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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 15, 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
September 30, 2004 (Unaudited) and December 31, 2003............................ 3
Consolidated Statements of Operations (Unaudited)
For the three and nine months ended, September 30, 2004 and 2003................ 4
Consolidated Statements of Cash Flows (Unaudited)
For the nine months ended, September 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........................................................ 12
Item 3. Quantitative and Qualitative Disclosure of Market Risk..................................... 22
Item 4. Controls and Procedures.................................................................... 22
PART II. OTHER INFORMATION........................................................................... 23
Item 1. Legal Proceedings.......................................................................... 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds................................ 23
Item 3. Defaults Upon Senior Securities............................................................ 23
Item 4. Submission of Matters to a Vote of Security Holders........................................ 23
Item 5. Other Information.......................................................................... 23
Item 6. Exhibits ................................................................................ 23
SIGNATURES 24
Exhibit 10.1 AWARD/CONTRACT BETWEEN SENTIGEN HOLDING CORP. AND TECHNICAL SUPPORT WORKING GROUP 25
Exhibit 10.2 STUDY AGREEMENT BETWEEN CELL & MOLECULAR TECHNOLOGIES, INC. AND MERCK & CO. INC. 29
Exhibit 10.3 CONSULTING AGREEMENT BETWEEN SENTIGEN HOLDING CORP. AND ERIK R. LUNDH 34
Exhibit 10.4 PROMISSORY NOTE BETWEEN CELL & MOLECULAR TECHNOLOGIES, INC. AND PNC BANK 36
Exhibit 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF SENTIGEN
HOLDING CORP. PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES AND
EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 39
Exhibit 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF SENTIGEN
HOLDING CORP. PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002 40
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 41
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 42
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2004 2003
------------ ------------
Assets
Current assets
Cash and cash equivalents $ 996,857 $ 10,086,952
U.S. Treasury Note, available for sale, at fair value 9,075,960 -
Accounts receivable - net of allowance for doubtful
accounts of $45,000 for 2004 and 2003
1,060,192 940,570
Unbilled services - 4,650
Inventory 285,105 241,134
Accrued interest receivable 105,469 4,156
Prepaid expenses 100,225 70,396
------------ ------------
11,623,808 11,347,858
------------ ------------
Property, plant and equipment 4,123,950 3,736,039
Equipment under capital lease 197,777 130,945
Less: accumulated depreciation 2,851,509 2,463,384
------------ ------------
1,470,218 1,403,600
------------ ------------
Other assets
Security deposits 21,111 20,411
Deferred financing costs - net of accumulated amortization
of $6,685 for 2004 and $5,584 for 2003 6,975 8,076
License costs - net of accumulated amortization
of $116,630 for 2004 and $97,191 for 2003 323,995 343,434
------------ ------------
352,081 371,921
------------ ------------
Total assets $ 13,446,107 $ 13,123,379
============ ============
Liabilities and stockholders' equity
Current liabilities
Current maturities of long-term debt $ 140,260 $ 211,927
Liability under capital lease - current portion 67,465 44,448
Accounts payable and accrued expenses 1,392,214 892,059
Customer deposits 922,396 234,570
Unearned revenue 6,741 8,600
------------ ------------
2,529,076 1,391,604
------------ ------------
Liability under capital lease - long-term 42,955 42,483
Long-term debt - net of current maturities 770,460 758,098
------------ ------------
Total liabilities 3,342,491 2,192,185
------------ ------------
Stockholders' equity
Preferred Stock - $.01 par value, 5,000,000 shares
authorized - none issued or outstanding $ - $ -
CommonStock - $.01 par value, 20,000,000 shares authorized,
7,470,292 and 7,454,744 shares issued and outstanding in 2004
and 2003, respectively 74,702 74,547
Additional paid-in capital 14,009,782 13,185,570
Accumulated other comprehensive income 83,414 -
Accumulated deficit (4,064,282) (2,328,923)
------------ ------------
Total stockholders' equity 10,103,616 10,931,194
------------ ------------
Total liabilities and stockholders' equity $ 13,446,107 $ 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 nine months ended
