<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, 1997
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: (485)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 5, 1997, there were issued and outstanding 13,364,958 shares of
common stock, par value $.01 per share.
<PAGE>
PROCYTE CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (unaudited)
Balance Sheet- 3
Three months ended March 31, 1997 and 1996
Statements of Operations - 4
Three months ended March 31, 1997 and 1996
Statements of Cash Flows 5
Three months ended March 31, 1997 and 1996
Statements of Stockholders' Equity 6
Notes to Financial Statements 7
Item 2. Management's Discussion and 9
Analysis of Financial Condition and
Results of Operations
PART II OTHER INFORMATION 18
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
INDEX TO EXHIBITS 18
SIGNATURES 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
------------ --------------
1997 1996
------------ --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 1,690,434 $ 1,804,875
Securities available for sale. . . . . . . . . . . . . . . . . . . . . 16,868,039 19,041,961
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737,006 596,740
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723,911 318,580
------------ --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 20,019,390 21,762,156
PROPERTY AND EQUIPMENT, at cost
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,850,822 3,604,764
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . 6,344,640 5,097,833
Improvements in progress . . . . . . . . . . . . . . . . . . . . . . . 43,646 1,463,940
Less accumulated depreciation and amortization . . . . . . . . . . . . (4,472,701) (4,306,094)
------------ --------------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . 5,766,407 5,860,443
PATENTS, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,930 290,930
Less accumulated amortization. . . . . . . . . . . . . . . . . . . . . (113,269) (109,270)
------------ --------------
Patents, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,661 181,660
OTHER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 384,399 159,399
------------ --------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,347,857 $ 27,963,658
------------ --------------
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,786 $ 334,843
Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,056,677 779,890
Payable to stockholders for settlement of litigation . . . . . . . . . 0 0
------------ --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 1,366,463 1,114,733
DEFERRED LEASE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . 5,142 10,148
DEFERRED STATE SALES TAXES . . . . . . . . . . . . . . . . . . . . . . 0 0
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 13,364,958
- March 31, 1997 and 13,364,958 - December 31, 1996 . . . . . . . . 133,026 132,776
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 82,640,840 82,576,340
Deficit accumulated during the development stage . . . . . . . . . . . (57,797,614) (55,870,339)
Unearned compensation. . . . . . . . . . . . . . . . . . . . . . . . . 0 0
------------ --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . 24,976,252 26,838,777
------------ --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . $ 26,347,857 $ 27,963,658
------------ --------------
------------ --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
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,
1997 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES
Product revenues . . . . . . . . . . . . . . . . . . . . . . $ 29,554 $ 0 $ 60,117
Research and development
revenues under collaborative
agreements . . . . . . . . . . . . . . . . . . . . . . . . 0 0 7,754,711
Contract manufacturing . . . . . . . . . . . . . . . . . . . 379,541 244,903 1,239,481
License fees . . . . . . . . . . . . . . . . . . . . . . . . 0 900,000 1,500,000
Interest income. . . . . . . . . . . . . . . . . . . . . . . 263,582 544,581 8,922,327
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 712,110
------------ ------------ -------------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . 672,677 1,689,484 20,188,746
------------ ------------ -------------
COSTS AND EXPENSES
Cost of product sales. . . . . . . . . . . . . . . . . . . . 11,765 0 25,675
Research and
development. . . . . . . . . . . . . . . . . . . . . . . . 1,265,106 1,747,339 51,144,375
Litigation settlement. . . . . . . . . . . . . . . . . . . . 0 0 5,750,000
General and administrative . . . . . . . . . . . . . . . . . 1,323,081 1,364,086 21,069,098
------------ ------------ -------------
Total costs and expenses. . . . . . . . . . . . . . . . . . 2,599,952 3,111,425 77,989,148
------------ ------------ -------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,927,275) $ (1,421,941) $ (57,800,402)
------------ ------------ -------------
------------ ------------ -------------
NET LOSS PER
COMMON SHARE . . . . . . . . . . . . . . . . . . . . . . . . $ (0.15) $ (0.11) $ (7.40)
------------ ------------ -------------
------------ ------------ -------------
Weighted average number of
common shares used in computing
net loss per common share. . . . . . . . . . . . . . . . . 13,290,058 13,153,553 7,805,975
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
January 1,
1985
(predecessor
Three months ended March 31 inception) to
----------------------------- March 31,
1997 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss ($1,927,275) ($1,421,941) $(57,800,402)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166,607 156,770 4,723,370
