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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 MARCH 31, 1998
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
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of April 30, 1998, there were issued and outstanding 14,423,393 shares of
common stock, par value $.01 per share.
1
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PROCYTE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION..................................................................... 3
Item 1. Financial Statements....................................................................... 3
Balance Sheet-As of March 31, 1998 and December 31, 1997 (unaudited).............................. 3
Statements of Operations-Three months ended March 31, 1998 and 1997 (unaudited)................... 4
Statements of Cash Flows -Three months ended March 31, 1998 and 1997 (unaudited).................. 5
Statement 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
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 18
PART II - OTHER INFORMATION.......................................................................... 18
Item 1. Legal Proceedings.......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18
Item 6. Exhibits and Reports on Form 8-K........................................................... 18
SIGNATURES........................................................................................... 19
EXHIBIT INDEX........................................................................................ 20
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET-AS OF MARCH 31, 1998 AND DECEMBER 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
March 31,1998 Dec 31, 1997
-----------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents...................................... $ 4,896,987 $ 3,003,524
Securities available for sale.................................. 6,913,139 9,863,093
Inventories.................................................... 1,944,267 1,927,325
Other.......................................................... 460,656 363,134
-----------------------------------------------
TOTAL CURRENT ASSETS 14,215,049 15,157,076
PROPERTY AND EQUIPMENT, AT COST
Equipment...................................................... 2,507,184 2,484,535
Leasehold improvements......................................... 5,513,850 5,513,850
Improvements in progress....................................... 9,419 0
Less accumulated depreciation and amortization................. (2,563,286) (2,394,562)
-----------------------------------------------
PROPERTY AND EQUIPMENT, NET 5,467,167 5,603,823
PATENTS, AT COST 290,930 290,930
Less accumulated amortization.................................. (129,269) (125,269)
-----------------------------------------------
PATENTS, NET 161,661 165,661
OTHER 384,399 384,399
-----------------------------------------------
TOTAL ASSETS $ 20,228,277 $ 21,310,959
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................................... $ 203,551 $ 203,764
Accrued liabilities............................................ 351,149 470,643
-----------------------------------------------
TOTAL CURRENT LIABILITIES 554,700 674,407
DEFERRED LEASE PAYMENTS 105,687 20,055
STOCKHOLDERS' EQUITY
Preferred stock $01 par value: 2,000,000 shares authorized; no
shares issued or outstanding.................................. 0 0
Common stock $01 par value: 30,000,000 shares authorized;
shares issued and outstanding 13,364,958 - Dec 31, 1997 and
13,364,958 -March 31, 1998.................................... 133,650 133,650
Additional paid-in capital..................................... 82,801,832 82,801,830
Deficit accumulated during the development stage............... (63,367,591) (62,318,983)
-----------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 19,567,891 20,616,497
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,228,277 $ 21,310,959
===============================================
</TABLE>
See notes to financial statements
3
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STATEMENTS OF OPERATIONS-THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---------------------------------
<S> <C> <C>
REVENUES
Product sales............................................ $ 236,460 $ 29,554
Contract manufacturing................................... 26,363 379,541
----------- -----------
TOTAL REVENUE............................................ 262,823 409,095
OPERATING EXPENSES
Cost of product sales.................................... 127,543 11,765
Research & development................................... 542,281 1,265,106
General & administrative................................. 817,860 1,323,081
----------- -----------
TOTAL COSTS AND EXPENSES................................. 1,487,683 2,599,952
OPERATING LOSS............................................ (1,224,860) (2,190,857)
OTHER INCOME
Interest income.......................................... 176,253 263,582
Other income............................................. 0 0
----------- -----------
TOTAL OTHER INCOME....................................... 176,253 263,582
---------------------------------
NET LOSS.................................................. $(1,048,607) $(1,927,275)
Net loss per common share................................. $(0.08) $(0.15)
Weighted average number of common shares used in
computing net loss per common share...................... 13,364,958 13,290,058
</TABLE>
See notes to financial statements