September 30, September 30,
------------ ------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue
Molecular cell science $ 1,528,443 $ 1,525,064 $ 4,036,633 $ 4,514,283
Specialty media 826,481 692,207 2,383,339 2,252,252
Sentigen Biosciences 75,927 - 75,927 -
----------- ----------- ----------- -----------
2,430,851 2,217,271 6,495,899 6,766,535
----------- ----------- ----------- -----------
Direct costs
Molecular cell science 533,499 485,207 1,455,701 1,390,574
Specialty media 351,738 312,201 941,023 917,076
Sentigen Biosciences 51,050 - 51,050 -
----------- ----------- ----------- -----------
936,287 797,408 2,447,774 2,307,650
----------- ----------- ----------- -----------
Income after direct costs
Molecular cell science 994,944 1,039,857 2,580,932 3,123,709
Specialty media 474,743 380,006 1,442,316 1,335,176
Sentigen Biosciences 24,877 - 24,877 -
----------- ----------- ----------- -----------
1,494,564 1,419,863 4,048,125 4,458,885
----------- ----------- ----------- -----------
Operating expenses
Selling, general and administrative costs 678,462 691,307 1,884,668 1,980,896
Research and development 460,112 279,590 1,389,051 770,273
Corporate overhead 383,955 267,033 1,357,848 767,550
Stock based compensation 62,784 836,798 760,223 935,475
Depreciation and amortization 168,078 134,134 408,665 380,948
----------- ----------- ----------- -----------
1,753,391 2,208,862 5,800,455 4,835,142
----------- ----------- ----------- -----------
Loss from operations (258,827) (788,999) (1,752,330) (376,257)
----------- ----------- ----------- -----------
Interest income 73,262 21,184 144,693 69,267
Interest expense 13,095 16,077 39,437 52,932
----------- ----------- ----------- -----------
Interest income, net of interest expense 60,167 5,107 105,256 16,335
----------- ----------- ----------- -----------
Loss before provision for income taxes (198,660) (783,892) (1,647,074) (359,922)
Provision for income taxes 40,250 20,170 88,285 90,906
----------- ----------- ----------- -----------
Net loss (238,910) (804,062) (1,735,359) (450,828)
Other comprehensive income
Unrealized gain on investments 74,469 - 83,414 -
----------- ----------- ----------- -----------
Comprehensive (loss) income $ (164,441) $ (804,062) $(1,651,945) $ (450,828)
=========== =========== =========== ===========
Net income (loss) per share:
Basic and diluted $ (0.03) $ (0.11) $ (0.23) $ (0.06)
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic and diluted 7,468,633 7,454,744 7,462,309 7,453,394
=========== =========== =========== ===========
See notes to consolidated financial statements.
4
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(Unaudited)
For the nine months ended
September 30,
------------------------------
2004 2003
------------ ------------
Cash Flows from Operating Activities
Net loss $ (1,735,359) $ (450,828)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization 408,665 380,948
Stock based compensation 760,223 935,475
(Increase) decrease in:
Accounts receivable, net of allowance (119,622) (362,910)
Unbilled services 4,650 9,745
Inventory (43,971) (37,999)
Accrued interest receivable (101,313) (1,518)
Prepaid expenses and security deposits (30,529) 83,627
Increase (decrease) in:
Accounts payable and accrued expenses 500,155 168,956
Customer deposits and unearned revenue 685,967 (275,328)
------------ ------------
Cash provided by operating activities 328,866 450,168
------------ ------------
Cash Flows from Investing Activities
Acquisitions of property and equipment (387,911) (145,991)
Sale of U.S. Treasury Security - 5,293,602
Purchase of U.S. Treasury Security (8,992,546) -
------------ ------------
Cash (used in) provided by investing activities (9,380,457) 5,147,611
------------ ------------
Cash Flows from Financing Activities
Repayments of long term debt (212,958) (202,988)
Proceeds from issuance of long term debt 110,310 -
Cash received from stock options exercised 64,144 4,510
------------ ------------
Cash used in financing activities ` (38,504) (198,478)
------------ ------------
(Decrease) increase in cash and cash equivalents (9,090,095) 5,399,301
Cash and cash equivalents - beginning of period 10,086,952 4,819,967
------------ ------------
Cash and cash equivalents - end of period $ 996,857 $ 10,219,268
============ ============
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest $ 39,437 $ 52,932
============ ============
Income taxes $ 65,000 $ 116,000
============ ============
Non-cash investing and financing activities:
Investing activities:
Equipment acquired under capital lease $ (66,832) $ (35,000)
Financing activities:
Debt incurred under capital
lease $ 66,832 $ 35,000
See notes to consolidated financial statements.
