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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period Ended June 30, 2002

Commission File Number 0-18044

PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)

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 ý No o

As of August 8, 2002, there were issued and outstanding 15,720,720 shares of common stock, par value $.01 per share.

ProCyte Corporation
Index

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Part I—Financial Information

Item 1. Condensed Financial Statements (unaudited)

Balance Sheets—as of June 30, 2002 and December 31, 2001

See notes to condensed financial statements

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Statements of Operations—Three & Six Months Ended June 30, 2002 and 2001

See notes to condensed financial statements

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Statements of Cash Flows—Six Months Ended June 30, 2002 and 2001

See notes to condensed financial statements

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Statements of Stockholders' Equity—Six Months Ended June 30, 2002 and 2001

See notes to condensed financial statements

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ProCyte Corporation
Notes to Condensed Financial Statements

1.    Basis of Presentation

The accompanying unaudited condensed financial statements of ProCyte Corporation ("ProCyte" or the "Company") for the three-month and six-month periods ended June 30, 2002 and 2001 have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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, 2001. In the opinion of management, all material adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial statements have been included. Interim results are not necessarily indicative of the results that may be expected for the year.

In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS No. 145 also rescinds SFAS No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS No. 145 amends SFAS No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Certain provisions of SFAS No. 145 will be adopted by the Company on January 1, 2003. The Company does not anticipate that adoption of these provisions will have a material effect on its financial position or results of operations. The Company has adopted the provisions of SFAS No. 145 that are effective for financial statements issued after May 15, 2002. There was no impact on the Company's financial position or results of operations as a result of the adoption of these provisions.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

2.    Accounts Receivable

The Company shipped several large orders to its licensing partners at the end of June, which increased its accounts receivable balance at June 30, 2002 significantly as compared to the balance at December 31, 2001. Two Customers represented 36.5% and 13.7% of the outstanding accounts receivable balance at June 30, 2002.

During the six months ended June 30, 2002, the Company wrote-off uncollectable balances related to certain terminated licensing agreements. The Company has provided a reserve for uncollectable receivables in the amount of $83,312 at June 30, 2002 and $243,213 at December 31, 2001. The bad debt expense, net of recoveries, was ($12,039) and $2,760 for the quarters ended June 30, 2002 and

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2001, respectively, and ($6,910) and $10,210 for the six months ended in June 30, 2002 and 2001, respectively.

3.    Inventory

Inventory after consideration for excess and obsolete items consisted of the following:

4.    Property and Equipment

Property and equipment consisted of the following:

5.    Intangible Assets

At June 30, 2002 and December 31, 2001, intangible assets are shown net of accumulated amortization of $1,055,442 and $1,047,438, respectively. On January 1, 2002, the Company implemented the guidance of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets" in recognizing certain intangibles as goodwill and assessing potential future impairments of goodwill. The Company performed an annual test on the value of its goodwill under the guidance of SFAS 142 on March 31, 2002, and did not identify the need to recognize any impairment of value at that time. There were no events in the second quarter, which would cause the Company to change its valuation as of June 30, 2002. This analysis was based on one reportable unit. All of Goodwill is deemed to be associated with ProCyte's overall business operations. The Company's amortization expense for goodwill was $61,250 and $122,500 in the quarter and six months ended June 30, 2001, respectively. The net loss for the quarter and the six months then ended would have been $303,391 and $743,806, or ($0.02) and ($0.05) net loss per share, if goodwill had not been amortized.

6.    Federal Income Taxes

The provision for income taxes consisted of the following components:

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The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before taxes as follows:

The tax effect of temporary differences and net operating loss carry forward that give rise to the Company's deferred tax assets and liabilities are as follows:

At June 30, 2002 and December 31, 2001, the Company provided full valuation allowance for its net deferred tax assets. The Company believes sufficient uncertainty exists regarding the realizability of the deferred tax assets. The net change in the valuation allowance during the six months ended June 30, 2002 and year ended December 31, 2001, were ($367,536) and $600,000, respectively.

