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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 September 30, 1999
Commission File Number 0-18044
PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)
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Washington 91-1307460
--------------
(State of incorporation) (I.R.S. Employer Identification No.)
8511 154th Avenue N.E., Redmond, WA 98052
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (425) 869-1239
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 25, 1999, there were issued and outstanding 15,400,850 shares of
common stock, par value $.01 per share.
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ProCyte Corporation
INDEX
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Part I - Financial Information .................................................................. 3
Item 1. Condensed Financial Statements............................................................ 3
Balance Sheets - as of September 30, 1999 and December 31, 1998 (unaudited)..................... 3
Statements of Operations - three and nine months ended September 30, 1999 and 1998 (unaudited).. 4
Statements of Cash Flows - nine months ended September 30, 1999 and 1998 (unaudited)............ 5
Statements of Stockholders' Equity - nine months ended September 30, 1999 and 1998 (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................................ 20
Part II - Other Information........................................................................ 20
Item 1. Legal Proceedings......................................................................... 20
Item 2. Change in Securities...................................................................... 20
Item 3. Defaults Upon Senior Securities........................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders....................................... 20
Item 5. Other Information......................................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................................... 21
Signatures......................................................................................... 21
EXHIBIT INDEX...................................................................................... 22
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2
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Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of September 30, 1999 and December 31, 1998 (unaudited)
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September 30, 1999 December 31, 1998
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Assets
Cash, cash equivalents and securities available for sale....... $ 4,377,937 $ 6,938,981
Accounts receivable, net of reserve for uncollectable accounts
of $65,421 and $54,948 at September 30, 1999 and December
31, 1998, respectively........................................ 524,004 692,196
Other current assets........................................... 899,255 574,967
-------------------------------------------------
Total current assets......................................... 5,801,196 8,206,144
Raw materials and work in process, net of reserve for excess
and obsolete inventory of $300,000 at September 30, 1999 and
December 31, 1998............................................. 1,466,010 1,493,557
Property and equipment, net of accumulated depreciation of
$3,468,901 and $3,008,159 at September 30, 1999 and December
31, 1998, respectively........................................ 4,777,038 5,163,967
Intangible assets, net of accumulated amortization of $460,094
and $281,829 at September 30, 1999 and December 31, 1998,
respectively.................................................. 3,506,348 3,159,101
Other assets................................................... 231,043 279,609
-------------------------------------------------
Total Assets $ 15,781,635 $ 18,302,378
=================================================
Liabilities and Stockholders' Equity
Total current liabilities...................................... $ 391,860 $ 497,611
Other liabilities.............................................. 138,003 125,217
-------------------------------------------------
Total liabilities............................................ 529,863 622,828
Common stock and additional paid in capital.................... 84,887,812 84,465,480
Accumulated deficit............................................ (69,636,040) (66,785,930)
-------------------------------------------------
Stockholders' equity......................................... 15,251,772 17,679,550
-------------------------------------------------
Total Liabilities and Stockholders' Equity $ 15,781,635 $ 18,302,378
=================================================
</TABLE>
See notes to financial statements
3
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Statements of Operations - three and nine months ended September 30, 1999 and
1998 (unaudited)
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Three months ended September 30 Nine months ended September 30
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues
Product sales............................ $ 826,622 $ 640,341 $ 2,746,184 $ 1,485,927
Contract manufacturing................... 105,980 123,280 407,730 255,267
Licenses, royalties and other............ 16,313 7,912 114,413 20,246
--------------------------------------------------------------------------
Total revenue............................ 948,915 771,533 3,268,327 1,761,440
Cost of product sales.................... 321,565 290,990 1,064,512 634,779
--------------------------------------------------------------------------
627,350 480,543 2,203,815 1,126,661
Operating Expenses
Selling, general and administrative...... 1,085,180 1,241,268 3,896,452 3,182,356
Research and development................. 410,125 492,743 1,353,195 1,605,931
--------------------------------------------------------------------------
Total expenses........................... 1,495,305 1,734,011 5,249,647 4,788,287
--------------------------------------------------------------------------