5
SENTIGEN HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, September 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 utilizing 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 consist primarily of research and
development. Research and development costs are expensed as such costs are
incurred. Revenues, direct costs and overhead in connection with our
contract with the Technical Support Working Group (TSWG) - an interagency
government office with representatives from the Departments of Defense,
State and Homeland Security - are reported as such in our consolidated
statements of operations.
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, and administrative assistant, (2) professional fees for legal,
accounting and consulting 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 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
September 30,
------------------------
2004 2003
--------- ---------
Net Loss:
As reported $(238,910) $(804,062)
Pro-forma expense as if
stock options were charged
against net loss (117,037) (47,970)
--------- ---------
Pro-forma net loss
using the fair value method $(355,947) $(852,032)
========= =========
Diluted EPS:
As reported $ (0.03) $ (0.11)
Pro-forma using the fair
value method $ (0.05) $ (0.11)
For the nine months
ended
September 30,
----------------------------
2004 2003
----------- -----------
Net Loss:
As reported $(1,735,359) $ (450,828)
Pro-forma expense as if
stock options were charged
against net loss (287,187) (127,682)
----------- -----------
Pro-forma net loss
using the fair value method $(2,022,546) $ (578,510)
=========== ===========
Diluted EPS:
As reported $ (0.23) $ (0.06)
Pro-forma using the fair
value method $ (0.27) $ (0.08)
7
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 September 30, 2004.
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.
8
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 primarily 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
----------------------------
September 30, September 30,
2004 2003
------------ ------------
Revenues
MCS $ 1,587,175 $ 1,553,281
SM 826,481 692,207
Sentigen Biosciences 75,927 -
----------- -----------
Revenues for reportable segments 2,489,583 2,245,488
Elimination of intersegment revenues (58,732) (28,217)
----------- -----------
Total Reported $ 2,430,851 $ 2,217,271
----------- -----------
Income (loss) from operations
MCS $ 312,012 $ 434,000
SM 275,065 167,417
Sentigen Biosciences (399,949) (301,476)
----------- -----------
(Loss) income from operations
for reportable segments 187,128 299,941
Corporate loss unallocated to reportable segments (445,955) (1,088,940)
----------- -----------
Total Reported $ (258,827) $ (788,999)
----------- -----------
Depreciation and amortization
MCS $ 127,577 $ 89,758
SM 24,096 26,346
Sentigen Biosciences 14,905 16,350
----------- -----------
Depreciation and amortization for
reportable segments 166,578 132,634
Corporate depreciation and amortization
unallocated to segments 1,500 1,500
----------- -----------
Total Reported $ 168,078 $ 134,134
----------- -----------
9
For the nine months ended
------------------------------
September 30, September 30,
2004 2003
------------ ------------
Revenues
MCS $ 4,162,727 $ 4,584,840
SM 2,383,339 2,252,252
Sentigen Biosciences 75,927 -
----------- -----------
Revenues for reportable segments 6,621,993 6,837,092
Elimination of intersegment revenues (126,094) (70,557)
----------- -----------
Total Reported $ 6,495,899 $ 6,766,535
----------- -----------
Income (loss) from operations
MCS $ 697,977 $ 1,354,690
SM 873,397 756,236
Sentigen Biosciences (1,720,742) (891,047)
----------- -----------
(Loss) income from operations
for reportable segments (149,368) 1,219,879
Corporate loss unallocated to reportable segments (1,602,962) (1,596,136)
----------- -----------
Total Reported $(1,752,330) $ (376,257)
----------- -----------
Depreciation and amortization
MCS $ 285,307 $ 253,092
SM 74,143 70,538
Sentigen Biosciences 44,715 49,139
----------- -----------
Depreciation and amortization for
reportable segments 404,165 372,769
Corporate depreciation and amortization
unallocated to segments 4,500 8,179
----------- -----------
Total Reported $ 408,665 $ 380,948
