<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1999
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.)
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 20, 1999, there were issued and outstanding 14,547,458 shares of
common stock, par value $.01 per share.
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ProCyte Corporation
INDEX
<TABLE>
<S> <C>
Part I - Financial Information............................................................ 3
Item 1. Condensed Financial Statements.................................................. 3
Balance Sheets - as of March 31, 1999 and December 31, 1998 (unaudited)............... 3
Statements of Operations - three months ended March 31, 1999 and 1998 (unaudited)..... 4
Statements of Cash Flows - three months ended March 31, 1999 and 1998 (unaudited)..... 5
Statements of Stockholders' Equity - three months ended March 31, 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...................... 19
Part II - Other Information............................................................... 19
Item 1. Legal Proceedings............................................................... 19
Item 2. Change in Securities............................................................ 19
Item 3. Defaults Upon Senior Securities................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............................. 19
Item 5. Other Information............................................................... 20
Item 6. Exhibits and Reports on Form 8-K................................................ 20
Signatures................................................................................ 20
EXHIBIT INDEX............................................................................. 21
</TABLE>
2
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Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of March 31, 1999 and December 31, 1998 (unaudited)
<TABLE>
<CAPTION>
------------------------------------------------
March 31, 1999 December 31, 1998
------------------------------------------------
<S> <C> <C>
ASSETS
Cash, cash equivalents and securities available for sale....... $ 6,372,795 $ 6,938,981
Accounts receivable, net of reserve for uncollectable accounts
of $54,948 at March 31, 1999 and December 31, 1998............ 655,667 692,196
Other current assets........................................... 620,340 574,967
------------------------------------------------
Total current assets......................................... 7,648,802 8,206,144
Raw materials and work in process, net of reserve for excess
and obsolete inventory of $300,000 at March 31, 1999 and
December 31, 1998............................................. 1,472,591 1,493,557
Property and equipment, net of accumulated depreciation of
$3,160,213 and $3,008,159 at March 31, 1999 and December 31,
1998, respectively............................................ 5,027,089 5,163,967
Intangible assets, net of accumulated amortization of $338,331
and $281,829 at March 31, 1999 and December 31, 1998,
respectively.................................................. 3,102,599 3,159,101
Other assets................................................... 281,389 279,609
------------------------------------------------
Total Assets $ 17,532,470 $ 18,302,378
================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities...................................... $ 666,120 $ 497,611
Other liabilities.............................................. 129,939 125,217
------------------------------------------------
Total liabilities............................................ 796,059 622,828
Common stock and additional paid in capital.................... 84,480,480 84,465,480
Accumulated deficit............................................ (67,744,069) (66,785,930)
------------------------------------------------
Stockholders' equity......................................... 16,736,411 17,679,550
------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,532,470 $ 18,302,378
================================================
</TABLE>
See notes to financial statements
3
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Statements of Operations -- three months ended
March 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
-----------------------------------------
Three months ended March 31,
1999 1998
-----------------------------------------
<S> <C> <C>
Revenues
Product sales........................... $ 949,581 $ 236,460
Contract manufacturing.................. 104,320 26,363
Licenses, royalties and other........... 83,397 -
-----------------------------------------
Total revenue........................... 1,137,298 262,823
Cost of product sales................... 398,121 127,543
-----------------------------------------
739,177 135,280
Operating Expenses
Selling, general and administrative..... 1,300,610 817,859
Research and development................ 479,684 542,281
-----------------------------------------
Total expenses.......................... 1,780,294 1,360,140
-----------------------------------------
Operating Loss.......................... (1,041,117) (1,224,860)
Interest Income......................... 82,978 176,253
-----------------------------------------
Net loss................................ ($ 958,139) ($1,048,607)
=========================================
Net loss per common share................ ($0.07) ($0.08)
Weighted average number of common shares
used in computing net loss per common
share................................... 14,522,198 13,364,958
</TABLE>
See notes to financial statements
4
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Statements of Cash Flows - three months ended
March 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
-----------------------------------------
Three months ended March 31,
1999 1998
-----------------------------------------
<S> <C> <C>
Operating Activities
