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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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.)
BUILDING A, 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
-------------
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 July 30, 1997, there were issued and outstanding 13,364,958 shares of
common stock, par value $.01 per share.
1
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PROCYTE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I FINANCIAL INFORMATION...........................................................................3
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).............................................................3
BALANCE SHEET - AS OF JUNE 30, 1997 AND DECEMBER 31, 1996 (UNAUDITED).............................3
STATEMENTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)..........4
STATEMENTS OF CASH FLOWS-SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)......................5
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)....................................................6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED).........................................................7
ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........9
PART II - OTHER INFORMATION...........................................................................17
ITEM 1. LEGAL PROCEEDINGS...........................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................17
ITEM 5. OTHER INFORMATION...........................................................................18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................18
SIGNATURES............................................................................................19
</TABLE>
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Balance Sheet - As of June 30, 1997 (unaudited) and December 31, 1996
<TABLE>
<CAPTION>
ASSETS June.30, 1997 Dec. 31, 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................... $5,643,919 $1,804,875
Securities available for sale............... 10,666,605 19,041,961
Inventories................................. 1,208,632 596,740
Other....................................... 800,111 318,580
----------- -----------
TOTAL CURRENT ASSETS 18,319,268 21,762,156
PROPERTY AND EQUIPMENT, AT COST
Equipment................................... 3,882,836 3,604,764
Leasehold improvements...................... 5,015,348 5,097,833
Improvements in progress.................... 350,537 1,463,940
Less accumulated depreciation and
amortization............................... (3,319,797) (4,306,094)
------------ -----------
PROPERTY AND EQUIPMENT, NET 5,928,924 5,860,443
PATENTS, AT COST............................... 290,930 290,930
Less accumulated amortization............... (117,269) (109,270)
----------- ----------
PATENTS, NET 173,661 181,660
Other.......................................... 384,399 159,399
----------- ---------
TOTAL ASSETS $24,806,252 $27,963,658
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................ $472,432 $334,843
Accrued liabilities......................... 994,866 779,890
---------- ---------
TOTAL CURRENT LIABILITIES 1,467,298 1,114,733
DEFERRED LEASE PAYMENTS 0 10,148
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; 13,364,958 shares issued
and outstanding............................. 133,276 133,276
Additional paid-in capital.................. 82,705,340 82,576,340
Deficit accumulated during the development
stage....................................... (59,499,662) (55,870,339)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 23,338,954 26,838,777
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,806,252 $27,963,658
------------- ------------
------------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
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Statements of Operations - Three and six months ended June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
Jan 1, 1985
(predeccssor
Three months ended June 30, Six months ended June 30, inception) to
--------------------------- ------------------------- June 30,
STATEMENTS OF OPERATIONS DATA: 1997 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Product revenues.................... $53,016 $0 $82,570 $0 $113,133
Contract manufacturing.............. 190,442 230,313 569,983 475,216 1,429,923
License Fees........................ 0 0 0 900,000 1,500,000
R&D collaborative agreements........ 0 0 0 0 7,754,711
Interest income..................... 243,948 240,997 507,528 785,578 9,166,275
Other income........................ 400,000 0 400,000 0 1,112,110
----------- ----------- ----------- ----------- ------------
TOTAL REVENUES 887,406 471,310 1,560,082 2,160,794 21,076,152
COSTS AND EXPENSES
Cost of product sales............... 19,455 0 31,221 0 45,131
Research & development.............. 1,328,492 1,459,647 2,652,290 3,206,987 52,531,559
Litigation settlement............... 0 0 0 0 5,750,000
General & administrative............ 1,240,787 1,059,760 2,505,894 2,423,846 22,251,911
----------- ----------- ----------- ----------- ------------
TOTAL COSTS AND EXPENSES 2,588,734 2,519,407 5,189,405 5,630,833 80,578,601
NET LOSS $(1,701,328) $(2,048,097) $(3,629,323) $(3,470,039) $(59,502,449)
----------- ----------- ----------- ----------- ------------
NET LOSS PER COMMON SHARE............ $(0.13) $(0.16) $(0.27) $(0.26) $(7.50)
Weighted average number of
common shares used in
computing net loss per
common share....................... 13,315,104 13,196,124 13,302,650 13,174,838 7,933,443
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
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Statements of Cash Flows-Six months ended June 30, 1997 and 1996 (unaudited)
<TABLE>
<CAPTION>
Jan. 1, 1985
(Predecessor
OPERATING ACTIVITIES Six months ended June30, inception) to
--------------------------- June 30,
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET LOSS ($3,629,323) ($3,470,039) $(59,502,448)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation................................................... 342,993 313,629 4,899,756
Patent expense................................................. 7,999 8,000 794,928
Amortization of discount on marketable
securities................................................... 0 0 (15,625)
(Gain) loss on sale of securities
available for sale........................................... (459) 160,980 (138,047)
Stock grants and Restricted Stock grants....................... 129,500 129,500 462,221
Compensation expense on stock options.......................... 0 21,505 597,638
Changes in assets and liabilities:.............................
