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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 MARCH 31, 2003
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
Incorporation or Organization) 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
As of May 14, 2003 the registrant had outstanding 7,455,044 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
March 31, 2003 (Unaudited) and December 31, 2002...................... 3
Consolidated Statements of Operations (Unaudited)
For the three months ended, March 31, 2003 and 2002................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the three months ended, March 31, 2003 and 2002................... 5
Notes to Consolidated Financial Statements (Unaudited)........................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................. 13
Item 3. Quantitative and Qualitative Disclosure of Market Risk........................... 19
Item 4. Controls and Procedures.......................................................... 20
PART II. OTHER INFORMATION................................................................ 20
Item 1. Legal Proceedings................................................................ 20
Item 2. Changes in Securities and Use of Proceeds........................................ 20
Item 3. Default Upon Senior Securities................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders.............................. 21
Item 5. Other Information................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................. 21
SIGNATURES................................................................................ 22
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 25
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 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2003 2002
----------- ------------
Assets
Current Assets
Cash and cash equivalents $10,037,841 $ 4,819,967
Investment securities, available for sale, at fair value - 5,307,419
Accounts receivable - net of allowance for doubtful accounts
of $45,000 for 2003 and 2002 705,862 509,298
Unbilled services 16,365 15,400
Inventory 272,317 212,104
Accrued interest receivable - 18,645
Prepaid expenses 162,173 175,716
----------- ------------
11,194,558 11,058,549
----------- ------------
Property, plant and equipment 3,572,867 3,535,355
Equipment under capital lease 95,945 95,945
Less: Accumulated depreciation 2,053,656 1,938,272
----------- ------------
1,615,156 1,693,028
----------- ------------
Other Assets
Security deposits 17,961 17,961
Deferred financing costs - net of accumulated amortization
of $4,483 for 2003 and $4,116 for 2002 9,177 9,544
License costs - net of accumulated amortization
of $77,752 for 2003 and $71,272 for 2002 362,873 369,353
----------- ------------
390,011 396,858
----------- ------------
Total Assets $13,199,725 $ 13,148,435
=========== ============
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt 246,515 235,234
Liability under capital lease - current portion 31,143 30,574
Accounts payable and accrued expenses 601,340 511,620
Customer deposits 170,284 410,507
Unearned revenue 84,952 58,850
----------- ------------
1,134,234 1,246,785
Liability under capital lease - long-term 49,483 57,486
Long-term debt - net of current maturities 904,730 973,675
----------- ------------
Total liabilities 2,088,447 2,277,946
----------- ------------
Stockholders' Equity
Preferred Stock - $.01 par value, 5,000,000 shares
authorized - none issued or outstanding - -
Common Stock - $.01 par value, 20,000,000 shares
authorized, 7,453,044 and 7,451,044 shares issued
and outstanding in 2003 and 2002, respectively 74,531 74,511
Additional paid-in capital 12,256,342 12,237,896
Accumulated other comprehensive income - 13,817
Accumulated deficit (1,219,595) (1,455,735)
----------- ------------
Total stockholders' equity 11,111,278 10,870,489
----------- ------------
Total Liabilities and Stockholders' Equity $13,199,725 $ 13,148,435
=========== ============
See notes to consolidated financial statements.
3
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
--------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Revenue
Molecular cell science $ 1,418,772 $ 1,045,992
Specialty media 766,245 676,586
-------------- --------------
2,185,017 1,722,578
-------------- --------------
Direct Costs
Molecular cell science 410,964 349,150
Specialty media 277,552 258,073
-------------- --------------
688,516 607,223
-------------- --------------
Income After Direct Costs
Molecular cell science 1,007,808 696,842
Specialty media 488,693 418,513
-------------- --------------
1,496,501 1,115,355
-------------- --------------
Operating Expenses
Selling, general and administrative 586,510 576,223
Research and development 227,347 260,174
Corporate overhead 273,086 311,589
Stock based compensation 16,466 105,561
Depreciation and amortization 122,231 100,147
-------------- --------------
1,225,640 1,353,694
-------------- --------------
Income (Loss) From Operations 270,861 (238,339)
-------------- --------------
Interest income 24,580 91,409
Interest expense 19,387 21,962
-------------- --------------
Interest income, net of interest expense 5,193 69,447
-------------- --------------
Income (Loss) before Provision for Income Taxes 276,054 (168,892)
Provision for Income Taxes 39,914 37,394
-------------- --------------
Net Income (Loss) $ 236,140 $ (206,286)
============== ==============
Net Income (Loss ) per Share:
Basic $ 0.03 $ (0.03)
============== ==============
Diluted $ 0.03 $ (0.03)
============== ==============
Weighted average shares outstanding:
Basic 7,452,044 7,299,184
============== ==============
Diluted 7,638,807 7,299,184
============== ==============
See notes to consolidated financial statements.
