UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ________ to _________
Commission File Number 1-14004
XENOMETRIX, INC.
----------------
(Exact name of small business issuer as specified in its charter)
Delaware 04-3166089
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification number)
2425 North 55th Street
Boulder, CO 80301
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(Address of principal executive offices)
(303) 447-1773
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(Issuers telephone number)
Check whether issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, $0.001 par value 2,950,247 Common Shares
(Class) Outstanding at September 30, 1999
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE>
XENOMETRIX, INC
FORM 10-QSB
FOR THE PERIOD ENDED SEPTEMBER 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Balance Sheet - September 30, 1999..............................Page 3
Statement of Operations -
Quarters ended September 30, 1999 and 1998...................Page 4
Statement of Cash Flows -
Quarters ended September 30, 1999 and 1998...................Page 5
Notes to Financial Statements...................................Page 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................Page 8
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K................................Page 11
Signatures...............................................................Page 12
2
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Part One--Financial Information
Xenometrix, Inc.
Balance Sheet
September 30, 1999
(Unaudited)
Assets
Current Assets:
Cash $ 114,000
Accounts receivable, net 24,000
Inventory 35,000
Prepaid insurance 55,000
Other current assets 39,000
------------
Total current assets 267,000
Property and equipment, net 410,000
Patents, net 350,000
------------
Total assets $ 1,027,000
============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 315,000
Accrued salaries and wages 137,000
Other accrued liabilities 388,000
------------
Total current liabilities 840,000
------------
Stockholders' Equity:
Preferred stock--$.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding --
Common stock--$.001 par value; 20,000,000 shares authorized;
2,950,000 shares issued and outstanding 3,000
Additional paid-in capital 16,093,000
Accumulated deficit (15,909,000)
Total stockholders' equity 187,000
------------
Total liabilities and stockholders' equity $ 1,027,000
============
The accompanying notes are an integral part of these financial statements.
3
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Xenometrix, Inc.
Statement of Operations
September 30, 1999
(Unaudited)
Quarter Ended
September 30,
---------------------------
1999 1998
----------- -----------
Revenue:
Products and services $ 67,000 $ 33,000
Licensing revenue 575,000 300,000
----------- -----------
Total revenue 642,000 333,000
Cost of revenue:
Cost of products and services 85,000 38,000
Cost of licensing revenue 132,000 68,000
----------- -----------
Total cost of revenue 217,000 106,000
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Gross profit 425,000 227,000
----------- -----------
Research and development 19,000 117,000
Selling, general and administrative 162,000 395,000
----------- -----------
Total operating expense 181,000 512,000
----------- -----------
Operating income (loss) 244,000 (285,000)
Interest expense, net (4,000) (131,000)
----------- -----------
Net income (loss) $ 240,000 $ (416,000)
=========== ===========
Income (loss) per common share-basic $ 0.08 $ (0.14)
=========== ===========
Income (loss) per common share-diluted $ 0.07 $ (0.14)
=========== ===========
Weighted average shares outstanding 2,950,000 2,948,000
=========== ===========
Weighted & dilutive potential average shares 3,238,000 2,948,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
Statement of Cash Flows
(Unaudited)
Quarter Ended
September 30
----------------------
1999 1998
--------- ---------
Cash Flows from Operating Activities:
<S> <C> <C>
Net income (loss) $ 240,000 $(416,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 81,000 91,000
Amortization of discount on senior promissory notes -- 83,000
Provision for doubtful accounts -- (5,000)
Changes in assets and liabilities:
Accounts receivable 56,000 (107,000)
Inventory 11,000 (98,000)
Prepaid insurance 28,000 65,000
Deposits and prepaid expense 11,000 12,000
Accounts payable and accrued liabilities (194,000) 298,000
--------- ---------
Net cash provided by (used in) operating activities 233,000 (77,000)
--------- ---------
Cash Flows from Investing Activities:
Patent acquisition cost (14,000) (164,000)
--------- ---------
Net cash used in investing activities (14,000) (164,000)
--------- ---------
Cash Flows from Financing Activities:
Repayment of senior promissory notes (242,000) --
--------- ---------
Net cash provided by financing activities (242,000) --
--------- ---------
Net increase (decrease) in cash (23,000) (241,000)
Cash and cash equivalents at beginning of period 137,000 341,000
--------- ---------
Cash and cash equivalents at end of period $ 114,000 $ 100,000
========= =========
The accompanying notes are an integral part of these financial statements.
