<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ACT OF 1934
For the quarterly period ended March 31, 1996
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number: 0-21134
PROCEPT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2893483
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
840 Memorial Drive, Cambridge, Massachusetts 02139
- - -------------------------------------------- -----
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (617) 491-1100
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
- -
Number of shares outstanding of each of the issuer's classes of common stock, as
of latest practicable date.
Class Outstanding as of May 13, 1996
----- ------------------------------
Common Stock, $.01 par value 8,864,750
This report includes a total of 12 pages
Exhibit Index Appears on Page 11
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PROCEPT, INC.
INDEX
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Page No.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
March 31, 1996 and December 31, 1995
Statements of Operations 4
Three months ended March 31, 1996 and 1995
Statements of Cash Flows 5
Three Months ended March 31, 1996 and 1995
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
PROCEPT, INC.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $4,035,211 $ 565,521
Marketable securities -- 2,005,670
Accounts receivable, net 42,673 8,944
Prepaid expenses and other current assets 163,809 147,511
---------- ----------
Total current assets 4,241,693 2,727,646
Property and equipment, net 2,565,458 2,815,320
Restricted investment 469,000 522,000
Deferred financing charges -- 152,773
Other assets 213,475 178,920
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TOTAL ASSETS $7,489,626 $6,396,659
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
<S> <C> <C>
Accounts payable $ 557,877 $ 888,700
Accrued compensation 194,115 194,115
Accrued contract research costs 615,041 417,353
Other current liabilities 303,656 366,670
Current portion of capital lease
obligations 860,428 908,432
Deferred revenue 850,000 1,275,000
------------ ------------
Total current liabilities 3,381,117 4,050,270
Capital lease obligations, less current portion 437,512 634,293
Other noncurrent liabilities 281,660 273,139
Commitments and contingencies (Note 3)
Stockholders' equity (Note 2):
Common stock, par value $.01 per share; 12,000,000
shares authorized at March 31, 1996 and December 31,
1995 respectively; 8,864,750 and 6,476,062 shares
issued and outstanding at March 31, 1996 and
December 31, 1995, respectively 88,647 64,761
Additional paid-in capital 43,888,324 38,882,654
Receivable from sale of stock (37,933) (42,107)
Accumulated deficit (40,549,701) (37,467,440)
Unrealized gain on securities available for sale -- 1,088
------------ ------------
Total stockholders' equity 3,389,337 1,438,956
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,489,626 $ 6,396,658
============ ============
</TABLE>
The accompanying notes are an integral
part of the financial statements.
3
<PAGE>
PROCEPT, INC.
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Research and development revenue
under collaborative arrangements $ 425,000 $ 1,000,000
Research and development revenue
under collaborative arrangement with
related party 75,000 28,645
Grant income -- 51,600
Interest income 51,911 237,850
----------- -----------
Total revenues 551,911 1,318,095
----------- -----------
Costs and Expenses:
Research and development 2,828,425 3,162,293
General and administrative 771,488 926,942
Interest expense 34,259 71,040
----------- -----------
Total costs and expenses 3,634,172 4,160,275
----------- -----------
Net loss $(3,082,261) $(2,842,180)
=========== ===========
Net loss per common share $(0.40) $(0.45)
=========== ===========
Weighted average number of common
shares outstanding 7,761,219 6,373,030
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
4
<PAGE>
PROCEPT, INC.
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,082,261) $(2,842,180)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 312,110 236,615
Loss on sale/leaseback -- 3,270
Gain on sale of marketable securities (1,359) --
Changes in operating assets and liabilities:
Accounts receivable (33,729) --
Prepaid expense and other current assets (16,298) (33,862)
Other assets 2,945 3,988
Accounts payable (330,823) (662,909)
Accrued compensation -- (16,110)
Accrued contract research 197,688 (152,472)
Other current liabilities (63,015) 15,422
Other noncurrent liabilities 8,521 20,446
Deferred revenue (425,000) (1,000,000)
----------- -----------
Net cash used in operating activities (3,431,221) (4,427,792)
----------- -----------
Cash flows from investing activities:
Capital expenditures (60,377) (249,227)
Proceeds from sale of marketable securities 2,004,070 109,461
Other investing activities (37,500) --
(Increase) decrease in restricted investments 53,000 (92,000)
----------- -----------
Net cash provided by (used in)
investing activities 1,959,193 (231,766)
----------- -----------
Cash flows from financing activities:
Principal payments on capital lease obligations (244,786) (271,743)
Proceeds from issuance of common stock 5,115,562 50,209
Proceeds from employee stock purchase plan 70,722 --
Proceeds from sale of common stock warrants 220 --
----------- -----------
Net cash provided by (used in)
financing activities 4,941,718 (221,534)
----------- -----------
Net change in cash and cash equivalents 3,469,690 (4,881,092)
Cash and cash equivalents at beginning of period 565,521 7,449,746
----------- -----------
Cash and cash equivalents at end of period $ 4,035,211 2,568,654
=========== ===========
Supplemental disclosures and non-cash transactions:
Interest paid $ 34,259 $ 71,793
=========== ===========
Property and equipment acquired under capital leases -- $ 1,050,117
=========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
5
<PAGE>
PROCEPT, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
Plan of Operations
- - ------------------
Since its inception the Company has generated no revenue from product sales.