----------- -----------
September 30, December 31,
2004 2003
------------ -----------
Segment Assets
MCS $ 1,524,642 $ 1,486,108
SM 1,044,373 990,133
Sentigen Biosciences 573,766 459,919
----------- -----------
Total assets for reportable segments 3,142,781 2,936,160
Assets unallocated to segments 10,303,326 10,187,219
----------- -----------
Total Reported $13,446,107 $13,123,379
----------- -----------
10
5. INVENTORY
Inventory as of September 30, 2004 and December 31, 2003 is entirely
comprised of the physical inventory of the SM Division. Components of
physical inventory as of September 30, 2004 and December 31, 2003 are as
follows:
September 30, December 31,
2004 2003
------------ -----------
Finished goods $ 185,848 $ 139,020
Packaging materials 30,708 30,019
Raw materials 68,549 72,095
--------- ---------
Total inventory $ 285,105 $ 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 and warrants, to the extent such conversion would be dilutive.
Securities which are convertible into common stock were excluded from the
computation of diluted loss per share for the three and nine month
periods ending September 30, 2004 and 2003 because SFAS No. 128
"Earnings per Share," prohibits adjusting the denominator of diluted net
income (loss) per share for additional potential common shares when a net
loss from continuing operations is reported. The total number of
securities which are convertible into common stock that were excluded
from the calculation of diluted loss per share was 963,658 and 1,327,916
for the three month periods ended September 30, 2004 and 2003,
respectively. The total number of securities which are convertible into
common stock that were excluded from the calculation of diluted net loss
per share was and 1,036,845 and 1,327,027 for the nine month periods
ended September 30, 2004 and 2003. Such securities would have been
included in the computation of diluted net loss per share if they were
dilutive.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The statements contained herein which
are not historical facts are forward-looking statements that involve known and
unknown risks and uncertainties that could significantly affect our actual
results, performance or achievements in the future and, accordingly, such actual
results, performance or achievements may materially differ from those expressed
or implied in any forward-looking statements made by or on 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; potential inability of
our research programs to develop commercially viable products; 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 utilizing 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.
On August 18, 2004, CMT entered into a study agreement with Merck & Co.,
Inc. Under the agreement CMT will develop, bank and study certain cell lines
based on standards and protocols specified by Merck & Co., Inc. The agreement
provides for total payments to CMT of $1,338,130, with $669,065 of this total
payable upon execution of the agreement. The up-front payment has been accounted
for as a customer deposit on our consolidated balance sheet as of September 30,
2004. A copy of this agreement is filed with this Form 10-Q as Exhibit 10.2.
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
12
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.
On July 19, 2004, we entered into a consulting agreement with Erik R.
Lundh, our former executive vice president of commercial operations. This
consulting agreement replaces an employment agreement we previously had with Mr.
Lundh. The agreement provides for compensation at a rate of $800 per day that
services are provided to us. The agreement is cancelable with thirty days
written notice by either party. The agreement also amends the stock option
agreement we had previously with Mr. Lundh for the purchase of 50,000 shares of
our common stock at $4.75 per share. The agreement provides for the immediate
vesting of 10,000 stock options as of the effective date of this consulting
agreement. The agreement also provides for the vesting of 833 stock options per
month for each month this consulting agreement is in effect, beginning on
October 1, 2004. A copy of this agreement is filed with this Form 10-Q as
Exhibit 10.3.
