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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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 August 13, 2004 the registrant had outstanding 7,470,292 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
June 30, 2004 (Unaudited) and December 31, 2003................................. 3
Consolidated Statements of Operations (Unaudited)
For the three and six months ended, June 30, 2004 and 2003...................... 4
Consolidated Statements of Cash Flows (Unaudited)
For the six months ended, June 30, 2004 and 2003................................ 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..................................... 24
Item 4. Controls and Procedures.................................................................... 24
PART II. OTHER INFORMATION............................................................................ 25
Item 1. Legal Proceedings.......................................................................... 25
Item 2. Changes in Securities and Use of Proceeds.................................................. 25
Item 3. Default Upon Senior Securities............................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders........................................ 25
Item 5. Other Information.......................................................................... 26
Item 6. Exhibits and Reports on Form 8-K........................................................... 26
SIGNATURES 27
Exhibit 10.1 AGREEMENT BETWEEN THE TRUSTEES OF COLUMBIA UNIVERSITY AND SENTIGEN BIOSCIENCES 28
Exhibit 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF SENTIGEN
HOLDING CORP. PURSUANT TO RULE 13a-15 AND 15d-15 UNDER THE SECURITIES AND EXCHANGE
ACT OF 1934, AS AMENDED 41
Exhibit 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF SENTIGEN
HOLDING CORP. PURSUANT TO RULE 13a-15 AND 15d-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED 42
Exhibit 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF SENTIGEN
HOLDING CORP. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 43
Exhibit 32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF SENTIGEN
HOLDING CORP. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 44
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2004 2003
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 640,909 $ 10,086,952
Investment securities, available for sale, at fair value 9,000,000 -
Accounts receivable - net of allowance for doubtful
accounts of $45,000 for 2004 and 2003 798,550 940,570
Unbilled services 22,273 4,650
Inventory 313,145 241,134
Accrued interest receivable 35,156 4,156
Prepaid expenses 145,963 70,396
------------ ------------
10,955,996 11,347,858
------------ ------------
Property, plant and equipment 3,889,792 3,736,039
Equipment under capital lease 197,777 130,945
Less: accumulated depreciation 2,690,277 2,463,384
------------ ------------
1,397,292 1,403,600
------------ ------------
Other assets
Security deposits 20,411 20,411
Deferred financing costs - net of accumulated amortization
of $6,318 for 2004 and $5,584 for 2003 7,342 8,076
License costs - net of accumulated amortization of $110,151
for 2004 and $97,191 for 2003 330,474 343,434
------------ ------------
358,227 371,921
------------ ------------
Total assets $ 12,711,515 $ 13,123,379
============ ============
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 157,717 $ 211,927
Liability under capital lease - current portion 67,079 44,448
Accounts payable and accrued expenses 1,192,691 892,059
Customer deposits 322,171 234,570
Unearned revenue 26,566 8,600
------------ ------------
1,766,224 1,391,604
Liability under capital lease - long-term 59,722 42,483
Long-term debt - net of current maturities 686,824 758,098
------------ ------------
Total liabilities 2,512,770 2,192,185
------------ ------------
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, 7,466,974 and 7,454,744 shares issued
and outstanding in 2004 and 2003, respectively 74,669 74,547
Additional paid-in capital 13,940,503 13,185,570
Accumulated other comprehensive income 8,945 -
Accumulated deficit (3,825,372) (2,328,923)
------------ ------------
Total stockholders' equity 10,198,745 10,931,194
------------ ------------
Total liabilities and stockholders' equity $ 12,711,515 $ 13,123,379
============ ============
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 Six Months Ended
------------------------------ ------------------------------
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Revenue
Molecular cell science $ 1,177,973 $ 1,570,447 $ 2,508,190 $ 2,989,219
Specialty media 740,358 793,800 1,556,858 1,560,045
----------- ----------- ----------- -----------
1,918,331 2,364,247 4,065,048 4,549,264
----------- ----------- ----------- -----------
Direct costs
Molecular cell science 396,070 494,403 922,202 905,367
Specialty media 290,796 327,323 589,285 604,875
----------- ----------- ----------- -----------
686,866 821,726 1,511,487 1,510,242
----------- ----------- ----------- -----------
Income after direct costs
Molecular cell science 781,903 1,076,044 1,585,988 2,083,852
Specialty media 449,562 466,477 967,573 955,170
----------- ----------- ----------- -----------
1,231,465 1,542,521 2,553,561 3,039,022
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative costs 574,069 703,080 1,206,206 1,289,590
Research and development 521,927 263,336 928,939 490,683
Corporate overhead 482,373 227,431 973,893 500,517
Stock based compensation 48,874 82,211 697,439 98,677
Depreciation and amortization 123,078 124,582 240,587 246,813
----------- ----------- ----------- -----------
1,750,321 1,400,640 4,047,064 2,626,280
----------- ----------- ----------- -----------
(Loss) income from operations (518,856) 141,881 (1,493,503) 412,742
----------- ----------- ----------- -----------
Interest income 43,725 23,503 71,431 48,083
Interest expense 12,685 17,468 26,342 36,855
----------- ----------- ----------- -----------
Interest income, net of interest expense 31,040 6,035 45,089 11,228
----------- ----------- ----------- -----------
(Loss) income before provision for income taxes (487,816) 147,916 (1,448,414) 423,970