4
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STATEMENTS OF CASH FLOWS -THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
OPERATING ACTIVITIES 1998 1997
-------------------------------------
<S> <C> <C>
NET LOSS ($1,048,607) ($1,927,275)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation..................................................... 168,723 166,607
Patent expense................................................... 4,000 3,999
(Gain) loss on sale of securities available for sale............. 92
Stock grants and Restricted Stock grants......................... 64,750
Changes in assets and liabilities:
(Increase) decrease in inventories............................... (16,942) (140,266)
(Increase) decrease in other current assets...................... (19,447) (405,331)
Increase (decrease) in accounts payable.......................... (213) (25,057)
Increase (decrease) in accrued liabilities....................... (119,494) 276,789
Increase (decrease) in deferred lease payments................... 85,632 (5,006)
-------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (946,348) (1,990,698)
-------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net............................ 0 0
Proceeds from borrowings......................................... 0 0
-------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 0
-------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment............................... (32,067) (72,572)
Purchase of securities available-for-sale........................ 0 (15,656,243)
Proceeds from sale or maturity of securities available for sale.. 2,949,954 17,830,071
Other............................................................ (78,076) (225,000)
-------------------------------------
NET CASH USED IN INVESTING ACTIVITIES 2,839,811 1,876,257
-------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,893,463 (114,441)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,003,524 1,804,875
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,896,987 $ 1,690,434
=====================================
</TABLE>
See notes to financial statements
5
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STATEMENT 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, Dec. 31, 1997 13,364,958 $133,650 $82,801,830 ($62,318,983) $20,616,497
----------------------------------------------------------------------------------
Net loss (1,048,607) (1,048,607)
----------------------------------------------------------------------------------
Balance, March 31, 1998 13,364,958 $133,650 $82,801,832 ($63,367,590) $19,567,891
==================================================================================
</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
("ProCyte" or the "Company") for the three-month periods ended March 31, 1998
and 1997, 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 Form 10-K for the year ended December 31, 1997. 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, 1998.
2. INVESTMENTS
At March 31, 1998, the Company's investments consisted entirely of U.S.
Treasury bills & notes, U.S. Agency securities, and investment-grade commercial
paper. All investments are classified as "available for sale." At March 31,
1998, the amortized cost and estimated market value for investments maturing in
one year or less was $3,934,284, and for those maturing in one through five
years was $2,978,855. There were no gross realized or unrealized gains or
losses on investments at March 31, 1998.
3. 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 March 31, 1998,
finished goods inventory was valued at $521,941, and raw materials and work-in-
process inventory was valued at $1,422,326.
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4. 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, 1997.............. 1,442,193 $3.50
Granted............................. 140,500 $2.31
Exercised........................... 0 $2.35
Canceled............................ (79,833) $2.73
------------------------------------
Balance, Mar 31, 1997................. 1,502,860 $3.44
====================================
Balance, January 1, 1998.............. 1,304,374 $2.94
Granted............................. 202,000 $1.47
Exercised........................... 0 $0.00
Canceled............................ 0 $0.00
------------------------------------
Balance, Mar 31, 1998................. 1,506,374 $2.79
====================================
Currently exercisable................. 804,048 $3.54
====================================
</TABLE>
During the three-month period ended March 31, 1998, the Compensation
Committee of the Board of Directors approved grants of incentive stock options
and nonqualified stock options to employees and consultants to the Company under
the Company's 1989 Restated Stock Option Plan to purchase 202,000 shares of
common stock. All options are subject to vesting schedules.
5. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was recently issued and was effective for the Company's fiscal year
ending December 31, 1997. This statement required a change in the presentation
of earnings per share. Early adoption of this statement was not permitted.
Management believes that the impact of the adoption of this statement on the
financial statements, taken as a whole, is not 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 statement; however management believes that the impact of its adoption will
not be material to the financial statements, taken as a whole.