4
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
For the Three Months Ended
--------------------------
March 31, 2003 March 31, 2002
-------------- --------------
Cash Flows from Operating Activities
Net Income (Loss) $ 236,140 $ (206,286)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 122,231 100,147
Stock based compensation 16,466 105,561
(Increase) decrease in:
Accounts receivable, net of allowance (196,564) (40,113)
Unbilled services (965) (4,082)
Inventory (60,213) (6,312)
Accrued interest receivable 18,645 (69,544)
Prepaid expenses 13,543 (22,278)
Increase (decrease) in:
Accounts payable and accrued expenses 89,720 10,866
Customer deposits (240,223) 94,788
Unearned revenue 26,102 50,947
-------------- --------------
Cash provided by operating activities 24,882 13,694
-------------- --------------
Cash Flows from Investing Activities
Acquisitions of property and equipment (37,512) (322,816)
Purchase of investment securities - (1,926)
Sales of investment securities 5,293,602 -
-------------- --------------
Cash provided by (used in) investing activities 5,256,090 (324,742)
-------------- --------------
Cash Flows from Financing Activities
Repayments of long term debt (65,098) (39,441)
Proceeds from issuance of long term debt - 315,663
Cash received from stock options exercised 2,000 205,884
-------------- --------------
Cash (used in) provided by financing activities (63,098) 482,106
-------------- --------------
Increase in cash and cash equivalents 5,217,874 171,058
Cash and cash equivalents - beginning of period 4,819,967 4,889,272
-------------- --------------
Cash and cash equivalents - end of period $ 10,037,841 $ 5,060,330
-------------- --------------
Supplemental Disclosures of Cash Flow Information
Cash paid / (received) during the year:
Interest $ 19,387 $ (21,962)
============== ==============
Income taxes $ 33,000 $ 9,626
============== ==============
See notes to consolidated financial statements.
5
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, March 31, 2003 (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 engaged in scientific research to develop assays for
the screening of G Protein-Coupled Receptors, or GPCRs. The assays have
applications in drug discovery, micro-array based detection
technologies and environmentally sound pest management solutions for
agricultural and human health vectors.
CMT operates through two divisions -- Molecular Cell Science (MCS) and
Specialty Media (SM). MCS provides contract R&D services and High
Throughput Screening applications and services to companies engaged in
the drug discovery process. SM develops, manufactures, markets and
sells specialty cell culture media, reagents and other research
products.
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.
The expenses of Sentigen Holding Corp. are reflected as "Corporate
overhead" expenses in our consolidated statements of operations and
include the following major classes: (1) compensation and employee
benefits cost for our chairman of the board, chief financial officer,
and administrative assistant, (2) professional fees for legal and audit
services, (3) office rental, utilities and communication costs, (4)
stock market listing fees and (5) business travel expenses.
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 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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Sentigen Holding Corp. and its wholly owned
subsidiaries, after elimination of all intercompany accounts and
transactions.
b. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include liquid
investments with maturities of three months or less at the time of
purchase.
c. INVESTMENT SECURITIES - Investment securities consist of U.S.
Treasury Notes. All investment securities are defined as available
for sale under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" and, as such, have been reported at fair
value. Quoted market prices are used to determine fair value.
Investment securities purchased before 2002 are defined as
held-to-maturity under the provisions of SFAS No. 115 and, as such,
have been reported at amortized cost.
d. INVENTORY - Inventory, consisting of cell culture media, reagents
and related packaging and raw materials for the SM division, is
stated at the lower of cost or market. We use the FIFO (first-in,
first-out) method for inventory accounting.
e. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Depreciation is provided on both straight-line and
accelerated methods over the estimated useful lives of the assets,
which range from three to forty years. Amortization of leasehold
improvements is provided on the straight-line basis over the lesser
of the estimated useful life of the asset or the remaining lease
term.
6
Repairs and maintenance, which do not extend the useful lives of the
related assets, are expensed as incurred.
f. LICENSE AND DEFERRED COSTS - License costs are amortized over 17
years on a straight line basis and result from our exclusive
licensing agreement with the Trustees of Columbia University.
Deferred financing costs were incurred in connection with our
various loan facilities. Deferred financing costs are amortized on a
straight-line basis over the duration of the related loan.
g. IMPAIRMENT - We review intangible and long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. A
review for impairment includes comparing the carrying value of an
asset to an estimate of the undiscounted net future cash inflows
over the life of the asset. An asset is considered to be impaired
when the carrying value exceeds the calculation of the undiscounted
net future cash inflows or fair market value. An impairment loss is
defined as the amount of the excess of the carrying value over the
fair market value of the asset. We believe none of our intangible
and long-lived assets are impaired as of March 31, 2003.
h. REVENUE RECOGNITION - We record revenue from fixed-price contracts
extending over more than one accounting period on a
percentage-of-completion basis. Percentage-of-completion is
determined based on the proportion of completed costs to total
anticipated costs on each contract. If we determine that a loss will
result from the performance of a contract, the entire amount of
estimated loss is charged against income in the period in which the
determination is made. In general, prerequisites for billings are
established by contractual provisions including predetermined
payment schedules, the achievement of contract milestones or
submission of appropriate billing detail. Unbilled services arise
when services have been rendered but clients have not been billed.