Operating Loss........................... (867,955) (1,253,468) (3,045,832) (3,661,626)
Interest Income.......................... 45,798 119,544 195,722 438,243
--------------------------------------------------------------------------
Net loss................................. ($ 822,157) ($1,133,924) ($2,850,110) ($3,223,383)
==========================================================================
Net loss per common share.................. ($0.05) ($0.08) ($0.19) ($0.23)
Weighted average number of common shares
used in computing net loss per common
share..................................... 15,400,850 14,468,678 14,858,285 13,992,016
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See notes to financial statements
4
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Statements of Cash Flows - nine months ended September 30, 1999 and 1998
(unaudited)
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Nine months ended September 30,
1999 1998
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Operating Activities
Net Loss..................................................... ($2,850,110) ($3,223,383)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 639,007 589,358
(Gain) loss on sale of securities........................... 6,980 (2,841)
Stock issued in payment of expenses......................... 172,332 15,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.................. 168,192 (96,289)
Decrease (increase) in other current assets................. (324,288) 176,106
Decrease (increase) in raw materials and work in process.... 27,547 (202,977)
Increase in other non-current assets........................ (3,748) -
Decrease in current liabilities............................. (105,751) (137,715)
Increase in other liabilities............................... 12,786 100,822
-------------------------------------------------
Net cash used in operating activities..................... (2,257,053) (2,781,919)
Investing Activities
Acquisition of NextDerm, Inc. (1999) and purchase of assets
of HumaTech Corp. (1998).................................... (285,000) (1,925,000)
Purchase of property and equipment........................... (64,325) (139,637)
Purchase of securities....................................... - (499,922)
Proceeds from sale or maturity of securities................. 3,915,605 5,884,734
Decrease in security deposit................................. 52,314 206,014
-------------------------------------------------
Net cash provided by investing activities................. 3,618,594 3,526,189
-------------------------------------------------
Net Increase in Cash and Cash Equivalents................. 1,361,541 744,270
Cash and Cash Equivalents:
At Beginning of Period.................................... 2,003,896 3,003,524
-------------------------------------------------
At End of Period.......................................... $ 3,365,437 $ 3,747,794
=================================================
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See notes to financial statements
5
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Statements of Stockholders' Equity - nine months ended September 30, 1999 and
1998 (unaudited)
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Common Stock Additional Accumulated
---------------------------------- paid-in
Shares Par Value Capital Deficit Total
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Balance - January 1, 1998........ 13,364,958 $133,650 $82,801,830 ($62,318,983) $20,616,497
Shares issued on April 27, 1998
in connection with the purchase
of the assets of HumaTech
Corporation..................... 1,088,435 10,884 1,489,116 1,500,000
Shares issued on July 1, 1998
for second quarter 1998
retainer under the 1998
Non-employee Director stock plan 15,285 153 14,847 15,000
Net loss......................... (3,223,383) (3,223,383)
-------------------------------------------------------------------------------------------
Balance - September 30, 1998..... 14,468,678 $144,687 $84,305,793 (65,542,366) $18,908,114
===========================================================================================
Balance - January 1, 1999........ 14,489,803 $144,898 $84,320,582 ($66,785,930) $17,679,550
Shares issued on January 4, 1999
for fourth quarter 1998
retainer under the 1998
Non-employee Director stock plan 32,395 324 14,676 15,000
Shares issued on April 1, 1999
for first quarter 1999 retainer
under the 1998 Non-employee
Director stock plan............. 25,260 253 14,747 15,000
Shares issued on May 26, 1999
for the 1998-99 HumaTech
earn-out payments............... 236,748 2,367 127,965 130,332
Shares issued on June 30, 1999
for the acquisition of
NextDerm, Inc................... 600,000 6,000 244,000 250,000
Shares issued on July 1, 1999
for second quarter 1999
retainer under the 1998
Non-employee Director stock plan 16,644 166 11,834 12,000
Net Loss......................... (2,850,110) (2,850,110)
-------------------------------------------------------------------------------------------
Balance - September 30, 1999..... 15,400,850 $154,008 $84,733,804 ($69,636,040) $15,251,772
===========================================================================================
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See notes to financial statements
6
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ProCyte Corporation
Notes to Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements of ProCyte
Corporation ("ProCyte" or the "Company") for the three- and nine-month periods
ended September 30, 1999 and 1998 have been prepared by the Company in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Pursuant to such rules and regulations, the condensed financial statements do
not include all of the information and footnotes required by generally accepted
accounting principles for audited financial statements. Accordingly, this
financial information should be read in conjunction with the complete audited
financial statements, including the notes thereto, which are included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. 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, 1999.
