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 September 30, 1996
Commission File No. 000-19495
Embrex, Inc.
(Exact name of registrant 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)
Registrant'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, $0.01 par value, outstanding as of October
31, 1996, was 7,379,960.
<PAGE>
EMBREX, INC.
INDEX
Part I Page
Financial Information:
Item 1:
Balance Sheets....................................3 of 12
Statements of Operations..........................4 of 12
Statements of Cash Flows..........................5 of 12
Notes to Consolidated Financial Statements........6 of 12
Item 2:
Management's Discussion and Analysis of
Financial Condition and Results of Operations.....7 of 12
Part II
Other Information........................................10 of 12
Signatures...............................................11 of 12
Exhibit Index ...........................................12 of 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
CONSOLIDATED BALANCE SHEETS
EMBREX, INC.
<TABLE>
<CAPTION>
(Dollars in thousands)
September 30 December 31
1996 1995
------------------ ---------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .............................................. $ 5,366 $ 5,354
Short-term investments.................................................. 1,875 1,972
Inventories:
Materials and supplies.............................................. 1,206 1,027
Product ............................................................ 577 600
Accounts receivable - trade............................................. 2,230 1,787
Other current assets.................................................... 279 108
------------ --------------
TOTAL CURRENT ASSETS................................................. 11,533 10,848
INOVOJECT(R)SYSTEMS UNDER CONSTRUCTION....................................... 565 801
INOVOJECT(R)SYSTEMS .......................................................... 17,497 13,846
Less accumulated depreciation........................................... ( 7,826) (5,271)
------------ ------------
9,671 8,575
EQUIPMENT, FURNITURE AND FIXTURES........................................... 2,495 2,274
Less accumulated depreciation .......................................... (1,599) (1,441)
----------- -------------
896 833
OTHER ASSETS:
Patents and exclusive licenses of patentable technology, net........... 127 131
Debt issuance costs, net.............................................. 32 201
Other non-current assets................................................ 302 400
------------ ------------
TOTAL ASSETS.................................................................. $ 23,126 $ 21,789
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses................................... $ 2,563 $ 2,581
Current portion of capital lease obligations............................ 2,993 2,333
Current portion of long-term debt...................................... 1,613 0
-------- ---------
TOTAL CURRENT LIABILITIES....................................... 7,169 4,914
CAPITAL LEASE OBLIGATIONS, less current portion............................. 6,633 7,172
LONG-TERM DEBT, less current portion..................................... 8 3,225
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized - 30,000,000 shares
Issued and outstanding - 7,221,553 and 6,714,724 shares at
September 30, 1996 and December 31, 1995, respectively.......... 48,506 46,122
Additional paid-in capital............................................. 371 371
Accumulated deficit..................................................... (39,561) (40,015)
-------- ----------
TOTAL SHAREHOLDERS' EQUITY........................................... 9,316 6,478
-------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 23,126 $ 21,789
========= ========
</TABLE>
3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
EMBREX, INC.
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
INOVOJECT(R)revenue.................................... $ 5,188 $3,480 $14,129 $8,783
Product revenues..................................... 408 30 1,043 816
Other revenue....................................... 45 27 132 61
----------- ------------ --------- -----------
TOTAL REVENUES................................ 5,641 3,537 15,304 9,660
COST OF REVENUES.......................................... 2,321 1,635 6,557 4,778
--------- ---------- -------- ---------
3,320 1,902 8,747 4,882
OPERATING EXPENSES
General and administrative............................ 1,182 833 3,057 2,664
Sales and marketing.................................. 473 678 1,221 1,634
Research and development............................. 1,092 803 2,860 2,566
-------- ----------- --------- ---------
TOTAL OPERATING EXPENSES.......................... 2,747 2,314 7,138 6,864
OTHER INCOME (EXPENSE)
Interest income..................................... 94 116 250 264
Interest expense..................................... (398) (503) (1,241) (1,179)
---------- ----------- --------- ----------
TOTAL OTHER EXPENSE.............................. (304) (387) (991) (915)
---------- ----------- ---------- -----------
INCOME (LOSS) BEFORE TAXES............... 269 (799) 618 (2,897)
INCOME TAXES 66 0 164 0
---------- ------------ ---------- ---------
NET INCOME (LOSS)......................... $ 203 $ ( 799) $ 454 $ (2,897)
========= =========== ========= =========
Net income (loss) per share of Common Stock.............. $ .03 $ (.12) $ .06 $ (.46)
========== ============ ========== ===========
Weighted average shares of
Common Stock outstanding (in thousands)............... 7,442 6,518 7,266 6,237
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
EMBREX, INC.