Similarly, unearned revenue represents amounts billed in excess of
revenue recognized. Revenues from product sales are recognized upon
transfer of title to the product, which generally occurs upon
shipment to the customer.
i. DIRECT COSTS - We expense direct costs as such costs are incurred.
Direct costs in the MCS division include: (1) costs incurred for
direct materials used in the services performed under research
contracts, (2) an allocation of the compensation costs for the time
incurred on such contracts by our scientists, (3) an allocation of
indirect materials costs for general laboratory expenses incurred
for the benefit of all contracts in process, and (4) an allocation
of certain general and administrative expenses incurred by CMT. The
direct costs of the SM division represent the direct costs of
research products sold, including an allocation of the compensation
costs for production personnel, and an allocation of certain general
and administrative expenses incurred by CMT.
j. RESEARCH AND DEVELOPMENT COSTS - We expense research and development
costs as such costs are incurred. 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.
k. CORPORATE OVERHEAD COSTS - We expense corporate overhead costs as
such costs are incurred. The operations of the holding company are
reflected as corporate overhead expenses in our consolidated
statements of operations and include the following major classes:
(1) compensation and employee benefits cost for our chairman of the
board, chief financial officer, and administrative assistant, (2)
professional fees for legal and audit services, (3) office rental,
utilities and communication costs, (4) stock market listing fees and
(5) business travel expenses.
l. RESEARCH GRANTS - CMT was engaged in research and development
activities under grant from the National Institute of Health (NIH).
The research expenses incurred under the grants were exactly offset
by the cash received under the grants. This activity is not recorded
in the consolidated statements of operations as it was a
reimbursement of amounts passed through to sub-recipients (See Note
4).
m. INCOME TAXES - We account for certain income and expense items
differently for financial reporting and income tax purposes.
Deferred tax assets and liabilities are determined based on the
difference between the financial statement and income tax basis of
assets and liabilities and the tax effect of net operating loss and
tax credit carryforwards applying the enacted statutory tax rates in
effect for the year in which the differences are expected to
reverse.
n. ADVERTISING, MARKETING AND SALES COSTS - We expense all costs
relating to advertising, marketing and sales as such costs are
incurred.
o. ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires our
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those
estimates.
p. EARNINGS PER SHARE - The accompanying financial statements include
earnings per share calculated as required by SFAS No. 128 "Earnings
Per Share" which replaced the calculation of primary and fully
7
diluted earnings per share with basic and diluted earnings per
share. Basic earnings per share is calculated by dividing net loss
by the weighted average number of shares of common stock
outstanding. Diluted earnings per share include the effects of
securities convertible into common stock, consisting of stock
options, to the extent such conversion would be dilutive. For the
quarter ended March 31, 2003, 186,803 shares of potential common
stock were included in the calculation of diluted earnings per
share. Potential common stock was excluded from the computation for
the quarter ended March 31, 2002 because SFAS No. 128 prohibits
adjusting the denominator of diluted EPS for additional potential
common shares when a net loss from continuing operations is
reported.
q. STOCK-BASED COMPENSATION - SFAS No. 123 "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at
fair value. We continue to account for stock-based compensation to
employees using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". APB No. 25 requires no recognition of compensation
expense for the stock-based compensation arrangements provided by us
where the exercise price is equal to the market price at the date of
the grants. Options issued to non-employees are valued at the fair
value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The
expense for options issued to non-employees is recorded as stock
based compensation in our consolidated statements of operations.
r. SEGMENTS - The accompanying financial statements include segment
disclosure as required by SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information," which expands and
modifies disclosures but has no impact on our consolidated financial
position or results of operations or cash flows. Our reportable
operating segments are: MCS, SM and Sentigen Corp (See Note 3).
s. NEW ACCOUNTING PRONOUNCEMENTS - In June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 141, "Business
Combinations." 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. The adoption of SFAS No. 141 did
not have a material effect on our financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets," which revises the accounting for purchased goodwill and
intangible assets. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but are tested
for impairment annually or in the event of an impairment indicator.
SFAS No. 142 was effective January 1, 2002. The adoption of SFAS No.
142 did not have a material effect on our financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." 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 No. 143 is effective for
all fiscal years beginning after June 15, 2002. The adoption of SFAS
No. 143 did not have a material effect on our financial position or
results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 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 No. 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. SFAS No. 144 was effective January 1, 2002. The
adoption of SFAS No. 144 did not have a material effect on our
financial position or 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 is effective January 1, 2003.