2. Investments
At September 30, 1999, the Company's investments consisted entirely of US
Agency securities and US Treasury notes. At September 30, 1999, the cost and
estimated market value of the investments was $1,012,500 and all of the
investments matured in less than one year. There were no material unrealized
gains or losses on investments at September 30, 1999.
3. Inventories
Inventory is valued at the lower of cost or market. At September 30, 1999,
the finished goods inventory was valued at $836,834 and the related reserve
remained at $80,000. Also at that date raw materials were valued at $584,774
and work in process was valued at $1,181,236.
4. Stockholders' Equity
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
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Shares subject to Weighted average
option exercise price
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Balance - January 1, 1998......................... 1,304,374 $2.94
Granted.......................................... 647,500 $1.30
Exercised........................................ - -
Canceled......................................... (413,814) $2.86
-------------------------------------------------
Balance - September 30, 1998...................... 1,538,060 $2.28
=================================================
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7
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<CAPTION>
Shares subject to Weighted average
option exercise price
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Balance - January 1, 1999......................... 1,618,061 $2.18
Granted.......................................... 830,000 $0.81
Exercised........................................ - -
Canceled......................................... (596,167) $1.70
-----------------------------------------------
Balance - September 30, 1999...................... 1,851,894 $1.72
================================================
Currently exercisable............................. 750,411 $2.90
=================================================
</TABLE>
During the three-month period ended September 30, 1999, the Compensation
Committee of the Company's Board of Directors awarded incentive stock options
and non-qualified stock options to employees and consultants to purchase 451,500
shares of common stock under the Company's 1989 Restated Stock Option Plan. The
1989 plan does not permit grants of additional options after September 15, 1999.
At September 30, 1999 there remained 324,500 shares of the Company's common
stock reserved for issuance under the Company's 1996 Stock Option Plan.
At September 30 there were 100,000 shares of the Company's common stock
reserved for issuance under the common stock warrants issued on May 26, 1999.
The warrants oblige the Company to issue 33,334 shares at $0.6875 per share, the
market price on the grant date, 33,333 shares at $1.6875 and 33,333 shares at
$2.6875. Each of the three warrants has a five year life and vests one-third on
the grant date, one-third six months after the grant date, and one-third twelve
months after the grant date.
8
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The entire discussion in this report, as well as other management
discussion of the Company's goals and expectations, 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 rate of market acceptance of the
Company's products, the status of competing products, and the Company's ability
to obtain and defend patent and intellectual property rights and to successfully
develop and market the Company's existing and future 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
During the third quarter of 1999 ProCyte negotiated a supply agreement with
Advicare, Inc, a newly formed company offering products and services to plastic
and cosmetic surgeons. The agreement makes ProCyte the primary Advicare
supplier of skin health and hair care products. The initial order for products
sold under the agreement was received by ProCyte in early October. In
connection with this agreement Susan Browner and Ken Tapman left ProCyte to join
Advicare and Ms. Browner also resigned from the ProCyte Board of Directors.
During the first nine months of 1999 ProCyte continued to develop and
market its skin health and hair care products, introduced new packaging for its
therapeutic skin health products, introduced a line of new anti-aging products,
and continued to work with its licensees to promote sales of its wound care
products. As the Company's product line has expanded, it has continued to focus
its direct efforts on specialty skin health and wound care sectors - marketing
its products primarily to dermatologists, plastic surgeons and cosmetic
surgeons.
The Company has continued with its approach to marketing the GraftCyte(TM)
line of copper peptide containing wound care products for use following hair
restoration surgery. ProCyte is the only company to provide a line of products
that address the importance of wound repair in the hair transplant procedure.
The Company's GraftCyte(TM) products are promoted through its own sales force
and specialty distributors.
The Company has also continued to emphasize its Complex Cu3(TM) Intensive
Repair Creme, a product used to treat patients following chemical peels,
microdermabrasion and laser treatments, as a complement to its line of
prescription and over-the-counter topical drugs, sun protection and anti-aging
skin care products. The Complex Cu3(TM) products provide a comprehensive
approach to post-procedure care and allow the Company to differentiate its line
of skin care products on the basis of its proprietary copper peptide technology.