Provision for income taxes 21,310 30,822 48,035 70,736
----------- ----------- ----------- -----------
Net (loss) income (509,126) 117,094 (1,496,449) 353,234
Other comprehensive income (loss)
Unrealized gain on investments 8,945 - 8,945 -
----------- ----------- ----------- -----------
Comprehensive (loss) income $ (500,181) $ 117,094 $(1,487,504) $ 353,234
=========== =========== =========== ===========
Net income (loss) per share:
Basic $ (0.07) $ 0.02 $ (0.20) $ 0.05
=========== =========== =========== ===========
Diluted $ (0.07) $ 0.02 $ (0.20) $ 0.05
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 7,462,099 7,453,894 7,459,647 7,452,944
=========== =========== =========== ===========
Diluted 7,462,099 7,604,776 7,459,647 7,621,787
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
For the Six Months Ended
------------------------------
June 30, 2004 June 30, 2003
------------- -------------
Cash Flows from Operating Activities
Net (loss) income $ (1,496,449) $ 353,234
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 240,587 246,813
Stock based compensation 697,439 98,677
(Increase) decrease in:
Accounts receivable, net of allowance 142,020 (355,250)
Unbilled services (17,623) (21,032)
Inventory (72,011) (13,065)
Accrued interest receivable (31,000) 18,645
Prepaid expenses (75,567) 18,001
Increase (decrease) in:
Accounts payable and accrued expenses 300,632 28,765
Customer deposits 87,601 (248,129)
Unearned revenue 17,966 84,067
------------ ------------
Cash (used in) provided by operating activities (206,405) 210,726
------------ ------------
Cash Flows from Investing Activities
Acquisitions of property and equipment (153,753) (81,946)
Sales of investment securities - 5,293,602
Purchase of investment securities (8,991,055) -
------------ ------------
Cash (used in) provided by investing activities (9,144,808) 5,211,656
------------ ------------
Cash Flows from Financing Activities
Repayments of long term debt (152,446) (132,076)
Cash received from stock options exercised 57,616 4,510
------------ ------------
Cash (used in) financing activities (94,830) (127,566)
------------ ------------
(Decrease) increase in cash and cash equivalents (9,446,043) 5,294,816
Cash and cash equivalents - beginning of period 10,086,952 4,819,967
------------ ------------
Cash and cash equivalents - end of period $ 640,909 $ 10,114,783
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 26,342 $ 36,855
============ ============
Income taxes $ 45,000 $ 66,000
============ ============
Non-cash investing and financing activities:
Investing activities:
Equipment acquired under capital lease $ 66,832 $ -
Financing activities:
Debt incurred under capital lease $ 66,832 $ -
See notes to consolidated financial statements.
5
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, June 30, 2004 (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 Biosciences, Inc. ("Sentigen Biosciences," formerly Sentigen
Corp.). CMT provides contract research and development services and
manufactures specialty cell culture media, reagents and other research
products for companies engaged in the drug discovery process. Sentigen
Biosciences is primarily engaged in the development and commercialization
of novel bioassay systems that elucidate the underlying biology of
protein-protein interactions. Sentigen Biosciences is initially targeting
its Tango(TM) Assay System to address the functionalization of G
protein-coupled receptors (GPCRs) for pharmaceutical drug discovery and
development. Sentigen Biosciences has filed patent applications on its
Assay System and expects to file additional patent applications on this
technology in the future.
CMT operates through two divisions -- Molecular Cell Science ("MCS") and
Specialty Media ("SM"). MCS provides contract research and development
services and High Throughput Screening support services to companies
engaged in the drug discovery process. SM develops, manufactures, and
markets high quality cell culture media, reagents and other research
products.
The operations of Sentigen Biosciences are reflected as research and
development expenses in our consolidated statements of operations.
Sentigen Biosciences' operations since its inception in February 2000
consist entirely of research and development.
The expenses of the parent company, 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 the chairman of the board, chief financial
officer, executive vice president of commercial operations and
administrative assistant, (2) professional fees for legal and accounting
services, (3) office rental, utilities and communication costs, (4) stock
market listing fees and other related public company expenses and (5)
business travel expenses.
We were incorporated under the laws of the State of Delaware in May 1990.
After having engaged in the acquisition and operation of different
businesses 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 on May 6, 1997 to acquire all of the
outstanding stock in each 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, and changed its name to Sentigen
Biosciences, Inc. on February 24, 2004. We changed our name from Prime
Cellular Inc. 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. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Sentigen
Holding Corp. and subsidiaries should be read in conjunction with the
audited financial statements and notes thereto included in our annual
report on Form 10-K for the year ended December 31, 2003, as filed with
the Securities and Exchange Commission. The accompanying financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States ("GAAP") for interim financial
information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, since they are interim
statements, the accompanying financial statements do not include all of
the information and notes required by GAAP for complete financial
statements. The accompanying financial statements reflect all adjustments,
consisting of normal recurring adjustments, that are, in the opinion of
management, necessary for a fair statement of the results of operations
for the interim periods presented. Interim results are not necessarily
indicative of results for a full year.