Among other things, SFAS No. 145 requires that gains or losses on
the extinguishment of debt will generally be required to be reported
as a component of income from continuing operations and will no
longer be classified as an extraordinary item. The adoption of SFAS
No. 145 did not have a material effect on our financial position or
results of operations.
8
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
that a liability be recorded for such activities when the liability
is actually incurred, and unlike EITF 94-3, the existence of a plan
does not necessarily support the basis for the recording of a
liability. SFAS No. 146 is effective for all exit or disposal
activities initiated after December 31, 2002. The Company did not
undertake any exit or disposal activities for the quarter ended
March 31, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation --Transition and Disclosure, an amendment
of SFAS No. 123." SFAS No. 148 amends SFAS No. 123 to provide
alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of
the method used on reported results. SFAS No. 148 was effective for
the year ended December 31, 2002.
The following table reconciles net loss and diluted earnings per
share (EPS), as reported, to pro-forma net loss and diluted EPS, as
if the Company had expensed the fair value of stock options as
permitted by SFAS No. 123, as amended by SFAS No. 148, since it
permits alternative methods of adoption.
For the three months
ended March 31,
2003 2002
--------- ---------
Net Income (Loss):
As reported $ 236,140 $(206,286)
Pro-forma expense as if
stock options were charged
against net loss (37,856) (48,013)
--------- ---------
Pro-forma net income (loss) using
the fair value method $ 198,284 $(254,299)
========= =========
Diluted EPS:
As reported $ 0.03 $ (0.03)
Pro-forma using the fair
value method $ 0.03 $ (0.03)
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting And Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The interpretation also
requires enhanced and additional disclosures of guarantees in
financial statements ending after December 15, 2002. In the normal
course of business, the Company does not issue guarantees to
third-parties; accordingly, this interpretation does not effect the
disclosures included herein.
9
In January 2003, the FASB issued FIN No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51." FIN No. 46
defines when a business enterprise must consolidate a variable
interest entity. This interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003,
to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company does not have variable
interest entities as of March 31, 2003.
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149
amends SFAS No. 133 for certain decisions made by the Board as part
of the Derivatives Implementation Group (DIG) process and is
effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. In
addition, SFAS No. 149 should be applied prospectively. The
provisions of SFAS No. 149 that relate to SFAS No. 133
Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in
accordance with their respective effective dates. The Company is not
involved in any hedging activities.
10
3. 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 sales and transfers between
segments, 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
--------------------------
March 31, March 31,
2003 2002
------------ ------------
Revenues
MCS $ 1,442,524 $ 1,080,028
SM 766,245 676,586
Sentigen 244,497 -
------------ ------------
Revenues for reportable segments 2,453,266 1,756,614
Elimination of intersegment revenues (268,249) (34,036)
------------ ------------
Total Reported $ 2,185,017 $ 1,722,578
------------ ------------
Income (Loss) from Operations
MCS $ 462,782 $ 176,412
SM 326,084 272,135
Sentigen (241,643) (372,267)
------------ ------------
Income from operations for reportable segments 547,223 76,280
Corporate loss unallocated to reportable segments (276,362) (314,619)
------------ ------------
Total Reported $ 270,861 $ (238,339)
------------ ------------
Depreciation and Amortization
MCS $ 81,241 $ 60,735
SM 21,296 15,818
Sentigen 16,418 20,564
------------ ------------
Depreciation and amortization for
reportable segments 118,955 97,117
Corporate depreciation and amortization
unallocated to segments 3,276 3,030
------------ ------------
Total Reported $ 122,231 $ 100,147
------------ ------------
March 31, December 31,
2003 2002
------------ ------------
Segment Assets
MCS $ 1,393,551 $ 1,480,390
SM 1,072,373 793,646
Sentigen 512,503 581,303
------------ ------------
Total assets for reportable segments 2,978,427 2,855,339
Corporate assets unallocated to segments 10,221,298 10,293,096
------------ ------------
Total Reported $ 13,199,725 $ 13,148,435
------------ ------------
11
4. 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 months ended March 31, 2002 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 March 31
---------------------------
2003 2002
------------ ------------
SM NIH funding received $ - $ 17,337
NIH research expenses incurred by sub-recipients - (17,337)
------ ------------
Net effect on our
Statements of Operations for the
three months then ended $ - $ -
====== ============
There was no activity under NIH funded grants during the three months
ended March 31, 2003.
5. 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. For the quarter ended March
31, 2003, 186,803 shares of potential common stock were included in the
calculation of diluted earnings per share. Potential common stock was
excluded from the computation for the three months ended March 31, 2002
because 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.