In January 1999 the Company and Neutrogena signed a product study agreement
covering the evaluation of ProCyte's proprietary copper peptide technology for
inclusion in potential products that Neutrogena would sell in the worldwide
consumer skin care
9
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market. During the first quarter, ProCyte began shipping its skin care products
in redesigned packaging including a new icon and the tagline- "Healing the
Wounds of Time(TM)." During the second quarter the Company acquired NextDerm,
Inc. and with it the rights to several skin care products in various stages of
development. Also at the end of the second quarter the Company launched its
Neova(TM) Therapy line of anti-aging products in response to demand from
physician customers. These products are distributed using the Company's own
sales force, contract sales representatives and specialty distributors. During
the first quarter of 1999 the Company signed a distribution agreement with
Sigmacon Medical Products of Toronto, Canada, covering the Company's skin and
hair care products in the Canadian dermatology and cosmetic surgery markets.
ProCyte has a wound care distribution agreement with the Bard Medical
Division ("Bard") of C.R. Bard, Inc. which gives Bard the right to distribute
the Company's wound care products, including Iamin(R) Hydrating Gel, Iamin(R)
Wound Cleanser, and OsmoCyte(R) Pillow Wound Dressings, in the hospital, nursing
home and extended care markets in the United States. The exclusive nature of
this agreement is based on increasing minimum annual purchase requirements, and
Bard's ability to meet the requirements for 1999 is subject to considerable
uncertainty. ProCyte also has a distribution agreement with Tanox Pharma
International, Inc. for Iamin(R) Hydrating Gel and OsmoCyte(R) Pillow Wound
Dressings in China, Taiwan and other Asian countries, and with Merck KGaA for
Iamin(R) Hydrating Gel in Latin America and South Africa. Iamin(R) Hydrating
Gel has been approved in China and Taiwan, and the process of obtaining approval
in various Latin American nations is proceeding on schedule.
The Company markets its Tricomin(R) line of triamino copper complex
containing hair care products primarily to physicians. Tricomin(R) shampoos,
conditioners, and follicle therapy solution are positioned to participate in the
rapidly growing $1.5 billion United States hair care market as a program for the
maintenance of thinning hair for both men and women. Hair follicles require
high concentrations of biological copper and the Tricomin(R) products deliver
copper along with amino acids for nourishing and stimulating the hair and scalp
for improved health, strength, and appearance. The Company has initiated a
series of consumer advertisements focused specifically on the hair care needs
and concerns of the aging babyboomer population and has begun selling the
Tricomin(R) products directly to consumers through its web site at
www.tricomin.com. In January 1999 the Company and Neutrogena signed an option
and product study agreement covering the evaluation of the Company's proprietary
triamino copper technology for use in potential consumer hair care products to
be marketed worldwide by Neutrogena.
Operating Losses
The Company has incurred operating losses since its inception due to the
marketing expense of product launches and the costs of supporting research,
development and clinical studies of its proprietary technology at a time when
sales of the Company's products and other revenues do not yet exceed operating
expenses. At September 30, 1999 the Company's accumulated deficit was
approximately $69.6 million. The Company expects to incur additional operating
losses until its product lines have been further expanded and have achieved
market acceptance.
Revenue
During the nine-month period ended September 30, 1999 ProCyte generated
total operating revenue of $3,268,327 from product sales, contract manufacturing
and royalties. Comparable
10
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revenues were $1,761,440 for the nine-month period ended September 30, 1998.
Total operating revenue was $948,915 and $771,533 for the third quarter of 1999
and 1998, respectively.
Revenue from product sales was $2,746,184 during the nine-month period
ended September 30, 1999, up $1,260,257 or 84.8% from $1,485,927 during the
comparable nine-month period in 1998. Revenue from product sales was $826,622
and $640,341 for the third quarter of 1999 and 1998, respectively, an increase
of $186,281 or 29.1%. The increase for both the quarter and the nine-month
period was primarily a result of the expanded product line obtained through the
acquisition of HumaTech Corporation on April 27, 1998 and the introduction of
new products incorporating the Company's proprietary copper peptide technology.
Contract manufacturing revenue was $407,730 during the nine-month period
ended September 30, 1999, an increase of $152,463 or 59.7% from $255,267 during
the comparable nine-month period in 1998. Contract manufacturing revenue was
$105,980 and $123,280 for the third quarter of 1999 and 1998, respectively, a
decrease of $17,300 or 14%. The increase for the nin-month period reflects
additional contracts undertaken for customers. The decrease for the quarter
reflects differences in the timing of completion of contracts. The Company is
considering the feasibility of disposing of its contract manufacturing
operations and the facility used for such purposes and has retained a financial
advisor to assist it with this and related matters. See "Important Factors
Regarding Forward-Looking Statements - Uncertainties related to Contract
Manufacturing."