6
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and notes thereto. A discussion of the
Company's critical accounting policies and management estimates is
described in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this quarterly
report on Form 10-Q.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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 an 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 an effect on
our 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 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. We did not
undertake any exit or disposal activities during the six months ended June
30, 2004.
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.
7
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
June 30,
------------------------
2004 2003
--------- ---------
Net Loss:
As reported $(509,126) $ 117,094
Pro-forma expense as if stock options were
charged against net loss (82,155) (41,856)
--------- ---------
Pro-forma net loss using the fair value method $(591,281) $ 75,238
========= =========
Diluted EPS:
As reported $ (0.07) $ 0.02
Pro-forma using the fair value method $ (0.08) $ 0.01
For the six months
ended
June 30,
----------------------------
2004 2003
------------ -----------
Net Loss:
As reported $(1,496,449) $ 353,234
Pro-forma expense as if stock options were
charged against net loss (170,150) (79,712)
----------- -----------
Pro-forma net loss using the fair value method $(1,666,599) $ 273,522
=========== ===========
Diluted EPS:
As reported $ (0.20) $ 0.05
Pro-forma using the fair value method $ (0.22) $ 0.04
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, we do 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, as restated by FIN No. 46R,
"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 December 15, 2003,
to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. We do not have variable interest
entities as of June 30, 2004.
8
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 FASB 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. We are not involved in
any hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 addresses how certain financial instruments with
characteristics of both liabilities and equity should be classified and
measured. The adoption of SFAS No. 150 did not have an effect on the
Company's financial position.
9
4. SEGMENT INFORMATION
We operate through our two wholly-owned subsidiaries, CMT and Sentigen
Biosciences. CMT is evaluated on the performance of its two divisions, MCS
and SM. Sentigen Biosciences is engaged in research and development. We
consider MCS, SM and Sentigen Biosciences as our three separate and
distinct reportable operating segments. The accounting policies of the
segments are the same as those described in "Critical Accounting Policies"
appearing elsewhere in this quarterly report. 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. We account for sales and transfers
between segments, if any, as if the transactions were to third parties,
that is at current market prices. All inter-company transactions have been
eliminated in the presentation of segment information.
For the Three Months Ended
----------------------------
June 30, June 30,
2004 2003
----------- -----------
Revenues
MCS $ 1,212,572 $ 1,589,034
SM 740,358 793,800
Sentigen Biosciences - -
----------- -----------
Revenues for reportable segments 1,952,930 2,382,834
Elimination of intersegment revenues (34,599) (18,587)
----------- -----------
Total Reported $ 1,918,331 $ 2,364,247
----------- -----------
Income (Loss) from Operations
MCS $ 206,769 $ 457,907
SM 258,609 262,735
Sentigen Biosciences (500,361) (347,927)
----------- -----------
Income from operations for reportable segments (34,983) 372,715
Corporate loss unallocated to reportable segments (483,873) (230,834)
----------- -----------
Total Reported $ (518,856) $ 141,881
----------- -----------
Depreciation and Amortization
MCS $ 80,721 $ 82,092
SM 25,952 22,896
Sentigen Biosciences 14,905 16,191
----------- -----------
Depreciation and amortization for reportable segments 121,578 121,179
Corporate depreciation and amortization unallocated
to segments 1,500 3,403
----------- -----------
Total Reported $ 123,078 $ 124,582
----------- -----------
10
For the Six Months Ended
----------------------------
June 30, June 30,
2004 2003
----------- -----------
Revenues
MCS $ 2,575,552 $ 3,031,559
SM 1,556,858 1,560,045
Sentigen Biosciences - -
----------- -----------
Revenues for reportable segments 4,132,410 4,591,604
Elimination of intersegment revenues (67,362) (42,340)
----------- -----------
Total Reported $ 4,065,048 $ 4,549,264
----------- -----------
Income (Loss) from Operations
MCS $ 385,965 $ 920,690
SM 598,332 588,819
Sentigen Biosciences (1,320,793) (589,571)
----------- -----------
Income from operations for reportable segments (336,496) 919,938
Corporate loss unallocated to reportable segments (1,157,007) (507,196)
----------- -----------
Total Reported $(1,493,503) $ 412,742
----------- -----------
Depreciation and Amortization
MCS $ 157,730 $ 163,333
SM 50,047 44,192
Sentigen Biosciences 29,810 32,609
----------- -----------
Depreciation and amortization for reportable segments 237,587 240,134
Corporate depreciation and amortization unallocated
to segments 3,000 6,679
----------- -----------
Total Reported $ 240,587 $ 246,813
----------- -----------
June 30, December 31,
2004 2003
----------- -----------
Segment Assets
MCS $ 1,373,576 $ 1,486,108
SM 996,445 990,133
Sentigen Biosciences 503,620 459,919
----------- -----------
Total assets for reportable segments 2,873,641 2,936,160
Corporate assets unallocated to segments 9,837,874 10,187,219
----------- -----------
Total Reported $12,711,515 $13,123,379
----------- -----------
11
5. INVENTORY
Inventory as of June 30, 2004 and December 31, 2003 is entirely comprised
of the physical inventory of the SM Division. Components of physical
inventory as of June 30, 2004 and December 31, 2003 are as follows:
June 30, December 31,
2004 2003
-------- ------------
Finished goods $201,545 $139,020
Packaging materials 34,141 30,019
Raw materials 77,459 72,095
-------- --------
Total inventory $313,145 $241,134
======== ========
6. EARNINGS PER SHARE
Basic income (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding for the
respective periods. Diluted income (loss) per share includes the effects
of securities which are convertible into common stock, consisting of stock
options, to the extent such conversion would be dilutive. Potential common
stock was excluded from the computation for the three and six month
periods ending June 30, 2004 because SFAS No. 128 "Earnings per Share,"
prohibits adjusting the denominator of diluted EPS for additional
potential common shares when a net loss from continuing operations is
reported. For the three and six month periods ending June 30, 2003,
150,882 and 168,843 shares of potential common stock, respectively, were
included in the calculation of diluted earnings per share.