6. INVENTORY
Inventory as of March 31, 2003 and December 31, 2002 is entirely
comprised of the physical inventory of the SM Division. Components of
physical inventory as of March 31, 2003 and December 31, 2002 are as
follows:
March 31, December 31,
2003 2002
------------ ------------
Finished goods $ 161,524 $ 123,464
Packaging materials 26,129 30,093
Raw materials 84,664 58,547
------------ ------------
Total inventory $ 272,317 $ 212,104
============ ============
12
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.
OVERVIEW
We are a holding company conducting business through two wholly owned
operating subsidiaries, CMT and Sentigen Corp. CMT is comprised of a service
organization that provides contract research and development 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 engaged in scientific research to develop assays for the screening of
G Protein-Coupled Receptors, or GPCRs. These assays potentially would have
applications in drug discovery, micro-array based detection technologies and
environmentally sound pest management solutions for agricultural and human
health vectors.
CMT operates through two divisions -- Molecular Cell Science, or MCS
and Specialty Media, or SM. MCS provides contract research and development
services and High Throughput Screening applications and services to companies
engaged in the drug discovery process. SM develops, manufactures, markets and
sells specialty cell culture media, reagents and other research products.
SIGNIFICANT ACCOUNTING POLICIES
Cell & Molecular Technologies, Inc.
We evaluate the performance of CMT through its two divisions (both are
treated as separate business segments). Revenue, income after direct costs and
net income are used to measure and evaluate the financial results of CMT.
Revenue Recognition. The MCS division's services are performed on a
fee-for-service, fixed contract basis that provides for payments after specific
research milestones are achieved. Revenues from the MCS division are recognized
using the percentage-of-completion method for fixed price contracts extending
over more than one accounting period. Work-in-process, representing time and
costs incurred on projects in process in excess of amounts billed to customers,
are recorded as "Unbilled services" in our consolidated balance sheets. Unearned
revenue represents amounts billed in excess of costs incurred and are recorded
as liabilities in our consolidated balance sheets. Revenues from the product
sales of the SM division are recognized upon transfer of title to the product,
which generally occurs upon shipment to the customer.
Direct Costs. The major classes of direct costs for the MCS division
include: (1) costs incurred for direct materials used in the services performed
under research contracts, (2) an allocation of the compensation costs for the
time incurred on such contracts by our scientists, (3) an allocation of indirect
materials costs for general laboratory expenses incurred for the benefit of all
contracts in process, and (4) an allocation of certain general and
administrative expenses incurred by CMT. The direct costs of the SM division
represent the direct costs of research
13
products sold, including an allocation of the compensation costs for production
personnel, and an allocation of certain general and administrative expenses
incurred by CMT. The inventory of the SM division is determined using the FIFO
(first-in, first-out) method of accounting.
Selling, General and Administrative Expenses. The major classes of
selling, general and administrative expenses incurred by CMT include: (1) the
compensation and employee benefit costs of CMT's management, sales, and
administrative staff, (2) the compensation and employee benefit costs for the
time of scientific and production personnel spent on selling, general and
administrative activities, (3) facilities rental, utilities, communication costs
and related operating expenses, (4) marketing, sales and advertising costs, (5)
business travel expenses, (6) commercial and product liability insurance costs,
(7) repairs and maintenance costs on facilities and laboratory equipment and (8)
professional fees for legal and audit services.
Sentigen Corp.
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 expense research and development costs as such
costs are incurred.
On August 19, 2002, Sentigen Corp. was awarded a Federal Phase I Grant
in the amount of $100,003 from the National Institute of Health. The term of the
grant was from September 1, 2002 through February 28, 2003. The grant provides
for the direct costs of a specific project within Sentigen Corp.'s overall
research program (budgeted in the grant for $75,000) as well as an allocation
for the facilities and administrative costs of Sentigen Corp. related to the
project (budgeted in the grant at $25,003). As of December 31, 2002, Sentigen
Corp. completed the research project covered under the grant and all funds have
been received from the National Institute of Health.
Sentigen Holding Corp.
The expenses of Sentigen Holding Corp. are reflected as "Corporate
overhead" expenses in our consolidated statements of operations and include the
following major classes: (1) compensation and employee benefits cost for our
chairman of the board, chief financial officer, and administrative assistant,
(2) professional fees for legal and audit services, (3) office rental, utilities
and communication costs, (4) stock market listing fees and (5) business travel
expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. We base these estimates and assumptions upon
historical experience and existing, known circumstances. Actual results could
differ from those estimates. Specifically, management must make estimates in the
following areas:
Allowance for doubtful accounts. We provide a reserve against our
receivables for estimated losses that may result from our customers' inability
to pay. We determine the amount of the reserve by analyzing known uncollectible
accounts, aged receivables, historical losses and our customers'
credit-worthiness. Amounts later determined and specifically identified to be
uncollectible are charged or written off against this reserve. To minimize the
likelihood of uncollectible accounts, customers' credit-worthiness is reviewed
periodically based on our experience with the account and external credit
reporting services (if necessary) and adjusted accordingly. Should a customer's
account become past due, we generally place a hold on the account and
discontinue further shipments or services to that customer, minimizing further
risk of loss. Additionally, our policy is to fully reserve for all accounts with
aged balances greater than one year. Reserves are fully provided for all
expected or probable losses of this nature.
