income.........................................................
Total current liabilities............................................. 9,014,040 9,116,150
DEFERRED LEASE PAYMENTS................................................. 64,233 69,172
DEFERRED STATE SALES TAXES.............................................. 23,682 23,682
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value: 2,000,000 shares
authorized; no shares issued or outstanding..........................
Common stock $.01 par value: 30,000,000 shares
authorized; shares issued and outstanding 13,338,965
- March 31, 1996 and 13,318,495 - December 31, 1995................. 131,765 131,311
Additional paid-in capital.............................................. 82,465,661 82,350,862
Deficit accumulated during the development stage........................ (47,935,161) (46,513,220)
Unearned compensation................................................... (70,018) (84,399)
--------------- --------------
Total stockholders' equity........................................... 34,592,247 35,884,554
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 43,694,202 $ 45,093,558
--------------- --------------
--------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
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PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
January 1,
1985
(predecessor
Three months ended March 31, inception) to
--------------------------- March 31,
OPERATING ACTIVITIES 1996 1995 1996
------------ ------------- --------------
<S> <C> <C> <C>
REVENUES
Research and development revenues under
collaborative agreements....................................... $ 244,903 $ 576,655 $ 8,151,450
License fees..................................................... 900,000 1,500,000
Interest income.................................................. 544,581 711,387 7,580,382
Other............................................................ 697,764
------------ ------------- --------------
Total revenues................................................... 1,689,484 1,288,042 17,929,596
------------ ------------- --------------
COSTS AND EXPENSES
Research and development......................................... 1,747,339 1,891,556 44,887,697
Litigation settlement............................................ 4,750,000
General & administrative......................................... 1,364,086 966,665 16,229,848
------------ ------------- --------------
Total costs and expenses......................................... 3,111,425 2,858,221 65,867,545
------------ ------------- --------------
NET LOSS......................................................... $ (1,421,941) $ (1,570,179) $(47,937,949)
------------ ------------- --------------
------------ ------------- --------------
NET LOSS PER COMMON SHARE........................................ $ (0.11) $ (0.12) $ (6.63)
------------ ------------- --------------
------------ ------------- --------------
Weighted average number of common shares used in computing net
loss per common share............................................ 13,153,553 13,043,586 7,235,255
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
4
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PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
January 1,
1985
(predecessor
Three months ended March inception) to
------------------------ March 31,
OPERATING ACTIVITIES 1996 1995 1996
-------------------------- -------------
<S> <C> <C> <C>
Net Loss ($1,421,941) ($1,570,179) $(47,937,949)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation.................................................... 156,770 195,363 3,652,239
Patent expense.................................................. 4,000 15,000 774,929
Amortization of discount on marketable securities............... (15,625)
(Gain) loss on sale of securities available for sale............ (42,312) (138,264) (229,936)
Stock grants and Restricted Stock grants........................ 64,750 138,471
Compensation expense on stock options........................... 14,381 26,457 670,120
Changes in assets and liabilities:
(Increase) decrease in other current assets.................... (64,677) 106,947 (541,796)
(Increase) decrease in insurance receivable.................... 0 (3,000,000)
Increase in other assets...................................... 0 (9,399)
Increase (decrease) in accounts payable....................... (221,193) 137,014 372,386
Increase (decrease) in accrued liabilities.................... 119,083 5,743 751,627
Increase (decrease) in litigation payable..................... 0 7,750,000
Increase (decrease) in deferred income........................ 0 28,076 0
Increase (decrease) in deferred lease payments................ (4,939) (1,976) 64,233
Decrease in deferred use tax.................................. 0 0 (71,031)
Net cash used in operating activities.............................. (1,396,078) (1,195,819) (37,631,731)
FINANCING ACTIVITIES
Proceeds from issuance of stock - net............................. 50,503 27,423 81,345,399
Proceeds from borrowings.......................................... 500,000
---------- --------- ------------
Net cash provided by financing activities.......................... 50,503 27,423 81,845,399
---------- --------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment................................ (28,211) (5,583) (8,609,612)
Refund (payment) Interest-bearing lease deposit................... (150,000)
Purchase of securities available-for-sale......................... (51,853,404) (29,272,464) (260,347,199)
Proceeds from sale or maturity of securities available for sale... 59,622,145 21,080,421 238,261,409
Patents:
Expenditures..................................................... 0 (6,049) (1,018,117)
Reimbursements................................................... 0 1,660 64,546
----------- ----------- -----------