Revenue from royalties and licenses in 1999 includes fees from the product
study and option agreements with Neutrogena recognized during the first quarter.
No such income was earned during the first three quarters of 1998.
Interest income was $195,722 during the nine-month period ended September
30, 1999, down $242,521 or 55.3% from $438,243 during the comparable period in
1998. Interest income was $45,798 and $119,544 during the third quarter of 1999
and 1998, respectively, a decrease of $73,746 or 61.7%. The decrease in
interest income for both the quarter and the nine-month period was primarily a
result of reduced funds available for investment.
Expenses
The cost of product sales was $1,064,512 (38.8% of product sales) for the
nine-month period ended September 30, 1999, an increase of $429,733 or 67.7%
from $634,779 (42.7% of product sales) during the comparable period in 1998.
The cost of product sales was $321,565 and $290,990 during the third quarter of
1999 and 1998, respectively, an increase of $30,575 or 10.5%. The increase in
the cost of products sold for both the quarter and the nine-month period
reflects the growth in the number units sold and the change in the mix between
sales of generally lower margin skin health products and generally higher margin
products based on proprietary technology.
Selling, general and administrative expenses were $3,896,452 during the
nine-month period ended September 30, 1999, an increase of $714,096 or 22.4%
from $3,182,356 during the comparable period in 1998. Selling, general and
administrative expenses were $1,085,180 and $1,241,268 during the third quarter
of 1999 and 1998, respectively, a decrease of $156,088 or 12.6%. The increase
for the nine-month period reflects the higher level of sales support required
for new products and the cost of entering the consumer hair care market. The
decrease for the quarter principally reflects the departure of two senior
managers and roll-out of the Tricomin(R) line in the third quarter of 1998. The
Company anticipates that during the remainder of 1999 expenditures will remain
at or near current levels in proportion to product sales.
11
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Research and development expenses were $1,353,195 during the nine-month
period ended September 30, 1999, down $252,736 or 15.7% from $1,605,931 during
the comparable period in 1998. Research and development expenses were $410,125
and $492,743 during the third quarter of 1999 and 1998, respectively, a decrease
of $82,618 or 16.8%. The decrease for both the quarter and the nine-month
period resulted from the completion of research projects and studies and a
scaling back of research activities. The Company anticipates that expenditures
for product development will remain at or near current levels during the
remainder of 1999.
Liquidity and Capital Resources
The Company has relied primarily on equity financing, product sales,
contract manufacturing, interest income and corporate partnerships to fund its
operations and capital expenditures. At September 30, 1999, the Company had
approximately $4.4 million in cash, cash equivalents and securities available
for sale, as compared to $6.9 million at December 31, 1998. The $2.5 million
decrease in cash reflects primarily the $2.25 million cash outflow from
operations and the payment of $250,000 for the acquisition of NextDerm, Inc.
The Company expects that its operating cash needs will continue at similar
levels in future periods.
The decrease of $168,192 in accounts receivable from December 31, 1998 to
September 30, 1999 reflects the receipt of royalties accrued at year-end and an
increase in balances due from customers. The increase in other current assets
from December 31, 1998 to September 30, 1999 includes an increase of $267,501 in
finished goods inventory, primarily as a result of new products and in support
of higher sales volumes, and an increase of $56,787 in prepaid expenses.
Since March 25, 1999 the Company's common stock has traded on the NASD OTC
bulletin board. See "Important Factors Regarding Forward-Looking Statements -
NASDAQ National Market System listing."
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 for the next twelve months. 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 are 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 potential
products. The Company will depend upon product revenues contract manufacturing,
interest income, asset redeployment, equity financing, and funding from
corporate partnerships to meet its future capital needs. The Company has
engaged a financial advisor to assist it with matters including disposition of
assets and financing alternatives. There can be no assurance that additional
funds will be available as needed or on terms that are acceptable to the
Company. In addition, the Company's ability to raise funds is likely to be
adversely affected if it is unable to regain a listing on a national securities
exchange. 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 and manufacturing and
administrative programs, or dispose of assets or technology. See "Important
Factors Regarding Forward-Looking Statements - Need for Additional Capital",
"Important Factors Regarding Forward-Looking Statements - Uncertainties related
to Contract Manufacturing", and "Important Factors Regarding Forward-Looking
Statements - NASDAQ National Market System listing."