14
Inventory adjustments. Inventories are stated at the lower of cost or
market. We review the components of our inventory on a regular basis for excess,
obsolete and impaired inventory based on estimated future usage and sales. Our
stock levels generally do not exceed one quarter's expectation of usage or
sales. Inventories were stated at $272,317 and no reserve for impairment or
obsolescence was necessary as of March 31, 2003.
Impairment of intangibles. Our intangible assets consist primarily of
license costs of $362,873 as of March 31, 2003, and are the result of our
exclusive licensing agreement with the Trustees of Columbia University. The
value of the license reflects the closing share price of our common stock on
April 10, 2000 (the closing date of our agreement with the Trustees of Columbia
University) less accumulated amortization. The value of the license is subject
to an amortization period of 17 years. We review the value of the license for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be fully recoverable. A review for
impairment includes comparing the carrying value of the license to an estimate
of the undiscounted net future cash inflows over the life of the license. The
license is considered to be impaired when the carrying value exceeds the
calculation of the undiscounted net future cash inflows or fair market value. An
impairment loss in the amount of the excess would be recognized in our
consolidated statements of operations if the carrying value exceeded the fair
market value of the license. We believe no such loss is necessary as of March
31, 2003.
Revenue recognition. Revenues from the MCS division are recognized
using the percentage-of-completion method for fixed price contracts.
Percentage-of-completion is determined based on the proportion of completed
costs to total anticipated costs on each contract. We use estimates of remaining
costs to complete each contract to determine the revenue and profitability on
each contract. We reevaluate these estimates periodically and such reevaluations
may, in the future, lead to changes in the rate of profitability on each
contract. There were no contracts where the expected costs exceeded the contract
price. All contract receivables are due within one year.
Stock-based compensation. SFAS No. 123 "Accounting for Stock-Based
Compensation", encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. We continue to
account for stock-based compensation to employees using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". APB No. 25 requires no recognition of compensation
expense for the stock-based compensation arrangements provided by us where the
exercise price is equal to the market price at the date of the grants. Options
issued to non-employees are valued at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. The expense for options issued to non-employees is recorded
as stock based compensation in our consolidated statements of operations. The
fair value of each option grant is estimated using the Black-Scholes option
pricing model. We also adopted the provisions of SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of SFAS No.
123."
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2003 TO THREE MONTHS ENDED
MARCH 31, 2002
Revenues. Revenues for the three months ended March 31, 2003 were
$2,185,017 compared to revenue of $1,722,578 for the three months ended March
31, 2002. This increase of $462,439, or 27%, was the result of an increase of:
$372,780, or 36%, in contract revenue from CMT's MCS division, and an increase
of $89,659, or 13%, in revenue from CMT's SM division. Our revenues were
entirely attributable to the operations of CMT and its two divisions, MCS and
SM.
An analysis of our revenues from the MCS division is as follows:
For the Three Months Ended
March 31,
--------------------------- Percent
2003 2002 Change
----------- ------------- -------
HTS contract $ 600,000 $ 501,000 20%
All other contracts 818,772 544,992 50%
----------- -------------
Total $ 1,418,772 $ 1,045,992 36%
=========== =============
15
The contract revenue for high-throughput screening, or HTS, services is
derived from a retainer contract. The contract provides for payments of $200,000
per month, regardless of the volume of services performed. The term of the
contract is for one year and ends on December 31, 2003. The 20% increase in the
revenues we received under the contract resulted from the increase in HTS
services required by the customer to support its HTS programs during the three
months ended March 31, 2003 compared to the three months ended March 31, 2002.
The 50% growth from other contracts was driven by: (1) mouse genetics services,
(2) protein expression services and (3) services for the pre-clinical analysis
of compound efficacy on diminishing or eliminating pathogen infection.
Revenues from the SM division grew 13% for the three months ended March
31, 2003 as compared to the three months ended March 31, 2002. This growth was
driven by three factors:
- an increase in sales of the SM division's line of Murine Embryonic stem
cells and feeder cells as well as media associated with this product
line;
- increase in sales of the SM division's proprietary formulations sold
under private label; and
- price increases implemented as of January 1, 2003.
Income after Direct Costs and Gross Margin. Income after direct costs
for the three months ended March 31, 2003 was $1,496,501 compared to income
after direct costs of $1,115,355 for the three months ended March 31, 2002.
Gross margin for the three months ended March 31, 2003 was 68% compared to 65%
for the three months ended March 31, 2002. This increase was driven by reduced
direct materials costs for the MCS division, as well as reduced direct materials
costs in the SM division.
