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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 SEPTEMBER 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 Identification Number)
Incorporation or Organization)
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 November 13, 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.............................................................................................. 3
Item 1. Consolidated Financial Statements................................................................................... 3
Consolidated Balance Sheets
September 30, 2002 (Unaudited) and December 31, 2001.......................................... 3
Consolidated Statements of Operations (Unaudited)
For the three and nine months ended, September 30, 2002 and 2001.............................. 4
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended, September 30, 2002 and 2001........................................ 5
Notes to Consolidated Financial Statements (Unaudited).............................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................................. 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk.............................................................. 17
Item 4. Controls and Procedures............................................................................................. 17
PART II. OTHER INFORMATION................................................................................................... 17
Item 1. Legal Proceedings................................................................................................... 17
Item 2. Changes in Securities and Use of Proceeds........................................................................... 18
Item 3. Default Upon Senior Securities...................................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders................................................................ 18
Item 5. Other Information................................................................................................... 18
Item 6. Exhibits and Reports on Form 8-K.................................................................................... 18
SIGNATURES................................................................................................................... 19
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 22
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 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2002 2001
------------ ------------
Assets
Current Assets
Cash and cash equivalents $ 4,967,201 $ 4,889,272
Investment securities 4,904,338 4,898,490
Accounts receivable - net of allowance for doubtful accounts
of $45,000 for 2002 and 2001 548,195 771,867
Unbilled services 12,255 49,245
Inventory 241,152 197,184
Accrued interest receivable 117,064 47,135
Prepaid expenses 66,100 75,254
------------ ------------
10,856,305 10,928,447
------------ ------------
Property, plant and equipment 3,449,181 2,903,450
Less: Accumulated depreciation 1,768,358 1,387,154
------------ ------------
1,680,823 1,516,296
------------ ------------
Other Assets
Security deposits 11,917 11,917
Deferred financing costs - net of accumulated amortization
of $3,749 and $2,648 for 2002 and 2001, respectively 9,911 11,012
License costs - net of accumulated amortization
of $64,792 and $45,353 for 2002 and 2001, respectively 375,833 395,272
------------ ------------
397,661 418,201
------------ ------------
Total Assets $ 12,934,789 $ 12,862,944
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long term debt $ 244,852 $ 175,702
Accounts payable and accrued expenses 448,678 620,387
Customer deposits 144,032 196,613
Unearned revenue 5,565 5,750
------------ ------------
843,127 998,452
Long-Term debt - net of current maturities 1,020,107 914,110
------------ ------------
1,863,234 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 12,230,118 11,812,612
Accumulated (deficit) (1,233,073) (933,704)
------------ ------------
11,071,555 10,950,382
------------ ------------
Total Liabilities and Stockholders' Equity $ 12,934,789 $ 12,862,944
============ ============
See notes to consolidated financial statements.
3
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited) (Unaudited)
For the Three Months Ended For the Nine Months Ended
-------------------------- -------------------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Revenue
Molecular cell science $ 1,108,307 $ 892,511 $ 3,282,801 $ 3,034,628
Specialty media 673,331 627,948 2,121,954 1,619,822
----------- ----------- ----------- -----------
1,781,638 1,520,459 5,404,755 4,654,450
----------- ----------- ----------- -----------
Direct Costs
Molecular cell science 345,214 317,353 1,079,166 1,112,269