12
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Year 2000 Software Issue
The Company has completed assessment, remediation and testing of its
information technology ("IT") systems for year 2000 related problems. The
Company has also completed similar assessment, remediation and testing of its
non-IT systems. The Company did not incur any material incremental costs in
this regard. The Company does not plan to conduct further assessment,
remediation or testing of its IT or non-IT systems and consequently does not
expect to incur any additional year 2000 related costs. There can be no
assurance, however, that the Company has accurately assessed the need for
software and computer upgrades or modifications and if such upgrades and
modifications are not made, or if they are not made on a timely basis, year 2000
problems could have a material impact on the operations of the Company.
Funding for remediation of both IT and non-IT systems came from funds
provided by operations. No other IT projects were deferred as a result of year
2000 remediation projects.
The Company believes that it is not dependent on any single source of
supply for its products and consequently has not surveyed and does not intend to
survey suppliers or other third parties concerning their year 2000 preparedness.
The Company has reviewed the public statements made by its significant customers
and service providers (including providers of financial services, utilities and
telecommunications services,) all of which assert that their systems are year
2000 compliant or are expected to be year 2000 compliant by the end of 1999. In
the Company's judgment the most reasonably likely worst case scenario would be
short-term disruptions of the Company's supply chain and customer payments. The
Company has arranged for stockpiles of certain raw materials to attempt to
mitigate the risk of short-term supply chain disruption and expects that its
financial position will be adequate to accommodate a short-term disruption of
customer payments. The Company has not developed a formal contingency plan for
such disruptions and does not presently believe that such a formal plan is
warranted. There can be no assurance that the Company's efforts will mitigate
the risk of disruptions and significant failures of customers or other third
parties could materially affect the Company's business.
The Company believes it is taking the necessary steps regarding year 2000
issues with respect to matters within the Company's control as it seeks to
minimize the impact of year 2000 issues on its business. However, despite these
steps there can be no assurance that the systems on which the Company relies are
year 2000 compliant or can be made year 2000 compliant in a timely manner, that
the Company will not incur significant additional expenses in dealing with year
2000 issues, that the third parties on which the Company's business depends will
avoid year 2000 issues, or that the year 2000 issues will not materially
adversely affect the Company's business, financial condition or results of
operations.
Important Factors Regarding Forward-Looking Statements
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
The Company launched its first product based on its proprietary copper
peptide technology in 1996, launched additional products based on that
technology in 1997 and 1998 and will continue to launch new copper peptide based
products in 1999. To date, however, the Company has generated relatively minor
revenues from sales of products based on its proprietary technology and there
can be no assurance that the Company will be able to generate sufficient product
sales from those products to achieve a profitable level of operations. As of
September 30, 1999, the Company's accumulated
13
<PAGE>
deficit was approximately $69.6 million. The Company expects to incur additional
operating losses at least through early 2000. In addition to sales of products
based on its proprietary copper peptide technology, the Company's revenues have
historically included sales of non-proprietary products, license fees and
royalties, revenue from contract research and manufacturing, and interest
income. The Company's ability to achieve a consistent, profitable level of
operations is dependent in large part on 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 products and technology, of which there can be no assurance. In
addition, payments under corporate partnerships and licensing arrangements, if
any, may 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 at least
through 1999. The Company may require substantial additional funds to expand or
enhance its sales and marketing activities and to continue product development.
The Company's future capital requirements will depend on numerous factors,
including its efforts, and the efforts of its collaborative partners, to
commercialize its products; continued progress in the Company's research and
development programs; the results of research and development activities;
relationships with existing and future corporate collaborators, if any;
competing technological and market developments; the costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of commercialization
activities; and other factors. At September 30, 1999 the Company had cash, cash
equivalents and securities available for sale of $4.4 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 for the next twelve
months. There can be no assurance that the underlying assumed levels of revenue
and expense will prove accurate. Whether or not these assumptions prove to be
accurate, the Company may need to raise additional capital. The Company has
engaged a financial advisor to assist it with matters including disposition of
assets and financing alternatives. The Company may be required to seek
additional funding through public or private financing, including equity
financing, or through collaborative arrangements. Adequate funds for these
purposes, whether obtained through financial markets or from collaborative or
other arrangements with corporate partners or other sources, may not be
available when needed or may not be available on terms favorable to the Company,
if at all. If issuing equity securities raises additional funds, dilution to
existing shareholders will result. In addition, in the event that additional
funds are obtained through arrangements with collaborative partners, such
arrangements may require the Company to relinquish 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, to sell assets, 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 or asset sales might be less favorable than if the Company were
negotiating from a stronger position. Moreover, if funding is insufficient at
any time in the future, and the Company's existing funds are depleted, the
Company may be required to cease operations.