Operating Expenses. Operating expenses for the three months ended March
31, 2003 were $1,225,640 compared to $1,353,694 for the three months ended March
31, 2002. This decrease of $128,054, or 9%, was primarily attributable to a
decrease of $32,827 in the research and development costs of Sentigen Corp., a
decrease of $38,503 in corporate overhead driven by reduced professional fees,
and a decrease of $89,095 in stock based compensation. These decreases were
offset in part by an increase of $10,287 in the selling, general and
administrative expenses of CMT and an increase of $22,084 in depreciation and
amortization.
Income / Loss from Operations. Income from operations for the three
months ended March 31, 2003 was $270,861 compared to a loss from operations of
$238,339 for the three months ended March 31, 2002. The components of this
improvement are as follows:
For the Three Months Ended
March 31,
--------------------------- Percent
2003 2002 Change
----------- ------------- -------
CMT $ 788,866 $ 448,547 76%
Sentigen Corp. (241,643) (372,267) 35%
Corporate (276,362) (314,619) 12%
----------- -------------
Total $ 270,861 $ (238,339) 214%
============ =============
The increase in the income from operations of CMT was driven by its 27%
increase in revenues. The revenue increase was augmented by higher gross margins
due to reduced materials costs and lower selling, general and administrative
expenses (as a percentage of revenues) during the quarter. The loss from
operations attributable to Sentigen Corp. improved due to lower research and
development and stock based compensation costs. The loss from corporate
activities improved due to lower professional fees during the quarter ended
March 31, 2003 compared to the 2002 period.
Interest income. Interest income, net of interest expenses declined by
$64,254 due to the fall in yields on U.S. Treasury and money market securities.
16
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003 we had $10,037,841 in cash and working capital of
$10,060,324. During the three months ended March 31, 2003 we financed our
operations and capital expenditures through working capital.
On January 22, 2003 we sold our $5,250,000 face value, 2.125% U.S.
Treasury Note maturing on October 31, 2004. The proceeds from the sale were
reinvested in 90-day U.S. Treasury Bills. Capital gains recognized from the
transaction were minimal. This sale accounts for the majority of the $5,217,874
increase in cash and cash equivalents reported in our consolidated balance
sheet.
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.
Cell & Molecular Technologies, Inc.
In October 2002, CMT leased equipment for use in the performance of
certain contracts in the MCS division. The lease qualified for treatment as a
capital lease for accounting purposes. At the inception of the lease, we
recorded the equipment on our balance sheet and an offsetting capital lease
liability of $95,945. We used a fixed interest rate of 7.40% to approximate the
borrowing rate for the lease. The equipment will be depreciated on a
straight-line basis through the term of the lease which expires in September
2005. Through March 31, 2003, we made rental payments of $18,033. Of those
payments, we applied $15,319 to the capital lease liability and $2,714 to
interest expense. As of March 31, 2003 the total remaining lease obligation
amounted to $80,626.
During the first quarter of 2001 we leased approximately 3,000 square
feet of laboratory space to accommodate CMT's High Throughput Screening
applications and assay development services group. 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 available under this loan commitment to finance capital expenditures
made in connection with our new facility in Phillipsburg, New Jersey. We are
required to repay this loan over a seven year period that commenced in June
2002. The terms of the loan require CMT to maintain annual cash flow equal to
1.25 to 1.00 times the total annual debt service of CMT and a ratio of debt to
net worth of 3.00 to 1.00. CMT complied with these terms as of and during the
three months ended March 31, 2003. Sentigen Holding Corp. guarantees this
obligation of CMT. The unpaid principal balance on this loan at March 31, 2003
was $652,814. On April 15, 2003, CMT renegotiated the interest rate on this loan
from a fixed rate of 7.40% to a fixed rate of 5.250%. The amortization period of
the loan remained unchanged.
Sentigen Corp.
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. Sentigen Holding Corp. guarantees this
obligation of Sentigen Corp. The loan also requires that Sentigen Holding Corp.
keep unencumbered liquid assets equaling two-times the combined outstanding loan
balances for Sentigen and CMT. We complied with these terms as of March 31,
2003. As of March 31, 2003, Sentigen Corp. had borrowed a total of $300,000
under this facility, and the unpaid principal balance on this loan was $142,904.
On February 5, 2003 we renegotiated the interest rate on this borrowing from the
fixed rate of 8.75% to a variable interest rate. The variable interest rate is
the prime rate plus 1.00% with a minimum interest rate of 5.50%.
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 required 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 have been 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.
17
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 and 2003 (the second and
third fiscal years of the license agreement). We believe that we have enough
capital resources to meet the financial requirements of this provision for the
agreement years 2004 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.
