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, 1997
___ 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.
(Exact name of registrant as specified in its charter)
Delaware 04-2893483
(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 15, 1997
----- ------------------------------
Common Stock, $.01 par value 13,720,334
This report includes a total of 13 pages
Exhibit Index Appears on Page 12
<PAGE>
PROCEPT, INC.
INDEX
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Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets 3
March 31, 1997 and December 31, 1996
Statements of Operations 4
Three months ended March 31, 1997 and 1996
Statements of Cash Flows 5
Three Months ended March 31, 1997 and 1996
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 10
SIGNATURES 11
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
PROCEPT, INC.
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $3,318,005 $1,962,229
Marketable securities -- 4,001,625
Accounts receivable 168,038 172,812
Prepaid expenses and other current assets 194,074 111,237
------------- ------------
Total current assets 3,680,117 6,247,903
Property and equipment, net 1,586,123 1,863,200
Restricted investment 474,809 469,000
Other assets 386,960 337,163
------------- ------------
TOTAL ASSETS $6,128,009 $8,917,266
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $838,993 $773,501
Accrued compensation 130,579 122,712
Accrued contract research costs 204,009 438,513
Other current liabilities 139,217 196,610
Current portion of capital lease obligations 437,512 614,063
------------- ------------
Total current liabilities 1,750,310 2,145,399
Capital lease obligations, less current portion -- 20,231
Other noncurrent liabilities 333,057 435,529
Commitments and contingencies (Note 2)
Stockholders' equity:
Common stock, par value $.01 per share; 30,000,000 shares authorized at
March 31, 1997 and December 31, 1996 respectively; 13,720,334 and
13,680,399 shares issued and outstanding at March 31, 1997 and
December 31, 1996, respectively 137,203 136,804
Additional paid-in capital 55,010,993 54,960,583
Receivable from sale of stock (73,242) (73,242)
Accumulated deficit (51,030,312) (48,703,200)
Unrealized (loss) on securities available for sale -- (4,838)
------------- ------------
Total stockholders' equity 4,044,642 6,316,107
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,128,009 $8,917,266
========== ==========
</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,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues:
Research and development revenue
under collaborative arrangements $-- $425,000
Research and development revenue
under collaborative agreements from
related party 140,625 75,000
Revenue from grant 55,811 --
Interest income 67,782 51,911
------------ ------------
Total revenues 264,218 551,911
------------ ------------
Costs and expenses:
Research and development 1,880,142 2,828,425
General and administrative 692,463 771,488
Interest expense 18,725 34,259
------------ ------------
Total costs and expenses 2,591,330 3,634,172
------------ ------------
Net loss $(2,327,112) $(3,082,261)
=========== ===========
Net loss per common share $(0.17) $(0.40)
============ ============
Weighted-average number of common
shares outstanding 13,693,881 7,761,219
============ ============
</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,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,327,112) $(3,082,261)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 286,193 312,110
Gain on sale of marketable securities -- (1,359)
Changes in operating assets and liabilities:
Accounts receivable 4,774 (33,729)
Prepaid expense and other current assets (82,837) (16,298)
Other assets (49,797) 2,945
Accounts payable 65,492 (330,823)
Accrued compensation 7,867 --
Accrued contract research (234,504) 197,688
Other current liabilities (57,393) (63,015)
Other noncurrent liabilities (102,472) 8,521
Deferred revenue -- (425,000)
------------- ------------
Net cash used in operating activities (2,489,789) (3,431,221)
------------- ------------
Cash flows from investing activities:
Capital expenditures (9,116) (60,377)
Proceeds from sale of marketable securities -- 2,004,070
Proceeds from maturity of marketable securities 4,006,463 --
Other investing activities -- (37,500)
(Increase) decrease in restricted investment (5,809) 53,000
------------- ------------
Net cash provided by
investing activities 3,991,538 1,959,193
------------- ------------
Cash flows from financing activities:
Principal payments on capital lease obligations (196,782) (244,786)
Proceeds from exercise of common stock options 410 --
Proceeds from issuance of common stock -- 5,115,562
Proceeds from employee stock purchase plan 50,399 70,722
Proceeds from issuance of warrants -- 220
------------- ------------
Net cash provided by (used in)
financing activities (145,973) 4,941,718
------------- ------------
Net change in cash and cash equivalents 1,355,776 3,469,690
Cash and cash equivalents at beginning of period 1,962,229 565,521
------------- ------------
Cash and cash equivalents at end of period $3,318,005 4,035,211
============= ============
Supplemental disclosures and non-cash transactions:
Interest paid $11,813 $34,259
============= ============
</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 Procept, Inc. ("Procept" or 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 $51,030,000 through
March 31, 1997. 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 due to ongoing research and development
efforts and expanded preclinical and clinical testing.
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, 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, 1997 and 1996 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, 1997 and 1996. 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, 1996, which are contained in the Company's 1996
Annual Report on Form 10-K.
