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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] 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: 0-18700
SENTIGEN HOLDING CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-3570672
- ------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
580 Marshall Street
Phillipsburg, New Jersey 08865
(908) 387-1673
---------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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 August 14, 2002 the registrant had outstanding 7,451,044 shares of
its Common Stock, $.01 par value.
===============================================================================
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION F-1
Item 1. Consolidated Financial Statements F-1
Consolidated Balance Sheets
June 30, 2002 (Unaudited) and December 31, 2001 F-1
Consolidated Statements of Operations (Unaudited)
For the three and six months ended, June 30, 2002 and 2001 F-2
Consolidated Statements of Cash Flows (Unaudited)
For the six months ended, June 30, 2002 and 2001 F-3
Notes to Consolidated Financial Statements (Unaudited) F-4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
PART II. OTHER INFORMATION 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2002 2001
------------ ------------
Assets
Current Assets
Cash and cash equivalents $ 4,769,062 $ 4,889,272
Investment securities 4,902,368 4,898,490
Accounts receivable - net of allowance for
doubtful accounts of $45,000 for 2002 and 2001 908,795 771,867
Unbilled services 20,205 49,245
Inventory 230,891 197,184
Accrued interest receivable 45,976 47,135
Prepaid expenses 75,312 75,254
------------ ------------
10,952,609 10,928,447
------------ ------------
Property, plant and equipment 3,337,746 2,903,450
Less: Accumulated depreciation 1,593,394 1,387,154
------------ ------------
1,744,352 1,516,296
------------ ------------
Other Assets
Security deposits 11,917 11,917
Deferred financing costs - net of
accumulated amortization of $3,382 and
$2,648 for 2002 and 2001, respectively 10,278 11,012
License costs - net of accumulated
amortization of $58,313 and $45,353 for
2002 and 2001, respectively 382,312 395,272
------------ ------------
404,507 418,201
------------ ------------
Total Assets $13,101,468 $12,862,944
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long term debt 218,247 175,702
Accounts payable and accrued expenses 485,161 620,387
Customer deposits 244,632 196,613
Unearned revenue 11,648 5,750
------------ ------------
959,688 998,452
Long-Term debt - net of current maturities 1,100,837 914,110
------------ ------------
2,060,525 1,912,562
------------ ------------
Stockholders' Equity
Preferred Stock - $.01 par value, 5,000,000
shares authorized - none issued - -
Common Stock - $.01 par value, 20,000,000
shares authorized, 7,451,044 and 7,147,324
shares issued and outstanding in 2002 and
2001, respectively 74,510 71,474
Additional paid-in capital 12,174,790 11,812,612
Accumulated (deficit) (1,208,357) (933,704)
------------ ------------
11,040,943 10,950,382
------------ ------------
Total Liabilities and Stockholders' Equity $13,101,468 $12,862,944
============ ============
See notes to consolidated financial statements.
F-1
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited) (Unaudited)
For the Three Months Ended For the Six Months Ended
-------------------------------- --------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Revenue
Molecular cell science $ 1,128,502 $ 1,105,334 $ 2,174,494 $ 2,142,118
Specialty media 772,037 520,898 1,448,623 991,873
------------ ------------ ------------ ------------
1,900,539 1,626,232 3,623,117 3,133,991
------------ ------------ ------------ ------------
Direct Costs
Molecular cell science 384,802 373,894 733,952 794,916
Specialty media 336,180 186,892 594,253 379,927
------------ ------------ ------------ ------------
720,982 560,786 1,328,205 1,174,843
------------ ------------ ------------ ------------
Income After Direct Costs
Molecular cell science 743,700 731,440 1,440,542 1,347,202
Specialty media 435,857 334,006 854,370 611,946
------------ ------------ ------------ ------------
1,179,557 1,065,446 2,294,912 1,959,148
------------ ------------ ------------ ------------
Operating Expenses
Selling, general and administrative costs 582,144 450,380 1,158,367 812,574
Research and development 241,966 240,453 502,140 426,828
Corporate overhead 272,725 321,770 584,314 594,188
Stock based compensation 53,769 86,929 159,330 235,629
Depreciation and amortization 119,787 96,696 219,934 174,972
------------ ------------ ------------ ------------
1,270,391 1,196,228 2,624,085 2,244,191
------------ ------------ ------------ ------------
(Loss) From Operations (90,834) (130,782) (329,173) (285,043)
------------ ------------ ------------ ------------
Interest income 85,843 161,678 177,252 320,332
Interest expense (25,376) (18,997) (47,338) (50,884)
------------ ------------ ------------ ------------
Interest income, net of expense 60,467 142,681 129,914 269,448
------------ ------------ ------------ ------------
Income (Loss) before Provision for
Income Taxes (30,367) 11,899 (199,259) (15,595)
Provision for Income Taxes 38,000 44,522 75,394 87,367
------------ ------------ ------------ ------------
Net Income (Loss) $ (68,367) $ (32,623) $ (274,653) $ (102,962)
============ ============ ============ ============
Net Income (Loss) per Share
Basic $ (0.01) $ - $ (0.04) $ (0.01)
============ ============ ============ ============
Diluted $ (0.01) $ - $ (0.04) $ (0.01)
============ ============ ============ ============
Basic and Diluted Weighted Average of
Common Shares Outstanding 7,451,044 7,096,999 7,349,804 7,071,504
============ ============ ============ ============
See notes to consolidated financial statements.