8
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion contains forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. The words "believe", "expect", "intend", "anticipate",
variations of such words and similar expressions identify forward-looking
statements, but their absence does not mean that the statement is not forward-
looking. These statements are not guaranties of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Factors that could affect the Company's actual results include, among
other things, the availability of adequate funding, the availability of contract
manufacturing opportunities, relationships with corporate collaborators, the
progress and costs of preclinical studies and clinical trials, the recruitment
of suitable patients, the timing of regulatory approvals, the rate of market
acceptance of the Company's products, the availability of third-party
reimbursement for the Company's products, the ability to obtain and defend
patent and related future products and intellectual property rights and to
market the Company's products and the status of competing products. See
"Important Factors Regarding Forward-Looking Statements." Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this report. ProCyte undertakes no obligation to update
publicly any forward-looking statement to reflect new information, events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
Corporate Overview
For the first three months of 1998 ProCyte continued its marketing and
development efforts for an array of wound care products. As the Company's
product line has expanded, it has continued to focus its efforts on the
specialty wound care sectors - marketing to dermatologists and plastic and
cosmetic surgeons. During the first quarter, the Company introduced Complex
Cu3(TM) Intensive Repair Creme, a product used to treat patients following
chemical peels, dermabrasion and laser treatments. The Company's also began
selling its Pillo(TM) Pro dressings which provide moisture absorption following
liposuction procedures. Each year in the United States alone an estimated
400,000 such surgeries are performed.
In December 1997, ProCyte entered into an exclusive distribution agreement
with the Bard Medical Division ("Bard") of C.R. Bard, Inc. Bard is a newly
formed division servicing the hospital, nursing home and extended care markets
in the United States and Canada. ProCyte granted Bard the exclusive rights to
distribute ProCyte's products for the wound care markets in these market sectors
and regions. As partial consideration for this grant, Bard must make certain
minimum purchases quarterly. ProCyte's Iamin(R) Hydrating Gel, Iamin(R) Wound
Cleanser, and OsmoCyte(R) Pillow Wound Dressings became the first Company
products to be added to the Bard sales effort. The Company shipped its first
orders to Bard in January 1998.
Sales of the Company's GraftCyte(TM) line of copper-peptide containing
wound care products for use following hair restoration surgery continued to
increase in the first quarter of 1998. An estimated 200,000 hair restoration
procedures are performed annually in the United States. ProCyte is the first
company to provide a line of products that address the importance of wound
repair in the hair transplant process. The Company's GraftCyte(TM) products are
promoted through specialty distributors.
9
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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. At March 31, 1998, the Company's accumulated
deficit was approximately $63.4 million. The Company expects to incur
additional operating losses for a number of years until its product lines have
been expanded and have achieved market acceptance.
Revenue
For the three-month period ended March 31, 1998, ProCyte earned total
operating revenue of approximately $263,000 from product sales and from
performing contract manufacturing services. Comparable revenues were $410,000
for the three-month period ended March 31, 1997. The decrease in operating
revenue was due to a decline in contract manufacturing revenue from $380,000 in
1998 to $26,000 in 1997. This decline resulted from the completion and
conclusion of a contract manufacturing project in 1997 that did not carry over
into 1998, and by product regulatory delays faced by one of the Company's
largest contract manufacturing customers that has indefinitely delayed this
customer's need for the Company's services.
Revenue from product sales were approximately $236,000 for the quarter
ended March 31, 1998, up from $30,000 for the quarter ended March 31, 1997. The
increase was primarily a result of revenue from products launched in the 3rd and
4th quarters in 1997, especially products from the GraftCyte(TM) line, and from
revenues from the initial shipments of various wound care products to Bard under
the distribution agreement signed in 4th quarter 1997.
Interest income was approximately $176,000 for the three-month period ended
March 31, 1998, compared to $264,000 for the same period in 1997. The decrease
in interest income was primarily a result of reduced funds available for
investment.
Expenses
Research and development expenses decreased to approximately $542,000 for
the three-month period ended March 31, 1998, resulting primarily from 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 $1,265,000 for the same three-month period in 1997. Expense reductions
resulted from reduced staffing levels and from the completion of various
research projects and studies. The Company anticipates that expenditures for
research and development will remain at or near current levels.
