Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
Commission File No. 000-19495
Embrex, Inc.
(Exact name of small business issuer as specified in its charter)
North Carolina 56-1469825
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1035 Swabia Court, Durham, NC 27703
(Address of principal executive offices) (Zip Code)
Issuer's telephone no. including area code: (919) 941-5185
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
The number of shares of Common Stock, no par value, outstanding as of April 30,
1996, was 6,912,933.
<PAGE>
EMBREX, INC.
INDEX
Part I Page
Financial Information:
Item 1:
Balance Sheets.......................................... 3 of 11
Statements of Operations................................ 4 of 11
Statements of Cash Flows................................ 5 of 11
Notes to Consolidated Financial Statements.............. 6 of 11
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 7 of 11
Part II
Other Information...............................................10 of 11
Signatures......................................................11 of 11
2
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
EMBREX, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in thousands)
March 31 December 31
1996 1995
--------------- ----------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ............................................. $ 4,876 $ 5,354
Short-term investments................................................. 2,216 1,972
Inventories:
Materials and supplies............................................. 1,198 1,027
Product............................................................ 630 600
Accounts receivable - trade............................................ 1,931 1,787
Other current assets................................................... 387 108
------------- --------------
TOTAL CURRENT ASSETS................................................ 11,238 10,848
INOVOJECT(R) SYSTEMS UNDER CONSTRUCTION..................................... 228 801
INOVOJECT(R) SYSTEMS ........................................................ 15,230 13,846
Less accumulated depreciation............................................... ( 6,060) (5,271)
------------ ------------
9,170 8,575
EQUIPMENT, FURNITURE AND FIXTURES........................................ 2,389 2,274
Less accumulated depreciation .......................................... (1,500) (1,441)
----------- -------------
889 833
OTHER ASSETS:
Patents and exclusive licenses of patentable technology
(net of accumulated amortization of $51 in 1996 and $48 in 1995) . 129 131
Debt issuance costs (net of accumulated amortization of $159 in
1996 and $125 in 1995)............................................. 133 201
Other non-current assets............................................... 379 400
------------- ------------
TOTAL ASSETS............................................................... $ 22,166 $ 21,789
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses................................... $ 2,225 $ 2,581
Current portion of capital lease obligations........................... 2,556 2,333
-------- ----------
TOTAL CURRENT LIABILITIES...................................... 4,781 4,914
CAPITAL LEASE OBLIGATIONS, less current portion............................ 7,444 7,172
LONG-TERM DEBT, less current portion....................................... 2,625 3,225
SHAREHOLDERS' EQUITY Common Stock, no par value:
Authorized - 15,000,000 shares
Issued and outstanding - 6,886,419 and 6,714,724 shares at
March 31, 1996 and December 31, 1995, respectively............. 46,902 46,122
Additional paid-in capital............................................ 371 371
Accumulated deficit..................................................... (39,957) (40,015)
--------- ----------
TOTAL SHAREHOLDERS' EQUITY........................................ 7,316 6,478
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 22,166 $ 21,789
========== ========
</TABLE>
3
<PAGE>
STATEMENTS OF OPERATIONS
EMBREX, INC.
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended
March 31
-----------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES
INOVOJECT(R) revenue.................................................... $ 4,320 $ 2,555
Product revenues...................................................... 222 392
Other revenue........................................................ 53 20
---------- -----------
TOTAL REVENUES.................................................... 4,595 2,967
COST OF PRODUCT SALES AND INOVOJECT(R) REVENUES............................ 1,999 1,538
----------------------------
2,596 1,429
OPERATING EXPENSES
General and administrative............................................ 861 832
Sales and marketing................................................... 404 470
Research and development.............................................. 830 941
------------ -----------
TOTAL OPERATING EXPENSES.......................................... 2,095 2,243
OTHER INCOME (EXPENSE)
Interest income ..................................................... 72 53
Interest expense....................................................... (444) (227)
----------- -----------
TOTAL OTHER INCOME (EXPENSE)...................................... (372) (174)
------------ -----------
INCOME (LOSS) BEFORE TAXES.................................... 129 (988)
INCOME TAXES.......................................................... 71 10
----------- -----------
NET INCOME (LOSS)............................................. $ 58 $ (998)
============= ==========
Net income (loss) per share of Common Stock............................... $ .01 $ (.17)
============= ============
Weighted average shares of Common Stock outstanding (in thousands)........ 7,038 6,017
</TABLE>
4
<PAGE>
STATEMENTS OF CASH FLOWS
EMBREX, INC.