F-2
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
For the Six Months Ended
---------------------------------------
June 30, 2002 June 30, 2001
------------- -------------
Cash Flows from Operating Activities
Net loss $ (274,653) $(102,962)
Adjustments to reconcile loss
to net cash provided by (used for) operating
activities:
Depreciation and amortization 219,934 174,972
Accrued interest on stockholder loans - 21,426
Stock based compensation 159,330 235,629
(Increase) decrease in:
Accounts receivable, net of allowance (136,928) (222,942)
Unbilled services 29,040 112,497
Inventory (33,707) (48,158)
Accrued interest receivable 1,159 2,493
Prepaid expenses (58) (90,255)
Security deposits - (3,000)
Increase (decrease) in:
Accounts payable (135,226) 457,741
Customer deposits 48,019 47,722
Unearned revenue 5,898 (78,764)
----------- ---------
Cash provided by (used in) operating activities (117,192) 506,399
----------- ---------
Cash Flows from Investing Activities
Acquisitions of property and equipment (434,296) (445,857)
Purchase of investment securities (3,878) (11,091)
----------- ---------
Cash (used in) investing activities (438,174) (456,948)
----------- ---------
Cash Flows from Financing Activities
Repayments of long term debt (86,391) (74,980)
Proceeds from issuance of long term debt 315,663 311,588
Cash received from stock options exercised 205,884 107,400
----------- ---------
Cash provided by financing activities 435,156 344,008
----------- ---------
Increase (decrease) in cash and cash equivalents (120,210) 393,459
Cash and cash equivalents - beginning of period 4,889,272 281,547
----------- ---------
Cash and cash equivalents - end of period $ 4,769,062 $ 675,006
=========== =========
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 47,338 $ 29,459
=========== =========
Income taxes $ 120,202 $ 54,867
=========== =========
See notes to consolidated financial statements.
F-3
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, June 30, 2002 (Unaudited)
================================================================================
1. ORGANIZATION AND NATURE OF OPERATIONS
We are a holding company conducting business through two wholly-owned
operating subsidiaries, Cell & Molecular Technologies, Inc. (CMT) and
Sentigen Corp. CMT is comprised of a service organization that provides
contract research and development (R&D) services, and a products
organization that provides cell culture media, reagents and other research
products to companies engaged in the drug discovery process. Sentigen Corp.
is involved in scientific research to develop environmentally sound
approaches to prevent insect crop damage and the spread of human diseases
by impacting insect behavior.
CMT operates through two divisions -- Molecular Cell Science (MCS) and
Specialty Media (SM). MCS provides contract R&D services and High
Throughput Screening (HTS) applications and services to companies engaged
in the drug discovery process. SM develops, manufactures and markets
specialty cell culture media, reagents, cell lines focused in the area of
mouse embryology and Murine embryonic stem cells.
The operations of Sentigen Corp. are reflected as research and development
expenses in our consolidated statements of operations. Sentigen Corp.'s
operations, since its inception in February 2000, consist entirely of
research and development.