Patent expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,999 4,000 790,928
Amortization of discount on marketable securities . . . . . . . . . . . (15,625)
(Gain) loss on sale of securities available for sale. . . . . . . . . . 92 (42,312) (137,496)
Stock grants and Restricted Stock grants. . . . . . . . . . . . . . . . 64,750 64,750 397,471
Compensation expense on stock options . . . . . . . . . . . . . . . . . 0 14,381 597,638
Changes in assets and liabilities:
(Increase) decrease in inventories. . . . . . . . . . . . . . . . . . (140,266) 0 (737,006)
(Increase) decrease in other current assets . . . . . . . . . . . . . (405,331) (64,677) (723,914)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . 0 0 (9,399)
Increase (decrease) in accounts payable . . . . . . . . . . . . . . . (25,057) (221,193) 224,667
Increase (decrease) in accrued liabilities. . . . . . . . . . . . . . 276,789 119,083 1,001,771
Increase (decrease) in deferred lease payments. . . . . . . . . . . . (5,006) (4,939) 5,142
Decrease in deferred use tax. . . . . . . . . . . . . . . . . . . . . 0 0 (94,713)
----------- ----------- ------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . (1,990,698) (1,396,078) (51,777,568)
----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net . . . . . . . . . . . . . . . . . . 0 50,503 81,405,340
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . . . . . 500,000
----------- ----------- ------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . 0 50,503 81,905,340
----------- ----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment. . . . . . . . . . . . . . . . . . . . (72,572) (28,211) (10,393,848)
Purchase of securities available-for-sale . . . . . . . . . . . . . . . . (15,656,243) (51,853,404) (395,336,672)
Proceeds from sale or maturity of securities available for sale . . . . . 17,830,071 59,622,145 378,621,752
Patents:
Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 (1,018,117)
Reimbursements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 64,546
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225,000) (375,000)
----------- ----------- ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . 1,876,257 7,740,530 (28,437,338)
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . (114,441) 6,394,955 1,690,434
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . 1,804,875 6,019,740
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD. . . . . . . . . . . . . . . . . $1,690,434 $12,414,695 $1,690,434
----------- ----------- ------------
----------- ----------- ------------
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
<PAGE>
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
---------- -------- ----------- ------------ ------------ -----------
Balance, December 31, 1996 . . . . 13,277,558 $132,776 $82,576,340 ($55,870,339) $0 $26,838,777
---------- -------- ----------- ------------ ------------ -----------
Hymedix Restricted Stock:
($2.59 per share) March 31 . . . 25,000 250 64,500 64,750
Net loss . . . . . . . . . . . . . (1,927,275) (1,927,275)
---------- -------- ----------- ------------ ------------ -----------
Balance, March 31, 1997. . . . . . 13,302,558 $133,026 $82,640,840 ($57,797,614) $0 $24,976,252
---------- -------- ----------- ------------ ------------ -----------
---------- -------- ----------- ------------ ------------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
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, 1997 and 1996,
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, 1996. 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, 1997.
2. INVESTMENTS
At March 31, 1997, the Company's investments consist entirely of U.S.
Treasury bills and notes and classified as "available for sale." The
amortized cost and estimated market value for investments maturing in one
year or less is $1,690,434, and those maturing in one through five years is
$16,868,039. There were no gross unrealized gains or losses at March 31,
1997, and realized losses from sales of investments in the three-month period
ended March 31, 1997 were $92.00.
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
<PAGE>
Under the terms of the agreement with Hymedix, the Company is obligated
to pay certain upfront, milestone and royalty payments. The Company's
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 SEC
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.
4. INVENTORIES
Inventories consist of raw materials, work in process and finished
goods, and are accounted for at the lower of cost or market.
5. STOCKHOLDERS' EQUITY
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
Shares subject Weighted average
to option exercise price
-------------- ----------------
Balance, January 1, 1996 1,536,957 $4.44
Granted 89,500 3.08
Exercised 20,470 2.47
Canceled 213,835 9.24
--------- -----
Balance, March 31, 1996 1,392,152 $3.65
Balance, January 1, 1997 1,442,193 $3.50
Granted 140,500 2.31
Exercised 0 0
Canceled 79,833 2.73
--------- -----
Balance, March 31, 1997 1,450,361 $3.44
Currently exercisable 782,384 $4.04
During the three month period ended March 31, 1997, the Compensation
Committee of the Board of Directors approved grants of incentive stock
options to purchase 140,500 shares of common stock to employees of the
Company, including a grant of an incentive stock option to purchase 100,000
shares of common stock to an officer of the Company. All options are subject
to vesting schedules.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PRODUCT UPDATE
As of the end of the first quarter, March 31, 1997, ProCyte had
introduced or received clearance to market several new wound care products.