Specialty media 257,944 237,320 852,197 617,248
----------- ----------- ----------- -----------
603,158 554,673 1,931,363 1,729,517
----------- ----------- ----------- -----------
Income After Direct Costs
Molecular cell science 763,093 575,158 2,203,635 1,922,359
Specialty media 415,387 390,628 1,269,757 1,002,574
----------- ----------- ----------- -----------
1,178,480 965,786 3,473,392 2,924,933
----------- ----------- ----------- -----------
Operating Expenses
Selling, general and administrative costs 586,944 512,693 1,745,310 1,325,267
Research and development 209,914 302,149 712,054 728,976
Corporate overhead 195,470 264,733 779,784 858,921
Stock based compensation 55,328 56,496 214,658 292,125
Depreciation and amortization 181,809 109,833 401,744 284,805
----------- ----------- ----------- -----------
1,229,465 1,245,904 3,853,550 3,490,094
----------- ----------- ----------- -----------
Loss From Operations (50,985) (280,118) (380,158) (565,161)
----------- ----------- ----------- -----------
Interest income 75,285 162,152 252,537 482,484
Interest expense (27,122) (22,471) (74,460) (73,355)
----------- ----------- ----------- -----------
Interest income, net of expense 48,163 139,681 178,077 409,129
----------- ----------- ----------- -----------
Loss before Provision for Income Taxes (2,822) (140,437) (202,081) (156,032)
Provision for Income Taxes 21,894 36,755 97,288 124,122
----------- ----------- ----------- -----------
Net Loss $ (24,716) $ (177,192) $ (299,369) $ (280,154)
=========== =========== =========== ===========
Net Loss per Share
Basic $ (0.00) $ (0.02) $ (0.04) $ (0.04)
=========== =========== =========== ===========
Diluted $ (0.00) $ (0.02) $ (0.04) $ (0.04)
=========== =========== =========== ===========
Basic and Diluted Weighted Average of Common
Shares Outstanding 7,451,044 7,147,324 7,375,114 7,090,459
=========== =========== =========== ===========
See notes to consolidated financial statements
4
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
For the Nine Months Ended
-------------------------
September 30, September 30,
2002 2001
----------- -----------
Cash Flows from Operating Activities
Net loss $ (299,369) $ (280,154)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation and amortization 401,744 284,805
Accrued interest on stockholder loans - 22,676
Stock based compensation 214,658 292,125
(Increase) decrease in:
Accounts receivable, net of allowance 223,672 (134,903)
Unbilled services 36,990 112,993
Inventory (43,968) (25,121)
Accrued interest receivable (69,929) (133,426)
Prepaid expenses 9,154 (98,338)
Security deposits - (11,117)
Increase (decrease) in:
Accounts payable and accrued expenses (171,709) 156,910
Customer deposits (52,581) 22,467
Unearned revenue (185) (50,259)
----------- -----------
Cash provided by operating activities 248,477 158,658
----------- -----------
Cash Flows from Investing Activities
Acquisitions of property and equipment (545,731) (589,054)
Maturities of investment securities - 340,000
Purchase of investment securities (5,848) (16,713)
----------- -----------
Cash used in investing activities (551,579) (265,767)
----------- -----------
Cash Flows from Financing Activities
Repayments of long term debt (140,516) 461,258
Proceeds from issuance of long term debt 315,663 (711,667)
Cash received from stock options exercised 205,884 107,401
----------- -----------
Cash provided by (used in) financing activities 381,031 (143,008)
----------- -----------
Increase (decrease) in cash and cash equivalents 77,929 (250,117)
Cash and cash equivalents - beginning of period 4,889,272 281,547
----------- -----------
Cash and cash equivalents - end of period $ 4,967,201 $ 31,430
----------- -----------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year:
Interest $ 74,460 $ 50,679
=========== ===========
Income taxes $ 159,987 $ 75,367
=========== ===========
See notes to consolidated financial statements.
5
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, September 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, 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 nine months ended
September 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 (the "FASB") 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.
6
In June 2001, the FASB 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 or business combinations since
the effective date of this pronouncement, and therefore there is no
goodwill or excess purchase price to be considered.
In August 2001, the FASB 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 FASB 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 reclassified to conform
to the current presentation. These reclassifications have no effect on
previously reported income.