We were incorporated under the laws of the State of Delaware in May 1990
and, after having engaged in the acquisition and operation of different
business entities subsequent to our initial public offering in August 1990,
we commenced our current business operations when we acquired CMT by a
reverse merger in May 1998. CMT was incorporated in May 1997 to acquire all
of the outstanding stock of Specialty Media, Inc. and Molecular Cell
Science, Inc., two entities operating in the biotechnology and
pharmaceutical industries since 1987 and 1991, respectively. Sentigen Corp.
was formed on February 16, 2000. We changed our name to Sentigen Holding
Corp. on June 23, 2000. On January 9, 2002, our common stock began trading
on The Nasdaq SmallCap Market under the symbol SGHL.
2. SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote
disclosure normally included in annual consolidated financial statements
have been omitted from the accompanying interim consolidated financial
statements. In the opinion of management, all adjustments (which consist
only of normal recurring adjustments) necessary for a fair presentation of
financial position and results of operations have been included. All
significant intercompany transactions and balances have been eliminated.
Operating results for the three and six months ended June 30, 2002, are not
necessarily indicative of the results to be expected for the year ending
December 31, 2002. These financial statements and notes should be read in
conjunction with the financial statements and notes thereto included in our
annual report on Form 10-K for the year ended December 31, 2001.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141).
This standard eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001 and addresses the accounting for
intangible assets and goodwill acquired in a business combination. We have
not completed any business combinations after June 30, 2001, the effective
date of SFAS 141.
F-4
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Intangible Assets"
(SFAS 142), which revises the accounting for purchased goodwill and
intangible assets. Under SFAS 142, goodwill and intangible assets with
indefinite lives will no longer be amortized, but will be tested for
impairment annually or in the event of an impairment indicator. We adopted
SFAS 142 on January 1, 2002. Our intangibles consist of licenses and
deferred financing costs which have a finite life and are amortized over
the life of the assets and accordingly adoption of SFAS 142 had no impact
on our financial position or results of operations. There have been no
acquisitions since the effective date of this pronouncement, and therefore
no goodwill or excess purchase price to be considered.
In August 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). The standard requires entities to
record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. SFAS 143 is effective for all fiscal
years beginning after June 15, 2002. We do not expect SFAS 143 to have a
material effect on our financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS 144 requires that long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or discontinued operations.
Therefore, discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not yet
occurred. SFAS 144 also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from
the ongoing operations of their entity in a disposal transaction. We
adopted SFAS 144 on January 1, 2002 and the adoption did not have a
material effect on our financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections".
SFAS No. 145 rescinds the provisions of SFAS No. 4 that requires companies
to classify certain gains and losses from debt extinguishments as
extraordinary items, eliminates the provisions of SFAS No. 44 regarding
transition to the Motor Carrier Act of 1980 and amends the provisions of
SFAS No. 13 to require that certain lease modifications be treated as sale
leaseback transactions. The provisions of SFAS No. 145 related to
classification of debt extinguishment are effective for fiscal years
beginning after May 15, 2002. Commencing January 1, 2003, the Company will
classify debt extinguishment costs within income from operations and will
reclassify previously reported debt extinguishments as such. The provisions
of SFAS No. 145 related to lease modification are effective for
transactions occurring after May 15, 2002. The Company does not expect the
provisions of SFAS No. 145 related to lease modification to have a material
impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies
Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for
certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in as Restructuring)". The principal
difference between SFAS No. 146 and EITF No. 94-3 relates to its
requirements for recognition of a liability for a cost associated with an
exit or disposal activity. SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF No. 94-3, a liability for an exit cost
was recognized at the date of an entity's commitment to an exit plan. SFAS
No. 146 is effective for exit and disposal activities that are initiated
after December 31, 2002. The Company does not expect the provisions of SFAS
No. 146 to have a material impact on its financial position or results of
operations.
4. RECLASSIFICATIONS
Certain amounts from the prior periods have been restated to conform to the
current presentation. These reclassifications have no effect on previously
reported income.
F-5
5. SEGMENT INFORMATION
We operate through our two wholly-owned subsidiaries, CMT and Sentigen
Corp. CMT is evaluated on the performance of its two divisions, MCS and SM.
Sentigen Corp. is engaged in research and development. We consider MCS, SM
and Sentigen Corp. as our three separate and distinct reportable operating
segments. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We account for
inter- segment sales and transfers, if any, as if the transactions were to
third parties, that is at current market prices. Our reportable segments
are strategic business units that offer different products and services.
They are managed separately because each business requires different
technologies and marketing strategies.