(Increase) decrease in inventories............................ (611,892) (1,208,632)
(Increase) decrease in other current assets................... (481,531) (588,770) (800,114)
(Increase) decrease in insurance receivable................... 0 2,000,000 0
(Increase) decrease in escrowed cash.......................... 0 (2,500,000) 0
Increase in other assets...................................... 0 (33,662) (9,399)
Increase (decrease) in accounts payable....................... 137,589 (335,579) 387,313
Increase (decrease) in accrued liabilities.................... 214,974 (43,832) 939,956
Increase (decrease) in deferred lease payments................ (10,148) (9,878) (0)
Decrease in deferred use tax.................................. 0 0 (94,713)
----------- ----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (3,900,295) (4,348,146) (53,687,165)
----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net.......................... 0 72,211 81,405,340
Proceeds from borrowings....................................... 0 0 500,000
----------- ----------- ------------
Net cash provided by financing activities...................... 0 72,211 81,905,340
----------- ----------- ------------
INVESTING ACTIVITIES
Purchase of property and equipment............................. (411,476) (193,700) (10,732,752)
Purchase of securities available-for-sale...................... (31,113,126) (98,772,868) (410,793,555)
Proceeds from sale or maturity of
securities available for sale................................. 39,488,940 104,822,120 400,280,621
Patents:.......................................................
Expenditures................................................... 0 0 (1,018,117)
Reimbursements................................................. 0 0 64,546
Other.......................................................... (225,000) 0 (375,000)
----------- ----------- ------------
NET CASH USED IN INVESTING ACTIVITIES 7,739,339 5,855,552 (22,574,256)
----------- ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,839,044 1,579,617 5,643,919
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,804,875 6,019,740
----------- ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,643,919 $7,599,357 $5,643,919
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES $500,000
------------
------------
Conversion of debt to common stock $27,790
Issuance of stock for patents ------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
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Statements of Stockholders' Equity (unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid-in Accumulated
Shares Par Value Capital Deficit Total
---------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 13,277,558 $132,776 $82,576,340 ($55,870,339) $26,838,777
Hymedix Restricted Stock:
($2.59 per share) March 31 25,000 250 64,500 64,750
($2.59 per share) June 30 25,000 250 64,500 64,750
Net loss (3,629,321) (3,629,321)
---------- --------- ----------- ------------ ----------
Balance, June 30, 1997 13,327,558 $133,276 $82,705,340 ($59,499,660) $23,338,956
---------- --------- ----------- ------------ ----------
---------- --------- ----------- ------------ ----------
</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 and six-month periods ended June 30, 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 June 30, 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 cash equivalents is $5,643,919, and for
investments (maturing in one through five years) is $10,666,605. There were no
gross unrealized gains or losses at June 30, 1997, and realized gains from sales
of investments in the three and six-month periods ended June 30, 1997 were
$551 and $459, respectively.
3. EXISTING CORPORATE LICENSE AGREEMENT
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.
Under the terms of the agreement with Hymedix, the Company is obligated
to pay certain up-front, milestone and royalty payments. The Company's
up-front payment
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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. The Company is currently accruing on a quarterly basis the
expense of the milestone payment.
4. INVENTORIES
Inventories consist of raw materials, work in process and finished goods,
and are accounted for at the lower of cost or market. As of June 30, 1997,
finished goods inventory was valued at $365,461, and raw materials and
work-in-process inventory was valued at $843,181.