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 behalf of us. These
risks and uncertainties include, but are not limited to, risks associated with
our history of consolidated net losses; our dependence on a limited number of
customers; our dependence on research and development expenditures by the
pharmaceutical and biotechnology industries; our need for additional capital to
finance our expanding research and development programs; changes in customer
preferences; the ability to hire and retain key personnel; compliance with
federal or state environmental laws and other laws, changes in such laws and the
administration of such laws; protection of patents, trademarks and other
proprietary rights; technological change, competitive factors and 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, Cell & Molecular Technologies, Inc. ("CMT"), and
Sentigen Biosciences. CMT provides contract research and development services
and manufactures specialty cell culture media, reagents and other research
products for companies engaged in the drug discovery process. Sentigen
Biosciences is primarily engaged in the development and commercialization of
novel bioassay systems that elucidate the underlying biology of protein-protein
interactions. Sentigen Biosciences is initially targeting its Tango Assay System
to address the functionalization of G protein-coupled receptors (GPCRs) for
pharmaceutical drug discovery and development. Sentigen Biosciences has filed
patent applications on its Assay System and expects to file additional patent
applications on this technology in the future.
CMT operates through two divisions -- Molecular Cell Science ("MCS") and
Specialty Media ("SM"). MCS provides contract research and development services
and High Throughput Screening support services to companies engaged in the drug
discovery process. SM develops, manufactures and markets specialty cell culture
media, reagents and other research products.
The cost of our research programs at Sentigen Biosciences is exceeding the
income provided by CMT, primarily accounting for the increased loss from
operations for the three and six month periods ended June 30, 2004. CMT's
revenues for the three and six month periods ended June 30, 2004 declined 19%
and 11%, respectively when compared to the same periods in 2003. This decline is
primarily attributable to the completion of a service contract that did not
renew in 2004. If CMT is not successful in increasing its revenues and its
income does not increase commensurate with the increased research and
development expenditures by Sentigen Biosciences, our losses could continue to
increase.
Sentigen Biosciences has been primarily focused on research and
development, and has participated in various scientific and industry conferences
and met with leading pharmaceutical, biotechnology and agricultural companies in
an effort to raise awareness of its technologies among constituents in those
communities. Sentigen Biosciences intends to seek strategic discovery and
development partnerships around key molecular targets with biotechnology,
pharmaceutical and other life sciences research institutions and although
introductory meetings have begun, no assurance can be given that any such
partnerships will be successfully entered into. Sentigen Biosciences also
intends to expand its research and development programs and we may seek to
obtain additional debt or equity financing to fund these expanded research and
development programs.
On May 27, 2004 we entered into a second license agreement with The
Trustees of Columbia University ("Columbia") for the exclusive license to
Columbia's rights under patent applications developed jointly by us and Columbia
in the area of assaying receptor activity (our first exclusive license agreement
was entered into in April
13
2000 and relates to patent applications in the areas of chemosensation and
olfaction). In consideration of the May 27, 2004 exclusive license agreement, we
agreed to the following:
- We will pay Columbia a royalty totaling 5% of the net sales received
by us on any therapeutic products developed solely by us and
approved by the Food & Drug Administration ("FDA").
- We will also pay to Columbia a royalty totaling 5% of any net sales
received by us on any therapeutic products approved by the FDA that
were developed pursuant to sublicenses of our rights under the
patents.
We are also obligated to spend the following on the research and development of
products under the patents:
- A minimum of $1,000,000 from May 27, 2004 through December 31, 2005
and
- A minimum of $100,000 per year for calendar years 2006 through 2010.
A copy of this agreement is filed with this Form 10-Q as Exhibit 10.1.
On July 26, 2004, we were awarded a contract by the Technical Support
Working Group (TSWG) - an interagency government office with representatives
from the Departments of Defense, State and Homeland Security - to develop
advanced biotechnology for the detection of explosives and other threats. The
contract, entitled "Olfactory Receptor Microarray-Based Sensor for Explosives
Detection (ORM-EDS)", will provide us with $1.65 million in research funding
over the next 2 years. We expect to begin the research project in August 2004.