For the Three Months Ended
--------------------------
June 30, June 30,
2002 2001
---------- ----------
Revenues
MCS $1,153,028 $1,121,529
SM 772,037 520,898
Sentigen - -
---------- ----------
Revenues for reportable segments 1,925,065 1,642,427
Elimination of intersegment revenues (24,526) (16,195)
---------- ----------
Total Reported $1,900,539 $1,626,232
========== ==========
Income (Loss) from Operations
MCS $ 204,147 $ 332,726
SM 285,204 192,806
Sentigen (304,430) (331,361)
---------- ----------
Income from operations for reportable segments 184,921 194,171
Corporate loss unallocated to reportable segments (275,755) (324,953)
---------- ----------
Total Reported $ (90,834) $ (130,782)
---------- ----------
Depreciation and Amortization
MCS $ 74,096 $51,271
SM 22,096 26,393
Sentigen 20,565 15,849
-------- -------
Depreciation and amortization for
reportable segments 116,757 93,513
Corporate depreciation and amortization
unallocated to segments 3,030 3,183
-------- -------
Total Reported $119,787 $96,696
======== =======
F-6
For the Six Months Ended
--------------------------
June 30, June 30,
2002 2001
---------- ----------
Revenues
MCS $2,233,056 $2,171,227
SM 1,448,623 991,873
Sentigen - -
---------- ----------
Revenues for reportable segments 3,681,679 3,163,100
Elimination of intersegment revenues (58,562) (29,109)
---------- ----------
Total Reported $3,623,117 $3,133,991
========== ==========
Income (Loss) from Operations
MCS $ 380,559 $ 635,990
SM 557,339 350,294
Sentigen (676,697) (671,352)
---------- ----------
Income from operations for reportable segments 261,201 314,932
Corporate loss unallocated to reportable segments (590,374) (599,975)
---------- ----------
Total Reported $ (329,173) $ (285,043)
========== ==========
Depreciation and Amortization
MCS $134,831 $100,352
SM 37,914 38,405
Sentigen 41,129 30,428
-------- --------
Depreciation and amortization for
reportable segments 213,874 169,185
Corporate depreciation and amortization
unallocated to segments 6,060 5,787
-------- --------
Total Reported $219,934 $174,972
======== ========
June 30, December 31,
2002 2001
----------- -----------
Segment Assets
MCS $ 1,609,489 $ 1,401,896
SM 882,854 927,768
Sentigen 566,589 608,836
----------- -----------
Total assets for reportable segments 3,058,932 2,938,500
Corporate assets unallocated to segments 10,042,536 9,924,444
----------- -----------
Total Reported $13,101,468 $12,862,944
=========== ===========
F-7
6. RESEARCH GRANTS
The SM division, in collaboration with Harvard University, is the recipient
of an NIH Federal Phase II Grant in the amount of $757,532. The research
performed under this grant originally covered the period from July 1998
through August 2001, but was extended through March 2002.
For the three and six months ended June 30, 2002 and 2001 research expenses
incurred were exactly offset by the cash received under the grants. This
activity is not recorded in the consolidated statements of operations as it
is a reimbursement of amounts passed through to sub-recipients. The amounts
received and expended are as follows:
For the Three Months Ended
--------------------------
June 30, June 30,
2002 2001
--------- --------
SM NIH funding received $ - $ 56,050
NIH research expenses incurred by sub-recipients - (56,050)
--------- --------
Net effect on our
Statements of Operations for the three months
then ended $ - $ -
========= ========
For the Six Months Ended
------------------------
June 30, June 30,
2002 2001
--------- --------
SM NIH funding received $ 17,337 $ 98,208
NIH research expenses incurred by sub-recipients (17,337) (98,208)
Net effect on our
Statements of Operations for the
three months then ended $ - $ -
========= ========
F-8
7. EARNINGS PER SHARE
Basic loss per share is calculated by dividing net loss by the weighted
average number of common shares outstanding for the respective periods.
Diluted loss per share includes the effects of securities which are
convertible into common stock, consisting of stock options, to the extent
such conversion would be dilutive. Potential common stock was excluded from
the computation for the three and six months ended June 30, 2002 and 2001
because of their anti-dilutive effect.