5. STOCKHOLDERS' EQUITY
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
<TABLE>
<CAPTION>
Shares subject Weighted average
to option exercise price
-------------- ----------------
<S> <C> <C>
Balance, January 1, 1996...................... 1,536,957 $4.44
Granted...................................... 95,500 3.15
Exercised.................................... 30,126 2.40
Canceled..................................... 292,500 7.58
--------- -------
Balance, June 30, 1996........................ 1,309,831 $3.69
--------- -------
--------- -------
Balance, January 1, 1997...................... 1,376,361 $3.53
Granted...................................... 164,000 3.15
Exercised.................................... 0 0
Canceled..................................... 237,498 2.70
--------- -------
Balance, June 30, 1997........................ 1,302,863 $3.52
--------- -------
--------- -------
Currently exercisable......................... 729,715 $4.15
--------- -------
--------- -------
</TABLE>
During the three-month period ended June 30, 1997, the Compensation
Committee of the Board of Directors approved grants to employees of incentive
stock options under the Company's 1989 Restated Stock Option Plan to purchase
1,000 shares of common stock. Pursuant to the shareholders' approval at the May
15, 1997 Annual Meeting of the Shareholders of amendments to the 1991 Restated
Stock Option Plan for Non-Employee Directors, two non-employee directors each
received stock option grants for 6,000 shares of common stock. All options are
subject to vesting schedules.
8
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6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was recently issued and is effective for the Company's fiscal year
ending December 31, 1997. This Statement requires a change in the presentation
of earnings per share. Early adoption of this statement is not permitted.
Management believes that the impact of the adoption of this Statement on the
financial statements, taken as a whole, will not be material.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also recently issued and is effective for the Company's year
ending December 31, 1998. The Company is currently evaluating the effects of
this Standard; however, management believes that the impact of its adoption will
not be material to the financial statements, taken as a whole.
Item 2-Management's Discussion and Analysis of Financial Condition and Results
of Operations
CORPORATE OVERVIEW
As of the end of the second quarter, June 30, 1997, ProCyte had introduced
or received clearance to market several new wound care products. These are in
addition to the Company's first 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 care and management
of chronic and acute wounds, including diabetic and venous stasis ulcers.
During the three-month period ended June 30, 1997, ProCyte introduced in
the United States a second copper peptide-containing wound care dressing,
tradenamed GraftCyte-TM- Moist Dressings. These copper peptide-impregnated
gauze dressings received clearance to be marketed under the United States Food
and Drug Administration's ("FDA") 510(k) medical device regulations for use in
hair transplant surgical procedures. The dressings are designed to contribute
moisture to the transplant area, and to provide essential micronutrients that
are important to natural wound healing.
During the second quarter, the Company also introduced a complementary
product, GraftCyte-TM- Hydrating Mist, for continued moisturizing of the scalp
following hair restoration surgery. Both GraftCyte-TM- products are being
promoted to hair restoration specialists and mark the Company's entree into the
specialized wound care and personal care markets. Specialized wound care
includes such fields as dermatology, podiatry, plastic surgery and hair
restoration surgery.
Other new products introduced by the Company during the quarter ended June
30, 1997 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
9
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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 510(k) pre-market
clearance applications to the FDA for other copper peptide-containing or
other wound care products.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on equity financings, contract manufacturing
fees, interest income, product sales and corporate partnerships to fund its
operations and capital expenditures. At June 30, 1997, the Company had
approximately $16.3 million in cash, cash equivalents and securities available
for sale.
Through June 30, 1997, the Company has invested a total of approximately
$2.7 million in laboratory and computer equipment, furniture and leasehold
improvements. In addition, the Company has invested approximately $6.5 million
in leasehold improvements and equipment for its manufacturing plant.
In the three-month period ended June 30, 1997, the Company completed
construction and relocation of its corporate headquarters to Redmond,
Washington, which consolidated the Company's administrative offices and labs and
manufacturing facilities into one facility, effective June 30, 1997.
Increases in inventory were anticipated and planned. The increase in raw
material and work-in-process inventory resulted from a ramp-up for a large,
ongoing production campaign of the Company's primary copper peptide compound.
Finished goods inventory rose with Company product launches for the
GraftCyte-TM- Iamin-Registered Trademark- wound cleanser and thin film products.
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, product sales, contract manufacturing fees and
other factors, many of which are beyond the Company's control, such as changes
in healthcare product reimbursement schedules.
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,
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the Company has supported and continues to finance development of
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 have been expanded and successfully distributed.
At June 30, 1997, the Company's accumulated deficit was approximately $59.5
million.
REVENUE
For the three and six-month periods ended June 30, 1997, ProCyte earned
revenue from initial product sales, contract manufacturing services, other
income and interest income of $887,406 and $1,560,082, respectively. The
Company was performing contract research and development in 1996 that it is not
conducting in 1997, and ProCyte received its first FDA product clearances in
1996 to begin promoting its products in the US in the second half of that year.
The three and six-month periods in 1996 are not directly comparable with regard
to revenue in the same periods in 1997.
