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, 1998
Commission File No. 000-19495
Embrex, Inc.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1469825
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1035 Swabia Court, Durham, NC 27703
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(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 April
30, 1998, was 8,246,057.
<PAGE>
EMBREX, INC.
INDEX
Part I Page
Financial Information: ------
Item 1: Financial Statements
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
Item 3:
Quantitative and Qualitative Disclosures
About Market Risk.......................................9 of 12
Part II
Other Information:
Item 1: Legal Proceedings......................................10 of 12
Item 2: Changes in Securities..................................10 of 12
Item 3: Defaults Upon Senior Securities........................10 of 12
Item 4: Submission of Matters to a Vote of Security Holders....10 of 12
Item 5: Other Information......................................10 of 12
Item 6: Exhibits and Reports on Form 8-k.......................10 of 12
Signatures.....................................................11 of 12
Exhibit Index..................................................12 of 12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Embrex, Inc.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 6,815 $ 8,580
Restricted Cash................................................... 275 275
Inventories:
Materials and supplies........................................ 971 898
Product....................................................... 1,249 603
Accounts receivable - trade....................................... 2,802 2,772
Other current assets.............................................. 799 595
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TOTAL CURRENT ASSETS.......................................... 12,911 13,723
INOVOJECT(R)SYSTEMS UNDER CONSTRUCTION................................ 471 690
INOVOJECT(R)SYSTEMS.................................................... 22,025 21,024
Less accumulated depreciation...................................... (13,244) (12,149)
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8,781 8,875
EQUIPMENT, FURNITURE AND FIXTURES .................................... 4,093 3,601
Less accumulated depreciation and amortization.................... (2,132) (2,041)
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1,961 1 ,560
OTHER ASSETS:
Patents and exclusive licenses of patentable technology (net of
accumulated amortization of $88 in 1998 and $80 in 1997) ..... 303 309
Other non-current assets ........................................ 4 4
-------------- ---------------
TOTAL ASSETS ...................................................... $ 24,431 $ 25,161
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................................. $ 1,080 $ 1,312
Accrued expenses.................................................. 1,631 2,147
Current portion of capital lease obligations...................... 2,254 2,391
Current portion of long-term debt................................. 268 292
-------------- ---------------
TOTAL CURRENT LIABILITIES..................................... 5,233 6,142
CAPITAL LEASE OBLIGATIONS, less current portion....................... 2,634 3,269
LONG-TERM DEBT, less current portion.................................. 9 9
SHAREHOLDERS' EQUITY
Common Stock,$.01 par value:
Authorized - 30,000,000 shares
Issued and outstanding -
8,245,388 and 8,239,946 shares at March 31, 1998 and
December 31, 1997, respectively........................... 82 82
Additional paid-in capital........................................ 54,812 54,788
Currency translation adjustments.................................. 67 (196)
Accumulated deficit............................................... (38,406) (38,933)
-------------- ---------------
TOTAL SHAREHOLDERS' EQUITY.................................... 16,555 15,741
-------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 24,431 $ 25,161
============== ===============
</TABLE>
3
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Embrex, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------------------
1998 1997
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<S> <C> <C>
REVENUES
INOVOJECT(R)SYSTEM revenue....................................... $ 6,579 $ 5,668
Product sales.................................................... 254 206
Other revenue.................................................... 24 51
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TOTAL REVENUES............................................... 6,857 5,925
COST OF PRODUCT SALES AND INOVOJECT(R)SYSTEM REVENUES................ 3,209 2,822
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GROSS PROFIT............................................... 3,648 3,103
OPERATING EXPENSES
General and administrative....................................... 1,799 1,364
Sales and marketing.............................................. 197 199
Research and development......................................... 861 1,015
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TOTAL OPERATING EXPENSES..................................... 2,857 2,578
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OPERATING INCOME..................................................... 791 525
OTHER INCOME (EXPENSE)
Interest income.................................................. 80 123