14
<PAGE>
NASDAQ National Market System listing; Application of Rule 15g-9 and Penny Stock
Rules
Since March 25, 1999 the Company's Common Stock has traded on the NASD OTC
Bulletin Board. The Company had requested a continued NASDAQ National Market
System listing notwithstanding its failure to meet the NASDAQ minimum bid price
requirement and presented its plan to return to compliance with that requirement
at a hearing with NASDAQ officials held on February 12, 1999. On March 24, 1999
the Company was informed of the determination by the NASDAQ Listing
Qualifications Panel that Company's securities should be delisted. The Company
requested a review of this determination and on July 26, 1999 it was informed
that the request would not be considered. Because real-time price information
may no longer be available, an investor is likely to find it more difficult to
dispose of, or obtain accurate quotations on the market value of, the Company's
securities.
In addition, purchases and sales of the Company's securities may be subject
to Rule 15g-9 of the Exchange Act. This Rule imposes various sales practice
requirements on broker-dealers who sell securities governed by the Rule to
persons other than established customers and accredited investors (generally
institutions with assets exceeding $5 million or individuals with a net worth
exceeding $1 million or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by Rule 15g-9, the broker-dealer
must specially determine the purchaser's suitability and obtain the purchaser's
written consent before the sale. Application of this Rule is likely to
adversely affect the ability of broker-dealers to sell the Company's securities,
the salability of the securities in the secondary market and the ability of the
Company to raise funds.
The Company's securities may also become subject to penny stock rules,
which could have a material adverse effect on their market liquidity. The
Securities and Exchange Commission regulates broker-dealer practices in
connection with transactions in "penny stocks," which generally are equity
securities priced at less than $5.00 per share (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that the exchange or system gives current price and volume
information). The penny stock rules require a broker-dealer, before trading in
a penny stock not exempt from the rules, to give the customer a standardized
document providing information about penny stocks and the risks in the penny
stock market, current bid and offer quotations for the penny stock, and a
statement of the compensation of the broker-dealer and its salesperson in the
transaction. The broker dealer must also provide monthly account statements
showing the market value of each penny stock held in the customer's account. If
the Company's common stock continues to trade below the $5.00 per share
threshold it may fall within the definition of penny stocks. If the penny stock
rules were to apply, these disclosure requirements are likely to reduce the
level of trading activity in the secondary market for the Company's securities
and make selling the securities more difficult for an investor.
Uncertainties Related to Contract Manufacturing
Since inception, a substantial portion of the Company's revenues have been
derived from contract manufacturing 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 commercialize 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. Contract
15
<PAGE>
manufacturing projects, and the revenue derived from them, may be subject to
significant fluctuations in both timing and size. There can be no assurance that
contract revenues in the future will be significant.
The Company is considering the feasibility of disposing of its contract
manufacturing operations and the facility used for such purposes and has engaged
a financial advisor to assist it with this and related matters. Such a
transaction may not be feasible on a timely basis or may not be feasible with
terms acceptable to the Company, and there can be no assurance that such a
transaction will ever be successfully completed.
Uncertainties Related to Product Development
From the Company's inception in 1986 until it launched its first commercial
product in 1996, substantially all of its resources were dedicated to the
research and development of wound healing and hair health applications of its
topically administered copper peptide compounds. To date the Company has
generated relatively minor revenues from sales of products based on its
proprietary copper peptide technology. There can be no assurance that the
Company's current products or potential products will be successfully
commercialized and accepted for use by physicians, healthcare providers and
consumers.
The Company is dependent upon the successful development of its current and
potential products. 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. There can be no assurance that the Company will obtain regulatory
approval, 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.