6
<PAGE>
2. RESEARCH COLLABORATIONS
-----------------------
In September 1996, the Company's three-year sponsored research agreement with
Sandoz Pharma Ltd. ended as originally scheduled. Upon the completion of the
agreement all rights to compounds developed under the agreement reverted to the
company that originally supplied or developed the compound. Under the terms of
this agreement, Procept recorded $425,000 in revenue in the three month period
ended March 31, 1996. No revenue related to this agreement was recorded during
the three month period ended March 31, 1997.
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. Under terms of this
agreement, Procept recorded $140,625 and $75,000 in revenues in the three-month
periods ended March 31, 1997 and 1996, respectively.
3. NEW ACCOUNTING PRONOUNCEMENT
----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128), which is
effective for periods ending after December 15, 1997, including interim periods.
Earlier adoption is not permitted. However, an entity is permitted to disclose
pro forma earnings per share amounts computed under SFAS 128 in the notes to the
financial statements in periods prior to adoption. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee entitled
International Accounting Standard 33, Earnings Per Share. The Company plans to
adopt SFAS 128 in 1997 and has determined its adoption will have no impact.
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 $51,030,000 through March 31, 1997. 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 due to its ongoing
research and development efforts and expanded preclinical and clinical testing.
Three Months Ended March 31, 1997 and 1996
The Company's total revenues decreased to $264,000 in the first quarter of 1997
from $552,000 during the same period of 1996, principally as a result of the
scheduled completion of the Sandoz Agreement. In the first quarter of 1997,
revenues consisted of $141,000 earned under the VacTex Agreement, $56,000 under
a grant from the National Cooperative Drug Discovery Group and $68,000 in
interest earned on invested funds. In 1996, first quarter 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.
The Company's total operating expenses decreased to $2,591,000 in the first
quarter of 1997, from $3,634,000 during the same period in 1996. Research and
development expenses decreased 34% to $1,880,000 in the first quarter of 1997
from $2,828,000 in the first quarter of 1996. 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 1996 to
the same period in 1997. The 10% decrease in general and administrative expenses
during the first quarter of 1997 to $692,000 from $771,000 in the first quarter
of 1996 reflects a decrease in administrative personnel as well as reduced
general and administrative expenses due to cost control measures. Interest
expense decreased to $19,000 in the first quarter of 1997 from $34,000 in the
first quarter of 1996 as a result of the decrease in payments under
the Company's lease financing arrangements.
8
<PAGE>
FINANCIAL CONDITION
At March 31, 1997, the Company's aggregate cash and cash equivalents were
$3,318,000, a net increase of $1,356,000 since December 31, 1996. The increase
in cash is primarily attributable to the maturity of a marketable security of
$4,006,000 offset by $2,490,000 used in operations, principally to fund research
and development activities and principal payments on capital lease obligations
of $197,000.
The Company expects that its current funds, interest income and equipment lease
financing will be sufficient to fund Procept's financial needs into the third
quarter of 1997. 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128), which is
effective for periods ending after December 15, 1997, including interim periods.
Earlier adoption is not permitted. However, an entity is permitted to disclose
pro forma earnings per share amounts computed under SFAS 128 in the notes to the
financial statements in periods prior to adoption. The statement requires
restatement of all prior period earnings per share data presented after the
effective date. SFAS 128 specifies the computation, presentation, and disclosure
requirements for earnings per share and is substantially similar to the standard
recently issued by the International Accounting Standards Committee entitled
International Accounting Standard 33, Earnings Per Share. The Company plans to
adopt SFAS 128 in 1997 and has determined its adoption will have no impact.
9
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities:
(c) On January 6, 1997, in exchange for investment banking services
the Company issued a warrant exercisable for 75,000 shares of the Company's
Common Stock at a price of $1.50 per share, expiring on January 6, 2002.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits.
---------
No. 27 Financial Data Schedule.
(b) Reports on Form 8-K.
--------------------
None.
10
<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 15, 1997 by: /s/ Michael J. Higgins
----------------------
Michael J. Higgins
Vice President, Finance
Chief Financial Officer
(Principal Accounting Officer)
11
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------ ----------- ------
27 Financial Data Schedule 13
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from balance
sheet @ March 31, 1997 and the statement of operations for the three months
ended March 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,318,005
<SECURITIES> 0
<RECEIVABLES> 168,038
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,680,117
<PP&E> 5,714,024
<DEPRECIATION> 4,127,901
<TOTAL-ASSETS> 6,128,009
<CURRENT-LIABILITIES> 1,750,310
<BONDS> 0
0
0
<COMMON> 137,203
<OTHER-SE> 3,907,439
<TOTAL-LIABILITY-AND-EQUITY> 6,128,009
<SALES> 0
<TOTAL-REVENUES> 264,218
<CGS> 0
<TOTAL-COSTS> 2,591,330
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,725
<INCOME-PRETAX> (2,327,112)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,327,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,327,112)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