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
March 31
-----------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ...................................................... $ 58 $ (998)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization....................................... 886 610
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets........ (624) (285)
Accounts payable and accrued expenses............................ (318) 135
---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES....................... 2 (538)
INVESTING ACTIVITIES
Purchases of short-term investments...................................... (244) (17)
Purchases of INOVOJECT(R) systems, equipment, furniture
and fixtures......................................................... (907) (2,251)
Proceeds from capital lease obligations ................................. 1,143 2,692
---------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......................... (8) 424
FINANCING ACTIVITIES
Issuance of Common Stock................................................ 176 8
Payments on capital lease obligations.................................... (648) (333)
------ ---------
NET CASH USED IN FINANCING ACTIVITIES........................................ (472) (325)
------ ---------
DECREASE IN CASH AND CASH EQUIVALENTS........................................ (478) (439)
Cash and cash equivalents at beginning of period......................... 5,354 2,803
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................... $ 4,876 $ 2,364
========= =========
</TABLE>
Supplemental Schedule of Noncash Financing Activity:
During 1996, $600,000 of outstanding debentures along with $38,000 of accrued
interest were converted into 128,189 shares of Common Stock net of unamortized
debt issuance costs totaling $34,000.
5
<PAGE>
EMBREX, INC.
FORM 10-Q
March 31, 1996
NOTES TO CONSOLIDATED INTERIM CONDENSED FINANCIAL STATEMENTS (Unaudited)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of Embrex,
Inc. and its wholly owned subsidiaries, Embrex Europe Limited and Embrex Sales,
Inc. (collectively referred to as the Company) and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of financial condition and results of operations have been
included. Operating results for the three month period ended March 31, 1996 are
not necessarily indicative of the results that may be attained for the entire
year. For further information, refer to the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1995.
NOTE 2 - NET INCOME PER SHARE
Primary earnings per share are computed by dividing net income (loss) by the
weighted average number of shares of Common Stock and common stock equivalents
outstanding during the period. Common stock equivalents consist of stock
options, warrants, and common shares purchasable under the Employee Stock
Purchase Plan and are computed using the treasury stock method. The difference
between primary and fully diluted net income per common share is not significant
in all periods presented.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Consolidated revenues for the first quarter totaled $4.6 million representing an
increase of $1.6 million (55 percent) over the prior year. INOVOJECT(R) revenues
reached $4.3 million for the 1996 period - an increase of nearly 70 percent
compared to the 1995 period. Substantially all of the 1996 and 90 percent of the
1995 INOVOJECT(R) revenues were derived from INOVOJECT(R) lease fees. The
balance of the 1995 INOVOJECT(R) revenues was from the sale of one INOVOJECT(R)
system to a human pharmaceutical company for use in the production of influenza
vaccines. The growth in INOVOJECT(R) lease revenues was fueled by an increase in
the number of INOVOJECT(R) systems operating under lease agreements in the
United States and Canada from 148 units at March 31, 1995 to 251 units at March
31, 1996.
Product revenues decreased from $392,000 in the 1995 period to $222,000 in the
1996 period. Sales of the Company's proprietary viral neutralizing factor
product (VNF) accounted for all of the Company's 1995 product revenues. The 1996
product revenues represent sales of both VNF and BDA-Blen. BDA-Blen is a product
which combines the Company's VNF compound with an Infectious Bursal Disease
(IBD) vaccine. BDA-Blen has approval for post-hatch use, and is undergoing
regulatory review for in ovo use by the United States Department of Agriculture.
Management anticipates that the product will receive such approval later in
1996, and intends to aggressively market the product thereafter.
Cost of product sales and INOVOJECT(R) revenues decreased from 52% of total
revenues during the 1995 first quarter (and 48% for full-year 1995) to 44% of
total revenues in the 1996 period.
Operating expenses decreased from $2.2 million during the first quarter of 1995
to $2.1 million during the first quarter of 1996. The decrease in operating
expenses reflects management's commitment to leveraging its know-how, patent
position, market presence and expenditures.
Net interest expense totaled $372,000 for the first quarter of 1996 compared to
$174,000 for the comparable 1995 period. The increase in interest expense
results primarily from INOVOJECT(R) lease financing obtained during 1995 and
early 1996.
Based on stronger INOVOJECT(R) system lease revenues, the presence of
pre-licensing sales of VNF for use in the regulatory process, improved gross
margins, and a commitment to the containment of operating expenses, Embrex
posted its first profitable quarter showing a modest after-tax profit of $58,000
for the period ending March 31, 1996. This compares to a loss of $998,000 for
the first quarter of 1995 and a loss of $596,000 during the fourth quarter of
1995. Earnings per common share totaled $.01 for the 1996 quarter based on 7.0
million weighted average shares outstanding compared to a loss of $.17 per
7
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share based on 6.0 million weighted average shares outstanding in the comparable
1995 period. Included in the weighted average shares outstanding in the 1996
period are 218,000 common stock equivalent shares attributable to dilutive stock
options and warrants to purchase common stock.
