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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1 TO 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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This amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q, as filed by the Registrant on April 28, 1999, and is being filed to
reflect the restatement of the Registrant's discussion of the Year 2000 Software
Issue in Item 2 ("Management's Discussion and Analysis").
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 it's 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 Cu3(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 Cu3(TM)
Hydrating Gel and Complex Cu3(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.
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 it's own sales force, contract sales
representatives and specialty distributors.
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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 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.
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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."
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."
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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 or government agencies.
The Company has completed assessment, remediation and testing of its
information technology ("IT") systems. In connection with the relocation of the
operations acquired in 1998 the Company replaced substantially all of its
computer hardware and implemented a new accounting and distribution software
package and a new network operating system, all of which are represented by the
vendors to be year 2000 compliant. These applications represent substantially
all of the IT systems employed by the Company. The Company did not accelerate
the installation of the new hardware and software systems due to the year 2000
issue and therefore does not believe that it incurred any incremental cost
specifically attributable to the year 2000 issue in this connection.
Additionally, the Company has tested its IT systems using third party diagnostic
software. Other than the installation of additional upgrades and modifications
provided by vendors, if any, the Company does not plan to conduct further
assessment, remediation or testing of its IT systems and consequently the
Company does not expect to incur additional material year 2000 related costs
with respect to such assessment, remediation or testing of its IT systems.
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.
The Company has completed assessment and remediation of substantially all
of its non-IT systems including its security system, phone system, HVAC system
and certain machine control systems. The Company has installed and completed
the testing of the vendor-supplied upgrades and replaced certain ancillary
equipment required to remediate all critical non-IT systems. Remediation or
replacement of remaining non-IT systems is scheduled to be completed during the
second quarter of 1999. The Company has not incurred material historical costs
in connection with remediating non-IT systems and does not anticipate that any
remaining costs or capital expenditures related to such remediation and testing
will be material.
Funding for remediation of IT and non-IT systems has come from funds
provided by operations and the Company expects to fund any additional year 2000
related costs in a similar manner. No other IT projects have been deferred as a
result of remediation projects.
The Company is not dependent on any single source of supply for its
products and consequently 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 they expect 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 in 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 these disruptions and is currently assessing whether it is
feasible to develop such a plan. There can be no assurance that the Company's
efforts will mitigate the risk of non-compliance and a significant failure 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 the year 2000 issue 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 achieve year 2000 compliance, or that the year 2000
problem will not materially adversely affect the Company's business, financial
condition or results of operations.
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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 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
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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 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,
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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 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.
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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 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.
<PAGE>
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 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,
<PAGE>
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.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to its
report on Form 10-Q to be signed on its behalf by the undersigned, thereunto
duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
Date: May 14, 1999 By: /s/ John F. Clifford
--------------------------------------
John F. Clifford, President and CEO
Date: May 14, 1999 By: /s/ Jerry Scott
--------------------------------------
Jerry P. Scott, Vice President and CFO