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 Sentigen Biosciences with $1.65 million in
research funding over the next two years. We are conducting 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 mammalian nose. We are attempting 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. The contract provides for the reimbursement of
research expenditures plus a fixed profit margin. Through September 30, 2004 we
have earned revenues of $70,927 under this contract, while incurring total costs
of $67,550. A copy of this contract is filed with this Form 10-Q as Exhibit
10.1.
In connection with our internal drug discovery program at Sentigen
Biosciences, we entered into a consulting agreement with Dr. Masashi Yanagisawa.
Dr. Yanagisawa is an Investigator at the Howard Hughes Medical Institute at The
University of Texas Southwestern Medical Center and is also Professor of
Molecular Genetics and holder of the Patrick E. Haggerty Distinguished Chair in
Basic Biomedical Science. He received his M.D. and Ph.D. degrees from the
University of Tsukuba, Japan, where he worked with Tomoh Masaki. Before moving
to Dallas, he was Assistant Professor of Pharmacology at the Kyoto University
School of Medicine, Japan. Dr. Yanagisawa is a member of the National Academy of
Sciences.
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
13
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 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 consist primarily of research and development.
Research and development costs are expensed as such costs are incurred.
Revenues, direct costs and overhead in connection with our contract with the
Technical Support Working Group (TSWG)-an interagency government office with
representatives from the Departments of Defense, State and Homeland Security-
are reported as such in our consolidated statements of operations.
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, and administrative
assistant, (2) professional fees for legal, accounting and consulting 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
14
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 $285,105 and no reserve for impairment or
obsolescence was necessary as of September 30, 2004.
Impairment of intangibles. Our intangible assets consist primarily of
license costs of $323,995 as of September 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 carrying value exceeded the fair
market value of the license. We believe no such loss is necessary as of
September 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 with employees 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 September 30, 2004, we did not have any off-balance-sheet
arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.
15
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003
Revenues. Revenues for the three months ended September 30, 2004 were
$2,430,851 compared to revenues of $2,217,271 for the three months ended
September 30, 2003. This increase of $213,580, or 10%, was the result of an
increase of $134,274, or 19%, in revenue from CMT's SM division. This growth was
augmented by the initiation of our TSWG contract. This contract accounted for
$70,927 in revenue for the third quarter ended September 30, 2004. Contract
revenue from CMT's MCS division was flat for the quarter ending September 30,
2004 when compared to the quarter ending September 30, 2003.
An analysis of our revenues from the MCS division is as follows:
For the three months ended
September 30,
-------------------------- Percent
2004 2003 Change
---------- ---------- ----------
HTS contract $ 577,727 $ 600,000 (4%)
All other contracts 950,716 925,064 3%
---------- ----------
Total $1,528,443 $1,525,064 -%
========== ==========
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 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 September 30, 2004
unearned revenue totaled $6,741 to account for the value of the potential credit
which would be due in 2005.
Revenues from the SM division increased 19% for the three months ended
September 30, 2004 as compared to the three months ended September 30, 2003. The
increase 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 September 30, 2004 was $1,494,564 compared to income
after direct costs of $1,419,863 for the three months ended September 30, 2003.
Gross margin for the three months ended September 30, 2004 was 61% compared to
64% for the three months ended September 30, 2003. The decline was due to higher
direct materials costs in the MCS division.
Operating Expenses. Operating expenses for the three months ended
September 30, 2004 were $1,753,391 compared to $2,208,862 for the three months
ended September 30, 2003. This decline of $455,471, or 21%, was primarily
attributable to the following:
- A decrease of $774,014 or 93% in stock based compensation. During the
three months ended September 30, 2003 we amended a stock option agreement
with our Chairman resulting in a one-time charge of $820,407.
- A decrease of $12,845 or 2% in the selling, general and administrative
expenses of CMT.
These declines were partially offset by the following:
- An increase of $180,522, or 65% 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. We believe
that these costs will continue to increase as we pursue our drug discovery
initiatives.