7
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
--------------------------
September 30, September 30,
2002 2001
----------- -----------
Revenues
MCS $ 1,135,274 $ 947,985
SM 673,331 628,219
Sentigen - -
----------- -----------
Revenues for reportable segments 1,808,605 1,576,204
Elimination of intersegment revenues (26,967) (55,745)
----------- -----------
Total Reported $ 1,781,638 $ 1,520,459
----------- -----------
Income (Loss) from Operations
MCS $ 164,602 $ 107,599
SM 249,680 236,194
Sentigen
(266,475) (356,226)
----------- -----------
Income (loss) from operations
for reportable segments 147,807 (12,433)
Corporate loss unallocated to reportable segments (198,792) (267,685)
----------- -----------
Total Reported $ (50,985) $ (280,118)
----------- -----------
Depreciation and Amortization
MCS $ 126,596 $ 73,709
SM 31,326 16,201
Sentigen 20,565 16,971
----------- -----------
Depreciation and amortization for
reportable segments 178,487 106,881
Corporate depreciation and amortization
unallocated to segments 3,322 2,952
----------- -----------
Total Reported $ 181,809 $ 109,833
=========== ===========
8
For the Nine Months Ended
-------------------------
September 30, September 30,
2002 2001
----------- -----------
Revenues
MCS $ 3,368,330 $ 3,119,211
SM 2,121,954 1,620,093
Sentigen - -
----------- -----------
Revenues for reportable segments 5,490,284 4,739,304
Elimination of intersegment revenues (85,529) (84,854)
----------- -----------
Total Reported $ 5,404,755 $ 4,654,450
----------- -----------
Income (Loss) from Operations
MCS $ 545,161 $ 743,589
SM 807,019 586,488
Sentigen (943,172) (1,027,578)
----------- -----------
Income from operations for reportable segments 409,008 302,499
Corporate loss unallocated to reportable segments (789,166) (867,660)
----------- -----------
Total Reported $ (380,158) $ (565,161)
----------- -----------
Depreciation and Amortization
MCS $ 261,428 $ 174,061
SM 69,240 54,605
Sentigen 61,694 47,401
----------- -----------
Depreciation and amortization for
reportable segments 392,362 276,067
Corporate depreciation and amortization
unallocated to segments 9,382 8,738
----------- -----------
Total Reported $ 401,744 $ 284,805
=========== ===========
September 30, December 31,
2002 2001
----------- -----------
Segment Assets
MCS $ 1,343,178 $ 1,401,896
SM 970,640 927,768
Sentigen 552,146 608,836
----------- -----------
Total assets for reportable segments 2,865,964 2,938,500
Corporate assets unallocated to segments 10,068,825 9,924,444
----------- -----------
Total Reported $12,934,789 $12,862,944
=========== ===========
9
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 nine months ended September 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
--------------------------
September 30, September 30,
2002 2001
------------ ------------
SM NIH funding received $ - $ 105,362
NIH research expenses incurred by sub-recipients - (105,362)
------------ ------------
Net effect on our
Statements of Operations for the
three months then ended $ - $ -
============ ============
For the Nine Months Ended
--------------------------
September 30, September 30,
2002 2001
------------ ------------
SM NIH funding received $ 17,337 $ 203,570
NIH research expenses incurred by sub-recipients (17,337) (203,570)
------------ ------------
Net effect on our
Statements of Operations for the
nine months then ended $ - $ -
------------ -----------
10
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 nine months ended September 30,
2002 and 2001 because of SFAS No. 128 "Earnings per Share" which prohibits
adjusting the denominator of diluted EPS for additional potential common
shares when a net loss from continuing operations is reported.
8. INVENTORY
Inventory as of September 30, 2002 and December 31, 2001 is entirely
comprised of the physical inventory of the SM Division. Components of
physical inventory as of September 30, 2002 and December 31, 2001 are as
follows:
September 30, December 31,
2002 2001
------------- ------------
Finished goods $112,584 $108,373
Packaging materials 32,836 28,510
Raw materials 95,732 60,301
------------- ------------
Total inventory $241,152 $197,184
============= ============
11
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 THE THREE MONTHS ENDED SEPTEMBER 30, 2002 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2001
Revenues. All of our revenues are entirely attributable to our
wholly-owned subsidiary, Cell & Molecular Technologies, Inc. (CMT). CMT has two
divisions, Molecular Cell Science (MCS) and Specialty Media (SM). Revenue for
the three months ended September 30, 2002 was $1,781,638 as compared to revenue
of $1,520,459 for the three months ended September 30, 2001. This increase of
$261,179 or 17%, was the result of a $215,796 or a 24% increase in contract
revenue from the MCS division and a $45,383 or a 7% increase in sales from the
SM division.
The 24% increase from the MCS division was due in part to the
renegotiation, as of January 1, 2002, of 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
September 30,
-------------
Percent
2002 2001 Change
---------- ---------- ----------
HTS contract $ 501,000 $ 248,730 101%
All other contracts 607,307 643,781 (6%)
---------- ----------
Total $1,108,307 $ 892,511 24%
========== ==========
The 101% growth from the HTS contract was due to the fact that we provided
more HTS services to this customer during the quarter ended September 30, 2002
compared to the quarter ended September 30, 2001 and, under the old
pay-per-service agreement, would have also shown an increase in revenues from
this contract during the quarter ended September 30, 2002.
Revenues from the SM division, grew 7% for the three months ended
September 30, 2002 as compared to the three months ended September 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.