8. INVENTORY
Inventory as of June 30, 2002 and December 31, 2001 is entirely comprised
of the physical inventory of the SM Division. Components of physical
inventory as of June 30, 2002 and December 31, 2001 are as follows:
June 30, December 31,
2002 2001
-------- ------------
Finished goods $116,633 $108,373
Packaging materials 28,835 28,510
Raw materials 85,423 60,301
-------- --------
Total inventory $230,891 $197,184
======== ========
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The statements contained herein which
are not historical facts are forward-looking statements that involve known and
unknown risks and uncertainties that could significantly affect our actual
results, performance or achievements in the future and, accordingly, such actual
results, performance or achievements may materially differ from those expressed
or implied in any forward-looking statements made by or on our behalf. These
risks and uncertainties include, but are not limited to, risks associated with
our future growth and operating results; our ability to successfully integrate
newly acquired business operations and personnel into our operations; changes in
customer preferences; our ability to hire and retain key personnel; compliance
with federal or state environmental laws and other laws and changes in such laws
and the administration of such laws; risks associated with government grants and
funding of our customers' projects; dependence on certain significant customers;
protection of trademarks and other proprietary rights, technological change;
competitive factors; unfavorable general economic conditions. Actual results may
vary significantly from such forward-looking statements. The words "believe,"
"expect," "anticipate," "intend" and "plan" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements which speak only as of the date the statement
was made.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2002 TO THREE MONTHS ENDED JUNE 30,
2001
Revenue for the three months ended June 30, 2002 was $1,900,539 as compared
to revenue of $1,626,232 for the three months ended June 30, 2001. This increase
of $274,307 or 17%, was the result of a $23,168 or a 2% increase in contract
revenue from the Molecular Cell Science (MCS) division and a $251,139 or a 48%
increase in sales from the Specialty Media (SM) division. Revenues are entirely
attributable to our wholly-owned subsidiary, Cell & Molecular Technologies, Inc.
(CMT).
As of January 1, 2002, the MCS division renegotiated a significant contract
for high-throughput screening (HTS) services from a pay-per-service contract to
a retainer contract. The new retainer contract provides for payments of $167,000
per month, regardless of the volume of services performed. The term of the
contract is for one year, ending December 31, 2002. An analysis of the revenues
from the MCS division follows:
For the Three Months Ended
June 30,
--------------------------- Percent
2002 2001 Change
---------- ---------- -------
HTS contract $ 501,000 $ 697,468 (28%)
All other contracts 627,502 407,866 54%
---------- ----------
Total $1,128,502 $1,105,334 2%
========== ==========
The 28% decline in revenue from our HTS contract is due to the
renegotiation of the contract as described above. The new retainer HTS contract
for the year ending December 31, 2002 provides for payments totaling $2,004,000
as compared to $1,745,020 provided by the pay-per-service contract during the
year ended December 31, 2001, a 15% increase. The 54% growth from other
contracts was driven by: (i) mouse genetics services, which include the
construction of sophisticated knock-out and knock-in gene models of mice that
are used to study transcription activity, gene expression and function by
altering or mutating a specific gene in the mouse, and (ii) protein expression
services, which include the expression and purification of recombinant proteins
in mammalian cell lines.
Revenues from the SM division, grew 48% for the three months ended June 30,
2002 as compared to the three months ended June 30, 2001. The growth was driven
by four factors: (i) an increase in sales of SM's line of Murine Embryonic stem
cells and feeder cells as well as media associated with this product line, (ii)
increase in
12
sales of SM's proprietary formulations sold under private label, (iii) an
increase in sales to Japan through SM's distributor, the research products
division of Dainippon Pharmaceuticals, and (iv) price increases implemented as
of January 1, 2002.
Income after direct costs, or gross margin on revenues for the three months
ended June 30, 2002 was $1,179,557, or 62% of revenues as compared to income
after direct costs, or gross margin on revenues of $1,065,446 or 66% of revenue
for the three months ended June 30, 2001. This decline can be attributed to
rising serum costs in the SM division which negatively impacted margins in that
division. The MCS division's gross margin was 66% for both the quarter ended
June 30, 2002 and the quarter ended June 30, 2001.
Operating expenses for the three months ended June 30, 2002 were $1,270,391
as compared to $1,196,228 for the three months ended June 30, 2001. This
$74,163, or 6% increase is primarily attributable to: (i) a 29% increase in
selling, general and administrative expenses (attributable to CMT) due to CMT's
expansion in Phillipsburg, NJ and North Wales, PA, and increases in commercial
insurance expenses, (ii) a 1% increase in research and development costs of
Sentigen Corp. and (iii) a 24% increase in depreciation and amortization due to
our capital expenditures in connection with CMT's expansion in Phillipsburg, NJ
and North Wales, PA. These increases were partially offset by: (i) a 38% decline
in stock based compensation due to the change in the vesting terms of the option
agreements with our scientific consultants in the fourth quarter of 2001, and
(ii) a 15% decline in corporate overhead driven by reduced professional fees.