The Company has not been profitable since inception and has incurred an
accumulated deficit of approximately $40,550,000 through March 31, 1996. Losses
have resulted principally from costs incurred in research and development
activities related to the Company's efforts to develop drug candidates and from
the associated administrative costs. The Company expects to incur significant
additional operating losses over the next several years and expects cumulative
losses to increase substantially due to expanded research and development
efforts, preclinical and clinical testing and development of marketing, sales
and production capabilities.
Because of its continuing losses from operations, the Company will be required
to obtain additional funds in the short term to satisfy its ongoing capital
needs and to continue operations. Although management continues to pursue
additional funding arrangements and/or strategic partnering there can be no
assurance that additional funding will be available from any of these sources
or, if available, will be available on acceptable or affordable terms. If the
Company is unable to obtain financing on acceptable terms in order to maintain
operations through the next fiscal year, it could be forced to curtail or
discontinue its operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The accompanying financial statements for the three month periods ended March
31, 1996 and 1995 are unaudited and have been prepared by the Company in
accordance with generally accepted accounting principles. The interim financial
statements, in the opinion of management, reflect all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
results for the interim periods ended March 31, 1996 and 1995. The results of
operations for the interim periods are not necessarily indicative of the results
of operations to be expected for the fiscal year. These interim financial
statements should be read in conjunction with the audited financial statements
for the year ended December 31, 1995, which are contained in the Company's 1995
Annual Report on Form 10-K.
6
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2. STOCKHOLDERS' EQUITY
--------------------
On February 14, 1996, the Company closed on a follow-on public offering. The
Company received proceeds of $4,920,373 (net of underwriting discount and
underwriter's offering expenses) for the issuance of 2,200,000 shares of Common
Stock. The Company incurred additional costs in the amount of $304,882 related
to this financing which were charged to additional paid-in capital in 1996.
On March 27, 1996, the underwriter in the follow-on offering partially exercised
its over allotment option related to the follow-on offering and on March 27,
1996 the Company issued and sold 150,000 shares of the Company's common stock.
This transaction resulted in net proceeds to the Company of $343,125.
3. RESEARCH COLLABORATIONS
-----------------------
Effective as of September 1, 1995, the Company's sponsored research agreement
with Sandoz Pharma Ltd. was amended to focus the research program on compounds
targeting CD4 and its ligand and to limit the research program with respect to
compounds that bind to CD2 and its ligand to certain screening activities being
conducted by Sandoz through the end of 1995. In connection with this amendment,
the research and license fees due for the third year of the research program
were reduced from $5 million to $2.2 million. Procept remains eligible to
receive $12 million in milestone payments as compounds discovered in these
research programs progress through clinical development. Procept recorded
$425,000 in revenue in the three month period ended March 31, 1996 under the
terms of this agreement.
In January 1996, Procept entered into a Sponsored Research Agreement with
VacTex, Inc. ("VacTex"), an entity created by a group of executives and
scientists from leading biotechnology companies and academic institutions to
provide research services relating to the development of novel vaccines based on
discoveries licensed from the Brigham and Women's Hospital and Harvard Medical
School. These discoveries shed light on a previously unknown aspect of
immunology, the CD1 system of lipid antigen presentation. Under the Sponsored
Research Agreement, Procept will conduct specified research tasks on behalf of
VacTex for which Procept will receive a combination of cash and equity in VacTex
based on the number of full-time equivalent employees of Procept engaged in the
research, but subject to maximum cash and stock limits. Procept recorded
$75,000 in revenue in the three month period ended March 31, 1996 under the
terms of this agreement.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
RESULTS OF OPERATIONS
Since its inception, the Company has generated no revenues from product sales.