Interest expense................................................. (215) (323)
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TOTAL OTHER EXPENSE.......................................... (135) (200)
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INCOME BEFORE TAXES........................................... 656 325
INCOME TAXES ..................................................... 129 63
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NET INCOME ..................................................$ 527 $ 262
============= ===========
NET INCOME PER SHARE OF COMMON STOCK:
Basic............................................................$ 0.06 $ 0.03
Diluted..........................................................$ 0.06 $ 0.03
WEIGHTED AVERAGE NUMBER OF SHARES USED IN PER-SHARE CALCULATION:
Basic............................................................ 8,243 8,058
Diluted.......................................................... 8,334 8,278
</TABLE>
4
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Embrex, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------------
1998 1997
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<S> <C> <C>
Operating Activities
Net Income................................................................ $ 527 $ 262
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization.......................................... 1,194 875
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets.......... (948) (456)
Accounts payable and accrued expenses............................... (748) 697
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................... 25 1,378
Investing Activities
Purchases of short-term investments...................................... 0 (503)
Purchases of INOVOJECT(R)systems, equipment, furniture and fixtures.......... (1,274) (996)
Decrease (Increase) in patents and other noncurrent assets............... (2) 302
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NET CASH PROVIDED BY (USED IN) USED IN INVESTING ACTIVITIES..................... (1,276) (1,197)
Financing Activities
Issuance of Common Stock.................................................. 24 152
Payments on long-term debt................................................. (29) (29)
Proceeds from capital lease obligations................................... 26 19
Payments on capital lease obligations....................................... (798) (776)
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NET CASH PROVIDED BY (USED IN) PROVIDED BY FINANCING ACTIVITIES................ (777) (634)
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Increase (Decrease) In Cash And Cash Equivalents ............................... (2,028) (453)
Currency Translation Adjustments............................................... 263 (103)
Cash and cash equivalents at beginning of period................................ 8,580 9,036
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CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 6,815 $ 8,480
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
During 1997, $125,000 of outstanding debentures along with $18,000 of accrued
interest were converted into 28,673 shares of Common Stock net of unamortized
debt issuance costs totaling $1,000.
5
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EMBREX, INC.
FORM 10-Q
March 31, 1998
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, 1998 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,
1997.
NOTE 2 - NET INCOME PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, "Earnings Per Share" which established new standards for
computing and presenting net income per share information. As required, the
Company adopted the provisions of Statement No. 128 in its 1997 financial
statements. Basic net income per share was determined by dividing net income
available for common shareholders by the weighted average number of common
shares outstanding during each year. Diluted net income per share reflects the
potential dilution that could occur assuming conversion or exercise of all
convertible securities and issued and unexercised stock options.
NOTE 3 - COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income ("SFAS 130"). This Statement establishes
standards for reporting and display of comprehensive income and its components
in the financial statements. Initial application of this Statement is required
for interim periods of fiscal years beginning after December 15, 1997; however,
interim period disclosure is limited to reporting a total for comprehensive
income. In accordance with SFAS 130, the Company has determined total
comprehensive income, net of tax, to be $790,000 and $158,000 for the three
months ended March 31, 1998 and 1997, respectively. Embrex's total comprehensive
income represents net income plus the after-tax effect of foreign currency
translation adjustments for the periods presented.
6
<PAGE>
EMBREX, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
Company's financial statements and related notes appearing elsewhere in this
report.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Consolidated revenues for the first quarter totaled $6.9 million, representing
an increase of $1.0 million (16 percent) over the prior year first quarter.
INOVOJECT(R) system revenues reached $6.6 million for the 1998 period, an
increase of 16 percent compared to the 1997 period. Most of the 1998 and 1997
INOVOJECT(R) system revenues were derived from INOVOJECT(R) system lease fees.
