SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: March 31, 1996
Commission File Number: 0-68440
EnSys Environmental Products, Inc.
(Exact name of registrant as specified in its charter)
Delaware 56-1581761
(State or other jurisdiction of (I.R.S. Employer Identification Number)
organization or incorporation)
4222 Emperor Boulevard
Durham, North Carolina 27703
(Address of principal executive offices, including zip code)
(919) 941-5509
(Registrant's Telephone Number, Including Area Code)
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),
YES X NO
and (2) has been subject to such filing requirements for the past
90 days.
YES X NO
The number of shares of common stock outstanding as of April 28,
1996 was 7,095,840
EnSys Environmental Products, Inc.
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements:
Balance Sheets as of December 31,
1995 and March 31, 1996 3
Statements of Operations for the three months ended
March 31, 1995 and 1996 4
Statements of Cash Flows for the three months ended
March 31, 1995 and 1996 5
Notes to Interim Financial Statements 6
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II - Other Information
Item 1. Legal Proceedings Not Applicable
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 9
Signatures 10
Exhibit Index 11
Exhibit 11.1 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENSYS ENVIRONMENTAL PRODUCTS, INC.
BALANCE SHEETS
December 31, March 31,
1995 1996
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,467,857 $ 4,050,372
Marketable debt investments (cost of
$7,208,430 at December 31, 1995 and
$5,915,742 at March 31, 1996 (unaudited)) 7,190,840 5,930,815
Accounts receivable, trade, less allowance
for doubtful accounts of $96,970 and
$88,411 at December 31, 1995 and
March 31, 1996 (unaudited), respectively 424,119 419,840
Inventory, primarily raw materials 761,098 877,349
Prepaids and other current assets 142,273 144,884
Total current assets 12,986,187 11,423,260
Equipment, furniture and fixtures:
Equipment, furniture and fixtures 1,974,831 2,017,298
Leasehold improvements 310,313 310,313
2,285,144 2,327,611
Less accumulated depreciation and
amortization 1,480,055 1,593,648
805,089 733,963
Intangible asset, less accumulated amortization
of $14,167 and $16,667 at December 31, 1995 and
March 31, 1996 (unaudited), respectively 35,833 753,926
Pledged certificates of deposit 100,000 100,000
Other assets 402,534 453,363
$14,329,643 $13,464,512
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, trade $ 79,340 $ 100,860
Accrued expenses:
Salaries and wages 309,559 203,140
Other 338,485 751,217
Current portion of capital lease obligations 70,930 63,884
Total current liabilities 798,314 1,119,101
Capital lease obligations, less current
portion 29,389 19,813
Total liabilities 827,703 1,138,914
Stockholders' equity:
Common stock, $.01 par value, 25,000,000,
shares authorized, 6,018,935 and 7,118,935
shares issued and outstanding at December 31, 1995
and March 31, 1996 (unaudited), respectively 60,189 71,189
Additional paid-in capital 31,028,302 32,254,802
Treasury stock at cost (24,146 shares
at December 31, 1995 and March 31, 1996
(unaudited), respectively) (117,038) (117,038)
Unrealized loss on marketable debt investments (17,590) (9,934)
Accumulated deficit (17,451,923) (19,873,421)
Net stockholders' equity 13,501,940 12,325,598
Commitments and contingencies
Total liabilities and stockholders' equity $14,329,643 $13,464,512
See accompanying notes to financial statements.
3
ENSYS ENVIRONMENTAL PRODUCTS, INC.
STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
1995 1996
(Unaudited)
Product and service revenues $ 840,196 $ 604,860
Cost of goods sold 296,440 392,240
Gross profit 543,756 212,620
Operating expenses:
Selling, general and administrative 1,120,982 928,248
Acquired research and development - 1,700,000
Research and development 189,627 165,804
Total operating expenses 1,310,609 2,794,052
Operating loss (766,853) (2,581,432)
Other income (expense):
Interest income 178,164 162,817
Interest expense (5,287) (2,883)
Other income (expense), net 172,877 159,934
Net loss $ (593,976) $(2,421,498)
Net loss per common and common
equivalent share $ (0.10) $ (0.40)
Weighted average common and
common equivalent shares
outstanding 5,914,386 6,018,966
See accompanying notes to financial statements.