Net cash used in investing activities.............................. 7,740,530 (8,202,015) (31,798,973)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 6,394,955 (9,370,411) 12,414,695)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 6,019,740 26,243,922
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $12,414,695 $16,873,511 $12,414,695
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Conversion of debt to common stock................................ $ 500,000
-----------
-----------
Issuance of stock for patents..................................... $ 27,790
-----------
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
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PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
------------------------ Paid-in Development Unearned
Shares Par Value Capital Stage Compensation Total
----------- ----------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995................ 13,131,095 $ 131,311 $ 82,350,862 $(46,513,220) $ (84,399) $35,884,554
----------- ----------- ------------ ------------- ------------ -----------
Exercise of stock options:
($2.64 per share) January 5 to March 5... 13,635 136 33,075 33,211
($2.53 per share) January 5 to March 5... 6,835 68 17,224 17,292
Hymedix Restricted Stock:
($2.59 per share) March 31............... 25,000 250 64,500 64,750
Amortization of unearned compensation..... 14,381 14,381
Net loss.................................. (1,421,941) (1,421,941)
----------- ----------- ------------ ------------- ------------ -----------
Balance, March 31, 1996................... 13,176,565 131,765 82,465,661 (47,935,161) (70,018) 34,592,247
----------- ----------- ------------ ------------- ------------ -----------
----------- ----------- ------------ ------------- ------------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
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PROCYTE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited Financial Statements of ProCyte Corporation
(the "Company") for the three-month periods ended March 31, 1996 and 1995,
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Pursuant to such
rules and regulations, the Financial Statements do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Accordingly, this financial
information should be read in conjunction with the complete Financial
Statements, including the notes thereto and the auditors' opinion, which are
included in the Company's Annual Report, incorporated by reference on Form
10-K, for the year ended December 31, 1995. In the opinion of management,
all material adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Interim results are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
2. INVESTMENTS
At March 31, 1996, the Company's investments consist entirely of U.S.
Treasury bills and notes and are classified as "available for sale." The
amortized cost and estimated market value for investments maturing in one
year or less is $9,423,798, and those maturing in one through five years is
$12,907,553. There were no gross unrealized gains or losses at March 31,
1996, and realized gains from sales of investments in the three-month period
ended March 31, 1996 were $43,312.
3. EXISTING CORPORATE LICENSE AGREEMENTS
HYMEDIX INTERNATIONAL, INC.
In November 1995, ProCyte entered into a license agreement with Hymedix
International Inc. ("Hymedix") in which the Company acquired the exclusive
worldwide rights, outside of Asia, to five FDA-cleared wound care products
developed by Hymedix, as well as exclusive rights to the use of the
underlying technology in the territory for future wound care products.
Additionally, the Company acquired, on a non-exclusive basis, the rights to a
sixth FDA-cleared wound care product in the same territory. The Company
shares marketing rights to the sixth product with B. Braun Medical, Inc. The
Company also acquired exclusive worldwide rights to the drug delivery
application of Hymedix's polymer-based technology for wound healing
applications.
7
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Under the terms of the agreement with Hymedix, the Company is obligated
to pay certain upfront, milestone and royalty payments. During the
three-month period ended March 31, 1996, the Company funded $150,000 to
Hymedix for the 1996 research and development program related to the licensed
technology. The Company's November 1995 upfront payment included 200,000
shares of the Company's common stock, releasable over a two-year period in
four equal assignments of 50,000 shares each, unless Hymedix has materially
breached the license agreement or the Company has terminated the license
agreement. The stock is subject to S.E.C. Rule 144 restrictions and has
piggyback registration rights for a limited period of time. The Company may
terminate the agreement at any time upon sixty days' written notice.
KISSEI PHARMACEUTICAL CO., LTD.
In November 1993, the Company entered into a license agreement with
Kissei Pharmaceutical Co., Ltd. ("Kissei"). Under the terms of the
agreement, the Company granted to Kissei an exclusive license to make, have
made, use and sell the Company's Iamin-Registered Trademark- compound in
Japan, China, Taiwan, and Korea for topical wound healing applications,
including chronic human dermal wounds such as diabetic ulcers, venous stasis
ulcers, pressure sores, surgical wounds and burns.
Pursuant to the terms of the agreement with Kissei, the Company will
manufacture Kissei's requirements for the Iamin-Registered Trademark-
compound for Kissei's product development and for Kissei's clinical trials
for the first approved use of the Iamin-Registered Trademark- compound in
Japan. In addition, Kissei is responsible for making certain research and
development, milestone and royalty payments to the Company subject to the
terms of the agreement. In January 1996, Kissei paid the Company a $900,000
milestone payment owing under the agreement. Kissei may terminate the
agreement at any time upon sixty days' written notice.