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
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 products containing the Company's copper peptide technology
to the prestige skin care market. In December 1997, the Company entered into a
wound care distribution agreement with the Bard Medical Division ("Bard") of
C.R. Bard, Inc. Pursuant to this agreement, Bard is the exclusive supplier of
the Company's wound care products to the hospital, nursing home and extended
care markets in the United States. The exclusive nature of this agreement is
based on increasing minimum annual purchase requirements, and Bard's ability to
meet the requirements for 1999 is subject to considerable uncertainty. ProCyte
has also entered into similar agreements for the registration and distribution
of certain of its wound care products in the Far East and Latin America with
Tanox Pharma International, Inc. and Merck KGaA, respectively. During the first
quarter of 1999 the Company signed a distribution agreement with Sigmacon
Medical Products of Toronto, Canada, covering the Company's skin and hair care
products in the Canadian dermatology and cosmetic
16
<PAGE>
surgery markets. On September 1, 1999 the Company signed a supply agreement with
Advicare, Inc. making it the primary Advicare supplier of skin health and hair
care products. ProCyte plans to seek similar distribution partnerships in
additional countries as well as alliances for development, manufacturing,
marketing and distribution of products for the consumer market. Toward this end,
in January 1999 the Company and Neutrogena signed an option and product study
agreement covering the evaluation of the Company's proprietary triamino copper
technology for use in potential consumer hair care products to be marketed
worldwide by Neutrogena, and a product study agreement covering the evaluation
of ProCyte's proprietary copper peptide technology for inclusion in potential
products that Neutrogena would sell in the worldwide consumer skin care market.
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 US
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 September 30, 1999, the Company had 18 issued United States patents
expiring between 2005 and 2013, and numerous issued foreign patents and patent
registrations. The patents relate to use of the Company's copper-based
technology for a variety of healthcare applications, and to the composition of
certain biologically active, synthesized compounds. The Company's strategy has
been to apply for patent protection for certain compounds and their discovered
uses that are believed to have potential commercial value in countries, which
offer significant market potential. There can be no assurance that patent
applications relating to the technology used by the Company will result in
patents being issued. There can be no assurance that any patent issued to the
Company will not be subjected to further proceedings limiting the scope of the
rights under the patent or that such patent will provide a competitive advantage
or will afford protection against competitors with similar technology, or will
not be successfully challenged, invalidated or circumvented by competitors.
17
<PAGE>
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 or any breach of obligations designed to protect such
technology or development of equivalent technology may have a material adverse
effect on the Company's business, financial condition and results of operations.
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 cosmetic
products and medical devices. Product development and approval or clearance
within the regulatory framework requires a number of years and involves the
expenditure of substantial resources.
In order to obtain FDA clearance to market a new 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 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 the manufacturing
or marketing of the Company's existing and potential products is costly and
time-consuming and is subject to unanticipated delays. Accordingly,
18
<PAGE>
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. 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 and certain 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 applications
submitted to the FDA or similar agencies in other countries will receive
clearance to be marketed, or that the labeling claims sought will be approved,
or that, if cleared, such products will be commercially successful.
In addition to obtaining approval or clearance from the FDA or foreign
regulatory bodies to market a product, the prospective manufacturer's quality
control and manufacturing procedures must conform to current good manufacturing
practices ("cGMP") guidelines, or ISO 9000 standards, when appropriate. In
complying with these regulations, which are subject to change at any time
without notice to the Company, ProCyte must continue to expend time, effort and
financial resources in production and quality control. In addition, ProCyte's
manufacturing plant is subject to the regulations of and inspections by other
foreign, federal, state or local agencies, such as local and regional 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 laboratory practices, and the use and
disposal of hazardous or potentially hazardous substances used in connection
with research, development and 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 and
BioMatrix divisions, Johnson and Johnson, Obagi and Allergan. 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
19
<PAGE>
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 and commercializing products or
obtaining patent protection or other regulatory approvals for 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 than 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
None
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
None.
Item 3 - Defaults Upon Senior Securities
None.
20
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Effective July 12, 1999 Ms. Susan Browner, a Director and an officer of the
Company, resigned from her positions with ProCyte Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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: October 28, 1999 By: /s/ John F. Clifford
------------------------------------
John F. Clifford, President and CEO
Date: October 28, 1999 By: /s/ Jerry Scott
--------------------------------------
Jerry P. Scott, Vice President and CFO
21
<PAGE>
EXHIBIT INDEX
Exhibit Number Title
-------------- -----
27 Financial Data Schedule
22
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,365,437
<SECURITIES> 1,012,500
<RECEIVABLES> 589,425
<ALLOWANCES> (65,421)
<INVENTORY> 756,834
<CURRENT-ASSETS> 5,801,196
<PP&E> 8,245,939
<DEPRECIATION> (3,468,901)
<TOTAL-ASSETS> 15,781,635
<CURRENT-LIABILITIES> 391,860
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<COMMON> 154,008
<OTHER-SE> 15,097,764
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