4
ENSYS ENVIRONMENTAL PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
(Unaudited)
1995 1996
Operating activities:
Net loss $ (593,976) $(2,421,498)
Adjustments to reconcile net loss to net
cash used by operating activities:
Common stock issued in connection
with product line acquisition - 1,237,500
Translation (gain)/loss (1,785) -
Change in cash due to exchange rates 48 -
Depreciation 82,758 113,593
Amortization 2,500 2,500
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable,
trade (207,838) 4,279
Increase in inventories (68,478) (116,251)
Increase in prepaids and other
current assets (15,650) (2,611)
Increase in other assets (799,625) (771,422)
Increase (decrease) in accounts payable,
trade (21,950) 21,520
Increase in accrued expenses 168,233 306,313
Net cash used by operating activities (1,455,763) (1,626,077)
Investing activities:
Capital expenditures (77,964) (42,467)
(Increase) decrease in marketable debt
investments 4,097,188 1,267,681
Net cash provided by investing activities 4,019,224 1,225,214
Financing activities:
Capital stock transactions:
Common issued 24,292 -
Treasury stock repurchased (9,480) -
Net common stock 14,812 -
Principal payments on capital lease obligations (20,620) (16,622)
Net cash used by financing activities (5,808) (16,622)
Increase in cash and cash equivalents 2,557,653 (417,485)
Cash and cash equivalents at beginning of period 2,324,433 4,467,857
Cash and cash equivalents at end of period $4,882,086 $4,050,372
See accompanying notes to financial statements
5
ENSYS ENVIRONMENTAL PRODUCTS, INC.
NOTES TO INTERIM FINANCIAL STATEMENTS
Note 1. Interim Financial Statements
The accompanying unaudited consolidated financial statements of
EnSys Environmental Products, Inc. (the "Company") have been
prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all the
information and footnotes required by generally accepted
accounting principles for complete financial statements and
should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996. In the
opinion of management, the accompanying financial statements
include all adjustments (of a normal recurring nature) necessary
for a fair presentation. The results of operations for the three
month period ended March 31, 1996 are not necessarily indicative
of the results to be expected for the full year.
Note 2. Severance Costs
On March 31, 1995, Dr. Stephen B. Friedman resigned as Senior
Vice President, Research and Development. The Company had entered
into a two year employment agreement effective July 30, 1993 with
Dr. Friedman. In connection with Dr. Friedman's resignation, the
Company is obligated to pay Dr. Friedman's salary and certain
other benefits for a period of one year after such termination.
The Company's Statement of Operations for the quarter ended March
31, 1995 includes a charge of $130,884 to cover the anticipated
severance costs associated with Dr. Friedman's resignation.
On February 29, 1996, Dr. Ian Mackenzie resigned as Managing
Director of EnSys (Europe) Limited. The Company had entered into
an employment agreement effective October 26, 1993 with Dr.
Mackenzie. In connection with Dr. Mackenzie's resignation, the
Company is obligated to pay Dr. Mackenzie's salary and certain
other benefits for a period of six months after such termination.
The Company's Statement of Operations for the quarter ended March
31, 1996 includes a charge of $75,000 to cover the anticipated
severance costs associated with Dr. Mackenzie's resignation.
Note 3. Recent Developments
On March 29, 1996, the Company acquired from Millipore
Corporation ("Millipore") certain assets, which consist primarily
of inventory, work-in-process, equipment, intellectual property
rights, contract rights and customer lists, of Millipore's
"EnvirogardTM" product line. In exchange for such assets, the
Company paid to Millipore $1,000,000 in cash and issued to
Millipore 1,100,000 shares of the Company's common stock, par
value $0.01 per share (the "Common Stock"), which represents
approximately 15% of the Company's total outstanding shares after
the acquisition. The acquistion resulted in an estimated charge
of $1,700,000 for acquired research and development.
Note 4. Intangibles
The intangibles balance includes an estimate of $721,000
attributed to the value of the customer and employee bases
acquired in the Envirogard product line transaction.
6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
Revenues. Revenues decreased 28% to $604,860 in the first
quarter of 1996 from $840,196 in the first quarter of 1995. The
number of tests sold for the first quarter of 1996 decreased 32%
to approximately 22,300 tests from approximately 33,000 tests in
the first quarter of 1995. Sales of the Company's core products
PCB, Petro and PAH were down 32% to approximately $365,000 from
approximately $538,000 in the first quarter of 1995. Revenues
from the Company's European subsidiary in the first quarter of
1996 comprised 17% of total sales and increased 6% over the same
period in 1995. Sales of the Company's Hydrofluor test for
Cryptosporidium and Giardia fell 20% from their 1995 levels. The
Company's lower sales reflect the general weakness in the
environmental sector. Overcapacity in analytical labs and
threatened regulatory changes that have caused customers to delay
spending had a negative impact on sales during the past two
quarters. Inclement weather over most of the United States in
January and February also impacted first quarter sales.
Gross Profit. Gross profit decreased 61% to $212,620 in the
first quarter of 1996 from $543,756 in the first quarter of 1995.
The majority of the decrease in gross profit was due primarily to
decline in sales revenues and a $152,349 inventory reserve for
slow-moving items. Gross profit as a percentage of sales revenues
decreased to 35% in the first quarter of 1996 from 65% in the first
quarter of 1995. The majority of the decrease resulted from the loss
of economies of scale caused by lower manufactured volumes and the
write-down of inventory.