KAKEN PHARMACEUTICAL CO., LTD.
On January 31, 1996, the Company's license agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), for development of the Company's
peptide-copper hair growth technology in Asia, was terminated. As a result,
ProCyte regained worldwide rights to the use of its technology for hair
growth and hair loss prevention applications. Kaken satisfied all of its
research and development funding obligations to ProCyte during the active
term of the agreement.
8
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4. STOCKHOLDERS' EQUITY
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
Shares subject Option price
to option range
-------------- --------------
Balance, January 1, 1995 1,412,710 $.09 - $11.88
Granted 428,500 $2.94
Exercised 194,880 $.09 - $0.86
Canceled 89,600 $2.53 - $10.79
---------
Balance, March 31, 1995 1,556,730 $2.16 - $11.88
---------
---------
Balance, January 1, 1996 1,536,957 $2.15 - $11.88
Granted 89,500 $3.02 - $3.09
Exercised 20,470 $2.16 - $2.64
Canceled 215,169 $2.53 - $11.88
---------
Balance, March 31, 1996 1,390,818 $2.15 - $11.88
---------
---------
Currently exercisable 624,785
During the three-month period ended March 31, 1996, the Compensation
Committee of the Board of Directors approved grants of incentive stock
options to purchase 64,500 shares of common stock to employees of the
Company, and also approved the grant of a nonqualified stock option to
purchase 25,000 shares of the Company's common stock to a new member of the
Board. All options are subject to vesting schedules. In January 1996, an
officer of the Company voluntarily and without recompense relinquished and
returned to the ProCyte Corporation 1989 Restated Stock Option Plan,
nonqualified options for the purchase of up to 200,000 shares of ProCyte
common stock, granted to him in 1992. The officer took this action to
provide that more options would be available for the Company's use in
granting options to future employees of the Company.
9
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on equity financings and corporate
partnerships to fund its operations and capital expenditures. At March 31,
1996, the Company had cash, cash equivalents and short-term investments of
approximately $34.7 million.
The Company believes that its present capital resources and expected
revenues from existing license agreements should be sufficient to fund the
Company's currently planned operations and capital needs for approximately
two years. The Company's future cash requirements, however, may vary
materially from those now expected because of a number of factors, including
the cost to staff a dedicated sales force and cash requirements for expansion
of the Company's manufacturing capability for commercialization of
polymer-based wound care products.
ProCyte's mission is to become a fully-integrated healthcare products
and services company through continued pursuit of its threefold strategy,
which the Company implemented in 1995 in an effort to build long-term
shareholder value. This strategy includes: (1) continued development of
certain of the Company's proprietary family of copper-based compounds for
therapeutic and other applications; (2) utilization of the Company's
manufacturing facility to serve both the Company's own clinical and
commercial needs as well as to address the contract manufacturing needs of
selected industry clients; and (3) continued evaluation and, as appropriate,
acquisition, of in-licensing or cross-licensing of technologies or products
which complement the Company's wound care product focus. In addition, the
Company will continue to seek corporate partners or out-licensing
opportunities to develop and/or distribute certain of its technology or
products.
In first quarter 1996, the Company had three copper-based drug
candidates in clinical development. Enrollment in the Company's Phase II
study of PC1358, tradenamed Tricomin-Registered Trademark- solution, was
completed in first quarter. The study is evaluating the safety and
effectiveness of the investigational compound, at varying doses versus
placebo, in the treatment of early to mid stage male pattern baldness, and is
expected to be completed at year end 1996.
During the quarter, ProCyte ended its license agreement with Kaken for
development of the Company's hair growth technology in Asia. ProCyte
regained worldwide rights to its technology for hair growth applications.
In first quarter 1996, the Company also continued enrollment in its
Phase I/II safety and initial effectiveness study in humans of PC1020,
administered via retention enema, for the potential treatment of mild to
moderate ulcerative colitis. The study of this compound, tradenamed
Iamin-IB-Registered Trademark- solution, is expected to be completed in 1996.
10
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ProCyte presently is planning IN VITRO and/or human clinical studies or
has such studies in progress in the U.S. and/or the U.K. for the continued
evaluation of Iamin-Registered Trademark- gel as a potential therapeutic
agent. Additionally, Kissei presently is conducting a Phase I study of the
compound in Japan.