10
<PAGE>
General and administrative expenses decreased to approximately $818,000 for
the three-month period ended March 31, 1998, compared to $1,324,000 for the same
period in 1997. The decrease in general and administrative expenses was planned
and were primarily related to reduced staffing levels and from savings resulting
from the consolidation of the Company's facilities in the 3rd quarter of 1997.
The Company anticipates that expenditures will remain at or near current levels
as a result of planned levels of operations.
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 March 31, 1998, the Company had
approximately $11.8 million in cash, cash equivalents and securities available
for sale, as compared to $12.9 million at December 31, 1997. The decrease of
$1.1 million was used primarily to fund ongoing operations. The Company expects
that its cash needs will continue at similar levels in future periods.
Through March 31, 1997, the Company has invested a total of approximately
$1.6 million in laboratory and computer equipment, furniture and leasehold
improvements. In addition, the Company has invested approximately $6.4 million
in leasehold improvements and equipment for its manufacturing plant.
Increases in inventory were anticipated and planned. For the quarter
ending March 31, 1998, inventory rose by approximately $17,000, primarily as a
result of the continued completion and stocking of certain finished products.
The Company believes that its existing cash, cash equivalents, securities
available for sale, and interest thereon, will be sufficient to meet its capital
requirements at least through 1999. However, there can be no assurance that the
underlying assumed levels of revenue and expense will prove accurate. Although
the Company believes that its existing and potential products appear promising,
it is unknown whether any of such products will prove commercially viable. In
any event, substantial additional funds will be needed to commercialize existing
products and to continue development of its potential products. The Company
will depend upon equity financings, contract manufacturing fees, interest
income, product revenues and funding from corporate partnerships to meet its
future capital needs. There can be no assurance that such funds will be
available as needed or on terms that are acceptable to the Company. If the
Company is unable to obtain sufficient funds to satisfy its cash requirements,
the Company will be required to delay, reduce or eliminate some or all of its
research and development activities, clinical trials, and manufacturing and
administrative programs, or dispose of assets or technology. See "Important
Factors Regarding Forward-Looking Statements."
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
ProCyte is a development stage company and has generated minimal revenues
since inception. The Company launched its first product in 1996, launched
additional wound care product lines in 1997 and expects further product launches
in 1998; however, to date, the Company has generated only minimal revenues from
product sales and there can be no assurance that the Company will be able to
generate sufficient product sales to achieve a profitable level of operations.
As of December 31, 1997, the Company's accumulated deficit was approximately
$62.3 million. The
11
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Company expects to incur substantial additional operating losses over at least
the next several years and expects cumulative losses to increase substantially
as it continues to expand its marketing and research and development activities.
The Company's revenues have principally been from interest income, research
fees, license fees and fees for performance of contract manufacturing services.
The Company's ability to achieve a consistent, profitable level of operations is
dependent in large part upon obtaining regulatory approvals for its products,
successfully manufacturing and marketing its products, entering into agreements
with corporate partners for distribution and commercialization of the Company's
products and out-licensing of the Company's technology, of which there can be no
assurance. In addition, payments under corporate partnerships and licensing
arrangements, if any, will be subject to significant fluctuations in both timing
and amounts. The time required to reach sustained profitability is highly
uncertain, and there can be no assurance that the Company will be able to
achieve profitability on a sustained basis, if at all. Moreover, if
profitability is achieved, the level of profitability cannot be predicted and it
may vary significantly from quarter to quarter.