The loss from operations for the three months ended June 30, 2002 was
$90,834 as compared to a loss from operations of $130,782 for the three months
ended June 30, 2001. An explanation of the 31% improvement is as follows:
For the Three Months Ended
June 30,
--------------------------- Percent
2002 2001 Change
--------- --------- -------
CMT $ 489,351 $ 525,532 (7%)
Sentigen Corp. (304,430) (331,361) 8%
Corporate (275,755) (324,953) 15%
--------- --------
Total $ (90,834) $(130,782) 31%
========= ========
The income from operations for CMT declined by 7%. The decline was due to
higher depreciation and amortization charges related to the increased capital
expenditures associated with CMT's expansion in Phillipsburg, NJ and North
Wales, PA as well as higher selling, general and administrative costs due to the
respective expansions. The loss from operations for Sentigen Corp. improved by
8%. The improvement was due to lower stock based compensation charges due to the
change in the vesting terms of the option agreements with our scientific
consultants in the fourth quarter of 2001. Sentigen Corp's operations consist
entirely of research and development activities. The loss from operations for
Corporate activities improved by 15%. The improvement can largely be attributed
to lower professional fees.
Interest income, net of interest expenses declined by $82,214 or 58%, which
is directly attributable to the fall in yields on U.S. Treasury and money market
securities.
The provision for income taxes declined 15% primarily due to the decline in
the income from operations for CMT.
As a result of the foregoing our net loss increased from $32,623 for the
three months ended June 30, 2001 to $68,367 for the three months ended June 30,
2002.
13
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2002 TO SIX MONTHS ENDED JUNE 30, 2001
Revenue for the six months ended June 30, 2002 was $3,623,117 as compared
to revenue of $3,133,991 for the six months ended June 30, 2001. This increase
of $489,126 or 16%, was the result of a $32,376 or a 2% increase in contract
revenue from the Molecular Cell Science (MCS) division and a $456,750 or a 46%
increase in sales from the Specialty Media (SM) division. Revenues are entirely
attributable to our wholly-owned subsidiary, Cell & Molecular Technologies, Inc.
(CMT).
As of January 1, 2002, the MCS division renegotiated a significant contract
for high-throughput screening (HTS) services from a pay-per-service contract to
a retainer contract. The new retainer contract provides for payments of $167,000
per month, regardless of the volume of services performed. The term of the
contract is for one year, ending December 31, 2002. An analysis of the revenues
from the MCS division follows:
For the Six Months Ended
June 30,
---------------------------- Percent
2002 2001 Change
---------- ---------- -------
HTS contract $1,002,000 $1,308,089 (23%)
All other contracts 1,172,494 834,029 41%
---------- ----------
Total $2,174,494 $2,142,118 2%
========== ==========
The 23% decline in revenue from our HTS contract is due to the
renegotiation of the contract as described above. The new retainer HTS contract
for the year ending December 31, 2002 provides for payments totaling $2,004,000
as compared to $1,745,020 provided by the pay-per-service contract during the
year ended December 31, 2001, a 15% increase. The 41% growth from other
contracts was driven by: (i) mouse genetics services, which include the
construction of sophisticated knock-out and knock-in gene models of mice that
are used to study transcription activity, gene expression and function by
altering or mutating a specific gene in the mouse, and (ii) protein expression
services, which include the expression and purification of recombinant proteins
in mammalian cell lines.
Revenues from the SM division, grew 46% for the six months ended June 30,
2002 as compared to the six months ended June 30, 2001. The growth was driven by
four factors: (i) an increase in sales of SM's line of Murine Embryonic stem
cells and feeder cells as well as media associated with this product line, (ii)
increase in sales of SM's proprietary formulations sold under private label,
(iii) an increase in sales to Japan through SM's distributor, the research
products division of Dainippon Pharmaceuticals, and (iv) price increases
implemented as of January 1, 2002.