INFLATION
Inflation has historically not had a material effect on our operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations." 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. The adoption of SFAS No. 141 did not have a material
effect on our financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets," which revises the accounting for purchased goodwill and intangible
assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives
are no longer amortized, but are tested for impairment annually or in the event
of an impairment indicator. SFAS No. 142 was effective January 1, 2002. The
adoption of SFAS No. 142 did not have a material effect on our financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." 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 No. 143 is effective for all fiscal years beginning after June
15, 2002. The adoption of SFAS No. 143 did not have a material effect on our
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 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 No. 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. SFAS No. 144 was effective January 1, 2002. The
adoption of SFAS No. 144 did not have a material effect on our financial
position or 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 is effective January 1, 2003. Among other things,
SFAS No. 145 requires that gains or losses on the extinguishment of debt will
generally be required to be reported as a component of income from continuing
operations and will no longer be classified as an extraordinary item. The
adoption of SFAS No. 145 did not have a material effect on our financial
position or results of operations.
18
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability be recorded for such activities when the liability is
actually incurred, and unlike EITF 94-3, the existence of a plan does not
necessarily support the basis for the recording of a liability. SFAS No. 146 is
effective for all exit or disposal activities initiated after December 31, 2002.
The Company did not undertake any exit or disposal activities for the quarter
ended March 31, 2003.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of SFAS No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for the year ended December 31, 2002 and the
appropriate disclosures have been included herein.
The following table reconciles net loss and diluted earnings per share
(EPS), as reported, to pro-forma net loss and diluted EPS, as if the Company had
expensed the fair value of stock options as permitted by SFAS No. 123, as
amended by SFAS No. 148, since it permits alternative methods of adoption.
For the three months
ended March 31,
2003 2002
----------- ---------
Net Income (Loss):
As reported $ 236,140 $(206,286)
Pro-forma expense as if
stock options were charged
against net loss (37,856) (48,013)
----------- ---------
Pro-forma net income (loss) using
the fair value method $ 198,284 $(254,299)
=========== =========
Diluted EPS:
As reported $ 0.03 $ (0.03)
Pro-forma using the fair
value method $ 0.03 $ (0.03)
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting And Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in financial statements ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third-parties; accordingly, this interpretation does not effect the disclosures
included herein.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an interpretation of ARB 51." FIN No. 46 defines when a
business enterprise must consolidate a variable interest entity. This
interpretation applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The Company does not
have variable interest rate entities as of March 31, 2003.
19
In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133 for certain decisions made by the Board as part of the Derivatives
Implementation Group (DIG) process and is effective for contracts entered into
or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. In addition, SFAS No. 149 should be applied prospectively. The
provisions of SFAS No. 149 that relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. The company is not involved in any hedging activities.
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. 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 March 31, 2003, we have total debt of $1,231,871. This debt consists
of a capital lease, 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.
On February 5, 2003, CMT renegotiated the interest rate on its
equipment loan, maturing August 2004 from a fixed rate of 8.75% to a variable
interest rate. The variable interest rate is the prime rate of interest plus
1.00% with a minimum interest rate of 5.50%.
On February 5, 2003, Sentigen Corp. renegotiated the interest rate on
its equipment loan, maturing May 2005 from a fixed rate of 8.75% to a variable
interest rate. The variable interest rate is the prime rate of interest plus
1.00% with a minimum interest rate of 5.50%.
The interest rate on CMT's mortgage obligation maturing in August 2017
is a variable interest rate which resets every 3 years. The interest rate reset
in February 2003 from an interest rate of 9.50% to a rate of 5.00%.
On April 15, 2003, CMT renegotiated the interest rate on its equipment
loan, maturing May 2009 from a fixed rate of 7.40% to a fixed rate of 5.25%. The
amortization period of the loan remained unchanged.
20
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.
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.
21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on December 17,
2002. The following proposals were adopted by the margins indicated:
1. To elect six directors, each of who is to serve until the next Annual
Meeting of Stockholders and until their successors are elected and qualified.
Number of Shares
----------------
For Withheld Authority
--------- ------------------
Joseph K. Pagano 5,845,217 1,605,827
Thomas Livelli 5,845,217 1,605,827
Frederick R. Adler 5,845,217 1,605,827
Samuel A. Rozzi 5,845,217 1,605,827
Joel M. Pearlberg 5,845,217 1,605,827
Gerald Greenwald 5,845,217 1,605,827
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ending December 31, 2002.
For 5,845,217
Against -
Abstain 1,605,827
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.
22
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: May 14, 2003
By: /s/ Fredrick B. Rolff
-------------------------
Fredrick B. Rolff,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
23
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: May 14, 2003
- --------------------------------------------------
Joseph K. Pagano
Chairman of the Board, Chief Executive Officer
and President
24
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: May 14, 2003
- -----------------------------------------
Fredrick B. Rolff
Chief Financial Officer
25