12
Income after Direct Costs and Gross Margin. Income after direct costs, for
the three months ended September 30, 2002 was $1,178,480, as compared to income
after direct costs of $965,786 for the three months ended September 30, 2001.
Gross margin for the three months ended September 30, 2002 was 66% compared to
64% for the three months ended September 30, 2001. These increases were due
primarily to lower direct materials costs in the MCS division.
Operating Expenses. Operating expenses for the three months ended
September 30, 2002 were $1,229,465 as compared to $1,245,904 for the three
months ended September 30, 2001. This slight decrease of $16,439 was primarily
attributable to: (i) a 31% decline in research and development costs of Sentigen
Corp., (ii) a 26% decline in corporate overhead driven by reduced professional
fees and (iii) a 2% decline in stock based compensation. These decreases were
offset by: (i) a 14% increase in selling, general and administrative expenses
due to the opening of two new CMT facilities located in Phillipsburg, New Jersey
and North Wales, Pennsylvania, as well as increases in commercial insurance
expenses, and (ii) a 66% increase in depreciation and amortization due to
capital expenditures made in connection with CMT's new facilities.
Loss from Operations. The loss from operations for the three months ended
September 30, 2002 was $50,985 as compared to a loss from operations of $280,118
for the three months ended September 30, 2001. The components of this 82%
improvement are as follows:
For the Three Months Ended
September 30,
-------------
Percent
2002 2001 Change
--------- ---------
CMT $ 414,282 $ 343,793 21%
Sentigen Corp. (266,475) (356,226) 25%
Corporate (198,792) (267,685) 26%
--------- ---------
Total $ (50,985) $(280,118) 82%
========= =========
Income from operations for CMT increased by 21%, primarily due to the
higher revenues from our HTS business compared to the quarter ended September
30, 2001. Loss from operations attributable to Sentigen Corp. improved by 25%,
due to lower operating costs and lower professional fees. Sentigen Corp's
operations consist entirely of research and development activities. Loss from
operations attributable to Corporate activities improved by 26% largely due to
lower professional fees.
Interest income. Interest income, net of interest expenses declined by
$91,518 due to the fall in yields on U.S. Treasury and money market securities.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
Revenues. Revenue for the nine months ended September 30, 2002 was
$5,404,755 as compared to revenue of $4,654,450 for the nine months ended
September 30, 2001. This increase of $750,305 or 16%, was the result of a
$248,173 or a 8% increase in contract revenue from the MCS division and a
$502,132 or a 31% increase in sales from the SM division.
13
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 Nine Months Ended
September 30,
-------------
Percent
2002 2001 Change
------------- ------------- ------------
HTS contract $ 1,503,000 $ 1,556,819 (3%)
All other contracts 1,779,801 1,477,809 20%
------------- -------------
Total $ 3,282,801 $ 3,034,628 8%
============= =============
The 3% decline in revenue from the HTS contract was due to the
renegotiation of the contract as described above. The 20% 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 31% for the nine months ended
September 30, 2002 as compared to the nine months ended September 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 and Gross Margin. Income after direct costs for
the nine months ended September 30, 2002 was $3,473,392 as compared to income
after direct costs of $2,924,933 for the nine months ended September 30, 2001.
Gross margin for the nine months ended September 30, 2002 was 64% compared to
63% for the nine months ended September 30, 2001. These increases were driven by
reduced direct materials costs for the MCS division, offset in part by rising
serum costs in the SM division.
Operating Costs. Operating expenses for the nine months ended September
30, 2002 were $3,853,550 as compared to $3,490,094 for the nine months ended
September 30, 2001. This increase of $363,456 or 10% was primarily attributable
to: (i) a 32% increase in selling, general and administrative expenses due to
the opening of two new CMT facilities located in Phillipsburg, New Jersey and
North Wales, Pennsylvania, and increases in commercial insurance expenses and
(ii) a 41% increase in depreciation and amortization due to capital expenditures
made in connection with CMT's new facilities. These increases were partially
offset by: (i) a 2% decline in the research and development costs of Sentigen
Corp., (ii) a 27% 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 (iii) a 9% decline in corporate overhead driven by
reduced professional fees.