Need for Additional Capital
The Company expects negative cash flow from operations to continue for the
foreseeable future. The Company will require substantial additional funds to
conduct its marketing activities; to continue research and development; to
conduct further preclinical studies and clinical trials; and to expand or
enhance quality-control, regulatory, marketing, sales and administrative
capabilities. The Company's future capital requirements will depend on numerous
factors, including its efforts, and the efforts of its collaborative partners,
to commercialize its products; continued scientific progress in the Company's
research and development programs; the results of research and development
activities; preclinical studies and clinical trials; relationships with existing
and future corporate collaborators, if any; competing technological and market
developments; the time and costs involved in obtaining regulatory approvals; the
costs involved in filing, prosecuting and enforcing patent claims; the time and
costs of commercialization activities; and other factors. As of December 31,
1997, the Company had cash, cash equivalents and securities available for sale
of $12.9 million. The Company estimates that at its planned rate of spending,
its existing cash, cash equivalents and securities available for sale and the
interest income thereon will be sufficient to meet its capital requirements at
least through 1999. There can be no assurance that the underlying assumed
levels of revenue and expense will prove accurate. Whether or not these
assumptions prove to be accurate, the Company will need to raise substantial
capital to fund operations. The Company intends to seek additional funding
through public or private financing, including equity financing, and through
collaborative arrangements. Adequate funds for these purposes, whether obtained
through financial markets or from collaborative or other arrangements with
corporate partners or other sources, may not be available when needed or may not
be available on terms favorable to the Company, if at all. If additional funds
are raised by issuing equity securities, dilution to existing shareholders will
result. In addition, in the event that additional funds are obtained through
arrangements with collaborative partners, such arrangements may require the
Company to relinquish rights to certain of its technologies or potential
products that it would otherwise seek to develop or commercialize itself. If
funding is insufficient at any time in the future, the Company may be required
to delay, scale back or eliminate some or all of its marketing and research and
development programs or to license third parties to commercialize products or
technologies that the Company would otherwise seek to develop itself.
Furthermore, the terms of any such license agreements might be less favorable
than if the Company were negotiating from a stronger position. Moreover, if
funding is insufficient at any time in the future, and the Company's existing
funds are depleted, the Company may be required to cease operations.
12
<PAGE>
Uncertainties Related to Contract Manufacturing Operations
Since inception, a substantial portion of the Company's revenues have been
derived from its contract manufacturing operations as the Company has sought to
more fully utilize its existing facility's capacity while its own products were
under development. For the foreseeable future, ProCyte expects to continue to
have excess manufacturing capacity as it works to complete development, and
begin commercialization, of its potential products. Accordingly, the Company
will continue to seek contract manufacturing opportunities. Contract
manufacturing revenues will be adversely affected to the extent the Company's
customers decide to manufacture their products themselves or choose to have them
manufactured elsewhere. In addition, the Company's contract manufacturing
revenues may be adversely affected to the extent its customers experience
regulatory delays, product recalls, or competitive pressures in the marketplace.
The Company expects that revenues from contract manufacturing will significantly
decline in 1998 as a result of the loss of two of its most significant contract
manufacturing customers, one of whom faces an indefinite delay in receiving FDA
clearance. There can be no assurance that contract revenues in the future will
be significant.
Uncertainties Related to Early Stage of Development
From the Company's inception in 1986 until it launched its first commercial
product in June 1996, substantially all of its resources were dedicated to the
research and development of wound healing and tissue repair applications of its
topically administered copper-peptide compounds. Although the Company launched
additional wound care product lines in 1997 and expects further product launches
in 1998, to date Company has generated only minimal revenues from product sales.
The Company's revenues have principally been from fees for performance of
contract manufacturing services, interest income, research fees and license
fees. There can be no assurance that the Company's current products or its
potential products, if successfully developed, can be produced in commercial
quantities at reasonable costs, nor can there be any assurance that any such
products will be successfully marketed at prices that would permit the Company
to operate profitably. The failure of the Company to successfully develop its
potential products or its failure to successfully commercialize its existing or
potential products will have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainties Related to Clinical Trials and Product Development
The Company is dependent upon the successful development of its potential
products. There can be no assurance that the Company will be permitted to
undertake additional or complete ongoing clinical trials of its potential
products within reasonable time periods or otherwise, that sufficient numbers of
patients can be accrued for such trials or that clinical trials will demonstrate
that the products tested are safe and effective. Development of the Company's
potential products is highly uncertain and unanticipated developments, clinical
and regulatory delays, adverse or unexpected side effects or inadequate
therapeutic efficacy could slow or prevent the successful completion of the
Company's product and technology development. Even if clinical trials are
successful, there can be no assurance that the Company will obtain regulatory
approval for any indication, that an approved product can be produced in
commercial quantities at reasonable costs or gain acceptance for use by
physicians, healthcare providers and consumers or that any potential products
will be successfully marketed at prices that would permit the Company to operate
profitably, the failure of any of which would have a material adverse effect on
the Company's business, financial condition and results of operations.