Revenue increases for the three-month period ended June 30, 1997 compared
to the same three-month period in 1996 were primarily a result of initial
product launches and a one-time recovery of a previously reserved receivable
from an insurer related to litigation settlement. However, revenue decreased
for the six-month period ended June 30, 1997 compared to the same six-month
period in 1996 primarily due to receipt of a license fee in 1996 that did not
occur in 1997 as well as reduced interest income. However, these factors were
partially offset by initial product sales and contract manufacturing revenue
increases.
EXPENSES
Research and development expenses decreased to $1,328,492 and $2,652,290,
respectively, for the three and six-month periods ended June 30, 1997, and
related primarily to the Company's planned expenditures for development of its
wound care, skin and hair health product candidates. This compares to research
and development expenses of $1,459,647 and $3,206,987 for the same three and
six-month periods in 1996. 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.
General and administrative expenses were $1,240,787 and $2,505,894 for the
three and six-month periods ended June 30, 1997, compared to $1,059,760 and
$2,423,846, respectively, for the like periods in 1996. The planned increase in
expenses was primarily due to costs associated with sales force staffing and the
Company's relocation of its corporate offices in June 1997 to consolidate its
facility expenses going forward. The Company anticipates that expenditures may
decrease or remain the same during the year as a result of the Company's
completed corporate relocation.
11
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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 distribution, 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.
GENERAL FINANCIAL POSITION OF THE COMPANY
The Company anticipates that its operating expenses will remain the same
or decrease in 1997 and subsequent years as the Company moves products forward
in commercialization, enters distribution relationships or reduces certain of
its overhead expenses. The Company may be required to raise additional
capital through equity offerings, strategic alliances, technology or product
out-licensing or other sources. There can be no assurance that such funds
will be available to the Company on acceptable terms, if at all.
The Company expects 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 seek to acquire,
distribute or in-license, there can be no assurance that products so obtained
will be commercialized successfully, if at all.
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
12
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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 in addition to serving
its own product manufacture requirements. By quarter end June 30, 1997, ProCyte
had provided or was still performing contract manufacturing services on behalf
of clients, including one multinational pharmaceutical company and one
biotechnology company.
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 Company's or clients' products, and competition, there can be
no assurance that the Company will be successful.
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 or failure to receive
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.
13
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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 seek to acquire,
distribute or in-license, there can be no assurance that products so obtained
will be commercialized successfully, 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 June 30, 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, 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
14
<PAGE>
Convatec division, Kendall Healthcare Company, and Johnson &
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 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 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.
GOVERNMENT REGULATION
The manufacture and marketing of ProCyte's products and its 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.
15
<PAGE>
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. 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 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, moneys and effort in production and quality control. Manufacturing
establishments, such as ProCyte's manufacturing plant,
16
<PAGE>
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.
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.
Part II - Other Information
Item 1. Legal Proceedings
The Company reached settlement with one of its insurance carriers with
respect to monies the Company believed were owed to it under the terms of its
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. The Company recorded as revenue the one-time payment in the
amount of $400,000, which was received from the carrier during the three-month
period ended June 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held the annual meeting of its shareholders on May 15, 1997.
Three items were submitted to the shareholders for a vote. As of the March 7,
1997 record date, there were 13,364,958 shares eligible to vote at the meeting,
of which 73.30%, or 9,795,848 were present at the meeting. A quorum was present
at the meeting. The first resolution was the election of directors. The six
nominated directors were re-elected to serve until the next annual meeting of
the shareholders or until their successors are elected and qualified. The vote
for each such director follows:
DIRECTOR FOR WITHHOLD
Joseph Ashley 9,352,209 443,639
Jules Blake, Ph.D. 9,428,909 366,939
John F. Clifford 9,472,920 322,928
Robert E. Patterson 9,468,109 327,739
William M. Sullivan 9,456,320 339,528
Thomas E. Tierney 9,475,832 320,016
17
<PAGE>
The second resolution was the approval of the amendments to the 1991
Restated Stock Option Plan for Non-Employee Directors, which passed by a vote of
8,973,209 shares voting for, 606,971 shares voted against and 215,668 shares
abstained. The third resolution was the approval of the 1996 Stock Option Plan,
which passed with 8,970,393 shares voted for, 606,704 shares voted against and
218,751 shares abstained.
Item 5. Other Information
Not applicable.
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: July 30, 1997 By: /s/John F. Clifford
----------------------------------
John F. Clifford, President and CEO
Date: July 30, 1997 By: /s/ Jon Sortland
----------------------------------
Jon Sortland, Manager of Accounting
19
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