16
- An increase of $116,922 or 44% in corporate overhead due to increased
compensation expenses and higher professional fees.
- An increase of $33,944 or 25% in depreciation and amortization relating to
equipment acquisitions during the three months ended September 30, 2004 at
CMT.
Loss from Operations. Loss from operations for the three months ended
September 30, 2004 was $258,827 compared to a loss from operations of $788,999
for the three months ended September 30, 2003. The components of this 67%
improvement are as follows:
For the Three Months Ended
September 30,
--------------------------- Percent
2004 2003 Change
----------- ----------- -------
CMT $ 587,077 $ 601,417 (2%)
Sentigen Biosciences (399,949) (301,476) (33%)
Holding company expenses (445,955) (1,088,940) 59%
----------- -----------
Total $ (258,827) $ (788,999) 67%
=========== ===========
The decline in the income from operations of CMT was driven by higher
depreciation and amortization charges relating to equipment acquisitions made
during the quarter and higher materials costs in the MCS division. The loss from
operations attributable to Sentigen Biosciences increased due to higher research
and development costs. The loss from holding company expenses improved due to
the absence of a one-time charge for stock based compensation incurred during
the three months ended September 30, 2003.
Interest income. Interest income, net of interest expenses increased by
$55,060 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Revenues. Revenues for the nine months ended September 30, 2004 were
$6,495,899 compared to revenues of $6,766,535 for the nine months ended
September 30, 2003. This decrease of $270,636, or 4%, was the result of a
decrease of $477,650, or 11%, in contract revenue from CMT's MCS division,
offset by an increase of $131,087 or 6% in revenue from CMT's SM division. In
addition, our revenues for the nine months ended September 30, 2004 included
$70,927 from the initiation of our contract with TSWG.
An analysis of our revenues from the MCS division is as follows:
For the nine months ended
September 30,
------------------------- Percent
2004 2003 Change
---------- ---------- -------
HTS contract $1,800,000 $1,800,000 -%
All other contracts 2,236,633 2,714,283 (18%)
---------- ----------
Total $4,036,633 $4,514,283 (11%)
========== ==========
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 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
17
value of the additional services performed in addition to the base contract
value for 2004. At September 30, 2004 unearned revenue totaled $6,741 to account
for the value of the potential credit which would be due in 2005.
The 18% 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 increased 6% for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003. The
increase is due primarily to volume increases in both direct and OEM sales
channels.
Income after Direct Costs and Gross Margin. Income after direct costs for
the nine months ended September 30, 2004 was $4,048,125 compared to income after
direct costs of $4,458,885 for the nine months ended September 30, 2003. Gross
margin for the nine months ended September 30, 2004 was 62% compared to 66% for
the nine months ended September 30, 2003. The decline was due to higher direct
materials costs in the MCS division.
Operating Expenses. Operating expenses for the nine months ended September
30, 2004 were $5,800,455 compared to $4,835,142 for the nine months ended
September 30, 2003. This increase of $965,313, or 20%, was primarily
attributable to the following:
- An increase of $618,778, or 80% 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 $590,298 or 77% in corporate overhead due to increased
compensation expenses and higher professional fees.
- An increase of $27,717, or 7% in depreciation and amortization due to
equipment acquisitions at CMT during the three months ended September 30,
2004.
These increases were partially offset by the following:
- A decrease of $175,252 or 19% in stock based compensation. The decline is
due to the absence of a one-time stock based compensation charge incurred
during the three months ended September 30, 2003 offset by increases in
stock based compensation 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 September 30, 2004 when compared to the price of our
common stock at September 30, 2003.
- A decrease of $96,228 or 5% 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.