These are in addition to the Company's copper-peptide product,
Iamin-Registered Trademark- Hydrating Gel, and the polymer-based
OsmoCyte-Registered Trademark-Pillow Wound Dressings which were introduced
in 1996.
For the three-month period ended March 31, 1997, ProCyte announced that
it had received clearance under the United States Food and Drug
Administration's ("FDA") 510(k) medical device regulations to market a second
copper-peptide containing wound care dressing, GraftCyte-TM- Moist Dressings.
These gauze pads are impregnated with the company's copper-peptide
technology for use in hair transplant surgical procedures. An estimated
200,000 such procedures are performed annually in the United States. The
dressings are designed to contribute moisture to the transplant suture area,
and to provide essential micronutrients that are important to natural wound
healing. U.S. product launch is expected in May 1997, together with
GraftCyte-TM- Mist for continued moisturizing of the scalp following hair
restoration surgery
Other new products for which U.S. market launch is pending include
ProCyte Transparent Film Dressing - a thin film dressing which provides a
barrier against infection while allowing wounds to breath, and
Iamin-Registered Trademark- Wound Cleanser - a copper-peptide containing
wound cleanser. Iamin-Registered Trademark--Vet Skin Care Gel and the
OsmoCyte-Registered Trademark- Pillows for exudating wounds have been
introduced to the veterinary market for treatment of wounds in both large and
small animals. The Company has submitted several other pre-market clearance
applications to the FDA for other copper-peptide containing or polymer-based
wound care products.
Some of the Company's human wound care products may be eligible for
Medicare reimbursement - an important factor in the acceptance and use of
these products for chronic wound care, particularly with regard to hospital,
nursing home and extended care usage. The Company recently was advised by
the government's administrative body for Medicare pricing policy that it has
decided to use a different reimbursement code for Iamin-Registered Trademark-
Hydrating Gel than the code sought by the Company. The Company is preparing
new information to submit to appeal this decision which it believes would
have a material adverse effect on the acceptance and use of Iamin-Registered
Trademark- Hydrating Gel in certain of the core markets for which the product
is intended and is in current use. There can be no assurance that the
Company will be successful in reversing the code decision or that the product
would be used in such chronic wound care if a different reimbursement code is
not obtained. The Company believes that failure to obtain a suitable
reimbursement code could have a material adverse effect on the Company.
During the quarter ended March 31, 1997, the Company expanded its sales
force and added distributors and manufacturers' representatives to augment
its product promotion in the chronic wound care and related markets. The
Company's products are promoted to veterinarians by specialty distributors.
9
<PAGE>
On April 4, 1997, the Company announced the results of its initial Phase
II, single center, dose-ranging, placebo-controlled study of PC1358,
tradenamed Tricomin-Registered Trademark- solution, for treatment of
androgenetic alopecia. This early-stage study enrolled 36 men with early to
mid-stage male pattern hair loss. Thirty-three of the participants were
evaluable in the study, in which they were randomly assigned to either one of
two dose groups or the vehicle formulation. Participants in the study
applied the study treatment twice a day for up to 24 weeks.
Results from the study's prospectively designed endpoints showed
statistical significance in the increase in total hair count of men treated
with the high dose, 2.5% compound, versus those treated with placebo.
Appreciable increases in total hair weight were not found over the treatment
phase of the study, but the participants who applied the high dose compound
reported in their general cosmetic assessment that they were either growing
more hair or staying the same. Over half of the participant's in the placebo
group reported that they believed they lost more hair over the course of the
study.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on equity financings and corporate
partnerships to fund its operations and capital expenditures. At March 31,
1997, the Company had approximately $18.5 million in cash, cash equivalents
and securities available for sale.