As of June 30, 2002, the Company's U.S. federal net operating loss and general business credit carry forward for income tax purposes were approximately $25,733,367. If not utilized, the federal net operating loss carry forward and tax credits carry forward will expire between 2002 and 2021. Changes in ownership, as defined by Section 382 of the IRC, may limit the amount of net operating loss carry forward used in any one year.

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7.    Stockholders' Equity

Information relating to stock options granted, exercised, canceled and currently exercisable is as follows:

At June 30, 2002, the Company's 1996 Stock Option Plan had 628,162 shares of the Company's common stock available, which included the 750,000 shares approved for the plan at the Company' annual shareholders meeting on May 21, 2002.

The Company issued 7,052 shares on July 1, 2002, in payment of the Board of Director retainers for the second quarter. As of August 8, 2002, the Company's 1998 Non-employee Director Stock Plan had 155,475 shares of the Company's common stock available.

The Company granted 10,000 stock options on February 21, 2002 and 10,000 stock options on May 20, 2002 in exchange for advisory services from two non-employee consultants. The February and May grants, respectively, oblige the Company to issue 10,000 common stock shares at $1.33 and $1.83, the market price on the dates of grant. Both grants become fully vested one year after their date of issuance. The fair value of the February and May grants was determined to be $6,448 and $11,005, respectively, using the Black-Scholes option pricing model. The assumptions used in the model for the February and May grants, respectively, were a risk-free interest rate of 3.84% and 3.92%, 67% and 61% stock price volatility, and no dividends over the two year expected lives. The fair values are reported as deferred compensation in Stockholders' Equity, and are being amortized as an operating expense over the expected lives.

The Company issued three common stock warrants for 100,000 shares on May 26, 1999 in exchange for services. The three warrants oblige the Company to issue 33,334 shares at $0.6875 per share, the market price on the grant date, 33,333 shares at $1.6875 and 33,333 shares at $2.6875. Each of the warrants has a five-year life and is fully vested. The fair value of these warrants was determined to be $90,117 using the Black-Scholes option-pricing model and was expensed in 1999. The assumptions used in the model were a risk-free interest rate of 4.08%, an expected life of five years, 98% stock price volatility and no dividends over the expected life. On January 2, 2002, the first warrant for 33,334 shares was exercised.

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8.    Related Party Disclosure

The Company owns a promissory note in the principle amount of $2,000,000 from Emerald Pharmaceutical L.P., which it received as partial consideration for the sale of its contract manufacturing operation in 2001. The note is secured by the manufacturing assets sold and bears interest equal to the effective yield on the 10 Year US Treasury Note, which is adjusted quarterly. The average yield for the quarter and six months ended June 30, 2002 was 5.39% and 5.21%, respectively. Emerald will begin making annual principal payments of $285,714 in July 2005. The Company also received a minority limited partnership interest in Emerald as part of consideration received in the sale. As part of the agreement, ProCyte leases a portion of its current 32,750 square foot leased facility, including existing leasehold improvements, to Emerald. Also included in the proceeds is $1,627,906, which is being recognized over the term of the lease for Emerald's use of the leasehold improvements. ProCyte engages Emerald Pharmaceutical L.P. to do certain manufacturing and other quality and analytical services. Emerald billed ProCyte a total of $61,040 and $193,701 for the services during the quarter and six months ended June 30, 2002, respectively.

One of the Company's Directors serves as Chairman and Chief Executive Officer of one of ProCyte's customers. The customer purchased $186,755 and $308,544 in product during the quarter and six months ended June 30, 2002, respectively. On June 30, 2002 the customer owed ProCyte $253,237.

At June 30, 2002 and December 31, 2001, respectively, an Officer owed the Company $103,898 and $117,904, respectively, including accrued interest at 4.28% under the terms of a promissory note dated December 16, 1998. In the second quarter of 2002, the Compensation Committee of the Board of Directors agreed to extend the note's due date an additional two years to June 30, 2004.

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