Income after direct costs, or gross margin on revenues for the six months
ended June 30, 2002 was $2,294,912 or 63% of revenues as compared to income
after direct costs or gross margin on revenues of $1,959,148 or 63% of revenues
for the six months ended June 30, 2001. The MCS division's gross margin was 66%
for the six months ended June 30, 2002 as compared to 63% for the six months
ended June 30, 2001. The increase in gross margin can be attributed to a decline
in materials costs. The SM division's gross margin was 59% for the six months
ended June 30, 2002 as compared to 62% for the six months ended June 30, 2001.
The decline in gross margin can be attributed to rising serum costs for the SM
division.
Operating expenses for the six months ended June 30, 2002 were $2,624,085
as compared to $2,244,191 for the six months ended June 30, 2001. This $379,894
or 17% increase is primarily attributable to: (i) a 43% increase in selling,
general and administrative expenses (attributable to CMT) due to CMT's expansion
in Phillipsburg, NJ and North Wales, PA, and increases in commercial insurance
expenses (ii) an 18% increase in the research and development costs of Sentigen
Corp. and (iii) a 26% increase in depreciation and amortization due to our
capital expenditures in connection with CMT's expansion in Phillipsburg, NJ and
North Wales, PA. These increases were partially offset by: (i) a 32% decline in
stock based compensation due to the change in the vesting terms of the option
agreements with our scientific consultants in the fourth quarter of 2001, and
(ii) a 2% decline in corporate overhead driven by reduced professional fees.
14
The loss from operations for the six months ended June 30, 2002 was
$329,173 as compared to a loss from operations of $285,043 for the six months
ended June 30, 2001. An explanation of the 15% decline is as follows:
For the Six Months Ended
June 30,
------------------------- Percent
2002 2001 Change
--------- --------- -------
CMT $ 937,898 $ 986,284 (5%)
Sentigen Corp. (676,697) (671,352) (1%)
Corporate (590,374) (599,975) 2%
--------- ---------
Total $(329,173) $(285,043) (15%)
========= =========
The income from operations for CMT declined by 5%. The decline was due to
higher depreciation and amortization charges related to the increased capital
expenditures associated with CMT's expansion in Phillipsburg, NJ and North
Wales, PA as well as higher selling, general and administrative costs due to the
respective expansions. The loss from operations for Sentigen Corp. increased by
1%. Sentigen Corp's operations consist entirely of research and development
activities. The loss from operations for Corporate activities improved by 2%.
The improvement can largely be attributed to lower professional fees.
Interest income, net of interest expenses declined by $139,534 or 52%,
which is directly attributable to the fall in yields on U.S. Treasury and money
market securities.
The provision for income taxes declined 14% primarily due to the decline in
the income from operations for CMT.
As a result of the foregoing our net loss increased from $102,962 for the
six months ended June 30, 2001 to $274,653 for the six months ended June 30,
2002.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002 we had $4,769,062 in cash and working capital of
$9,992,921. During the six months ended June 30, 2002 we financed our operations
primarily through working capital and we financed capital expenditures through
bank loans.
During the first quarter of 2001 we leased approximately 3,000 square feet
of laboratory space to accommodate growth opportunities for CMT's High
Throughput Screening applications and assay development services. In connection
with this new facility, CMT borrowed $404,337 under a $720,000 loan commitment
to finance capital equipment expenditures. In March 2002, CMT borrowed the
remaining $315,663 under this loan commitment. The $720,000 loan is being repaid
over 7 years at the prime rate plus 50 basis points.
In June 2001, Sentigen Corp. borrowed an additional $60,000 under its
existing $500,000 five-year loan commitment to finance equipment expenditures
for a total of $300,000 borrowed to date, at an interest rate of 8.75%. Sentigen
Corp. now has $200,000 in available funds under this loan commitment.
Sentigen Corp. was formed in February of 2000 and is focusing on research
and development activities. Our licensing agreement with The Trustees of the
Columbia University in New York calls for us to contribute a minimum of
$1,000,000 into Sentigen Corp. within one year of the date of the agreement (by
April 2001) or we must be involved in active negotiations to raise $1,000,000 in
additional funding. We satisfied this provision through the consummation of our
private placement in November 2000 in which we sold 863,834 shares of our common
stock at $6.00 per share for aggregate gross proceeds of $5,183,004.