Net Loss..................................................... ($ 958,139) ($1,048,607)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 208,556 172,724
Loss on sale of securities.................................. 1,250 -
Expenses paid with stock.................................... 15,000 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.................. 36,529 (197,051)
Increase in other current assets............................ (45,373) (6,615)
Decrease in raw materials and work in process............... 20,966 89,202
Increase in other non-current assets........................ (1,780) -
Increase (decrease) in current liabilities.................. 168,509 (119,708)
Increase in other liabilities............................... 4,722 85,632
-----------------------------------------
Net cash used in operating activities..................... (549,760) (1,024,423)
Investing Activities
Purchase of property and equipment........................... (15,176) (32,068)
Proceeds from sale or maturity of securities................. 3,131,685 2,949,954
-----------------------------------------
Net cash provided by investing activities................. 3,116,509 2,917,886
-----------------------------------------
Net Increase in Cash and Cash Equivalents................. 2,566,749 1,893,463
Cash and Cash Equivalents:
At Beginning of Period.................................... 2,003,896 3,003,524
-----------------------------------------
At End of Period.......................................... $ 4,570,645 $ 4,896,987
=========================================
</TABLE>
See notes to financial statements
5
<PAGE>
Statements of Stockholders' Equity - three months ended
March 31, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Common Stock Additional
----------------------------- paid-in Accumulated
Shares Par Value Capital Deficit Total
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1998........ 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 $82,801,830 ($63,367,590) 19,567,890
==============================================================================
Balance - January 1, 1999........ 14,489,803 $144,898 $84,320,582 ($66,785,930) $17,679,550
Shares issued under 1998 Non-
employee Director stock plan.... 32,395 324 14,676 15,000
Net Loss......................... (958,139) (958,139)
------------------------------------------------------------------------------
Balance March 31, 1999........... 14,522,198 $145,222 $84,335,258 ($67,744,069) $16,736,411
==============================================================================
</TABLE>
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 month periods ended March
31, 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 March 31, 1999, the Company's investments consisted entirely of US
Treasury bills & notes, US Agency securities, and investment-grade commercial
paper. All investments are classified as "available for sale." At March 31,
1999, the cost and estimated market value for investments maturing in one year
or less was $789,650 and for those maturing in one through five years was
$1,012,500. There were no material unrealized gains or losses on investments at
March 31, 1999.
3. Inventories
Inventory is valued at the lower of cost or market. At March 31, 1999, the
finished goods inventory was valued at $616,818 and the related reserve remained
at $80,000. Also at that date raw materials were valued at $486,263, work in
process was valued at $1,286,328 and the related reserve remained at $300,000.
4. Stockholders' Equity
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
<TABLE>
<CAPTION>
Shares subject to Weighted average
option exercise price
----------------- ----------------
<S> <C> <C>
Balance - January 1, 1998...... 1,304,374 $2.94
Granted...................... 202,000 $1.47
Exercised.................... - -
Canceled..................... - -
--------------------------------------
Balance - March 31, 1998....... 1,506,374 $2.74
======================================
</TABLE>
7
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<TABLE>
<CAPTION>
Shares subject to Weighted average
option exercise price
------------------ ----------------
<S> <C> <C>
Balance - January 1, 1999...... 1,618,061 $2.18
Granted...................... 265,500 $0.93
Exercised.................... - -
Canceled..................... (59,334) $1.09
--------------------------------------
Balance -- March 31, 1999...... 1,824,227 $2.03
======================================
Currently exercisable.......... 755,408 $3.10
======================================
</TABLE>
During the three-month period ended March 31, 1999, the Compensation
Committee of the Board of Directors awarded incentive stock options to employees
under the Company's 1989 Restated Stock Option Plan to purchase 100,000 shares
of common stock and awarded incentive stock options and non-qualified stock
options to employees and consultants under the Company's 1996 Stock Option Plan
to purchase 165,500 shares of common stock. At March 31, 1999 the remaining
number of shares reserved for issuance under the Company's various option plans
were as follows:
<TABLE>
<CAPTION>
Option plan Number of shares available for option grants
----------- ----------------------------------------------
<S> <C>
1989 Restated Stock Option Plan................. 60,352
1996 Stock Option Plan.......................... 284,500
1991 Non-Employee Director Stock Option Plan.... 16,000
</TABLE>
5. Subsequent event
Subject to the negotiation of a definitive purchase agreement (anticipated
by April 30, 1999) ProCyte intends to acquire all of the stock of NextDerm,
Inc., a new company focused on development and marketing of topical therapeutics
for skin conditions such as hyperpigmentation, acne and oily skin. The
consideration for the acquisition will include $250,000 in cash and 600,000
shares of ProCyte common stock. As part of the purchase the Company will
nominate Mr. Glenn Oclassen, a NextDerm founder and chairman of it's board, for
election to the ProCyte Board of Directors.