Selling, General and Administrative Expenses. Selling, general
and administrative expenses decreased 17% to $928,248 in the
first quarter of 1996 from $1,120,982 in the first quarter of
1995. Selling, general and administrative expenses in the first
quarter of 1995 and 1996 included charges for severance costs of
$130,884 and $75,000, respectively. Excluding these charges,
selling, general and administrative expenses decreased 14% to
$853,248 in the first quarter of 1996 from $990,098 in the first
quarter of 1995. The majority of the decrease in selling,
general and administrative expenses was caused by a reduction in
personnel as the Company attempted to bring its expenditures in
line with revenues.
Research and Development Expenses. Research and development
("R&D") expenses increased 884% to $1,865,804 in the first
quarter of 1996 from $189,627 in the first quarter of 1995. The
increase included a charge of $1,700,000 for acquired R&D in
connection with the acquisition of the Envirogard product line
from Millipore. Excluding this charge, R&D costs actually
decreased 13% from their 1995 levels. The decrease in R&D
expenses was caused by a reduction in the number of employees
during the last nine months of 1995, including the Senior Vice
President of Research and Development. Current research and
development efforts are focused on the development of the
previously announced one-step test.
Interest and Other Income and Interest Expense. Interest and
other income decreased 9% to $162,817 in the first quarter of
1996 from $178,164 in the first quarter of 1995. The decrease
for the quarter was primarily attributable to lower investment
balances as the Company used cash to support continuing
operations. The effect of a declining investment balance was
somewhat offset by higher interest rates earned on remaining
investments. Interest expense decreased 45% to $2,883 in the
first quarter of 1996 from $5,287 in the first quarter of 1995.
The decrease was due to the Company paying down amounts due under
lease financing agreements.
Net Loss. The Company's net loss increased 308% to $2,421,498
(or $0.40 per share) in the first quarter of 1996 from $593,976
(or $0.10 per share) in the first quarter of 1995. Excluding the
additional charges for severance costs, inventory write-downs and
purchased research and development discussed above, the Company's
net loss increased 7% to $494,149 (or $0.08 per share) in the
first quarter of 1996 from $463,092 (or $0.08 per share) in the
first quarter of 1995. Thus, the balance of the increase in net loss
during the quarter was primarily due to decreased sales revenue.
7
Liquidity and Capital Resources
Working capital which consists principally of cash, cash
equivalents and marketable debt investments was $10.3 million at
March 31, 1996 compared to $12.2 million at December 31, 1995.
Cash, cash equivalents and marketable debt investments which
consist primarily of money market accounts and investments in
treasury notes and other government backed securities was $10.0
million at March 31, 1996 compared to $11.7 million at December
31, 1995. The decrease in working capital was primarily caused by
the funding of the net loss, and the purchase of the Envirogard
product line from Millipore.
The Company believes that its available cash will be sufficient
to meet its funding needs for at least the next 24 months.
8
ENSYS ENVIRONMENTAL PRODUCTS, INC.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 2.1 Asset Purchase Agreement among EnSys Environmental *1*(2.1)
Products, Inc., Millipore Corporation, and ImmunoSystems,
Inc.
Exhibit 11.1 Statement re Computation of Earnings Per Share
(b) Reports on Form 8-K
The Company filed a Form 8-K dated April 12, 1996,
concerning the acquisition by the Company of the
Envirogard product line from Millipore Corporation.
*1* Incorporated by reference to the designated exhibit of the
Company's Form 8-K filed on April 12, 1996. This document has been
redacted pursuant to a confidentiality request filed on April 12,
1996 under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.
9
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.
May 13, 1996 ENSYS ENVIRONMENTAL PRODUCTS, INC.
/s/ James M. Terrell, III
Name: James M. Terrell, III
Title: Chief Accounting Officer
(Principal Financial and Accounting Officer)
10
ENSYS ENVIRONMENTAL PRODUCTS, INC.
-----------------
EXHIBIT INDEX
-----------------
Exhibit 2.1 Asset Purchase Agreement among EnSys Environmental *1*(2.1)
Products, Inc., Millipore Corporation, and
ImmunoSystems, Inc.
Exhibit 11.1 Statement re Computation of Earnings Per Share
*1* Incorporated by reference to the designated exhibit of the
Company's Form 8-K filed on April 12, 1996. This document has been
redacted pursuant to a confidentiality request filed on April 12,
1996 under Rule 24b-2 of the Securities Exchange Act of 1934, as
amended.
11
EXHIBIT 11.1
Net loss per common and common equivalent share for the period
January 1, 1996 to March 31, 1996 is determined on a basis consistent
with APB 15.
The calculation follows:
Statement re Computation of Per Share Earnings
Weighted Average Common Shares Outstanding
Three Months Ended
March 31,
1995 1996
Common Stock issued through December
31, 1994 and 1995 respectively 5,861,332 5,994,790
Weighted average Common Stock issued
in the three months ended March 31,
1995 and 1996 respectively 53,054 24,176
Total Stock 5,914,386 6,018,966
Net loss $ (593,976) $ (2,421,498)
Net loss per share $ (0.10) $ (0.40)
12