Loss from Operations. Loss from operations for the nine months ended
September 30, 2004 was $1,752,330 compared to loss from operations of $376,257
for the nine months ended September 30, 2003. The components of this increase in
loss are as follows:
For the nine months ended
September 30,
---------------------------- Percent
2004 2003 Change
----------- ----------- -------
CMT $ 1,571,374 $ 2,110,926 (26%)
Sentigen Biosciences (1,720,742) (891,047) (93%)
Holding company expenses (1,602,962) (1,596,136) -%
----------- -----------
Total $(1,752,330) $ (376,257) (366%)
=========== ===========
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
18
based compensation costs. Holding company expenses increased due to higher
compensation costs and professional fees.
Interest income. Interest income, net of interest expenses increased by
$88,921 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 September 30, 2004 we had $996,857 in cash and cash equivalents and
$9,075,960 invested in a U.S. Treasury Note. Our working capital as of September
30, 2004 was $9,094,732. During the nine months ended September 30, 2004 we
financed our operations through working capital and capital expenditures
primarily through a bank loan and a capital lease.
On May 11, 2004 we bought a $9,000,000 face value, 3.125% U.S. Treasury
Note maturing on May 15, 2007. This purchase accounts for the majority of the
$9,090,095 decline in cash and cash equivalents reported in our consolidated
statement of cash flow for the nine months ended September 30, 2004.
On January 22, 2003 we sold a $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. This sale accounts for the majority of the
$5,399,301 increase in cash and cash equivalents reported in our consolidated
statement of cash flow for the nine months ended September 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.
On August 13, 2004 CMT borrowed $110,310 under a $500,000 promissory note
to finance capital equipment expenditures. We are required to pay interest at
the prime rate on principal amounts borrowed during the first year of the
promissory note. At the conclusion of the first year of the promissory note
(July 2005), a principal repayment schedule will be negotiated and the interest
rate will become fixed. On October 26, 2004 CMT borrowed an additional $197,373
under this loan commitment.
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 nine months ended September 30, 2004 totaled
$11,855. Of those payments, $10,291 was applied to the capital lease liability
and $1,564 was applied to interest expense. As of September 30, 2004 the total
remaining lease obligation amounted to $54,977.
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.
19
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.
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 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.
20
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
September 30,
--------------------------
2004 2003
---------- ---------
Net Loss:
As reported $(238,910) $(804,062)
Pro-forma expense as if
stock options were charged
against net loss (117,037) (47,970)
--------- ---------
Pro-forma net loss
using the fair value method $(355,947) $(852,032)
========= =========
Diluted EPS:
As reported $ (0.03) $ (0.11)
Pro-forma using the fair
value method $ (0.05) $ (0.11)
For the nine months ended
September 30,
----------------------------
2004 2003
----------- -----------
Net Loss:
As reported $(1,735,359) $ (450,828)
Pro-forma expense as if
stock options were charged
against net loss (287,187) (127,682)
----------- -----------
Pro-forma net loss
using the fair value method $(2,022,546) $ (578,510)
=========== ===========
Diluted EPS:
As reported $ (0.23) $ (0.06)
Pro-forma using the fair
value method $ (0.27) $ (0.08)
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 September 30, 2004.
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.
21
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 September 30, 2004, we have total debt of $1,021,140. 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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
10.1 AWARD/CONTRACT BETWEEN SENTIGEN HOLDING CORP. AND TECHNICAL SUPPORT
WORKING GROUP
10.2 STUDY AGREEMENT BETWEEN CELL & MOLECULAR TECHNOLOGIES, INC. AND
MERCK & CO. INC.
10.3 CONSULTING AGREEMENT BETWEEN SENTIGEN HOLDING CORP. AND ERIK R.
LUNDH
10.4 PROMISSORY NOTE BETWEEN CELL & MOLECULAR TECHNOLOGIES, INC. AND PNC
BANK
31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER OF SENTIGEN HOLDING
CORP. PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
AND EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER OF SENTIGEN HOLDING
CORP. PURSUANT TO RULE 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES
AND EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION
302 OF THE SARBANES-OXLEY ACT OF 2002
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
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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: November 15, 2004
By: /s/ Fredrick B. Rolff
--------------------------------
Fredrick B. Rolff,
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
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