We will conduct research for the development of a freestanding sensor for the
detection of explosive agents. The sensor is aimed at reproducing the
sensitivity, versatility and chemical range of the nose. We will be working to
isolate, produce and assemble mammalian olfactory receptors into microarrays
that would allow the nano-scale monitoring of patterns of olfactory receptor
activation resulting from exposure to potentially harmful agents.
CRITICAL ACCOUNTING POLICIES
Cell & Molecular Technologies, Inc.
Management evaluates the performance of CMT through its two divisions
(both are treated as separate business segments). Revenue, income after direct
costs (also referred to as "gross margin on revenues" or "gross margin") 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 provide for payments after specific
research milestones are achieved. Revenues from fixed price contracts with a
term of more than 12 months are recognized using the percentage-of-completion
method for fixed price contracts. Work-in-process, representing time and costs
incurred on projects in process in excess of amounts billed to customers, are
recorded as "Unbilled services" on our consolidated balance sheets. Unearned
revenue represents amounts billed in excess of costs incurred and are recorded
as liabilities on our consolidated balance sheets. Revenues for fixed price
contracts with a term of less than 12 months are recognized when specific
research milestones are achieved. Revenues from the product sales of the SM
division are recognized upon the transfer of title and the transfer of risk of
loss to the product, which generally occurs upon shipment to the customer.
Direct Costs. The major classes of direct costs for the MCS division are
as follows: (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. 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 are as follows: (1)
compensation and employee benefit costs of CMT's management, sales, and
administrative staff, (2) compensation and employee benefit costs for the time
of scientific and production
14
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 accounting services.
Sentigen Biosciences
The operations of Sentigen Biosciences are reflected as research and
development expenses in our consolidated statements of operations. Sentigen
Biosciences operations since its inception in February 2000 consist entirely of
research and development. Research and development costs are expensed as such
costs are incurred.
Sentigen Holding Corp.
The expenses of the parent company, 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 the chairman of the board, chief financial officer, executive vice
president of commercial operations and administrative assistant, (2)
professional fees for legal and accounting services, (3) corporate office
rental, utilities and communication costs, (4) stock market listing fees and
other related public company expenses 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. Management bases 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. Our consolidated balance sheet includes a
reserve against receivables for estimated losses that may result from customers'
inability to pay. Management determines the amount of the reserve by analyzing
uncollectible accounts, aged receivables, and customers' creditworthiness.
Amounts later determined and specifically identified to be uncollectible are
charged against this reserve. To minimize the likelihood of uncollectible
accounts, customers' creditworthiness is reviewed periodically based on our
experience with the customer and external credit services (if necessary) and
adjusted accordingly. Should a customer's account become past due, a hold is
generally placed on the account and further shipments or services are
discontinued to that customer, minimizing further risk of loss. Additionally,
all accounts with aged balances greater than one year are fully reserved.
Inventory valuation. Inventories are stated at the lower of cost or
market. Management reviews the components of inventory on a regular basis for
excess, obsolete and impaired inventory based on estimated future usage and
sales. Stock levels generally do not exceed one quarter's expectation of usage
or sales. Inventories were stated at $313,145 and no reserve for impairment or
obsolescence was necessary as of June 30, 2004.
Impairment of intangibles. Our intangible assets consist primarily of
license costs of $330,474 as of June 30, 2004, and are the result of an
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 the agreement with the Trustees of Columbia
University) less accumulated amortization. The value of the license is subject
to an amortization period of 17 years. Management reviews 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
15
carrying value exceeded the fair market value of the license. We believe no such
loss is necessary as of June 30, 2004.
Revenue recognition. Revenues from the MCS division for contracts with a
term of more than 12 months 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. Management uses estimates of remaining costs to complete each contract
to determine the revenue and profitability on each contract. Management
reevaluates 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 that the exercise
price is equal to the market price at the date of the grants. Options granted to
non-employees are valued at either 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.
The Black-Scholes model requires management to estimate common stock price
volatility, risk-free interest rates and other parameters in order to determine
the fair value of an option grant. We also adopted the provisions of SFAS No.
148, "Accounting for Stock-Based Compensation --Transition and Disclosure, an
amendment of SFAS No. 123."
OFF-BALANCE-SHEET ARRANGEMENTS
As of June 30, 2004, we did not have any off-balance-sheet arrangements,
as defined in Item 303(a)(4)(ii) of Regulation S-K.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED
JUNE 30, 2003
Revenues. Revenues for the three months ended June 30, 2004 were
$1,918,331 compared to revenues of $2,364,247 for the three months ended June
30, 2003. This decrease of $445,916, or 19%, was the result of a decrease of
$392,474, or 25%, in contract revenue from CMT's MCS division, and a decrease of
$53,442, or 7%, 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
June 30,
-------------------------------- Percent
2004 2003 Change
------------ ------------ -------
HTS contract $ 600,000 $ 600,000 -%
All other contracts 577,973 970,447 (40%)
------------ ------------
Total $ 1,177,973 $ 1,570,447 (25%)
============ ============
The contract revenue for high-throughput screening, or HTS, services is
derived from a contract with one customer. The contract has a term of one year,
ending on December 31, 2004. The contract provides for payments to CMT of
$200,000 per month in exchange for a fixed number of cell and reagent deliveries
to support the customer's HTS program. Should actual deliveries during 2004
exceed the fixed number of deliveries provided for
16
in the contract additional deliveries will be billed at the rate of $909 per
delivery. Actual deliveries during the quarter ended June 30, 2004 were equal to
the fixed number of deliveries provided for in the contract.