8
<PAGE>
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 as reported in the Company's
1998 Annual Report to Shareholders, 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
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
During the first quarter of 1999 ProCyte continued its marketing and
development efforts for an array of wound care products, introduced new
packaging for its therapeutic skin health products, and continued the
development of complementary skin health and hair care products. As the
Company's product line has expanded, it has continued to focus its efforts on
the specialty tissue repair sectors - marketing its products primarily to
dermatologists, plastic surgeons and cosmetic surgeons.
The Company has continued to refine its approach to marketing the
GraftCyte/TM/ line of copper peptide containing wound care products for use
following hair restoration. ProCyte is the only 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, its own sales force and contract sales representatives.
The Company has also continued to emphasize its Complex Cu\3\/TM/ Intensive
Repair Creme, a product used to treat patients following chemical peels,
dermabrasion and laser treatments as the centerpiece of its skin care product
line which includes prescription and over-the-counter topical drugs, sun
protection, and anti-aging skin care products. In addition, Complex Cu\3\/TM/
Hydrating Gel and Complex Cu\3\/TM/ Gentle Cleanser, providing a comprehensive
approach to post-procedure care, were prominently featured in the Company's new
skin care product catalogue. During the first quarter, ProCyte introduced its
newly redesigned packaging for its skin care products, including a new icon and
the tagline - "Healing the Wounds of Time/TM/," and attended several leading
medical conventions, receiving an enthusiastic response. The sales force was
expanded with the addition of four part-time contract sales representatives.
Several major teaching institutions such as Harvard Medical Center in Boston and
Truman Medical Center in Kansas City, have begun using the ProCyte therapeutic
skin care products.
9
<PAGE>
Also 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. Together with its skin care products, the Company continues to
market its Pillo/TM/ Pro Absorbent Dressings which provide moisture absorption
following liposuction procedures using its own sales force, contract sales
representatives and specialty distributors.
ProCyte has an exclusive distribution agreement with the Bard Medical
Division ("Bard") of C.R. Bard, Inc. Subject to certain minimum annual purchase
requirements Bard has the exclusive rights 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 and Canada. ProCyte also has a
distribution agreement with Tanox Pharma for sales of Iamin/(R)/ Hydrating Gel
and OsmoCyte/(R)/ Pillow Wound Dressings in China, Taiwan and Hong Kong and
other Asian countries. Iamin/(R)/ Hydrating Gel has been approved as a
pharmaceutical in China and Taiwan. In January 1999 the Company and Neutrogena
signed a product study agreement to evaluate ProCyte's GHK:cu technology for
inclusion in potential products that Neutrogena would sell in the worldwide
consumer skin care market.
The Company markets its Tricomin/(R)/ line of triamino copper complex
containing hair care products 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 in 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 is engaged in the development of healthcare products utilizing
copper peptide containing and polymer-based compounds. Such 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 the costs of supporting research, development and clinical
studies of its proprietary technology. At March 31, 1999 the Company's
accumulated deficit was approximately $67.7 million. The Company expects to
incur additional operating losses until its product lines have been expanded and
have achieved market acceptance.
Revenue
During the three-month period ended March 31, 1999 ProCyte generated total
operating revenue of $1,137,298 from product sales, contract manufacturing and
royalties. Comparable revenues were $262,823 for the three-month ended March 31,
1998.