In first quarter 1996, ProCyte was advised by the National Institutes of
Health ("NIH") that the NIH is continuing to evaluate one of the Company's
phenanthroline compounds for IN VIVO assessment of inhibition of respiratory
syncytial virus. Currently, the Company has relegated further effort in this
area of research primarily to a smaller role within the Company given
ProCyte's internal resource commitment to wound care and contract
manufacturing priorities.
ProCyte's second strategic goal in 1996 is to continue to expand the
utilization of the Company's manufacturing plant, by providing contract
manufacturing services to select industry clientele. The Company currently
utilizes the plant for the clinical and planned commercial manufacture of the
Company's own bulk drug candidates and planned wound care products. In first
quarter 1996, the Company also performed contract manufacturing services on
behalf of outside clients.
The third primary area of business focus being pursued by the Company in
1996 builds upon the Company's pioneering research expertise in the complex
field of wound care and healing. In February 1996, the FDA granted ProCyte
clearance to market Iamin-Registered Trademark- gel as a 510(k)-regulated
wound dressing for the care and management of acute and chronic wounds,
including diabetic ulcers, venous stasis ulcers, pressure sores, first and
second degree burns, postoperative wounds and skin abrasions. ProCyte
expects to launch Iamin-Registered Trademark- Hydrating Gel in 1996 and, in
first quarter, began to staff a dedicated sales force in support of this
wound care product.
ProCyte is continuing to evaluate the polymer technology to which it
acquired worldwide rights, exclusive of Asia, for wound care product
applications. In first quarter, the Company began conducting marketing
studies with the first prototype products which incorporate the unique
polymer properties, and the Company is working to develop manufacturing
methods for the first of these planned products.
In 1996, ProCyte intends to seek to establish corporate alliances with
companies that are capable of pursuing alternative registrations of the
Company's hair technology in Asia and elsewhere, and to distribute and/or
develop certain other Company compounds and/or products.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The entire foregoing discussion, as well as other management discussion
of the Company's 1996 goals and expectations as reported in the Company's
Annual Report on Form 10-K and its Annual Report to Shareholders for the year
ended December 31, 1995, contain forward-looking statements. Any and all
statements of goals, beliefs, intent, plans, anticipation,
11
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or expectations set forth in its S.E.C. reports and other communications are
forward-looking statements.
The Company has identified important factors that it believes apply to
specific forward-looking statements. The following factors, among others,
could affect the Company's actual results with regard to such forward-looking
statements, and could cause such results to differ materially from those
expressed in the Company's forward-looking statements.
GENERAL FINANCIAL POSITION OF THE COMPANY
The Company may be required to raise additional capital through equity
offerings, strategic alliances or other sources. There can be no assurance
that such funds will be available to the Company on acceptable terms, if at
all.
There can be no assurance that the Company will be successful in
attracting or retaining corporate alliances on terms favorable to the
Company, whether for the Company's hair technology or otherwise, or that the
interests and motivations of any corporate partner or licensee would be or
remain consistent with those of the Company, or that such partners or
licensees would successfully perform the technology transfer, clinical
development, regulatory compliance, manufacturing, marketing or other
obligations. Suspension or termination of agreements with the Company's
current or future partners or licensees could have a material adverse effect
on the development of the Company's proposed products and could adversely
effect the Company's financial position.
CLINICAL AND COMMERCIAL DEVELOPMENT OF NOVEL COMPOUNDS
There can be no assurance that the Company will commence or successfully
complete preclinical or clinical testing or commercial development, including
commercial-scale manufacturing and market launch, of any of the product
candidates identified above, or that, if successfully developed, such product
candidates will be approved or cleared for sale by the FDA for sale in the
United States or by comparable regulatory authorities for sale in other
countries. Approval of a product for marketing in one country does not
ensure approval for marketing in other countries. Launch of a product does
not ensure market acceptance. The results of Phase I, Phase II or Phase III
studies are not necessarily indicative of efficacy or safety of a commercial
product for human use.
CONTRACT MANUFACTURING
Given the risks and uncertain timelines associated with pharmaceutical
and biotechnology products being developed, tested, reviewed or sold by
clients of the manufacturing facility, the Company will be required to strive
to maintain sufficient clientele to counter the effect that regulatory
delays, product failures, product recalls, and other such circumstances may
have on its contract manufacturing capabilities and revenues. Also, such
factors as unexpected or unsuccessful plant audits or regulatory inspections,
the potential impact of adverse weather conditions on plant operations, the
decision of a client to
12
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manufacture its own products or have them manufactured elsewhere, market
acceptance of clients' products, and competition, mean there can be no
assurance that the Company will be successful in its contract manufacturing
endeavors.