For the remainder of the year, the goals of management continue to be worldwide
penetration of the INOVOJECT(R) system, and further development of proprietary
in ovo vaccines. Management will concentrate on managing its operating expenses
through, what it anticipates will be, continued growth in its customer base and
revenues.
Management's outlook for the second quarter is influenced by the high grain
prices currently experienced by the poultry industry. High grain prices have
caused the poultry industry to cut back on bird production in the short term,
which may in turn result in lower volumes through the Company's INOVOJECT(R)
systems in the second quarter of 1996. Management believes that the poultry
industry has historically increased production levels following such short-
term cutbacks, and does not anticipate that the conditions cited here will
adversely impact its performance in the second half of the year.
Management anticipates further revenue growth throughout 1996, from its existing
INOVOJECT(R) operations in the United States and Canada, new INOVOJECT(R) system
leases in other countries, product sales of VNF to vaccine manufacturers and
sales of its BDA-Blen product to poultry producers. However, the precise timing
of the anticipated regulatory approval of BDA-Blen for in ovo use in the United
States, the rate at which the marketplace will accept its INOVOJECT(R)
technology outside the United States and Canada, the timing of approvals of
third-party vaccines for in ovo use outside the United States and Canada, and
possible decreases to U.S. hatchery bird production as a result of high grain
prices will impact the pace of revenue growth and the attainment of, or increase
in, profitability from the installation and operational throughputs of
INOVOJECT(R) systems. Management will continue to manage its costs of revenues
in an effort to maintain or improve gross margins, and will continue to
carefully balance operating and interest expenses against its goal of continuing
and increasing profitability.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At March 31, 1996, the Company's cash and short-term investment balances totaled
$7.1 compared to $7.3 million at December 31, 1995.
Operating and investing activities were both essentially cash neutral for the
first quarter of 1996. Net working capital requirements of $942,000 were fully
offset by net income, adjusted to remove the impact of non-cash expenses.
Proceeds from capital leases totaled $1.1 million and were used to fully finance
INOVOJECT(R) and other equipment additions.
Net financing activities consumed $472,000 during the period. Proceeds from the
exercise of options to purchase Common Stock provided $176,000 while payments on
capital lease obligations consumed $648,000.
As of March 31, 1996 the Company had outstanding purchase commitments of
approximately $1.7 million related to materials and supplies for the
construction and maintenance of INOVOJECT(R) systems. Additionally, in
connection with the January 1996 agreement reached with Select Laboratories (as
discussed in the Company's Form 10-K for
8
<PAGE>
the year ended December 31, 1995), the Company has an obligation to purchase all
existing inventories of raw material, BDA-BLEN, and related materials from
Select within thirty months following the receipt of in ovo approval of the BDA-
BLEN product being manufactured for Embrex. At March 31, 1996, the Company's
outstanding purchase commitment under this agreement totaled approximately $1.4
million, of which $280,000 was paid upon executing the agreement.
Based on its current operations, management believes that its available cash and
short-term investments, together with cash flow from operations and existing
equipment financing lines, will be sufficient to meet its foreseeable cash
requirements. At the present time, the Company has no plans to seek an extension
or modification of its outstanding, publicly-traded warrants which have an
expiration date of November 7, 1996.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities. Not applicable.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of
Security Holders. Not applicable.
Item 5. Other information. Not applicable.
Item 6. Exhibits and Reports on Form 8-K. None.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: May 13, 1996
EMBREX, INC.
By: /s/ Randall L. Marcuson
Randall L. Marcuson
President and Chief Executive Officer
By: /s/ John L. Bradley, Jr.
John L. Bradley, Jr.
Vice President, Finance and Administration
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,876
<SECURITIES> 2,216
<RECEIVABLES> 1,931
<ALLOWANCES> 0
<INVENTORY> 1,828
<CURRENT-ASSETS> 11,238
<PP&E> 17,847
<DEPRECIATION> 7,560
<TOTAL-ASSETS> 22,166
<CURRENT-LIABILITIES> 4,781
<BONDS> 10,069
0
0
<COMMON> 46,902
<OTHER-SE> (39,586)
<TOTAL-LIABILITY-AND-EQUITY> 22,166
<SALES> 222
<TOTAL-REVENUES> 4,595
<CGS> 66
<TOTAL-COSTS> 1,999
<OTHER-EXPENSES> 830
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444
<INCOME-PRETAX> 129
<INCOME-TAX> 71
<INCOME-CONTINUING> 58
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