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Nine Months Ended September 30
1996 1995
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................... $ 454 $ (2,897)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................................... 2,851 2,338
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets.......... (770) (1,021)
Accounts payable and accrued expenses.............................. 150 318
--------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES............................ 2,685 (1,262)
INVESTING ACTIVITIES
Purchases of short-term investments....................................... 97 (414)
Purchases of INOVOJECT(R)systems, equipment, furniture
and fixtures............................................................ (3,597) (5,879)
Proceeds from capital lease obligations..................................... 2,141 6,017
------ -----
NET CASH USED IN INVESTING ACTIVITIES........................................... (1,359) (276)
FINANCING ACTIVITIES
Issuance of Common Stock................................................... 260 348
Issuance of long-term debt............................................... 8 5,385
Proceeds from short-term borrowings........................................ 468 0
Repayments on short-term borrowings....................................... (30) 0
Payments on capital lease obligations....................................... (2,020) (1,202)
------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES............................ (1,314) 4,531
--------- -------
INCREASE IN CASH AND CASH EQUIVALENTS......................................... 12 2,993
Cash and cash equivalents at beginning of period ....................... 5,354 2,803
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 5,366 $ 5,796
======== =======
</TABLE>
Supplemental Schedule of Noncash Financing Activity:
In May 1995, American Cyanamid Company, a subsidiary of American Home Products
Corporation, converted the promissory note issued by Embrex, Inc. to American
Cyanamid in 1991. The $1.2 million note, which would have been due on May 27,
1995, was converted into 320,000 shares of Common Stock.
Also, during the 1995 period, $2.5 million of the debentures issued in May 1995,
along with $34,000 of accrued interest were converted into 507,678 shares of
Common Stock net of unamortized debt issuance costs totaling $211,000.
During 1996, an additional $2.05 million debentures along with $168,000 of
accrued interest were converted into 444,021 shares of Common Stock net of
unamortized debt issuance costs totaling $94,000.
5
<PAGE>
EMBREX, INC.
FORM 10-Q
September 30, 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 nine month period ended September 30, 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 - CASH AND CASH EQUIVALENTS
In connection with the secured line of credit discussed in NOTE 3 which follows,
the Company has deposited $447,000 as compensating cash balances with the
lender.
NOTE 3 - LONG-TERM DEBT
During June 1996 the Company closed on a $2.0 million secured equipment
financing line which will be used to support the Company's continuing
international expansion efforts. The financing line is secured by compensating
cash balances, has a four-year term which calls for quarterly repayments of
principal, and carries an interest rate one percentage point above the rate
being earned by the Company on the compensating cash balances. At September 30,
1996, the Company owed approximately $438,000 under this line.
NOTE 4 - 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 September 30, 1996 and 1995
Consolidated revenues totaled $5.6 million for the quarter ended September 30,
1996, up $2.1 million, or 59 percent, from a year earlier. INOVOJECT(R)
revenues, which increased from $3.5 million to $5.2 million, accounted for $1.7
million of the overall increase. Sales of the Company's proprietary BDA-BLEN
product in the U.S. and pre-licensing sales of VNF to Arthur Webster Pty. Ltd.
of Australia (Websters), the Company's manufacturing and marketing partner for
Europe, the Middle East, and Africa, generated $408,000 of product revenues for
the 1996 quarter compared to $30,000 for the same period in 1995.
Cost of revenues totaled 41 percent of total revenues in the 1996 period
compared to 46 percent during the comparable 1995 period.
Operating expenses increased by $0.4 million, from $2.3 million during the third
quarter of 1995 to $2.7 million during the third quarter of 1996. The increase
in operating expenses during the 1996 period reflects increased international
expansion, accruals associated with the appointment and relocation of two
officers who filled vacated positions, and legal expenses related to corporate
and patent activity, including expenses related to the patent infringement
lawsuit filed by the Company as described in Part II, Item 1- "Legal
Proceeding".