13
<PAGE>
Dependence on and Management of Existing and Future Corporate Alliances
The successful commercialization of the Company's existing and future
products will depend upon ProCyte's ability to enter into and effectively manage
numerous corporate partnerships. ProCyte currently promotes certain of its
products through specialty distributors. Other products and technology are
licensed for incorporation into products sold by others. In November 1997, the
Company entered into an exclusive worldwide supply and marketing agreement with
Osmotics Corporation ("Osmotics"), pursuant to which the Company granted
Osmotics the right to introduce the Company's copper-peptide-containing products
to the prestige skin care market. In December 1997, the Company entered into an
exclusive distribution agreement with the Bard Medical Division ("Bard") of C.R.
Bard, Inc. Pursuant to this agreement, Bard will be the exclusive supplier of
the Company's wound care products into the hospital, nursing home, and extended
care markets in the United States and Canada. Subsequent to the Bard agreement,
ProCyte entered into exclusive distribution agreements for the registration and
distribution of certain of its wound care products in certain foreign countries.
ProCyte plans to seek similar distribution partnerships in additional countries.
There can be no assurance that any of the Company's collaborators will perform
their obligations under their agreements with the Company or that the Company's
products or the products of others that incorporate the Company's products or
technology, will be successfully commercialized, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
There can be no assurance that the Company will be successful in
establishing corporate alliances in the future, or that it will be successful in
maintaining existing or any future corporate alliances. Moreover, there can be
no assurance that the interests and motivations of any corporate partner,
distributor or licensee would be or remain consistent with those of the Company,
or that such partners, distributors or licensees would successfully perform the
necessary technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Failure of any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Patent Position and Proprietary Rights
The patent positions of biotechnology, medical device and healthcare
products companies are often uncertain and involve complex legal and factual
questions, and the breadth of claims allowed in such patents cannot be
predicted. In addition, there is a substantial backlog of patents at the U.S.
Patent and Trademark Office that may delay the review and the potential issuance
of patents. The Company's success will depend to a significant degree on its
ability to obtain patents and licenses to patent rights, to maintain trade
secrets and to operate without infringing on the proprietary rights of others,
both in the United States and in other countries. The failure of the Company or
its licensors to obtain and maintain patent protection for the Company's
technology could have a material adverse effect on the Company.
ProCyte's success depends in part upon its ability to protect its products
and technology under intellectual property laws in the United States and abroad.
As of December 31, 1997, the Company had 18 issued United States patents
expiring between 2005 and 2014, and 132 issued foreign patents and patent
registrations. The patents relate to use of the Company's copper-based
technology for a variety of healthcare applications, and to the composition of
certain biologically active, synthesized compounds. The Company's strategy has
been to apply for patent protection for certain compounds and their discovered
uses that are believed to have potential commercial value in countries that
offer significant market potential. There can be no assurance that patent
applications
14
<PAGE>
relating to the technology used by the Company will result in patents being
issued. There can be no assurance that any patent issued to the Company will not
be subjected to further proceedings limiting the scope of the rights under the
patent or that such patent will provide a competitive advantage or will afford
protection against competitors with similar technology, or will not be
successfully challenged, invalidated or circumvented by competitors.