The growth in INOVOJECT(R) system revenues was due to an 11 percent increase in
the number of INOVOJECT(R) systems operating under lease agreements in the
United States and Canada, and in select international markets. Given its
approximate 80% market penetration in the United States and Canada, the Company
anticipates diminished growth in the number of INOVOJECT(R) system installations
in that market.
Product revenues increased from $206,000 in the 1997 period to $254,000 in the
1998 period. Sales of the Company's proprietary viral neutralizing factor
product (VNF(R)) and Bursaplex(TM) accounted for the Company's 1998 and 1997
product revenues. Bursaplex(TM) is a product which combines the Company's VNF(R)
compound with an Infectious Bursal Disease (IBD) vaccine. In January 1997, the
USDA granted approval for IN OVO use of Bursaplex(TM).
Consolidated revenues grew faster than the cost of product sales and
INOVOJECT(R) revenues, resulting in an improvement in gross profit from 52% of
total revenues during the first quarter in 1997, to 53% during the comparable
1998 quarter.
Operating expenses increased from $2.6 million during the first quarter of 1997,
to $2.9 million during the first quarter of 1998. This increase reflects the
combination of $259,000 attributable to general corporate expense and legal fees
related to patent infringement lawsuits filed by the Company and related
matters, and $175,000 pertaining to stepped-up international activity,
principally in Asia, offset by lower research and development expense which was
$155,000 less relative to the comparable 1997 quarter.
Net interest expense totaled $135,000 for the first quarter of 1998 compared to
$200,000 for the same period in 1997. The $65,000 decrease is a function of
lower interest expense following from reductions in lease and debt obligations.
Recurring INOVOJECT(R) system lease revenues and improved gross margins enabled
Embrex to post a substantial improvement in its first quarter after-tax profit.
The Company doubled its net income for the period, with first quarter results of
$527,000 representing an increase of $265,000 over the comparable period in
1997. Diluted net income per common share was $.06 for the 1998 quarter based on
8.3 million weighted average shares outstanding,
7
<PAGE>
compared to diluted earnings of $.03 per share based on 8.3 million weighted
average shares outstanding in the comparable 1997 period. Included in the
weighted average shares outstanding in the 1998 period are 91,000 common shares
attributable to the dilutive impact of the potential exercise of outstanding
stock options.
Embrex's general ledger and primary financial accounting software is a DOS-based
application that operates on a client-server network. While this system uses
only two digits to identify a year in the date field, replacement of this system
with a Windows(TM)-based application is underway and is expected to be concluded
before year end. The Company believes that the additional costs associated with
the Year 2000 aspects of the replacement will be immaterial.
For the remainder of the year, the goals of management are to maintain
profitability, to continue its efforts to achieve worldwide placements of the
INOVOJECT(R) system, to continue development of proprietary IN OVO vaccines, and
to strive for additional efficiencies in INOVOJECT(R) system operations. Growth
in INOVOJECT(R) system fees and revenue from the sale of vaccine products during
the rest of 1998, if any, will be a function of the rate at which the
marketplace outside the United States and Canada accepts INOVOJECT(R) system
technology, and the timing of approvals of Bursamune(TM) and third-party
vaccines for IN OVO use. In addition, normal fluctuations in the market price of
grain, domestic consumption levels and export opportunities in all Embrex
markets may impact the timing and quantity of egg injections and the
corresponding IN OVO administration of vaccines. Moreover, additional delays in
obtaining U.K. regulatory approval for the sale of Bursamune(TM) would
negatively impact the Company's ability to generate revenue from both the use of
INOVOJECT(R) systems, and the sale of vaccine products in certain European
markets.
CHANGES IN FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
At March 31, 1998, the total of the Company's cash and short-term investment
balances decreased by $1.8 million, to $6.8 million from $8.6 million at
December 31, 1997. Working capital increased to $7.7 million at March 31, 1998
from $7.6 million at year-end 1997, principally reflecting higher inventory
balances, and reduced liabilities associated with accounts payable and accrued
expenses.