5
</TABLE>
<PAGE>
XENOMETRIX, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD ENDING SEPTEMBER 30, 1999
(Unaudited)
1. Basis of Presentation
The accompanying financial statements are unaudited. However, in the opinion of
management, the accompanying financial statements reflect all adjustments,
consisting of only normal recurring adjustments, necessary for fair
presentation. Interim results of operations are not necessarily indicative of
results for the full year. These financial statements should be read in
conjunction with the Xenometrix Annual Report on Form 10-KSB for the year ended
June 30, 1999.
Except for the historical information contained in this Form 10-QSB, this Form
contains forward-looking statements that involve risks and uncertainties.
Xenometrix's actual results could differ materially from those discussed in this
Report. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in this Report and any documents
incorporated herein by reference, as well as in the Xenometrix Annual Report on
Form 10-KSB for the year ended June 30, 1999.
2. Senior Promissory Notes
Between June 20, 1997 and January 12, 1998, the Company entered into a Senior
Line of Credit Agreement (the "Agreement") with the Aries Domestic Fund LP (the
"Fund") and the Aries Fund, a Cayman Islands Trust (the "Trust"). Dr. Lindsay
Rosenwald, a former director of the Company, is the Chairman of Paramount
Capital Asset Management, LLC, the investment advisor to the Fund and the
General Partner of the Trust. The Agreement provided for a line of credit for up
to $1,500,000 and Xenometrix issued senior promissory notes (the "Notes") in the
total amount of $1,500,000 to serve as bridge financing. The Company repaid the
Notes in full in this quarter, thereby removing any security interests against
the assets of the Company. In connection with the issuance of these Notes, the
Xenometrix granted warrants to purchase 499,995 shares of common stock. The Note
holders agreed, that in the event that the Company or substantially all of its
assets is acquired by a third party at a price per share that is greater than
the exercise price of the warrants ($0.125), to surrender the warrants at the
closing of such a transaction in exchange for either cash or freely tradable
common stock of the third party in an aggregate amount equal to the difference
between the acquisition price per share and the exercise price per share of the
warrants, multiplied by the total number of warrants held by the Note holders.
3. Earnings (Loss) Per Common Share
Net income (loss) per common share is computed using the Financial Accounting
Standards Board's Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings Per Share" (EPS).
6
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Basic income or loss per common share is computed by dividing the net income or
loss by the weighted-average number of common shares outstanding during the
period.
Diluted income or loss per share is computed using the treasury stock method,
based upon the weighted-average number of common shares, dilutive common stock
equivalent shares and the assumed conversion of any dilutive convertible
securities outstanding during the period.
4. Subsequent Events.
The Company continues to offer non-exclusive licenses of its intellectual
property and to explore opportunities for strategic alliances. Xenometrix shares
ownership of some of the patents in the Company's intellectual property estate
with Harvard University ("Harvard"), and has an exclusive worldwide license to
Harvard's interests in the intellectual property. The Company is in disagreement
with Harvard on a section of the Company's license agreement from Harvard and
filed a Demand for Arbitration with American Arbitration Association in December
1998. Arbitration proceedings were suspended in April 1999 by mutual agreement
between the Company and Harvard University in favor of settling the differences
directly. The parties are negotiating in good faith and expect to come to an
agreement, although either party has the right to resume binding arbitration at
any time. The nature and the date of the settlement are unpredictable at this
time.
7
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Item 2.
XENOMETRIX, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this Report. Except for the historical information
contained herein, this Report contains forward-looking statements that involve
risks and uncertainties. Xenometrix's actual results could differ materially
from those discussed in this Report. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in this Report
and any documents incorporated herein by reference, as well as in the Xenometrix
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1999.