Revenue from product sales was $949,581 during the three-month period ended
March 31, 1999, up from $236,460 during the three-month period ended March 31,
1998. The increase was
10
<PAGE>
primarily a result of the expanded product line obtained through the acquisition
of HumaTech Corporation during the second quarter of 1998 and the introduction
of new products incorporating the Company's proprietary copper peptide
technology.
Contract manufacturing revenue increased from $26,363 during the three-
month period ended March 31, 1998 to $104,320 during the comparable period in
1999. This increase reflects a greater volume of projects undertaken for
additional customers. Revenue from royalties and licenses in 1999 includes fees
from the product study agreements with Neutrogena. No such income was earned
during the first quarter of 1998.
Interest income was $82,978 during the three-month period ended March 31,
1999, compared to $176,253 during the three-month period ended March 31, 1998.
The decrease in interest income was primarily a result of reduced funds
available for investment.
Expenses
The cost of product sales increased from $127,543 during the three-month
period ended March 31, 1998 to $398,121 during the comparable period in 1999.
This reflects the increase in units sold and the introduction of skin health
products with generally lower margins than those based on proprietary
technology.
Selling, general and administrative expenses were $1,300,610 and $817,859
during the quarters ended March 31, 1999 and 1998, respectively. The increase
reflects the higher level of support required for new products and the cost of
entering the consumer hair care market. The Company anticipates that during 1999
expenditures will remain at or near current levels as a proportion of product
sales.
Research and development expenses were $479,684 and $542,281 during the
quarters ended March 31, 1999 and 1998, respectively, reflecting the
continuation of the Company's expenditures for development of wound care, skin
health and hair care product candidates. The decreases resulted from the
completion of various research projects and studies. The Company anticipates
that expenditures for product development will remain at or near current levels
during 1999.
Liquidity and Capital Resources
The Company has relied primarily on equity financing, product sales,
contract manufacturing revenue, interest income and corporate partnerships to
fund its operations and capital expenditures. At March 31, 1999, the Company had
approximately $6.4 million in cash, cash equivalents and securities available
for sale, as compared to $6.9 million at December 31, 1998. The $500,000
decrease represents cash used to fund ongoing operations. The Company expects
that its operating cash needs will continue at similar levels in future periods.
The decrease of $36,529 in accounts receivable during the three-month
period ended March 31, 1999 reflects the receipt of royalties accrued at year-
end. During the three-month period ended March 31, 1999, finished goods
inventory increased by $47,485 primarily as a result of the new packaging for
the therapeutic skin care products.
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 delisting."
11
<PAGE>
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 potential products. The Company will
depend upon equity financing, 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. 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" and "Important Factors Regarding
Forward-Looking Statements NASDAQ National Market System delisting."
Year 2000 Software Issue
The Company recognizes that its operations may be negatively affected by
the widely discussed software problems anticipated with the new millennium,
either from its own computer systems or its interactions with outside vendors,
service providers, customers and government agencies. In connection with the
relocation of the operations acquired in 1998 the Company has substantially
upgraded its computer hardware and implemented new accounting and distribution
software which are represented by the vendors to be year 2000 compliant. The
Company does not believe that it incurred any incremental cost specifically
attributable to Year 2000 issues in connection with the new hardware and
software installations and it expects that the costs to be incurred for
monitoring and testing remaining systems (including security systems, phone
systems, machine control systems, etc.) will not be significant. Moreover, the
Company does not anticipate that any significant capital expenditures will be
required to remediate any deficiencies revealed by the testing and monitoring
currently in process. The Company plans to implement any additional vendor
upgrades and modifications necessary to avoid year 2000 software issues and does
not expect that the incremental cost of such upgrades and modifications will be
significant. The Company believes that it has arranged for adequate stockpiles
of critical raw materials and that it is not dependent on any single source of
supply and consequently the Company does not intend to survey suppliers
concerning their preparedness. In the Company's judgment the most reasonably
likely worst case scenario would be short-term disruptions in the Company's
supply chain and customer payments. The Company presently believes that it is
well positioned to address these issues but it intends to have a contingency
plan in place by the end of 1999 to allow operations to continue even if
significant disruptions are experienced. There can be no assurance that the
Company has accurately assessed the need for software and computer upgrades or
modifications in this regard and if such upgrades and modifications are not
made, or if they are not made on a timely basis, or if third parties fail to
adequately anticipate and remediate issues with software, computers and embedded
processors, or if there are severe disruptions of the overall business
infrastructure, year 2000 problems could have a material impact on the
operations of the Company.