The Company's processes and potential products may conflict with patents
that have been or may be granted to competitors and others. As the
biotechnology, medical device and healthcare industries expand and more patents
are issued, the risk increases that the Company's processes and potential
products may give rise to claims that they infringe the patents of others. Such
other persons could bring legal actions against the Company claiming damages and
seeking to enjoin clinical testing, manufacturing and marketing of the affected
product or use of the affected process. Litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of proprietary
rights of others. If the Company becomes involved in such litigation, it could
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. In addition to any
potential liability for significant damages, the Company could be required to
obtain a license to continue to manufacture or market the affected product or
use the affected process. Costs associated with any licensing arrangement may
be substantial and could include ongoing royalties. There can be no assurance
that any license required under any such patent would be made available to the
Company on acceptable terms, if at all. If such licenses could not be obtained
on acceptable terms, the Company could be prevented from manufacturing and
marketing existing or potential products. Accordingly, an adverse determination
in such litigation could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon unpatented proprietary technology. There can
be no assurance that the Company can meaningfully protect its rights in such
unpatented technology, that any obligation to maintain the confidentiality of
such proprietary technology will not be breached by employees, consultants,
collaborators or others, or that others will not independently develop or
acquire substantially equivalent technology. To the extent that corporate
partners or consultants apply Company technological information independently
developed by them or by others to Company projects or apply Company technology
or know-how to other projects, disputes may arise as to the ownership of
proprietary rights to such information. Any failure to protect unpatented
proprietary technology, any the breach of obligations designed to protect such
technology or development of equivalent technology may have a material adverse
effect on the Company's business, financial condition and results of operations.
Uncertainty of Government Regulatory Requirements
The manufacture and marketing of ProCyte's products 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, record-keeping, 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>
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 trials,
and the filing of a product registration dossier such as a new drug application
or 510(k) medical device application with the FDA to obtain authorization to
market a product. The Company's products and product candidates may be
regulated by any of a number of divisions of the FDA. The process of obtaining
and maintaining regulatory approvals for clinical trials or for the
manufacturing or marketing of the Company's existing and potential products is
costly and time-consuming and is subject to unanticipated delays. There can be
no assurance as to the length of the clinical trial period or the number of
patients required to be enrolled in clinical trials in order to establish the
safety, efficacy and potency of therapeutic products. Accordingly, delays,
rejections or unexpected costs may be encountered based on changes in the policy
or regulations of the FDA or foreign governmental authorities during the period
of product development and regulatory review, which changes may result in
limitations or restrictions on the Company's ability to utilize its technology
or develop product candidates. Regulatory requirements ultimately imposed could
also adversely affect the ability of the Company to clinically test, manufacture
or market products. Furthermore, the Company or governmental authorities may
suspend clinical trials at any time if it is determined that the subjects
participating in such trials are exposed to unacceptable health risks. There
can be no assurance that the Company will not encounter these or other problems
in clinical trials that will cause the Company or governmental authorities to
delay or suspend such trials. Even if regulatory approval of a potential
product is obtained, such approval may entail limitations on the indicated uses
for which such product may be marketed, which may restrict the patient
population for which any product may be prescribed. In addition, a marketed
product is subject to continual FDA review. Later discovery of previously
unknown problems or failure to comply with the applicable regulatory
requirements may result in restrictions on marketing a product or withdrawal of
the product from the market, as well as possible criminal or civil sanctions.
In the United States, products that do not seek to make effectiveness
claims based on human clinical evaluation may be subject to review and
regulation under the FDA's cosmetic or 510(k) medical device guidelines.
Similar guidelines exist for such products in other countries. Such products,
which include wound care dressings, 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 approval or clearance to market a product from the
FDA or foreign regulatory bodies, 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 these regulations, which are subject to change at any time
without notice to the Company, ProCyte must continue to expend time, effort and
financial resources in production and quality control. In addition, ProCyte's
manufacturing plant is subject to regulations of 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 agencies. There can be no assurance that the Company's manufacturing
facility or its manufacturing operations will meet or continue to meet all
appropriate guidelines or to pass inspections by any government agency.