Loss from Operations. Loss from operations for the nine months ended
September 30, 2002 was $380,158 as compared to a loss from operations of
$565,161 for the nine months ended September 30, 2001. The components of this
33% improvement are as follows:
For the Nine Months Ended
September 30,
-------------
Percent
2002 2001 Change
------------- -------------
CMT $ 1,352,180 $ 1,330,077 2%
Sentigen Corp. (943,172) (1,027,578) 8%
Corporate (789,166) (867,660) 9%
------------- -------------
Total $ (380,158) $ (565,161) 33%
============= =============
14
Income from operations for CMT increased by 2% due to higher revenues
offset by higher operating costs and depreciation and amortization charges
related to CMT's two new facilities. Loss from operations attributable to
Sentigen Corp. improved by 8% due to reduced operating expenses. Sentigen Corp's
operations consist entirely of research and development activities. Loss from
operations attributable to Corporate activities improved by 9% largely
attributable to lower professional fees.
Interest Income. Interest income, net of interest expenses declined by
$231,052 or 56%, due to the fall in yields on U.S. Treasury and money market
securities.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002 we had $4,967,201 in cash and working capital of
$10,013,178. During the nine months ended September 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 to finance capital expenditures
made in connection with our new facility in Phillipsburg, New Jersey. This loan
is required to be repaid over seven years at a variable interest rate (currently
4.75%) of the prime rate plus .50%. Sentigen Holding Corp. guarantees this
obligation of CMT.
In June 2001, Sentigen Corp. borrowed an additional $60,000 under its
existing $500,000 loan facility. This facility has a term of five years, may be
used to finance capital expenditures and bears interest at 8.75%. As of
September 30, 2002 and the date of filing of this report, Sentigen Corp. had
borrowed $300,000 under this facility and $200,000 remained available for
borrowing.
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 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 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, New York. 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 at least the next 12 months. However, we
may, in the future, need to obtain additional debt or equity financing to meet
our liquidity needs. It is possible that any such financing may be dilutive to
our stockholders and the terms of any debt financings likely could contain
restrictive covenants limiting our ability to do certain things, including
paying dividends. Our ability to obtain financing depends upon the status of our
future business prospects, as well as conditions prevailing in the capital
markets.
15
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 FASB 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 FASB 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 or business combinations since the effective date of this
pronouncement, and therefore there is no goodwill or excess purchase price to be
considered.
In August 2001, the FASB 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 FASB 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
16
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
We are exposed to market risk for the effect of interest rate changes on
our U.S. Treasury securities, money market securities and variable rate bank
debt. We are not currently exposed to any foreign currency risks. Other
information relating to quantitative and qualitative disclosure about market
risk is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates
primarily to our cash, investment securities and our long-term debt. All of our
cash and cash equivalents and investment securities are designated as
held-to-maturity and, accordingly, are presented at amortized cost on our
balance sheets. We generally invest our excess cash in U.S. Treasury securities
of short- to intermediate-term and money market mutual funds. Fixed rate
securities may have their fair market value adversely affected due to a rise in
interest rates, and we may suffer losses in principal if forced to sell
securities that have declined in market value due to changes in interest rates
prior to maturity.
At September 30, 2002, we have total debt of $1,264,959. This debt
consists of three bank notes used for equipment financing and a mortgage on our
executive office at 580 Marshall Street, Phillipsburg, New Jersey 08865. Our
payment commitments under these debt instruments are comprised of interest and
principal payments. We may incur additional interest expense over the repayment
period with increases in the prime rate of interest.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chairman of the Board and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Company's Chairman of the Board and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) that is required to be
included in the Company's periodic filings with the Securities and Exchange
Commission. There have been no significant changes in the Company's internal
controls or, to the Company's knowledge, in other factors that could
significantly affect those internal controls subsequent to the date the Company
carried out its evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT ISSUANCES OF UNREGISTERED SECURITIES
Not applicable.
USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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
None.
18
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: November 13, 2002
By: /s/ Fredrick B. Rolff
----------------------------------------
Fredrick B. Rolff,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
19
CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMEMDED
I, Joseph K. Pagano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sentigen Holding
Corp;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of , and for, the periods presented in
this quarterly report;
4. the registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Joseph K. Pagano Dated: November 13, 2002
- -----------------------------------------------
Joseph K. Pagano
Chairman of the Board, Chief Executive Officer
and President
20
CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMEMDED
I, Fredrick B. Rolff, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Sentigen Holding
Corp;
2. based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of , and for, the periods presented in
this quarterly report;
4. the registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days of the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
/s/ Fredrick B. Rolff Dated: November 13, 2002
- ---------------------------------------------
Fredrick B. Rolff
Chief Financial Officer
21