Overview
The Company continues to focus its efforts on non-exclusive licensing of
its intellectual property and exploring strategic alliances. In November 1997,
the Company was granted a European patent claiming methods and kits for
generating gene profiles resulting from exposure of eukaryotic cells, (including
human, animal and yeast cells) to compounds. In September 1998, the Company was
issued a patent covering similar subject matter in the U.S. In January 1998, the
Company was granted a European patent claiming methods and kits for generating
gene profiles resulting from the exposure of prokaryotic cells to compounds. In
addition to the gene profiling patents, Xenometrix has an exclusive worldwide
license to the bacterial strains used in the family of Ames II* Assays from the
University of California, Berkeley and an exclusive license for yeast strains
used in Yeast DEL*. The U.S. patent for the Ames II bacterial strains was issued
October 1997 and its European equivalent was issued July 1998.
The Company sells its products and services to pharmaceutical, chemical and
biotechnology companies for testing, evaluation and optimization of their lead
compounds. The timing and amount of revenues from sales of products and services
to the drug discovery and development market and chemical markets cannot be
predicted with certainty. Similarly, the Company's ability to enter into license
agreements and meaningful collaborative arrangements with customers or other
potential collaborators and licensees cannot be predicted with a high degree of
accuracy. Accordingly, results of operations for any period may be unrelated to
results of operations for any other period and are likely to fluctuate sharply.
In addition, historical results should not be viewed as indicative of future
operating results.
As Of October 29, 1999, the Company had cash of approximately $92,000. The
Company estimates that its current resources together with projected collections
on accounts receivable from customers will be sufficient to meet its operating
needs through the end of December 1999. Xenometrix is currently in discussions
with several companies regarding licensing of the Company's intellectual
- --------
* Ames II(TM) and Yeast Del(TM) are trademarks of Xenometrix, Inc
8
<PAGE>
property, and is hopeful that additional revenue will be obtained from such
agreements. The Company continues to sublease a portion of its facilities to
another company, which enabled the Company to retain its modern,
state-of-the-art facility while reducing its monthly expenditures. The Company
has no debt remaining from $1,500,000 of the Notes that were due September 15,
1999.
Results of Operations
Comparison of quarters ended September 30, 1999 and 1998
- --------------------------------------------------------
Revenue. For the quarter ended September 30, 1999, revenue increased 93% to
approximately $642,421 from $333,000 reported in the comparable quarter of the
prior year. The increase was substantially attributable to revenue from an
increase in up-front licensing fees. Sales of products and service revenue from
the Company's Client Research Laboratory were also increased by 103% to $67,000
from $33,000 reported in the prior year.
Gross Profit. For the quarter ended September 30, 1999, gross profit
increased by 87% to $425,000 from $227,000 reported in the prior year. The
increase in gross profit was primarily due to an increase in licensing
activities compared to the same quarter of the prior year. The cost of revenue
of approximately $217,000 represents, in part, a portion of the amortization of
the costs associated with the patents and legal expenses in prosecuting the
patents and royalties paid to the Universities of Harvard and California,
Berkeley under the Company's existing licensing agreements. Gross profit margins
on revenue from sales of products and services were decreased by approximately
27%. This negative gross profit margin is due to the small volume sales and the
fixed overhead costs.
Research and Development Expenses (R&D). R&D expenses for the quarter ended
September 30, 1999, decreased 84% to $19,000 from $117,000 reported in the same
quarter of the prior year. This decrease was primarily attributable to reduced
personnel and activity in the R&D department. Consequently, laboratory supplies
and most other expenses in the R&D department were also decreased in the current
quarter, as compared to the comparable quarter of the prior year.
Selling, General and Administrative Expenses (SG&A). For the quarter ended
September 30, 1999, SG&A expenses were $162,000, down 59% from $395,000 in the
prior year. This decrease was primarily attributable to lower executive,
administrative, finance, legal and business development costs resulting from
personnel reductions in February 1999.