Through March 31, 1997, the Company has invested a total of
approximately $4.0 million in laboratory and computer equipment, furniture
and leasehold improvements. In addition, the Company has invested
approximately $6.2 million in leasehold improvements and equipment for its
manufacturing plant. The Company anticipates that its operating expenses
will increase in 1997 and subsequent years as the Company expands its
manufacturing plant and purchases equipment to process its planned wound care
products and advances potential product candidates in development.
Foreseeable incremental costs may include, but are not limited to, those
associated with the Company's planned manufacture of copper-peptide and/or
polymer-based products, product development and post-product launch studies,
patent filings, legal fees, and administrative activities.
The Company expects to continue to try to negotiate strategic
collaborations or other suitable partnerships for certain applications of its
technology, such as inflammatory bowel disease and hair loss, and to seek
product acquisition and/or distribution agreements with other parties whose
products, capabilities or interests complement the Company's goals and
abilities internationally. Certain of these relationships may involve
commitments from ProCyte to fund some or all of certain research and
development projects or to make royalty payments based on products sold
during a defined period.
Although strategic partnerships have provided revenue to the Company in
the past, there can be no assurance that similar sources of funds will be
available to the Company in the future. Additionally, though the Company
makes every effort to extensively review products it may
10
<PAGE>
seek to acquire, distribute or in-license, there can be no assurance that
products so obtained will be commercialized successfully, if at all.
In the first three months of 1997, the Company commenced construction of
its corporate headquarters in Redmond, Washington, which, when completed,
will consolidate the Company's administrative offices and labs and
manufacturing facilities into one. Further expenditures will be required for
manufacturing, including but not limited to, adding equipment for the
manufacture of the polymer-based wound care products; building a sales
organization and marketing program for the Company's products in North
America and elsewhere; and for office and related space and equipment to
accommodate the activities and personnel associated with bringing potential
products into development or the marketplace. All these activities, and
others that may not have been anticipated at this time, will require
substantial financial resources. There can be no assurance that the Company
will have sufficient resources to fund the cost of such activities, or that
it will be able to obtain any additional financial resources on acceptable
terms or in time to fund any necessary or desirable expenditures.
The Company anticipates that its existing capital resources should be
sufficient to fund its cash requirements for approximately two years.
However, the amounts and timing of expenditures will depend on such things as
the progress and results of ongoing clinical development programs, the rate
at which operating losses are incurred, the execution of in-licensing or
product distribution agreements with others, the establishment of
out-licensing agreements or strategic alliances for certain of the Company's
products or technology, the FDA regulatory process and similar processes
among similar agencies in other countries, and other factors, many of which
are beyond the Company's control, such as changes in healthcare product
reimbursement schedules.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The discussion in this report, including but not limited to such things
as pending product launches, regulatory submissions and reimbursement
pricing, strategic partnering, and availability of cash to fund operations
contains forward-looking statements. Any and all statements of goals,
beliefs, intent, plans, anticipation or expectations set forth in the
Company's SEC reports and other communications may be forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements which reflect the Company's views and beliefs only
as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
revisions may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
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
11
<PAGE>
At March 31, 1997, the Company had approximately $18.5 million in cash,
cash equivalents and securities available for sale. The Company expects to
spend approximately $2 million per quarter in 1997 as it continues to develop
and test product candidates, provide marketing and sales support of current
or future products, and incur ongoing general overhead expenses. 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 materially
adversely effect the Company's financial position.
CLINICAL AND COMMERCIAL DEVELOPMENT OF NOVEL COMPOUNDS AND PRODUCTS
There can be no assurance that the Company will commence, continue or
successfully complete preclinical or clinical testing or commercial
development, including commercial-scale manufacturing and market launch of
any of the products or product candidates identified elsewhere in this
report, or that, if successfully developed, such product candidates would be
cleared 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
ProCyte's manufacturing plant was commissioned in 1994, and allows the
Company to provide select contract manufacturing services to industry
clientele in addition to serving its own product manufacture requirements.
By quarter end March 31, 1997, ProCyte had provided or was still performing
contract manufacturing services on behalf of several clients, including two
multinational pharmaceutical companies and several biotechnology companies.
The Company expects to utilize approximately 75% of the plant's current
capacity for these endeavors in 1997, though for reasons such as but not
limited to unexpected or unsuccessful plant audits or regulatory inspections,
changes in local, state or federal facility operation requirements for such
things as water and chemical usage, storage or disposal, the potential impact
of adverse weather conditions on plant operations, the decision of a client
to manufacture its own products or have them manufactured elsewhere, market
acceptance of the
12
<PAGE>
Company's or clients' products, and competition, there can be no assurance
that the Company will be successful.