WOUND CARE PRODUCT DEVELOPMENT AND DISTRIBUTION
Factors beyond the Company's control, such as delays in obtaining FDA
clearance to market new products, delays in product launch, the promotion and
introduction of competitive products by others with larger and more
established sales and marketing organizations, lack of product acceptance by
the marketplace, changes in Medicare reimbursement and the impact this would
have on product pricing, unexpected difficulties in scaling-up the full-scale
commercial manufacturing processes, obtaining suitable raw materials, and
staffing the production operation, mean that there can be no assurance that
the Company will be able to commercialize any of its planned wound care
products in a cost-effective, timely manner, if at all.
COMPETITION
Competition in the Company's planned area of initial product launch -
wound care - is particularly intense, involving a number of well-established,
major pharmaceutical and healthcare companies, such as Bristol Myers Squibb,
Kendall Healthcare Company, and Johnson & Johnson, and others. A significant
number of smaller companies as well are developing or marketing competitive
wound care products, some of which may have an entirely different approach
than products being developed by the Company.
Wound care is an evolving field as far as technology, regulations, and
products are concerned. The Company believes that its most substantial
competition with respect to its planned wound care product line will come
from established pharmaceutical and healthcare companies, which are
significantly larger than the Company and have substantially greater
financial resources, marketing and sales staffs, and experience in obtaining
regulatory approvals, as well as in manufacturing and marketing wound care
products, and where they have considerable experience, and established
reputations, promoting to healthcare providers.
Competition in the Company's other areas of interest, as well as wound
care, is based on scientific and technological advances, the availability of
patent protection, access to adequate capital, the requirement for and
ability to obtain government approval for new products or testing, timing and
scope of regulatory approvals, product pricing, manufacturing and marketing
capability. There can be no assurance that the Company's competitors will
not succeed in bringing to market technologies and/or products that may make
the proposed products being developed by the Company obsolete or
noncompetitive. Some of the Company's competitors may achieve product
commercialization earlier than the Company, which may adversely affect market
introductions and sales of the Company's proposed products. Competition for
highly qualified scientific, technical, and managerial personnel, consultants
and advisors on whose services the Company depends is also intense.
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The contract manufacturing service business also is 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.
The chemical, commodity products and pharmaceutical industries have
undergone and are expected to continue to undergo significant technological
and strategic change, and the Company expects the competition to intensify as
technical advances or business alliances are made by others in fields of
interest to the Company. The Company believes that its success in competing
with others will depend on such things as its ability to retain scientific
expertise and capable, experienced management, and identifying and pursuing
scientifically feasible, medically relevant, and commercially viable
opportunities.
PATENTS AND PROPRIETARY RIGHTS
ProCyte's success depends, in part, upon its ability to protect its
products and technology under intellectual property laws in the Unites States
and abroad. As of March 31, 1996, the Company had 16 issued United States
patents expiring between 2005 and 2010, and 123 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 which offer significant market potential. The
Company currently holds several registered trademarks for its product
candidates.
There can be no assurance as to the breadth or degree of protection that
the Company's existing trademarks or patents, or any additional trademarks or
patents that may be granted in the future, will afford the Company, or that
any additional trademarks or patents will be issued to the Company. In
addition, there can be no assurance that others will not independently
develop substantially equivalent proprietary technology that is not covered
by the Company's patents or that others will not be issued patents that may
prevent the Company's manufacture, sale or use of the Company's proposed
products or require licensing and the payment of significant fees or
royalties by the Company for the pursuit of its business. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce
the Company's patents or to determine the scope and validity of other
parties' proprietary rights. If the outcome of any such litigation were
adverse, the Company's business could be materially affected. The Company is
unable to predict how courts would resolve any future issues relating to the
validity and scope of the Company's patents or trademarks should they be
challenged.
The Company also intends to rely on its unpatented proprietary know-how,
and there can be no assurance that others will not develop or acquire
equivalent proprietary information. 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
14
<PAGE>
technology or know-how to other projects, disputes may arise as to the
ownership of proprietary rights to such information.