The Company is dependent upon research and development collaborations, equity
financing and interest on invested funds to provide the working capital required
to pursue its intended business activities. The Company has incurred an
accumulated deficit of approximately $40,550,000 through March 31, 1996. Losses
have resulted principally from costs incurred in research and development
activities related to the Company's efforts to develop drug candidates and from
the associated administrative costs. The Company expects to incur significant
additional operating losses over the next several years and expects cumulative
losses to increase substantially due to expanded research and development
efforts, preclinical and clinical testing and development of marketing, sales
and production capabilities.
Three Months Ended March 31, 1996 and 1995
The Company's total revenues decreased to $552,000 in the first quarter of 1996
from $1,318,000 during the same period of 1995, principally as a result of an
amendment to the Sandoz Agreement. In the first quarter of 1996, revenues
consisted of $425,000 earned under the Sandoz Agreement, $75,000 earned under
the VacTex Agreement and $52,000 in interest earned on invested funds. In 1995,
first quarter revenues consisted of $1,000,000 earned under the Sandoz
Agreement, $29,000 earned under its now completed sponsored research agreement
with Bristol-Myers Squibb, $52,000 earned under The National Cooperative Drug
Discovery Group (NCDDG) Grant and $238,000 in interest earned on invested funds.
The Company's total operating expenses decreased to $3,634,000 in the first
quarter of 1996, from $4,160,000 during the same period in 1995. Research and
development expenses decreased 11% to $2,828,000 in the first quarter of 1996
from $3,162,000 in the first quarter of 1995. This expense decrease was due
primarily to a decrease in personnel in the Company's research and development
organization and their related research costs from the first quarter of 1995 to
the same period in 1996. The 17% decrease in general and administrative
expenses during the first quarter of 1996 to $771,000 from $927,000 in the first
quarter of 1995 reflects a decrease in administrative personnel as well as a
lowering of most general and administrative expenses due to cost control
measures. Interest expense decreased to $34,000 in the first quarter of 1996
from $71,000 in the first quarter of 1995 as a result of the increase in
principal payments under the Company's lease financing arrangements.
8
<PAGE>
FINANCIAL CONDITION
At March 31, 1996, the Company's aggregate cash and cash equivalents were
$4,035,000, a net increase of $1,464,000 since December 31, 1995. The increase
in cash is primarily attributable to the completion of the Company's follow-on
public offering of $5,116,000 offset by $3,431,000 used in operations,
principally to fund research and development activities, expenditures for
property and equipment of $60,000 and principal payments on capital lease
obligations of $245,000.
The Company expects that its current funds, in conjunction with the net proceeds
from its follow-on public offering completed on February 14, 1996, interest
income and equipment lease financing will be sufficient to fund Procept's
financial needs into the third quarter of 1996. Although management continues
to pursue additional funding arrangements, no assurance can be given that such
financing will be available to the Company. If the Company is unable to enter
into an additional corporate collaboration(s) that produce revenue for the
Company, or secure additional financing, the Company's financial condition will
be materially adversely affected.
The Company's expectations regarding the sufficiency of its sources of cash over
future periods is a forward-looking statement. The sufficiency of such
resources will be affected by numerous factors including the rate of planned and
unplanned expenditures by the Company and the timing of achievements of various
milestones in the Company's research and development programs.
The Company's working capital and other cash needs will depend heavily on the
success of the Company's clinical trials. Success in early stage clinical
trials would lead to an increase in working capital requirements. The Company's
actual cash requirements may vary materially from those now planned because of
results of research and development, clinical trials, product testing,
relationships with strategic partners, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the process of obtaining United States Food and Drug Administration or
other regulatory approvals and other factors.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits.
---------
No. 27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
None.
9
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
PROCEPT, INC.
(Registrant)
Date: May 13, 1996 by: /s/ Michael J. Higgins
----------------------
Michael J. Higgins
Vice President, Finance
Chief Financial Officer
(Principal Accounting Officer)
10
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description Number
- - ------ ----------- ------
27 Financial Data Schedule 12
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET @ MARCH 31, 1996 AND THE STATEMENT OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,035,211
<SECURITIES> 0
<RECEIVABLES> 42,673
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,241,693
<PP&E> 5,905,806
<DEPRECIATION> 3,340,348
<TOTAL-ASSETS> 7,489,626
<CURRENT-LIABILITIES> 3,381,117
<BONDS> 0
0
0
<COMMON> 88,647
<OTHER-SE> 3,300,690
<TOTAL-LIABILITY-AND-EQUITY> 7,489,626
<SALES> 0
<TOTAL-REVENUES> 551,911
<CGS> 0
<TOTAL-COSTS> 3,599,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 34,259
<INCOME-PRETAX> (3,082,261)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,082,261)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,082,261)
<EPS-PRIMARY> (0.40)
<EPS-DILUTED> (0.40)
</TABLE>