The contract also provides for a credit against other services (outside
the scope of the base contract) performed for the customer in 2005 should actual
deliveries during 2004 fall below the fixed number of deliveries provided for in
the contract. The contract states that the credit against the value of future
additional services performed in 2005 cannot exceed 30% of the value of the
additional services performed in addition to the base contract value for 2004.
At June 30, 2004 unearned revenue totaled $26,566 to account for the value of
the potential credit which would be due in 2005.
The 40% decline in other contracts was driven primarily by the completion
of a contract for the pre-clinical analysis of compound efficacy on diminishing
or eliminating pathogen infection using the Taqman(TM) assay. The contract did
not renew in 2004.
Revenues from the SM division declined 7% for the three months ended June
30, 2004 as compared to the three months ended June 30, 2003. The decline was
primarily due to the timing of customer orders placed in 2004 as compared to
2003.
Income after Direct Costs and Gross Margin. Income after direct costs for
the three months ended June 30, 2004 was $1,231,465 compared to income after
direct costs of $1,542,521 for the three months ended June 30, 2003. Gross
margin for the three months ended June 30, 2004 was 64% compared to 65% for the
three months ended June 30, 2003. The decline was due to higher direct materials
costs in the MCS division.
Operating Expenses. Operating expenses for the three months ended June 30,
2004 were $1,750,321 compared to $1,400,640 for the three months ended June 30,
2003. This increase of $349,681, or 25%, was primarily attributable to the
following:
- An increase of $258,591, or 98% in research and development costs.
The increase is primarily attributable to the increased costs
associated with the expansion of our research programs at Sentigen
Biosciences. It is believed that these costs will continue to
increase as we pursue our drug discovery initiatives
- An increase of $254,942 or 112% in corporate overhead due to
increased compensation expenses (associated with the hiring of our
executive vice president of commercial operations in September 2003)
and higher professional fees.
These increases were partially offset by the following:
- A decrease of $129,011 or 18% in the selling, general and
administrative expenses of CMT. The decline was attributed to lower
marketing, sales and advertising costs, travel expenses and
consulting fees.
- A decrease of $33,337 or 41% in stock based compensation.
- A decrease of $1,504 in depreciation and amortization.
Income / Loss from Operations. Loss from operations for the three months
ended June 30, 2004 was $518,856 compared to income from operations of $141,881
for the three months ended June 30, 2003. The components of this decline are as
follows:
For the Three Months Ended
June 30,
-------------------------- Percent
2004 2003 Change
--------- --------- -------
CMT $ 465,378 $ 720,642 (35%)
Sentigen Biosciences (500,361) (347,927) 44%
Holding company expenses (483,873) (230,834) 110%
--------- ---------
Total $(518,856) $ 141,881 (466%)
========= =========
17
The decline in the income from operations of CMT was driven by its decline
in revenues. The loss from operations attributable to Sentigen Biosciences
increased due to higher research and development costs. Holding company expenses
increased due to higher compensation costs and professional fees.
Interest income. Interest income, net of interest expenses increased by
$25,005 due to lower interest expenses on our debt balances as well as an
increase in interest income attributable to the purchase of a $9,000,000 U.S.
Treasury Note, with a coupon of 3.125% that matures on May 15, 2007.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED JUNE
30, 2003
Revenues. Revenues for the six months ended June 30, 2004 were $4,065,048
compared to revenues of $4,549,264 for the six months ended June 30, 2003. This
decrease of $484,216, or 11%, was the result of a decrease of $481,029, or 16%,
in contract revenue from CMT's MCS division, and a decrease of $3,187 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 Six Months Ended
June 30,
------------------------- Percent
2004 2003 Change
---------- ---------- -------
HTS contract $1,222,273 $1,200,000 2%
All other contracts 1,285,917 1,789,219 (28%)
---------- ----------
Total $2,508,190 $2,989,219 (16%)
========== ==========
The contract revenue for high-throughput screening, or HTS, services is
derived from a contract with one customer. The contract has a term of one year,
ending on December 31, 2004. The contract provides for payments to CMT of
$200,000 per month in exchange for a fixed number of cell and reagent deliveries
to support the customer's HTS program. Should actual deliveries during 2004
exceed the fixed number of deliveries provided for in the contract additional
deliveries will be billed at the rate of $909 per delivery. The 2% increase in
revenues from the HTS contract results from 24.5 deliveries in excess of the
fixed number of deliveries provided for in the contract during the first six
months of 2004.