Net interest expense decreased from $387,000 in the 1995 period to $304,000 in
the 1996 period, following further conversions of the Company's 8% convertible
debentures.
Net income for the quarter ended September 30, 1996 totaled $203,000, or $0.03
per share, compared to a net loss of $799,000, or $0.12 per share, for the
comparable 1995 period. Weighted average shares outstanding increased from 6.5
million in the 1995 period to 7.4 million in the 1996 period, principally as a
result of the conversion of debentures into Common Stock.
Nine Months Ended September 30, 1996 and 1995
Consolidated revenues for the nine months ended September 30, 1996 increased 58
percent over the same 1995 period, or $5.6 million, to $15.3 million primarily
due to expanding INOVOJECT(R) operations. During the same period INOVOJECT(R)
revenues, which included the sale of one system to a pharmaceutical company for
use in the production of human influenza vaccine in the 1996 period, increased
by 61 percent from $8.8 million in the 1995 period to $14.1 million in the 1996
period. Revenues derived from sources outside of North America increased from
3.6 percent of total revenues during the 1995 period to 8.1 percent of revenues
in the 1996 period.
Cost of revenues totaled $6.6 million, or 43 percent of total revenues, for the
first nine months of 1996 compared to $4.8 million, or 49 percent of total
revenues, for the same 1995 period.
7
<PAGE>
Operating expenses for the first nine months of 1996 totaled $7.1 million, 4
percent higher than the comparable 1995 period. This increase in overall
operating expenses is attributable to the 1996 third quarter operations as
discussed above.
Net interest expense increased from $915,000 for the first nine months of 1995
to $991,000 for the same 1996 period. This increase results primarily from
INOVOJECT lease financing obtained during 1995 and the first half of 1996.
Net income for the nine months ended September 30, 1996 totaled $454,000, or
$.06 per share of Common Stock, compared to a net loss of $2.9 million , or $.46
per share of Common Stock, for the same period in 1995.
Management anticipates further revenue growth over 1995 levels for the remainder
of the year from the Company's existing INOVOJECT(R) operations in the United
States and Canada, new INOVOJECT(R) system leases in other countries, and sales
of its BDA-BLEN product to poultry producers. To date, U.S. sales of BDA-BLEN
have been of product labeled for post-hatch use. However, management anticipates
that the USDA will give final approval for the in ovo use of BDA-BLEN in the
U.S. market near the end of this year or early in 1997. Additionally, the
Company anticipates that during this same time frame a provisional license will
be issued in the U.K. allowing initial sales of a complex containing the
Company's VNF product combined with a bursal disease vaccine in the European
market. However, whether these approvals will occur and their precise timing,
the rate at which the marketplace will accept the 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
variability in U.S. hatchery bird production as a result of continuing 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 carefully manage operations in
an effort to maintain or improve gross margins and profitability.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At September 30, 1996, cash and short-term investments totaled $7.2 million. The
Company has maintained cash and short-term investment balances of just over $7
million throughout the year.
Operating activities generated over $2.6 million during the first nine months of
1996 despite a $770,000 increase in accounts receivable, inventory, and other
current assets associated with the Company's expanding operations.
During the same period, net investing activities consumed $1.4 million,
primarily as a result of the Company relying on internal cash flows to finance
international INOVOJECT(R) construction requirements.
Net financing activities consumed an additional $1.3 million during the first
nine months of 1996 principally as a result of repayments on capital lease
obligations. Additionally, as noted in the Company's 1996 second quarter Form
10-Q, the Company closed on a $2.0 million secured equipment financing line
which will be used to support the Company's continuing international expansion
efforts. At September 30, 1996, the Company owed $438,000 under this line of
credit.
8
<PAGE>
As of September 30, 1996 the Company had outstanding purchase commitments of
approximately $4.3 million for the production of BDA-BLEN product as well as
materials and supplies for the construction and maintenance of INOVOJECT(R)
systems.