Operating activities were essentially cash neutral during the first quarter of
1998, generating a net increase in cash of $25,000. This was the result of using
substantially all of the $1.7 million provided by operations to purchase product
and materials and supplies inventory ($948,000), and to settle obligations
reflected in accounts payable and accrued expenses ($748,000).
Investing activities consumed $1.3 million, reflecting a net increase of
$782,000 in the capitalized cost of INOVOJECT(R) systems attributable to new and
planned installations worldwide, and the use of $492,000 related to the
construction and furnishing of the Company's Avian Research Facility which was
opened in February 1998.
Financing activities consumed $777,000 of cash, primarily reflecting the
repayment of capital lease obligations principally incurred to finance
INOVOJECT(R) systems and other equipment additions.
8
<PAGE>
As of March 31, 1998 the Company had outstanding purchase commitments of
approximately $2.6 million related to the acquisition of materials and supplies
for the construction and maintenance of INOVOJECT(R) systems.
Based on its current operations, management believes that its available cash and
cash equivalents, together with cash flow from operations will be sufficient to
meet its foreseeable cash requirements.
FORWARD-LOOKING STATEMENTS
This report contains "forward-looking" statements, including statements with
respect to future products, services, markets and financial results. These
statements involve risks and uncertainties that could cause actual results to
differ materially, including without limitation the ability of the Company to
penetrate new markets, successfully conclude its patent litigation, complete
commercial development of potential future products or obtain regulatory
approval of its products, which approval is dependent upon a number of factors,
such as results of trials, the discretion of regulatory officials, potential
changes in regulations, and the Company's dependence on certain customers.
Additional information on these risks and other factors which could affect the
Company's financial results are included in the Company's Form 10-K filed with
the Securities and Exchange Commission and other filings with the SEC, including
the Company's Forms 10-Q and 8-K.
Item 3. Qualitative and Quantitative Disclosures About Market Risk. Not
applicable.
9
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of certain patent infringement proceedings initiated by the
registrant and related legal proceedings, see registrant's Form 10-K for the
year ended December 31, 1997 filed with the Securities and Exchange Commission
on March 30, 1998.
Item 2. Changes in Securities and Use of Proceeds.
On or about March 19, 1998, the registrant issued approximately 23,906
shares of its Common Stock to certain officers and employees as
compensation, in lieu of cash, in reliance upon a claim of exemption
from registration pursuant to Section 4(2) of the Securities Act of
1993, as amended, because such issuance did not involve a public
offering.
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) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
10
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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 ____, 1998
EMBREX, INC.
By:______________________________________________
Randall L. Marcuson
President and Chief Executive Officer
By:______________________________________________
Don T. Seaquist
Vice President, Finance and Administration
(Principal Financial and Chief Accounting Officer)
11
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Embrex, Inc.
File No. 000-19495
Form 10-Q
For the Quarterly Period
Ended March 31, 1998
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 7,090
<SECURITIES> 0
<RECEIVABLES> 2,802
<ALLOWANCES> 0
<INVENTORY> 2,220
<CURRENT-ASSETS> 799
<PP&E> 26,896
<DEPRECIATION> (15,376)
<TOTAL-ASSETS> 24,431
<CURRENT-LIABILITIES> 5,233
<BONDS> 2,643
0
0
<COMMON> 82
<OTHER-SE> 16,473
<TOTAL-LIABILITY-AND-EQUITY> 24,431
<SALES> 6,857
<TOTAL-REVENUES> 6,857
<CGS> (3,209)
<TOTAL-COSTS> 3,648
<OTHER-EXPENSES> 2,857
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135
<INCOME-PRETAX> 656
<INCOME-TAX> 129
<INCOME-CONTINUING> 527
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 527
<EPS-PRIMARY> $0.06<F1>
<EPS-DILUTED> $0.06
<FN>
<F1> EPS-BASIC
</FN>
</TABLE>