The contract also provides for a credit against other services (outside
the scope of the base contract) performed for the customer in 2005 should actual
deliveries during 2004 fall below the fixed number of deliveries provided for in
the contract. The contract states that the credit against the value of future
additional services performed in 2005 cannot exceed 30% of the value of the
additional services performed in addition to the base contract value for 2004.
At June 30, 2004 unearned revenue totaled $26,566 to account for the value of
the potential credit which would be due in 2005.
The 28% decline in other contracts was driven primarily by the completion
of a contract for the pre-clinical analysis of compound efficacy on diminishing
or eliminating pathogen infection using the Taqman(TM) assay. This contract did
not renew in 2004.
Revenues from the SM division declined $3,187 for the six months ended
June 30, 2004 as compared to the six months ended June 30, 2003.
Income after Direct Costs and Gross Margin. Income after direct costs for
the six months ended June 30, 2004 was $2,553,561 compared to income after
direct costs of $3,039,022 for the six months ended June 30, 2003. Gross margin
for the six months ended June 30, 2004 was 63% compared to 67% for the six
months ended June 30, 2003. The decline was due to higher direct materials costs
in the MCS division.
18
Operating Expenses. Operating expenses for the six months ended June 30,
2004 were $4,047,064 compared to $2,626,280 for the six months ended June 30,
2003. This increase of $1,420,784, or 54%, was primarily attributable to the
following:
- An increase of $438,256, or 89% in research and development costs.
The increase is primarily attributable to the increased costs
associated with the expansion of our research programs at Sentigen
Biosciences. It is believed that these costs will continue to
increase as we pursue our drug discovery initiatives
- An increase of $473,376 or 95% in corporate overhead due to
increased compensation expenses (associated with the hiring of our
executive vice president of commercial operations in September 2003)
and higher professional fees.
- An increase of $598,762 or 607% in stock based compensation. The
increase in stock based compensation results primarily from the
increase in the fair values of stock options granted to non-employee
scientific consultants. The increase in fair value is primarily the
result of the increase in the price of our common stock as of June
30, 2004 when compared to the price of our common stock at June 30,
2003.
These increases were partially offset by the following:
- A decrease of $83,384 or 6% in the selling, general and
administrative expenses of CMT. The decline was attributed to lower
marketing, sales and advertising costs, travel expenses and
consulting fees.
- A decrease of $6,226 in depreciation and amortization.
Income / Loss from Operations. Loss from operations for the six months
ended June 30, 2004 was $1,493,503 compared to income from operations of
$412,742 for the six months ended June 30, 2003. The components of this decline
are as follows:
For the Six Months Ended
June 30,
---------------------------- Percent
2004 2003 Change
----------- ----------- -------
CMT $ 984,297 $ 1,509,509 (35%)
Sentigen Biosciences (1,320,793) (589,571) 124%
Holding company expenses (1,157,007) (507,196) 128%
----------- -----------
Total $(1,493,503) $ 412,742 (462%)
=========== ===========
The decline in the income from operations of CMT was driven by its decline
in revenues. The loss from operations attributable to Sentigen Biosciences
increased due to higher research and development costs and stock based
compensation costs. Holding company expenses increased due to higher
compensation costs, professional fees and stock based compensation costs.
Interest income. Interest income, net of interest expenses increased by
$33,861 due to lower interest expenses on our debt balances as well as an
increase in interest income attributable to the purchase of a $9,000,000 U.S.
Treasury Note, with a coupon of 3.125% that matures on May 15, 2007.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004 we had $9,640,909 in cash and investment securities and
working capital of $9,189,772. During the six months ended June 30, 2004 we
financed our operations and capital expenditures primarily through working
capital and a capital lease.
On May 11, 2004 we bought $9,000,000 face value, 3.125% U.S. Treasury
Notes maturing on May 15, 2007. This purchase accounts for the majority of the
$9,446,043 decline in cash and cash equivalents reported in our consolidated
statement of cash flow for the six months ended June 30, 2004.
19
On January 22, 2003 we sold $5,250,000 face value, 2.125% U.S. Treasury
Notes 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 $5,294,816 increase in
cash and cash equivalents reported in our consolidated statement of cash flow
for the six months ended June 30, 2003.
We believe that our financial resources will be sufficient to fund
operations and capital requirements for at least the next 12 months. However, we
may seek to obtain additional debt or equity financing to fund expanded research
and development programs. It is possible that any such financing may be dilutive
to current 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 future business prospects, as well as conditions prevailing in the
capital markets.
Cell & Molecular Technologies, Inc.
In April 2004, 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, equipment and an
offsetting capital lease liability was recorded on our consolidated balance
sheet in the amount of $66,832. We used a fixed interest rate of 5.00% to
approximate the borrowing rate for the lease. The equipment is being depreciated
on a straight-line basis through the term of the lease which expires in March
2007. Rental payments for the three months ended June 30, 2004 totaled $5,927.
Of those payments, $5,113 was applied to the capital lease liability and $814
was applied to interest expense. As of June 30, 2004 the total remaining lease
obligation amounted to $61,719.