SUBSEQUENT EVENTS
On November 7, 1996, warrants to purchase approximately 640,000 shares of Common
Stock of the Company were exercised by the underwriter of the Company's 1991
initial public offering at an aggregate exercise price of approximately $3.1
million.
Also on November 7, warrants to purchase approximately 3.5 million shares of
Common Stock at exercise prices ranging from $9.02 to $15.52 per share expired.
Subsequent to the above noted transactions, warrants to purchase a total of
360,775 shares of Common Stock at prices ranging from $6.00 to $9.50, subject to
adjustment, remain outstanding. These outstanding warrants have expiration dates
ranging from July 28, 1998 through June 9, 2001.
CERTAIN RISKS AND UNCERTAINTIES
Except for the historical information contained herein, this report contains
various forward- looking statements, including statements pertaining to
anticipated revenue growth, profitability, and regulatory approvals, that are
subject to risks and uncertainties and actual results could differ materially.
Potential risks and uncertainties include, without limitation, quarterly
fluctuations in results; the ability for the Company, its manufacturing and
marketing partners, and others to obtain regulatory approval for products to be
delivered in ovo (including the Company's BDA-Blen product, Websters bursal
disease complex containing the Company's proprietary VNF compound, or any other
product for in ovo use) which are dependent upon a number of factors, including
the results of trials, the discretion of regulatory officials, any potential
changes in regulations; the Company's ability to generate future cash flow from
operations; continued customer demand for the INOVOJECT(R) system; the ability
of the Company to manage growth and to expand internationally; and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings, including the Company's Forms 10-Q, 10-K and 8-K.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On September 20, 1996, Embrex filed an action for patent
infringement and breach of contract against Service Engineering
Corp. and Edward G. Bounds in the United States District Court for
the Eastern District of North Carolina (Raleigh Division). The
infringement action is for the infringement of U.S. Patent No.
4,458,630 to Sharma et al.; the breach of contract action is based
on the Consent Judgment in a previous infringement action, now
concluded, by Embrex against these two defendants. The case has
been assigned Civil Action No. 5:96-CV-824-BR(3). The Defendants
filed an answer and counterclaims on November 4, 1996, asserting
various affirmative defenses, seeking a declaratory judgment of
invalidity and non- infringement of the Sharma patent, and alleging
that Embrex has: made misrepresentations of Defendant's goods or
commercial activities in violation of the Lanham Act, 15 USC
ss.1125 (a); defamed the defendant; tortiously interfered with the
defendant's business relationships; sought to maintain prices for
in ovo vaccination at an artificially high level by removal of a
prospective competitor in violation of North Carolina General
Statute ss.75-5; and engaged in unfair methods of competition under
North Carolina law.
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.
a. Exhibit Table
Exhibit 27 Financial Data Schedule
b. The Company did not file any reports on Form 8-K during the
quarterly period ended September 30, 1996.
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: November 12, 1996
EMBREX, INC.
By: /s/ Randall L. Marcuson
-------------------------------
Randall L. Marcuson
President and Chief Executive Officer
By: /s/ Don T. Seaquist
----------------------------------------
Don T. Seaquist
Vice President, Finance and Administration
11
<PAGE>
Embrex, Inc.
File No. 000-19495
Form 10-Q
For the Quarterly Period
Ended September 30, 1996
EXHIBIT INDEX
Sequential
Exhibit Page Number
27 Financial Data Schedule
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000878725
<NAME> EMBREX, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,366
<SECURITIES> 1,875
<RECEIVABLES> 2,230
<ALLOWANCES> 0
<INVENTORY> 1,783
<CURRENT-ASSETS> 11,533
<PP&E> 20,557
<DEPRECIATION> 9,425
<TOTAL-ASSETS> 23,126
<CURRENT-LIABILITIES> 7,169
<BONDS> 6,641
0
0
<COMMON> 48,506
<OTHER-SE> (39,190)
<TOTAL-LIABILITY-AND-EQUITY> 23,126
<SALES> 1,043
<TOTAL-REVENUES> 15,304
<CGS> 376
<TOTAL-COSTS> 6,557
<OTHER-EXPENSES> 2,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,241
<INCOME-PRETAX> 618
<INCOME-TAX> 164
<INCOME-CONTINUING> 454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 454
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