ProCyte expects to continue to provide select contract manufacturing
services in the future, and to produce clinical and commercial quantities of
certain of its peptide-copper compounds for its use.
Given the risks and uncertain timelines associated with device,
pharmaceutical and biotechnology products being developed, tested, reviewed
or sold by clients of the manufacturing facility, and the Company's own
products, 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
manufacture its own products or have them manufactured elsewhere, inability
or failure to manufacture a product to established product specifications,
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, MANUFACTURE AND DISTRIBUTION
Factors beyond the Company's control, such as delays in obtaining
regulatory 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, acceptance and use, 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.
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, 1997, the Company had 18 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,
13
<PAGE>
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 relies 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 technology or
know-how to other projects, disputes may arise as to the ownership of
proprietary rights to such information.
COMPETITION
Competition in the Company's initial area of sales and distribution -
wound care and related applications - is particularly intense, involving a
number of well-established, major pharmaceutical and healthcare companies,
such as Bristol Myers Squibb's Convatec division, Kendall Healthcare Company,
and Johnson and Johnson. 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,
pricing, reimbursement, 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 years of
experience, and established reputations, promoting to healthcare providers.
Competition also 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 or current products being
developed or marketed 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
14
<PAGE>
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.
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.
GOVERNMENT REGULATION
The manufacture and marketing of ProCyte's products, whether internally
developed and licensed-in, and its research and development activities in
general, 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, recordkeeping, advertising and promotion of pharmaceutical
products and medical devices. Product development and approval or clearance
within the regulatory framework requires a number of years and involves the
expenditure of substantial resources.
In order to obtain FDA clearance to market a new drug or device in the
United States for use in humans, it is necessary to proceed through several
stages of product testing, including research and development, clinical
evaluations, the filing of a product registration dossier such as a new drug
application or 510(k) application with the FDA to obtain authorization to
market a product. The Company's product candidates may be regulated by any
of a number of divisions of the FDA.
Before human testing of a therapeutic product candidate may commence,
the FDA, and like agencies in other countries, generally require certain
preclinical testing, such as toxicology studies in animals, to begin to
establish product safety. Results of such studies are submitted as part of
the application to the regulatory agency. Preclinical testing is not
necessarily indicative of the safety or effectiveness of a product candidate
for human use.
Human clinical trials of an investigational therapeutic compound in the
United States typically involve a three-phase process. Following the IND
submission period, Phase I trials may be conducted with a small group of
healthy volunteers or, in some instances, patients, to
15
<PAGE>
determine the early safety profile and the pattern of drug absorption,
distribution and metabolism. Phase II trials are conducted with groups of
patients afflicted with a specific disease or specific element of a disease
to determine preliminary effectiveness, optimal dosage and treatment regimens
and expanded evidence of safety. Phase III comparative trials are conducted
with a larger number of patients at multiple test sites to gather information
about safety and effectiveness that is needed to evaluate the overall
benefit-risk relationship of the compound and to provide an adequate basis
for proposed product labeling.
The results of clinical trials are submitted to the FDA, and to similar
agencies in other countries, in the form of an of NDA or like submission, for
approval to commence commercial distribution of the product. The regulatory
agencies may take one to two years or more to act on an NDA or like
submission, if they elect to act at all. The final decision rests with the
regulatory agency as to whether or not approval will be granted. The
regulatory agencies, at their discretion, may request further testing,
additional data, or may deny approval if the agency determines that
regulatory approval criteria are not sufficiently satisfied. As such, there
can be no assurance that any approvals of the Company's product candidates,
if and when the Company has drug candidates in development, would be granted
on a timely basis, if at all, following completion of clinical testing.
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 510(k) medical device guidelines. Similar
guidelines exist for such products in other countries. Such products, which
include wound care dressings, ointments and gels, must show safety and
substantial equivalency with predicate products already cleared to be
marketed by the FDA. There can be no assurance that such product pre-market
notification 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 FDA or other countries' approval or clearance
to market a product, the prospective manufacturer's quality control and
manufacturing procedures must conform to current good manufacturing practices
("cGMPs") guidelines, or ISO 9000 standards, when appropriate. In complying
with standards set forth in these regulations, which are subject to change at
any time without notice to the Company, manufacturers must continue to expend
time, monies and effort in production and quality control. Manufacturing
establishments, such as ProCyte's manufacturing plant, also are subject to
regulations from and inspections by other foreign, federal, state or local
agencies, such as the Drug Enforcement Agency, the city water and waste
treatment agencies, and state and federal safety and health regulations.