OPERATING LOSSES
The Company is engaged in the research and development of human health
care products, including potential pharmaceutical agents, utilizing
copper-based compounds. Such research and development has been funded from
the Company's equity-derived working capital and through corporate
partnerships. The Company has incurred operating losses since its inception
due to financial and regulatory requirements required to support research,
development and clinical studies of its proprietary technology. In
particular, the Company has supported and continues to finance development of
investigational Iamin-Registered Trademark- gel for potential treatment of
chronic dermal wounds, investigational Iamin-IB-Registered Trademark-
solution for potential treatment of inflammatory bowel disease,
investigational Tricomin-Registered Trademark- solution for potential
treatment of hair loss conditions, and polymer-based wound care products.
The Company expects to incur additional operating losses for a number of
years until its proposed products may be approved and successfully
distributed. At March 31, 1996, the Company's accumulated deficit was
approximately $47.9 million.
REVENUES
For the three-month period ended March 31, 1996, ProCyte earned revenues
from its collaborative agreements of $1,144,903 and interest income of
$544,581. This compares to collaborative agreement revenues of $576,655 and
interest income of $711,387 earned in the first three months of 1995. The
increase in revenues is primarily due to the payment of a milestone payment
owing under the Company's license agreement with Kissei. Kissei may
terminate its license with the Company at any time upon sixty days' written
notice.
EXPENSES
Research and development expenses for the three-month period ended March
31, 1996 were $1,747,339, compared to $1,891,556 for the same period in 1995.
Expenditures during the period conform with the Company's planned expenses,
relating primarily to the Company's clinical and wound care product
development programs.
General and administrative expenses for the three-month period ended
March 31, 1996 were $1,364,086 compared to $966,665 for the same three-month
period in 1995. The increase was primarily related to legal and other fees
incurred as a result of the Company's defense of the class action lawsuit and
continuing business development programs.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 1996, the Company announced that a tentative settlement had
been reached in the shareholder lawsuit filed in October 1994 against the
Company and certain of its officers and directors. The Company continues to
believe that there was no wrongdoing on the part of the Company and/or any of
its officers and directors, but reached the tentative settlement agreement in
an effort to focus management's attention and corporate financial resources
on the important business of building long-term shareholder value in the
Company.
The tentative settlement, which is subject to court approval, is for
$7.75 million, of which at least $2.5 million will be paid in cash, with the
remainder payable, at the Company's discretion, in cash or shares of ProCyte
common stock. The amount, if any, of the stock portion would be dependent
upon the market price of ProCyte common stock during the six-month period
following final court approval of the settlement. The tentative settlement
is conditioned upon the Company receiving an appropriate contribution to the
settlement from its insurance carriers. One of the Company's insurance
carriers has declined coverage with respect to $1.0 million. The Company has
currently filed litigation against the carrier.
In connection with the Company's settlement of its suit, the Company
will have the option to make payment of $5.25 million of the settlement in
either cash or shares of the Company's common stock. To the extent that the
Company elects to issue shares of its common stock as settlement, sales of
significant amounts of such stock could have an adverse effect on the market
for and price of the Company's common stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the shareholders for vote during first
quarter 1996. The Company plans to hold the annual meeting of its
shareholders on May 14, 1996. The Company may use a proxy solicitation firm
to solicit proxies for the meeting of its shareholders. Use of such a firm
should not exceed $3,000.
ITEM 5. OTHER INFORMATION
On April 25, 1996, Gordon W. Duncan voluntarily resigned as a part-time
employee, officer and a director of the Company. Pursuant to his Separation
Agreement with the Company, the Company extended the exercise period on
options to purchase 173,334 shares of the Company's common stock for a
two-year period from the effective date of termination, subject to certain
conditions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
Date: May 13, 1996 By /s/Joseph Ashley
------------------------
Joseph Ashley
Chairman, President and C.E.O.
Date: May 13, 1996 By: /s/ David H. Fulle
------------------------
David H. Fulle
Principal Accounting Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 12,414,695
<SECURITIES> 22,331,351
<RECEIVABLES> 124,551
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,287,839
<PP&E> 8,454,873
<DEPRECIATION> 3,401,569
<TOTAL-ASSETS> 43,694,202
<CURRENT-LIABILITIES> 9,014,040
<BONDS> 0
0
0
<COMMON> 82,597,426
<OTHER-SE> 48,005,179<F1>
<TOTAL-LIABILITY-AND-EQUITY> 43,694,202
<SALES> 0
<TOTAL-REVENUES> 1,689,484
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,111,425
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,421,941)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,421,941)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,421,941)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> 13,153,553
<FN>
<F1>This represents deficit accumulated during development stage and unearned
compensation.
</FN>
</TABLE>