12
<PAGE>
Important Factors Regarding Forward-Looking Statements
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
The Company launched its first product in 1996, launched additional wound
care products in 1997 and 1998 and expects further product launches of skin
health and hair care products in 1999. To date, however, the Company has
generated only minimal 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 to achieve a profitable level of operations.
As of March 31, 1999, the Company's accumulated deficit was approximately $67.7
million. The Company expects to incur additional operating losses at least
through 1999. Historically, the Company's revenues have principally been from
interest income, research fees, license fees and fees for contract manufacturing
services. The Company's ability to achieve a consistent, profitable level of
operations is dependent in large part on successfully manufacturing 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, 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 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 March 31, 1999 the Company had cash, cash
equivalents and securities available for sale of $6.4 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 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
may be required 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 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 or to license third parties to
commercialize products or technologies that the Company would otherwise seek to
develop
13
<PAGE>
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.
NASDAQ National Market System delisting; 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 the 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.
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 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 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
14
<PAGE>
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. There can be no assurance that contract revenues in the future will
be significant.
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 copper peptide containing
products. 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 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 to the hospital, nursing home and extended
care markets in the United States and Canada. Subsequent to the Bard agreement,
ProCyte entered into similar exclusive distribution agreements for the
registration and distribution of certain of its wound care products in the Far
East and Latin America with Tanox Pharma 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 surgery markets.
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 to evaluate
15
<PAGE>
ProCyte's GHK:cu 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 March 31, 1999, 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, 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.
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
16
<PAGE>
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, 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
17
<PAGE>
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 ("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 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, 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 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 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
18
<PAGE>
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.
Item 4 - Submission of Matters to a Vote of Security Holders
None.
19
<PAGE>
Item 5. Other Information
Subject to the negotiation of a definitive purchase agreement (anticipated
by April 30, 1999) ProCyte intends to acquire all of the stock of NextDerm,
Inc., a new company focused on development and marketing of topical therapeutics
for skin conditions such as hyperpigmentation, acne and oily skin. The
consideration for the acquisition will include $250,000 in cash and 600,000
shares of ProCyte common stock. As part of the purchase the Company will
nominate Mr. Glenn Oclassen, a NextDerm founder and chairman of it's board, for
election to the ProCyte Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed one report on 8-K during the first quarter of 1999. It
was filed on March 25, 1999 and reported on the NASDAQ listing qualifications
panel ruling that the Company's common stock would no longer be traded on the
NASDAQ national market.
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: April 27, 1999 By: /s/ John F. Clifford
--------------------------------------
John F. Clifford, President and CEO
Date: April 27, 1999 By: /s/ Jerry Scott
--------------------------------------
Jerry P. Scott, Vice President and CFO
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Title
- -------------- -----
<S> <C>
27 Financial Data Schedule
</TABLE>
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,570,645
<SECURITIES> 1,802,150
<RECEIVABLES> 710,615
<ALLOWANCES> 54,948
<INVENTORY> 536,818
<CURRENT-ASSETS> 7,648,802
<PP&E> 8,187,302
<DEPRECIATION> 3,160,213
<TOTAL-ASSETS> 17,532,470
<CURRENT-LIABILITIES> 796,059
<BONDS> 0
0
0
<COMMON> 84,480,480
<OTHER-SE> (64,744,069)
<TOTAL-LIABILITY-AND-EQUITY> 17,532,470
<SALES> 949,581
<TOTAL-REVENUES> 1,137,298
<CGS> 398,121
<TOTAL-COSTS> 398,121
<OTHER-EXPENSES> 1,780,294
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (958,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (958,139)
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