The Company also is or may become subject to various other federal, state,
local and foreign laws, regulations and policies relating to, among other
things, safe working conditions, good
16
<PAGE>
laboratory practices, animal welfare, and the use and disposal of hazardous or
potentially hazardous substances used in connection with research, development
and/or manufacturing.
Failure to obtain regulatory approvals for its product candidates or to
either attain or maintain compliance with cGMP or other manufacturing
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Intense Competition
Competition in the wound care, skin health and hair care markets is
intense. The Company's competitors include well-established pharmaceutical,
cosmetic and healthcare companies such as Bristol Myers Squibb's ConvaTec
division, Kendall Healthcare Company, Johnson and Johnson, L'Oreal and Revlon.
These competitors have substantially more financial and other resources, larger
research and development staffs, and more experience and capabilities in
researching, developing and testing products in clinical trials, in obtaining
FDA and other regulatory approvals, and in manufacturing, marketing and
distribution than the Company. In addition, a number of smaller companies are
developing or marketing competitive products, some of which may have an entirely
different approach than products being marketed or developed by the Company.
The Company's competitors may succeed in developing, obtaining patent protection
for, receiving FDA and other regulatory approvals for, or commercializing
products more rapidly than the Company. If the Company is successful in
commercializing its products, it will be required to be competitive with respect
to manufacturing efficiency and marketing capabilities, areas in which it has
very limited experience. The Company's competitors may develop new technologies
and products that are available for sale prior to the Company's potential
products or that are more effective that the Company's existing or potential
products. In addition, competitive products may be manufactured and marketed
more successfully than the Company's potential products. Such developments
could render the Company's existing or potential products less competitive or
obsolete, and could have a material adverse effect on the Company's business,
financial condition and results of operations.
The contract manufacturing service business is also highly competitive.
Competitors include major chemical and pharmaceutical companies, as well as
specialized biotechnology firms, smaller contract chemical manufacturers and
some universities. Many of these companies or institutions have greater
financial, technical and marketing resources than the Company.
Potential Volatility of Stock Price
The market prices for securities of healthcare, medical dressings,
pharmaceutical and biotechnology companies are subject to volatility, and the
market has from time to time experienced significant fluctuations that are
unrelated to the operations of the Company. ProCyte's market price has
fluctuated over a wide range since the Company's initial public offering in
1989. Announcements concerning the Company or its competitors, including
fluctuations in operating results, research and development program direction,
results of clinical trials, addition or termination of corporate alliances,
technology licenses, clearance or approval to market products, announcements of
technological innovations or new products by the Company or its competitors,
changes in government regulations, healthcare reform, developments in patent or
other proprietary rights of the Company or its competitors, litigation
concerning business operations or intellectual property, or public concern as to
safety of products, as well as changes in general market conditions and mergers
and acquisitions, may have a significant effect on the market price of ProCyte's
common stock.
17
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders for vote during first
quarter 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(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 8, 1998 By: /s/ John F. Clifford
-------------------------------------
John F. Clifford, President and CEO
Date: May 8, 1998 By: /s/ Jon Sortland
-------------------------------------
Jon Sortland, Manager of Accounting
19
<PAGE>
EXHIBIT INDEX
Exhibit Number Title
-------------- -----
27 Financial Data Schedule
20
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,869,987
<SECURITIES> 6,913,139
<RECEIVABLES> 226,357
<ALLOWANCES> 0
<INVENTORY> 1,944,267
<CURRENT-ASSETS> 14,215,049
<PP&E> 8,021,034
<DEPRECIATION> 2,563,286
<TOTAL-ASSETS> 20,228,277
<CURRENT-LIABILITIES> 554,700
<BONDS> 0
0
0
<COMMON> 82,935,482
<OTHER-SE> (63,367,591)
<TOTAL-LIABILITY-AND-EQUITY> 20,228,277
<SALES> 236,460
<TOTAL-REVENUES> 439,076
<CGS> 127,543
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<INCOME-PRETAX> (1,048,607)
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<INCOME-CONTINUING> (1,048,607)
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