Interest Expense, Net. During the quarter ended September 30, 1999, the
Company incurred net interest expense of $4,000 compared to $131,000 in the
comparable quarter of the prior fiscal year. The net interest expense incurred
included interest accrued on the Notes at 12% per annum. The net interest
expense decreased approximately 97% from the comparable quarter in the prior
year because the Notes had been substantially repaid before this quarter.
9
<PAGE>
Net Income (Loss). For the quarter ended September 30, 1999, there was a
net income of $240,000 or $0.08 per share compared to a loss of $416,000 or
$0.14 per share, reported for the comparable quarter of fiscal year 1998. The
earnings would have been $0.07 per diluted share.
Impact of Year 2000 Issues
The Year 2000 issue is related to computer software utilizing two digits
rather than four to define the appropriate year. As a result, any of the
Company's computer programs or any of the Company's suppliers or vendors that
have date sensitive software may incur system failures or generate incorrect
data if "00" is recognized as 1900 rather than 2000.
The Company has evaluated its proprietary software used to facilitate
performing, analyzing and interpreting the results of its assays, and the
proprietary software used in conjunction with its bioinformatics database, and
found them to address appropriately the date issues associated with the year
2000. The Company believes that all dates in its proprietary software are stored
with either a minimum of four digits for the year or as a text string, thereby
preventing inappropriate sequencing of date sensitive information. While the
Company believes that its proprietary software will not produce any material
problems, erroneous calculations or degradation of performance as a result of
Year 2000 issues, users are advised that the Company's software must be run on
Year 2000 compliant platforms.
The Company has verified that its major suppliers, service providers and
financial institutions are Year 2000 compliant, however there can be no
assurance that the systems and networks of its key suppliers and customers will
not be affected by Year 2000 issues, which could have an adverse effect on the
Company's business, operating results and financial condition. The Company
believes, based upon the evaluations performed upon its proprietary software and
the claims of Year 2000 compliance made by the providers of non-proprietary
software used by the Company, that the impact of Year 2000 will not be material.
However, to the extent the Company or third parties upon which it relies do not
timely achieve Year 2000 readiness, the Company's results of operations may be
adversely affected.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents of
$114,000. During the three month period ended September 30, 1999, $233,000 was
provided by the Company's activities and $14,000 was invested in patents. There
were no cash resources generated from financing activities and $242,000 was used
to complete repayment of senior promissory Notes.
As Of October 29, 1999, the Company had cash of approximately $92,000
compared to $137,000 at the end of June 30, 1999. The Company is currently in
discussions with several companies regarding licensing of the Company's
intellectual property, and strategic alliances and is hopeful that additional
revenue from these licenses will be sufficient to fund the Company's operating
needs through March, 2000.
10
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Summary Financial Information Schedule
Reports on Form 8-K
On June 30, 1998, Registrant filed a Form 8-K and on July 9, 1999, the
amendment Form 8-K/A reporting a change in the Registrant's certifying
accountant from PricewaterhouseCoopers, LLP to Gordon Hughes and Banks,
LLP.
----------------
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this Report to be signed on its behalf.
XENOMETRIX, INC.
/s/ Pauline Gee
---------------
November 15, 1999 Pauline Gee
President, Chief Scientific Officer
12
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Summary Financial Information Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 114
<SECURITIES> 0
<RECEIVABLES> 29
<ALLOWANCES> 5
<INVENTORY> 35
<CURRENT-ASSETS> 267
<PP&E> 1,249
<DEPRECIATION> 839
<TOTAL-ASSETS> 1,027
<CURRENT-LIABILITIES> 840
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 184
<TOTAL-LIABILITY-AND-EQUITY> 1,027
<SALES> 67
<TOTAL-REVENUES> 642
<CGS> 85
<TOTAL-COSTS> 217
<OTHER-EXPENSES> 181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4
<INCOME-PRETAX> 240
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<NET-INCOME> 240
<EPS-BASIC> .08
<EPS-DILUTED> .07
</TABLE>