There can be no assurance that the Company's manufacturing facility or its
operations for the manufacture of its own product candidates or the bulk
products manufactured and processes followed by the Company on behalf of its
clients will be able to meet all appropriate guidelines or to pass
inspections by any government agency. If the Company's manufacturing
operations should fail to pass an inspection, for any reason, the possible
resultant outcome on the plant's continuing operations, and the financial
impact on the Company's overall reputation and operations could be severely
adversely affected.
16
<PAGE>
The Company also is or may become subject to various other foreign,
U.S., state and local laws, regulations and policies relating to, among other
things, product pricing and reimbursement, safe working conditions, good
laboratory practices, animal welfare, and the use and disposal of hazardous
or potentially hazardous substances used in connection with research,
development and/or manufacturing.
OPERATING LOSSES
The Company is engaged in the development of healthcare products
utilizing copper-peptide containing and polymer-based compounds. Such
research and development has historically 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, and other wound care studies or pharamacoeconomic analyses involving
its product candidates or commercial products.
The Company expects to incur additional operating losses for a number of
years until its product lines has been expanded and successfully distributed.
At March 31, 1997, the Company's accumulated deficit was approximately $57.8
million.
REVENUE
For the three-month period ended March 31, 1997, ProCyte earned revenue
from contract manufacturing of $379,541, introductory product sales of its
first two US wound care products - Iamin-Registered Trademark- Hydrating Gel
and the OsmoCyte-Registered Trademark- Pillow Wound Dressings - of $29,554,
and interest income of $263,582. This compares to contract manufacturing
revenue of $244,903, product sales of $0, license fees of $900,000 and
interest income of $544,581 earned in the first three months of 1996. The
increase in contract manufacturing and product sales revenue is primarily due
to the continuing work being done by the Company on behalf of clients of its
manufacturing facility and initial wound care products sold in the US for
human and veterinary wound care applications. The expected decrease in
interest income and license fees is a result of less cash available for
investment and corporate partners satisfying their payment obligations.
EXPENSES
Research and development expenses for the three-month period ended March
31, 1997, were $1,265,106, compared to $1,747,339 for the like period in
1996. Expenditures during the period conform with the Company's planned
decrease in expenses, primarily as a result of cost-saving measures
implemented by management. The Company anticipates that expenditures will
remain at or near current levels as a result of the stage of current product
development and cessation of further drug research studies.
17
<PAGE>
General and administrative expenses for the three-month period ended
March 31, 1997, were $1,323,081, compared to $1,364,086 for the same
three-month period in 1996. The decrease was primarily related to
cost-saving programs implemented by management. The Company anticipates that
expenditures may increase during the year as a result of the Company's
planned corporate relocation and other administrative charges.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is in settlement discussions with one of its insurance
carriers with respect to $1 million of Director and Officer insurance
coverage that was related to the now-settled class action lawsuit brought
against the Company and certain of its officers and directors in 1994.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders for vote during first
quarter 1997. The Company plans to hold the annual meeting of its
shareholders on May 15, 1997. 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
Mr. John Young, who served as the Company's vice president of
manufacturing operations, ceased to be an employee of the Company during the
quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None
18
<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 5, 1997 By /s/John F. Clifford
--------------------------------
John F. Clifford
President and CEO
Date: May 5, 1997 By:/s/ Robert MacDonald
--------------------------------
Robert MacDonald
Director of Finance
19
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<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,690,434
<SECURITIES> 16,868,039
<RECEIVABLES> 325,592
<ALLOWANCES> 0
<INVENTORY> 737,006
<CURRENT-ASSETS> 20,019,390
<PP&E> 10,195,462
<DEPRECIATION> 4,472,701
<TOTAL-ASSETS> 26,347,857
<CURRENT-LIABILITIES> 1,366,463
<BONDS> 0
0
0
<COMMON> 82,773,866
<OTHER-SE> 57,797,614<F1>
<TOTAL-LIABILITY-AND-EQUITY> 26,347,857
<SALES> 29,554
<TOTAL-REVENUES> 672,677
<CGS> 11,765
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,599,952
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,927,275)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,927,275)
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