Sentigen Biosciences
Sentigen Biosciences was formed in February of 2000 and is focusing on
research and development activities. The licensing agreement with The Trustees
of the Columbia University in New York that we entered into in April 2000
required us to contribute a minimum of $1,000,000 into Sentigen Biosciences
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 a 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 requires that a minimum of $50,000 per
six month period or $100,000 per annual period 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 2004.
On May 27, 2004 we entered into a second license agreement with The
Trustees of Columbia University ("Columbia") for the exclusive license to
Columbia's rights under patent applications developed jointly by us and Columbia
in the area of assaying receptor activity (our first exclusive license agreement
was entered into in April 2000 and relates to patent applications in the areas
of chemosensation and olfaction). In consideration of the May 27, 2004 exclusive
license agreement, we agreed to the following:
- We will pay Columbia a royalty totaling 5% of the net sales received
by us on any therapeutic products developed solely by us and
approved by the Food & Drug Administration ("FDA").
- We will also pay to Columbia a royalty totaling 5% of any net sales
received by us on any therapeutic products approved by the FDA that
were developed pursuant to sublicenses of our rights under the
patents.
We are also obligated to spend the following on the research and development of
products under the patents:
- A minimum of $1,000,000 from May 27, 2004 through December 31, 2005
and
- A minimum of $100,000 per year for calendar years 2006 through 2010.
A copy of this agreement is filed with this Form 10-Q as Exhibit 10.1.
20
There is no assurance that the technology related to the licensing
agreement with The Trustees of Columbia University or other technologies
involved in the research and development activities of Sentigen Biosciences 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 its 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 August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("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 an 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 an effect on our 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 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.
We did not undertake any exit or disposal activities during the six months ended
June 30, 2004.
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.
21
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
June 30,
------------------------
2004 2003
--------- ---------
Net Loss:
As reported $(509,126) $ 117,094
Pro-forma expense as if stock options were
charged against net loss (82,155) (41,856)
--------- ---------
Pro-forma net loss using the fair value method $(591,281) $ 75,238
========= =========
Diluted EPS:
As reported $ (0.07) $ 0.02
Pro-forma using the fair value method $ (0.08) $ 0.01
For the six months
ended
June 30,
----------------------------
2004 2003
----------- -----------
Net Loss:
As reported $(1,496,449) $ 353,234
Pro-forma expense as if stock options were
charged against net loss (170,150) (79,712)
----------- -----------
Pro-forma net loss using the fair value method $(1,666,599) $ 273,522
=========== ===========
Diluted EPS:
As reported $ (0.20) $ 0.05
Pro-forma using the fair value method $ (0.22) $ 0.04
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, we do 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, as restated by FIN No. 46R,
"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 December 15, 2003, to entities in which an enterprise
holds a variable interest that it acquired before February 1, 2003. We do not
have variable interest entities as of June 30, 2004.
22
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 FASB 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. We are not
involved in any hedging activities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 addresses how certain financial instruments with characteristics of both
liabilities and equity should be classified and measured. The adoption of SFAS
No. 150 did not have an effect on the Company's financial position.
23
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
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."
Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalents, investment securities and 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 June 30, 2004, we have total debt of $971,342. This debt consists of
three capital leases, three bank notes used for equipment financing and a
mortgage on our executive office at 580 Marshall Street, Phillipsburg, New
Jersey 08865. The 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
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective in timely alerting them to
material information relating to our company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
not been any changes in our internal control over financial reporting during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT ISSUANCES OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on June 9, 2004. The following
proposals were adopted by the margins indicated:
1. To elect seven directors, each of whom is to serve until the next
Annual Meeting of Stockholders and until his successor is elected
and qualified.
NUMBER OF SHARES
--------------------------------------
WITHHELD
FOR AUTHORITY AGAINST
--------- --------- -------
Joseph K. Pagano 6,439,700 244,266 -
Thomas Livelli 6,439,700 244,266 -
Frederick R. Adler 6,439,700 244,266 -
Samuel A. Rozzi 6,439,700 244,266 -
Joel M. Pearlberg 6,439,700 244,266 -
Gerald Greenwald 6,439,700 244,266 -
Bruce Slovin 6,439,700 244,266 -
2. To ratify the appointment of Deloitte & Touche LLP as independent
auditors for the fiscal year ending December 31, 2004.
For 6,683,966
Withheld Authority -
Against -
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 AGREEMENT BETWEEN THE TRUSTEES OF COLUMBIA UNIVERSITY AND SENTIGEN
BIOSCIENCES
31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF SENTIGEN HOLDING
CORP. PURSUANT TO RULE 13a-15 AND 15d-15 UNDER THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED
31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF SENTIGEN HOLDING
CORP. PURSUANT TO RULE 13a-15 AND 15d-15 UNDER THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED
32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF SENTIGEN HOLDING
CORP.PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF SENTIGEN HOLDING
CORP. PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(b) Reports filed on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SENTIGEN HOLDING CORP.
Dated: August 13, 2004
By: /s/ Fredrick B. Rolff
--------------------------------
Fredrick B. Rolff,
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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