Another provision of the agreement calls for a minimum of $50,000 per six
month period or $100,000 per annual period to be spent on bona fide research and
development of the patents and licenses subject to the agreement from the second
through the fourth years of the agreement (April 2002 through April 2004) or we
must be involved
15
in active negotiation to raise $1,000,000 in additional funding. We satisfied
this provision through April 2002. We believe that we have enough capital
resources to meet the financial requirements of this provision for the agreement
years 2002 and beyond.
There is no assurance that the technology involved in the research and
development activities related to the licensing agreement with The Trustees of
Columbia University will prove to be productive. In the event we should decide
to terminate such activities, there will be associated costs to us such as
payment to employees and expenses related to the closing of our facility at 3960
Broadway, New York, NY. No provisions have been made for such possible further
expense.
We believe our financial resources will be sufficient to fund our
operations and capital requirements for the foreseeable future. However, we may,
in the future, deem it advisable to obtain additional debt or equity financing
if interest rates and other terms are favorable.
SIGNIFICANT ACCOUNTING POLICIES
We do not believe that any of the accounting policies we have adopted
involve either a high degree of complex and subjective judgment in their
application or choices among alternatives that would lead to materially
different results. A summary of our significant accounting policies is provided
in Note 2 of the Financial Statements.
INFLATION
Inflation has historically not had a material effect on our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). This
standard eliminates the pooling method of accounting for business combinations
initiated after June 30, 2001 and addresses the accounting for intangible assets
and goodwill acquired in a business combination. We have not completed any
business combinations after June 30, 2001, the effective date of SFAS 141.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Intangible Assets" (SFAS
142), which revises the accounting for purchased goodwill and intangible assets.
Under SFAS 142, goodwill and intangible assets with indefinite lives will no
longer be amortized, but will be tested for impairment annually or in the event
of an impairment indicator. We adopted SFAS 142 on January 1, 2002. Our
intangibles consist of licenses and deferred financing costs which have a finite
life and are amortized over the life of the assets and accordingly adoption of
SFAS 142 had no impact on our financial position or results of operations. There
have been no acquisitions since the effective date of this pronouncement, and
therefore no goodwill or excess purchase price to be considered.
In August 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS 143). The standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period in
which it is incurred. SFAS 143 is effective for all fiscal years beginning after
June 15, 2002. We do not expect SFAS 143 to have a material effect on our
financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 replaces SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". SFAS 144 requires that long-lived assets be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or discontinued operations. Therefore, discontinued
16
operations will no longer be measured at net realizable value or include amounts
for operating losses that have not yet occurred. SFAS 144 also broadens the
reporting of discontinued operations to include all components of an entity with
operations that can be distinguished from the rest of the entity and that will
be eliminated from the ongoing operations of their entity in a disposal
transaction. We adopted SFAS 144 on January 1, 2002 and the adoption did not
have a material effect on our financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections". SFAS
No. 145 rescinds the provisions of SFAS No. 4 that requires companies to
classify certain gains and losses from debt extinguishments as extraordinary
items, eliminates the provisions of SFAS No. 44 regarding transition to the
Motor Carrier Act of 1980 and amends the provisions of SFAS No. 13 to require
that certain lease modifications be treated as sale leaseback transactions. The
provisions of SFAS No. 145 related to classification of debt extinguishment are
effective for fiscal years beginning after May 15, 2002. Commencing January 1,
2003, the Company will classify debt extinguishment costs within income from
operations and will reclassify previously reported debt extinguishments as such.
The provisions of SFAS No. 145 related to lease modification are effective for
transactions occurring after May 15, 2002. The Company does not expect the
provisions of SFAS No. 145 related to lease modification to have a material
impact on its financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 nullifies Emerging
Issues Task Force ("EITF") No. 94-3, "Liability Recognition for certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in as Restructuring)". The principal difference between SFAS No.
146 and EITF No. 94-3 relates to its requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No. 94-3, a liability for
an exit cost was recognized at the date of an entity's commitment to an exit
plan. SFAS No. 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. The Company does not expect the provisions of
SFAS No. 146 to have a material impact on its financial position or results of
operations.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT
TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports on Form 8-K
Form 8-K, dated May 6, 2002 announcing March 31, 2002 financial results
17
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.
SENTIGEN HOLDING CORP.
Dated: August 14, 2002
By: /s/ Fredrick B. Rolff
-----------------------------------------------
Fredrick B. Rolff,
Chief Financial Officer, Vice President and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)
18